MORGAN STANLEY UNIVERSAL FUNDS INC, 485BPOS, 1997-04-30

MORGAN STANLEY UNIVERSAL FUNDS INC
485BPOS, 1997-04-30

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<PAGE>

File No. 333-3013
811-7607

================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM N-1A

REGISTRATION STATEMENT (No. 333-03013)
UNDER

THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 1
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 1

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

MORGAN STANLEY UNIVERSAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of Principal Executive Office)
Registrant's Telephone Number (800) 548-7786

Harold J. Schaaff, Jr., Esquire
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas, New York, New York 10020
(Name and Address of Agent for Service)

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

COPIES TO:
Warren J. Olsen Richard W. Grant, Esquire
Morgan Stanley Asset Management Inc. Morgan, Lewis & Bockius LLP
1221 Avenue of the Americas 2000 One Logan Square
New York, NY 10020 Philadelphia, PA 19103

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

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX)

/X/ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAGH (b) OF RULE 485
/ / ON _____________ PURSUANT TO PARAGRAPH (b) OF RULE 485
/ / 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a) OF RULE 485
/ / 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a) OF RULE 485
/ / ON _____________ PURSUANT TO PARAGRAPH (a) OF RULE 485

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

Registrant has elected to register an indefinite number of shares
pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended.
Registrant filed its Rule 24f-2 notice for the period ended December 31, 1996 on
February 28, 1997.
================================================================================
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

CROSS REFERENCE SHEET

Part A - Information Required in a Prospectus
- -------- ------------------------------------

Form N-1A
Item Number Location in Prospectus for the Emerging Markets Equity Portfolio.
- ----------- -----------------------------------------------------------------

Item 1. Cover Page -- Cover Page

Item 2. Synopsis -- The Fund; Management; Offering of Shares; Prospectus
Outline

Item 3. Condensed Financial Information -- *

Item 4. General Description of Registrant -- Portfolio Summary; The
Portfolio's Investments; Securities and Investment Techniques;
Fundamental Investment Limits

Item 5. Management of the Fund -- Management; Management of the Fund

Item 5A. Management's Discussion of Fund Performance -- **

Item 6. Capital Stock and Other Securities -- Management of the Fund; Account
Policies

Item 7. Purchase of Securities Being Offered -- Cover Page; Offering of Shares;
Management of the Fund; Account Policies

Item 8. Redemption or Repurchase -- Account Policies

Item 9. Pending Legal Proceedings -- *

___________________
* Omitted since the answer is negative or the Item is not applicable.

** Information required by Item 5A is contained in the 1996 Annual Report to
Shareholders, except for the following portfolios which were not in operation at
December 31, 1996: Money Market, Core Equity, Mid Cap Growth, International
Fixed Income, Emerging Markets Debt, U.S. Real Estate, Asian Equity, Balanced
and Multi-Asset-Class Portfolios. Information required by Item 5A for the
aforementioned portfolios will be contained in the next Report to Shareholders
following commencement of operations.

Form N-1A
Item Number Location in Prospectus for the U.S. Real Estate, Global Equity,
- ----------- International Magnum, Emerging Markets Equity and Asian Equity
Portfolios.
---------------------------------------------------------------

Item 1. Cover Page -- Cover Page

Item 2. Synopsis -- The Fund; Management; Offering of Shares; Prospectus
Outline

Item 3. Condensed Financial Information -- *

Item 4. General Description of Registrant -- Portfolio Summaries; The
Portfolio's Investments; Securities and Investment Techniques;
Fundamental Investment Limits

Item 5. Management of the Fund -- Management; Management of the Fund

Item 5A. Management's Discussion of Fund Performance -- **

Item 6. Capital Stock and Other Securities -- Management of the Fund; Account
Policies

Item 7. Purchase of Securities Being Offered -- Cover Page; Offering of Shares;
Management of the Fund; Account Policies

Item 8. Redemption or Repurchase -- Account Policies

Item 9. Pending Legal Proceedings -- *

___________________
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1996 Annual Report to
Shareholders, except for the following portfolios which were not in operation at
December 31, 1996: Money Market, Core Equity, Mid Cap Growth, International
Fixed Income, Emerging Markets Debt, U.S. Real Estate, Asian Equity, Balanced
and Multi-Asset-Class Portfolios. Information required by Item 5A for the
aforementioned portfolios will be contained in the next Report to Shareholders
following commencement of operations.

<PAGE>

Form N-1A
Item Number Location in Prospectus for the U.S. Real Estate, Value, Fixed
- ----------- Income, Mid Cap Value and Emerging Markets Equity Portfolios.
-------------------------------------------------------------

Item 1. Cover Page -- Cover Page

Item 2. Synopsis -- The Fund; Management; Offering of Shares; Prospectus
Outline

Item 3. Condensed Financial Information -- *

Item 4. General Description of Registrant -- Portfolio Summaries; The
Portfolio's Investments; Securities and Investment Techniques;
Fundamental Investment Limits

Item 5. Management of the Fund -- Management; Management of the Fund

Item 5A. Management's Discussion of Fund Performance -- **

Item 6. Capital Stock and Other Securities -- Management of the Fund; Account
Policies

Item 7. Purchase of Securities Being Offered -- Cover Page; Offering of Shares;
Management of the Fund; Account Policies

Item 8. Redemption or Repurchase -- Account Policies

Item 9. Pending Legal Proceedings -- *

___________________
* Omitted since the answer is negative or the Item is not applicable.

Form N-1A
Item Number Location in Prospectus for the U.S. Real Estate and Fixed Income
- ----------- Portfolios.
------------------------------------------------------------------

Item 1. Cover Page -- Cover Page

Item 2. Synopsis -- The Fund; Management; Offering of Shares; Prospectus
Outline

Item 3. Condensed Financial Information -- *

Item 4. General Description of Registrant -- Portfolio Summaries; The
Portfolio's Investments; Securities and Investment Techniques;
Fundamental Investment Limits

Item 5. Management of the Fund -- Management; Management of the Fund

Item 5A. Management's Discussion of Fund Performance -- **

Item 6. Capital Stock and Other Securities -- Management of the Fund; Account
Policies

Item 7. Purchase of Securities Being Offered -- Cover Page; Offering of Shares;
Management of the Fund; Account Policies

Item 8. Redemption or Repurchase -- Account Policies

Item 9. Pending Legal Proceedings -- *

___________________
* Omitted since the answer is negative or the Item is not applicable.

<PAGE>

Form N-1A
Item Number Location in Prospectus for the Fixed Income, High Yield, Equity
- ----------- Growth, Value, Mid Cap Value, Global Equity, International Magnum
and Emerging Markets Equity Portfolios.
-----------------------------------------------------------------

Item 1. Cover Page -- Cover Page

Item 2. Synopsis -- The Fund; Management; Offering of Shares; Prospectus
Outline

Item 3. Condensed Financial Information -- *

Item 4. General Description of Registrant -- Portfolio Summaries; The
Portfolio's Investments; Securities and Investment Techniques;
Fundamental Investment Limits

Item 5. Management of the Fund -- Management; Management of the Fund

Item 5A. Management's Discussion of Fund Performance -- **

Item 6. Capital Stock and Other Securities -- Management of the Fund; Account
Policies

Item 7. Purchase of Securities Being Offered -- Cover Page; Offering of Shares;
Management of the Fund; Account Policies

Item 8. Redemption or Repurchase -- Account Policies

Item 9. Pending Legal Proceedings -- *

___________________
* Omitted since the answer is negative or the Item is not applicable.

Form N-1A
Item Number Location in Prospectus for the Money Market, Fixed Income, High
Yield, Core Equity, Equity Growth, Value, Mid Cap Growth, Mid Cap
Value, U.S. Real Estate, International Fixed Income, Emerging
Markets Debt, Global Equity, International Magnum, Emerging
Markets Equity, Asian Equity, Balanced and Multi-Asset-Class
Portfolios
-----------------------------------------------------------------

Item 1. Cover Page -- Cover Page

Item 2. Synopsis -- The Fund; Management; Offering of Shares; Prospectus
Outline

Item 3. Condensed Financial Information -- *

Item 4. General Description of Registrant -- Portfolio Summaries; The
Portfolio's Investments; Securities and Investment Techniques;
Fundamental Investment Limits

Item 5. Management of the Fund -- Management; Management of the Fund

Item 5A. Management's Discussion of Fund Performance -- **

Item 6. Capital Stock and Other Securities -- Management of the Fund; Account
Policies

Item 7. Purchase of Securities Being Offered -- Cover Page; Offering of Shares;
Management of the Fund; Account Policies

Item 8. Redemption or Repurchase -- Account Policies

Item 9. Pending Legal Proceedings -- *

___________________
* Omitted since the answer is negative or the Item is not applicable.

Part B - Information Required in a Statement of Additional Information
- -------- -------------------------------------------------------------

Form N-1A
Item Number Location in Statement of Additional Information
- ----------- -----------------------------------------------

Item 10. Cover Page -- Cover Page

Item 11. Table of Contents -- Cover Page

Item 12. General Information and History -- *

Item 13. Investment Objectives and Policies -- Securities and Investment
Techniques; Investment Limitations; Determining Maturities of Certain
Instruments; Description of Securities and Ratings

Item 14. Management of the Fund -- Management of the Fund

Item 15. Control Persons and Principal Holders of Securities -- Management of
the Fund; General Information

Item 16. Investment Advisory and Other Services -- Management of the Fund;
General Information

Item 17. Brokerage Allocation and Other Practices -- *

Item 18. Capital Stock and Other Securities -- General Information

Item 19. Purchase, Redemption and Pricing of Securities Being Offered --
Purchase of Shares; Redemption of Shares; Net Asset Value for the
Money Market Fund; General Information

Item 20. Tax Status -- Taxes; Special Tax Considerations Relating to Foreign
Investments; Taxes and Foreign Shareholders

Item 21. Underwriters -- Management of the Fund

Item 22. Calculation of Performance Data -- Performance Information

Item 23. Financial Statements -- Financial Statements

Part C - Other Information
- -------- -----------------

Part C contains the information required by the Items of the Form N-1A
under such Items as set forth in the Form N-1A.

- ------------------------------
* Omitted since the answer is negative or the Item is not applicable.

<PAGE>

EMERGING MARKETS EQUITY PORTFOLIO

A PORTFOLIO OF THE

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC.

MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A MUTUAL FUND DESIGNED TO
PROVIDE INVESTMENT VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES AND FOR CERTAIN TAX-QUALIFIED INVESTORS. THIS PROSPECTUS
PERTAINS TO THE FUND'S EMERGING MARKETS EQUITY PORTFOLIO WHICH IS MANAGED BY
MORGAN STANLEY ASSET MANAGEMENT INC. THE FUND ALSO OFFERS 16 OTHER PORTFOLIOS
MANAGED BY EITHER MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM") OR MILLER
ANDERSON & SHERRERD, LLP, AN AFFILIATE OF MSAM.

SHARES OF THE EMERGING MARKETS EQUITY PORTFOLIO MAY BE PURCHASED ONLY BY THE
SEPARATE ACCOUNTS OF INSURANCE COMPANIES FOR THE PURPOSE OF FUNDING VARIABLE
ANNUITY CONTRACTS AND VARIABLE LIFE INSURANCE POLICIES AND BY CERTAIN TAX-
QUALIFIED INVESTORS. THE EMERGING MARKETS EQUITY PORTFOLIO MAY NOT BE AVAILABLE
IN YOUR STATE DUE TO VARIOUS INSURANCE REGULATIONS. PLEASE CHECK WITH YOUR
INSURANCE COMPANY FOR AVAILABILITY OF THE EMERGING MARKETS EQUITY PORTFOLIO IN
YOUR STATE. IF THE EMERGING MARKETS EQUITY PORTFOLIO IS NOT AVAILABLE IN YOUR
STATE THIS PROSPECTUS IS NOT TO BE CONSIDERED A SOLICITATION.

THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE EMERGING MARKETS
EQUITY PORTFOLIO'S INVESTMENTS AND SERVICES. YOU SHOULD READ IT BEFORE
INVESTING, AND KEEP IT ON FILE FOR FUTURE REFERENCE ALONG WITH THE PROSPECTUS
OF THE SEPARATE ACCOUNT OF THE SPECIFIC INSURANCE PRODUCT WHICH ACCOMPANIES
THIS PROSPECTUS.

A STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED MAY 1, 1997, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED HEREIN BY
REFERENCE, AND, THEREFORE, LEGALLY FORMS A PART OF THE PROSPECTUS. FOR A COPY
OF THE SAI, AT NO CHARGE, CONTACT THE FUND AT THE ADDRESS BELOW, CONTACT YOUR
INSURANCE COMPANY, OR CALL 1-800-422-6464 EXT. 7182.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

THE EMERGING MARKETS EQUITY PORTFOLIO MAY INVEST IN EQUITY SECURITIES OF
RUSSIAN COMPANIES. RUSSIA'S SYSTEM OF SHARE REGISTRATION AND CUSTODY INVOLVES
CERTAIN RISKS OF LOSS THAT ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN
OTHER SECURITIES MARKETS. SEE "SECURITIES AND INVESTMENT TECHNIQUES--RUSSIAN
SECURITIES" FOR FURTHER INFORMATION.

Prospectus dated May 1, 1997
MORGAN STANLEY UNIVERSAL FUNDS, INC.
P.O. Box 2798, Boston, MA 02208-2798

<PAGE>

THE FUND

The Fund is an open-end management investment company, or mutual fund. The
following pages describe the types of securities and investment techniques that
the Fund's Emerging Markets Equity Portfolio (the "Portfolio") uses to seek its
objective, as well as the risks inherent in those types of securities and
investment techniques.

MANAGEMENT

Morgan Stanley Asset Management Inc. ("MSAM") advises the Portfolio.

MSAM conducts a worldwide investment advisory business. As of February 28, 1997
MSAM and its investment advisory affiliates managed assets of $176.9 billion.

OFFERING OF SHARES

The Fund is intended to be a funding vehicle for all types of variable annuity
contracts and variable life insurance policies offered by insurance companies.
Shares of the Fund may also be offered to certain tax-qualified investors,
including qualified pension and retirement plans. It is possible that material
conflicts among the various insurance companies and other investors in the Fund
may arise. The Fund's Board of Directors will monitor events in order to
identify the existence of any material conflicts and to determine what action,
if any, should be taken in response to any such conflicts.

PAGE

PROSPECTUS OUTLINE

FINANCIAL HIGHLIGHTS 3

The Portfolio's financial highlights.

PORTFOLIO SUMMARY 3

The Portfolio's investment objective and a summary of strategy, potential
investors, and investment characteristics and risks.

THE PORTFOLIO'S INVESTMENTS 3

A more detailed review of how the Portfolio invests and investment
characteristics and risks.

SECURITIES AND INVESTMENT TECHNIQUES 5

More information about the types of investment strategies used by the
Portfolio and information about investment risks and limitations.

FUNDAMENTAL INVESTMENT LIMITS 17

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 17

General information on organization and operations of the Fund, including
details about MSAM and the individual portfolio managers, as well as fees,
expenses, and performance calculations.

ACCOUNT POLICIES 21

Information on net asset value calculation, income and gain distributions,
taxes and share purchases and redemptions.

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following table provides financial highlights for the shares of the
Portfolio for the period presented. The audited financial highlights for the
year ended December 31, 1996 are part of the Fund's financial statements which
appear in the Fund's December 31, 1996 Annual Report to Shareholders and which
are included in the Fund's Statement of Additional Information. The Portfolio's
financial highlights for the period ended December 31, 1996 have been audited
by Price Waterhouse LLP, whose unqualified report thereon is also included in
the Statement of Additional Information. Additional performance information for
the Portfolio is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and toll-
free number noted on the cover page to this Prospectus or from your insurance
company.

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1996
- ---------------------------------- -------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................... $ 10.00
-------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income........................................ 0.01
Net Realized and Unrealized Loss............................. (0.21)
-------
Total From Investment Operations........................... (0.20)
-------
DISTRIBUTIONS
Net Investment Income........................................ (0.02)
-------
Total Distributions........................................ (0.02)
-------
NET ASSET VALUE, END OF PERIOD................................. $ 9.78
=======
TOTAL RETURN................................................... (2.03)%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's).............................. $11,789
Ratio of Expenses to Average Net Assets........................ 1.75%**
Ratio of Net Investment Income to Average Net Assets........... 0.32%**
Portfolio Turnover Rate........................................ 9%
Average Commission Rate#....................................... $0.0013
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income (Loss)............ $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets............................... 6.17%**
Net Investment Income (Loss) to Average Net Assets........... (4.06)%**
</TABLE>
- -------
* Commencement of operations.
** Annualized.
# For the period ended December 31, 1996, the average commission rate paid on
trades on which commissions were charged was 0.45% of the trade amount.

PORTFOLIO SUMMARY

Certain investment terms used below have initial capital letters ("Emerging
Market Country Securities," for example). These terms are further described
under "Securities and Investment Techniques" below.

EMERGING MARKETS EQUITY PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of emerging market country issuers with a focus on those
in which MSAM believes the economies are developing strongly and in which the
markets are becoming more sophisticated.

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
achieve long-term capital appreciation by investing in Emerging Market Country
Securities. By including emerging market country investments in their
portfolio, investors can achieve additional diversification and participate in
growth opportunities in emerging market countries.

RISK PROFILE: Very high potential risk and reward. In addition to general risks
involved in Equity Securities, including fluctuations in the stock market and
changes in the economy, Foreign Investment involves different or increased
risks. The performance of the Portfolio will be affected by foreign currency
values, the greater volatility of securities exchanges, and the overall
political, regulatory, and economic environment in the countries in which the
Portfolio invests. The risks of Foreign Investment are exacerbated in the case
of Emerging Market Country Securities.

THE PORTFOLIO'S INVESTMENTS

EMERGING MARKETS EQUITY PORTFOLIO

The 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. Under normal circumstances, at
least 65% of the Portfolio's total assets will be invested in Emerging Market
Country Equity Securities.

The Portfolio may also invest in Fixed Income Securities denominated in the
currency of an emerging market country or issued or guaranteed by an emerging
market country company or the government of an emerging market country, Equity
Securities or Fixed Income Securities of corporate or governmental issuers
located in industrialized countries, Foreign Currency Transactions, Investment
Funds, Loan Participations and Assignments, Money Market Instruments,
Investment Company Securities, Repurchase Agreements, Non-Publicly Traded
Securities, Private Placements, Restricted Securities, Temporary Investments,
When-Issued and Delayed Delivery Securities, and Derivatives, including

3
<PAGE>

but not limited to Forwards, Futures and Options and may engage in Loans of
Portfolio Securities. It is likely that many of the Fixed Income Securities in
which the Portfolio will invest will be unrated, and whether or not rated, such
securities may have speculative characteristics.

When deemed appropriate by MSAM, the Portfolio may also invest up to 10% of its
total assets (measured at the time of the investment) in Fixed Income
Securities that are not Investment Grade Securities (commonly referred to as
High Yield Securities or junk bonds). For temporary, defensive purposes, the
Portfolio may invest less than 65% of its total assets in Emerging Market
Country Equity Securities, in which case the Portfolio may invest in other
Equity Securities or may invest in Fixed Income Securities as described in
"Securities and Investment Techniques--Temporary Investments" below. The
Portfolio also has the ability to invest without limitation in high quality
Money Market Instruments or Temporary Investments for temporary, defensive
purposes.

