MORGAN STANLEY UNIVERSAL FUNDS INC, N-30D, 1997-08-27

MORGAN STANLEY UNIVERSAL FUNDS INC
N-30D, 1997-08-27

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<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.

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ASIAN EQUITY PORTFOLIO
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EMERGING MARKETS EQUITY PORTFOLIO
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GLOBAL EQUITY PORTFOLIO
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INTERNATIONAL MAGNUM PORTFOLIO
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EQUITY GROWTH PORTFOLIO
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MID CAP VALUE PORTFOLIO
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U.S. REAL ESTATE PORTFOLIO
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VALUE PORTFOLIO
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EMERGING MARKETS DEBT PORTFOLIO
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FIXED INCOME PORTFOLIO
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HIGH YIELD PORTFOLIO
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SEMI-ANNUAL REPORT
JUNE 30, 1997
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
TABLE OF CONTENTS

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<TABLE>
<S> <C>
Overview and Statement of Net Assets by Portfolio:
Asian Equity Portfolio.............................................. 1
Emerging Markets Equity Portfolio................................... 6
Global Equity Portfolio............................................. 13
International Magnum Portfolio...................................... 17
Equity Growth Portfolio............................................. 23
Mid Cap Value Portfolio............................................. 28
U.S. Real Estate Portfolio.......................................... 33
Value Portfolio..................................................... 38
Emerging Markets Debt Portfolio..................................... 43
Fixed Income Portfolio.............................................. 47
High Yield Portfolio................................................ 51
Statement of Operations............................................... 54
Statement of Changes in Net Assets.................................... 54
Financial Highlights ................................................. 65
Notes to Financial Statements......................................... 76
Directors and Officers................................................ 81
</TABLE>
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

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INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
China 1.1%
Hong Kong 30.7%
Indonesia 9.4%
Korea 6.8%
Malaysia 13.7%
Philippines 4.7%
Singapore 15.6%
Taiwan 11.7%
Thailand 3.6%
Other 2.7%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) COMBINED
FAR EAST FREE EX-JAPAN INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
YTD
--------------
<S> <C>
PORTFOLIO(3).................. 6.60%
INDEX......................... -1.38%
</TABLE>

1. The MSCI Combined Far East Free ex-Japan Index is an unmanaged index of
common stocks and includes Indonesia, Hong Kong, Malaysia, the Philippines,
Korea, Singapore, Taiwan and Thailand (includes dividends).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on March 3, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------------ ------------ -------------
<S> <C> <C>
Cheung Kong Holdings Ltd. Hong Kong 7.2%
HSBC Holdings plc Hong Kong 5.6%
Astra International Indonesia 5.3%
China Resources Enterprise Hong Kong 4.2%
Ltd.
Henderson Land Development
Co., Ltd. Hong Kong 4.0%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------- --------- -------------
<S> <C> <C>
Finance $ 4,719 43.1%
Consumer Products 2,503 22.9%
Capital Equipment 1,139 10.4%
Energy 807 7.4%
Services 804 7.3%
</TABLE>

THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
COMBINED FAR EAST FREE EX-JAPAN INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY
AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.

The investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Asian
issuers (excluding Japan). The Portfolio intends to invest in equity securities
that are traded on recognized stock exchanges of countries in Asia and in equity
securities of companies organized under the laws of an Asian country whose
business is conducted principally in Asia.

For the period from March 3, 1997 (commencement of operations) through June 30,
1997, the Portfolio had a total return of 6.60% as compared to -1.38% for the
Morgan Stanley Capital International (MSCI) Combined Far East Free ex-Japan
Index (the "Index").

Continuing the pattern set in 1996, the individual Asian markets showed a great
divergence in performance in the first half of 1997. The rise in the Asian
markets was led by the greater China markets where Taiwan (+26.6%), China
(+10.3%) and Hong Kong (+8.1%) staged sharp increases ahead of Hong Kong's
handover to China on July 1, 1997. Rounding out the Northeast Asian markets,
Korea also showed a sharp rise, gaining 9.7%. In contrast, the Southeast Asian
markets of Thailand (-37.3%), The Philippines (-12.2%) and Malaysia (-12.2%)
registered sharp falls.

As of June 30, 1997, the Portfolio was overweighted compared to the Index in
Korea (6.8% vs. 5.9%), Singapore (15.6% vs. 11.1%) and China (1.1% vs. 0.8%). It
was underweight everywhere else, most notably in Malaysia (13.7% vs. 18.4%).

Following the first quarter where the Hong Kong market fell -9.5%, the Portfolio
increased its exposure to that market from 30% to 36%. The Portfolio's increased
weight in Hong Kong stood it in good stead as the market staged a sharp rebound.
Euphoria over China concept plays and in particular red chips led the way.
Sentiment and liquidity further contributed, as asset injection stories
propelled the red chips ever higher while traditional blue chip stocks
languished. The rally culminated in an all-time high of 15,197 on the Hang Seng
Index on June 27, 1997, the last trading day before the handover. With the
handover complete, red chip fever has subsided and talk of

-------------
1

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

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INVESTMENT OVERVIEW (CONT.)

increasing the supply of residential units in Hong Kong has caused the property
sector to weaken. The Portfolio will be looking to take its Hong Kong weighting
down while shifting towards better value blue chips such as the major property
developers if they weaken further.

The Portfolio also sharply increased its weight in Taiwan over the period.
Following on a strong 1996 performance of 38.9%, the Taiwan market continued to
surge, up 26.6% for the first half. This sharp rise was powered primarily by the
electronics sector which surged more than 60% on strong earnings growth in the
second quarter alone. The Portfolio intends to maintain its weighting in this
market as domestic liquidity continues to be high. The position will be trimmed,
however, if the central bank anticipates a further pick up in domestic growth
and moves to tighten liquidity.

The Portfolio also increased its weight in Korea over the period and will
continue to look for good values in that market. The Korean economy appears to
have bottomed as positive export growth generated its first monthly trade
surplus in 30 months. Equally encouraging, there are also signs that the Korean
corporate culture is finally changing. The zealousness with which many Korean
companies pursued market share gains and top line growth is finally beginning to
shift towards interest in the bottom line which should bode well for equity
investors.

By contrast, the Portfolio reduced its weighting in Malaysia over the second
quarter. Bank Negara's curbs on property lending and stock market margin loans
in April finally forced the economy to confront its problems with the impending
oversupply in the property market and an infrastructure spending binge. The
subsequent severity of the market fallout indicated an overstretched market.
Although the long term fundamentals for Malaysia remain good, short-term
prospects are not promising, especially in the aftermath of the fallout from the
depegging of the Thai baht. The Portfolio is looking to maintain its underweight
in Malaysia barring unforeseen positive developments.

The Portfolio's weighting in Thailand has also been taken down, due to a
combination of Portfolio sales and a collapsing market. This market has
continued to be a disaster, falling -37.3% this year following a -38.0% decline
last year. Most recently, confidence plummeted as the government resorted to
capital controls and increased interest rates to fend off the currency
speculators. The gloom was further compounded by news of a slowing economy as
the mounting financial crisis resulted in the suspension of 16 finance
companies. The depegging of the Thai baht at the beginning of July is the first
step towards addressing the Thai financial crisis. Recovery, however, will be a
slow and painful process, and the first sharp rally since the baht broke is
proving hard to sustain. The Portfolio will selectively continue to seek to
acquire good companies at low prices but it is still too early to bet on the
Thai market.

The Thai financial crisis and the final depegging of the Thai baht have brought
into focus the common ills of the fast growing Southeast Asian nations. Thailand
is further along the economic cycle but the pain it is going through has
heightened investors' wariness about the region in general and is likely to
prove a dampener on the markets in the near term. The collapse in the Thai
market and the correction in Malaysia, Singapore and the Philippines have
brought market valuations back to attractive levels but short term sentiment
remains poor.

In summary, the Portfolio will continue to selectively seek to move out of more
extended markets like Hong Kong into the more distressed situations in Southeast
Asia.

July 1997

- ---------- 2
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------

COMMON STOCKS (97.2%)
CHINA (1.1%)
(a)35,000 First Tractor Co., Ltd., Class H............................ $ 23
44,000 Shenzhen Fangda Co., Ltd., Class B.......................... 64
(a)159,000 Zhehuang Expressway Co., Ltd., Class H...................... 39
-------
126
-------
HONG KONG (30.7%)
80,000 Cheung Kong Holdings Ltd.................................... 790
13,000 China Merchants Holdings
International Co., Ltd.................................... 40
93,000 China Resources Enterprise Ltd.............................. 456
13,000 Hang Seng Bank Ltd.......................................... 185
49,000 Henderson Land Development Co., Ltd......................... 435
20,400 HSBC Holdings plc........................................... 613
36,000 New World Development Co., Ltd.............................. 215
32,000 Ng Fung Hong Ltd............................................ 48
58,000 Shanghai Industrial Holdings Ltd............................ 361
18,000 Sun Hung Kai Properties Ltd................................. 217
-------
3,360
-------
INDONESIA (9.4%)
(a)142,000 Astra International (Foreign)............................... 584
(d)27,500 Bimantara Citra (Foreign)................................... 48
(d)44,000 Mayora Indah (Foreign)...................................... 25
(a,d)113,500 Putra Surya Multidana (Foreign)............................. 181
(d)118,000 Telekomunikasi Indonesia (Foreign).......................... 193
-------
1,031
-------
KOREA (6.8%)
1,700 Hansol Paper Co............................................. 43
(d)2,600 Housing & Commercial Bank, Korea............................ 49
(a)5,037 Kookmin Bank GDR............................................ 106
3,400 Korea Electric Power Corp................................... 101
5,700 Korea Electric Power Corp. ADR.............................. 107
(a)82 Samsung Electronics GDR (New)............................... 5
(a)5,000 Samsung Electronics GDS (New)............................... 281
(d)3,330 Shinhan Bank Co., Ltd....................................... 48
-------
740
-------
MALAYSIA (13.7%)
99,000 Berjaya Group Bhd........................................... 122
10,000 Berjaya Sports Toto Bhd..................................... 47
40,000 Commerce Asset Holding Bhd.................................. 105
28,000 Dialog Group Bhd............................................ 405
19,000 Genting Bhd................................................. 91
14,000 Jaya Tiasa Holdings Bhd..................................... 70
19,000 Leader Universal Holdings Bhd............................... 34
1,000 Lityan Holdings Bhd......................................... 12
14,000 Malayan Banking Bhd......................................... 147
7,000 Malaysian Pacific Industries Bhd............................ 31
14,000 Malaysian Resources Corp. Bhd............................... 39
28,000 Multi-Purpose Holdings Bhd.................................. 39
22,000 Rashid Hussain Bhd.......................................... 140
36,000 Resorts World Bhd........................................... 108
15,000 United Engineers Ltd........................................ 108
-------
1,498
-------

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
PHILIPPINES (4.7%)
144,000 Ayala Land, Inc., Class B................................... $ 132
(a)581,000 Digital Telecommunications Philippines, Inc................. 56
(a)154,000 DMCI Holdings, Inc.......................................... 51
(a)87,000 Fil-Estate Land, Inc........................................ 26
39,400 Manila Electric Co., Class B................................ 194
183,000 SM Prime Holdings, Inc...................................... 54
-------
513
-------
SINGAPORE (15.5%)
7,000 Development Bank of Singapore Ltd. (Foreign)................ 88
21,000 Electronic Resources Ltd.................................... 33
88,000 NatSteel Ltd................................................ 224
8,400 Oversea-Chinese Banking Corp. (Foreign)..................... 87
(a)26,000 Pacific Century Regional Development........................ 36
19,000 Parkway Holdings Ltd........................................ 85
11,000 Singapore Press Holdings (Foreign).......................... 221
61,000 Summit Holdings Ltd......................................... 46
(a)120,000 Super Coffeemix Manufacturing Ltd........................... 100
10,000 United Overseas Bank Ltd. (Foreign)......................... 103
(a)108,000 Want Want Holdings.......................................... 359
110,000 Wing Tai Holdings Ltd....................................... 317
-------
1,699
-------
TAIWAN (11.7%)
(a)39,000 Acer, Inc................................................... 140
(a)22,500 Asustek Computer, Inc....................................... 298
14,000 Cathay Life Insurance Co., Ltd.............................. 80
(a)24,000 China Development Corp...................................... 124
41,600 Compal Electronics.......................................... 164
99,000 Far Eastern Textile Ltd..................................... 156
44,690 Formosa Plastics Corp....................................... 108
(a)25,000 Kuoyang Construction........................................ 60
46,200 Siliconware Precision Industries Co......................... 156
-------
1,286
-------
THAILAND (3.6%)
16,200 Bangkok Bank PCL (Foreign).................................. 111
24,000 Big C Supercenter PCL....................................... 8
30,000 CVD Entertainment PCL....................................... 51
(a)9,400 Eastern Water Resources Development & Management PCL........ 11
3,400 I.C.C. International PCL.................................... 11
(d)7,000 Nation Multimedia Group PCL (Foreign)....................... 15
(d)55,600 National Petrochemical PCL (Foreign)........................ 57
(d)5,000 Post Publishing PCL (Foreign)............................... 5
9,000 Quality House PCL........................................... 3
(d)27,000 Robinson Department Store PCL (Foreign)..................... 10
(a)4,000 Sino Thai Engineering & Construction PCL.................... 11
17,000 Thai Farmers Bank PCL (Foreign)............................. 72
1,000 Thai Rung Union Car PCL..................................... 4
(a,d)4,000 Thai Stanley Electric PCL (Foreign)......................... 8
5,000 Thai Storage Battery PCL.................................... 5
5,800 Thai Theparos Food Product PCL (Foreign).................... 9
-------
391
-------
TOTAL COMMON STOCKS (COST $9,873)............................................. 10,644
-------
</TABLE>

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3
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------

RIGHTS (0.1%)
MALAYSIA (0.0%)
(a)7,200 Commerce Asset Holding Bhd.................................. $ --
(a)3,142 Rashid Hussain Bhd.......................................... --
-------
--
-------
SINGAPORE (0.1%)
(a)10,500 Electronic Resources Ltd. Bhd............................... 7
-------
TOTAL RIGHTS (COST $0)........................................................ 7
-------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------

WARRANTS (0.0%)
MALAYSIA (0.0%)
(a)4,500 Commerce Asset Holding Bhd, expiring 3/16/02 (COST $0)...... 1
-------
TOTAL FOREIGN SECURITIES (97.3%) (COST $9,873)................................ 10,652
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------

SHORT-TERM INVESTMENT (6.3%)
REPURCHASE AGREEMENT (6.3%)
$693 Chase Securities, Inc. 5.70%, dated 6/30/97, due 7/1/97, to
be repurchased at $693, collateralized by U.S. Treasury
Notes, 5.625%, due 2/15/06, valued at $706 (COST $693).... 693
-------
FOREIGN CURRENCY (2.5%)
HKD 2 Hong Kong Dollar............................................ --
IDR 14,756 Indonesian Rupiah........................................... 6
MYR 2 Malaysian Ringgit........................................... 1
SGD 1 Singapore Dollar............................................ 1
TWD 7,342 Taiwan Dollar............................................... 264
-------
TOTAL FOREIGN CURRENCY (COST $272)............................................ 272
-------
TOTAL INVESTMENTS (106.1%) (COST $10,838*).................................... 11,617
-------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (1.8%)
Cash...................................................................... $ 56
Receivable for Investments Sold........................................... 126
Due from Adviser.......................................................... 8
Dividends Receivable...................................................... 4
Receivable for Portfolio Shares Sold...................................... 2 196
-------
LIABILITIES (-7.9%)
Payable for Investments Purchased......................................... (817)
Custodian Fees Payable.................................................... (10)
Deferred Foreign Taxes Payable............................................ (4)
Administrative Fees Payable............................................... (4)
Net Unrealized Loss on Foreign Currency Exchange Contracts................ (2)
Other Liabilities......................................................... (30) (867)
------- --------
NET ASSETS (100%).................................................................... $10,946
--------
--------
</TABLE>

<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------

NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,026,507 outstanding $0.001 par value shares (authorized 500,000,000
shares)............................................................................ $ 10.66
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital...................................................................... $10,277
Undistributed Net Investment Income.................................................. 35
Accumulated Net Realized Loss........................................................ (139)
Unrealized Appreciation on Investments and Foreign Currency Translations (Net of
foreign taxes of $4)............................................................... 773
--------
NET ASSETS........................................................................... $10,946
--------
--------
</TABLE>

FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:

<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR NET UNREALIZED
(000) (000) DATE (000) VALUE (000) GAIN (LOSS) (000)
- ---------- ----- ----------- ----------- ----- -----------------
<S> <C> <C> <C> <C> <C>
U.S.$ 1 $ 1 7/2/97 THB 19 $ 1 $ --
THB 6,876 261 8/18/97 U.S.$ 259 259 (2)
----- ----- ---
$ 262 $ 260 $ (2)
----- ----- ---
----- ----- ---
</TABLE>

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

(a) -- Non-income producing security
(d) -- Securities (totaling $639 or 5.8% of net assets at June 30, 1997)
valued at fair value -- See Note A-1 to financial statements.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
PCL -- Public Company Limited
THB -- Thai Baht

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

*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Asian Equity Portfolio
were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- ------------- --------------- ---------------
<S> <C> <C> <C>
$ 10,566 $ 1,182 $ (403) $ 779
</TABLE>

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the Asian Equity Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $13,636,000 and $3,636,000,
respectively.
- ----------------------------------------------------------------

- -----------------
4
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1997
(UNAUDITED)

SUMMARY OF INVESTMENTS BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
% OF
VALUE NET
SECTOR DIVERSIFICATION (000) ASSETS
- ---------------------------------------- ------- ---------
<S> <C> <C>
Capital Equipment....................... $ 1,139 10.4%
Consumer Products....................... 2,503 22.9
Energy.................................. 807 7.4
Finance................................. 4,719 43.1
Materials............................... 433 4.0
Multi-Industry.......................... 247 2.2
Services................................ 804 7.3
Other................................... 965 8.8
------- ---------
Total Investments....................... $11,617 106.1%
------- ---------
------- ---------
</TABLE>

-----------------
5
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

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

INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Argentina 2.0%
Brazil 15.1%
Chile 0.6%
China 0.1%
Colombia 0.2%
Egypt 0.7%
Hong Kong 2.5%
Hungary 0.4%
India 6.8%
Indonesia 4.7%
Israel 2.9%
Korea 5.2%
Malaysia 0.9%
Mexico 10.0%
Pakistan 3.0%
Peru 0.4%
Poland 1.6%
Russia 7.5%
South Africa 8.1%
Taiwan 3.9%
Thailand 5.1%
Turkey 3.8%
Venezuela 0.3%
Zimbabwe 0.9%
Other 13.3%
</TABLE>

<TABLE>
<CAPTION>
PERFORMANCE COMPARED TO THE IFC GLOBAL TOTAL RETURN COMPOSITE INDEX(1)
- ------------------------------------
TOTAL RETURNS(2)
-----------------------------
TOTAL RETURNS
YTD SINCE INCEPTION
---------- -----------------
<S> <C> <C>
PORTFOLIO(3)........ 23.01% 20.51%
INDEX............... 17.10% 15.10%
</TABLE>

1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (includes dividends).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on October 1, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------------------ --------- -------------
<S> <C> <C>
Morgan Stanley India Investment
Fund, Inc. India 3.5%
Unified Energy Systems Russia 3.2%
Telebras Brazil 2.7%
CRT Brazil 2.7%
Telmex Mexico 2.5%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE COUNTRIES
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------- ----------- -------------
<S> <C> <C>
Brazil $ 3,073 15.1%
Mexico 2,030 10.0%
South Africa 1,638 8.1%
Russia 1,533 7.5%
India 1,381 6.8%
</TABLE>

THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
COUNTRY OR REGIONAL INDICES ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT
BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.

The Emerging Markets Equity Portfolio seeks long-term capital appreciation by
investing primarily in common and preferred stocks, convertible securities,
rights and warrants to purchase common stocks, sponsored or unsponsored ADRs and
other equity securities of emerging market country issuers. The Portfolio
commenced operations on October 1, 1996.

For the period from January 1, 1997 through June 30, 1997, the Portfolio had a
total return of 23.01% as compared to 17.10% for the IFC Global Total Return
Composite Index (the "Index"). For the period from October 1, 1996 (commencement
of operations) through June 30, 1997, the Portfolio had a total return of 20.51%
compared with 15.10% for the Index.

The second quarter was volatile, with returns ranging from -26.0% in Thailand to
44.5% in Russia. Latin America continued its outperformance in the second
quarter. All markets in the region were up during the second quarter. Brazil, up
51.2% year-to-date and 25.0% during the quarter, remains the anchor in the
region. Privatization and strong earnings growth underpinned the region's 20.9%
return in U.S. dollars terms over the quarter. While we remain optimistic about
the positive impact that privatization will have in the region, we are concerned
that the market may be anticipating too much good news on the horizon, and are
lightening up our exposure to Brazil. Going forward, our exposure in Brazil will
be concentrated in those stocks that have compelling valuations, superior
management expertise or limited downside risk to a macro shock. We continue to
like Mexico, where falling interest rates and a stable peso contribute to a
solid economic recovery. Positive news on the consumer front further supports
this market.

- ---------- 6

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
MSCI Emerging Markets Indices
Performance ($US)
3 Months to June 30 1997
% Change
THAILAND -26.0%
CZECH REPUBLIC -20.4%
POLAND -15.5%
PHILIPPINES -14.3%
MALAYSIA -12.1%
TURKEY -0.6%
PAKISTAN 1.1%
SOUTH AFRICA 1.3%
GREECE 6.4%
INDONESIA 6.9%
COLOMBIA 7.7%
JORDAN 10.3%
ISRAEL 12.0%
CHINA 12.9%
KOREA 13.4%
PORTUGAL 14.4%
ARGENTINA 15.0%
CHILE 15.2%
TAIWAN 15.6%
PERU 16.0%
MEXICO 18.1%
HONGKONG 19.4%
BRAZIL 25.0%
HUNGARY 26.0%
INDIA 27.4%
SRI LANKA 29.5%
VENEZUELA 44.2%
RUSSIA 44.5%
</TABLE>

Asia continues to convulse with macro-economic imbalances created by
overinvestment, growth of current account deficits and inflexible exchange
rates. In May, a speculative attack on the Thai baht prompted officials to raise
interest rates precipitously and to institute a two-tiered currency system,
further diminishing badly needed inflows of foreign capital to this market.

The Bank of Thailand moved to a managed float of the baht in July. The value of
the baht would be set by market forces, but the flotation would be managed by
the authorities. The baht peg to a basket of currencies has been discontinued.
We hedged our Thai currency exposure in May as we believed that the Thai market
represented value but we also believed that a devaluation was in the offing. The
hedge was put on when the baht traded at 26. It subsequently went to 20 and
finally to 29. The baht has been trading in a range since the announcement, but
we believe that there could be further depreciation near term. We also believe
that the Thai market has bottomed and that this event is bullish for the stock
market, although bearish for the economy. Our projection for the baht level in
the near term is in the 31-32 area. We have maintained approximately 50% of our
hedge in the aftermath of the devaluation. We achieved a return of approximately
8% on the portion of the hedge that was closed out. We will continue to monitor
this situation closely to determine if and when we should unwind our remaining
baht hedges. Possible next steps include a financial sector restructuring
package and the elimination of the two tier foreign exchange system. Thailand
needs foreign capital flows to finance its economic recovery and these controls
are hampering capital inflows. Also, as the currency stabilizes the need for
these controls should disappear.

Further in the region, markets like Malaysia (-12.2% year-to-date) and the
Philippines (-12.2% year-to-date) have suffered as fears of Thai style property
and finance problems led to sell-offs. We are significantly underweight Malaysia
and are out of the Philippines, which has positively impacted Portfolio
performance. With these two markets 20-25% off their highs, we are re-examining
our extreme underweight in these countries.

In Russia, falling interest rates and significant progress on both the economic
restructuring and tax reform fronts supported the market. Russia was up 44.5%
during the second quarter and 117.3% year-to-date. Lower rates are luring local
investors, further boosting returns. The inclusion of Russia in the IFC's
investable index also favorably impacted performance. We favor energy and
electric utility stocks in this market, as valuations remain attractive and
growth prospects long-term are solid.

India has shaken off the malaise of political instability and is refocussed on
the business of market liberalization and reform. Tax cuts, lower interest rates
and the new coalition government have brought local and foreign investors into
the market, which is up 27.4% in the second quarter and 36.4% so far this year.
The market has been led so far by a select few companies, but with easing rates
and projected pick-ups in industrial production, we expect to see an increasing
breadth in advances. Pakistan has followed its political rival. Similar problems
have led to similar opportunities. The market continues to rise on the back of
low valuations and stabilizing politics. We will continue to raise our weight in
Pakistan, mainly through Pakistan Telecom, as we expect some positive
developments on tariff rates.

-------------
7

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

Marianne Hay has taken on responsibility for managing the Emerging Markets
Private Equity group. This team invests in private equity opportunities in the
emerging markets, and has recently had the first closing of their fund. Because
of the increased amount of time that Marianne will be spending on investments in
the private equity area, she will relinquish her client service and marketing
responsibilities on the global emerging markets equity product. Marianne will
continue to provide strategic input to the global investment team. Robert Meyer,
Managing Director, has assumed Marianne's day-to-day management responsibilities
for the global emerging markets equity product.