MSAM's approach is to focus the Portfolio's investments on those emerging
market countries in which it believes the economies are developing strongly and
in which the markets are becoming more sophisticated. As used in this
Prospectus, emerging markets describes any country which is generally
considered to be an emerging or developing country by the international
financial community such as the International Bank for Reconstruction and
Redevelopment (commonly known as the World Bank) and the International Finance
Corporation. Emerging markets can include every nation in the world except the
United States, Canada, Japan, Australia, and most Western European nations.
There are currently over 130 countries which, in the opinion of MSAM, are
generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Currently, investing in many emerging market countries is not
feasible or may involve unacceptable political risks.

The Portfolio intends to invest primarily in some or all of the following
emerging market countries:

<TABLE>
<S> <C> <C> <C>
Argentina Botswana Brazil Chile
China Colombia Egypt Greece
Hong Kong Hungary India Indonesia
Israel Jamaica Jordan Kenya
Malaysia Mexico Nigeria Pakistan
Peru Philippines Poland Portugal
Russia South Africa South Korea Sri Lanka
Taiwan Thailand Turkey Venezuela
Zimbabwe
</TABLE>

As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging market countries in which it invests. The
Portfolio does not intend to invest in any security in a country where the
currency is not freely convertible to U.S. dollars, unless the Portfolio has
obtained the necessary governmental licensing to convert such currency or other
appropriately licensed or sanctioned
contractual guarantees to protect such investment against loss of that
currency's external value, or the Portfolio has a reasonable expectation at the
time the investment is made that such governmental licensing or other
appropriately licensed or sanctioned guarantees would be obtained or that the
currency in which the security is quoted would be freely convertible at the
time of any proposed sale of the security by the Portfolio. MSAM will analyze
assets, revenues and earnings of an issuer. In selecting industries and
particular issuers, MSAM will evaluate costs of labor and raw materials, access
to technology, export of products and government regulation. Although the
Portfolio seeks to invest in larger companies, it may invest in small and
medium-size companies that, in MSAM's view, have potential for growth.

The value of the Portfolio's investments and the income they generate will vary
from day-to-day and generally reflect market conditions, interest rates, and
other company, political, or economic news both in the United States and
abroad. In the short-term, stock prices can fluctuate dramatically in response
to these factors. Over time, however, stocks have shown greater growth
potential than other types of securities. The prices of Fixed Income Securities
also fluctuate and generally move in the opposite direction from interest
rates.

The Portfolio spreads investment risk by limiting its holdings in any one
company or industry. Nevertheless, the Portfolio will experience price
volatility the extent of which will be affected by the types of securities and
techniques the Portfolio uses. Additionally, because the Portfolio is a non-
diversified portfolio and is permitted greater flexibility to invest its assets
in the obligations of a single issuer, it is exposed to increased risk of loss
if such an investment underperforms expectations. See "Non-Diversified Status"
in this Prospectus and "Investment Limitations" in the Statement of Additional
Information ("SAI"). MSAM may use various investment techniques to hedge risks,
including Derivatives, but there is no guarantee that these strategies will
work as intended.

Investments in foreign securities, including Emerging Market Country
Securities, may involve risks in addition to those of U.S. investments. The
performance of the Portfolio's investments in foreign securities, including
Emerging Market Country Securities, will be affected by foreign currency
values, the political and regulatory environment, and overall economic factors
in the countries in which investments are made. See "Foreign Investments" and
"Foreign Equities" in "Securities and Investment Techniques" below. Emerging
Market Country Securities also pose greater liquidity risks than securities of
companies located in developed countries and traded in more established
markets. The Portfolio may not be able to hedge foreign currency risk
adequately. Also, the registration, clearing and settlement of securities
transactions in Russia are subject to significant risks not normally associated
with securities transactions in the United States and other more developed
markets. See "Securities and Investment Techniques--Russian Securities."

When Portfolio shares are redeemed, they may be worth more or less than their
original cost. An investment in the

4
<PAGE>

Portfolio is not in itself a balanced investment plan. As with any mutual fund,
there is no assurance that the Portfolio will achieve its goal.

SECURITIES AND INVESTMENT TECHNIQUES

The following pages contain more detailed information about types of
instruments in which the Portfolio may invest, and strategies MSAM may employ
in pursuit of the Portfolio's investment objective. A summary of risks and
restrictions associated with these instruments and investment practices is
included as well. A complete listing of the Portfolio's policies and
limitations and more detailed information about the Portfolio's investments is
contained in the SAI. Policies and limitations are considered at the time of
purchase; the sale of instruments is not required in the event of a subsequent
change in circumstances, for example, a rating downgrade.

The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and the Portfolio will, when required,
comply with investment restrictions imposed under such laws and regulations on
life insurance company separate accounts investing in the Portfolio.

MSAM may not buy all of these instruments or use all of these techniques to the
full extent permitted unless it believes that doing so will help the Portfolio
achieve its investment objective. Current holdings and recent investment
strategies are described in the Portfolio's financial reports, which will be
sent to the Portfolio's shareholders twice a year. For a copy of the SAI or
financial report, at no charge, contact the Fund or your insurance company.

INSTRUMENTS AND INVESTMENTS

AGENCIES. Agencies are securities which are not guaranteed by, or backed by the
full faith and credit of, the U.S. Government, but which are issued, sponsored
or guaranteed by a federal agency or federally sponsored agency such as the
Student Loan Marketing Association, Resolution Funding Corporation, or any of
several other agencies. For further information on these securities, see
"Description of U.S. Government Securities" in the SAI.

ABSS. Asset-backed securities ("ABSs") are securities collateralized by shorter
term loans such as automobile loans, home equity loans, computer leases or
credit card receivables. The payments from the collateral are passed through to
the security holder. The collateral behind ABSs tends to have prepayment rates
that usually do not vary with interest rates. In addition the short-term nature
of the loans reduces the impact of any change in prepayment level. Due to
amortization, the average life for ABSs is also the conventional proxy for
maturity.

Due to the possibility that prepayments (on automobile loans and other
collateral) will alter the cash flow on ABSs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayments will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, MSAM will look for those securities that offer a
higher yield to compensate for any variation in average maturity.

BRADY BONDS. Brady Bonds are Fixed Income Securities which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury (the "Brady
Plan"). Brady Bonds have been issued only recently, and, accordingly, do not
have a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
are actively traded in the over-the-counter secondary market. For further
information on these securities, see the SAI. The Portfolio will invest in
Brady Bonds only if they are consistent with quality specifications.

CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:

(1)Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank
or savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).

The Portfolio may invest in obligations of U.S. banks, obligations of foreign
branches of U.S. banks ("Eurodollars") and obligations of U.S. branches of
foreign banks ("Yankee dollars"). Investments in Eurodollars and Yankee dollars
involve some of the same risks of investing in international securities that
are discussed in "Foreign Investment" below.

The Portfolio will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one

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such bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation ("FDIC"), (ii) in
the case of U.S. banks, it is a member of the FDIC, and (iii) in the case of
foreign branches of U.S. banks, the security is deemed by MSAM to be of an
investment quality comparable with other Fixed Income Securities which may be
purchased by the Portfolio.

(2)Commercial paper rated at time of purchase by one or more nationally
recognized statistical ratings organization ("NRSRO") to be in one of their two
highest categories, (e.g., A-1 or A-2 by Standard & Poor's Ratings Group
("S&P") or Prime 1 or Prime 2 by Moody's Investors Service, Inc. ("Moody's")),
or, if not rated, issued by a corporation having an outstanding unsecured debt
issue rated high-grade by an NRSRO (e.g., A or better by Moody's, S&P or Fitch
Investors Service, Inc. ("Fitch")).

(3)Short-term corporate obligations rated high-grade at the time of purchase by
an NRSRO (e.g., A or better by Moody's, S&P or Fitch).

(4)U.S. Governments and Agencies.

(5)Repurchase Agreements collateralized by securities listed above.

CMOS. Collateralized Mortgage Obligations ( "CMOs") are Derivatives which are
collateralized by mortgage pass-through securities. Cash flows from the
mortgage pass-through securities are allocated to various tranches (a "tranche"
is essentially a separate security) in a predetermined, specified order. Each
tranche has a stated maturity--the latest date by which the tranche can be
completely repaid, assuming no prepayments--and has an average life--the
average of the time to receipt of a principal payment weighted by the size of
the principal payment. The average life is typically used as a proxy for
maturity because the debt is amortized (repaid a portion at a time), rather
than paid off entirely at maturity, as would be the case in a straight debt
instrument.

Due to the possibility that prepayments (on home mortgages and other
collateral) will alter the cash flow on CMOs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayments will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, MSAM will look for those securities that offer a
higher yield to compensate for any variation in average maturity.

Prepayment risk has two important effects. First, like Fixed Income Securities
in general, MBSs will generally decline in price when interest rates rise.
However, when interest rates fall, MBSs may not enjoy as large a gain in market
value due to prepayment risk. Second, when interest rates fall, additional
mortgage prepayments must be reinvested at lower interest rates. In part to
compensate for these risks, MBSs will generally offer higher yields than
comparable bonds. See "MBSs" below.

COMMON STOCKS. Common Stocks are Equity Securities which represent an ownership
interest in a corporation, entitling the shareholder to voting rights and
receipt of dividends paid based on proportionate ownership.

CONVERTIBLE SECURITIES. Convertible Securities are securities, such as
convertible Corporate Bonds, convertible Preferred Stocks, Warrants or other
securities which may be exchanged under certain circumstances for a fixed
number of shares of Common Stock.

CORPORATE BONDS. Corporate Bonds are Fixed Income Securities issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. The Portfolio will buy
Corporate Bonds subject to any quality constraints. If a security held by the
Portfolio is down-graded, the Portfolio may retain the security.

DEPOSITARY RECEIPTS. Depositary Receipts are securities representing ownership
interests in securities of foreign companies (an "underlying issuer") and are
deposited with the depositary. Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities. Depositary
Receipts include American Depositary Receipts ("ADRs"), Global Depositary
Receipts ("GDRs") and other types of Depositary Receipts (which, together with
ADRs and GDRs, are hereinafter collectively referred to as "Depositary
Receipts"). ADRs are dollar-denominated Depositary Receipts typically issued by
a U.S. financial institution which evidence ownership interests in a security
or pool of securities issued by a foreign issuer. ADRs are listed and traded in
the United States. GDRs and other types of Depositary Receipts are typically
issued by foreign banks or trust companies, although they also may be issued by
U.S. financial institutions, and evidence ownership interests in a security or
pool of securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use
in securities markets outside the United States.

Depositary Receipts may be "sponsored" or "unsponsored". Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
Depositary Receipt generally bear all the costs associated with establishing
the unsponsored Depositary Receipt. In addition, the issuers of the securities
underlying unsponsored Depositary Receipts are not obligated to disclose
material information in the U.S. and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between
such information and

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the market value of the Depositary Receipts. For purposes of the Portfolio's
investment policies, the Portfolio's investments in Depositary Receipts will be
deemed to be investments in the underlying securities except as noted.

DERIVATIVES. Derivatives are financial products or instruments that derive
their value from the value of an underlying asset, reference rate or index.
Derivatives include, but are not limited to, the following: CMOs, SMBSs (i.e.,
Stripped Mortgage-Backed Securities), Convertible Securities, Warrants,
Forwards, Futures, Options, Structured Notes, structured investments and Swaps.

MSAM will use Derivatives only in circumstances where they offer the most
economic means of improving the risk/reward profile of the Portfolio. MSAM will
not use Derivatives to increase Portfolio risk above the level that could be
achieved in the Portfolio using only traditional investment securities. In
addition, MSAM will not use Derivatives to acquire exposure to changes in the
value of assets or indexes of assets that are not listed in the applicable
allowable investments for the Portfolio. The Portfolio may enter into over-the-
counter derivative transactions (Swaps, Caps, Floors, etc., but excluding CMOs,
Forwards, Futures, Options, and SMBSs) with counterparties approved by MSAM in
accordance with guidelines established by the Fund's Board of Directors. These
guidelines provide for a minimum credit rating for each counterparty and
various credit enhancement techniques (for example, collateralization of
amounts due from counterparties) to limit exposure to counterparties with
ratings below AA.

See elsewhere in this "Securities and Investment Techniques" section for
descriptions of these various Derivatives, and see the SAI for more information
regarding any investment policies or limitations applicable to their use.

EASTERN EUROPEAN SECURITIES. The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment associated
with the transition to market economics. Unstable economic and political
conditions may adversely affect security values. Upon the accession to power of
Communist regimes approximately 40 years ago, the governments of a number of
Eastern European countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
In the event of the return to power of the Communist Party, there can be no
assurance that the Portfolio's investments in Eastern Europe would not be
expropriated, nationalized or otherwise confiscated.

EMERGING MARKET COUNTRY SECURITIES. An Emerging Market Country Security is one
issued by a company that has one or more of the following characteristics: (i)
its principal securities trading market is in an emerging market, (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in emerging markets, or
(iii) it is organized under the laws of, and has a principal office in, an
emerging market country. MSAM will base determinations as to eligibility on
publicly available information and inquiries made to the companies.

The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been, and may
continue to be, adversely affected by economic conditions in the countries with
which they trade.

Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the Portfolio will experience losses or diminution
in available gains due to bankruptcy, insolvency or fraud.

With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value
of the Portfolio's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.

EQUITY SECURITIES. Equity Securities commonly include, but are not limited to,
Common Stocks, Preferred Stocks, Depositary Receipts, Rights, Warrants, and
Foreign Equities. Preferred Stock is contained in both the definition of Equity
Securities and Fixed Income Securities because it exhibits characteristics
commonly associated with each type of security. See the "The Portfolio's
Investments" section to determine in which of the above the Portfolio may
invest.

FIXED INCOME SECURITIES. Fixed Income Securities commonly include, but are not
limited to, debentures, U.S. Governments, Zero Coupons, Agencies, Corporate
Bonds, High Yield Securities, MBSs, SMBSs, CMOs, ABSs, Convertible Securities,
Brady Bonds, Floaters, Inverse Floaters, Cash Equivalents, Municipals,
Repurchase Agreements, Preferred Stocks and Foreign Bonds. Preferred Stock is
contained in both the definition of Equity Securities and Fixed Income
Securities since it exhibits characteristics commonly associated with each type
of security. See the

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"Portfolio's Investments" section to determine in which of the above the
Portfolio may invest.

FLOATERS. Floaters are Fixed Income Securities with a floating or variable rate
of interest, i.e. the rate of interest varies with changes in specified market
rates or indices, such as the prime rate, or at specified intervals. Certain
Floaters may carry a demand feature that permits the holder to tender them back
to the issuer of the underlying instrument, or to a third party, at par value
prior to maturity. When the demand feature of certain Floaters represents an
obligation of a foreign entity, the demand feature will be subject to certain
risks discussed under "Foreign Investment".

FOREIGN BONDS. Foreign Bonds are Fixed Income Securities denominated in foreign
currency and issued and traded primarily outside the United States, including:
(1) obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (2) Fixed Income
Securities issued, guaranteed or sponsored by supranational organizations
established or supported by several national governments, including the World
Bank, the European Community, the Asian Development Bank and others; (3) non-
government foreign corporate debt securities; (4) foreign MBSs and various
other MBSs and ABSs denominated in foreign currency; and (5) Brady Bonds.
Investing in foreign companies involves certain special considerations that are
not typically associated with investing in U.S. companies. See "Foreign
Investment" below.

FOREIGN CURRENCY TRANSACTIONS. The Portfolio invests in foreign securities and
will regularly transact security purchases and sales in foreign currencies. The
Portfolio may hold foreign currency or engage in the Foreign Currency
Transactions discussed below.

As a means of reducing the risks associated with investing in securities
denominated in foreign currencies, the Portfolio may purchase or sell foreign
currency on a forward basis ("Forwards" or "forward contracts"), enter into
foreign currency futures contracts and options on futures ("Forex Futures") and
foreign currency options ("Forex Options"). These investment techniques are
designed primarily to hedge against anticipated future changes in currency
prices, that otherwise might adversely affect the value of the Portfolio's
investments.

Forex Futures are standardized contracts for the future delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Forex Futures traded in the United States are traded on regulated
futures exchanges. The Portfolio will incur brokerage fees when it purchases or
sells Forex Futures and it will be required to maintain margin deposits.
Parties to a Forex Future must make initial margin deposits to secure
performance of the contract, which generally range from 2% to 5% of the
contract price. There also are requirements to make "variation" margin deposits
as the value of the futures contract fluctuates.

Purposes for which such Forex Futures and Forex Options may be used include
protecting against a decline in a foreign currency against the U.S. dollar
between the trade date and settlement date when the Portfolio purchases or
sells securities, locking in the U.S. dollar value of dividends declared on
securities held by the Portfolio and generally protecting the U.S. dollar value
of securities held by the Portfolio against exchange rate fluctuations. Such
contracts will be used only as a protective measure against the effects of
fluctuating rates of currency exchange and exchange control regulations. While
Forex Futures and Forex Options may limit losses to the Portfolio as a result
of exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.

Forwards are obligations to purchase or sell an amount of a specified currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract. Forwards are traded in the interbank market conducted directly
between currency traders (usually large commercial banks).

The Portfolio may use Forwards in the normal course of business to lock in an
exchange rate in connection with purchases and sales of securities (transaction
hedge) or to lock in the dollar value of portfolio positions (position hedge).
In addition, the Portfolio may cross-hedge currencies by entering into a
transaction to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Portfolio has or
expects to have portfolio exposure. The Portfolio may also engage in proxy
hedging which is defined as entering into positions in one currency to hedge
investments denominated in another currency, where the two currencies are
economically linked. Forwards will be used only as a protective measure against
the effects of fluctuating rates of currency exchange and exchange control
regulations. While such contracts may limit losses to the Portfolio as a result
of exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.

The Portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a Foreign Bond, the Portfolio may purchase a
U.S. dollar-denominated security and at the same time enter into a forward
contract to exchange U.S. dollars for the contract's underlying currency at a
future date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, the Portfolio may be
able to lock in the foreign currency value of the security and adopt a
synthetic investment position reflecting the credit quality of the U.S. dollar-
denominated security.

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<PAGE>

There is a risk in adopting a synthetic investment position to the extent that
the value of a security denominated in the U.S. dollar or other foreign
currency is not exactly matched with the Portfolio's obligation under the
forward contract. On the date of maturity, the Portfolio may be exposed to some
risk of loss from fluctuations in that currency. Although MSAM will attempt to
hold such mismatching to a minimum, there can be no assurance that MSAM will be
able to do so. When the Portfolio enters into a forward contract for purposes
of creating a synthetic security, it will generally be required to hold liquid
assets in a segregated account with a daily value at least equal to its
obligation under the forward contract.

When the Portfolio engages in Forwards it will comply with the segregation
requirements required by the 1940 Act and the rules adopted thereunder. See
"Investment Objectives and Policies--Forward Foreign Currency Exchange
Contracts" in the SAI.

At the maturity of a forward contract, the Portfolio may either accept or make
delivery of the currency specified in the contract or, prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to Forwards are
usually effected with the currency trader who is a party to the original
forward contract. The Portfolio will only enter into such a forward contract if
it is expected that there will be a liquid market in which to close out such
contract. There can, however, be no assurance that such a liquid market will
exist in which to close a forward contract, in which case the Portfolio may
suffer a loss.

FOREIGN EQUITIES. Foreign Equity Securities ("Foreign Equities") include, but
are not limited to, Common Stock, Preferred Stock, Depositary Receipts, Rights,
Warrants and Convertible Securities of foreign issuers. Investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. See "Foreign Investment" below.