July 1997

- ---------- 8
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

COMMON STOCKS (86.6%)
ARGENTINA (2.0%)
(a)1,150 Nortel ADR.................................................. $ 31
1,020 Telecom Argentina ADR....................................... 53
6,780 Telefonica Argentina ADR.................................... 235
2,885 YPF ADR..................................................... 89
-------
408
-------
BRAZIL (15.1%)
3,874,000 Banco Bradesco (Preferred).................................. 39
423,000 Brahma (Preferred).......................................... 322
3,330 Brahma ADR (Preferred)...................................... 51
(a)190 Celesc GDR, Class B (Preferred)............................. 26
6,008,000 CEMIG (Preferred)........................................... 310
2,710 CEMIG ADR (Preferred)....................................... 136
(a)361,400 CRT (Preferred)............................................. 544
110,000 Coneminas (Preferred)....................................... 43
573,000 Eletrobras.................................................. 320
2,677 Eletrobras ADR.............................................. 75
950 Eletrobras ADR, Class B (Preferred)......................... 28
103,000 Eletrobras, Class B (Preferred)............................. 61
174,000 Itaubanco (Preferred)....................................... 98
89,000 Lightpar.................................................... 35
1,159,000 Lojas Arapua (Preferred).................................... 19
1,305 Lojas Arupua ADR (Preferred)................................ 22
552,000 Lojas Renner (Preferred).................................... 28
(a)1,470 Pao de Acucar ADR (Preferred)............................... 34
634,000 Petrobras (Preferred)....................................... 176
833,000 Telebras.................................................... 113
1,977 Telebras ADR (Preferred).................................... 300
955,000 Telebras (Preferred)........................................ 145
(a)88,000 TELESP...................................................... 26
27,836 TELESP (Preferred).......................................... 9
(a)2,955 Unibanco GDR (Preferred).................................... 110
-------
3,070
-------
CHILE (0.6%)
1,510 CCU ADR..................................................... 33
695 Enersis ADR................................................. 25
1,700 Santa Isabel ADR............................................ 55
-------
113
-------
CHINA (0.1%)
64,000 Guangshen Railway Co. Ltd., Class H......................... 28
-------
COLOMBIA (0.2%)
86,000 Banco de Colombia........................................... 32
-------
EGYPT (0.7%)
1,750 Commercial International Bank............................... 37
1,200 Eastern Tobacco............................................. 30
1,000 Helwan Portland Cement Co................................... 21
650 North Cairo Flour Mills Co.................................. 34
1,000 Tora Portland Cement........................................ 25
-------
147
-------
HONG KONG (2.5%)
7,000 Cheung Kong Holdings Ltd.................................... 69
(a)30,000 China Everbright-IHD Holdings Ltd........................... 90
90,000 China Resources Beijing Land................................ 67
27,000 China Resources Enterprise Ltd.............................. 132
4,000 Hutchison Whampoa Ltd....................................... 35
5,000 New World Development Co., Ltd.............................. 30

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
9,000 Shanghai Industrial Holdings Ltd............................ $ 56
64,000 Zhenhai Rifining and Chemical Co. Ltd., Class H............. 23
-------
502
-------
HUNGARY (0.4%)
(a)950 MOL Magyar Olaj-es Gazipari Rt. GDR......................... 21
350 Pannonplast Rt.............................................. 18
280 Richter Gedeon Rt........................................... 26
(a)1,200 Tisza Vegyi Kombinat Rt. GDR................................ 20
-------
85
-------
INDIA (6.8%)
2,500 Century Textiles and Industries Ltd. GDR.................... 133
(a)60,000 Crompton Greaves Ltd. GDR................................... 177
25,000 Indian Petrochemicals Corp. Ltd. GDR........................ 353
(g)55,500 Morgan Stanley India Investment Fund, Inc................... 718
-------
1,381
-------
INDONESIA (4.6%)
60,000 Astra International (Foreign)............................... 247
(d)80,004 Bank International Indonesia (Foreign)...................... 69
(d)171,000 Bank Negara Indonesia (Foreign)............................. 109
(d)37,000 Bimantara Citra (Foreign)................................... 65
(d)24,000 Gudang Garam (Foreign)...................................... 101
(d)21,000 Hanjaya Mandala Sampoerna (Foreign)......................... 80
(d)64,000 Indah Kiat Pulp & Paper Corp. (Foreign)..................... 37
(d)27,000 Indofood Sukses Makmur (Foreign)............................ 62
(d)59,000 Matahari Putra Prima (Foreign).............................. 119
(d)9,000 Mayora Indah (Foreign)...................................... 5
(d)4,000 Putra Surya Multidana (Foreign)............................. 6
(d)22,000 Telekomunikasi Indonesia (Foreign).......................... 36
-------
936
-------
ISRAEL (2.9%)
(a)5,150 Blue Square-Israel Ltd. ADR................................. 89
6,467 Elbit Ltd................................................... 22
6,466 Elbit Medical Imaging Ltd................................... 46
6,466 Elbit Systems Ltd........................................... 77
160 First International Bank of Israel Ltd., Class 5............ 123
940 Koor Industries Ltd......................................... 83
48,950 Supersol Ltd................................................ 157
-------
597
-------
KOREA (5.2%)
13,300 Cho Hung Bank Co. Ltd. GDR.................................. 96
2,000 Hansol Paper................................................ 51
(d)4,400 Housing & Commercial Bank, Korea............................ 82
(d)1,227 Kookmin Bank................................................ 23
6,409 Kookmin Bank GDR............................................ 135
2,000 Korea Electric Power Corp................................... 60
2,600 Korea Electric Power Corp. ADR.............................. 49
1,100 LG Information and Communication Ltd........................ 136
990 Pohang Iron & Steel Co. Ltd. ADR............................ 32
(a)5,896 Samsung Electronics GDR..................................... 331
(d)4,040 Shinhan Bank Co., Ltd....................................... 58
-------
1,053
-------
MALAYSIA (0.9%)
18,000 Commerce Asset Holding Bhd.................................. 48
10,000 Genting Bhd................................................. 48
4,000 Rashid Hussain Bhd.......................................... 25
13,000 Resorts World Bhd........................................... 39
4,000 United Engineers Ltd........................................ 29
-------
189
-------
</TABLE>

-----------------
9
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
MEXICO (10.0%)
4,035 Apasco...................................................... $ 29
(a)37,979 Banacci, Class B............................................ 98
(a)370 Bancomer ADR, Class B....................................... 4
(a)192,325 Bancomer, Class B........................................... 93
2,405 Carso ADR................................................... 34
9,260 Carso, Class A1............................................. 64
7,790 Cemex ADR, Class B.......................................... 75
33,304 Cemex CPO................................................... 145
920 Cemex CPO ADR............................................... 8
6,300 Cemex, Class B.............................................. 31
1,273 Cifra, Series A............................................. 2
10,410 Cifra, Series C............................................. 17
1,372 Desc ADR.................................................... 40
70,240 FEMSA, Class B.............................................. 419
(a)3,303 Gruma, Class B.............................................. 15
(a)418 Gruma GDR (Registered)...................................... 8
27,255 Kimberly, Class A........................................... 109
10,005 Maseca, Class B............................................. 11
(a)10,285 Televisa CPO GDR............................................ 312
10,810 Telmex ADR, Class L......................................... 516
-------
2,030
-------
PAKISTAN (3.0%)
84,000 Fauji Fertilizer Co., Ltd................................... 165
(a)7,600 Hub Power Co................................................ 8
15,000 Pakistan State Oil Co., Ltd................................. 121
406,700 Pakistan Telecommunications, Class A........................ 309
-------
603
-------
PERU (0.4%)
3,520 Tel Peru, Class A ADR....................................... 92
-------
POLAND (1.6%)
(a)2,425 Agros Holding S.A., Class C................................. 65
442 Agros Holding S.A., Class D................................. 9
(a)800 Bank Handlowy W Warszawie................................... 9
1,000 Bank Rozwoju Eksportu S.A................................... 21
450 Bank Slaski S.A............................................. 32
19,760 BIG S.A..................................................... 24
1,550 Debica S.A.................................................. 32
7,000 Elektrim S.A................................................ 61
(a)3,500 Exbud S.A................................................... 35
8,400 Polifarb Wroclaw S.A........................................ 31
-------
319
-------
RUSSIA (7.5%)
(a)3,500 Gazprom ADR................................................. 58
(a)3,400 LUKoil Holding ADR.......................................... 267
(a)2,800 Mosenergo ADR............................................... 119
(a)45,000 Rostelecom.................................................. 175
3,400 Surgutneftegaz ADR.......................................... 182
(a)800 Tatneft ADR................................................. 85
(a)800,000 Unified Energy Systems...................................... 289
(a)9,600 Unified Energy Systems GDR.................................. 358
-------
1,533
-------
SOUTH AFRICA (8.1%)
4,100 Amalgamated Banks of South Africa........................... 29
10,500 Barlow Ltd.................................................. 114
2,900 De Beers Centenary AG....................................... 107
13,000 Ellerine Holdings Ltd....................................... 93
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
10,100 First National Bank Holdings Ltd............................ $ 87
35,000 Gencor Ltd.................................................. 161
14,400 Illovo Sugar Ltd............................................ 33
10,000 Persetel Holdings Ltd....................................... 70
56,500 Polfin Ltd.................................................. 106
24,200 Rembrandt Group Ltd......................................... 258
27,600 Reunert Ltd................................................. 95
37,000 Sasol Ltd................................................... 485
-------
1,638
-------
TAIWAN (3.9%)
(a)22,000 Acer, Inc................................................... 79
(a)19,500 Asustek Computer, Inc....................................... 258
(a)9,000 China Development Corp...................................... 47
(a)36,400 Compal Electronics.......................................... 144
81,000 Far Eastern Textile Ltd..................................... 127
14,170 Formosa Plastics Corp....................................... 34
(a)18,300 Kuoyang Construction........................................ 44
17,640 Siliconware Precision Industries Co......................... 60
-------
793
-------
THAILAND (5.1%)
6,800 Advanced Ino Service PCL.................................... 59
12,000 Advanced Info Service PCL (Foreign)......................... 86
31,800 Bangkok Bank PCL (Foreign).................................. 219
1,000 Banpu PCL (Foreign)......................................... 15
7,300 Central Pattana PCL (Foreign)............................... 10
18,000 Industrial Finance (Foreign)................................ 23
5,000 Lanna Lignite PCL........................................... 35
5,000 National Finance and Securities PCL......................... 3
23,000 National Finance and Securities PCL (Foreign)............... 14
18,800 National Petrochemical PCL.................................. 19
8,000 Shinawatra Computer Co. PCL................................. 55
(d)11,600 Shinawatra Computer Co. PCL (Foreign)....................... 80
1,500 Siam Cement PCL (Foreign)................................... 26
25,100 Siam Commercial Bank PCL (Foreign).......................... 103
47,100 Thai Farmers Bank PCL (Foreign)............................. 200
3,000 Tipco Asphalt PCL........................................... 16
16,900 United Communications Industry PCL.......................... 70
-------
1,033
-------
TURKEY (3.8%)
1,131,000 Bossa....................................................... 25
1,542,000 Eregli Demir Celik.......................................... 257
(a)2,062,843 Garanti Bankasi A.S......................................... 78
3,766,044 Turkiye Garanti Bankasi A.S................................. 142
370,000 Vestel Elektronik Sanayi ve Ticaret A.S..................... 21
11,159,400 Yapi ve Kredi Bankasi A.S................................... 255
-------
778
-------
VENEZUELA (0.3%)
820 Cantv ADR................................................... 35
11,100 Electricidad de Caracas..................................... 18
-------
53
-------
ZIMBABWE (0.9%)
29,850 Delta Corp. Ltd............................................. 46
53,400 Meikles Africa Ltd.......................................... 131
-------
177
-------
TOTAL COMMON STOCKS (COST $15,348)............................................ 17,590
-------
</TABLE>

- ----------10
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------

RIGHTS (0.1%)
BRAZIL (0.0%)
(a,d)11,850 CRT......................................................... $ 3
-------
INDONESIA (0.1%)
(a,d)57,600 Indah Kiat Pulp & Paper Corp. (Foreign), expiring 8/18/97... 10
-------
MALAYSIA (0.0%)
(a,d)3,600 Commerce Asset Holding Bhd, expiring 7/23/97................ --
-------
TOTAL RIGHTS (COST $0)........................................................ 13
-------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------

WARRANTS (0.0%)
HONG KONG (0.0%)
(a)2 Lai Sun Hotels Int, expiring 4/30/99........................ --
-------
INDONESIA (0.0%)
(a)7,112 Bank International Indonesia (Foreign), expiring 1/17/00.... 3
(a)10,240 Indah Kiat Pulp & Paper Corp. (Foreign), expiring 7/11/02... 2
-------
5
-------
MALAYSIA (0.0%)
(a)2,250 Commerce Asset Holding Bhd, expiring 3/16/02................ --
-------
TOTAL WARRANTS (COST $0)...................................................... 5
-------
TOTAL FOREIGN SECURITIES (86.7%) (COST $15,348)............................... 17,608
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------

SHORT-TERM INVESTMENT (10.8%)
REPURCHASE AGREEMENT (10.8%)
$2,188 Chase Securities, Inc. 5.70%, dated 6/30/97, due 7/1/97, to
be repurchased at $2,188, collateralized by U.S. Treasury
Notes, 5.625%, due 2/15/06, valued at $2,229 (COST
$2,188)................................................... 2,188
-------
FOREIGN CURRENCY (1.3%)
BRC 21 Brazilian Real.............................................. 20
COP 1,085 Colombian Pesos............................................. 1
HKD 3 Hong Kong Dollar............................................ --
IDR 726 Indonesian Rupiah........................................... --
KRW 16,650 Korea Won................................................... 19
MYR 2 Malaysian Ringgit........................................... 1
MXP 25 Mexican Peso................................................ 3
PKR 5,092 Pakistani Rupee............................................. 126
PHP 10 Philippines Peso............................................ --
PLZ 49 Polish Zloty................................................ 15
ZAR 69 South African Rand.......................................... 15
TWD 1,551 Taiwan Dollar............................................... 56
TRL 444,838 Turkish Lira................................................ 3
-------
TOTAL FOREIGN CURRENCY (COST $260)............................................ 259
-------
</TABLE>

<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------

TOTAL INVESTMENTS (98.8%) (COST $17,796*).............................................. $20,055
-------
OTHER ASSETS (6.2%)
Cash................................................................ $ 423
Deferred Organization Costs......................................... 437
Receivable for Portfolio Shares Sold................................ 150
Receivable for Investments Sold..................................... 138
Dividends Receivable................................................ 75
Due from Adviser.................................................... 49 1,272
-----
LIABILITIES (-5.0%)
Payable for Investments Purchased................................... (840)
Professional Fees Payable........................................... (77)
Payable for Closed Foreign Currency Contracts....................... (32)
Custodian Fees Payable.............................................. (31)
Administrative Fees Payable......................................... (10)
Payable for Portfolio Shares Redeemed............................... (4)
Deferred Foreign Taxes Payable...................................... (1)
Other Liabilities................................................... (24) (1,019)
----- -------
NET ASSETS (100%)...................................................................... $ 20,308
-------
-------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,688,498 outstanding $0.001 par value shares (authorized 500,000,000
shares).............................................................................. $ 12.03
-------
-------
NET ASSETS CONSIST OF:
Paid in Capital........................................................................ $ 17,343
Undistributed Net Investment Income.................................................... 83
Accumulated Net Realized Gain.......................................................... 654
Unrealized Appreciation on Investments and Foreign Currency Translations (Net of
foreign taxes of $1)................................................................. 2,228
-------
NET ASSETS............................................................................. $ 20,308
-------
-------
</TABLE>

- ---------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:

Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver U.S. Dollars in exchange for foreign
currency as indicated below:

<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- ----- ----------- ------------ ----- ---------------
<S> <C> <C> <C> <C> <C>
U.S.$ 46 $ 46 7/1/97 ZAR 209 $ 46 $ --
U.S.$ 26 26 7/2/97 THB 672 26 --
--- --- -----
$ 72 $ 72 $ --
--- --- -----
--- --- -----
</TABLE>

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

(a) -- Non-income producing security
(d) -- Security valued at fair value -- See Note A-1 to financial statements.
(g) -- The Fund is advised by an affiliate.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
PCL -- Public Company Limited
THB -- Thai Baht

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

*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Emerging Markets Equity
Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- ------------- --------------- -------------
<S> <C> <C> <C>
$ 17,536 $ 3,255 $ (995) $ 2,260
</TABLE>

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the Emerging Markets Equity Portfolio, other than long-term U.S. Government
securities and short-term investments, were approximately $9,400,000 and
$5,271,000, respectively.
- ----------------------------------------------------------------

-----------------
11
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1997
(UNAUDITED)

SUMMARY OF INVESTMENTS BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
% OF
VALUE NET
SECTOR DIVERSIFICATION (000) ASSETS
- ---------------------------------------- --------- ---------
<S> <C> <C>
Capital Equipment....................... $ 1,819 9.0%
Consumer Goods.......................... 365 1.8
Consumer Products....................... 2,638 13.0
Energy.................................. 2,380 11.7
Finance................................. 3,014 14.8
Materials............................... 1,967 9.7
Multi-Industry.......................... 1,450 7.1
Services................................ 3,975 19.6
Other................................... 2,447 12.1
--------- ---
Total Investments....................... $ 20,055 98.8%
--------- ---
--------- ---
</TABLE>

- ----------12
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

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

INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australia 0.8%
Belgium 1.3%
Canada 1.4%
France 3.9%
Germany 6.6%
Hong Kong 1.4%
Ireland 2.3%
Japan 10.4%
Netherlands 2.8%
Spain 0.6%
Switzerland 4.5%
United Kingdom 12.6%
United States 42.3%
Other 9.1%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD
INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
YTD
---------------
<S> <C>
PORTFOLIO(3).................. 14.90%
INDEX......................... 15.38%
</TABLE>

1. The MSCI World Index is an unmanaged index of common stocks and includes
securities representative of the market structure of 22 developed market
countries in North America, Europe, and the Asia/Pacific region (includes
dividends).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------------ ------------ ---------------
<S> <C> <C>
Philip Morris Cos., Inc. United 2.7%
States
Houghton Mifflin Co. United 2.5%
States
Volkswagen AG Germany 2.3%
Fuji Photo Film Ltd. Japan 2.2%
Irish Life plc Ireland 1.9%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------------------- --------- -------------
<S> <C> <C>
Consumer Products $ 1,669 22.8%
Capital Equipment 1,392 19.0%
Finance 1,200 16.4%
Services 942 12.8%
Materials 556 7.6%
</TABLE>

THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.

The Global Equity Portfolio is managed with the objective of obtaining long-term
capital appreciation by investing primarily in equity securities using an
approach that is oriented to the selection of individual stocks that Morgan
Stanley Asset Management believes are undervalued.

For the period from January 2, 1997 (commencement of operations) through June
30, 1997, the Portfolio had a total return of 14.90% as compared to 15.38% for
the Morgan Stanley Capital International (MSCI) World Index (the "Index").

A stunning rally in the U.S. saw the MSCI USA Index up 17.7% for the second
quarter as indicators suggested second quarter GDP growth had slowed from
quarter one's unsustainable 5.9%. Investors were encouraged by the Federal
Reserve Board's decision to leave interest rates unchanged at their May meeting,
reconfirmed on July 2nd. Inflation was key, the consumption price deflator at
1.8% suggests underlying inflation remains quiescent and below 2%. Further
budget deficit reductions, a mooted cut in capital gains tax, heavy mutual fund
inflows (for May, $20 billion) and continuing merger activity all helped power
the Index to new records.

Japan, unusually in recent times, was one of the strongest markets over the
second quarter. The MSCI Japan Index rose 23.7% in U.S. dollars, 14.3% in yen,
reflecting the sharp currency rise that followed Japanese Treasury officials'
remarks in response to U.S. concerns about Japan's rising trade surplus.
Financial sector problems, most recently manifest in the Nomura Securities
scandal, continue to plague the banks. April's VAT hike, however, was less of a
drag on domestic consumption than expected. Japan remains a two tier market --
large manufacturers/exporters thrive while smaller, non-manufacturing companies
from a range of sectors, particularly those facing deregulation, continue to
struggle.

The MSCI Europe Index rose 8.9% in U.S. dollar terms and 11.1% in local
currency. Political concerns dominated the second quarter, with the initial
shock of a Socialist administration in France and the German government's
unusual public disagreement with the Bundesbank over the treatment of its gold
reserves. Spain and Switzerland were again outstanding performers.

-------------
13

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

The U.K. lagged the other major markets as interest rates rose to offset an
overheating domestic economy. The MSCI U.K. Index rose 8% in U.S. dollars and
6.5% in sterling terms. The 25 basis point rate rise that followed Labor's
landslide election in May was followed in June by a further 25 basis point as
the Bank of England quickly utilized its hard won independence. While currency
strength continued to dampen exports, this was offset by strong gains in the
financial sector with the listing of the Norwich Union Building Society and
takeover speculation at National Westminster Bank.

Clearly, it is difficult to argue that the U.S. market is other than fully
priced. Only time will tell whether there has been a 'paradigm' shift given the
continued lack of pricing power in the face of both robust economic growth and a
fully employed workforce. Earnings, however, have consistently beaten the
consensus for the past seventeen quarters, continuing to confound most market
strategists. Labor markets, however, remain tight and yet productivity gains are
strong and jobs are still perceived as being easily available. With early
indications of a return to 3-4% GDP growth in the second half of the year the
prospect of further interest rate tightening remains a strong possibility.

In terms of currencies, we still subscribe to the view that the U.S. dollar
should be underpinned as the Fed is likely to raise rates further and European
and Japanese central banks will initially be inclined not to follow. Low levels
of nominal yields will also continue to encourage capital outflows from these
regions despite recent words of caution from the Japanese as investors search
for higher returns. Ongoing financial sector problems are likely in our opinion
to prevent the Bank of Japan from raising rates this year.

Our overall position in the United States remains slightly underweight versus
the benchmark and we remain at about half weighting in Japan following a recent
visit there from our Chief Investment Officer, which reinforced our belief that
it is currently hard to find value in this market. We are overweight in Europe
where we continue to find relative value primarily in The Netherlands,
Switzerland and Germany.

July 1997

- ----------14
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

COMMON STOCKS (90.9%)
AUSTRALIA (0.8%)
14,300 CSR Ltd.......................................... $ 55
--------
BELGIUM (1.3%)
1,220 Delhaize-Le Lion, S.A............................ 64
600 G.I.B. Holdings Ltd.............................. 29
--------
93
--------
CANADA (1.4%)
1,350 Potash Corp. of Saskatchewan, Inc................ 102
--------
FRANCE (3.9%)
2,000 Banque Nationale de Paris........................ 83
190 Bongrain S.A..................................... 74
400 Groupe Danone.................................... 66
370 Peugeot S.A...................................... 36
700 Scor S.A......................................... 28
--------
287
--------
GERMANY (6.6%)
1,300 BASF AG.......................................... 48
3,100 Bayer AG......................................... 119
100 Karstadt AG...................................... 36
1,500 VEBA AG.......................................... 85
50 Viag AG.......................................... 23
225 Volkswagen AG.................................... 171
--------
482
--------
HONG KONG (1.4%)
28,000 Jardine Strategic Holdings, Inc.................. 106
--------
IRELAND (2.3%)
3,600 Clondalkin Group plc (Units)..................... 35
26,500 Irish Life plc................................... 136
--------
171
--------
JAPAN (10.4%)
11 East Japan Railway Co............................ 56
4,000 Fuji Photo Film Ltd.............................. 161
5,000 Hitachi Ltd...................................... 57
5,000 Kao Corp......................................... 69
5,000 Matsushita Electric Industries Co., Ltd.......... 101
4 Nippon Telegraph & Telephone Corp................ 38
29,000 NKK Corp......................................... 62
12,000 Sumitomo Marine & Fire Insurance Co.............. 99
1,000 TDK Corp......................................... 73
2,200 Toyo Seikan Kaisha Ltd........................... 49
--------
765
--------
NETHERLANDS (2.8%)
200 Akzo Nobel N.V................................... 27
2,100 ING Groep N.V.................................... 97
1,100 Philips Electronics N.V.......................... 79
--------
203
--------
SPAIN (0.6%)
3,600 Iberdrola S.A.................................... 45
--------
SWITZERLAND (4.5%)
(a)35 Ascom Holdings AG (Bearer)....................... 49
160 Forbo Holding AG (Registered).................... 69

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
90 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... $ 85
70 Nestle S.A. (Registered)......................... 93
40 Sulzer AG (Registered)........................... 34
--------
330
--------
UNITED KINGDOM (12.6%)
5,800 Bass plc......................................... 71
3,000 B.A.T. Industries plc............................ 27
3,850 Burmah Castrol plc............................... 65
9,155 Christian Salvesen plc........................... 43
6,500 Grand Metropolitan plc........................... 62
10,400 Imperial Tobacco Group plc....................... 67
20,000 Matthews (Bernard) plc........................... 38
5,000 Peninsular & Oriental Steam Navigation Co........ 50
15,950 Racal Electronics plc............................ 64
8,200 Reckitt & Colman plc............................. 122
7,000 Rolls-Royce plc.................................. 27
3,600 Scottish Hydro-Electric plc...................... 25
12,900 Tate & Lyle plc.................................. 96
4,200 Unilever plc..................................... 120
1,600 WPP Group plc.................................... 47
--------
924
--------
UNITED STATES (42.3%)
2,100 Albertson's, Inc................................. 77
(a)900 AMR Corp......................................... 83
2,004 Ascent Entertainment Group, Inc.................. 18
1,200 AT&T Corp........................................ 42
1,600 BankBoston Corp.................................. 115
2,000 Boise Cascade Corp............................... 71
1,350 Borg-Warner Automotive, Inc...................... 73
3,800 Browning-Ferris Industries, Inc.................. 126
4,100 Comsat Corp...................................... 98
(a)5,200 Data General Corp................................ 135
(a)14,200 Egghead, Inc..................................... 56
2,100 Enhance Financial Services Group, Inc............ 92
2,000 Equitable Companies, Inc......................... 67
2,200 Federal-Mogul Corp............................... 77
800 Finova Group, Inc................................ 61
(a)3,100 GenRad, Inc...................................... 70
700 Georgia Pacific Corp............................. 60
3,230 Greenfield Industries, Inc....................... 87
1,600 Greenpoint Financial Corp........................ 107
2,700 Houghton Mifflin Co.............................. 180
2,730 IBP, Inc......................................... 64
(a)9,600 InteliData Technologies Corp..................... 46
1,300 Limited (The), Inc............................... 26
500 MBIA, Inc........................................ 56
1,500 MCI Communications Corp.......................... 57
1,400 Mellon Bank Corp................................. 63
(a)1,350 NCR Corp......................................... 40
2,360 Penncorp Financial Group, Inc.................... 91
450 Pennzoil Co...................................... 35
3,800 Pharmacia & Upjohn, Inc.......................... 132
4,500 Philip Morris Cos., Inc.......................... 200
1,300 Polaroid Corp.................................... 72
(a)2,950 Rohr, Inc........................................ 65
1,700 Tandy Corp....................................... 95
</TABLE>

-----------------
15
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
1,700 Tecumseh Products Co., Class A................... $ 102
2,450 Terra Nova (Bermuda) Holdings Ltd................ 52
(a)950 Toys "R" Us, Inc................................. 33
2,400 UST Corp......................................... 54
(a)3,800 Waban, Inc....................................... 122
--------
3,100
--------
TOTAL COMMON STOCKS (COST $5,880)............................... 6,663
--------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------

SHORT-TERM INVESTMENT (9.5%)
REPURCHASE AGREEMENT (9.5%)
$697 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $697,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $711 (COST $697)........ 697
--------
FOREIGN CURRENCY (0.3%)
BEF 52 Belgian Franc.................................... 1
DEM 1 Deutsche Mark.................................... 1
FRF 69 French Franc..................................... 12
JPY 301 Japanese Yen..................................... 3
NLG 1 Netherlands Guilder.............................. 1
CHF 2 Swiss Franc...................................... 1
--------
TOTAL FOREIGN CURRENCY (COST $20)............................... 19
--------
TOTAL INVESTMENTS (100.7%) (COST $6,597*)....................... 7,379
--------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (0.9%)
Cash.................................................. $ 1
Receivable for Portfolio Shares Sold.................. 35
Dividends Receivable.................................. 19
Foreign Withholding Tax Reclaim Receivable............ 5
Receivable for Investments Sold....................... 4 64
------
LIABILITIES (-1.6%)
Payable for Investments Purchased..................... (86)
Professional Fees Payable............................. (14)
Administrative Fees Payable........................... (3)
Custodian Fees Payable................................ (3)
Investment Advisory Fees Payable...................... (2)
Other Liabilities..................................... (9) (117)
------ --------
NET ASSETS (100%)............................................... $ 7,326
--------
--------
</TABLE>

<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------------------------

NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 637,379 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $ 11.49
--------
--------

NET ASSETS CONSIST OF:
Paid in Capital................................................. $ 6,483
Undistributed Net Investment Income............................. 50
Accumulated Net Realized Gain................................... 10
Unrealized Appreciation on Investments and Foreign Currency
Translations.................................................. 783
--------
NET ASSETS...................................................... $ 7,326
--------
--------
</TABLE>

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

(a) -- Non-income producing security

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

*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Global Equity Portfolio
were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- --------------- ----------------- -----------------
<S> <C> <C> <C>
$ 6,577 $ 869 $ (86) $ 783
</TABLE>

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the Global Equity Portfolio, other than long-term U.S. Government securities
and short-term investments, were $6,026,000 and $151,000, respectively.
- ----------------------------------------------------------------

SUMMARY OF INVESTMENTS BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
VALUE % OF
SECTOR DIVERSIFICATION (000) NET ASSETS
- ------------------------------------------- ----------- -------------
<S> <C> <C>
Capital Equipment.......................... $ 1,392 19.0%
Consumer Products.......................... 1,669 22.8
Energy..................................... 80 1.1
Finance.................................... 1,200 16.4
Materials.................................. 556 7.6
Mining..................................... 161 2.2
Multi-Industry............................. 370 5.0
Services................................... 942 12.8
Tobacco.................................... 293 4.0
Other...................................... 716 9.8
----------- -----
Total Investments.......................... $ 7,379 100.7%
----------- -----
----------- -----
</TABLE>

- ----------16
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

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

INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australia 2.9%
Austria 0.6%
Belgium 0.5%
Denmark 1.3%
Finland 1.3%
France 6.6%
Germany 6.9%
Hong Kong 4.3%
Italy 2.5%
Japan 29.5%
Malaysia 1.9%
Netherlands 5.6%
New Zealand 0.3%
Norway 1.1%
Singapore 2.1%
Spain 2.9%
Sweden 3.4%
Switzerland 7.2%
United Kingdom 12.9%
Other 6.2%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
YTD
----------------
<S> <C>
PORTFOLIO(3).................... 16.70%
INDEX........................... 11.21%
</TABLE>

1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends net of withholding
taxes).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE
PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------------ ------------ -------------
<S> <C> <C>
Volkswagen AG Germany 1.2%
Philips Electronics N.V. Netherlands 1.1%
Nestle S.A. (Registered) Switzerland 1.1%
Tokyo Electron Ltd. Japan 1.1%
TDK Corp. Japan 1.0%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------- --------- -------------
<S> <C> <C>
Capital Equipment $ 4,323 29.5%
Consumer Products 2,982 20.4%
Finance 2,304 15.7%
Services 1,673 11.4%
Materials 1,569 10.7%
</TABLE>

THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.

The International Magnum Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance with
the EAFE country weightings determined by Morgan Stanley Asset Management. The
EAFE countries in which the Portfolio will invest are those comprising the
Morgan Stanley Capital International (MSCI) EAFE Index, which includes
Australia, Japan, New Zealand, most nations located in Western Europe, and
certain developed countries in Asia.

For the period from January 2, 1997 (commencement of operations) through June
30, 1997, the Portfolio had a total return of 16.70% as compared to 11.21% for
the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index").

The second quarter of 1997 provided investors with almost an ideal global
investment environment. Markets around the world all posted impressive gains
driven by continued low inflation, surging liquidity and improving corporate
earnings, with several markets reaching new highs.

The Japanese market posted an impressive gain for the second quarter (+23.8% in
U.S. dollar terms; +14.3% in local currency) following an extended period of
underperformance dating back through much of 1996. The economy in Japan is
finally picking up, thereby realizing the lagged benefits of low interest rates
and the devaluation of the yen. The new fiscal year, which began in April, also
saw a surge of liquidity as newly deregulated Japanese pension plans increased
exposure to the equity markets. Overall, consumer and business sentiment appears
to be improving despite an increase in the value added tax (VAT) which was
implemented in April. Nonetheless, the recovery is not so robust that we would
expect interest rates to begin rising any time soon. The Portfolio's weighting
in Japan was maintained at nearly 30% of net assets, contributing to our
substantial gains during the quarter. We also gained from our currency
management, as we unwound all our yen hedges in late April when the yen reached
a low near 126 yen/dollar. We felt the yen had fallen too far, too fast and were
rewarded as the yen recovered in May. We reinstated our hedges at around 111
yen/dollar, believing that the yen has settled into a 110-123 trading range.

The markets in Europe continued their extended rally, rising 8.9% for the second
quarter in U.S. dollar terms and 11.1% in local currency terms. Elections in
France and U.K. saw conservative incumbents replaced by more liberal leaders,
with the French election contributing to increasing

-------------
17

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

uncertainty regarding the future of the European Economic and Monetary Union
(EMU). The French populous effectively voted against the austerity measures
implemented by the previous government to achieve the Maastricht criteria,
instead favoring a Socialist government aiming to increase employment. Both
France and Germany now look less likely to achieve the 3% debt-to-GDP ratio
required for entry into EMU. We believe that EMU will go forward but with a
larger number of countries in the first round -- meaning that the Euro will be a
weaker currency than the Deutschemark. As a result, we have maintained our
hedged exposure to the Deutschemark bloc currencies as we expect the dollar to
continue to strengthen moderately against them. Overall, stock selection in
Europe remains strong with Philips Electronics, one of the Portfolio's larger
holdings, gaining over 30% during June (and over 60% during the quarter) on
strong earnings reports and the news of the Dutch company's link up with Lucent
Technologies of the U.S. to develop additional communications equipment.

In Asia, the story was mixed. The Hong Kong market rose over 20% during the
second quarter as investors became euphoric ahead of the July 1 handover to
China. The market closed at a record high on June 30, Hong Kong's last day under
British rule. Red chip stock (companies with the strongest ties to China)
performed exceptionally well as investors looked to benefit from Hong Kong's new
sovereignty. In sharp contrast to these gains, the Thai market fell over 25%
during the quarter due to on-going concerns about the health of the nation's
banking system (which was burdened under non-performing real estate loans) and
currency (which the government devalued in early July). Although we are only
invested in the developed markets of Asia, the Thai crisis and the devaluation
of the currency have brought into focus the common ills of the fast growth
Southeast Asian economies. Thus, the markets in Malaysia (-11.8%) and Singapore
(-0.8%) both experienced corrections during the quarter. Overall, we have been
pulling back our allocation to Asia over the past several months. Within Asia,
we have been reducing exposure to Malaysia, Hong Kong and Singapore and
increasing exposure to Australia and New Zealand.

Overall, the markets have performed extremely well through the first half of
1997. Looking ahead, however, we are increasingly cautious as valuations look
extended in the majority of markets around the world. Nonetheless, we will
continue to endeavor to uncover stocks with value and monitor market conditions
to adjust our Portfolio accordingly.

July 1997

- ----------18
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

COMMON STOCKS (92.3%)
AUSTRALIA (2.9%)
8,528 Amcor Ltd................................................... $ 57
5,300 Broken Hill Proprietary Co., Ltd............................ 78
4,600 Commonwealth Bank of Australia.............................. 55
2,300 Lend Lease Corp., Ltd....................................... 49
11,700 News Corp., Ltd............................................. 56
3,830 National Australia Bank, Ltd................................ 55
12,200 WMC Ltd..................................................... 77
-------
427
-------
AUSTRIA (0.6%)
1,000 Boehler-Uddeholm AG......................................... 78
130 Radex-Heraklith Industriebet AG............................. 5
-------
83
-------
BELGIUM (0.5%)
1,640 G.I.B. Holdings Ltd......................................... 78
-------
DENMARK (1.3%)
1,700 BG Bank A/S................................................. 94
1,650 Unidanmark A/S, Class A (Registered)........................ 93
-------
187
-------
FINLAND (1.3%)
210 Kone Oy, Class B............................................ 25
12,100 Merita Ltd., Class A........................................ 40
7,900 Rautaruukki Oy.............................................. 83
2,300 Valmet Corp................................................. 40
-------
188
-------
FRANCE (6.6%)
300 Alcatel Alsthom............................................. 38
950 Banque Nationale de Paris................................... 39
140 Bongrain S.A................................................ 55
770 Cie de Saint Gobain......................................... 112
800 Elf Aquitaine S.A........................................... 86
600 Eridania Beghin-Say S.A..................................... 90
620 Groupe Danone............................................... 103
1,450 Lafarge S.A................................................. 90
1,800 Legris Industries S.A....................................... 85
(a)900 SGS-Thomson Microelectronics N.V............................ 71
1,220 Total S.A., Class B......................................... 123
4,500 Usinor Sacilor.............................................. 81
-------
973
-------
GERMANY (5.4%)
2,160 BASF AG..................................................... 80
2,070 Bayer AG.................................................... 80
70 Buderus AG.................................................. 39
4,840 Gerresheimer Glas AG........................................ 81
5,200 Lufthansa AG................................................ 100
(a)410 Metro AG.................................................... 45
1,700 VEBA AG..................................................... 96
200 Viag AG..................................................... 91
240 Volkswagen AG............................................... 182
-------
794
-------
HONG KONG (4.3%)
11,000 Cheung Kong Holdings Ltd.................................... 109
15,000 China Resources Enterprise Ltd.............................. 74

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------

8,000 Dao Heng Bank Group Ltd..................................... $ 44
6,000 Henderson Land Development Co., Ltd......................... 53
7,000 Hutchison Whampoa Ltd....................................... 60
4,000 HSBC Holdings plc........................................... 120
9,000 New World Development Co., Ltd.............................. 54
10,000 Shanghai Industrial Holdings Ltd............................ 62
4,000 Sun Hung Kai Properties Ltd................................. 48
-------
624
-------
ITALY (2.5%)
18,000 Editoriale L'Expresso S.p.A................................. 60
8,600 Marzotto (Gaetano) & Figli S.p.A............................ 72
29,800 Sogefi S.p.A................................................ 75
22,500 Stet Di Risp (NCS).......................................... 78
39,000 Telecom Italia S.p.A., Di Risp (NCS)........................ 77
-------
362
-------
JAPAN (29.5%)
8,000 Amada Co., Ltd.............................................. 71
7,000 Asahi Tec Corp.............................................. 34
5,000 Canon, Inc.................................................. 136
4,000 Dai Nippon Printing Co., Ltd................................ 90
11,000 Daicel Chemical Industry Ltd................................ 43
6,000 Daifuku Co., Ltd............................................ 79
5,000 Daikin Industries Ltd....................................... 45
1,200 FamilyMart.................................................. 59
3,000 Fuji Machine Manufacturing Co............................... 109
3,000 Fuji Photo Film Ltd......................................... 121
4,000 Fujitec Co., Ltd............................................ 47
9,000 Fujitsu Ltd................................................. 125
15,000 Furukawa Electric Co........................................ 95
3,000 Hitachi Credit Corp......................................... 58
11,000 Hitachi Ltd................................................. 123
5,000 Inabata & Co................................................ 34
11,000 Kaneka Corp................................................. 69
3,000 Kurita Water Industries..................................... 80
1,000 Kyocera Ltd................................................. 79
4,000 Kyudenko Co., Ltd........................................... 34
3,000 Lintec...................................................... 55
6,000 Matsushita Electric Industries Ltd.......................... 121
19,000 Mitsubishi Chemical Corp.................................... 62
4,000 Mitsubishi Estate Co., Ltd.................................. 58
12,000 Mitsubishi Heavy Industries Ltd............................. 92
4,000 Mitsumi Electric Co., Ltd................................... 95
2,000 Murata Manufacturing Co., Ltd............................... 80
10,000 NEC Corp.................................................... 140
3,000 Nifco, Inc.................................................. 31
1,000 Nintendo Corp., Ltd......................................... 84
12 Nippon Telegraph & Telephone................................ 115
12,000 Nissan Motor Co............................................. 93
5,000 Nissha Printing............................................. 58
10,000 Obayashi Corp............................................... 67
9,000 Ricoh Co., Ltd.............................................. 118
3,000 Rinnai Corp................................................. 64
1,000 Sangetsu Co., Ltd........................................... 21
4,000 Sankyo Co., Ltd............................................. 134
7,000 Sanwa Shutter............................................... 63
6,000 Sekisui Chemical Co......................................... 61
6,000 Sekisui House Ltd........................................... 61
</TABLE>

-----------------
19
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

2,000 Singapore Press Holdings (Foreign).......................... $ 40
21,000 Summit Holdings Ltd......................................... 16
(a)24,000 Super Coffeemix Manufacturing Ltd........................... 20
3,000 United Overseas Bank Ltd. (Foreign)......................... 31
(a)10,800 Want Want Holdings.......................................... 36
6,000 Wing Tai Holdings Ltd....................................... 17
-------
308
-------
SPAIN (2.9%)
1,030 Banco Bilbao Vizcaya S.A. (Registered)...................... 84
7,700 Iberdrola S.A............................................... 97
3,800 Telefonica de Espana S.A.................................... 110
11,420 Uralita S.A................................................. 128
-------
419
-------
SWEDEN (3.4%)
1,700 Esselte AB, Class B......................................... 40
3,800 Nordbanken AB............................................... 128
1,200 Pharmacia & Upjohn, Inc..................................... 40
1,640 Skandia Forsakrings AB...................................... 60
2,160 S.K.F. AB, Class B.......................................... 56
2,650 Sparbaken Sverige AB, Class A............................... 59
3,100 Spectra-Physics AB, Class A................................. 56
1,960 Svenska Handelsbanken, Class A.............................. 63
-------
502
-------
SWITZERLAND (7.2%)
(a)30 Baloise Holdings Ltd. (Registered).......................... 72
50 Bobst AG (Bearer)........................................... 85
270 Forbo Holdings AG (Registered).............................. 116
130 Holderbank Financiere Glarus AG, Class B (Bearer)........... 123
120 Nestle S.A. (Registered).................................... 158
50 Novartis AG (Registered).................................... 80
340 Oerlikon-Buehrle Holding AG (Registered).................... 40
65 Schindler Holding AG (Registered)........................... 83
60 Schweizerisch Industrie-Gesellschaft Holdings
(Registered).............................................. 89
140 Sulzer AG (Registered)...................................... 120
(a)250 Valora Holding AG (Registered).............................. 53
100 Zurich Versicherungs (Registered)........................... 40
-------
1,059
-------
UNITED KINGDOM (12.9%)
9,450 Associated British Foods plc................................ 81
7,654 Bank of Scotland............................................ 49
7,900 Bass plc.................................................... 96
9,000 BAT Industries plc.......................................... 80
10,800 BG plc...................................................... 40
13,200 British Telecommunications plc.............................. 98
7,100 Burmah Castrol plc.......................................... 120
23,000 Christian Salvesen plc...................................... 108
17,600 Courtaulds Textiles plc..................................... 90
14,800 Grand Metropolitan plc...................................... 142
21,000 Imperial Tobacco Group plc.................................. 135
23,867 John Mowlem & Co. plc....................................... 49
16,000 Kwik Save Group plc......................................... 81
3,900 Peninsular & Oriental Steam Navigation Co................... 39
600 Premier Farnell plc......................................... 5
</TABLE>

- ----------20
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ---------------

RIGHTS (0.0%)
MALAYSIA (0.0%)
(a)2,000 Commerce Asset Holding Bhd, expiring 7/23/97................ --
-------
SWITZERLAND (0.0%)
(a)100 Sulzer AG, expiring 7/11/97................................. --
-------
TOTAL RIGHTS (COST $0)........................................................ --
-------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.0%)
MALAYSIA (0.0%)
(a)1,250 Commerce Asset Holding Bhd, expiring 3/16/02................ --
(a)714 Rashid Hussain Bhd, expiring 12/31/02....................... --
-------
TOTAL WARRANTS (COST $0)...................................................... --
-------
TOTAL FOREIGN SECURITIES (93.8%) (COST $12,379)............................... 13,737
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------

SHORT-TERM INVESTMENT (10.2%)
REPURCHASE AGREEMENT (10.2%)
$1,489 Chase Securities, Inc. 5.70%, dated 6/30/97, due 7/1/97, to
be repurchased at $1,489, collateralized by U.S. Treasury
Notes, 5.625%, due 2/15/06, valued at $1,518 (COST
$1,489)................................................... 1,489
-------
</TABLE>

<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------

FOREIGN CURRENCY (1.2%)
BEF 779 Belgian Franc............................................... $ 22
DEM 8 Deutsche Mark............................................... 5
FRF 85 French Franc................................................ 15
ITL 7,332 Italian Lira................................................ 4
JPY 11,781 Japanese Yen................................................ 103
NLG 55 Netherlands Guilder......................................... 28
SGD 1 Singapore Dollar............................................ --
ESP 166 Spanish Peseta.............................................. 1
CHF 5 Swiss Franc................................................. 3
-------
TOTAL FOREIGN CURRENCY (COST $182)............................................ 181
-------
TOTAL INVESTMENTS (105.2%) (COST $14,050*).................................... 15,407
-------

OTHER ASSETS (1.7%)
Cash................................................................... $ 91
Receivable for Portfolio Shares Sold................................... 49
Dividends Receivable................................................... 46
Net Unrealized Gain on Foreign Currency Exchange Contracts............. 45
Foreign Withholding Tax Reclaim Receivable............................. 10
Receivable for Investments Sold........................................ 8 249
---------
LIABILITIES (-6.9%)
Payable for Investments Purchased...................................... (966)
Custodian Fees Payable................................................. (16)
Investment Advisory Fees Payable....................................... (6)
Administrative Fees Payable............................................ (5)
Professional Fees Payable.............................................. (2)
Payable for Closed Foreign Currency Contracts.......................... (1)
Other Liabilities...................................................... (17) (1,013)
--------- ---------
NET ASSETS (100%)................................................................... $ 14,643
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 1,255,156 outstanding $0.001 par value shares (authorized 500,000,000
shares)........................................................................... $ 11.67
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital..................................................................... $ 12,802
Undistributed Net Investment Income................................................. 109
Accumulated Net Realized Gain....................................................... 328
Unrealized Appreciation on Investments and Foreign Currency Translations............
1,404
---------
NET ASSETS.......................................................................... $ 14,643
---------
---------
</TABLE>

-----------------
21
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1997
(UNAUDITED)

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

FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:

Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:

<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED GAIN
(000) (000) DATE (000) (000) (LOSS) (000)
--------------- --------- ----------- ----------- --------- -------------------
<S> <C> <C> <C> <C> <C>
U.S.$ 125 $ 125 8/18/97 NLG 242 $ 124 $ (1)
U.S.$ 125 125 8/18/97 CHF 178 123 (2)
NLG 641 328 8/18/97 U.S.$ 338 338 10
CHF 19 13 8/18/97 U.S.$ 13 13 --
CHF 499 344 8/18/97 U.S.$ 351 351 7
JPY 100,442 884 8/25/97 U.S.$ 900 900 16
DEM 590 340 8/29/97 U.S.$ 344 344 4
U.S.$ 100 100 8/29/97 DEM 172 99 (1)
BEF 1,475 41 8/29/97 DEM 42 42 1
U.S.$ 25 25 8/29/97 BEF 886 25 --
U.S.$ 150 150 9/15/97 FRF 868 149 (1)
FRF 2,218 379 9/15/97 U.S.$ 391 391 12
--------- --------- ---
$ 2,854 $ 2,899 $ 45
--------- --------- ---
--------- --------- ---
</TABLE>

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

(a) -- Non-income producing security
NCS -- Non Convertible Shares

- ----------------------------------------------------------------
*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the International Magnum
Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- ------------- --------------- ---------------
<S> <C> <C> <C>
$ 13,868 $ 1,533 $ (175) $ 1,358
</TABLE>

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the International Magnum Portfolio other than long-term U.S. Government
securities and short-term investments were $14,030,000 and $1,701,000,
respectively.

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

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

SUMMARY OF INVESTMENTS BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
VALUE % OF
SECTOR DIVERSIFICATION (000) NET ASSETS
- ------------------------------------------------------------------------------ --------- -------------
<S> <C> <C>
Capital Equipment............................................................. $ 2,606 17.8%
Consumer Products............................................................. 2,982 20.4
Electrical and Electronics.................................................... 1,717 11.7
Energy........................................................................ 615 4.2
Finance....................................................................... 2,304 15.7
Materials..................................................................... 1,569 10.7
Multi-Industry................................................................ 271 1.9
Services...................................................................... 1,673 11.4
Other......................................................................... 1,670 11.4
--------- -----
Total Investments............................................................. $ 15,407 105.2%
--------- -----
--------- -----
</TABLE>

- ----------22
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

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

INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Capital Goods/Construction 10.4%
Consumer Cyclical 23.4%
Consumer Staples 13.0%
Diversified 11.6%
Energy 2.3%
Finance 20.5%
Materials 1.0%
Services 2.5%
Technology 10.2%
Other 5.1%
</TABLE>

<TABLE>
<CAPTION>
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- ------------------------------------ TOTAL
RETURNS(2)
YTD
-------------
<S> <C>
PORTFOLIO(3)................................. 15.30%
INDEX........................................ 20.61%
</TABLE>

1. The S&P 500 Index is an unmanaged index of common stocks.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT
OF
NET
SECURITY INDUSTRY ASSETS
- -------------------------- ----------------- ----
<S> <C> <C>
HFS, Inc. Consumer Cyclical 8.4%
Philip Morris Cos., Inc. Consumer Staples 6.6%
United Technologies Corp. Capital Goods-
Construction 4.6%
Wells Fargo & Co. Finance 2.7%
Berkshire Hathaway, Inc. Diversified 2.4%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------------------------- ----- -------------
<S> <C> <C>
Consumer Cyclical $ 925 23.4%
Finance 811 20.5%
Consumer Staples 516 13.0%
Capital Goods-Construction 483 12.2%
Technology 406 10.2%
</TABLE>

The Equity Growth Portfolio is managed with the objective of obtaining long-term
capital appreciation by investing primarily in equity securities of medium and
large capitalization companies that, in the judgement of Morgan Stanley Asset
Management, provide above-average potential for capital growth.

For the period from January 2, 1997 (commencement of operations) through June
30, 1997, the Portfolio had a total return of 15.30% as compared to 20.61% for
the S&P 500 Index (the "Index").

Our investment style is to concentrate quite heavily when our conviction in a
security is high and we believe the growth fundamentals of a company are very
strong. We also concentrate when positive earnings surprise vis-a-vis consensus
expectations is likely. But it is not a "surprise" if the stock is already owned
in virtually every growth portfolio and has surged. We tend to feel more
comfortable with stocks that may be temporarily under a cloud but where growth
fundamentals remain intact. We refer to this as "headline" risk as opposed to
earnings risk.

Since late 1996, we have felt that many of the high quality, large
capitalization growth stocks are not attractive investments, favoring instead
higher beta, less well established growth company stocks where growth is rapid
and the price/earnings ratio to growth rate is reasonable. Our call was either
wrong or painfully early. In both the first and second quarters of 1997, many of
the largest capitalization stocks moved sharply higher, typically without any
upward earnings estimate revisions and sometimes in the face of downward
revisions. The following statistics illustrate this point.