FOREIGN INVESTMENT. Investment in securities and obligations of foreign issuers
and in foreign branches of domestic banks involves somewhat different
investment risks than those affecting obligations of U.S. issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the U.S.
Many foreign securities markets have substantially less volume than U.S.
national securities exchanges, and securities of some foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and
interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on Foreign Investments as
compared to dividends and interest paid by U.S. companies. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction will impose or change withholding taxes on income payable
with respect to foreign securities, and the possible adoption of foreign
governmental restrictions such as exchange controls.

Prior governmental approval for Foreign Investments may be required under
certain circumstances in some emerging countries, and the extent of Foreign
Investment in certain Fixed Income Securities and domestic companies may be
subject to limitation in other emerging countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
emerging countries to prevent, among other concerns, violation of Foreign
Investment limitations.

Repatriation of investment income, capital and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some
emerging countries. The Portfolio could be adversely affected by delays in, or
a refusal to grant, any required governmental registration or approval for such
repatriation. Any investment subject to such repatriation controls will be
considered illiquid if it appears reasonably likely that this process will take
more than seven days.

Investments in securities of foreign issuers are frequently denominated in
foreign currencies. Because the Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets, as measured in U.S. dollars, may be affected favorably or unfavorably
by changes in currency rates and in exchange control regulations and the
Portfolio may incur costs in connection with conversions between various
currencies.

FUTURES

The Portfolio may purchase and sell futures contracts and options on futures
contracts, including but not limited to financial futures, securities index
futures, foreign currency exchange futures, and interest rate futures contracts
(collectively, "Futures").

Futures contracts provide for the sale by one party and purchase by another
party of a specified amount of a specific security, instrument or basket
thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.

The Portfolio may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase
securities index futures in order to gain market exposure. Subject to

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applicable laws, the Portfolio may engage in transactions in securities index
futures contracts (and options thereon) which are traded on a recognized
securities or futures exchange, or may purchase or sell such instruments in the
over-the-counter market. There currently are limited securities index futures
and options on such futures in many countries, particularly emerging countries.
The nature of the strategies adopted by MSAM, and the extent to which those
strategies are used, may depend on the development of such markets.

The Portfolio may engage in transactions involving foreign currency exchange
futures contracts. For more information, see "Foreign Currency Transactions"
above.

The Portfolio may engage in transactions in interest rate futures transactions.
Interest rate futures contracts involve an obligation to purchase or sell a
specific debt security, instrument or basket thereof at a specified future date
at a specified price. The value of the contract rises and falls inversely with
changes in interest rates. The Portfolio may engage in such transactions to
hedge its holdings of debt instruments against future changes in interest
rates.

Financial futures are futures contracts relating to financial instruments, such
as U.S. Government securities, foreign currencies, and certificates of deposit.
Such contracts involve an obligation to purchase or sell a specific security,
instrument or basket thereof at a specified future date at a specified price.
Like interest rate futures contracts, the value of financial futures contracts
rises and falls inversely with changes in interest rates. The Portfolio may
engage in financial futures contracts for hedging and non-hedging purposes.

Under rules adopted by the Commodity Futures Trading Commission, the Portfolio
may enter into futures contracts and options thereon for both hedging and non-
hedging purposes, provided that not more than 5% of the Portfolio's total
assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-
hedging activities. The Portfolio will not enter into future contracts to the
extent that its outstanding obligations to purchase securities under such
contracts, in combination with its outstanding obligations with respect to
options transactions (including options to purchase securities or instruments)
would exceed 20% of its total assets. In addition, the Portfolio will not enter
into any futures contract or option if immediately thereafter the value of all
the foreign currencies underlying its futures contracts and foreign currency
options would exceed 10% of the value of its total assets.

Gains and losses on futures contracts and options thereon depend on the MSAM's
ability to predict correctly the direction of securities prices, interest rates
and other economic factors. Other risks associated with the use of futures and
options are (i) imperfect correlation between the change in market value of
investments held by the Portfolio and the prices of futures and options
relating to investments purchased or sold by the Portfolio, and (ii) possible
lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures position. The risk that the Portfolio will be
unable to close out a futures position or options contract will be minimized by
only entering into futures contracts or options transactions for which there
appears to be a liquid exchange or secondary market. The risk of loss in
trading on futures contracts in some strategies can be substantial, due both to
the low margin deposits required and the extremely high degree of leverage
involved in futures pricing.

HIGH YIELD SECURITIES. High Yield Securities are generally considered to
include Corporate Bonds, Preferred Stocks and Convertible Securities rated Ba
through C by Moody's or BB through D by S&P, and unrated securities considered
to be of equivalent quality. Securities rated less than Baa by Moody's or BBB
by S&P are classified as non-Investment Grade Securities and are commonly
referred to as junk bonds or High Yield Securities. Such securities carry a
high degree of risk and are considered speculative by the major credit rating
agencies. The following are excerpts from the Moody's and S&P definitions for
speculative-grade debt obligations:

Moody's: Ba-rated bonds have "speculative elements" so their future
"cannot be considered assured," and protection of principal and interest
is "moderate" and "not well safeguarded during both good and bad times in
the future." B-rated bonds "lack characteristics of a desirable
investment" and the assurance of interest or principal payments "may be
small." Caa-rated bonds are "of poor standing," and "may be in default"
or may have "elements of danger with respect to principal or interest."
Ca-rated bonds represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked
shortcomings. C-rated bonds are the "lowest rated" class of bonds, and
issues so rated can be regarded as having "extremely poor prospects" of
ever attaining any real investment standing.

S&P: BB-rated bonds have "less near-term vulnerability to default" than
B- or CCC-rated securities but face major ongoing uncertainties . . .
which may lead to inadequate capacity" to pay interest or principal. B-
rated bonds have a "greater vulnerability to default than BB-rated bonds
and the ability to pay interest or principal will likely be impaired by
adverse business conditions." CCC-rated bonds have a currently
identifiable "vulnerability to default" and, without favorable business
conditions, will be "unable to repay interest and principal." The rating
C is reserved for income bonds on which "no interest is being paid." Debt
rated D is in default," and "payment of interest and/or repayment of
principal is in arrears."

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While such securities offer high yields, they also normally carry with them a
greater degree of risk than securities with higher ratings. High Yield
Securities may be issued as a consequence of corporate restructuring or similar
events. Also, High Yield Securities are often issued by smaller, less credit
worthy companies, or by highly leveraged (indebted) firms, which are generally
less able than more established or less leveraged firms to make scheduled
payments of interest and principal. The price movement of these securities is
influenced less by changes in interest rates and more by the financial and
business position of the issuing corporation when compared to Investment Grade
Securities.

The risks posed by securities issued under such circumstances are substantial.
If a security held by the Portfolio is down-graded, the Portfolio may retain
the security.

INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities, which have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase
in the coupon rate. Inverse Floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality,
redemption provisions and maturity, and inverse floater CMOs exhibit greater
price volatility than the majority of mortgage pass-through securities or CMOs.
In addition, some inverse floater CMOs exhibit extreme sensitivity to changes
in prepayments. As a result, the yield to maturity of an inverse floater CMO is
sensitive not only to changes in interest rates but also to changes in
prepayment rates on the related underlying mortgage assets.

INVESTMENT COMPANY SECURITIES. Investments in investment companies are
securities of other open-end or closed-end investment companies. The Investment
Company Act of 1940, as amended (the "1940 Act"), generally prohibits the
Portfolio from acquiring more than 3% of the outstanding voting shares of an
investment company and limits such investments to no more than 5% of the
Portfolio's total assets in any one investment company and no more than 10% in
any combination of investment companies. The 1940 Act also prohibits the
Portfolio from acquiring in the aggregate more than 10% of the outstanding
voting shares of any registered close-end investment company.

To the extent the Portfolio invests a portion of its assets in Investment
Company Securities, those assets will be subject to the expenses of the
purchased investment company as well as to the expenses of the Portfolio
itself. The Portfolio may not purchase shares of any affiliated investment
company except as permitted under the 1940 Act or by a rule or order of the
Securities and Exchange Commission ("SEC").

INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment in the securities of their companies.
However, indirect investment in the securities of companies listed and traded
on the stock exchanges in these countries is permitted by certain emerging
market countries through Investment Funds that have been specifically
authorized. The Portfolio may invest in these Investment Funds subject to the
provisions of the 1940 Act, as applicable, and other applicable laws as
discussed in "Investment Limitations" in the SAI. The Portfolio will invest in
such Investment Funds only where appropriate given that the Portfolio's
shareholders will bear not only their proportionate share of the expenses of
the Portfolio (including operating expenses and the fees of MSAM), but also
will indirectly bear similar expenses of the underlying Investment Funds.

Certain Investment Funds are advised by MSAM. The Portfolio may, to the extent
permitted under the 1940 Act and other applicable law, invest in these
Investment Funds. If the Portfolio does elect to make an investment in such an
Investment Fund, it will only purchase the securities of such Investment Fund
in the secondary market.

INVESTMENT GRADE SECURITIES. Investment Grade Securities are those rated by one
or more NRSRO in one of the four highest rating categories at the time of
purchase (e.g., AAA, AA, A or BBB by S&P or Fitch, or Aaa, Aa, A or Baa by
Moody's). Securities rated BBB or Baa represent the lowest of four levels of
Investment Grade Securities and are regarded as borderline between definitely
sound obligations and those in which the speculative element begins to
predominate. MBSs, including mortgage pass-throughs and CMOs, deemed investment
grade by MSAM, will either carry a guarantee from an agency of the U.S.
Government or a private issuer of the timely payment of principal and interest
(such guarantees do not extend to the market value of such securities or the
net asset value per share of the Portfolio) or, in the case of unrated
securities, be sufficiently seasoned that they are considered by MSAM to be
investment grade quality. MSAM may retain a security if its rating falls below
investment grade if it deems retention of the security to be in the best
interests of the Portfolio. The Portfolio may hold unrated securities if MSAM
considers the risks involved in owning that security to be equivalent to the
risks involved in holding an Investment Grade Security.

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<PAGE>

expected in most instances to be in the form of participation in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. The Portfolio will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In the event of the insolvency of the Lender selling a
Participation, the Portfolio may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower.
Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender
with respect to the Participation. Even under such a structure, in the event of
the Lender's insolvency, the Lender's servicing of the Participation may be
delayed and the assignability of the Participation may be impaired. The
Portfolio will acquire Participations only if the Lender interpositioned
between the Portfolio and the borrower is determined by MSAM to be
creditworthy.

When the Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, 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. Because there is no liquid market for such
securities, the Portfolio anticipates that such securities could be sold only
to a limited number of institutional investors. The lack of a liquid secondary
market may have an adverse impact on the value of such securities and the
Portfolio's ability to dispose of particular Assignments or Participations when
necessary to meet the Portfolio's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the borrower.
The lack of a liquid secondary market for Assignments and Participations also
may make it more difficult for the Portfolio to assign a value to these
securities for purposes of valuing the Portfolio's securities and calculating
its NAV.

Direct debt instruments involve the risk of loss in case of default or
insolvency of the borrower. Direct debt instruments may offer less legal
protection to the Portfolio in the event of fraud or misrepresentation and may
involve a risk of insolvency of the lending bank or other financial
intermediary. Direct debt instruments may also include standby financing
commitments that obligate the investing Portfolio to supply additional cash to
the borrower on demand. Participations involving emerging market country
issuers may relate to loans as to which there has been or currently exists an
event of default or other failure to make payment when due, and may represent
amounts owed to financial institutions that are themselves subject to political
and economic risks, including the risk of currency devaluation, expropriation,
or failure. Such Participations present additional risks of default or loss.

LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions
for the purpose of increasing its net investment income. These loans must be
secured continuously by cash or equivalent collateral, or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will not enter into securities loan
transactions exceeding, in the aggregate, 33 1/3% of its total assets. For more
detailed information about securities lending, see "Securities and Investment
Techniques" in the SAI.

MONEY MARKET INSTRUMENTS. The Portfolio may invest in Money Market Instruments,
although the Portfolio intends to stay invested in securities satisfying its
primary investment objective to the extent practical. The Portfolio may invest
in Money Market Instruments pending other investment or settlement for
liquidity, or in adverse market conditions. The Money Market Instruments
permitted for the Portfolio include obligations of the U.S. Government and its
agencies and instrumentalities; obligations of foreign sovereignties;
obligations of the International Bank for Reconstruction and Development; other
debt securities; commercial paper, including bank obligations; certificates of
deposit (including Eurodollar certificates of deposit); and Repurchase
Agreements. For more detailed information about these Money Market Instruments,
see "Description of Certain Securities and Ratings" in the SAI.

MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities ("MBSs") are instruments
that entitle the holder to a share of all interest and principal payments from
pools of residential and commercial mortgage loans underlying the instruments,
and may take the form of pass-through securities or CMOs. Generally, these
securities are designed to provide monthly payments of interest and principal
to the investor.

Pass-Through Securities. The mortgagee's monthly payments to his or her lending
institution are passed through to investors such as the Portfolio. Most issuers
or poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. The guarantees made by issuers or poolers are
supported by various forms of credit, collateral, guarantees or insurance,
including individual loan, title, pool and hazard insurance purchased by the
issuer. The pools are assembled by various governmental, Government-related and
private organizations. The Portfolio may invest in securities issued or
guaranteed by the Government National Mortgage Association ("GNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association
("FNMA"), private issuers and other government agencies. There can be no
assurance that the private insurers can meet their obligations under the
policies. MBSs issued by non-agency issuers, whether or not such securities are
subject to guarantees, may

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<PAGE>

entail greater risk. If there is no guarantee provided by the issuer, MBSs
purchased by the Portfolio will be those which at time of purchase are rated
investment grade by one or more NRSRO, or, if unrated, are deemed by MSAM to be
of investment grade quality.

Due to the possibility that prepayments on home mortgages will alter cash flow
on MBSs, it is not possible to determine in advance the actual final maturity
date or average life. Faster prepayment will shorten the average life and
slower prepayments will lengthen it. However, it is possible to determine what
the range of that movement could be and to calculate the effect that it will
have on the price of the security. In selecting these securities, MSAM will
look for those securities that offer a higher yield to compensate for any
variation in average maturity.

There are two methods of trading MBSs. A specified pool transaction is a trade
in which the pool number of the security to be delivered on the settlement date
is known at the time the trade is made. This is in contrast with the typical
MBS transaction, called a TBA (to be announced) transaction, in which the type
of MBS to be delivered is specified at the time of trade but the actual pool
numbers of the securities that will be delivered are not known at the time of
the trade. The pool numbers of the pools to be delivered at settlement will be
announced shortly before settlement takes place. The terms of the TBA trade may
be made more specific if desired. Generally, agency pass-through MBSs are
traded on a TBA basis.

CMOs. CMOs are debt securities that are issued by a thrift or other financial
institution and are collateralized as follows. The bondholder has a first
priority perfected security interest in collateral, usually consisting of
agency mortgage pass-through securities, although other assets, including U.S.
Treasuries (including Zero Coupons), Agencies, Cash Equivalents, whole loans
and Corporate Bonds, may qualify. The amount of collateral must be continuously
maintained at levels from 115% to 150% of the principal amount of the bonds
issued, depending on the specific issue structure and collateral type. See
"CMOs" above.

MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income that is
exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and municipal notes
(those with maturities of less than five years). Municipal bonds are issued for
a wide variety of reasons: to construct public facilities, such as airports,
highways, bridges, schools, hospitals, mass transportation, streets, water and
sewer works; to obtain funds for operating expenses; to refund outstanding
municipal obligations; and to loan funds to various public institutions and
facilities. Certain industrial development bonds are also considered municipal
bonds if their interest is exempt from federal income tax. Industrial
development bonds are issued by or on behalf of public authorities to obtain
funds for various privately-operated manufacturing facilities, housing, sports
arenas, convention centers, airports, mass transportation systems and water,
gas or sewer works. Industrial development bonds are ordinarily dependent on
the credit quality of a private user, not the public issuer.

NON-DIVERSIFIED STATUS. The Portfolio is a non-diversified portfolio under the
1940 Act, which means that the Portfolio is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. Thus, the Portfolio may invest a greater proportion of its assets in
the securities of a small number of issuers and, as a result, will be subject
to greater risk with respect to its portfolio securities. However, the
Portfolio intends to comply with diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as
regulated investment company. See "Investment Limitations" and "Taxes" in the
SAI.

NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted Equity Securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be
less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Portfolio or less than
what may be considered the fair value of such securities. Furthermore,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.

As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market and securities that are restricted from sale
to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act") and are deemed to be
illiquid. Restricted Securities that can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("144A Securities") may
be deemed to be liquid under guidelines adopted by the Fund's Board of
Directors. The Portfolio may invest up to 25% of its total assets in 144A
Securities that are deemed to be liquid.

The Fund's Board of Directors has delegated to MSAM, subject to the supervision
of the Board of Directors, the daily function of determining and monitoring the
liquidity of Rule 144A Securities. Rule 144A Securities may become illiquid

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<PAGE>

if qualified institutional buyers are not interested in acquiring the
securities. Investors should note that investment of 5% of the Portfolio's
total assets in Restricted Securities may be considered a speculative activity
and may involve greater risk and expense to the Portfolio.

OPTIONS. Options are legal contracts that give the holder the right to buy or
sell a specified amount of the underlying asset or futures contract at a fixed
or determinable price upon the exercise of the Option. A call Option conveys
the right to buy and a put Option conveys the right to sell a specified
quantity of the underlying asset.

The Portfolio may seek to increase its return or may hedge its portfolio
investments through options transactions with respect to securities,
instruments, indices or baskets thereof in which the Portfolio may invest, as
well as with respect to foreign currency. Purchasing a put Option gives the
Portfolio the right to sell a specified security, currency or basket of
securities or currencies at the exercise price until the expiration of the
Option. Purchasing a call Option gives the Portfolio the right to purchase a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the Option.

The Portfolio also may write (i.e., sell) put and call Options on investments
it holds, as well as with respect to foreign currency. When the Portfolio
writes an Option it receives a premium, which increases the Portfolio's return
on the underlying security or instrument in the event the Option expires
unexercised or is closed out at a profit. However, by writing a call Option,
the Portfolio will limit its opportunity to profit from an increase in the
market value of the underlying security or instrument above the exercise price
of the Option for as long as the Portfolio's obligation as writer of the Option
continues. The Portfolio may only write Options that are "covered." A covered
call option means that so long as the Portfolio is obligated as the writer of
the Option, it will own (i) the underlying security or instrument subject to
the Option or (ii) securities or instruments convertible or exchangeable
without the payment of any consideration into the security or instrument
subject to the Option.

By writing (or selling) a put Option, the Portfolio incurs an obligation to buy
the security or instrument underlying the Option from the purchaser of the put
at the Option's exercise price at any time during the Option period, at the
purchaser's election. Options written by the Portfolio may be exercisable by
the purchaser only up to a specific date. If the Portfolio writes a put Option
will earmark or segregate sufficient liquid assets to cover its obligations
under the Option.

As a matter of operating policy, the value of the underlying securities on
which stock Options will be written at any one time will not exceed 5% of the
Portfolio's total assets.

The Portfolio may engage in transactions in Options which are traded on
recognized exchanges or over-the-counter. There currently are limited Options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the MSAM and
the extent to which those strategies are used will depend on the development of
such options markets. The primary risks associated with the use of Options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by the Portfolio and the prices of Options relating to
such investments, and (ii) possible lack of a liquid secondary market for an
Option.

PREFERRED STOCKS. Preferred Stocks are non-voting securities which evidence
ownership in a corporation and which pay a fixed or variable stream of
dividends.

RIGHTS. Rights represent a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance, before the stock is
offered to the general public, allowing the stockholder to retain the same
ownership percentage after the new stock offering.