<TABLE>
<CAPTION>
% GAIN IN RECENT P/E ON AVERAGE P/E
FIRST HALF ESTIMATE SUSTAINABLE PROJECTED -------------------------------
1997 REVISIONS GROWTH RATE 1997 EARNINGS 1994 1995 1996
---------- --------- ------------ ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GE............................ 33% Up 13% 26.0 14.9 15.8 19.4
Merck......................... 28% Down 14% 26.9 15.4 19.6 23.2
Coca Cola..................... 28% Flat 18% 40.1 24.3 26.5 32.1
Gillette...................... 22% Down 18% 36.4 21.9 24.9 39.1
Disney........................ 14% Down 18% 29.4 21.7 20.2 32.8
</TABLE>

Many factors are driving the powerful bull market in U.S. stocks, including
strong corporate profit growth, sustained low inflation, moderate interest rates
and increased shareholder orientation among corporate managements. But what is
driving the strong performance of the blue chip stocks

-------------
23

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

versus the broader equity market? There are a variety of possible factors, but
the explosion in passive index investing is likely the most important. Active
managers in U.S. stocks underperformed index funds by a wide margin in 1994,
1995, 1996 and again year-to-date in 1997. This has led to a perverse situation
in which larger cap means better due to money flows. This is further compounded
by the buying power of price momentum investors who are purchasing blue chips on
the basis of the strong uptrends in stock prices.

We do not know where all this will lead, but one thing is clear: stocks cannot
rise faster than the underlying companies' growth rates over the long term. Our
best guess is that the blue chips should begin to flatten out as investors
accept more risk for greater reward. Our largest holding at June 30, HFS,
represents the type of stock we think may outperform over the next 12-18 months.

HFS, a consumer services and franchising company that recently announced a
merger with direct marketer CUC International, is trading at about 25 times
projected 1997 earnings, with a near-term growth rate of 30% plus and a
sustainable growth rate, we think, of 20-25%. The balance sheet, pro forma for
the merger, is underleveraged and free cash flow generation is extremely strong.
Consensus earnings estimates should rise over the next 12 months. Looking out 18
months, we could see HFS trading, conservatively, at 20-25 times projected 1999
earnings, within a range of $82-102 (up 32-65%). But a much higher multiple is
conceivable given the price/earnings to growth ratios enjoyed by the blue chip
growth stocks. Other names in the Portfolio at June that fit into this category
of high beta/low P/E ratio to growth include: Clear Channel Communications,
Gtech, K-III Communications and Cracker Barrel.

Three groups that represent major commitments in the Portfolio are financial
services; multi-industry/aerospace; and tobacco. Financial services represented
approximately 21% of the Portfolio (based on net assets) at June 30, compared to
15% for the S&P 500 index and 6% for the Russell 1000 Growth Index. We have
believed for several years, and continue to feel, that selected financial
services companies enjoy robust growth fundamentals, yet investors tend to look
backwards and treat these stocks like the cyclical, interest-sensitive names
they used to be. We believe that the banking, credit card, brokerage/asset
management and insurance industries all have greater growth prospects than is
generally acknowledged. In addition, earnings estimates have been rising, even
in the face of the recent Fed Funds rate hike, and we feel confident that, for
the better positioned companies, further rate increases would not lead to
downward estimate revisions. In banking, our largest holding is Wells Fargo, and
we also hold meaningful positions in Citicorp, BankAmerica and Chase. We own
American Express, the dominant player in credit cards with a strong money
management arm. In the brokerage/asset management area we own Merrill Lynch and
Franklin Resources and in insurance our significant holdings include Aetna,
CMAC, Ace Ltd., CNA Financial and Berkshire Hathaway (which owns 100% of Geico).

Our third largest holding at June 30 was United Technologies, a global
multi-industry company with interests in jet engines (Pratt and Whitney), air
conditioning (Carrier), elevators (Otis), automotive parts (UT Automotive) and
helicopters (Sikorsky). Like our other multi-industry holdings--Allied Signal,
Textron and ITT Industries--United Technologies provides some cyclical exposure
to the Portfolio. But these companies are really "growth cyclicals" benefiting
from increased international demand, rising profit margins due to restructuring
and substantial free cash flow generation. We believe each of these companies is
executing a GE-type transformation from cyclical to stable growth company. We
expect United Technologies and Allied Signal to each grow in excess of 15%
compounded over the next 3-5 years, with Textron growing about 15%. ITT is a
cheaper, turnaround play but fundamentals are strong.

United Technologies is also appealing because its Pratt and Whitney division is
benefiting from the strong upcycle in the commercial aircraft industry. The
purest play in this, of course, is Boeing, which is also a major holding in the
Portfolio. Boeing is expected to close on its merger with

- ----------24

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

McDonnell Douglas this summer. We hold a combined position of about 3% in Boeing
and McDonnell Douglas. The new Boeing will be a unique and exciting cyclical
growth story due to a confluence of positives:

- - With Douglas Aircraft gone, Boeing will be the larger of two players in a
global duopoly, perfectly positioned to benefit from rising demand for
commercial aircraft.

- - As one of the largest defense contractors, Boeing should be far less
vulnerable to a weakening economy than before.

- - It is very unlikely that Boeing will need to develop a new aircraft during
this cycle, instead focusing on less costly derivatives of existing models.
This should drive profit margins much higher.

- - Earnings momentum should be very strong, with EPS growth of 40% projected in
1998, followed by close to 20% growth in 1999.

- - The balance sheet is underleveraged, meaning the company may begin to
repurchase shares by 1999.

After taking profits and downsizing our big tobacco bet in early 1997, we added
to it again in the second quarter. Why? The tobacco stocks have once again
drifted to huge P/E discounts to their true peer group of stocks--consumer
products, food, beverage and drug stocks. The result is that the tobacco stocks
appear to be in a "win-win" position, much like last year when they had sold off
in the spring and again in the autumn on litigation fears. The current fear is
that the recently proposed $368 billion global settlement will not make it
through Congress without more pain being inflicted on the industry. Our view is
that, as usual, the industry is in a much stronger position in this battle than
what is portrayed in the media. We say this for the following reasons:

- - Consumers have been warned for 30 years, and the product cannot be made
illegal since it creates gigantic tax revenues and prohibition would lead to a
black market. Combining income and excise taxes, Philip Morris is the largest
taxpayer in America.

- - Despite all the noise in the media, plaintiffs continue to have a very hard
time battling the deep-pocketed cigarette industry. After winning a case last
August, the plaintiffs lost the next two cases. The industry has never paid a
dime to plaintiffs. Hence, while health advocates and other anti-tobacco
activists scream about wanting the industry to feel more pain, the plaintiffs'
bar and state attorneys general want the deal to go through.

We own two tobacco stocks, Philip Morris and Loews. Philip Morris is our second
largest holding and together the two stocks account for about 9% of the
Portfolio (based on net assets). Finally, and importantly, business is strong
and we expect solid EPS growth in 1998 and beyond.

July 1997

-------------
25
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

COMMON STOCK (94.9%)
CAPITAL GOODS--CONSTRUCTION (10.4%)
AEROSPACE & DEFENSE (10.4%)
900 Boeing Co........................................ $ 48
700 Gulfstream Aerospace Corp........................ 21
(a)700 Litton Industries, Inc........................... 34
900 McDonnell Douglas Corp........................... 62
900 Thiokol Corp..................................... 63
2,200 United Technologies Corp......................... 182
------
TOTAL CAPITAL GOODS--CONSTRUCTION............................. 410
------
CONSUMER CYCLICAL (23.4%)
AUTOMOTIVE (1.0%)
500 Ford Motor Co.................................... 19
(a)500 O'Reilly Automotive, Inc......................... 19
------
38
------
BROADCAST--RADIO & TELEVISION (3.0%)
(a)1,300 Clear Channel Communications, Inc................ 80
(a)400 Heftel Broadcasting Corp., Class A............... 22
400 Time Warner, Inc................................. 19
------
121
------
ENTERTAINMENT & LEISURE (2.6%)
(a)2,900 GTECH Holdings Corp.............................. 94
300 WMS Industries, Inc.............................. 7
------
101
------
FOOD SERVICE (2.3%)
1,700 Cracker Barrel Old Country Store, Inc............ 45
600 Einstein/Noah Bagel Corp......................... 7
800 McDonald's Corp.................................. 39
------
91
------
GAMING & LODGING (9.2%)
(a)5,700 HFS, Inc......................................... 331
2,000 International Game Technology.................... 35
------
366
------
PUBLISHING (2.4%)
200 Gannett Co., Inc................................. 20
(a)6,300 K-III Communications Corp........................ 75
------
95
------
RETAIL--FOOD (0.3%)
400 Dominick's Supermarkets, Inc..................... 11
------
RETAIL--GENERAL (2.6%)
1,300 Home Depot, Inc.................................. 90
(a)500 Woolworth Corp................................... 12
------
102
------
TOTAL CONSUMER CYCLICAL....................................... 925
------
CONSUMER STAPLES (13.0%)
BEVERAGES (2.0%)
3,400 Coca Cola Enterprises, Inc....................... 78
------
CIGARETTES (6.6%)
5,900 Philip Morris Cos., Inc.......................... 262
------

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
FOOD (1.1%)
900 Campbell Soup Co................................. $ 45
------
HOSPITAL SUPPLIES & SERVICES (3.3%)
700 Aetna, Inc....................................... 71
800 Becton Dickinson & Co............................ 40
500 Columbia/HCA Healthcare Corp..................... 20
------
131
------
TOTAL CONSUMER STAPLES........................................ 516
------
DIVERSIFIED (11.6%)
1,100 Allied Signal, Inc............................... 92
(a)2 Berkshire Hathaway, Inc., Class A................ 94
600 Hillenbrand Industries........................... 29
1,700 ITT Industries, Inc.............................. 44
900 Loews Corp....................................... 90
1,100 Textron, Inc..................................... 73
2,000 Viad Corp........................................ 39
------
TOTAL DIVERSIFIED............................................. 461
------
ENERGY (2.3%)
COAL, GAS, & OIL (2.3%)
(a)200 AES Corp......................................... 14
300 Amoco Corp....................................... 26
200 British Petroleum Co. plc ADR.................... 15
(a)300 Diamond Offshore Drilling, Inc................... 23
100 Schlumberger, Ltd................................ 13
------
TOTAL ENERGY.................................................. 91
------
FINANCE (20.5%)
BANKING (7.0%)
1,000 BankAmerica Corp................................. 65
400 Chase Manhattan Corp............................. 39
400 Citicorp......................................... 48
400 H.F. Ahmanson & Co............................... 17
400 Wells Fargo & Co................................. 108
------
277
------
FINANCIAL SERVICES (5.8%)
800 American Express Co.............................. 60
700 Charles Schwab Corp.............................. 28
100 CIGNA Corp....................................... 18
500 Franklin Resources, Inc.......................... 36
700 Merrill Lynch & Co............................... 42
200 Ocwen Financial Corp............................. 7
300 Student Loan Marketing Association............... 38
------
229
------
INSURANCE (7.7%)
1,000 Ace Ltd.......................................... 74
1,800 CMAC Investment Corp............................. 86
(a)500 CNA Financial Corp............................... 53
400 Equitable of Iowa Cos............................ 22
500 MGIC Investment Corp............................. 24
200 Progressive Corp................................. 17
1,200 USF&G Corp....................................... 29
------
305
------
TOTAL FINANCE................................................. 811
------
</TABLE>

- ----------26
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------

SHORT-TERM INVESTMENT (15.4%)
REPURCHASE AGREEMENT (15.4%)
$608 Chase Securities, Inc. 5.70%,dated 6/30/97, due
7/1/97, to be repurchased at $608,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $620, (COST $608)....... $ 608
------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (110.3%) (COST $3,996*)... 4,367
------
OTHER ASSETS (2.1%)
Dividends Receivable............... $ 3
Receivable for Investments Sold.... 27
Due from Adviser................... 27
Receivable for Portfolio Shares
Sold.............................. 26 83
-----
LIABILITIES (-12.4%)
Payable for Investments
Purchased......................... (415)
Custodian Fees Payable............. (36)
Professional Fees Payable.......... (14)
Bank Overdraft..................... (6)
Administrative Fees Payable........ (2)
Other Liabilities.................. (18) (491)
----- ------
NET ASSETS (100%) $3,959
------
------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 343,470 outstanding $0.001 par
value shares (authorized 500,000,000
shares)................................... $11.53
------
------

NET ASSETS CONSIST OF:
Paid in Capital............................. $3,519
Undistributed Net Investment Income......... 9
Accumulated Net Realized Gain............... 60
Unrealized Appreciation on Investments...... 371
------
NET ASSETS.................................. $3,959
------
------
</TABLE>

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

(a) -- Non-income producing security
ADR -- American Depositary Receipt

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

*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Equity Growth Portfolio
were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- --------------- ----------------- ---------------
<S> <C> <C> <C>
$ 3,996 $ 401 $ (30) $ 371
</TABLE>

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the Equity Growth Portfolio, other than long-term U.S. Government securities
and short-term investments, were $5,724,000 and $2,396,000, respectively.
- ----------------------------------------------------------------

-----------------
27
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

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

INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Basic Resources 2.5%
Consumer Durables 5.2%
Consumer Services 3.3%
Energy 10.5%
Finance 19.9%
Food, Tobacco & Other 4.4%
Health Care 7.5%
Heavy
Industry/Transportation 17.1%
Retail 10.2%
Technology 14.1%
Utilities 2.9%
Other 2.4%
</TABLE>

<TABLE>
<CAPTION>
PERFORMANCE COMPARED TO THE S&P MIDCAP 400 INDEX(1)
- ------------------------------------
TOTAL RETURNS(2)
YTD
----------------
<S> <C>
PORTFOLIO(3).................. 19.10%
INDEX......................... 13.03%
</TABLE>

1. The S&P MidCap 400 Index is a value weighted index. The companies chosen for
the Index generally have market values between $800 million and $3 billion,
depending upon current equity market valuations, and represent a broad range
of industry segments within the U.S. economy.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ----------------------------- -------------- -------------
<S> <C> <C>
Air Express International Heavy
Corp. Industry/
Transportation 2.2%
Franklin Resources, Inc. Investment
Companies 2.1%
Crane Co. Heavy
Industry/
Transportation 1.5%
Miller (Herman), Inc. Heavy
Industry/
Transportation 1.5%
CVS Corp. Retail 1.5%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------- ----- -------------
<S> <C> <C>
Finance $ 979 19.9%
Heavy Industry/Transportation 843 17.1%
Technology 695 14.1%
Energy 513 10.5%
Retail 504 10.2%
</TABLE>

The Mid Cap Value Portfolio seeks above-average total return over a market cycle
of three to five years by investing in common stocks and other equity securities
of issuers with equity capitalizations in the range of the companies represented
in the S&P MidCap 400 Index.

For the period from January 2, 1997 (commencement of operations) through June
30, 1997, the Portfolio had a total return of 19.10% as compared to 13.03% for
the S&P MidCap 400 Index (the "Index").

The Portfolio invests in all economic sectors of the market, and our strategy of
maintaining a well-diversified portfolio is intended to produce consistent and
reliable results over time. Our investment approach combines quantitative and
fundamental research, and is based on the premise that the prices of stocks move
more frequently, and in greater magnitude, than do the fundamentals of the
underlying companies. This discrepancy creates an opportunity for disciplined,
value-oriented investors. Our value approach importantly includes quality and
growth standards which are carefully designed to help avoid "value-traps", where
cheap stocks sometimes remain cheap (or become cheaper) because the company is
run by bad managers or is mired in a hopelessly difficult business environment.
The end result should be a portfolio with below-market valuation and an overall
growth rate as similar as possible to the Index.

Both sector and stock selection supported the Portfolio's outperformance.
Particularly additive was the overweighting in financial services, a sector
which outperformed, and our underweight in utilities, a sector which
underperformed. Individual stocks which were additive to performance included
Franklin Resources in the financials, Computer Products in technology, Crane,
AccuStaff, and Air Express in heavy industry and transportation, and Noble
Drilling in the energy sector.

- ----------28

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

At the start of the second quarter we reduced our weighting in financials
following the Federal Reserve tightening. Subsequently, we reversed course and
added to financials after news on inflation and economic growth was moderate,
profitability was better than expected, and the strength of the dollar helped
mitigate inflation pressures. Importantly, sustained labor productivity gains
have reduced the effect of rising wages on profits and prices.

In addition to our overweighting in financials, we are also overweighted in the
oil service and business service stocks. We are maintaining an underweighting in
utilities and basic resources.

July 1997

-------------
29
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

COMMON STOCKS (97.6%)
BASIC RESOURCES (2.5%)
400 H. B. Fuller Co.................................. $ 22
200 Oregon Steel Mills, Inc.......................... 4
(a)1,100 Owens-Illinois, Inc.............................. 34
1,100 P.H. Glatfelter Co............................... 22
200 Rohm & Haas Co................................... 18
(a)800 Tetra Technologies, Inc.......................... 20
------
120
------
CONSUMER DURABLES (5.2%)
100 Armstrong World Industries, Inc.................. 7
400 Callaway Golf Co................................. 14
(a)700 Champion Enterprises, Inc........................ 11
300 Ethan Allen Interiors, Inc....................... 17
(a)700 Furniture Brands International, Inc.............. 14
500 Harley-Davidson, Inc............................. 24
(a)900 Lear Corp........................................ 40
500 Mascotech, Inc................................... 10
600 PACCAR, Inc...................................... 28
700 Premark International, Inc....................... 19
600 Southdown, Inc................................... 26
(a)500 Tower Automotive, Inc............................ 21
(a)700 USG Corp......................................... 26
------
257
------
CONSUMER SERVICES (3.3%)
400 Hertz Corp., Class A............................. 14
100 Jostens, Inc..................................... 3
2,100 Journal Register Co.............................. 42
(a)500 MGM Grand, Inc................................... 18
800 McClatchy Newspapers, Inc., Class A.............. 24
200 New York Times Co., Class A...................... 10
(a)500 Valassis Communications, Inc..................... 12
100 Washington Post Co., Class B..................... 40
------
163
------
ENERGY (10.5%)
700 Apache Corp...................................... 23
(a)900 BJ Services Co................................... 48
500 Columbia Gas System, Inc......................... 33
(a)400 Cooper Cameron Corp.............................. 19
(a)400 Diamond Offshore Drilling, Inc................... 31
200 El Paso Natural Gas Co........................... 11
(a)1,200 ENSCO International, Inc......................... 63
(a)700 Global Marine, Inc............................... 16
400 National Fuel Gas Co............................. 17
400 NICOR, Inc....................................... 14
(a)2,600 Noble Drilling Corp.............................. 59
400 ONEOK, Inc....................................... 13
400 Pacific Enterprises.............................. 13
(a)600 Precision Drilling Corp.......................... 29
(a)800 Santa Fe International Corp...................... 27
400 Sun Co., Inc..................................... 12
500 Transocean Offshore, Inc......................... 36
800 Union Texas Petro Holdings, Inc.................. 17
(a)400 Varco International, Inc......................... 13

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------
200 Vastar Resources, Inc............................ $ 7
(a)300 Weatherford Enterra, Inc......................... 12
------
513
------
FINANCE (19.9%)
BANKING (9.8%)
200 AMBAC, Inc....................................... 15
600 AmSouth Bancorp.................................. 23
400 Astoria Financial Corp........................... 19
300 City National Corp............................... 7
300 Collective Bancorp, Inc.......................... 13
800 Comerica, Inc.................................... 54
900 Community First Bankshares, Inc.................. 34
800 Cullen/Frost Bankers, Inc........................ 34
800 First Financial Corp. of Wisconsin............... 24
450 First of America Bank Corp....................... 20
300 FirstBank Puerto Rico............................ 8
300 MAF Bancorp, Inc................................. 13
800 National Commerce Bancorp........................ 18
1,400 North Fork Bancorp, Inc.......................... 30
400 Northern Trust Corp.............................. 19
900 Southtrust Corp.................................. 37
600 Summit Bancorp................................... 30
900 Union Planters Corp.............................. 47
200 UnionBanCal Corp................................. 14
500 Wilmington Trust Corp............................ 23
------
482
------
CREDIT & FINANCE (1.6%)
700 Capital One Financial Corp....................... 26
700 CMAC Investment Corp............................. 33
(a)200 Healthcare Financial Partners, Inc............... 4
100 Student Loan Marketing Association............... 13
------
76
------
INSURANCE (4.0%)
100 Chartwell Re Corp................................ 3
500 Everest Reinsurance Holdings, Inc................ 20
400 Hartford Life, Inc., Class A..................... 15
500 Mercury General Corp............................. 36
1,300 Nationwide Financial Services, Inc., Class A..... 35
400 Progressive Corp................................. 35
1,100 Reliance Group Holdings, Inc..................... 13
300 Torchmark Corp................................... 21
700 Western National Corp............................ 19
------
197
------
INVESTMENT RELATED COMPANIES (2.9%)
600 Bear Stearns Co., Inc............................ 21
1,400 Franklin Resources, Inc.......................... 102
300 Paine Webber Group, Inc.......................... 11
400 United Asset Management Corp..................... 11
------
145
------
REAL ESTATE INVESTMENT TRUSTS (1.6%)
2,300 CarrAmerica Realty Corp. REIT.................... 66
500 Kilroy Realty Corp. REIT......................... 13
------
79
------
TOTAL FINANCE............................................... 979
------
</TABLE>

- ----------30
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

HEALTH CARE (7.5%)
(a)500 Biogen, Inc...................................... 17
(a)600 Coherent, Inc.................................... 27
(a)1,100 FPA Medical Management, Inc...................... 26
(a)400 Health Care and Retirement Corp.................. 13
(a)2,500 Healthdyne Technologies, Inc..................... 43
(a)500 Marquette Medical Systems, Class A............... 11
(a)1,900 Nellcor Puritan Bennett, Inc..................... 35
(a)600 Personnel Group of America, Inc.................. 17
(a)200 Rotech Medical Corp.............................. 4
3,300 Sullivan Dental Products, Inc.................... 60
(a)800 Universal Health Services, Inc., Class B......... 31
(a)500 Vencor, Inc...................................... 21
(a)200 Watson Pharmaceuticals, Inc...................... 8
(a)1,000 Wellpoint Health Networks, Inc................... 46
600 Xomed Surgical Products, Inc..................... 12
------
371
------

HEAVY INDUSTRY/TRANSPORTATION (17.1%)
(a)2,400 AccuStaff, Inc................................... 57
400 Agco Corp........................................ 14
2,700 Air Express International Corp................... 107
1,600 Arnold Industries, Inc........................... 27
(a)1,000 Aviation Sales Co................................ 24
(a)1,700 CDI Corp......................................... 71
(a)300 Coltec Industries, Inc........................... 6
1,800 Crane Co......................................... 75
1,200 Danka Business Systems plc ADR................... 49
500 DONCASTERS plc ADR............................... 12
800 Expeditors International of Washington, Inc...... 23
400 Halter Marine Group, Inc......................... 10
(a)600 Hirsch International Corp., Class A.............. 13
100 Ingersoll Rand Co................................ 6
(a)500 Interim Services, Inc............................ 22
1,300 JLG Industries, Inc.............................. 18
400 Kaydon Corp...................................... 20
(a)750 Midwest Express Holdings, Inc.................... 20
2,000 Miller (Herman), Inc............................. 72
(a)2,200 OMI Corp......................................... 21
(a)1,400 Offshore Logistics, Inc.......................... 26
700 Precision Castparts Corp......................... 42
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------
(a)400 SPS Technologies, Inc............................ $ 28
300 Thiokol Corp..................................... 21
600 Triumph Group, Inc............................... 19
(a)400 Tuboscope Vetco International Corp............... 8
(a)700 USA Waste Services, Inc.......................... 27
100 York International Corp.......................... 5
------
843
------
RETAIL (10.2%)
300 American Stores Co............................... 15
(a)700 Boston Chicken, Inc.............................. 10
400 Brylane, Inc..................................... 15
1,400 CVS Corp......................................... 72
(a)700 Designer Holdings Ltd............................ 7
1,500 Duty Free International, Inc..................... 28
(a)300 Fred Meyer, Inc.................................. 15
(a)500 Fruit of the Loom, Inc., Class A................. 16
1,200 Hughes Supply, Inc............................... 48
(a)1,000 Office Depot, Inc................................ 19
1,100 Pier 1 Imports, Inc.............................. 29
(a)500 Polo Ralph Lauren Corp........................... 14
2,100 ProSource, Inc................................... 15
1,300 Richfood Holdings, Inc........................... 34
1,400 Ross Stores, Inc................................. 46
2,000 TJX Companies, Inc............................... 53
800 V.F. Corp........................................ 68
------
504
------
TECHNOLOGY (14.1%)
(a)600 ADC Telecommunications, Inc...................... 20
800 Adobe Systems, Inc............................... 28
(a)700 Altera Corp...................................... 35
(a)200 BMC Software, Inc................................ 11
(a)1,000 Cadence Design Systems, Inc...................... 34
(a)500 Ceridian Corp.................................... 21
(a)1,000 Computer Products, Inc........................... 25
(a)300 ESS Technology, Inc.............................. 4
(a)500 FactSet Research Systems, Inc.................... 12
(a)1,000 Fiserv, Inc...................................... 45
(a)1,200 Gateway 2000, Inc................................ 39
1,000 General Cable Corp............................... 26
(a)1,600 HMT Technology Corp.............................. 21
(a)800 Inacom Corp...................................... 25
(a)800 Intevac, Inc..................................... 10
(a)1,700 Overland Data, Inc............................... 9
(a)600 Parametric Technology Corp....................... 26
1,200 Penn Engineering & Manufacturing Corp............ 24
(a)600 SCI Systems, Inc................................. 38
(a)600 Seagate Technology............................... 21
(a)300 Solectron Corp................................... 21
(a)1,200 Symantec Corp.................................... 23
(a)800 Tech Data Corp................................... 25
800 Technology Modeling Association, Inc............. 11
600 Tektronix, Inc................................... 36
(a)900 Teradyne, Inc.................................... 35
(a)600 USCS International, Inc.......................... 20
(a)400 Vishay Intertechnology, Inc...................... 12
(a)1,200 Western Digital Corp............................. 38
------
695
------
</TABLE>

-----------------
31
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------

SHORT-TERM INVESTMENT (4.8%)
REPURCHASE AGREEMENT (4.8%)
$238 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $238,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $245 (COST $238)........ 238
------
TOTAL INVESTMENTS (102.4%) (COST $4,467*)................... 5,040
------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (1.7%)
Receivable for Investments Sold.................. $ 60
Receivable for Portfolio Shares Sold............. 15
Due from Adviser................................. 6
Dividends Receivable............................. 3 84
------
LIABILITIES (-4.1%)
Payable for Investments Purchased................ (131)
Bank Overdraft................................... (45)
Custodian Fees Payable........................... (11)
Professional Fees Payable........................ (9)
Administrative Fees Payable...................... (1)
Other Liabilities................................ (5) (202)
------ -------
NET ASSETS (100%).......................................... $4,922
-------
-------
</TABLE>

<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------------------

NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 413,203 outstanding $0.001 par value shares
(authorized 500,000,000 shares).......................... $11.91
-------
-------
NET ASSETS CONSIST OF:
Paid in Capital............................................ $4,231
Undistributed Net Investment Income........................ 8
Accumulated Net Realized Gain.............................. 110
Unrealized Appreciation on Investments..................... 573
-------
NET ASSETS................................................. $4,922
-------
-------
</TABLE>

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

(a) -- Non-income producing security
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust

- ---------------
*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Mid Cap Value Portfolio
were:

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the Mid Cap Value Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $6,523,000 and $2,403,000
respectively.
- ----------------------------------------------------------------

- ----------32
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

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

INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Apartment 20.6%
Healthcare 9.7%
Land 2.2%
Lodging/Leisure 12.2%
Manufactured Home 6.8%
Office and
Industrial 21.4%
Retail 14.9%
Self Storage 1.1%
Other 11.1%
</TABLE>

PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT
TRUSTS (NAREIT) EQUITY INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
YTD
-----------------
<S> <C>
PORTFOLIO(3).................. 3.70%
INDEX......................... 4.75%
</TABLE>

1. The NAREIT Equity Index is an unmanaged market weighted index of tax
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System (including dividends).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on March 3, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ------------------------ ------------------- ---------------
<S> <C> <C>
Chateau Properties, Inc.
REIT Manufactured Home 5.0%
American General
Hospitality Corp. REIT Lodging/Leisure 4.6%
Nationwide Health
Properties, Inc. REIT Healthcare 4.0%
Essex Property Trust,
Inc. REIT Apartment 3.7%
Urban Shopping Centers,
Inc. REIT Retail 3.4%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------- --------- -------------
<S> <C> <C>
Office and Industrial $ 1,287 21.4%
Apartment 1,243 20.6%
Retail 899 14.9%
Lodging/Leisure 737 12.2%
Healthcare 583 9.7%
</TABLE>

The U.S. Real Estate Portfolio seeks to provide above average current income and
long-term capital appreciation by investing primarily in equity securities of
U.S. and non U.S. companies principally engaged in the U.S. real estate
industry, including real estate investment trusts ("REITs").

For the period from March 3, 1997 (commencement of operations) through June 30,
1997, the Portfolio had a total return of 3.70% as compared to 4.75% for the
National Association of Real Estate Investment Trust (NAREIT) Equity Index (the
"Index").

Valuations in the REIT market have gone through some interesting gyrations
during 1997. The Morgan Stanley REIT Index ("RMS") which measures the
performance of REITs on a continuous basis -- as opposed to the Index which
measures performance on a month-end basis -- climbed to a high on March 12. RMS
proceeded to hit its low on April 25 following a decline throughout the month.
This represented a decline of more than 8.5% from its mid-March peak. Since that
low, RMS has proceeded straight up, gaining 9.9% and achieving new highs through
June 30.

The decline in the early part of the second quarter resulted from a combination
of the correction in the broad equity market as well as a significant amount of
new equity issuance. We did not expect to see strong appreciation until this
supply was absorbed. In fact, in the face of declining valuations in the period
from mid-March through April, REITs continued to raise capital and raised in
excess of $3.5 billion of equity in 25 separate offerings.

Some observers were disappointed to see the REIT market fall along with the
broad equity market in March and April. Our reaction is that REITs have not lost
their defensive characteristics. However, REIT stocks can only retain their
defensive characteristics if their stock prices reflect the underlying value of
their real estate. In the fourth quarter of last year, a number of stocks,
particularly some of the larger cap names, had traded to levels that were at
quite significant

-------------
33
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

premiums to their underlying asset values. These were the stocks that were most
penalized during the correction. We continue to believe that REITs should be
viewed as a separate asset class, distinct from stocks and bonds, providing
diversification within a portfolio. Clearly there is some correlation to other
financial assets but as demonstrated by on-going analysis provided by NAREIT the
correlation continues to wane. This research affirms our basic theory that real
estate stocks will move based on underlying real estate value.

As suggested above, new equity issuance in the REIT market continues at a torrid
pace. Through June 30, REITs had raised almost $10 billion in new equity. This
continues a theme of more real estate moving into the control of the public
markets. With a private institutional real estate market of approximately $1
trillion and equity capitalization at $110 billion, REITs continue to capture a
bigger share of the pie. We see continued equity issuance by existing REITs as
proceeds have primarily been used to pay for the acquisition of individual
properties, portfolios of properties and entire companies. One wildcard in the
growth potential of the assets held by public companies is the exchange of
property for shares by the institutional owners of real estate. In the second
quarter we saw a beginning of this trend as Meridian Industrial Trust entered
into transactions providing both an insurance company and a corporate pension
fund with shares in exchange for industrial properties.

After a dearth of initial public offerings over the course of the last two
years, there were 8 IPOs in the first two quarters raising in excess of $2
billion (this does not include two IPOs concluded immediately after the end of
June). The majority of capital raised was for office companies. We expect to see
a continuance of these IPOs as a result of the arbitrage between the private and
public real estate markets. The sectors that will feature the most new issuance
will be those in which it is not hard to assemble a meaningful collection of
assets combined with public market valuations that provide premium pricing.

It is interesting to note that once again sector bets on the office and hotel
sectors contributed to excess performance, despite prognosticators claiming that
after 1996 REITs had moved to a stock picker's game. We have been surprised by
the continued strength in the strip center and regional mall segments of retail
and have continued to underweight the retail sector.

<TABLE>
<CAPTION>
TOTAL
PERFORMANCE
YEAR TO DATE
SECTOR 1997
- ------------------------------------------------------------------- ----------------
<S> <C>
Apartments......................................................... 6.2%
Manufactured Homes................................................. 3.6%
Strip Centers...................................................... 7.5%
Regional Malls..................................................... 7.6%
Outlet Centers..................................................... -4.2%
Industrial......................................................... 1.7%
Office............................................................. 5.4%
Self Storage....................................................... -1.2%
Triple Net Lease................................................... 3.4%
Hotel.............................................................. 11.8%
Healthcare......................................................... 2.7%
Overall............................................................ 5.7%
</TABLE>

From the perspective of the Portfolio, approximately 65% of the outperformance
was as a result of stock selection and the remainder was from sector allocation.
The largest contributions from a sector allocation perspective were:
overweighting of hotels, underweighting of self storage, and underweighting of
outlet centers. As we have discussed previously, real estate cycles in the
physical property markets tend to last a long time, however, valuations in the
public markets continue to fluctuate and as a result we had some modest
movements in the Portfolio. The most significant top-down adjustments were
increasing the weighting in the multifamily sector since valuations were

- ----------34
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

beaten down, and decreasing the weighting in the office and industrial sectors
as we took profits on some office stocks and reduced industrial positions due to
stock valuations continuing to move far above underlying value.

The following chart provides a summary of the largest contributors to the
performance of the Portfolio both from a top-down and bottom-up perspective,
along with the rationales for the positions.

<TABLE>
<CAPTION>
FUND POSITION SECTOR RATIONALE
- ---------------------------------------- -----------------------------------------------------------------
<S> <C> <C>
BOTTOM-UP
Essex Properties Apartments Attractive Pacific markets
Chateau Communities Manufactured Home Favorable risk-return
Urban Shopping Centers Regional Malls High-end retail continues to improve
Pacific Gulf Properties Industrial Small cap with Pacific-focus
Meridian Industrial Properties Industrial Small cap growth story
Extended Stay of America Hotels Momentum investors exit

TOP-DOWN
Overweighting Hotels Lack of new supply at upper-end
Underweighting Self storage Public market premiums excessive
Underweighting Outlet centers Sector continues to worsen
</TABLE>

July 1997

-------------
35
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

COMMON STOCKS (88.6%)
APARTMENT (20.6%)
600 Amli Residential Properties Trust REIT........... $ 14
3,400 Associated Estates Realty Corp. REIT............. 80
5,500 Avalon Properties, Inc. REIT..................... 158
5,000 Bay Apartment Communities, Inc. REIT............. 185
500 Columbus Realty Trust REIT....................... 11
6,900 Essex Property Trust, Inc. REIT.................. 222
3,800 Gables Residential Trust REIT.................... 96
5,000 Merry Land & Investment Co., Inc. REIT........... 108
4,600 Oasis Residential, Inc. REIT..................... 108
4,800 Security Capital Atlantic, Inc. REIT............. 115
700 Summit Properties, Inc. REIT..................... 14
12,007 Wellsford Real Properties, Inc................... 132
-------
1,243
-------
HEALTHCARE (9.7%)
(a)1,900 Alexandria Real Estate Equities, Inc. REIT....... 42
(a)3,900 Assisted Living Concepts, Inc.................... 43
1,800 Health Care Property Investors, Inc. REIT........ 63
11,000 Nationwide Health Properties, Inc. REIT.......... 242
5,900 Omega Healthcare Investors, Inc. REIT............ 193
-------
583
-------
LAND (1.9%)
(a)10,948 Atlantic Gulf Communities Corp................... 70
(a)2,500 Catellus Development Corp........................ 45
-------
115
-------
LODGING/LEISURE (12.2%)
11,300 American General Hospitality Corp. REIT.......... 280
(a)1,300 Bristol Hotel Co................................. 50
(a)6,600 Extended Stay America, Inc....................... 104
(a)6,200 Host Marriott Corp............................... 110
(a)3,800 Servico, Inc..................................... 56
3,200 Starwood Lodging Trust REIT...................... 137
-------
737
-------
MANUFACTURED HOME (6.8%)
10,600 Chateau Communities, Inc. REIT................... 304
4,600 Manufactured Home Communities, Inc. REIT......... 106
-------
410
-------
OFFICE AND INDUSTRIAL (21.4%)
INDUSTRIAL (3.2%)
2,200 Meridian Industrial Trust, Inc. REIT............. 52
6,300 Pacific Gulf Properties, Inc. REIT............... 138
-------
190
-------
OFFICE (16.8%)
5,500 Arden Realty Group, Inc.......................... 143
3,700 Beacon Properties Corp. REIT..................... 124
9,900 Brandywine Realty Trust REIT..................... 200
(a)4,600 Brookfield Properties (Installment Receipts-
second installment: CAD6.50/Shr due on
2/13/98)....................................... 32

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------

4,200 CarrAmerica Realty Corp. REIT.................... $ 121
2,600 Cornerstone Properties, Inc. REIT................ 40
6,200 Great Lakes, Inc. REIT........................... 102
1,700 Kilroy Realty Corp. REIT......................... 43
2,700 Koger Equity, Inc. REIT.......................... 49
7,400 Trizec Hahn Corp. REIT........................... 158
-------
1,012
-------
OFFICE AND INDUSTRIAL (1.4%)
(a)1,600 Boston Properties, Inc. REIT..................... 44
1,600 Prentiss Properties Trust REIT................... 41
-------
85
-------
TOTAL OFFICE AND INDUSTRIAL.................................. 1,287
-------
RETAIL (14.9%)
REGIONAL MALL (10.2%)
11,300 First Union Real Estate REIT..................... 160
7,800 Tauban Centers, Inc. REIT........................ 103
6,500 Urban Shopping Centers, Inc. REIT................ 207
(a)8,400 Westfield America, Inc. REIT..................... 142
-------
612
-------
SHOPPING CENTER (1.7%)
1,500 Federal Realty Investment Trust REIT............. 40
800 IRT Property Co. REIT............................ 9
300 Price, Inc. REIT................................. 11
100 Ramco-Gershenson Properties Trust REIT........... 2
3,000 Western Investment Real Estate Trust REIT........ 42
-------
104
-------
STRIP CENTER (3.0%)
2,700 Alexander Haagen Properties, Inc. REIT........... 44
10,100 Burnham Pacific Property Trust REIT.............. 139
-------
183
-------
TOTAL RETAIL................................................. 899
-------
SELF STORAGE (1.1%)
2,300 Shurgard Storage Centers, Inc., Series A, REIT... 65
-------
TOTAL COMMON STOCKS (COST $5,135).............................. 5,339
-------
PREFERRED STOCK (0.3%)
LAND (0.3%)
(a,d)2,003 Atlantic Gulf Communities Corp. (COST $20)....... 20
-------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------

WARRANTS (0.0%)
LAND (0.0%)
(a,d)1,878 Atlantic Gulf Communities, Class A............... --
(a,d)1,878 Atlantic Gulf Communities, Class B............... --
(a,d)1,878 Atlantic Gulf Communities, Class C............... --
-------
TOTAL WARRANTS (COST $0)....................................... --
-------
</TABLE>

- ----------36
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------

SHORT-TERM INVESTMENT (7.6%)
REPURCHASE AGREEMENT (7.6%)
$458 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $458,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $466 (COST $458)........ $ 458
-------
TOTAL INVESTMENTS (96.5%) (COST $5,613*)....................... 5,817
-------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.8%)
Cash.................................................. $ 22
Receivable for Investments Sold....................... 219
Dividends Receivable.................................. 27
Due from Adviser...................................... 22
Receivable for Portfolio Shares Sold.................. 1 291
-----
LIABILITIES (-1.3%)
Payable for Investments Purchased..................... (35)
Custodian Fees Payable................................ (21)
Professional Fees Payable............................. (9)
Administrative Fees Payable........................... (2)
Other Liabilities..................................... (16) (83)
----- -------
NET ASSETS (100%)....................................... $ 6,025
-------
-------

<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 580,767 outstanding $0.001 par value shares
(authorized 500,000,000 shares).............................. $ 10.37
-------
-------
NET ASSETS CONSIST OF:
Paid in Capital................................................ $ 5,799
Undistributed Net Investment Income............................ 59
Accumulated Net Realized Loss.................................. (37)
Unrealized Appreciation on Investments......................... 204
-------
NET ASSETS..................................................... $ 6,025
-------
-------
</TABLE>

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

(a) -- Non-income producing security
(d) -- Security valued at fair value -- see Note A-1 to financial statements.
CAD -- Canadian Dollar
REIT -- Real Estate Investment Trust

- ---------------
*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the U.S. Real Estate
Portfolio were:

<TABLE>
<CAPTION>
COST APPRECIATION (DEPRECIATION) NET APPRECIATION
(000) (000) (000) (000)
- --------- --------------- ----------------- -----------------
<S> <C> <C> <C>
$ 5,613 $ 277 $ (73) $ 204
</TABLE>

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the U.S. Real Estate Portfolio, other than long-term U.S. Government
securities and short-term investments, were $7,269,000 and $2,044,000
respectively.
- ----------------------------------------------------------------

-----------------
37
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

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

INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Basic Resources 4.5%
Consumer Durables 8.4%
Consumer Services 0.3%
Energy 7.8%
Financial Services 16.0%
Food, Tobacco & Other 4.9%
Health Care 5.5%
Heavy
Industry/Transportation 19.9%
Retail 4.9%
Technology 6.6%
Utilities 2.4%
Other 18.8%
</TABLE>

<TABLE>
<CAPTION>
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- ------------------------------------
TOTAL RETURNS(2)
YTD
----------------
<S> <C>
PORTFOLIO(3).................. 15.50%
INDEX......................... 20.61%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ----------------------------- -------------- ---------------
<S> <C> <C>
Cummins Engine Co., Inc. Heavy
Industry/
Transportation 3.5%
Ford Motor Co. Consumer
Durables 2.4%
Case Corp. Heavy
Industry/
Transportation 2.4%
International Business
Machines Corp. Technology 2.2%
Philip Morris Cos., Inc. Food, Tobacco
& Other 2.1%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------- --------- -------------
<S> <C> <C>
Heavy
Industry/Transportation $ 1,047 19.9%
Financial Services 842 16.0%
Consumer Durables 441 8.4%
Energy 409 7.8%
Technology 346 6.6%
</TABLE>

The Value Portfolio seeks above-average total return over a market cycle of
three to five years by investing primarily in a diversified portfolio of common
stocks and other equity securities that are deemed by Miller Anderson &
Sherrerd, LLP to be relatively undervalued based on various measures such as
price/earnings ratios and price/book ratios.

For the period from January 2, 1997 (commencement of operations) through June
30, 1997, the Portfolio had a total return of 15.50% as compared to 20.61% for
the S&P 500 Index (the "Index").

The Value Portfolio had a total return of 14.02% during the second quarter
versus a total return of 17.46% for the Index. The Portfolio's significant cash
position of 11% resulted in about 200 of the Portfolio's 300 basis point
underperformance. The cash in the Portfolio at 11% is high relative to our
historical levels, but is solidly in the middle of its projected range of 0-20%.
As current equity valuations are at or above modern historical high levels, and
also as a result of our "buy the dips" philosophy, the relentless march upward
in stock prices has thinned out our buy candidate list quite considerably. We
will need a market pullback in general, or some significant underperformance of
specific sectors, to comfortably put our current cash back into the equity
market. Stock selection contributed the balance of the performance shortfall
against the Index. Relatively poor individual stock performance in health care,
energy, and the food and tobacco sectors could not overcome favorable
performance in heavy industry, retail, and the consumer durable sectors. Our
worst performing holdings included Seagate Technology, Mallinckrodt, IBP,
Maxicare, Amoco, and Harnischfeger. Our holdings in Ford, Goodyear, Cummins,
Aeroquip-Vickers, and VF Corp. contributed positively to our relative
performance. Sector selection, always a result of our formal low price/earnings
buy process, had no material impact on relative performance.

- ----------38

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

The total return of 17.5% for the S&P 500 in the second quarter was
exceptionally strong and atypical of such a late phase in a bull market cycle.
As in the first quarter, larger growth-oriented companies tended to outperform
smaller companies which exhibited greater economic or interest-rate sensitivity.
Three of the top four performing sectors of the S&P 500 included health care,
technology, and beverage and personal care. Because of our valuation discipline,
we maintain significant underweightings in these three sectors. Our low
price/earnings commitment has concentrated the Portfolio in many economic and
interest sensitive sectors such as heavy industry, consumer durables, and
financial services. Our discipline also mandates significant positions in the
smaller part of the large cap marketplace. As a result, at the end of the second
quarter the Portfolio had 46% of its holdings in the $1-5 billion market cap
range versus only a 9% exposure in this area for the S&P 500. During the
quarter, the stocks in the Index in that market cap range returned 13.4% against
nearly 18% for market caps greater than $5 billion. It is important to note,
however, that while our market cap may be smaller than the S&P 500, we do not
necessarily own small companies. The weighted average REVENUES of the stocks in
our Portfolio were $19.4 billion against $24.2 billion for the Index. During the
later stages of a bull market investors typically pay higher valuations for
large capitalizations in order to accommodate their desire for liquidity. In
essence they pay higher prices because they fear the overvalued nature of the
equity market. This keeps the market under accumulation and stock prices
upwardly biased. Our discipline will not allow us to participate in such
activities, and we believe this sense of security in big cap stocks will quickly
evaporate in a correction or bear market.

There were no significant changes in the Portfolio's sector allocation during
the second quarter. Consumer durables holdings increased a bit as we initiated
new positions in Owens Corning and Dana. We also increased our exposure to
health care and consumer durables with new positions in Columbia HCA and
Tupperware. We continued to trim our exposure in the technology sector as we
eliminated Stratus Computer and reduced positions in Compaq and Tektronix. Our
utility holdings came down as we sold our long distance telephone positions and
some underperforming electric utility stocks. And, finally, we reduced our
financial services exposure as we involuntarily parted with Great Western,
Standard Federal Bank, and part of our Providian position through takeovers.
Despite these minor sector adjustments, however, our major commitments have
remained fairly constant for the first half of the year. Industrial franchise
businesses such as Case, Cummins Engine, Caterpillar, Harnischfeger, and
Aeroquip-Vickers represent our largest overweighting. This is followed by a
healthy commitment to consumer durables including Ford, General Motors, Dana,
Goodyear Tire and Owens Corning. Financial services represents our third largest
overweighting with considerable holdings in Chase Manhattan, Citicorp, Everest
Reinsurance, Reliastar, and Capital One Financial. Our valuation discipline
precludes exposure to the growth sectors of the market such as drugs, foods,
beverages, personal care, and technology companies, and therefore we have
significant underweightings in these sectors. Also, we maintain a large
underweighting in the utility sector. Telephone stocks are too expensive for our
discipline and electric utilities face severe fundamental changes in their
marketplace. We are market weighted in three sectors: retail, raw materials, and
energy. We have individual holdings we like in each sector, but the valuations
are such that large overweightings are simply not possible at this time.

The value strategy produces actively managed Portfolios that focus on securities
that the marketplace values below their actual worth or potential. To identify
such issues, we combine quantitative and fundamental methodologies to limit our
universe and then to examine candidates for purchase. Fundamental research
comprises both sector and company-specific analysis.

Our investment approach produces well-diversified, generally large-cap,
value-oriented equity Portfolios that typically offer market-like profitability
and growth characteristics at below-market price multiples. Historically, our
Portfolio's overall P/E has averaged approximately 40% lower than that of the
S&P 500, while its growth statistics have typically been comparable to those of
the benchmark. This reflects our goal of identifying and purchasing companies
with reasonable business prospects that are selling at significant discounts.

Our goal is to achieve an above-average long-term total return with an emphasis
on delivering CONSISTENT performance not typically associated with
value-oriented investment strategies. Because

-------------
39

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

of our long-term focus, we do not attempt to time the market or respond
frenetically to frequent and sudden changes in market psychology. In our view,
consistency is preferable to occasional spectacular performance, in terms of
both achieving longer-term investment success and assuring client comfort.

We view a low price/earnings ratio as the single best indicator of attractive
equity valuation. We believe that we can achieve above-average long-term results
by investing in average companies that sell at discounted P/E valuations and
holding them until these valuations return to normal levels. To identify such
companies, we combine disciplined low-P/E quantitative evaluation with careful
fundamental analysis.

The U.S. economy during the first half of 1997 was exceptionally strong. Yet,
comprised of remarkably different first and second quarters, the economy's true
direction remains enigmatic. Inflation has remained low and that it will
continue to remain low is a key given according to two emerging schools... one
that believes growth is slowing materially and the other which holds that strong
growth can and will persist without a pick-up in inflation.

In the short run, neither view in our opinion will be vindicated by forthcoming
data which will remain inconclusive. What may become clearer is price behavior
which we believe remains the critical variable. Service sector prices deserve
close scrutiny and are increasing perceptibly, despite benign overall price
indices.