REPURCHASE AGREEMENTS. Repurchase Agreements are transactions in which the
Portfolio purchases a security and simultaneously commits to resell that
security to the seller (a bank, broker or dealer) at a mutually agreed upon
date and price. The term of these agreements is usually from overnight to one
week, and never exceeds one year. Repurchase Agreements may be viewed as a
fully collateralized loan of money by the Portfolio to the seller. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or date of maturity of the purchased
security.

In these transactions, the securities received by the Portfolio have a market
value at least equal to the purchase price (including accrued interest) of the
Repurchase Agreement as collateral, and this value is maintained during the
term of the agreement. These securities are held by the Portfolio's custodian
or an approved third party for the benefit of the Portfolio until repurchased.
Repurchase Agreements permit the Portfolio to keep all its assets invested
while retaining overnight flexibility in pursuit of investments of a longer
term nature. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the collateral may be
delayed or limited.

Pursuant to an order expected to be issued by the SEC, all of the Fund's
Portfolios, including the sixteen Portfolios of the Fund not described in this
Prospectus, may pool their daily uninvested cash balances in order to invest in
Repurchase Agreements on a joint basis. By entering into Repurchase Agreements
on a joint basis, it is expected that the Portfolios will incur lower
transaction costs and potentially obtain higher rates of interest on such
Repurchase Agreements. Each Portfolio's participation in the income from
jointly purchased Repurchase Agreements will be based on that Portfolio's
percentage share in the total Repurchase Agreement. The Portfolio's ability to
invest in Repurchase

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<PAGE>

Agreements on a joint basis will be contingent upon issuance of the order by
the SEC described above.

REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into Reverse Repurchase
Agreements with brokers, dealers, domestic and foreign banks or other financial
institutions. In a Reverse Repurchase Agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Portfolio. The Portfolio's
investment of the proceeds of a Reverse Repurchase Agreement is the speculative
factor known as leverage. The Portfolio may enter into a Reverse Repurchase
Agreement only if the interest income from investment of the proceeds is
greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement. The Portfolio
will maintain with the custodian a separate account with a segregated portfolio
of unencumbered liquid assets in an amount at least equal to its purchase
obligations under these agreements. If interest rates rise during a Reverse
Repurchase Agreement, it may adversely affect the Portfolio's ability to
maintain a stable NAV.

RUSSIAN SECURITIES. The registration, clearing and settlement of securities
transactions involving Russian issuers are subject to significant risks not
normally associated with securities transactions in the United States and other
more developed markets. Ownership of Equity Securities in Russian companies is
evidenced by entries in a company's share register (except where shares are
held through depositories that meet the requirements of the 1940 Act) and the
issuance of extracts from the register or, in certain limited cases, by formal
share certificates. However, Russian share registers are frequently unreliable
and the Portfolio could possibly lose its registration through oversight,
negligence or fraud. Moreover, Russia lacks a centralized registry to record
securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In
addition, while registrars are liable under law for losses resulting from their
errors, it may be difficult for the Portfolio to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by law to employ an independent registrar in practice, such companies
have not always followed this law. Because of this lack of independence of
registrars, management of a Russian company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions on the share
register. Furthermore, these practices may prevent the Portfolio from investing
in the securities of certain Russian companies deemed suitable by MSAM and
could cause a delay in the sale of Russian Securities by the Portfolio if the
company deems a purchaser unsuitable, which may expose the Portfolio to
potential loss on its investment.

In light of the risks described above, the Board of Directors of the Fund has
approved certain procedures concerning the Fund's investments in Russian
Securities. Among these procedures is a requirement that the Portfolio will not
invest in the securities of a Russian company unless that issuer's registrar
has entered into a contract with the Fund's sub-custodian containing certain
protective conditions, including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Portfolio. This
requirement will likely have the effect of precluding investments in certain
Russian companies that the Portfolio would otherwise make.

SMBSS. Stripped Mortgage-Backed Securities ("SMBSs") are Derivatives in the
form of multi-class mortgage securities. SMBSs may be issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose entities of the
foregoing.

SMBSs are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest ("IO class"), while the other class
will receive all of the principal ("principal-only" or "PO class"). The yield
to maturity on IO classes and PO classes is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the portfolio yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Portfolio may
fail to fully recoup its initial investment in these securities, even if the
security is in one of the highest rating categories.

Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to the Portfolio's limitations on investment in illiquid
securities.

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<PAGE>

increase or decrease through the use of multipliers or deflators. The use of
Structured Notes allows the Portfolio to tailor its investments to the specific
risks and returns MSAM wishes to accept while avoiding or reducing certain
other risks.

SWAPS. Swap Contracts are Derivatives in the form of a contract or other
similar instrument which is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed-income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, the
Portfolio may agree to swap the return generated by a fixed-income index for
the return generated by a second fixed-income index. The currency Swaps in
which the Portfolio may enter will generally involve an agreement to pay
interest streams in one currency based on a specified index in exchange for
receiving interest streams denominated in another currency. Such Swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.

The Portfolio will usually enter into Swaps on a net basis, i.e., the two
return streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the
case may be, only the net amount of the two returns. The Portfolio's
obligations under a Swap agreement will be accrued daily (offset against any
amounts owing to the Portfolio) and any accrued but unpaid net amounts owed to
a swap counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Governments, or high grade debt obligations. The
Portfolio will not enter into any Swap agreement unless the counterparty meets
the rating requirements set forth in guidelines established by the Fund's Board
of Directors.

Interest rate and total rate of return Swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that the Portfolio is contractually
obligated to make. If the other party to an interest rate or total rate of
return Swap defaults, the Portfolio's risk of loss consists of the net amount
of interest payments that the Portfolio is contractually entitled to receive.
In contrast, currency Swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency Swap is subject
to the risk that the other party to the Swap will default on its contractual
delivery obligations. If there is a default by the counterparty, the Portfolio
may have contractual remedies pursuant to the agreements related to the
transaction. The Swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the Swap
market has become relatively liquid. Swaps that include caps, floors, and
collars are more recent innovations for which standardized documentation has
not yet been fully developed and, accordingly, they are less liquid than
"traditional" Swaps.

The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If MSAM is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolio would be less favorable than it would have been if this
investment technique was not used.

TEMPORARY INVESTMENTS. During periods in which MSAM believes changes in
economic, financial or political conditions make it advisable, the Portfolio
may reduce its holdings for temporary defensive purposes and may invest in
certain short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) debt securities or may hold cash. The
short-term and medium-term debt obligations in which the Portfolio may invest
consist of (a) obligations of the U.S. or foreign country governments, their
respective agencies or instrumentalities; (b) bank deposits and bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances) of U.S. or foreign country banks denominated in any currency; (c)
Floaters and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate
commercial paper and other short-term corporate debt obligations of U.S. and
foreign country corporations meeting the Portfolio's credit quality standards;
and (e) Repurchase Agreements with banks and broker-dealers with respect to
such securities. For temporary defensive purposes, the Portfolio intends to
invest only in short-term and medium-term debt obligations that MSAM believes
to be of high quality, i.e., subject to relatively low risk of loss of interest
or principal (there is currently no rating system for foreign debt
obligations).

U.S. GOVERNMENTS. U.S. Governments are Fixed Income Securities that are backed
by the full faith and credit of the U.S. Government as to the payment of both
principal and interest. U.S. Governments may include securities issued by the
U.S. Treasury and securities issued by federal agencies and U.S. Government
sponsored instrumentalities. For further information on these securities, see
"Description of U.S. Government Securities" in the SAI.

WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.

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<PAGE>

Delivery of and payment for these securities may take as long as a month or
more after the date of the purchase commitment, but will take place no more
than 120 days after the trade date. The payment obligation and the interest
rates that will be received are each fixed at the time the Portfolio enters
into the commitment and no interest accrues to the Portfolio until settlement.
Thus, it is possible that the market value at the time of settlement could be
higher or lower than the purchase price if the general level of interest rates
has changed. The Portfolio will maintain with the custodian a separate account
with a segregated portfolio of high-grade debt securities or cash in an amount
at least equal to these commitments. The Portfolio will not enter into When-
Issued or Delayed Delivery Securities commitments exceeding, in the aggregate,
15% of the Portfolio's total assets other than the obligations created by these
commitments.

ZERO COUPONS, PAY-IN-KIND SECURITIES OR DEFERRED PAYMENT SECURITIES. Zero
Coupons are Fixed Income Securities that do not make regular interest payments.
Instead, Zero Coupons are sold at substantial discounts from their face value.
The difference between a Zero Coupon's issue or purchase price and its face
value represents the imputed interest an investor will earn if the obligation
is held until maturity. Zero Coupons may offer investors the opportunity to
earn higher yields than those available on ordinary interest-paying obligations
of similar credit quality and maturity. However, Zero Coupon prices may also
exhibit greater price volatility than ordinary Fixed Income Securities because
of the manner in which their principal and interest are returned to the
investor. Pay-In-Kind Securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred Payment Securities
are securities that remain Zero Coupons until a predetermined date, at which
time the stated coupon rate becomes effective and interest becomes payable at
regular intervals. Zero Coupon, Pay-In-Kind and Deferred Payment Securities may
be subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparably rated securities paying cash interest
at regular interest payment periods.

FUNDAMENTAL INVESTMENT LIMITS

The investment objective of the Portfolio discussed under "Portfolio Summary"
above is a fundamental policy, that is, a policy subject to change only by
shareholder approval. All policies stated throughout this Prospectus, other
than those identified as fundamental, can be changed without shareholder
approval. For additional fundamental and nonfundamental investment limits, see
"Investment Limitations" in the SAI.

INTERNAL REVENUE SERVICE (IRS) LIMITATIONS. In addition to the above, the
Portfolio also follows certain limitations imposed by the IRS on separate
accounts of insurance companies relating to the tax-deferred status of variable
annuity contracts and variable life insurance policies. For additional
information, see "Investment Limitations" in the SAI.

MANAGEMENT OF THE FUND

The Fund is governed by a Board of Directors which is responsible for the
management of the business and affairs of the Fund as provided in the laws of
the State of Maryland and the Fund's Articles of Incorporation and By-Laws. The
Board of Directors of the Fund has undertaken to monitor the Fund for the
existence of any material irreconcilable conflict among the interests of
variable annuity contract owners, variable life insurance policy owners and
qualified plans that invest in the Fund due to differences in tax treatment and
other considerations, and shall report any such conflict to the boards of the
respective life insurance companies that use the Fund as an investment vehicle
for their respective variable annuity contracts and variable life insurance
policies and to qualified plans. The Boards of Directors of those life
insurance companies and the fiduciaries of certain qualified plans and MSAM,
have agreed or will agree to be responsible for reporting any potential or
existing conflicts to the Directors of the Fund. If a material irreconcilable
conflict exists that affects those life insurance companies, they will be
required, at their own cost, to remedy such conflict up to and including
establishing a new registered management investment company and segregating the
assets underlying the variable annuity contracts and the variable life
insurance policies. Qualified plans which acquire more than 10% of the assets
of the Fund will be required to report any potential or existing conflicts to
the Directors of the Fund, and if a material irreconcilable conflict exists, to
remedy such conflict, up to and including redeeming shares of the Portfolio
held by the qualified plans. The majority of the Fund's Directors are not
affiliated with MSAM, any of its affiliates, any of the other companies that
provide services to the Fund or any of their affiliates. The officers of the
Fund conduct and supervise its daily business operations.

THE FUND MAY HOLD SPECIAL MEETINGS. The Fund will not hold annual shareholder
meetings, but may call special meetings when required by law, when requested by
a sufficient number of shareholders or for other reasons. An insurance company
issuing a variable annuity contract or variable life insurance policy that
participates in the Portfolio will vote shares held in its separate account as
required by law and interpretations thereof, as may be amended or changed from
time to time. In accordance with current law and interpretations thereof, a
participating insurance company is required to request voting instructions from
contract or policy owners and must vote shares in the separate account in
proportion to the voting instructions received. For a further discussion,
please refer to your insurance company's separate account prospectus.

INVESTMENT MANAGEMENT

INVESTMENT ADVISER. MSAM serves as the adviser for the Emerging Markets Equity
Portfolio. It provides

17
<PAGE>

investment advice and portfolio management services, pursuant to an Investment
Advisory Agreement and, subject to the supervision of the Fund's Board of
Directors, makes the Portfolio's day-to-day investment decisions, arranges for
the execution of portfolio transactions and generally manages the Portfolio's
investments. MSAM, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide investment management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. MSAM is a wholly owned subsidiary of Morgan Stanley
Group Inc. ("MSGI"), which is a publicly owned financial services corporation
listed on the New York, London and Pacific stock exchanges. MSAM, a registered
investment adviser under the Investment Advisers Act of 1940, as amended,
serves as investment adviser to numerous open-end and closed-end investment
companies. As of February 28, 1997, MSAM, together with its affiliated asset
management companies, had approximately $176.9 billion in assets under
management and fiduciary care. See "Management of the Fund" in the SAI.

On February 5, 1997, MSGI and Dean Witter, Discover & Co. ("Dean Witter
Discover") announced that they had entered into an Agreement and Plan of Merger
to form Morgan Stanley, Dean Witter, Discover & Co. Presently, Dean Witter,
Discover is a financial services company with three major businesses: full
service brokerage, credit services and asset management. Subject to certain
conditions being met, it is currently anticipated that the transaction will
close in mid-1997. Thereafter, MSAM will be a subsidiary of Morgan Stanley,
Dean Witter, Discover & Co.

PORTFOLIO MANAGERS. The following individuals have primary responsibility for
the Portfolio.

Madhav Dhar and Marianne L. Hay. Madhav Dhar is a Managing Director of MSAM and
Morgan Stanley & Co. Incorporated ("Morgan Stanley"). He joined MSAM in 1984 to
focus on global asset allocation and investment strategy and now heads MSAM's
emerging markets group and serves as the group's principal Portfolio Manager.
Mr. Dhar also coordinates MSAM's developing country funds effort and has been
involved in the launching of MSAM's country funds. He is a Director of the
Morgan Stanley Emerging Markets Fund, Inc. (a closed-end investment company).
He holds a B.S. (honors) from St. Stephens College, Delhi University (India),
and an M.B.A. from Carnegie-Mellon University. Marianne L. Hay, a Managing
Director of Morgan Stanley, joined the Adviser in June 1993 to work with the
Adviser's senior management covering all emerging markets asset allocation,
product development and client services. Ms. Hay has 17 years of investment
experience. Prior to joining the Adviser, she was a director of Martin Currie
Investment Management, Ltd. ("Martin Currie") where her responsibilities
included geographic asset allocation and portfolio management for global and
emerging markets funds, as well as being director in charge of the company's
North American clients. Prior to her tenure at Martin Currie, she worked for
the Bank of Scotland and the investment management firm of Ivory and Sime plc.
She graduated with an honors degree in genetics from Edinburgh University and
holds a Diploma in Education and the qualification of the Association of the
Institute of Bankers in Scotland. Mr. Dhar and Ms. Hay have shared primary
responsibility for managing the Portfolio's assets since its inception.

OTHER SERVICES

DISTRIBUTOR. Under its Distribution Agreement with the Fund, Morgan Stanley
serves as the exclusive distributor of the Fund and sells shares of the
Portfolio upon the terms and at the current offering price described in this
Prospectus. Morgan Stanley is not obligated to sell any certain number of
shares of the Portfolio. Morgan Stanley, as principal underwriter, or the
insurance companies whose variable products are funded by the Fund, will bear
all of the Fund's marketing expenses. This includes the cost of reproducing
prospectuses, statements of additional information or any other Fund documents
(such as semiannual reports) used as sales materials.

ADMINISTRATOR. MSAM also provides the Portfolio with administrative services
pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund, and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with
its custodian, and assistance in the preparation of the Fund's registration
statements under federal and state laws. The Administration Agreement also
provides that the Administrator through its agents will provide the Fund with
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays MSAM a monthly fee which on an annual
basis equals 0.25% of the average daily net assets of the Portfolio.

MSAM has entered into a Sub-Administration Agreement with Chase Global Funds
Services Company ("Chase Global"), a corporate affiliate of The Chase Manhattan
Bank ("Chase"), pursuant to which Chase Global has agreed to provide certain
administrative services to the Fund. MSAM supervises and monitors such
administrative services provided by Chase Global. The services provided under
the Administration Agreement and the Sub-Administration Agreement are also
subject to the supervision of the Board of Directors of the Fund. The Board of
Directors of the Fund has approved the provision of services described above
pursuant to the Administration Agreement and the Sub-Administration Agreement
as being in the best interests of the Fund. Chase Global's business address is
73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information
regarding the Administration Agreement or the Sub-Administration Agreement, see
"Management of the Fund" in the SAI.

18
<PAGE>

Certain administrative and recordkeeping services that would otherwise be
performed by MSAM or its service providers, may be performed by insurance
companies that purchase shares of the Portfolio. MSAM may make payments to
these insurance companies to defray the cost of providing these services.

Chase Global calculates the net asset value ("NAV") and dividends, maintains
the general accounting records and administers the securities lending program
for the Portfolio.

CUSTODIANS. Chase serves as the custodian of domestic securities and cash of
the Portfolio. Chase is not an affiliate of either MSAM or Morgan Stanley.
Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of MSAM
and Morgan Stanley, acts as the Fund's custodian for foreign assets held
outside the United States and employs sub-custodians approved by the Board of
Directors of the Fund in accordance with regulations of the SEC for the purpose
of providing custodial services for such assets. MSTC may also hold certain
domestic assets for the Fund. For more information on the custodians, see
"General Information--Custody Arrangements" in the SAI.

DIVIDEND DISBURSING AND TRANSFER AGENT. Chase Global acts as dividend
disbursing and transfer agent for the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and audits the annual financial statements of the Portfolio.

LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.

BREAKDOWN OF EXPENSES

The Portfolio pays fees and other costs related to its daily operations.
Expenses paid out of the Portfolio's assets are reflected in its share price.
The Portfolio pays a management fee to MSAM for managing its investments and
business affairs. MSAM pays fees to affiliates who provide assistance with
these services. The Portfolio also pays other expenses, which are explained
below. MSAM may, from time to time, reduce its fees or reimburse the Portfolio
for expenses above a specified limit. These fee reductions or expense
reimbursements, which may be terminated at any time without notice, can
decrease the Portfolio's expenses and boost its performance.

MANAGEMENT FEE

The Adviser is entitled to receive from the Portfolio a management fee, payable
quarterly, at an annual rate as a percentage of average daily net assets as
follows: 1.25% of the first $500 million, 1.20% of the next $500 million, and
1.15% of net assets in excess of $1 billion.

However, MSAM has agreed to a reduction in its management fees and to reimburse
the Portfolio, if necessary, if such fees would cause the total annual
operating expenses of the Portfolio to exceed 1.75% of average daily net
assets. This fee reduction is voluntary and may be terminated by MSAM at any
time without notice.

OTHER EXPENSES

In addition to investment advisory and certain administrative expenses charged
by the administrator of the Portfolio, the Portfolio pays all expenses not
assumed by MSAM. Such expenses include or could include investment-related
expenses, such as brokers' commissions, transfer taxes and fees related to the
purchase, sale, or loan of securities; fees and expenses for Directors not
affiliated with MSAM; fees and expenses of its independent accountants and
legal counsel; costs of Director and shareholder meetings; SEC fees; expenses
of preparing and filing registration statements; the cost of providing proxy
statements, prospectuses and statements of additional information to existing
variable annuity contract and variable life insurance policy owners; expenses
of preparing and printing the annual and semiannual shareholder reports to
variable annuity contract and variable life insurance policy owners; bank
transaction charges and certain custodians' fees and expenses; federal, state
or local income or other taxes; costs of maintaining the Portfolio's corporate
existence; membership fees for the Investment Company Institute and similar
organizations; fidelity bond and Directors' liability insurance premiums; and
any extraordinary expenses such as indemnification payments or damages awarded
in litigation or settlements made. All these expenses that are incurred by the
Portfolio will be passed on to the shareholders through a daily charge made to
the assets held in the Portfolio, which will be reflected in the share price.