July 1997

- ----------40
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

COMMON STOCKS (81.2%)
BASIC RESOURCES (4.5%)
1,000 Cabot Oil & Gas Corp., Class A................... $ 29
300 Dow Chemical Co.................................. 26
700 E.I. DuPont de Nemours & Co...................... 44
1,400 Great Lakes Chemical Corp........................ 73
500 Rohm & Haas Co................................... 45
700 Westvaco Corp.................................... 22
------
239
------
CONSUMER DURABLES (8.4%)
900 Dana Corp........................................ 34
3,400 Ford Motor Co.................................... 128
1,300 General Motors Corp.............................. 73
1,600 Goodyear Tire & Rubber Co........................ 101
1,100 Owens Corning.................................... 47
800 Premark International, Inc....................... 21
1,000 Tupperware Corp.................................. 37
------
441
------
CONSUMER SERVICES (0.3%)
600 Standard Register Co............................. 18
------
ENERGY (7.8%)
600 Amoco Corp....................................... 52
700 Atlantic Richfield Co............................ 49
700 British Petroleum plc ADR........................ 53
600 El Paso Natural Gas Co........................... 33
500 IMC Global, Inc.................................. 18
1,300 MAPCO, Inc....................................... 41
800 Phillips Petroleum Co............................ 35
1,100 Repsol SA ADR.................................... 47
900 Ultramar Diamond Shamrock Corp................... 29
1,700 YPF SA ADR....................................... 52
------
409
------
FINANCIAL SERVICES (16.0%)
BANKING (6.4%)
1,000 Bank of New York Co.............................. 44
700 Chase Manhattan Corp............................. 68
400 Citicorp......................................... 48
500 Crestar Financial Corp........................... 19
100 First Chicago NBD Corp........................... 6
400 First Union Corp................................. 37
900 Mellon Bank Corp................................. 41
400 Republic New York Corp........................... 43
900 Signet Banking Corp.............................. 32
------
338
------
CREDIT & FINANCE/INVESTMENT RELATED COMPANIES (1.8%)
1,100 Capital One Financial Corp....................... 42
800 Federal National Mortgage Association............ 35
300 Salomon, Inc..................................... 17
------
94
------
INSURANCE (7.8%)
304 Aegon N.V. ARS................................... 21
800 Allstate Corp.................................... 58
800 American General Corp............................ 38
500 Chubb Corp....................................... 33

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------
1,300 Everest Reinsurance Holdings, Inc................ $ 52
400 Hartford Financial Services Group, Inc........... 33
1,200 Old Republic International Corp.................. 36
700 Providian Corp................................... 23
600 ReliaStar Financial Corp......................... 44
800 TIG Holdings, Inc................................ 25
100 Torchmark Corp................................... 7
400 Transatlantic Holdings, Inc...................... 40
------
410
------
TOTAL FINANCIAL SERVICES.................................. 842
------
FOOD, TOBACCO & OTHER (4.9%)
1,300 IBP, Inc......................................... 30
2,500 Philip Morris Cos., Inc.......................... 111
2,100 RJR Nabisco Holdings Corp........................ 69
1,200 Universal Foods Corp............................. 46
------
256
------
HEALTH CARE (5.5%)
1,400 Beckman Instruments, Inc......................... 67
1,600 Bergen Brunswig Corp., Class A................... 45
900 Columbia/HCA Healthcare Corp..................... 35
(a)1,670 Foundation Health Corp........................... 51
1,000 Mallinckrodt, Inc................................ 38
(a)800 Maxicare Health Plans, Inc....................... 18
(a)1,900 Nellcor Puritan Bennett, Inc..................... 34
------
288
------
HEAVY INDUSTRY/TRANSPORTATION (19.9%)
2,300 Aeroquip-Vickers, Inc............................ 109
(a)400 AMR Corp......................................... 37
300 Burlington Northern Santa Fe, Inc................ 27
1,800 Case Corp........................................ 124
300 Caterpillar, Inc................................. 32
600 CSX Corp......................................... 33
2,600 Cummins Engine Co., Inc.......................... 183
600 Deere & Co....................................... 33
700 Eaton Corp....................................... 61
(a)700 FMC Corp......................................... 56
1,500 Harnischfeger Industries, Inc.................... 62
1,200 Kennametal, Inc.................................. 52
1,200 Olsten Corp...................................... 23
800 Parker Hannifin Corp............................. 49
600 Raytheon Corp.................................... 31
900 Tecumseh Products Co., Class A................... 54
800 TRW, Inc......................................... 45
(a)500 UAL Corp......................................... 36
------
1,047
------
RETAIL (4.9%)
1,000 Dillard Department Stores, Inc., Class A......... 35
1,100 Russell Corp..................................... 33
700 Springs Industries, Inc., Class A................ 37
1,300 Talbots, Inc..................................... 44
(a)1,400 Toys "R" Us, Inc................................. 49
700 V.F. Corp........................................ 59
------
257
------
</TABLE>

-----------------
41
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------

SHORT-TERM INVESTMENT (18.4%)
REPURCHASE AGREEMENT (18.4%)
$970 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $970,
collateralized by various U.S. Treasury Note,
5.625%, due 2/15/06, valued at $989, (COST
$970).......................................... 970
------
TOTAL INVESTMENTS (99.6%) (COST $4,772*).................... 5,241
------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.7%)
Cash............................................... $ 3
Receivable for Investments Sold.................... 47
Receivable for Portfolio Shares Sold............... 27
Due from Adviser................................... 8
Dividends Receivable............................... 5 90
---
LIABILITIES (-1.3%)
Payable for Investments Purchased.................. (40)
Professional Fees Payable.......................... (15)
Custodian Fees Payable............................. (6)
Administrative Fees Payable........................ (1)
Other Liabilities.................................. (5) (67)
--- --------
NET ASSETS (100%)......................................... $ 5,264
--------
--------

<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 455,591 outstanding $0.001 par value
shares (authorized 500,000,000 shares).................. $ 11.55
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital......................................... $ 4,690
Undistributed Net Investment Income..................... 33
Accumulated Net Realized Gain........................... 72
Unrealized Appreciation on Investments.................. 469
--------
NET ASSETS................................................ $ 5,264
--------
--------
</TABLE>

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

(a) -- Non-income producing security
ADR -- American Depositary Receipt
ARS -- American Registered Share

- ---------------
*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Value Portfolio were:

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the Value Portfolio, other than long-term U.S. Government securities and
short-term investments, were approximately $4,330,000 and $600,000,
respectively.
- ----------------------------------------------------------------

- -----------------
42
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

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

INVESTMENT OVERVIEW
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Argentina 12.9%
Brazil 12.2%
Bulgaria 5.7%
Ivory Coast 3.3%
Jamaica 1.5%
Mexico 15.5%
Morocco 4.6%
Panama 0.8%
Peru 2.4%
Russia 16.6%
South Africa 2.0%
Venezuela 11.3%
Other 11.2%
</TABLE>

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

<TABLE>
<CAPTION>
PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING MARKETS BOND PLUS INDEX(1)
TOTAL
RETURNS(2)
YTD
-------------
<S> <C>
PORTFOLIO(3)............ 0.00%
INDEX................... -0.21%
</TABLE>

1. The J.P. Morgan Emerging Markets Bond Plus Index is a market weighted index
composed of Brady bonds, loans and Eurobonds, as well as U.S. dollar local
market instruments outstanding and includes Argentina, Brazil, Bulgaria,
Mexico, Nigeria, the Philippines, Poland, Russia, South Africa and Venezuela.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on June 16, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- --------------------------------- --------- -------------
<S> <C> <C>
Government of Russia Russia 16.6%
Republic of Argentina Argentina 12.9%
Federative Republic of Brazil Brazil 12.2%
United Mexican States Mexico 11.8%
Republic of Venezuela Venezuela 11.3%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE COUNTRIES
VALUE PERCENT OF
COUNTRY (000) NET ASSETS
- ------------------------- ----------- -------------
<S> <C> <C>
Russia $ 1,665 16.6%
Mexico 1,562 15.5%
Argentina 1,302 12.9%
Brazil 1,228 12.2%
Venezuela 1,139 11.3%
</TABLE>

The Emerging Markets Debt Portfolio seeks high total return by investing
primarily in fixed income securities of government and government related
issuers located in emerging market countries.

For the period from June 16, 1997 (commencement of operations) through June 30,
1997, the Portfolio had a total return of 0.00% as compared to -0.21% for the
J.P. Morgan Emerging Markets Bond Plus Index (the "Index").

For the first few weeks of the fiscal year the trend of an across the board
tightening of credit spreads continued unabated. Attractive relative valuations,
the stretch for incremental yield and easy global monetary conditions prompted
increases in allocations to emerging market assets. Federal Reserve Governor
Greenspan's comments on the state of credit markets, extended valuations and
mispricing of risk stopped the music suddenly. A correction in fixed income
markets started in late February and lasted for much of March.

The emerging markets didn't surprise by behaving differently during this market
correction. An increase in risk premiums affected all countries and all bonds. A
correction, precipitated by possible Fed action and deepened by redemptions and
a reduction in committed capital tends to affect the broad market. The weight of
money heading for the exits drowns the fundamentals for a while.

During the second quarter of 1997, the emerging debt markets recovered from
their late first quarter correction buoyed by falling U.S. interest rates and a
renewed investor appetite for yield. U.S. interest rates fell by 35 to 40 basis
points across the yield curve. This decline in rates was prompted by signs of
moderating economic growth and the lack of evidence of any inflationary
pressures in the system. These factors reassured investors that the Federal
Reserve would not increase interest rates anytime soon. In addition to the
positive interest rate environment, a confluence of events both fundamental and
technical in nature bolstered the performance of emerging markets debt. On the
fundamental front, improving macro-economic outlooks and rating upgrades by
major U.S. ratings agencies in Argentina, Brazil, the Philippines, Uruguay, and

-------------
43

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

Venezuela provided support. While on the technical front, a continuation of the
trend of Brady bond retirement and debt buybacks as well as a strong inflow of
funds from non-dedicated or "crossover" investors caused spreads on emerging
markets debt to tighten back to levels not seen since 1993.

During the first half of the year, Bulgaria, Morocco, and Peru outperformed the
universe of emerging market debt, while the Philippines, Poland, and Nigeria
were the performance laggards.

Bulgarian bonds were the best performing in the emerging country universe during
the second quarter. The election of a reformist democratic government in April
assured investors that prudent macro-economic policy measures would be enacted.
The new government secured technical and financial help from the IMF and the
World Bank and adopted a policy framework to facilitate the July 1st
introduction of a currency board monetary system. As prices of Bulgarian Brady
bonds rose, we reduced our exposure to the credit but remained overweight. We
expect continued outperformance from our Bulgarian positions over the next six
months albeit at a more gradual pace.

Morocco benefited from an economic recovery following 1995's drought. The
prospect of favorable ratings also buoyed prices. We will consider increasing
our allocation to Morocco once valuations reach attractive levels again and are
consistent with our expectations for a BB rating. The other outperforming
credit, Peru, reacted to the release of above-consensus GDP growth numbers of
over 7% for the first six months of the year.

Our value-oriented investment style steered us away from the debt of the
Philippines and Poland which both trade at fully valued levels. Both countries
suffered from their proximity to the turbulence of neighboring currency markets
and both were forced to keep local interest rates high in a defensive move
against possible speculative attacks on their own currencies. We will monitor
both situations closely and may increase our exposure should valuations become
more attractive.

Deteriorating political dynamics caused us to avoid Nigerian debt which suffered
from its failed involvement in the unrest in neighboring Sierra Leone. The
Nigerian's inability to install the former civilian government has undermined
political stability in Nigeria. Also, lack of progress on economic reforms has
reduced the prospect of a new IMF agreement and consequently, debt forgiveness.

Our outlook remains cautiously positive. The benign U.S. rate environment,
improving economic fundamentals in the emerging countries and growing investor
interest in the emerging debt asset class should cause risk premiums on emerging
markets debt to come down and prices to rise over the medium term. Over the
short-term, however, we will be watching for signs of fatigue as spreads are
near historic lows and we expect some profit taking. Additionally, some emerging
countries in Asia and eastern Europe are experiencing considerable local
currency volatility and we will be monitoring the potential contagion effects on
emerging debt.

July 1997

- ----------44
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------

DEBT INSTRUMENTS (88.8%)
ARGENTINA (12.9%)
BONDS (12.9%)
U.S.$ 250 Republic of Argentina Global Bond, Series BGL4,
11.00%, 10/9/06................................ $ 278
ARP (e)100 Republic of Argentina, 11.75%, 2/12/07........... 112
U.S.$ 970 Republic of Argentina, Series L, 'Euro',
(Floating Rate), 6.75%, 3/31/05................ 912
-------
1,302
-------
BRAZIL (12.2%)
BONDS (12.2%)
224 Federative Republic of Brazil, Series C, 'Euro',
(Floating Rate), PIK, 8.00%, 4/15/14........... 180
800 Federative Republic of Brazil Debt Conversion
Bond, Series L, (Floating Rate), 6.938%,
4/15/12........................................ 662
400 Federative Republic of Brazil Global Bond,
10.125%, 5/15/27............................... 386
-------
1,228
-------
BULGARIA (5.7%)
BOND (5.7%)
1,000 Bulgaria Front Loaded Interest Reduction Bond,
Series A , 2.25%, 7/28/12...................... 571
-------
IVORY COAST (3.3%)
BOND (3.3%)
(b,e)1,000 Republic of Ivory Coast Front Loaded Interest
Reduction Bond, Zero Coupon, 12/29/49.......... 334
-------
JAMAICA (1.5%)
BOND (1.5%)
150 Government of Jamaica, 9.625%, 7/2/02............ 151
-------
MEXICO (15.5%)
BONDS (15.5%)
400 Banco National Global Bond, 7.25%, 2/2/04........ 373
700 United Mexican States Discount Bond, Series A,
(Floating Rate), 6.867%, 12/31/19 (Value
Recovery Rights Attached)...................... 651
400 United Mexican States Par Bond, Series B, 6.25%,
12/31/19 (Value Recovery Rights Attached)...... 309
200 United Mexican States Global Bond, 11.50%,
5/15/26........................................ 229
-------
1,562
-------
MOROCCO (4.6%)
LOAN AGREEMENT (4.6%)
500 Kingdom of Morocco, Restructuring & Consolidation
Agreement, Tranche A, (Floating Rate), 6.375%,
1/1/09 (Participation: Chase Securities)....... 458
-------
PANAMA (0.8%)
BOND (0.8%)
(e)100 Republic of Panama Interest Reduction Bond,
(Floating Rate), 3.50%, 7/17/14................ 77
-------

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
PERU (2.4%)
BOND (2.4%)
U.S.$ (n)400 Republic of Peru Front Loaded Interest Reduction
Bond, 3.25%, 3/7/17............................ $ 239
-------
RUSSIA (16.6%)
BOND (10.0%)
1,500 Ministry of Finance Tranche IV, GDR, 3.00%,
5/14/03........................................ 1,007
-------
NOTES (6.6%)
250 Russia Interest Arrears Note 12/31/99............ 191
700 Russian Principal Notes 12/31/99................. 467
-------
658
-------
1,665
-------
SOUTH AFRICA (2.0%)
BOND (2.0%)
ZAR 1,000 Republic of South Africa Series 150, 12.00%,
2/28/05........................................ 197
-------
VENEZUELA (11.3%)
BONDS (11.3%)
U.S.$ 750 Republic of Venezuela Debt Conversion Bonds,
Series DL, (Floating Rate), 6.75%, 12/18/07.... 696
238 Republic of Venezuela Front Loaded Interest
Reduction Bonds, Series A, (Floating Rate),
6.75%, 3/31/07................................. 221
250 Republic of Venezuela Discount Bonds, Series A,
(Floating Rate), 6.813%, 3/31/20............... 222
-------
1,139
-------
TOTAL FOREIGN DEBT INSTRUMENTS (COST $8,950).................... 8,923
-------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ------------

WARRANTS (0.0%)
VENEZUELA (0.0%)
(a)1,785 Republic of Venezuela Oil, expiring 3/31/20 (COST
$0)............................................ --
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------

SHORT-TERM INVESTMENTS (29.2%)
DISCOUNT NOTE (21.9%)
U.S.$ 2,200 Federal Home Loan Discount Note, 7/08/97......... 2,198
-------
REPURCHASE AGREEMENT (7.3%)
734 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/1/97 to be repurchased at $734,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $749.................... 734
-------
TOTAL SHORT-TERM INVESTMENTS (COST $2,932)..................... 2,932
-------
</TABLE>

-----------------
45
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------

TOTAL INVESTMENTS (118.0%) (COST $11,882*)............................................. $11,855
-------
OTHER ASSETS (2.8%)
Cash................................................................ $ 1
Receivable for Investments Sold..................................... 159
Interest Receivable................................................. 117
Due from Adviser.................................................... 3 280
-------
LIABILITIES (-20.8%)
Payable for Investments Purchased................................... (2,076)
Professional Fees Payable........................................... (3)
Custodian Fees Payable.............................................. (3)
Administrative Fees Payable......................................... (2)
Net Unrealized Loss on Foreign Currency Exchange Contracts.......... (1)
Other Liabilities................................................... (1) (2,086)
------- -------
NET ASSETS (100%)...................................................................... $ 10,049
-------
-------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,005,276 outstanding $0.001 par value shares (authorized 500,000,000
shares).............................................................................. $ 10.00
-------
-------
NET ASSETS CONSIST OF:
Paid in Capital........................................................................ $ 10,053
Undistributed Net Investment Income.................................................... 27
Accumulated Net Realized Loss.......................................................... (5)
Unrealized Depreciation on Investments and Foreign Currency Translations...............
(26)
-------
NET ASSETS............................................................................. $ 10,049
-------
-------
</TABLE>

FOREIGN CURRENCY EXCHANGE CONTRACTS INFORMATION:

Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver U.S. dollars in exchange for foreign
currency as indicated below:

<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE NET UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ---------- ----- ---------- ----------- ----- --------------
<S> <C> <C> <C> <C> <C>
U.S.$ 204 $204 7/3/97 ZAR 921 $203 $ (1)
----- ----- -----
----- ----- -----
</TABLE>

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

(a) -- Non-income producing security
(b) -- Non-income producing-in default
(e) -- 144A Security -- certain conditions for public sale may exist.
(n) -- Step Bond-coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity.
ARP -- Argentine Peso
GDR -- Global Depositary Receipt
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
ZAR -- South African Rand

Floating Rate Security -- Interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those in
effect at June 30, 1997.
- ---------------
*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Emerging Markets Debt
Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
(000) (000) (000) (000)
- --------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
$ 11,882 $ 26 $ (53) $ (27)
</TABLE>

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the Emerging Markets Debt Portfolio, other than long-term U.S. Government
securities and short-term investments, were $9,577,000 and $626,000
respectively.
- ----------------------------------------------------------------

- ----------46
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

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

INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Adjustable Rate Mortgages 4.7%
Agency Fixed Rate Mortgages 14.5%
Collateralized Mortgage Obligations-Agency Collateral
Series 2.4%
Commercial Mortgage 1.1%
Finance 0.4%
Foreign Governments 2.7%
Industrials 1.9%
Stripped Mortgage Backed Securities-Agency Collateral
Series 0.3%
Telephones 0.8%
U.S. Treasury Securities 53.9%
Yankee 1.4%
Other 15.9%
</TABLE>

<TABLE>
<CAPTION>
PERFORMANCE COMPARED TO THE SALOMON BROAD INVESTMENT GRADE INDEX(1)
- ------------------------------------
TOTAL RETURNS(2)
YTD
-----------------
<S> <C>
PORTFOLIO(3).................. 3.50%
INDEX......................... 3.06%
</TABLE>

1. The Salomon Broad Investment Grade Index is a fixed income market
capitalization-weighted index, including U.S. Treasury, agency, mortgage and
investment grade (BBB or better) corporate securities with maturities of one
year or longer and with amounts outstanding of at least $25 million.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ------------------------- --------------------- -------------
<S> <C> <C>
U.S. Treasury
U.S. Treasury Notes Securities 46.0%
Government National U.S. Government
Mortgage Association Agency Obligations 15.0%
U.S Treasury
U.S. Treasury Bonds Securities 7.1%
Federal National Mortgage U.S. Government
Association Agency Obligations 5.9%
Swedish Government Foreign Governments 1.8%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------- --------- -------------
<S> <C> <C>
U.S. Treasury Securities $ 4,867 53.9%
Agency Fixed Rate Mortgages 1,309 14.5%
Adjustable Rate Mortgages 425 4.7%
Foreign Governments 247 2.7%
Collateralized Mortgage
Obligations-Agency
Collateral Series 218 2.4%
</TABLE>

The Fixed Income Portfolio seeks an above-average total return over a market
cycle of three to five years by investing primarily in a diversified portfolio
of U.S. Government and Agencies securities, corporate bonds, mortgage-backed
securities, foreign bonds and other fixed income securities. The Portfolio's
average weighted maturity will ordinarily exceed five years and will usually be
between five and fifteen years.

For the period from January 2, 1997 (commencement of operations) through June
30, 1997, the Portfolio had a total return of 3.50% as compared to 3.06% for the
Salomon Broad Investment Grade Index (the "Index").

During the first quarter of 1997, the economy showed surprising strength despite
expectations to the contrary and the Federal Reserve increased the federal funds
rate by 25 basis points in March. During the second quarter, the bond market
rallied as the economy slowed and inflation remained low. At the end of the
quarter, the economy was in outstanding shape with unemployment near an all-time
low, low and falling inflation, consumer confidence at an all-time high, a
soaring stock market and declining interest rates. Activity softened last
quarter, but we see the risks ahead tilted toward strong growth, as incomes and
confidence are buoyant among both households and corporations, and foreign
economies are reviving. While inflation has been impressively resistant to
growth so far this year, we do not believe that the economy can maintain for
long the growth pace we foresee without some pickup in prices. Goods prices
remain contained by abundant global supply conditions, but a falling
unemployment rate points to increasing danger of supply limits being reached in
the labor market. As a result we are keeping a close watch on wages and the
prices of services since, if inflation does begin to rise, the early signs are
most likely to emerge in labor costs and the labor-intensive service sector.

-------------
47

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

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

INVESTMENT OVERVIEW (CONT.)

At the beginning of the period, the interest-rate sensitivity of the Portfolio
was roughly 35 basis points longer than that of the benchmark. In early
February, when interest rates fell, exposure was decreased to 15 basis points
longer than the benchmark. In May, the interest-rate sensitivity was reduced to
market levels, as the yield curve moved from a steeper-than-average to a normal
slope, therefore offering little or no compensation against a possible Fed
tightening, even though the continued high consumer confidence and income growth
threaten a recovery in the economy to above potential growth rates.

We purchased a 1% position in inflation-indexed Treasuries near the end of June.
Unlike other securities, which had rallied significantly in the face of lowered
inflation expectations, these bonds were trading at their cheapest levels since
they were issued six months ago. Given the spreads between traditional and
inflation-indexed Treasuries, the price of the bonds assigned minimal value to
the insurance against the risk of a pick-up in inflation. We expect that as
volatility in the market increases, the value of the insurance will increase,
leading to outperformance of the bonds.

Mortgages comprised a large portion of the Portfolio for much of the six month
period. Fixed-rate current-coupon mortgages were a large part of the Portfolio
at the beginning of the year, but were reduced steadily as their spreads over
Treasuries declined. Spreads became so tight late in the second quarter that the
yield advantage over Treasuries could be offset by a relatively small widening
in mortgage spreads. As a consequence, fixed-rate current-coupon mortgages were
eliminated from the Portfolio. Targets for super-premium mortgages, whose
prepayments are no longer very sensitive to interest rate fluctuations, and
commercial mortgages have been increased as attractive opportunities have
emerged. Current holdings also include seasoned discounts, ARMs, and other
mortgage securities structured to have low prepayment risk.

As spreads over Treasuries on corporate bonds tightened, the quality of holdings
was upgraded. Holdings are biased toward non-economically sensitive issues in
order to reduce exposure to spread widening. Despite the tight spreads over
Treasuries on corporate bonds, we were able to uncover pockets of value
including cable/media bonds, insurance surplus notes, bank capital notes and
emerging markets debt which contributed significantly to performance.

At the beginning of the period, the foreign position included 5% in
currency-hedged European and Canadian bonds. In January, European bond holdings
were cut by 3% following outperformance by these markets. The foreign position
was increased slightly to 3% in late March. European economies are now
recovering, but yield curves remain steeper than in the U.S.

July 1997

- ----------48
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

FIXED INCOME SECURITIES (84.1%)
ADJUSTABLE RATE MORTGAGES (4.7%)
Government National Mortgage Association
$ 269 7.125%, 7/20/25.................................. $ 275
150 6.00%, 6/20/27 August TBA........................ 150
--------
425
--------
AGENCY FIXED RATE MORTGAGES (14.5%)
Federal Home Loan Mortgage Corporation
61 10.50%, 2/1/15-9/1/16............................ 68
--------
Federal National Mortgage Corporation
Conventional Pools:
19 10.00%, 9/1/10................................... 20
45 11.50%, 7/1/13................................... 51
71 12.00%, 11/1/11-9/1/12........................... 81
175 6.00%, 06/15/26 July TBA......................... 163
--------
315
--------
Government National Mortage Association
Various Pools:
450 7.00%, 12/15/23.................................. 445
250 10.00%, 7/15/16-5/15/19.......................... 276
69 10.50%, 1/15/18.................................. 77
75 11.00%, 2/15/19-4/15/20.......................... 85
21 11.50%, 5/15/13-9/15/15.......................... 23
17 12.00%, 12/15/14................................. 20
--------
926
--------
1,309
--------
COLLATERALIZED MORTGAGE OBLIGATIONS--
AGENCY COLLATERAL SERIES (2.4%)
Federal Home Loan Mortgage Corporation, Series:
5 1709 H PO REMIC, 1/15/24......................... 2
9 1750 C PD PO REMIC, 3/15/24...................... 6
5 1813 K PO, 2/15/24............................... 3
10 1844 PC PO, 3/15/24.............................. 6
5 1887 I PO, 10/15/22.............................. 3
13 93-149 O PO REMIC, 8/25/23....................... 7
--------
27
--------
Federal National Mortgage Association, Series:
100 282 1 PO 5/15/24................................. 65
10 96-14 PC PO REMIC, 12/25/23...................... 5
10 96-46 PB PO REMIC, 9/25/23....................... 6
5 96-54 PO REMIC, 7/25/23.......................... 3
10 96-54 O PO REMIC, 11/25/23....................... 6
50 97-3 E PO 12/25/23............................... 30
49 97-7 E PO REMIC, 2/15/23......................... 31
73 97-7 EB PO 3/18/27............................... 45
--------
191
--------
218
--------
COMMERCIAL MORTGAGE (1.1%)
50 CSFB, Series 97-C1 A1C 7.24%, 4/20/07............ 50
50 Mortgage Capital Funding, Inc., Series 97-MC1 A3
7.288%, 3/20/07................................ 51
--------
101
--------

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------

FINANCE (0.4%)
$ 40 New Jersey Economic Development Authority,
Series A 7.425%, 2/15/29....................... $ 40
--------
FOREIGN GOVERNMENTS (2.7%)
125 Government of Germany, Series 95,
7.375%, 1/3/05................................. 80
Swedish Government Bonds
700 6.00%, 2/9/05.................................... 89
500 10.25%, 5/5/03................................... 78
--------
247
--------
INDUSTRIALS (1.9%)
50 Kmart Corp. 7.75%, 10/1/12....................... 46
25 News America Holdings 8.875%, 4/26/23............ 27
50 Paramount Communications, Inc. 8.25%, 8/1/22..... 48
25 RJR Nabisco, Inc. 8.75%, 4/15/04................. 25
30 Southland Corp. 5.00%, 12/15/03.................. 25
--------
171
--------
STRIPPED MORTGAGE BACKED SECURITIES--
AGENCY COLLATERAL SERIES (0.3%)
41 Federal National Mortgage Association, Series 249
1 PO 10/25/23.................................. 26
--------
TELEPHONES (0.8%)
70 Telecommunications, Inc. 8.75%, 2/15/23.......... 70
--------
U.S. TREASURY SECURITIES (53.9%)
525 U.S. Treasury Bond 8.75%, 8/15/20................ 638
U.S. Treasury Notes
101 3.375%, 1/15/07 (Inflation Indexed).............. 99
350 7.00%, 4/15/99................................... 355
1,100 7.125%, 9/30/99.................................. 1,123
1,175 7.25%, 8/15/04................................... 1,225
1,275 7.50%, 2/15/05................................... 1,349
350 U.S. Treasury Strip 2/15/19...................... 78
--------
4,867
--------
YANKEE BONDS (1.4%)
National Power Corp.
25 7.875%, 12/15/06................................. 24
25 8.40%, 12/15/16.................................. 25
(n)75 Republic of Argentina Par, Series L, `Euro'
5.50%, 3/31/23................................. 52
25 Republic of Colombia 8.70%, 2/15/16.............. 25
--------
126
--------
TOTAL FIXED INCOME SECURITIES (COST $7,574)............... 7,600
--------
SHORT-TERM INVESTMENT (23.8%)
REPURCHASE AGREEMENT (23.8%)
2,147 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $2,147,
collateralized by U.S. Treasury Notes, 5.875%,
due 1/31/99, valued at $2,152 (COST $2,147).... 2,147
--------
</TABLE>

-----------------
49
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------

TOTAL INVESTMENTS (107.9%) (COST $9,721*).............................................. $ 9,747
-------
OTHER ASSETS (24.5%)
Receivable for Investments Sold..................................... $ 2,051
Interest Receivable................................................. 151
Due From Adviser.................................................... 10
Net Unrealized Gain on Foreign Currency Exchange Contracts.......... 5 2,217
-------
LIABILITIES (-32.4%)
Payable for Investments Purchased................................... (2,446)
Bank Overdraft...................................................... (449)
Professional Fees Payable........................................... (17)
Custodian Fees Payable.............................................. (11)
Administrative Fees Payable......................................... (2)
Other Liabilities................................................... (6) (2,931)
------- -------
NET ASSETS (100%)...................................................................... $ 9,033
-------
-------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 872,453 outstanding $0.001 par value shares (authorized
500,000,000 shares)................................................. $ 10.35
-------
-------
NET ASSETS CONSIST OF:
Paid in Capital........................................................................ $ 8,733
Undistributed Net Investment Income.................................................... 218
Accumulated Net Realized Gain.......................................................... 52
Unrealized Appreciation on Investments and Foreign
Currency Translations................................................................ 30
-------
NET ASSETS............................................................................. $ 9,033
-------
-------
</TABLE>

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

FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:

Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:

<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ ----- ---------- ------------ ----- -----------
<S> <C> <C> <C> <C> <C>
SEK 1,305 $ 169 8/27/97 U.S.$ 172 $ 172 $ 3
DEM 145 84 8/29/97 U.S.$ 86 86 2
----- ----- -----
$ 253 $ 258 $ 5
----- ----- -----
----- ----- -----
</TABLE>

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

(n) -- Step Bond-coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
DEM -- German Mark
PO -- Principal Only
REMIC -- Real Estate Mortgage Investment Conduit
SEK -- Swedish Krona
TBA -- Security is subject to delayed delivery.

- ---------------
*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Fixed Income Portfolio
were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- ------ ------------ -------------- ------------
<S> <C> <C> <C>
$9,721 $39 $(13) $26
</TABLE>

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the Fixed Income Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $13,993,000 and $6,411,000
respectively.

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

- ----------50
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

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

INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Asset Backed Corporates 0.9%
Cable 10.5%
Consumer Services/Products 4.1%
Energy 2.4%
Finance 3.1%
Industrials 19.6%
Supermarkets 1.8%
Telephones 14.6%
U.S. Treasury Security 8.6%
Utilities 5.7%
Yankee 12.0%
Other 16.7%
</TABLE>

<TABLE>
<CAPTION>
PERFORMANCE COMPARED TO THE SALOMON HIGH-YIELD MARKET INDEX(1)
- ------------------------------------
TOTAL RETURNS(2)
YTD
-----------------
<S> <C>
PORTFOLIO(3).................. 5.80%
INDEX......................... 5.96%
</TABLE>

1. The Salomon High Yield Market Index includes public, non convertible
corporate bond issues with at least one year remaining to maturity and $50
million in par amount outstanding which carry a below investment grade
quality rating from either Standard & Poor's or Moody's rating services.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ------------------------------- ------------ -------------
<S> <C> <C>
U.S. Treasury Notes U.S.
Treasury
Security 8.6%
Time Warner, Inc., Series M Cable 4.0%
Nextel Communications, Inc. Telephones 4.0%
DR Securitized Lease Trust Industrials 3.6%
Rogers Cablesystems Ltd. Cable 2.7%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------- --------- -------------
<S> <C> <C>
Industrials $ 1,821 19.6%
Telephones 1,361 14.6%
Yankee 1,113 12.0%
Cable 975 10.5%
U.S. Treasury Security 797 8.6%
</TABLE>

The objective of the High Yield Portfolio is to achieve above-average total
return over a market cycle of three to five years by investing primarily in a
diversified portfolio of high yield securities, including corporate bonds and
other fixed income securities and derivatives. High yield securities are rated
below investment grade and are commonly referred to as "junk bonds". The
Portfolio's average weighted maturity will ordinarily exceed five years and will
usually be between five and fifteen years.

For the period from January 2, 1997 (commencement of operations) through June
30, 1997, the Portfolio had a total return of 5.80% as compared to 5.96% for the
Salomon High-Yield Market Index (the "Index").

We have continued to emphasize the communications industry in our Portfolio. We
believe exceptional growth opportunities exist in the newly deregulated local
exchange sector, as well as in selected companies in the wireless and long
distance sectors. Securities which performed strongly over the period included
Nextel Communications, Qwest Communications, and Occel, a cellular company based
in the Republic of Colombia. Microsoft's strategic investment in Comcast led to
strong gains for our holdings in the cable & telecommunication sectors,
particularly Telecommunications, Inc. and Cablevision Systems Corp. In the
emerging markets arena, our investments in U.S. dollar-dominated sovereign and
corporate bonds continued to outperform. We reduced both the cable and emerging
market sectors on strength in the second quarter.

Our overall portfolio structure continues to feature higher average credit
quality compared to market benchmarks. In terms of interest-rate sensitivity, we
have taken steps to reduce our exposure to no longer than that of market
benchmark. We believe that there is fair value in the U.S. bond market, and that
historically narrow high-yield credit spreads are supported by strong
fundamentals.

July 1997

-------------
51
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

FIXED INCOME SECURITIES (78.2%)
ASSET BACKED CORPORATES (0.9%)
$ 75 Aircraft Lease Portfolio Securitization, Ltd.,
Series 96-1 D
12.75%, 6/15/06................................ $ 81
-------
CABLE (6.5%)
150 Cablevision Systems Corp.
9.875%, 5/15/06................................ 160
200 Paramount Communications, Inc.
8.25%, 8/1/22.................................. 191
Rogers Cablesystems Ltd.
185 10.00%, 3/15/05, Series B...................... 200
50 10.125%, 9/1/12................................ 54
-------
605
-------
CONSUMER SERVICES\PRODUCTS (4.1%)
205 RJR Nabisco, Inc.
8.75%, 4/15/04................................. 209
150 TLC Beatrice International Holdings, Inc.
11.50%, 10/1/05................................ 169
-------
378
-------
ENERGY (2.4%)
120 Snyder Oil Corp.
8.75%, 6/15/07................................. 119
100 Vintage Petroleum, Inc.
8.625%, 2/1/09................................. 100
-------
219
-------
FINANCE (3.1%)
100 Amresco, Inc., Series 97-A
10.00%, 3/15/04................................ 103
First Nationwide Holdings, Inc.
55 9.125%, 1/15/03................................ 57
115 10.625%, 10/1/03............................... 126
-------
286
-------
INDUSTRIALS (19.6%)
125 Advanced Micro Devices, Inc.
11.00%, 8/1/03................................. 139
DR Securitized Lease Trust, Series:
177 93-K1 A1, 6.66%, 8/15/10....................... 156
87 94-K1 A1, 7.60%, 8/15/07....................... 83
100 94-K1 A2, 8.375%, 8/15/15...................... 93
125 Grand Casinos, Inc.
10.125%, 12/1/03............................... 131
175 Host Marriott Travel Plaza, Series B
9.50%, 5/15/05................................. 183
245 ISP Holdings, Inc., Series B
9.00%, 10/15/03................................ 253
105 Kmart Corp.
7.75%, 10/1/12................................. 96
(n)185 Norcal Waste Systems, Inc., Series B
13.00%, 11/15/05............................... 210
100 SD Warren Co.
12.00%, 12/15/04............................... 112

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 120 Tenet Healthcare Corp.
8.625%, 1/15/07................................ $ 122
250 Viacom, Inc.
8.00%, 7/7/06.................................. 243
-------
1,821
-------
SUPERMARKETS (1.8%)
200 Southland Corp.
5.00%, 12/15/03................................ 170
-------
TELEPHONES (13.5%)
Brooks Fiber Properties, Inc.
(n)250 0.00%, 3/1/06.................................. 170
(n)110 0.00%, 11/1/06................................. 72
(n)75 EchoStar Satellite Broadcasting
0.00%, 3/15/04................................. 53
125 IXC Communications Inc., Series B
12.50%, 10/1/05................................ 143
(n)480 Nextel Communications, Inc.
0.00%, 8/15/04................................. 367
210 Telecommunications, Inc.
9.25%, 1/15/23................................. 219
(n)320 Teleport Communications Group, Inc.
0.00%, 7/1/07.................................. 231
-------
1,255
-------
U.S. TREASURY SECURITY (8.6%)
800 U.S. Treasury Note
6.50%, 10/15/06................................ 797
-------
UTILITIES (5.7%)
160 Cleveland Electric Illuminating Co., Series B
8.375%, 12/1/11................................ 161
158 Midland Funding Corp. I, Series C-94
10.33%, 7/23/02................................ 169
200 Quezon Power Ltd.
8.86%, 6/15/17................................. 200
-------
530
-------
YANKEE (12.0%)
150 National Power Corp.
7.875%, 12/15/06............................... 147
75 Net Sat Servicos Ltd.
12.75%, 8/5/04................................. 82
(n)265 Republic of Argentina Par, Series L, 'Euro'
5.50%, 3/31/23................................. 183
125 Republic of Brazil Front Loaded Interest
Reduction Bond (Floating Rate)
4.50%, 4/15/09................................. 98
210 Republic of Colombia
8.70%, 2/15/16................................. 213
250 Republic of Venezuela, Series A
6.75%, 3/31/20................................. 197
250 United Mexican States, Series A
6.25%, 12/31/19................................ 193
-------
1,113
-------
TOTAL FIXED INCOME SECURITIES (COST $7,123).................... 7,255
-------
</TABLE>

- ----------52
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------

PREFERRED STOCKS (4.0%)
CABLE (4.0%)
337 Time Warner, Inc., Series M,
10.25%, 7/1/16................................. $ 370
-------
TOTAL PREFERRED STOCKS (COST $357)............................. 370
-------
CONVERTIBLE PREFERRED STOCKS (1.1%)
TELEPHONES (1.1%)
1,025 TCI Pacific Communications,
5.00%, 7/31/06................................. 106
-------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $95).................. 106
-------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------

RIGHTS (0.0%)
YANKEE (0.0%)
(a)1,250 Republic of Venezuela Recovery Rights,
expiring 3/31/20............................... --
(a)250,000 United Mexican States Recovery Rights,
expiring 6/30/03............................... --
-------
TOTAL RIGHTS (COST $0)......................................... --
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------

SHORT-TERM INVESTMENT (17.8%)
REPURCHASE AGREEMENT (17.8%)
$1,652 Chase Securities, Inc.
5.70%, due 6/30/97, dated 7/1/97, to be
repurchased at $1,652, collateralized by U.S.
Treasury Notes, 5.625%, due 2/15/06, valued at
$1,681 (COST $1,652)........................... 1,652
-------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (101.1%) (COST $9,227*)................... 9,383
---------
OTHER ASSETS (3.8%)
Cash........................................... $ 83
Interest Receivable............................ 178
Receivable for Investments Sold................ 95
Receivable for Portfolio Shares Sold........... 1 357
---------
LIABILITIES (-4.9%)
Payable for Investments Purchased.............. (438)
Custodian Fees Payable......................... (6)
Professional Fees Payable...................... (6)
Administrative Fees Payable.................... (2)
Other Liabilities.............................. (6) (458)
--------- ---------
NET ASSETS (100%)........................................... $ 9,282
---------
---------

<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 877,218 outstanding $0.001 par value shares
(authorized 500,000,000 shares)......................... $ 10.58
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital............................................. $ 8,794
Undistributed Net Investment Income......................... 308
Accumulated Net Realized Gain............................... 24
Unrealized Appreciation on Investments...................... 156
---------
NET ASSETS.................................................. $ 9,282
---------
---------
</TABLE>

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

(a) -- Non-income producing security
(n) -- Step Bond-coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.

Floating Rate Security -- The interest rate changes on these intsruments are
based on changes in a designated base rate. The rates shown are those in
effect on June 30, 1997.
- ---------------
*At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the High Yield Portfolio
were:

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

For the period ended June 30, 1997, purchases and sales of investment securities
for the High Yield Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $11,634,000 and $4,134,000,
respectively.
- ----------------------------------------------------------------

-----------------
53
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM MARCH 3,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 52
Interest 27
Less: Foreign Taxes Withheld (2)
-----
Total Income 77
-----
EXPENSES:
Investment Advisory Fees 26
Less: Fees Waived (26)
-----
Net Investment Advisory Fees --
Professional Fees 20
Custodian Fees 13
Shareholder Reports 12
Administrative Fees 9
Foreign Tax Expense 2
Other 2
Expenses Reimbursed by Adviser (16)
-----
Net Expenses 42
-----
Net Investment Income 35
-----
NET REALIZED LOSS ON:
Investments Sold (126)
Foreign Currency Transactions (13)
-----
Net Realized Loss (139)
-----
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments (Net of foreign taxes
of $4 on unrealized
appreciation.) 775
Foreign Currency Translations (2)
-----
Change in Unrealized
Appreciation/Depreciation 773
-----
Net Realized Gain and Change in
Unrealized
Appreciation/Depreciation 634
-----
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 669
-----
-----
</TABLE>

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

* Commencement of operations

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

STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM MARCH 3,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 35
Net Realized Loss (139)
Change in Unrealized
Appreciation/Depreciation 773
-------
Net Increase in Net Assets
Resulting from Operations 669
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 10,329
Redeemed (52)
-------
Net Increase in Net Assets Resulting
from Capital Share Transactions 10,277
-------
Total Increase in Net Assets 10,946
NET ASSETS:
Beginning of Period --
-------
End of Period (Including
undistributed net investment
income of $35) $10,946
-------
-------
- -------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,032
Shares Redeemed (5)
-------
Net Increase in Capital Shares
Outstanding 1,027
-------
-------
- -------------------------------------------------------------
* Commencement of operations
</TABLE>

- -----------------
54
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 190
Interest 38
Less: Foreign Taxes Withheld (9)
------
Total Income 219
------
EXPENSES:
Investment Advisory Fees 97
Less: Fees Waived (97)
------
Net Investment Advisory Fees --
Professional Fees 116
Custodian Fees 62
Amortization of Organizational
Costs 41
Administrative Fees 14
Shareholder Reports 14
Foreign Tax Expense 2
Directors' Fees and Expenses 1
Other 3
Expenses Reimbursed by Adviser (114)
------
Net Expenses 139
------
Net Investment Income 80
------
NET REALIZED GAIN (LOSS) ON:
Investments Sold 716
Foreign Currency Transactions (5)
------
Net Realized Gain 711
------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments (Net of foreign taxes
of $1 on unrealized
appreciation.) 2,394
Foreign Currency Translations (31)
------
Change in Unrealized
Appreciation/Depreciation 2,363
------
Net Realized Gain and Change in
Unrealized
Appreciation/Depreciation 3,074
------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $3,154
------
------
</TABLE>

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

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD FROM
JUNE 30, 1997 OCTOBER 1, 1996* TO
(UNAUDITED) DECEMBER 31, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 80 $ 8
Net Realized Gain (Loss) 711 (60)
Change in Unrealized
Appreciation/Depreciation 2,363 (135)
-------- -------
Net Increase (Decrease) in Net
Assets Resulting from Operations 3,154 (187)
-------- -------
DISTRIBUTIONS:
Net Investment Income -- (20)
-------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 16,479 11,993
Distributions Reinvested -- 3
Redeemed (11,114) --
-------- -------
Net Increase in Net Assets Resulting
from Capital Share Transactions 5,365 11,996
-------- -------
Total Increase in Net Assets 8,519 11,789
NET ASSETS:
Beginning of Period 11,789 --
-------- -------
End of Period (Including
undistributed net investment
income of $83 and $3,
respectively) $ 20,308 $11,789
-------- -------
-------- -------
- -----------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,466 1,205
Shares Issued on Distributions
Reinvested -- 1
Shares Redeemed (983) --
-------- -------
Net Increase in Capital Shares
Outstanding 483 1,206
-------- -------
-------- -------
- -----------------------------------------------------------------------------
* Commencement of operations
</TABLE>

-----------------
55
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 69
Interest 19
Less: Foreign Taxes Withheld (6)
-----
Total Income 82
-----
EXPENSES:
Investment Advisory Fees 22
Less: Fees Waived (22)
-----
Net Investment Advisory Fees --
Professional Fees 21
Administrative Fees 9
Shareholder Reports 7
Custodian Fees 6
Other 3
Expenses Reimbursed by Adviser (14)
-----
Net Expenses 32
-----
Net Investment Income 50
-----
NET REALIZED GAIN ON:
Investments Sold 5
Foreign Currency Transactions 5
-----
Net Realized Gain 10
-----
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 783
-----
Net Realized Gain and Change in
Unrealized
Appreciation/Depreciation 793
-----
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $843
-----
-----
</TABLE>

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

* Commencement of operations

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

STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 50
Net Realized Gain 10
Change in Unrealized
Appreciation/Depreciation 783
------
Net Increase in Net Assets
Resulting from Operations 843
------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 6,567
Redeemed (84)
------
Net Increase in Net Assets Resulting
from Capital Share Transactions 6,483
------
Total Increase in Net Assets 7,326
NET ASSETS:
Beginning of Period --
------
End of Period (Including
undistributed net investment
income of $50) $7,326
------
------
- -------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 645
Shares Redeemed (8)
------
Net Increase in Capital Shares
Outstanding 637
------
------
- -------------------------------------------------------------
</TABLE>

* Commencement of operations

- -----------------
56
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 163
Interest 32
Less: Foreign Taxes Withheld (22)
------
Total Income 173
------
EXPENSES:
Investment Advisory Fees 44
Less: Fees Waived (44)
------
Net Investment Advisory Fees --
Custodian Fees 35
Administrative Fees 23
Shareholder Reports 16
Professional Fees 13
Other 1
Expenses Reimbursed by Adviser (24)
------
Net Expenses 64
------
Net Investment Income 109
------
NET REALIZED GAIN ON:
Investments Sold 46
Foreign Currency Transactions 282
------
Net Realized Gain 328
------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 1,358
Foreign Currency Translations 46
------
Change in Unrealized
Appreciation/Depreciation 1,404
------
Net Realized Gain and Change in
Unrealized
Appreciation/Depreciation 1,732
------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $1,841
------
------
</TABLE>

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

* Commencement of operations

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

STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 109
Net Realized Gain 328
Change in Unrealized
Appreciation/Depreciation 1,404
-------
Net Increase in Net Assets
Resulting from Operations 1,841
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 12,853
Redeemed (51)
-------
Net Increase in Net Assets Resulting
from Capital Share Transactions 12,802
-------
Total Increase in Net Assets 14,643
NET ASSETS:
Beginning of Period --
-------
End of Period (Including
undistributed net investment
income of $109) $14,643
-------
-------
- -------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,260
Shares Redeemed (5)
-------
Net Increase in Capital Shares
Outstanding 1,255
-------
-------
- -------------------------------------------------------------
* Commencement of operations
</TABLE>

-----------------
57
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- ----------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 14
Interest 8
-------
Total Income 22
-------
EXPENSES:
Investment Advisory Fees 8
Less: Fees Waived (8)
-------
Net Investment Advisory Fees --
Custodian Fees 36
Shareholder Reports 16
Professional Fees 15
Administrative Fees 6
Other 2
Expenses Reimbursed by Adviser (62)
-------
Net Expenses 13
-------
Net Investment Income 9
-------
NET REALIZED GAIN ON:
Investments Sold 60
-------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 371
-------
Net Realized Gain and Change in
Unrealized
Appreciation/Depreciation 431
-------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 440
-------
-------
</TABLE>

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

* Commencement of operations

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

STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 9
Net Realized Gain 60
Change in Unrealized
Appreciation/Depreciation 371
------
Net Increase in Net Assets
Resulting from Operations 440
------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 3,542
Redeemed (23)
------
Net Increase in Net Assets Resulting
from Capital Share Transactions 3,519
------
Total Increase in Net Assets 3,959
NET ASSETS:
Beginning of Period --
------
End of Period (Including
undistributed net investment
income of $9) $3,959
------
------
- -------------------------------------------------------------

(1) Capital Share Transactions:
Shares Subscribed 346
Shares Redeemed (2)
------
Net Increase in Capital Shares
Outstanding 344
------
------
- -------------------------------------------------------------
* Commencement of operations
</TABLE>

- -----------------
58
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 20
Interest 7
-----
Total Income 27
-----
EXPENSES:
Investment Advisory Fees 14
Less: Fees Waived (14)
-----
Net Investment Advisory Fees --
Custodian Fees 11
Professional Fees 9
Shareholder Reports 5
Administrative Fees 5
Other 1
Expenses Reimbursed by Adviser (12)
-----
Net Expenses 19
-----
Net Investment Income 8
-----
NET REALIZED GAIN ON:
Investments Sold 110
-----
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 573
-----
Net Realized Gain and Change in
Unrealized
Appreciation/Depreciation 683
-----
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $691
-----
-----
</TABLE>

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

* Commencement of operations

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

STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8
Net Realized Gain 110
Change in Unrealized
Appreciation/Depreciation 573
------
Net Increase in Net Assets
Resulting from Operations 691
------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 4,233
Redeemed (2)
------
Net Increase in Net Assets Resulting
from Capital Share Transactions 4,231
------
Total Increase in Net Assets 4,922
NET ASSETS:
Beginning of Period --
------
End of Period (Including
undistributed net investment
income of $8) $4,922
------
------
- -------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 413
------
------
- -------------------------------------------------------------
* Commencement of operations
</TABLE>

-----------------
59
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM MARCH 3,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -----------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 61
Interest 17
-----
Total Income 78
-----
EXPENSES:
Investment Advisory Fees 14
Less: Fees Waived (14)
-----
Net Investment Advisory Fees --
Custodian Fees 21
Shareholder Reports 14
Professional Fees 9
Administrative Fees 5
Other 1
Expenses Reimbursed by Adviser (31)
-----
Net Expenses 19
-----
Net Investment Income 59
-----
NET REALIZED LOSS ON:
Investments Sold (37)
-----
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 204
-----
Net Realized Loss and Change in
Unrealized
Appreciation/Depreciation 167
-----
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $226
-----
-----
</TABLE>

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

* Commencement of operations

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

STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM MARCH 3,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- ------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 59
Net Realized Loss (37)
Change in Unrealized
Appreciation/Depreciation 204
-------
Net Increase in Net Assets
Resulting from Operations 226
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 5,799
-------
Total Increase in Net Assets 6,025
-------
NET ASSETS:
Beginning of Period --
-------
End of Period (Including
undistributed net investment
income of $59) $ 6,025
-------
-------
- ------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 581
-------
-------
- ------------------------------------------------------------------
* Commencement of operations
</TABLE>

- -----------------
60
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 32
Interest 16
-----
Total Income 48
-----
EXPENSES:
Investment Advisory Fees 10
Less: Fees Waived (10)
-----
Net Investment Advisory Fees --
Professional Fees 15
Custodian Fees 6
Shareholder Reports 5
Administrative Fees 5
Other 1
Expenses Reimbursed by Adviser (17)
-----
Net Expenses 15
-----
Net Investment Income 33
-----
NET REALIZED GAIN ON:
Investments Sold 72
-----
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 469
-----
Net Realized Gain and Change in
Unrealized
Appreciation/Depreciation 541
-----
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $574
-----
-----
</TABLE>

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

* Commencement of operations

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

STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 33
Net Realized Gain 72
Change in Unrealized
Appreciation/Depreciation 469
------
Net Increase in Net Assets
Resulting from Operations 574
------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 4,690
------
Total Increase in Net Assets 5,264
NET ASSETS:
Beginning of Period --
------
End of Period (Including
undistributed net investment
income of $33) $5,264
------
------
- -------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 456
------
------
- -------------------------------------------------------------
* Commencement of operations
</TABLE>

-----------------
61
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JUNE 16,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- ---------------------------------------------------------------