PORTFOLIO TRANSACTIONS

The Investment Advisory Agreement authorizes MSAM to select the brokers or
dealers that will execute the purchases and sales of investment securities for
the Portfolio and directs MSAM to use its best efforts to obtain the best
available price and most favorable execution with respect to all transactions
for the Portfolio. The Fund has authorized MSAM to pay higher commissions in
recognition of brokerage services which, in the opinion of MSAM, are necessary
for the achievement of better execution, provided MSAM believes this to be in
the best interest of the Fund.

Since shares of the Portfolio are not marketed through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.

In purchasing and selling securities for the Portfolio, it is the Fund's policy
to obtain quality execution at the most favorable prices through responsible
broker-dealers. In selecting broker-dealers to execute the securities
transactions for the Portfolio,

19
<PAGE>

consideration will be given to such factors as the price of the security, the
rate of the commission, the size and difficulty of the order, the reliability,
integrity, financial condition, general execution and operational capabilities
of competing broker-dealers, and the brokerage and research services which they
provide to the Fund. Some securities for investment by the Portfolio may also
be appropriate for other clients served by MSAM. If the purchase or sale of
securities consistent with the investment policies of the Portfolio and one or
more of these other clients served by MSAM is considered at or about the same
time, transactions in such securities will be allocated among the Portfolio and
such other clients in a manner deemed fair and reasonable by MSAM. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by MSAM, and the results of such allocations, are
subject to periodic review by the Fund's Board of Directors.

Subject to the overriding objective of obtaining the best possible execution of
orders, MSAM may allocate a portion of the Portfolio's brokerage transactions
to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan
Stanley or its affiliates to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Morgan Stanley or such
affiliates must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those Directors who are not
"interested persons," as defined in the 1940 Act, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.

Portfolio securities will not be purchased from or through, or sold to or
through, MSAM or Morgan Stanley or any "affiliated persons," as defined in the
1940 Act of Morgan Stanley when such entities are acting as principals, except
to the extent permitted by law.

PERFORMANCE OF THE PORTFOLIO

The Portfolio's total return may be quoted in advertising if accompanied by
performance of your insurance company's separate account. Performance is based
on historical results and is not intended to indicate future performance. For
additional performance information, contact your insurance company for a free
annual report.

TOTAL RETURN is the change in value of an investment in the Portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. Average annual total
returns smooth out variations in performance; they are not the same as actual
year-by-year results.

Average annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.

Total return quoted for the Portfolio includes the Portfolio's expenses, but
may not include charges and expenses attributable to any particular insurance
product. Since shares of the Portfolio may be purchased only through variable
annuity contracts and variable life insurance policies and by tax qualified
investors, such as qualified pension and retirement plans, you should carefully
review the prospectus of the insurance product you have chosen for information
on relevant charges and expenses. Excluding these charges from quotations of
the Portfolio's performance has the effect of increasing the performance
quoted. You should bear in mind the effect of these charges when comparing the
Portfolio's performance to that of other mutual funds.

PERFORMANCE OF MSAM

MSAM manages a portfolio of Morgan Stanley Institutional Fund, Inc. ("MSIF")
which served as the model for the Portfolio of the Fund. The portfolio of MSIF
has substantially the same investment objectives and policies as the Portfolio
of the Fund. In addition, MSAM intends the Portfolio of the Fund and the
corresponding portfolio of MSIF to be managed by the same personnel and to
continue to have closely similar investment strategies, techniques, and
characteristics.

Past investment performance of the MSIF portfolio, as shown in the table below,
may be relevant to your consideration of the Portfolio. The investment
performance of the MSIF portfolio is not necessarily indicative of future
performance of the Portfolio. Also, the operating expenses of the Portfolio
will be different from, and may be higher than, the operating expenses of the
corresponding MSIF portfolio. The investment performance of the MSIF portfolio
is provided merely to indicate the experience of MSAM in managing a similar
portfolio.

<TABLE>
<CAPTION>
ONE YEAR AVERAGE ANNUAL
TOTAL RETURN TOTAL RETURN
INCEPTION AS OF SINCE
FUND NAME DATE 12/31/96 INCEPTION
- ---------------- --------- ------------ --------------
<S> <C> <C> <C>
MSIF:
Emerging Markets 9/25/92 12.19% 12.93%
(Class A Shares)
</TABLE>

PERSONS CONTROLLING THE PORTFOLIO

As of April 7, 1997, MSGI owned more than 25% of the voting securities of the
Portfolio and, therefore, may be deemed a controlling person of the Portfolio
under the 1940 Act.

20
<PAGE>

In addition, The New York Life Insurance and Annuity Corporation ("NYLIAC")
owned more than 25% of the voting securities of the Portfolio for variable
annuity contracts and variable life insurance policies that it has issued to
the public. As required by law, NYLIAC votes the securities in accordance with
instructions received from its variable annuity contract and variable life
insurance policy owners.

For more information see "Control Persons and Principal Holders of Securities"
in the SAI.

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

The Fund intends the Portfolio to qualify as a separate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and to qualify as a
"regulated investment company" under Subchapter M of the Code. As a regulated
investment company under the Code, net income and net realized gains of the
Portfolio will be distributed to shareholders at least once a year.

As stated on the cover of this prospectus, shares of the Portfolio will be
purchased by life insurance companies for their separate accounts under
variable annuity contracts and variable life insurance policies and by other
entities under qualified pension and retirement plans. Under the provisions of
the Code currently in effect, net income and realized capital gains are not
currently taxable when left to accumulate within a variable annuity contract or
variable life insurance policy or under a qualified pension or retirement plan.

For information on federal income taxation of a life insurance company with
respect to its receipt of distributions from the Fund and federal income
taxation of owners of variable annuity contracts or variable life insurance
policies, refer to the life insurance company's variable annuity contract or
variable life insurance policy prospectus.

TRANSACTION DETAILS

The Portfolio is open for business each day the New York Stock Exchange
("NYSE") is open. The Portfolio's NAV is determined as of the close of business
of the NYSE (normally 4:00 p.m. Eastern Time) on each day that the NYSE is open
for business. The NYSE is currently scheduled to be closed on New Year's Day,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and on the preceding Friday or subsequent
Monday when any of these holidays falls on a Saturday or Sunday, respectively.

The Portfolio's NAV is the value of a single share. The NAV is computed by
adding the value of the Portfolio's investments, cash and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.

The Portfolio's investments are valued primarily on the basis of market
quotations. Foreign securities are valued on the basis of quotations from the
primary market in which they are traded, and are translated from the local
currency into U.S. dollars using current exchange rates. If quotations are not
readily available or if the values have been materially affected by events
occurring after the closing of a foreign market, assets are valued by a method
that the Fund's Board of Directors believes accurately reflects fair value.

The Portfolio's offering price (price to buy one share) and redemption price
(price to sell one share) are its NAV.

The Portfolio reserves the right to suspend the offering of shares for a period
of time. The Portfolio also reserves the right to reject any specific order.
Purchase orders may be refused if, in MSAM's opinion, they would disrupt
management of the Portfolio.

Each participating insurance company receives orders from its variable annuity
contract and variable life insurance policy owners to purchase or redeem shares
of the Portfolio each business day. That night, all orders received by that
insurance company on that business day are aggregated, and the insurance
company places a net purchase or redemption order for shares of the Portfolio
the morning of the next business day. These orders are normally executed at the
NAV that was computed at the close of the previous business day in order to
provide a match between the variable contract and policy owners' orders to the
insurance companies and the insurance companies' orders to the Portfolio. In
some cases, an insurance company's orders for Portfolio shares may be executed
at the NAV next computed after the order is actually transmitted to the
Portfolio.

Redemption proceeds will normally be wired to the insurance company on the next
business day after receipt of the redemption instructions by the Portfolio but
in no event later than seven days following receipt of instructions. The
Portfolio may suspend redemptions or postpone payment dates on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
21
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY MILLER
ASSET MANAGEMENT ANDERSON &
INC. SHERRERD, LLP

MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A MUTUAL FUND DESIGNED TO
PROVIDE INVESTMENT VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES AND FOR CERTAIN TAX-QUALIFIED INVESTORS. THIS PROSPECTUS
DESCRIBES FIVE PORTFOLIOS MANAGED BY MORGAN STANLEY ASSET MANAGEMENT INC.
("MSAM"). THE FUND ALSO OFFERS TWELVE OTHER PORTFOLIOS MANAGED BY MSAM OR
MILLER ANDERSON & SHERRERD, LLP. THE FUND MAKES AVAILABLE IN A SINGLE PRODUCT
THE COMBINED STRENGTH OF THESE LEADING INVESTMENT MANAGEMENT FIRMS.

THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND'S INVESTMENTS AND
SERVICES. YOU SHOULD READ IT BEFORE INVESTING, AND KEEP IT ON FILE FOR FUTURE
REFERENCE ALONG WITH THE PROSPECTUS OF THE SEPARATE ACCOUNT OF THE SPECIFIC
INSURANCE PRODUCT WHICH ACCOMPANIES THIS PROSPECTUS.

SHARES OF EACH PORTFOLIO MAY BE PURCHASED ONLY BY INSURANCE COMPANIES FOR THEIR
SEPARATE ACCOUNTS FOR THE PURPOSE OF FUNDING VARIABLE ANNUITY CONTRACTS AND
VARIABLE LIFE INSURANCE POLICIES AND BY CERTAIN TAX-QUALIFIED INVESTORS.
PARTICULAR PORTFOLIOS MAY NOT BE AVAILABLE IN YOUR STATE DUE TO VARIOUS
INSURANCE REGULATIONS. PLEASE CHECK WITH YOUR INSURANCE COMPANY FOR AVAILABLE
PORTFOLIOS. INCLUSION OF A PORTFOLIO IN THIS PROSPECTUS WHICH IS NOT AVAILABLE
IN YOUR STATE IS NOT TO BE CONSIDERED A SOLICITATION.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

THE PORTFOLIOS:

U.S. Real Estate Emerging Markets Equity
Global Equity Asian Equity
International Magnum

AN INVESTMENT IN ANY PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. YOU MAY RECEIVE MORE OR LESS THAN YOU INVESTED WHEN YOU REDEEM YOUR
SHARES.

Prospectus dated May 1, 1997
MORGAN STANLEY UNIVERSAL FUNDS, INC.
P.O. Box 2798, Boston, MA 02208-2798

<PAGE>

THE FUND

The Fund is an open-end management investment company, or mutual fund. Each of
the five separate investment portfolios (each, a "Portfolio") described in this
Prospectus has a distinct investment objective. The following pages describe
the types of securities and investment techniques each Portfolio uses to seek
its objective, as well as the risks inherent in those types of securities and
investment techniques.

MANAGEMENT

Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") advises the
following Portfolios.

U.S. Real Estate Emerging Markets
Global Equity Equity
International Magnum Asian Equity

MSAM conducts a world wide investment advisory business. As of February 28,
1997, MSAM and its investment advisory affiliates managed assets totaling
approximately $176.9 billion.

OFFERING OF SHARES

PAGE
PROSPECTUS OUTLINE

FINANCIAL HIGHLIGHTS 3

Financial highlights tables for certain Portfolios.

PORTFOLIO SUMMARIES 3

For each Portfolio, the investment objective and a summary of strategy,
potential investors, and investment characteristics and risks.

THE PORTFOLIOS' INVESTMENTS 4

A more detailed review of how each Portfolio invests and investment
characteristics and risks.

SECURITIES AND INVESTMENT TECHNIQUES 8

More information about the types of investment strategies that may be used
by some or all of the Portfolios and information about investment risks and
limitations.

FUNDAMENTAL INVESTMENT LIMITS 22

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 22

General information about the organization and operations of the Fund,
including details about MSAM and the individual portfolio managers, as well as
fees, expenses and performance calculations.

ACCOUNT POLICIES 28

Information on net asset value calculation, income and gain distributions,
taxes and share purchases and redemptions.

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following table provides financial highlights for the shares of the
Emerging Markets Equity Portfolio for the period presented. The Emerging
Markets Equity Portfolio was the only Portfolio of the Fund operational in the
fiscal year ended December 31, 1996 and, therefore, is the only Portfolio with
audited financial highlights for this period. These audited financial
highlights are part of the Fund's financial statements which appear in the
Fund's December 31, 1996 Annual Report to Shareholders and which are included
in the Fund's Statement of Additional Information. The Emerging Markets Equity
Portfolio's financial highlights for the period ended December 31, 1996 have
been audited by Price Waterhouse LLP, whose unqualified report thereon is also
included in the Statement of Additional Information. Additional performance
information for the Emerging Markets Equity Portfolio is included in the Annual
Report. The Annual Report and the financial statements therein, along with the
Statement of Additional Information, are available at no cost from the Fund at
the address and toll-free number noted on the cover page to this Prospectus or
from your insurance company.

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1996
- ---------------------------------- -------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Invested Income......................................... 0.01
Net Realized and Unrealized Loss............................ (0.21)
-------
Total From Investment Operations.......................... (0.20)
-------
DISTRIBUTIONS
Net Invested Income......................................... (0.02)
-------
Total Distributions....................................... (0.02)
-------
NET ASSET VALUE, END OF PERIOD................................ $ 9.78
=======
TOTAL RETURN.................................................. (2.03)%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)............................. $11,789
Ratio of Expenses to Average Net Assets....................... 1.75%**
Ratio of Net Investment Income to Average Net Assets.......... 0.32%**
Portfolio Turnover Rate....................................... 9%
Average Commission Rate#...................................... $0.0013
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net
Investment Income (Loss)................................... $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net
Assets..................................................... 6.17%**
Net Investment Income (Loss) to Average Net Assets.......... (4.06)%**
</TABLE>
- -------

* Commencement of operations.

** Annualized.

# For the period ended December 31, 1996, the average commission rate paid on
trades on which commissions were charged was 0.45% of the trade amount.

PORTFOLIO SUMMARIES

Certain investment terms used below have initial capital letters ("Common
Stocks," for example). These terms are further described under "Securities and
Investment Techniques" below.

U.S. REAL ESTATE PORTFOLIO

OBJECTIVE AND STRATEGY: 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").

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek
above-average current income and long-term capital appreciation by investing in
Equity Securities of U.S. and non-U.S. companies principally engaged in the
U.S. real estate industry, including REITs.

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, the Portfolio's investments may be subject to the risks
associated with the direct ownership of real estate and direct investments of
REITs.

GLOBAL EQUITY PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of issuers throughout the world, including U.S. issuers,
using an approach that is oriented to the selection of individual stocks that
MSAM believes are undervalued.

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets throughout the world, including the
United States. By including international investments in their portfolio,
investors can achieve additional diversification and participate in growth
opportunities around the world.

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, Foreign Investment involves different or increased
risks. The performance of the Portfolio will be affected by foreign currency
values, the greater volatility of securities exchanges, and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

INTERNATIONAL MAGNUM PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of non-U.S. issuers domiciled in EAFE countries (defined
herein).

3
<PAGE>

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets outside the United States. By
including international investments in their portfolio, investors can achieve
additional diversification and participate in growth opportunities around the
world.

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, international investing involves different or increased
risks. The performance of the Portfolio will be affected by foreign currency
values, the greater volatility of securities exchanges, and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

RISK PROFILE: Very high potential risk and reward. In addition to the general
risks involved in Equity Securities, including fluctuations in the stock market
and changes in the economy, international investing involves different or
increased risks. The performance of the Portfolio will be affected by foreign
currency values, the greater volatility of securities exchanges, and the
overall political economic, and regulatory environment in the countries in
which the Portfolio invests. The risks of foreign investing are exacerbated in
the case of Emerging Market Country Securities.

ASIAN EQUITY PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of Asian issuers (excluding Japan) using an approach that
is oriented to the selection of individual stocks that the Adviser believes are
undervalued. The Portfolio intends to invest primarily 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.

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets of Asian countries other than Japan.

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, international investing involves different or
increased risks. The performance of the Portfolio will be affected by foreign
currency values, the greater volatility of securities exchanges, and the
overall political, economic and regulatory environment in the countries in
which the Portfolio invests.

THE PORTFOLIOS' INVESTMENTS

INVESTMENT CHARACTERISTICS AND RISKS

The value of each Portfolio's investments and the income they generate will
vary from day-to-day and generally reflect market conditions, interest rates,
and other company, political, or economic news both in the United States and
abroad.

Each Portfolio spreads investment risk by limiting its holdings in any one
company or industry. Nevertheless, each Portfolio will experience price
volatility the extent of which will be affected by the types of securities and
techniques the particular Portfolio uses. In the short term, stock prices can
fluctuate dramatically in response to these factors. Over time, however, stocks
have shown greater growth potential than other types of securities. The prices
of bonds also fluctuate and generally move in the opposite direction from
interest rates.

Investments in foreign securities may involve risks in addition to those of
U.S. investments. The performance of the Portfolios investing in foreign
securities will be affected by foreign currency values, the political and
regulatory environment, and overall economic factors in the countries in which
investments are made.

Because the U.S. Real Estate, International Magnum and Emerging Markets Equity
Portfolios are non-diversified Portfolios and are permitted greater flexibility
to invest their assets in the obligations of a single issuer, they are exposed
to increased risk of loss if such an investment underperforms expectations. See
"Non-Diversified Status" in this Prospectus and "Investment Limitations" in the
SAI.

Investments in securities rated below investment grade, sometimes called high
risk or High Yield Securities or junk bonds, carry a high degree of risk and
are considered speculative. The Adviser may use various investment techniques
to hedge risks, including the use of Derivatives, but there is no guarantee
that these strategies will work as intended. When Portfolio shares are
redeemed, they may be worth more or less than their original cost. An
investment in any one Portfolio is not in itself a balanced investment plan. As
with any mutual fund, there is no assurance that a Portfolio will achieve its
goal.

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Each Portfolio will be invested according to its investment strategy. However,
the Portfolios also have the ability to invest without limitation in high-
quality Money Market Instruments or Temporary Investments for temporary,
defensive purposes. See "Securities and Investment Techniques" below.

U.S. REAL ESTATE PORTFOLIO

The Portfolio seeks above-average current income and long-term capital
appreciation by investing primarily in Equity Securities of companies in the
U.S. real estate industry. Such Equity Securities include Common Stocks, shares
or units of beneficial interest of REITs, limited partnership interests in
master limited partnerships, Rights or Warrants to purchase Common Stocks,
Convertible Securities, and Preferred Stock.

Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in income producing Equity Securities of U.S. and non-U.S.
companies principally engaged in the U.S. real estate industry. For purposes of
the Portfolio's investment policies, a company is "principally engaged" in the
real estate industry if (i) it derives at least 50% of its revenues or profits
from the ownership, construction, management, financing or sale of residential,
commercial or industrial real estate or (ii) it has at least 50% of the fair
market value of its assets invested in residential, commercial or industrial
real estate. Companies in the real estate industry may include among others:
REITs, master limited partnerships that invest in interests in real estate,
real estate operating companies, and companies with substantial real estate
holdings, such as hotel companies, residential builders and land-rich
companies.