INVESTMENT INCOME:
Interest $ 32
---
EXPENSES:
Investment Advisory Fees 3
Less: Fees Waived (3)
---
Net Investment Advisory Fees --
Custodian Fees 3
Professional Fees 3
Shareholder Reports 1
Administrative Fees 1
Expenses Reimbursed by Adviser (3)
---
Net Expenses 5
---
Net Investment Income 27
---
NET REALIZED LOSS ON:
Investments Sold (5)
---
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments (27)
Foreign Currency Translations 1
---
Change in Unrealized
Appreciation/Depreciation (26)
---
Net Realized Loss and Change in
Unrealized
Appreciation/Depreciation (31)
---
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (4)
---
---
</TABLE>

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

* Commencement of operations

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

STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JUNE 16,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- ---------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 27
Net Realized Loss (5)
Change in Unrealized
Appreciation/Depreciation (26)
-------
Net Decrease in Net Assets
Resulting from Operations (4)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 10,053
-------
Total Increase in Net Assets 10,049
NET ASSETS:
Beginning of Period --
-------
End of Period (Including
undistributed net investment
income of $27) $10,049
-------
-------
- ---------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,005
-------
-------
- ---------------------------------------------------------------
* Commencement of operations
</TABLE>

- -----------------
62
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- --------------------------------------------------------------

INVESTMENT INCOME:
Interest $248
-----
EXPENSES:
Investment Advisory Fees 17
Less: Fees Waived (17)
-----
Net Investment Advisory Fees --
Custodian Fees 11
Professional Fees 22
Shareholder Reports 6
Administrative Fees 10
Other 1
Expenses Reimbursed by Adviser (20)
-----
Net Expenses 30
-----
Net Investment Income 218
-----
NET REALIZED GAIN ON:
Investments Sold 44
Foreign Currency Transactions 8
-----
Net Realized Gain 52
-----
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 25
Foreign Currency Translations 5
-----
Change in Unrealized
Appreciation/Depreciation 30
-----
Net Realized Gain and Change in
Unrealized
Appreciation/Depreciation 82
-----
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $300
-----
-----
</TABLE>

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

* Commencement of operations

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

STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- --------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 218
Net Realized Gain 52
Change in Unrealized
Appreciation/Depreciation 30
------
Net Increase in Net Assets
Resulting from Operations 300
------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 8,793
Redeemed (60)
------
Net Increase in Net Assets Resulting
from Capital Share Transactions 8,733
------
Total Increase in Net Assets 9,033
NET ASSETS:
Beginning of Period --
------
End of Period (Including
undistributed net investment
income of $218) $9,033
------
------
- --------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 878
Shares Redeemed (6)
------
Net Increase in Capital Shares
Outstanding 872
------
------
- --------------------------------------------------------------
* Commencement of operations
</TABLE>

-----------------
63
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 2
Interest 339
-----
Total Income 341
-----
EXPENSES:
Investment Advisory Fees 21
Less: Fees Waived (21)
-----
Net Investment Advisory Fees --
Professional Fees 11
Administrative Fees 10
Custodian Fees 6
Shareholder Reports 5
Other 1
-----
Net Expenses 33
-----
Net Investment Income 308
-----
NET REALIZED GAIN ON:
Investments Sold 24
-----
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 156
-----
Net Realized Gain and Change in
Unrealized
Appreciation/Depreciation 180
-----
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $488
-----
-----
</TABLE>

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

* Commencement of operations

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

STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 308
Net Realized Gain 24
Change in Unrealized
Appreciation/Depreciation 156
------
Net Increase in Net Assets
Resulting from Operations 488
------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 8,806
Redeemed (12)
------
Net Increase in Net Assets Resulting
from Capital Share Transactions 8,794
------
Total Increase in Net Assets 9,282
NET ASSETS:
Beginning of Period --
------
End of Period (Including
undistributed net investment
income of $308) $9,282
------
------
- -------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 878
Shares Redeemed (1)
------
Net Increase in Capital Shares
Outstanding 877
------
------
- -------------------------------------------------------------
* Commencement of operations
</TABLE>

- -----------------
64
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM MARCH 3,
1997* TO JUNE 30, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
<S> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03
Net Realized and Unrealized Gain 0.63
-------
Total From Investment Operations 0.66
-------
NET ASSET VALUE, END OF PERIOD $ 10.66
-------
-------
TOTAL RETURN 6.60%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 10,946
Ratio of Expenses to Average Net
Assets 1.20%**
Ratio of Net Investment Income to
Average Net Assets 1.06%**
Portfolio Turnover Rate 49%
Average Commission Rate:
Per Share $ 0.0170
As a Percentage of Trade Amount 0.56%
- ----------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Loss $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.55%**
Net Investment Loss to Average Net
Assets (0.22)%**
</TABLE>

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

* Commencement of operations
** Annualized

-----------------
65
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD FROM
JUNE 30, 1997 OCTOBER 1, 1996*
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) TO DECEMBER 31, 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.78 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.01
Net Realized and Unrealized Gain
(Loss) 2.20 (0.21)
------- -------
Total From Investment Operations 2.25 (0.20)
------- -------
DISTRIBUTIONS
Net Investment Income -- (0.02)
------- -------
Total Distributions -- (0.02)
------- -------
NET ASSET VALUE, END OF PERIOD $ 12.03 $ 9.78
------- -------
------- -------
TOTAL RETURN 23.01% (2.03)%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 20,308 $ 11,789
Ratio of Expenses to Average Net
Assets 1.75%** 1.75%**
Ratio of Net Investment Income to
Average Net Assets 1.03%** 0.32%**
Portfolio Turnover Rate 38% 9%
Average Commission Rate:
Per Share $ 0.0012 $ 0.0013
As a Percentage of Trade Amount 0.40% 0.45%
- --------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income (Loss) $ 0.12 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 4.49%** 6.17%**
Net Investment Loss to Average Net
Assets (1.67)%** (4.06)%**
</TABLE>

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

* Commencement of operations
** Annualized

- -------------
66
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
<S> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.08
Net Realized and Unrealized Gain 1.41
-------
Total From Investment Operations 1.49
-------
NET ASSET VALUE, END OF PERIOD $ 11.49
-------
-------
TOTAL RETURN 14.90%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 7,326
Ratio of Expenses to Average Net
Assets 1.15%**
Ratio of Net Investment Income to
Average Net Assets 1.81%**
Portfolio Turnover Rate 3%
Average Commission Rate:
Per Share $ 0.0225
As a Percentage of Trade Amount 0.17%
- ----------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.46%**
Net Investment Income to Average
Net Assets 0.50%**
</TABLE>

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

* Commencement of operations
** Annualized

-----------------
67
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
<S> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.09
Net Realized and Unrealized Gain 1.58
-------
Total From Investment Operations 1.67
-------
NET ASSET VALUE, END OF PERIOD $ 11.67
-------
-------
TOTAL RETURN 16.70%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 14,643
Ratio of Expenses to Average Net
Assets 1.15%**
Ratio of Net Investment Income to
Average Net Assets 1.96%**
Portfolio Turnover Rate 19%
Average Commission Rate:
Per Share $ 0.0170
As a Percentage of Trade Amount 0.17%
- -------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.05
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.38%**
Net Investment Income to Average
Net Assets 0.73%**
</TABLE>

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

* Commencement of operations
** Annualized

- -------------
68
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
<S> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03
Net Realized and Unrealized Gain 1.50
-------
Total From Investment Operations 1.53
-------
NET ASSET VALUE, END OF PERIOD $ 11.53
-------
-------
TOTAL RETURN 15.30%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 3,959
Ratio of Expenses to Average Net
Assets 0.85%**
Ratio of Net Investment Income to
Average Net Assets 0.60%**
Portfolio Turnover Rate 95%
Average Commission Rate Per Share $ 0.0510
- -------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income (Loss) $ 0.85
Ratios Before Expense Limitation:
Expenses to Average Net Assets 5.55%**
Net Investment Loss to Average Net
Assets (4.11)%**
</TABLE>

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

* Commencement of operations
** Annualized

-----------------
69
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
<S> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02
Net Realized and Unrealized Gain 1.89
-------
Total From Investment Operations 1.91
-------
NET ASSET VALUE, END OF PERIOD $ 11.91
-------
-------
TOTAL RETURN 19.10%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 4,922
Ratio of Expenses to Average Net
Assets 1.05%**
Ratio of Net Investment Income to
Average Net Assets 0.43%**
Portfolio Turnover Rate 76%
Average Commission Rate Per Share $ 0.0429
- -------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income (Loss) $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.45%**
Net Investment Loss to Average Net
Assets (0.97)%**
</TABLE>

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

* Commencement of operations
** Annualized

- -------------
70
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM MARCH 3,
1997* TO JUNE 30, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
<S> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.10
Net Realized and Unrealized Gain 0.27
-------
Total From Investment Operations 0.37
-------
NET ASSET VALUE, END OF PERIOD $ 10.37
-------
-------
TOTAL RETURN 3.70%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 6,025
Ratio of Expenses to Average Net
Assets 1.10%**
Ratio of Net Investment Income to
Average Net Assets 3.52%**
Portfolio Turnover Rate 56%
Average Commission Rate Per Share $ 0.0576
- ----------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.71%**
Net Investment Income to Average
Net Assets 0.90%**
</TABLE>

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

* Commencement of operations
** Annualized

-----------------
71
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
<S> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.07
Net Realized and Unrealized Gain 1.48
-------
Total From Investment Operations 1.55
-------
NET ASSET VALUE, END OF PERIOD $ 11.55
-------
-------
TOTAL RETURN 15.50%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 5,264
Ratio of Expenses to Average Net
Assets 0.85%**
Ratio of Net Investment Income to
Average Net Assets 1.82%**
Portfolio Turnover Rate 22%
Average Commission Rate Per Share $ 0.0585
- ----------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.35%**
Net Investment Income to Average
Net Assets 0.32%**
</TABLE>

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

* Commencement of operations
** Annualized

- -------------
72
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM JUNE 16,
1997* TO JUNE 30, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
<S> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03
Net Realized and Unrealized Loss (0.03)
-------
Total From Investment Operations --
-------
NET ASSET VALUE, END OF PERIOD $ 10.00
-------
-------
TOTAL RETURN 0.00%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 10,049
Ratio of Expenses to Average Net
Assets 1.30%**
Ratio of Net Investment Income to
Average Net Assets 6.48%**
Portfolio Turnover Rate 14%
- -------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.77%**
Net Investment Income to Average
Net Assets 5.01%**
</TABLE>

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

* Commencement of operations
** Annualized

-----------------
73
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
<S> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.25
Net Realized and Unrealized Gain 0.10
------
Total From Investment Operations 0.35
------
NET ASSET VALUE, END OF PERIOD $ 10.35
------
------
TOTAL RETURN 3.50%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 9,033
Ratio of Expenses to Average Net
Assets 0.70%**
Ratio of Net Investment Income to
Average Net Assets 5.27%**
Portfolio Turnover Rate 100%
- ----------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.59%**
Net Investment Income to Average
Net Assets 4.38%**
</TABLE>

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

* Commencement of operations
** Annualized

- -------------
74
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997* TO JUNE 30, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
<S> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.35
Net Realized and Unrealized Gain 0.23
------
Total From Investment Operations 0.58
------
NET ASSET VALUE, END OF PERIOD $ 10.58
------
------
TOTAL RETURN 5.80%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 9,282
Ratio of Expenses to Average Net
Assets 0.80%**
Ratio of Net Investment Income to
Average Net Assets 7.41%**
Portfolio Turnover Rate 63%
- ----------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.30%**
Net Investment Income to Average
Net Assets 6.91%**
</TABLE>

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

* Commencement of operations
** Annualized

-----------------
75
The accompanying notes are an integral part of the financial statements.
<PAGE>
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<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 (UNAUDITED)

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Morgan Stanley Universal Funds, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. As of June 30, 1997, the Fund was comprised of eleven separate active
portfolios (individually referred to as a "Portfolio", collectively as the
"Portfolios"). The Emerging Markets Equity Portfolio commenced operations on
October 1, 1996. The Global Equity, International Magnum, Equity Growth, Mid Cap
Value, Value, Fixed Income and High Yield Portfolios each commenced operations
on January 2, 1997. The Asian Equity and U.S. Real Estate Portfolios each
commenced operations on March 3, 1997 and the Emerging Markets Debt Portfolio
commenced operations on June 16, 1997.

The Fund is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies.

A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.

1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date, for which market quotations are readily available, are valued at
the mean between the current bid and asked prices obtained from reputable
brokers. Bonds and other fixed income securities may be valued according to the
broadest and most representative market. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service which are based primarily on institutional size trading in similar
groups of securities. Debt securities purchased with remaining maturities of 60
days or less are valued at amortized cost, if it approximates market value. All
other securities and assets for which market values are not readily available,
including restricted securities, are valued at fair value as determined in good
faith by the Board of Directors, although the actual calculations may be done by
others.

2. INCOME TAXES: It is each Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable and tax-exempt income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.

A Portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as income and/or capital gains
are earned.

3. REPURCHASE AGREEMENTS: Each Portfolio may enter into repurchase agreements
under which a Portfolio lends cash and takes possession of securities with an
agreement that the counterparty will repurchase such securities. In connection
with transactions in repurchase agreements, a bank as custodian for the Fund
takes possession of the underlying securities which are held as collateral, with
a market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.

4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:

- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;

- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.

Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, 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 fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions and
the foreign currency portion of gains and losses realized on sales and
maturities of foreign denominated debt securities are treated as ordinary income
for U.S. Federal income tax purposes.

Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from foreign

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76

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)

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

currency exchange contracts, disposition of foreign currencies, currency gains
or losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income and
foreign withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized currency gains
(losses) from valuing foreign currency denominated assets and liabilities at
period end exchange rates are reflected as a component of unrealized
appreciation (depreciation) on the Statement of Net Assets. The change in net
unrealized currency gains (losses) for the period is reflected on the Statement
of Operations.

Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.

Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investments
in domestic companies may be subject to limitation in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Statement of Net Assets) may be created and offered for investment. The
"local" and "foreign" shares' market values may differ. In the absence of
trading of the foreign shares in such markets at June 30, 1997, the Portfolios
value the foreign shares at the closing exchange price of the local shares. Such
securities are reflected as fair valued in the Statement of Net Assets.

5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Portfolios may enter into foreign
currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign currency exchange
rates. A foreign currency exchange contract is an agreement between two parties
to buy or sell currency at a set price on a future date. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract is
marked-to-market daily and the change in market value is recorded by the
Portfolios as unrealized gain or loss. The Portfolios record realized gains or
losses when the contract is closed equal to the difference between the value of
the contract at the time is was opened and the value at the time it was closed.
Risk may arise upon entering into these contracts from the potential inability
of counterparties to meet the terms of their contracts and is generally limited
to the amount of the unrealized gain on the contracts, if any, at the date of
default. Risks may also arise from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar.

6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days) after
the date of the transaction. Additionally, each Portfolio may purchase
securities on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed delivery basis, it establishes
a segregated account in which it maintains liquid assets in an amount at least
equal in value to the Portfolio's commitments to purchase such securities.
Purchasing securities on a forward commitment or when-issued or delayed-delivery
basis may involve a risk that the market price at the time of delivery may be
lower than the agreed upon purchase price, in which case there could be an
unrealized loss at the time of delivery.

7. LOAN AGREEMENTS: The Portfolios may invest in fixed and floating rate loans
("Loans") arranged through private negotiations between an issuer of sovereign
debt obligations and one or more financial institutions ("Lenders") deemed to be
creditworthy by the investment adviser. A Portfolio's investments in Loans may
be in the form of participations in Loans ("Participations") or assignments of
all or a portion of Loans ("Assignments") from third parties. A Portfolio's
investment in Participations typically results in the Portfolio having a
contractual relationship with only the Lender and not with the borrower. The
Portfolio has the right to receive payments of principal, interest and any fees
to which it is entitled only upon receipt by the Lender of the payments from the
borrower. The Portfolio generally has no right to enforce compliance by the
borrower with the terms of the loan agreement. As a result, the Portfolio may be
subject to the credit risk of both the borrower and the Lender that is selling
the Participation. When a Portfolio purchases Assignments from Lenders, it
acquires direct rights against the borrower on the Loan. Because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender.

8. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the Emerging Markets Equity Portfolio's commencement of operations. Morgan
Stanley Asset Management Inc. has agreed that in the event any of it's initial
shares which comprised the Fund at it's inception are redeemed, the proceeds on
redemption will be reduced by the pro-rata portion of any unamortized
organizational costs in the same proportion as the number of shares redeemed
bears to the initial shares held at time of redemption.

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77

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)

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

9. OTHER: Security transactions are accounted for on the date the securities are
purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the identified cost basis. Dividend income is
recorded on the ex-dividend date (except for certain foreign dividends which may
be recorded as soon as the Fund is informed of such dividends) net of applicable
withholding taxes where recovery of such taxes is not reasonably assured.
Interest income is recognized on the accrual basis except where collection is in
doubt. Discounts and premiums on securities purchased (other than
mortgage-backed securities) are amortized according to the effective yield
method over their respective lives. Most expenses of the Fund can be directly
attributed to a particular Portfolio. Expenses which cannot be directly
attributed are apportioned among the Portfolios based upon relative net assets.
Distributions from the Portfolios are recorded on the ex-distribution date.

The U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year is
estimated to be a return of capital and is recorded as a reduction of their
cost.

B. ADVISERS: Morgan Stanley Asset Management Inc. ("MSAM"), a wholly-owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co., provides the
following Portfolios with investment advisory services for a fee, paid
quarterly, at the annual rate based on average daily net assets as follows:

<TABLE>
<CAPTION>
ASSETS
-----------------------------------------------
FROM $500
FIRST $500 MILLION TO $1 MORE THAN $1
PORTFOLIO MILLION BILLION BILLION
- -------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
Asian Equity.............. 0.80% 0.75% 0.70%
Emerging Markets Equity... 1.25 1.20 1.15
Global Equity............. 0.80 0.75 0.70
International Magnum...... 0.80 0.75 0.70
Equity Growth............. 0.55 0.50 0.45
U.S. Real Estate.......... 0.80 0.75 0.70
Emerging Markets Debt..... 0.80 0.75 0.70
</TABLE>

Miller Anderson & Sherrerd, LLP ("MAS"), a wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., provides the following Portfolios with
investment advisory services for a fee, paid quarterly, at the annual rate based
on average daily net assets as follows:

<TABLE>
<CAPTION>
ASSETS
-----------------------------------------------
FROM $500
FIRST $500 MILLION TO $1 MORE THAN $1
PORTFOLIO MILLION BILLION BILLION
- -------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
Mid Cap Value............. 0.75% 0.70% 0.65%
Value..................... 0.55 0.50 0.45
Fixed Income.............. 0.40 0.35 0.30
High Yield................ 0.50 0.45 0.40
</TABLE>

MSAM and MAS have agreed to reduce fees payable to them and to reimburse the
Portfolios, if necessary, if the annual operating expenses, as defined,
expressed as a percentage of average daily net assets, exceed the maximum ratios
indicated as follows:

<TABLE>
<CAPTION>
PORTFOLIO MAXIMUM EXPENSE RATIO
- --------------------------------------------- ---------------------
<S> <C>
Asian Equity................................. 1.20%
Emerging Markets Equity...................... 1.75
Global Equity................................ 1.15
International Magnum......................... 1.15
Equity Growth................................ 0.85
Mid Cap Value................................ 1.05
U.S. Real Estate............................. 1.10
Value........................................ 0.85
Emerging Markets Debt........................ 1.30
Fixed Income................................. 0.70
High Yield................................... 0.80
</TABLE>

C. ADMINISTRATORS: MSAM and MAS (the "Administrators") also provide their
respective Portfolios with administrative services pursuant to an administrative
agreement for a monthly fee which on an annual basis equals 0.25% of the average
daily net assets of each Portfolio, plus reimbursement of out-of-pocket
expenses. Under agreements between the Administrators and Chase Global Funds
Services Company ("CGFSC"), a subsidiary of The Chase Manhattan Bank ("Chase"),
CGFSC provides certain administrative services to the Fund. For such services,
each Administrator pays CGFSC a portion of the fee the Administrators receive
from the Fund. Certain employees of CGFSC are officers of the Fund. In addition,
the Fund incurs local administration fees in connection with doing business in
certain emerging market countries.

D. CUSTODIANS: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley, Dean Witter, Discover & Co., acts as custodian for the Fund's
assets held outside the United States in accordance with a custodian agreement.
Chase serves as custodian for the Fund's domestic assets in accordance with a
separate custodian agreement. Custodian fees are computed and payable monthly
based on assets held, investment purchases and sales activity, an account
maintenance fee, plus reimbursement for certain out-of-pocket expenses. For the
period ended June 30, 1997, the following Portfolios incurred custody fees and
had amounts payable to MSTC at June 30, 1997:

<TABLE>
<CAPTION>
MSTC CUSTODY CUSTODY FEES
FEES INCURRED PAYABLE TO MSTC
PORTFOLIO (000) (000)
- ------------------------------ ------------------- ---------------------
<S> <C> <C>
Asian Equity.................. $ 11 $ 7
Emerging Markets Equity....... 58 27
Global Equity................. 3 1
International Magnum.......... 31 13
Emerging Markets Debt......... 2 2
</TABLE>

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78

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)

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In addition, for the period ended June 30, 1997, the following Portfolios have
earned interest income and incurred interest expense on balances with MSTC as
follows:

<TABLE>
<CAPTION>
INTEREST INTEREST
INCOME EXPENSE
PORTFOLIO (000) (000)
- --------------------------------------------- ----------- -----------
<S> <C> <C>
Asian Equity................................. $ -- $ 1
Emerging Markets Equity...................... 1 1
</TABLE>

E. OTHER: During the period ended June 30, 1997, the following Portfolios paid
brokerage commissions to Morgan Stanley & Co., Incorporated and Dean Witter
Reynolds, Inc., affiliated broker/dealers, of approximately:

<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
(000)
------------------------------------
MORGAN STANLEY & DEAN WITTER
PORTFOLIO CO., INC. REYNOLDS, INC.
- --------------------------------- ----------------- -----------------
<S> <C> <C>
Emerging Markets Equity.......... $ 2 $ --
Equity Growth.................... -- 11
</TABLE>

At June 30, 1997, the net assets of certain Portfolios were substantially
comprised of foreign denominated securities and currency. Changes in currency
exchange rates will affect the U.S. dollar value of and investment income from
such securities.

From time to time, certain Portfolios of the Fund have shareholders that hold a
significant portion of a Portfolio's outstanding shares. Investment activities
of these shareholders could have a material impact on those Portfolios.

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79

<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)

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

F. SUPPLEMENTAL PROXY INFORMATION: On May 1, 1997, a special meeting of the
stockholders of Morgan Stanley Universal Funds, Inc. (the "Fund") was held for
the purpose of voting on the following matters:

1. To approve or disapprove a new investment advisory agreement with Morgan
Stanley Asset Management Inc.; and

2. To approve or disapprove a new investment advisory agreement with Miller
Anderson & Sherrerd, LLP.

Only Shareholders of investment portfolios (the "Portfolios") advised by Morgan
Stanley Asset Management Inc. are entitled to vote on Proposal 1. Likewise, only
Shareholders of the Portfolios advised by Miller Anderson & Sherrerd, LLP are
entitled to vote on Proposal 2. The result of the shares voted were:

<TABLE>
<CAPTION>
TOTAL
VOTED SHARES
PORTFOLIO VOTED FOR AGAINST ABSTENTIONS VOTED
- ------------------------------------------------------------ --------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Asian Equity................................................ 1,000,000 -- -- 1,000,000
Emerging Markets Equity..................................... 1,280,015 49,199 52,793 1,382,007
Global Equity............................................... 464,777 -- 43,899 508,676
International Magnum........................................ 1,009,006 -- 25,236 1,034,242
Equity Growth............................................... 270,061 -- -- 270,061
Mid Cap Value............................................... 314,112 -- 7,559 321,671
U.S. Real Estate............................................ 500,000 -- -- 500,000
Value....................................................... 310,552 -- -- 310,552
Fixed Income................................................ 819,655 -- -- 819,655
High Yield.................................................. 812,069 -- -- 812,069
</TABLE>

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<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.

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

DIRECTORS

Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley Asset Management Inc.
and Morgan Stanley Asset Management Limited;
Managing Director, Morgan Stanley & Co. Incorporated;
Director, Morgan Stanley Group Inc.

Michael F. Klein
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated

John D. Barrett II
Chairman and Director, Barrett Associates, Inc.

Gerard E. Jones
Partner, Richards & O'Neil LLP

Andrew McNally IV
Chairman and Chief Executive Officer, Rand McNally

Samuel T. Reeves
Chairman of the Board and CEO, Pinacle L.L.C.

Fergus Reid
Chairman and Chief Executive Officer, LumeLite Corporation

Frederick O. Robertshaw
Of Counsel, Bryan, Cave

INVESTMENT ADVISERS AND ADMINISTRATORS

Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020

Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899

DISTRIBUTOR

Morgan Stanley & Co., Incorporated
1251 Avenue of the Americas
New York, NY 10020

CUSTODIANS

Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210

The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, NY 11245

OFFICERS

James W. Grisham
VICE PRESIDENT

Douglas W. Kugler
VICE PRESIDENT

Harold J. Schaaff, Jr.
VICE PRESIDENT

Joseph P. Stadler
VICE PRESIDENT

Lorraine Truten
VICE PRESIDENT

Valerie Y. Lewis
SECRETARY

Joanna M. Haigney
TREASURER

Rene J. Feuerman
ASSISTANT TREASURER

Karl O. Hartmann
ASSISTANT SECRETARY

LEGAL COUNSEL

Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103

INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036

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THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY
THE PROSPECTUS OF THE MORGAN STANLEY UNIVERSAL FUNDS, INC. WHICH DESCRIBES IN
DETAIL EACH OF THE INVESTMENT PORTFOLIO'S INVESTMENT POLICIES, FEES AND
EXPENSES. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND MONEY.

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