The Portfolio may also invest in Fixed Income Securities issued or guaranteed
by real estate companies or secured by real estate assets and are Investment
Grade Securities or Money Market Instruments, such as notes, certificates of
deposit or bankers' acceptances issued by domestic or foreign issuers, or high-
grade debt securities, consisting of corporate debt securities and U.S.
Governments and Agencies. Securities rated in the lowest category of Investment
Grade Securities have speculative characteristics. The Portfolio may also
invest in certain securities or obligations, including Non-Publicly Traded
Securities, Private Placements, Restricted Securities, Repurchase Agreements,
When-Issued and Delayed Delivery Securities, Temporary Investments and
Derivatives, including but not limited to Options and Futures and Loans of
Portfolio Securities. For additional information about the Portfolio's
investments, see "Securities and Investment Techniques" and "Non-Diversified
Status" below.

The Adviser's approach is to invest in Equity Securities of companies that it
believes will provide a dividend yield that exceeds the composite dividend
yield of securities comprising the Standard & Poor's Ratings Group ("S&P") 500
Index. A substantial portion of the Portfolio's total assets will be invested
in Equity Securities of REITs. REITs pool investors' funds for investment
primarily in income producing real estate or real estate related loans or
interests, with certain tax advantages if regulatory requirements are met.
Generally, REITs can be classified as Equity REITs, Mortgage REITs or Hybrid
REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains from
appreciation realized through property sales. Equity REITs are further
categorized according to the types of real estate securities they own, e.g.,
apartment properties, retail shopping centers, office and industrial
properties, hotels, health-care facilities, manufactured housing and mixed-
property types. Mortgage REITs invest the majority of their assets in real
estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both Equity and Mortgage REITs. The
Portfolio will invest primarily in Equity REITs. A shareholder in the Portfolio
investing in REITs indirectly through the Portfolio will bear not only his or
her proportionate share of the expenses of the Portfolio, but also indirectly,
the management expenses of underlying REITs.

GLOBAL EQUITY PORTFOLIO

The Global Equity Portfolio seeks long-term capital appreciation by investing
primarily in Common and Preferred Stocks, Convertible Securities, and Rights
and Warrants to purchase Common Stocks, Depositary Receipts and other Equity
Securities of issuers throughout the world, including issuers in the United
States and emerging market countries. Under normal circumstances, at least 65%
of the total assets of the Portfolio will be invested in Equity Securities. In
addition, under normal circumstances, at least 20% of the Portfolio's total
assets will be invested in the Common Stocks of U.S. issuers and the remaining
equity position will be invested in at least three countries other than the
United States. Although the Portfolio intends to invest primarily in securities
listed on stock exchanges, it will also invest in Equity Securities that are
traded over the counter or that are not admitted to listing on a stock exchange
or dealt in on a regulated market. As a result of the absence of a public
trading market, such securities may pose liquidity risks.

The Portfolio may also invest in Foreign Currency Transactions, Money Market
Instruments, Repurchase Agreements and When-Issued or Delayed Delivery
Securities, and Loans of Portfolio Securities. For additional information about
investments, see "Securities and Investment Techniques" below.

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In selecting investments, the Adviser utilizes the research of a number of
sources, including Morgan Stanley Capital International, an affiliate of the
Adviser located in Geneva, Switzerland. Portfolio holdings are regularly
reviewed and subjected to fundamental analysis to determine whether they
continue to conform to the Adviser's value criteria. Equity Securities that no
longer conform to such investment criteria will be sold.

Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the
length of time they have been held. Investing in foreign countries and emerging
market countries is subjects the Portfolio to additional risk, see "Foreign
Investment" below.

INTERNATIONAL MAGNUM PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights or Warrants to
purchase Common Stocks and other Equity Securities of non-U.S. issuers
domiciled in EAFE countries (defined below). The production of any current
income is incidental to this objective. The Equity Securities in which the
Portfolio may invest may be denominated in any currency.

The countries in which the Portfolio will invest are those comprising the
Morgan Stanley Capital International EAFE Index (the "EAFE Index"), which
includes Australia, Japan, New Zealand, most nations located in Western Europe
and certain developed countries in Asia, such as Hong Kong and Singapore (each
an "EAFE country," and collectively the "EAFE countries"). Under normal
circumstances, at least 65% of the total assets of the Portfolio will be
invested in Equity Securities of issuers in at least three different EAFE
countries.

Although the Portfolio intends to invest primarily in Equity Securities listed
on stock exchanges in an EAFE country, the Portfolio may invest without limit
in Equity Securities that are traded over the counter or that are not admitted
to listing on a stock exchange or dealt in on a regulated market. As a result
of the absence of a public trading market, such securities may pose liquidity
risks.

The Portfolio may also invest in Private Placements or initial public offerings
in the form of oversubscriptions, certain short-term (less than twelve months
to maturity) and medium-term (not greater than five years to maturity) Fixed
Income Securities, Foreign Currency Transactions, Temporary Investments, Money
Market Instruments, Non-Publicly Traded Securities, Restricted Securities,
Repurchase Agreements, Cash or Cash Equivalents, When-Issued or Delayed
Delivery Securities, and Derivatives, including but not limited to Forwards,
Futures and Options, and Loans of Portfolio Securities. The Portfolio may also
invest up to 10% of its total assets in (i) Investment Company Securities with
investment objectives similar to that of the Portfolio and (ii) for temporary
purposes, Money Market Instruments and pooled investment vehicles. In addition,
for temporary defensive purposes during periods in which the Adviser believes
changes in economic, financial or political conditions make it advisable, the
Portfolio may invest up to 100% of its total assets in such short-term and
medium-term Fixed Income Securities or hold cash. The Portfolio will not invest
in Fixed Income Securities that are not Investment Grade Securities. Although
the Portfolio will not invest for short-term trading purposes, investment
securities may be sold from time to time without regard to the length of time
they have been held. For additional information about investments, see
"Securities and Investment Techniques" and "Non-Diversified Status" below.

The Adviser's approach is to establish regional allocation strategies. By
analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on comparative interest rates, currencies,
corporate profits and economic growth among the various regions represented in
the EAFE Index. These projections will be used to establish regional allocation
strategies. Within these regional allocations, the Adviser then selects Equity
Securities among issuers of a region.

The Adviser's approach in selecting among Equity Securities within a region
comprised of EAFE countries is oriented towards individual stock selection and
is value driven. The Adviser identifies those Equity Securities which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues. In selecting investments, the Adviser utilizes the
research of a number of sources, including Morgan Stanley Capital
International, an affiliate of the Adviser located in Geneva, Switzerland.
Portfolio holdings are regularly reviewed and subjected to fundamental analysis
to determine whether they continue to conform to the Adviser's investment
criteria. Equity Securities which no longer conform to such investment criteria
will be sold.

EMERGING MARKETS EQUITY PORTFOLIO

The 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. Under normal circumstances, at
least 65% of the Portfolio's total assets will be invested in Emerging Market
Country Equity Securities.

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Participations and Assignments, Money Market Instruments, Investment Company
Securities, Repurchase Agreements, Non-Publicly Traded Securities, Private
Placements, Restricted Securities, Temporary Investments, When-Issued and
Delayed Delivery Securities, and Derivatives, including but not limited to
Forwards, Futures and Options and may engage in Loans of Portfolio Securities.
It is likely that many of the Fixed Income Securities in which the Portfolio
will invest will be unrated, and whether or not rated, such securities may have
speculative characteristics.

When deemed appropriate by the Adviser, the Portfolio may also invest up to 10%
of its total assets (measured at the time of the investment) in Fixed Income
Securities that are not Investment Grade Securities (commonly referred to as
High Yield Securities or junk bonds). For temporary defensive purposes, the
Portfolio may invest less than 65% of its total assets in Emerging Market
Country Equity Securities, in which case the Portfolio may invest in other
Equity Securities or may invest in Fixed Income Securities as described in
"Securities and Investment Techniques--Temporary Investments" below. The
Portfolio also has the ability to invest without limitation in high quality
Money Market Instruments or Temporary Investments for temporary defensive
purposes. For additional information about investments, see "Securities and
Investment Techniques" and "Non-Diversified Status" below.

The Adviser's approach is to focus the Portfolio's investments on those
emerging market countries in which it believes the economies are developing
strongly and in which the markets are becoming more sophisticated. There are
currently over 130 countries which, in the opinion of the Adviser, are
generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Currently, investing in many emerging market countries is not
feasible or may involve unacceptable political risks.

The Portfolio intends to invest primarily in some or all of the following
emerging market countries:

Argentina Botswana Brazil Chile
China Colombia Egypt Greece
Hong Kong Hungary India Indonesia
Israel Jamaica Jordan Kenya
Malaysia Mexico Nigeria Pakistan
Peru Philippines Poland Portugal
Russia South Africa South Korea Sri Lanka
Taiwan Thailand Turkey Venezuela
Zimbabwe

As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging market countries in which it invests. The
Portfolio does not intend to invest in any security in a country where the
currency is not freely convertible to U.S. dollars, unless the Portfolio has
obtained the necessary governmental licensing to convert such currency or other
appropriately licensed or sanctioned contractual guarantees to protect such
investment against loss of that currency's external value, or the Portfolio has
a reasonable expectation at the time the investment is made that such
governmental licensing or other appropriately licensed or sanctioned guarantees
would be obtained or that the currency in which the security is quoted would be
freely convertible at the time of any proposed sale of the security by the
Portfolio. The Adviser will analyze assets, revenues and earnings of an issuer.
In selecting industries and particular issuers, the Adviser will evaluate costs
of labor and raw materials, access to technology, export of products and
government regulation. Although the Portfolio seeks to invest in larger
companies, it may invest in small- and medium-size companies that, in the
Adviser's view, have potential for growth.

Emerging Market Country Securities pose greater liquidity risks and other risks
than securities of companies located in developed countries and traded in more
established markets. The Portfolio may not be able to hedge foreign currency
risk adequately. For a description of special considerations and certain risks
associated with investment in foreign issuers, see "Foreign Investment" below.
Also, the registration, clearing and settlement of securities transactions in
Russia are subject to significant risks not normally associated with securities
transactions in the United States and other more developed markets. See
"Securities and Investment Techniques--Russian Securities."

ASIAN EQUITY PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights and Warrants to
purchase Common Stocks, Depositary Receipts and other Equity Securities that
are traded on recognized stock exchanges of the countries in Asia described
below and such Equity Securities of companies organized under the laws of any
such Asian country whose business is conducted principally in Asia. Although
the Portfolio intends to invest primarily in Equity Securities listed on stock
exchanges, it will also invest in Equity Securities traded in over-the-counter
markets. Securities traded in over-the-counter markets pose liquidity risks.
The production of any current income is incidental to the Portfolio's
objective.

The Portfolio does not intend to invest in Asian Equity Securities that are
principally traded in markets in Japan or in companies organized under the laws
of Japan. The Asian countries to be represented in the Portfolio, which include
the following countries, have the more established markets in the region: Hong
Kong, Singapore, Malaysia, Thailand, the Philippines and Indonesia. The
Portfolio may also invest in Common Stocks traded in markets in Taiwan, South
Korea, India, Pakistan, Sri Lanka and other developing markets that are open to
foreign investment. Under normal circumstances, the Portfolio will invest at
least 65% of the total assets of the Portfolio in such Asian Equity Securities.

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The Portfolio may also invest in Fixed Income Securities, bills and bonds of
governmental entities in Asia and the United States, notes, debentures and
bonds of companies in Asia, U.S. Money Market Instruments, Foreign Currency
Transactions, Investment Company Securities and Repurchase Agreements, When-
Issued or Delayed Delivery Securities and Derivatives, including but not
limited to Forwards and Futures, and may engage in Loans of Portfolio
Securities. Although the Portfolio will not invest for short-term trading
purposes, portfolio securities may be sold from time to time without regard to
the length of time they have been held. Pending investment or settlement, and
for liquidity purposes, the Portfolio may invest in domestic, Eurodollar and
foreign short-term Money Market Instruments. The Portfolio may also purchase
such instruments to temporarily reduce its equity holdings for defensive
purposes in response to adverse market conditions. Because of the lack of
hedging facilities in the currency markets of Asia, no active currency hedging
strategy is anticipated currently. Instead, each investment will be considered
on a total currency adjusted basis with the U.S. dollar as a base currency.

The Adviser's approach is oriented to individual stock selection and is value
driven, similar to the approach described for the International Magnum
Portfolio discussed above. There is no requirement that the Fund, at any given
time, invest in any or all of the countries listed above or in any other Asian
countries. The Fund has no set policy for allocating investments among the
various Asian countries. Allocation of investments will depend on the relative
attractiveness of the stocks of issuers in the respective countries. Government
regulation and restrictions in many of the countries of interest may limit the
amount, mode and extent of investment in companies of such countries. The
Adviser will analyze assets, revenues and earnings of an issuer. In selecting
industries and particular issuers, the Adviser will evaluate costs of labor and
raw materials, access to technology, export of products and government
regulation. Although the Portfolio seeks to invest in larger companies, it
may invest in small- and medium-size companies that, in the Adviser's view,
have potential for growth.

The Portfolio's investments will include Emerging Market Country Securities.
These securities pose greater liquidity risks and other risks than securities
of companies located in developed countries and traded in more established
markets. For a description of special considerations and certain risks
associated with investment in foreign issuers, see "Securities and Investment
Techniques--Emerging Market Country Securities."

SECURITIES AND INVESTMENT
TECHNIQUES

The following pages contain more detailed information about types of
instruments in which a Portfolio may invest and strategies the Adviser may
employ in pursuit of a Portfolio's investment objective. A summary of risks and
restrictions associated with these instruments and investment practices is
included as well. A complete listing of each Portfolio's policies and
limitations and more detailed information about each Portfolio's investments is
contained in the SAI. Policies and limitations are considered at the time such
investments are purchased; the sale of instruments is not required in the event
of a subsequent change in circumstances, for example, a rating's downgrade.

The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.

The Adviser may not buy all of these instruments or use all of these techniques
to the full extent permitted unless it believes that doing so will help a
Portfolio achieve its investment objective. Current holdings and recent
investment strategies are described in the Portfolio's financial reports, which
will be sent to the Portfolios' shareholders twice a year. For a copy of an SAI
or financial report, at no charge, contact the Fund or your insurance company.

STRATEGIES

EMERGING MARKETS INVESTING: The Adviser's approach to Emerging Markets
Investing is based on the Adviser's evaluation of both short-term and long-term
international economic trends and the relative attractiveness of emerging
markets and individual emerging market securities.

As used in this Prospectus, emerging markets describes any country which is
generally considered to be an emerging or developing country by the
international financial community such as the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which
are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.

Currently, investing in many emerging market countries is either not feasible
or very costly, or may involve unacceptable political risks. Other special
risks include the possible increased likelihood of expropriation or the return
to power of a political regime which would institute policies to expropriate,
nationalize or otherwise confiscate investments. A Portfolio will focus its
investments on those emerging market countries in which the Adviser believes
the potential for market appreciation outweighs these risks and/or the cost of
investment. Investing in emerging markets also involves

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an extra degree of custodial and/or market risk, especially where the
securities purchased are not traded on an official exchange or where ownership
records regarding the securities are maintained by an unregulated entity (or
even the issuer itself).

FOREIGN INVESTING: Investing in securities issued by foreign companies or
governments involves certain special considerations which are not typically
associated with investing in U.S. issuers. Since the securities of foreign
issuers may be denominated in foreign currencies, and since a Portfolio may
temporarily hold uninvested reserves in bank deposits of foreign currencies
prior to reinvestment or conversion to U.S. dollars, a Portfolio may be
affected favorably or unfavorably by changes in currency exchange rates and in
exchange control regulations, and may incur costs in connection with
conversions between various currencies.

U.S. companies. There is generally less government supervision and regulation
of stock exchanges, brokers and listed companies than in the United States.
With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.

Although a Portfolio will endeavor to achieve the most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges. In addition, it is expected that the expenses for custodial
arrangements of a Portfolio's foreign securities will be greater than the
expenses for the custodial arrangements for handling U.S. securities of equal
value. Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a Portfolio receives from the companies comprising the Portfolio's
investments.

GROWTH STOCK INVESTING: The Adviser seeks to invest in Equity Securities
generally characterized by higher growth rates of revenues and earnings. These
stocks tend to have higher price volatility, higher price/earnings ratios, and
lower yields than the stock market in general as measured by the S&P 500.

INTERNATIONAL EQUITY INVESTING: The Adviser's approach to International Equity
Investing is based on its evaluation of both short-term and long-term
international economic trends and the relative attractiveness of non-U.S.
equity markets and individual securities.

The Adviser considers fundamental investment characteristics, the principles of
valuation and diversification, and a relatively long-term investment time
horizon. Since liquidity will also be a consideration, emphasis will likely be
influenced by the relative market capitalizations of different non-U.S. stock
markets and individual securities. Portfolios seek to diversify investments
broadly among both developed and newly industrializing foreign countries. Where
appropriate, a Portfolio may also invest in regulated Investment Companies or
Investment Funds which invest in such countries to the extent allowed by
applicable law.

VALUE STOCK INVESTING: Emphasizes Common Stocks that are deemed by the Adviser
to be undervalued relative to the stock market in general as measured by the
appropriate market index, based on value measures such as price/earnings ratios
and price/book ratios. Value stocks are generally dividend-paying Common
Stocks. However, non-dividend- paying stocks may also be selected for their
value characteristics.

INSTRUMENTS AND INVESTMENTS

ABSS. Asset-backed securities ("ABSs") are securities collateralized by
shorter-term loans such as automobile loans, home equity loans, computer leases
or credit card receivables. The payments from the collateral are passed through
to the security holder. The collateral behind ABSs tends to have prepayment
rates that usually do not vary with interest rates. In addition the short-term
nature of the loans reduces the impact of any change in prepayment level. Due
to amortization, the average life for ABSs is also the conventional proxy for
maturity.

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movement could be and to calculate the effect that it will have on the price of
the security. In selecting these securities, the Adviser will look for those
securities that offer a higher yield to compensate for any variation in average
maturity.

BRADY BONDS. Brady Bonds are Fixed Income Securities that are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury. Brady Bonds
have been issued only in relatively recent years, and, accordingly, do not have
a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
are actively traded in the over-the-counter secondary market. For further
information on these securities, see the SAI. A Portfolio will invest in Brady
Bonds only if they are consistent with quality specifications.

CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:

(1) Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank
or savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).

A Portfolio may invest in obligations of U.S. banks, obligations of foreign
branches of U.S. banks ("Eurodollars") and obligations of U.S. branches of
foreign banks ("Yankee dollars"). Investments in Eurodollars and Yankee dollars
involve some of the same risks of investing in international securities that are
discussed in "Foreign Investment" below.

A Portfolio will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in
other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation ("FDIC"), (ii) in
the case of a U.S. bank, it is a member of the FDIC, and (iii) in the case of a
foreign branch of a U.S. bank, the security is deemed by the Adviser to be of
an investment quality comparable with other Fixed Income Securities which may
be purchased by the Portfolio.

(2) Commercial paper rated at time of purchase by one or more NRSROs in one of
their two highest categories, (e.g., A-1 or A-1+ by S&P or Prime 1 by Moody's,
or, if not rated, issued by a corporation having an outstanding unsecured debt
issue rated high-grade by an NRSRO (e.g., A or better by Moody's, S&P or Fitch
Investors Service, Inc. ("Fitch")).

(3) Short-term corporate obligations rated high-grade at the time of purchase
by an NRSRO (e.g., A or better by Moody's, S&P or Fitch).

(4) U.S. Governments and Agencies.

(5) Repurchase Agreements collateralized by securities listed above.

CMOS. Collateralized Mortgage Obligations ("CMOs") are Derivatives which are
collateralized by mortgage pass-through securities. Cash flows from the
mortgage pass-through securities are allocated to various tranches (a "tranche"
is essentially a separate security) in a predetermined, specified order. Each
tranche has a stated maturity--the latest date by which the tranche can be
completely repaid, assuming no prepayments--and has an average life--the
average of the time to receipt of a principal payment weighted by the size of
the principal payment. The average life is typically used as a proxy for
maturity because the debt is amortized (repaid a portion at a time), rather
than paid off entirely at maturity, as would be the case in a straight debt
instrument.

Due to the possibility that prepayments (on home mortgages and other
collateral) will alter the cash flow on CMOs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

Prepayment risk has two important effects. First, like bonds in general, MBSs
will generally decline in price when interest rates rise. However, when
interest rates fall, MBSs may not enjoy as large a gain in market value due to
prepayment risk. Second, when interest rates fall, additional mortgage
prepayments must be reinvested at lower interest rates. In part to compensate
for these risks, MBSs will generally offer higher yields than comparable bonds.
See "MBSs" below.

CONVERTIBLE SECURITIES. Convertible Securities are securities, such as
convertible Corporate Bonds, convertible

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Preferred Stocks, Warrants or other securities which may be exchanged under
certain circumstances for a fixed number of shares of Common Stock.

CORPORATE BONDS. Corporate Bonds are Fixed Income Securities issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. A Portfolio will buy
Corporate Bonds subject to any quality constraints. If a security held by a
Portfolio is down-graded, the Portfolio may retain the security.

DEPOSITARY RECEIPTS. Depositary Receipts are securities representing ownership
interests in securities of foreign companies (an "underlying issuer") and are
deposited with the depositary. Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities. Depositary
Receipts include ADRs, Global Depositary Receipts ("GDRs") and other types of
Depositary Receipts (which, together with ADRs and GDRs, are hereinafter
collectively referred to as "Depositary Receipts"). ADRs are dollar-denominated
Depositary Receipts typically issued by a U.S. financial institution which
evidence ownership interests in a security or pool of securities issued by a
foreign issuer. ADRs are listed and traded in the United States. GDRs and other
types of Depositary Receipts are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. financial institutions, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States.

Depositary Receipts may be "sponsored" or "unsponsored". Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
Depositary Receipt generally bear all the costs associated with establishing
the unsponsored Depositary Receipt. In addition, the issuers of the securities
underlying unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts. For
purposes of a Portfolio's investment policies, the Portfolio's investments in
Depositary Receipts will be deemed to be investments in the underlying
securities except as noted.

The Adviser will use Derivatives only in circumstances where they offer the
most economic means of improving the risk/reward profile of a Portfolio. The
Adviser will not use Derivatives to increase Portfolio risk above the level
that could be achieved in the Portfolio using only traditional investment
securities. In addition, the Adviser will not use Derivatives to acquire
exposure to changes in the value of assets or indexes of assets that are not
allowable investments for the Portfolio. A Portfolio may enter into over-the-
counter derivative transactions (Swaps, Caps, Floors, etc., but excluding CMOs,
Forwards, Futures, Options, and SMBSs) with counterparties approved by the
Adviser in accordance with guidelines established by the Fund's Board of
Directors. These guidelines provide for a minimum credit rating for each
counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties with ratings below AA.

EASTERN EUROPEAN SECURITIES. The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment associated
with the transition to market economics. Unstable economic and political
conditions may adversely affect security values. Upon the accession to power of
Communist regimes approximately 40 years ago, the governments of a number of
Eastern European countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
In the event of the return to power of the Communist Party, there can be no
assurance that a Portfolio's investments in Eastern Europe would not be
expropriated, nationalized or otherwise confiscated.

EMERGING MARKET COUNTRY SECURITIES. An Emerging Market Country Security is one
issued by a company that has one or more of the following characteristics: (i)
its principal securities trading market is in an emerging market, (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in emerging markets, or
(iii) it is organized under the laws of, and has a principal office in, an
emerging market country. The Adviser will base determinations as to eligibility
on publicly available information and inquiries made to the companies.

The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of

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inflation, currency depreciation, capital reinvestment, resource self-
sufficiency and balance of payments position. Further, the economies of
developing countries generally are heavily dependent upon international trade
and, accordingly, have been, and may continue to be, adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been, and may continue to be,
adversely affected by economic conditions in the countries with which they
trade.

Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud.

With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value
of a Portfolio's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.

EQUITY SECURITIES. Equity Securities commonly include, but are not limited to,
Common Stocks, Preferred Stocks, Depositary Receipts, Rights, Warrants, and
Foreign Equities. Preferred Stock is contained in both the definition of Equity
Securities and Fixed Income Securities because it exhibits characteristics
commonly associated with each type of security. See the "The Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

The short-term and medium-term Fixed Income Securities in which the
International Magnum Portfolio may invest consist of (a) obligations of
governments, agencies or instrumentalities of any member state of the
Organization for Economic Cooperation and Development ("OECD"), including the
United States; (b) bank deposits and bank obligations (including certificates
of deposit, time deposits and bankers' acceptances) of banks organized under
the laws of any member state of the OECD, including the United States,
denominated in any currency; and (c) finance company and corporate commercial
paper and other short-term corporate debt obligations of corporations organized
under the laws of any member state of the OECD, including the United States,
meeting the Portfolio's credit quality standards, provided that no more than
20% of the Portfolio's assets are invested in any one of such issuers. The
short-term and medium-term securities in which the Portfolio may invest will be
rated investment grade by an NRSRO (e.g., rated A or higher by Moody's or S&P),
or if unrated, will be determined to be of comparable quality by the Adviser.

FOREIGN BONDS. Foreign Bonds are Fixed Income Securities denominated in foreign
currency and issued and traded primarily outside the United States, including:
(1) obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (2) Fixed Income
Securities issued, guaranteed or sponsored by supranational organizations
established or supported by several national governments, including the World
Bank, the European Community, the Asian Development Bank and others; (3) non-
government foreign corporate debt securities; (4) foreign MBSs and various
other MBSs and Asset-Backeds denominated in foreign currency; and (5) Brady
Bonds. Investing in foreign companies involves certain special considerations
that are not typically associated with investing in U.S. companies. See
"Foreign Investment" below.

FOREIGN CURRENCY TRANSACTIONS. Portfolios investing in foreign securities will
regularly transact security purchases and sales in foreign currencies. The
Portfolios may hold foreign currency or engage in the Foreign Currency
Transactions discussed below.

As a means of reducing the risks associated with investing in securities
denominated in foreign currencies, a Portfolio may purchase or sell foreign
currency on a forward basis ("Forwards" or "forward contracts"), enter into
foreign currency futures and options on futures contracts ("Forex Futures") and
foreign currency options ("Forex Options"). These investment techniques are
designed primarily to hedge

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<PAGE>

against anticipated future changes in currency prices that otherwise might
adversely affect the value of a Portfolio's investments.

Forex Futures are standardized contracts for the future delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Forex Futures traded in the United States are traded on regulated
futures exchanges. A Portfolio will incur brokerage fees when it purchases or
sells Forex Futures and it will be required to maintain margin deposits.
Parties to a Forex Future must make initial margin deposits to secure
performance of the contract, which generally range from 2% to 5% of the
contract price. There also are requirements to make "variation" margin deposits
as the value of the futures contract fluctuates.

Purposes for which such Forex Futures and Forex Options may be used include
protecting against a decline in a foreign currency against the U.S. dollar
between the trade date and settlement date when a Portfolio purchases or sells
securities, locking in the U.S. dollar value of dividends declared on
securities held by a Portfolio and generally protecting the U.S. dollar value
of securities held by a Portfolio against exchange rate fluctuations. Such
contracts will be used only as a protective measure against the effects of
fluctuating rates of currency exchange and exchange control regulations. While
Forex Futures and Forex Options may limit losses to a Portfolio as a result of
exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.

Forwards are obligations to purchase or sell an amount of a specified currency
at a future date, which may be any fixed

number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. Forwards are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks).

A Portfolio may use Forwards in the normal course of business to lock in an
exchange rate in connection with purchases and sales of securities (transaction
hedge) or to lock in the dollar value of portfolio positions (position hedge).
In addition, a Portfolio may cross-hedge currencies by entering into a
transaction to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which a Portfolio has or
expects to have portfolio exposure. A Portfolio may also engage in proxy
hedging which is defined as entering into positions in one currency to hedge
investments denominated in another currency, where the two currencies are
economically linked. Forwards will be used only as a protective measure against
the effects of fluctuating rates of currency exchange and exchange control
regulations. While such contracts may limit losses to the Portfolio as a result
of exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.

A Portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a Foreign Bond, a Portfolio may purchase a
U.S. dollar-denominated security and at the same time enter into a forward
contract to exchange U.S. dollars for the contract's underlying currency at a
future date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, a Portfolio may be
able to lock in the foreign currency value of the security and adopt a
synthetic investment position reflecting the credit quality of the U.S. dollar-
denominated security.

There is a risk in adopting a synthetic investment position to the extent that
the value of a security denominated in U.S. dollars or other foreign currency
is not exactly matched with a Portfolio's obligation under the forward
contract. On the date of maturity, a Portfolio may be exposed to some risk of
loss from fluctuations in that currency. Although MSAM will attempt to hold
such mismatching to a minimum, there can be no assurance that MSAM will be able
to do so. When a Portfolio enters into a forward contract for purposes of
creating a synthetic security, it will generally be required to hold liquid
assets in a segregated account with a daily value at least equal to its
obligation under the forward contract.

A Portfolio engaging in Forwards will comply with the segregation requirements
required by the 1940 Act and the rules adopted thereunder. See "Investment
Objectives and Policies--Forward Foreign Currency Exchange Contracts" in the
SAI.

At the maturity of a forward contract, a Portfolio may either accept or make
delivery of the currency specified in the contract or, prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to Forwards are
usually effected with the currency trader who is a party to the original
forward contract. A Portfolio will only enter into such a forward contract if
it is expected that there will be a liquid market in which to close out such
contract. There can, however, be no assurance that such a liquid market will
exist in which to close a forward contract, in which case the Portfolio may
suffer a loss.

FOREIGN INVESTMENT. Investment in securities and obligations of foreign issuers
and in foreign branches of

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<PAGE>

domestic banks involves somewhat different investment risks than those
affecting obligations of U.S. issuers. There may be limited publicly available
information with respect to foreign issuers, and foreign issuers are not
generally subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to U.S. companies. There may also
be less government supervision and regulation of foreign securities exchanges,
brokers and listed companies than in the United States. Many foreign securities
markets have substantially less volume than U.S. national securities exchanges,
and securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. Dividends and interest paid by foreign issuers may be
subject to withholding and other foreign taxes, which may decrease the net
return on Foreign Investments as compared to dividends and interest paid by
U.S. companies. Additional risks include future political and economic
developments, the possibility that a foreign jurisdiction will impose or change
withholding taxes on income payable with respect to foreign securities, and the
possible adoption of foreign governmental restrictions such as exchange
controls.

Repatriation of investment income, capital and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some
emerging countries. A Portfolio could be adversely affected by delays in, or a
refusal to grant, any required governmental registration or approval for such
repatriation. Any investment subject to such repatriation controls will be
considered illiquid if it appears reasonably likely that this process will take
more than seven days.

Investments in securities of foreign issuers are frequently denominated in
foreign currencies. Because a Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets, as measured in U.S. dollars, may be affected favorably or unfavorably
by changes in currency exchange rates and in exchange control regulations and a
Portfolio may incur costs in connection with conversions between various
currencies.

FUTURES. A Portfolio may purchase and sell futures contracts and options on
futures contracts, including but not limited to financial futures, securities
index futures, foreign currency exchange futures, and interest rate futures
contracts (collectively, "Futures").

The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase
securities index futures in order to gain market exposure. Subject to
applicable laws, the Portfolios may engage in transactions in securities index
futures contracts (and options thereon) which are traded on a recognized
securities or futures exchange, or may purchase or sell such instruments in the
over-the-counter market. There currently are limited securities index futures
and options on such futures in many countries, particularly emerging countries.
The nature of the strategies adopted by MSAM, and the extent to which those
strategies are used, may depend on the development of such markets.

The Portfolios may engage in transactions involving foreign currency exchange
futures contracts. For more information, see "Foreign Currency Transactions"
above.

The Portfolios may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolios may use interest rate
futures contracts to hedge holdings of debt instruments against future changes
in interest rates.

Financial futures contracts are futures contracts relating to financial
instruments, such as U.S. Government securities, foreign currencies, and
certificates of deposit. Such contracts involve an obligation to purchase or
sell a specific security, instrument or basket thereof at a specified future
date at a specified price. Like interest rate futures contracts, the value of
financial futures contracts rises and falls inversely with changes in interest
rates. The Portfolios may use financial futures contracts for hedging and non-
hedging purposes.

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<PAGE>

purchase securities or instruments) would exceed 20% of its total assets. In
addition, the Emerging Markets Equity Portfolio will not enter into any futures
contract or option if immediately thereafter the value of all the foreign
currencies underlying its futures contracts would exceed 10% of the value of
its total assets.

Gains and losses on futures contracts and options thereon depend on MSAM's
ability to predict correctly the direction of security prices, interest rates
and other economic factors. Other risks associated with the use of futures and
options are (i) imperfect correlation between the change in market value of
investments held by a Portfolio and the prices of futures and options relating
to investments purchased or sold by the Portfolio, and (ii) possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Portfolio will be unable to close out
a futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a
liquid exchange or secondary market. The risk of loss in trading on futures
contracts in some strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in futures
pricing.

S&P: BB-rated bonds have "less near-term vulnerability to default" than
B- or CCC-rated securities but face major ongoing uncertainties . . .
which may lead to inadequate capacity to pay interest or principal. B-
rated bonds have a "greater vulnerability to default than BB-rated bonds
and the ability to pay interest or principal will likely be impaired by
adverse business conditions." CCC-rated bonds have a currently
identifiable "vulnerability to default" and, without favorable business
conditions, will be "unable to repay interest and principal." The rating
C is reserved for income bonds on which "no interest is being paid." Debt
rated D is "in default," and "payment of interest and/or repayment of
principal is in arrears."

While such securities offer high yields, they also normally carry with them a
greater degree of risk than securities with higher ratings. Lower-rated bonds
are considered speculative by traditional investment standards. High Yield
Securities may be issued as a consequence of corporate restructuring or similar
events. Also, High Yield Securities are often issued by smaller, less credit
worthy companies, or by highly leveraged (indebted) companies, which are
generally less able than more established or less leveraged companies to make
scheduled payments of interest and principal. The price movement of these
securities is influenced less by changes in interest rates and more by the
financial and business position of the issuing corporation when compared to
Investment Grade Securities.

The risks posed by securities issued under such circumstances are substantial.
If a security held by a Portfolio is down-graded, the Portfolio may retain the
security.

INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities, which have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an Inverse Floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an Inverse Floater causes an increase
in the coupon rate. Inverse Floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality,
redemption provisions and maturity, and Inverse Floater CMOs exhibit greater
price volatility than the majority of mortgage pass-through securities or CMOs.
In addition, some Inverse Floater CMOs exhibit extreme sensitivity to changes
in prepayments. As a result, the yield to maturity of an Inverse Floater CMO is
sensitive not only to changes in interest rates, but also to changes in
prepayment rates on the related underlying mortgage assets.

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<PAGE>

total assets in any one investment company and no more than 10% in any
combination of investment companies. The 1940 Act also prohibits a Portfolio
from acquiring in the aggregate more than 10% of the outstanding voting shares
of any registered close-end investment company.

To the extent a Portfolio invests a portion of its assets in Investment Company
Securities, those assets will be subject to the expenses of the purchased
investment company as well as to the expenses of the Portfolio itself. A
Portfolio may not purchase shares of any affiliated investment company except
as permitted under the 1940 Act or by a rule or order of the Securities and
Exchange Commission ("SEC").

INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment in the securities of their companies.
However, indirect investment in the securities of companies listed and traded
on the stock exchanges in these countries is permitted by certain emerging
market countries through Investment Funds that have been specifically
authorized. A Portfolio may invest in these Investment Funds subject to the
provisions of the 1940 Act, as applicable, and other applicable laws as
discussed in "Investment Limitations" in the SAI. The Portfolios will invest in
such Investment Funds only where appropriate given that the Portfolios'
shareholders will bear not only their proportionate share of the expenses of
the Portfolio (including operating expenses and the fees of the Adviser), but
also will indirectly bear similar expenses of the underlying Investment Funds.

Certain Investment Funds are advised by the Adviser. The Portfolios may, to the
extent permitted under the 1940 Act and other applicable law, invest in these
Investment Funds. If a Portfolio does elect to make an investment in such an
Investment Fund, it will only purchase the securities of such Investment Fund
in the secondary market.

INVESTMENT GRADE SECURITIES. Investment Grade Securities are those rated by one
or more NRSROs in one of the four highest rating categories at the time of
purchase (e.g., AAA, AA, A or BBB by S&P or Fitch, or Aaa, Aa, A or Baa by
Moody's). Securities rated BBB or Baa represent the lowest of four levels of
Investment Grade Securities and are regarded as borderline between definitely
sound obligations and those in which the speculative element begins to
predominate. MBSs, including mortgage pass-throughs and CMOs, deemed investment
grade by the Adviser, will either carry a guarantee from an agency of the U.S.
Government or a private issuer of the timely payment of principal and interest
(such guarantees do not extend to the market value of such securities or the
net asset value per share of the Portfolio) or, in the case of unrated
securities, be sufficiently seasoned and considered by the Adviser to be of
comparable quality. The Adviser may retain a security if its rating falls below
investment grade if it deems retention of the security to be in the best
interests of the Portfolio. Any Portfolio permitted to hold Investment Grade
Securities may hold unrated securities if the Adviser considers the risks
involved in owning that security to be equivalent to the risks involved in
holding an Investment Grade Security.

LOAN PARTICIPATIONS AND ASSIGNMENTS. Loan Participations are loans or other
direct debt instruments which are interests in amounts owed by a corporate,
governmental or other borrower to another party. They may represent amounts
owed to lenders or lending syndicates, to suppliers of goods or services (trade
claims or other receivables), or to other parties. A Portfolio may invest in
fixed rate and floating rate loans ("Loans") arranged through private
negotiations between an issuer of sovereign debt obligations and one or more
financial institutions ("Lenders"). A Portfolio's investments in Loans are
expected in most instances to be in the form of participation in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. A Portfolio will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In the event of the insolvency of the Lender selling a
Participation, a Portfolio may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower.
Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender
with respect to the Participation. Even under such a structure, in the event of
the Lender's insolvency, the Lender's servicing of the Participation may be
delayed and the assignability of the Participation may be impaired. A Portfolio
will acquire Participations only if the Lender interpositioned between a
Portfolio and the borrower is determined by the Adviser to be creditworthy.

When a Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by a Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, a
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and a Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet a Portfolio's liquidity needs or in response to a specific economic
event such as a deterioration in the creditworthiness of the borrower. The lack
of a liquid secondary market for Assignments and Participations also may make
it more difficult for a Portfolio to assign a value to these securities for
purposes of valuing a Portfolio's securities and calculating its NAV.

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<PAGE>

risk of insolvency of the lending bank or other financial intermediary. Direct
debt instruments may also include standby financing commitments that obligate
the investing Portfolio to supply additional cash to the borrower on demand.
Participations involving emerging market country issuers may relate to Loans as
to which there has been or currently exists an event of default or other
failure to make payment when due, and may represent amounts owed to financial
institutions that are themselves subject to political and economic risks,
including the risk of currency devaluation, expropriation, or failure. Such
Participations present additional risks of default or loss.

LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions
for the purpose of increasing its net investment income. These loans must be
secured continuously by cash or equivalent collateral, or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of its total assets. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

MONEY MARKET INSTRUMENTS. Each Portfolio may invest in Money Market
Instruments, although the Portfolios intend to stay invested in securities
satisfying their primary investment objective to the extent practical. Each
Portfolio may invest in Money Market Instruments pending other investment or
settlement for liquidity, or in adverse market conditions. The Money Market
Instruments permitted for the Portfolios include obligations of the U.S.
Government and its agencies and instrumentalities; obligations of foreign
sovereignties; obligations of the International Bank for Reconstruction and
Development; other debt securities; commercial paper, including bank
obligations; certificates of deposit, including Eurodollar certificates of
deposit; and Repurchase Agreements. For more detailed information about these
Money Market Instruments, see "Description of Certain Securities and Ratings"
in the SAI.

MBSS. Mortgage-Backed Securities ("MBSs") are instruments that entitle the
holder to a share of all interest and principal payments from pools of
residential and commercial mortgage loans underlying the instruments, and may
take the form of pass-through securities or CMOs. Generally, these securities
are designed to provide monthly payments of interest and principal to the
investor.

Pass-Through Securities. The mortgagee's monthly payments to his or her lending
institution are passed through to investors such as the Portfolio. Most issuers
or poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. The guarantees made by issuers or poolers are
supported by various forms of credit, collateral, guarantees or insurance,
including individual loan, title, pool and hazard insurance purchased by the
issuer or pooler. The pools are assembled by various governmental, Government-
related and private organizations. A Portfolio may invest in securities issued
or guaranteed by the GNMA, FHLMC, FNMA, private issuers and other government
agencies. There can be no assurance that the private insurers can meet their
obligations under the policies. MBSs issued by non-agency issuers, whether or
not such securities are subject to guarantees, may entail greater risk. If
there is no guarantee provided by the issuer, MBSs purchased by a Portfolio
will be those which at the time of purchase are rated investment grade by one
or more NRSRO, or, if unrated, are deemed by the Adviser to be of comparable
quality.

Due to the possibility that prepayments on home mortgages will alter cash flow
on MBSs, it is not possible to determine in advance the actual final maturity
date or average life. Like Fixed Income Securities in general, MBSs will
generally decline in price when interest rates rise. Due to prepayment risk,
rising interest rates also tend to discourage refinancings of home mortgages,
with the result that the average life of MBSs held by a Portfolio may be
lengthened. This extension of average life causes the market price of the MBSs
to decrease further than if their average lives were fixed. However, when
interest rates fall, mortgages may not enjoy as large a gain in market value
due to prepayment risk because additional mortgage prepayments must be
reinvested at lower interest rates. Faster prepayment will shorten the average
life and slower prepayments will lengthen it. However, it is possible to
determine what the range of that movement could be and to calculate the effect
that it will have on the price of the MBS. In selecting these MBSs, the Adviser
will look for those that offer a higher yield to compensate for any variation
in average maturity.

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The amount of collateral must be continuously maintained at levels from 115% to
150% of the principal amount of the bonds issued, depending on the specific
issue structure and collateral type. See "CMOs" above.

MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income that is
exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and municipal notes
(those securities with maturities of less than five years). Municipal bonds are
issued for a wide variety of reasons: to construct public facilities, such as
airports, highways, bridges, schools, hospitals, mass transportation, streets,
water and sewer works; to obtain funds for operating expenses; to refund
outstanding municipal obligations; and to loan funds to various public
institutions and facilities. Certain industrial development bonds are also
considered municipal bonds if their interest is exempt from federal income
taxes. Industrial development bonds are issued by or on behalf of public
authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewer works. Industrial development
bonds are ordinarily dependent on the credit quality of a private user, not the
public issuer.

NON-DIVERSIFIED STATUS. The U.S. Real Estate, International Magnum and Emerging
Markets Equity Portfolios are non-diversified portfolios under the 1940 Act,
which means that the Portfolios are not limited by the 1940 Act in the
proportion of their assets that may be invested in the obligations of a single
issuer. Thus, the Portfolios may invest a greater proportion of their assets in
the securities of a small number of issuers and, as a result, will be subject
to greater risk with respect to their portfolio securities. However, the
Portfolios intend to comply with diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as
regulated investment companies. See "Investment Limitations" and "Taxes" in the
SAI.

NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The U.S. Real Estate, Global Equity, International Magnum and
Emerging Markets Equity Portfolios may invest in securities that are neither
listed on a stock exchange nor traded over-the-counter, including privately
placed securities. Such unlisted Equity Securities may involve a higher degree
of business and financial risk that can result in substantial losses. As a
result of the absence of a public trading market for these securities, they may
be less liquid than publicly traded securities. Although these securities may
be resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Portfolio or less than
what may be considered the fair value of such securities. Furthermore,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.

As a general matter, a Portfolio may not invest more than 15% of its net assets
in illiquid securities, including securities for which there is no readily
available secondary market and securities that are restricted from sale to the
public without registration ("Restricted Securities") under the Securities Act
of 1933, as amended (the "1933 Act") and are deemed to be illiquid. Restricted
Securities that can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("Rule 144A Securities") may be deemed to be
liquid under guidelines adopted by the Fund's Board of Directors. The U.S. Real
Estate Portfolio may invest up to 15% of its total assets and the International
Magnum and Emerging Markets Equity Portfolios may each invest up to 25% of
their total assets in Rule 144A Securities that are deemed to be liquid.

The Fund's Board of Directors has adopted guidelines and delegated to each
Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A Securities.
Rule 144A Securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities. Investors should note that
investment of 5% of a Portfolio's total assets in Restricted Securities may be
considered a speculative activity and may involve greater risk and expense to
that Portfolio.

OPTIONS. The Portfolios may seek to increase their returns or may hedge their
portfolio investments through Options transactions with respect to securities,
instruments, indices or baskets thereof in which such Portfolios may invest, as
well as with respect to foreign currency. Purchasing a put Option gives a
Portfolio the right to sell a specified security, currency or basket of
securities or currencies at the exercise price until the expiration of the
Option. Purchasing a call Option gives a Portfolio the right to purchase a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the Option.

Each Portfolio also may write (i.e., sell) put and call Options on investments
held in its portfolio, as well as with respect to foreign currency. A Portfolio
that has written an Option receives a premium, which increases the Portfolio's
return on the underlying security or instrument in the event the Option expires
unexercised or is closed out at a profit. However, by writing a call Option, a
Portfolio will limit its opportunity to profit from an increase in the market
value of the underlying security or instrument above the exercise price of the
Option for as long as the Portfolio's obligation as writer of the Option
continues. The Portfolios may only write Options that are "covered." A covered
call Option means that so long as the Portfolio is obligated as the writer of
the Option, it will

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own (i) the underlying security or instrument subject to the Option or (ii)
securities or instruments convertible or exchangeable without the payment of
any consideration into the security or instrument subject to the Option.

By writing (or selling) a put Option, a Portfolio incurs an obligation to buy
the security or instrument underlying the Option from the purchaser of the put
at the Option's exercise price at any time during the Option period, at the
purchaser's election. Options written by a Portfolio may be exercisable by the
purchaser only up to a specific date. A Portfolio that has written a put Option
will earmark or segregate sufficient liquid assets to cover its obligations
under the Option.

As a matter of operating policy, the value of the underlying securities on
which stock Options will be written at any one time may not exceed 5% of a
Portfolio's total assets.

The Portfolios may engage in transactions in Options which are traded on
recognized exchanges or over-the-counter. There currently are limited Options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by MSAM and the
extent to which those strategies are used will depend on the development of
such Option markets. The primary risks associated with the use of Options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by a Portfolio and the prices of Options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
Option.

PREFERRED STOCKS. Preferred Stocks are non-voting securities which evidence
ownership in a corporation and which pay a fixed or variable stream of
dividends.

REPURCHASE AGREEMENTS. Repurchase Agreements are transactions in which a
Portfolio purchases a security and simultaneously commits to resell that
security to the seller (a bank, broker or dealer) at a mutually agreed upon
date and price. The term of these agreements is usually from overnight to one
week, and never exceeds one year. Repurchase Agreements may be viewed as a
fully collateralized loan of money by the Portfolio to the seller. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or date of maturity of the purchased
security.

In these transactions, the securities received by a Portfolio have a market
value at least equal to the purchase price (including accrued interest) of the
Repurchase Agreement as collateral, and this value is maintained during the
term of the agreement. These securities are held by the Portfolio's Custodian
or an approved third party for the benefit of the Portfolio until repurchased.
Repurchase Agreements permit a Portfolio to keep all its assets invested while
retaining overnight flexibility in pursuit of investments of a longer- term
nature. If the seller defaults and the collateral value declines, the Portfolio
might incur a loss. If bankruptcy proceedings are commenced with respect to the
seller, the Portfolio's realization upon the collateral may be delayed or
limited.

Pursuant to an order expected to be issued by the SEC, the Portfolios,
including the twelve portfolios of the Fund not described in this Prospectus,
may pool their daily uninvested cash balances in order to invest in Repurchase
Agreements on a joint basis. By entering into Repurchase Agreements on a joint
basis, it is expected that the Portfolios will incur lower transaction costs
and potentially obtain higher rates of interest on such Repurchase Agreements.
Each Portfolio's participation in the income from jointly purchased Repurchase
Agreements will be based on that Portfolio's percentage share in the total
Repurchase Agreement. The Portfolios' ability to invest in Repurchase
Agreements on a joint basis will be contingent upon issuance of the order by
the SEC described above.

REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into Reverse Repurchase
Agreements with brokers, dealers, domestic and foreign banks or other financial
institutions. In a Reverse Repurchase Agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Portfolio. The Portfolio's
investment of the proceeds of a Reverse Repurchase Agreement is the speculative
factor known as leverage. The Portfolio may enter into a Reverse Repurchase
Agreement only if the interest income from investment of the proceeds is
greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement. The Portfolio
will maintain with the Custodian a separate account with a
segregated portfolio of liquid assets in an amount at least equal to its
purchase obligations under these agreements. If
interest rates rise during a Reverse Repurchase Agreement, it may adversely
affect the Portfolio's ability to maintain a stable NAV.

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<PAGE>

securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In
addition, while registrars are liable under law for losses resulting from their
errors, it may be difficult for a Portfolio to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by Russian law to employ an independent registrar, in practice, such
companies have not always followed this law. Because of this lack of
independence of registrars, management of a Russian company may be able to
exert considerable influence over who can purchase and sell the company's
shares by illegally instructing the registrar to refuse to record transactions
on the share register. Furthermore, these practices may prevent a Portfolio
from investing in the securities of certain Russian companies deemed suitable
by the Adviser and could cause a delay in the sale of Russian Securities by the
Portfolio if the company deems a purchaser unsuitable, which may expose the
Portfolio to potential loss on its investment.

In light of the risks described above, the Board of Directors of the Fund has
approved certain procedures concerning the Fund's investments in Russian
Securities. Among these procedures is a requirement that a Portfolio will not
invest in the securities of a Russian company unless that issuer's registrar
has entered into a contract with the Fund's sub-custodian containing certain
protective conditions, including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Portfolio. This
requirement will likely have the effect of precluding investments in certain
Russian companies that a Portfolio would otherwise make.

SMBSs are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest ("interest-only" or "IO class"),
while the other class will receive all of the principal ("principal-only" or
"PO class"). The yield to maturity on IO classes and PO classes is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal repayments
may have a material adverse effect on the portfolio yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, a Portfolio may fail to fully recoup its initial investment in these
securities, even if the security is in one of the highest rating categories.

Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to a Portfolio's limitations on investment in illiquid
securities.

STRUCTURED NOTES. Structured Notes are Derivatives on which the amount of
principal repayment and/or interest payments is based upon the movement of one
or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500. In some cases, the impact of the movements
of these factors may increase or decrease through the use of multipliers or
deflators. The use of Structured Notes allows a Portfolio to tailor its
investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.

SWAPS. Swap contracts ("Swaps") are Derivatives in the form of a contract or
other similar instrument which is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed income indices, stock indices and commodity
indices (as well as amounts derived from arithmetic operations on these
indices). For example, a Portfolio may agree to swap the return generated by a
fixed income index for the return generated by a second fixed income index. The
currency Swaps in which a Portfolio may enter will generally involve an
agreement to pay interest streams in one currency based on a specified index in
exchange for receiving interest streams denominated in another currency. Such
Swaps may involve initial and final exchanges that correspond to the agreed
upon notional amount.

A Portfolio will usually enter into Swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two returns. A Portfolio's obligations under
a Swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a Swap counterparty
will be covered by the maintenance of a segregated account consisting of cash
or liquid securities. A Portfolio will not enter into any Swap agreement unless
the counterparty meets

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the rating requirements set forth in guidelines established by the Fund's Board
of Directors.

Interest rate and total rate of return Swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate or total rate of return Swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that a Portfolio is contractually entitled to receive. In contrast,
currency Swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency Swap is subject to the risk
that the other party to the Swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
Swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized Swap documentation. As a result, the Swap market has
become relatively liquid. Swaps that include caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than "traditional" Swaps.

The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of a Portfolio would be less favorable than it would have been if this
investment technique was not used.

TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in
economic, financial or political conditions make it advisable, each Portfolio
may reduce its holdings for temporary defensive purposes and may invest in
certain short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) debt securities or may hold cash. The
short-term and medium-term debt obligations in which a Portfolio may invest
consist of (a) obligations of the U.S. or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
U.S. or foreign banks denominated in any currency; (c) Floaters and other
instruments denominated in any currency issued by international development
agencies; (d) finance company and corporate commercial paper and other short-
term corporate debt obligations of U.S. and foreign corporations meeting a
Portfolio's credit quality standards; and (e) Repurchase Agreements with banks
and broker-dealers with respect to such securities. For temporary defensive
purposes, the Portfolios intend to invest only in short-term and medium-term
debt obligations that the Adviser believes to be of high quality, i.e., subject
to relatively low risk of loss of interest or principal (there is currently no
rating system for foreign debt obligations).

WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment, but will take place no more than 120 days after the trade date. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. The Portfolio will maintain with
the Custodian a separate account with a segregated portfolio of liquid
securities or cash in an amount at least equal to these commitments. The
Portfolios will not enter into When-Issued or Delayed Delivery Securities
commitments exceeding, in the aggregate, 15% of the Portfolio's total assets
other than the obligations created by these commitments.

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<PAGE>

aggregate par value of the securities. Deferred Payment Securities are
securities that remain Zero Coupons until a predetermined date, at which time
the stated coupon rate becomes effective and interest becomes payable at
regular intervals. Zero Coupon, Pay-In-Kind and Deferred Payment Securities may
be subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparably rated securities paying cash interest
at regular interest payment periods.

FUNDAMENTAL INVESTMENT LIMITS

The investment objective of each Portfolio discussed under "Portfolio
Summaries" above is a fundamental policy, that is, a policy subject to change
only by shareholder approval. The policy for each Portfolio in the following
paragraph is also fundamental. All policies stated throughout this Prospectus,
other than those identified as fundamental, can be changed without shareholder
approval. For additional fundamental and non-fundamental investment limits, see
"Investment Limitations" in the SAI.

Each Portfolio (excluding the U.S. Real Estate, International Magnum and
Emerging Markets Equity Portfolios) is a diversified investment company and is
therefore subject to the following fundamental limitations: as to 75% of its
total assets, a Portfolio may not (a) invest more than 5% of its total assets
in the securities of any one issuer, except obligations of the U.S. Government,
its agencies and instrumentalities, or (b) own more than 10% of the outstanding
voting securities of any one issuer.

INTERNAL REVENUE SERVICE ("IRS") LIMITATIONS. In addition to the above, each
Portfolio also follows certain limitations imposed by the IRS on separate
accounts of insurance companies relating to the tax-deferred status of variable
annuity contracts and variable life insurance policies. For additional
information, see "Investment Limitations" in the SAI.

MANAGEMENT OF THE FUND

The Fund is governed by a Board of Directors which is responsible for the
management of the business and affairs of the Fund as provided in the laws of
the State of Maryland and the Fund's Articles of Incorporation and By-Laws. The
Board of Directors of the Fund has undertaken to monitor the Fund for the
existence of any material irreconcilable conflict among the interests of
variable annuity contract owners, variable life insurance policy owners and
qualified plans that invest in the Fund due to differences in tax treatment and
other considerations, and shall report any such conflict to the boards of the
respective life insurance companies that use the Fund as an investment vehicle
for their respective variable annuity contracts and variable life insurance
policies and to qualified plans. The boards of directors of those life
insurance companies and the fiduciaries of certain qualified plans and the
Adviser, have agreed or will agree to be responsible for reporting any
potential or existing conflicts to the Directors of the Fund. If a material
irreconcilable conflict exists that affects those life insurance companies,
they will be required, at their own cost, to remedy such conflict up to and
including establishing a new registered management investment company and
segregating the assets underlying the variable annuity contracts and the
variable life insurance policies. Qualified plans which acquire more than 10%
of the assets of the Fund will be required to report any potential or existing
conflicts to the Directors of the Fund, and if a material irreconcilable
conflict exists, to remedy such conflict, up to and including redeeming shares
of the Portfolios held by the qualified plans. The majority of the Fund's
Directors are not affiliated with MSAM, MAS, any of their affiliates, any of
the other companies that provide services to the Fund or any of their
affiliates. The officers of the Fund conduct and supervise its daily business
operations.

THE FUND MAY HOLD SPECIAL MEETINGS. The Fund will not hold annual shareholder
meetings, but may call special meetings when required by law, when requested by
a sufficient number of shareholders or for other reasons. An insurance company
issuing a variable annuity contract or variable life insurance policy that
participates in the Portfolios will vote shares held in its separate account as
required by law and interpretations thereof, as may be amended or changed from
time to time. In accordance with current law and interpretations thereof, a
participating insurance company is required to request voting instructions from
contract or policy owners and must vote shares in the separate account in
proportion to the voting instructions received. For a further discussion,
please refer to your insurance company's separate account prospectus.

INVESTMENT MANAGEMENT

INVESTMENT ADVISER. The Adviser assigned to a Portfolio provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. MSAM serves as the Adviser for the Portfolios. MSAM, with
principal offices at 1221 Avenue of the Americas, New York, New York 10020,
conducts a worldwide investment management business, providing a broad range of
portfolio management services to customers in the United States and abroad.
MSAM is a wholly-owned subsidiary of Morgan Stanley Group Inc. ("MSGI"), which
is a publicly owned financial services corporation listed on the New York,
London and Pacific stock exchanges. MSAM, a registered Investment Adviser under
the Investment Adviser Act of 1940, as amended, serves as investment adviser to
numerous open-end

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and closed-end investment companies. As of February 28, 1997, MSAM and its
investment advisory affiliates (exclusive of MAS and Van Kampen) managed assets
of approximately $74 billion. Also as of February 28, 1997, MSAM and all of its
affiliated asset management companies managed assets totaling $176.9 billion.
See "Management of the Fund" in the SAI.

PORTFOLIO MANAGERS. The following individuals have primary responsibility for
the Portfolios as indicated below.

U.S. REAL ESTATE PORTFOLIO -- Theodore R. Bigman and Russell Platt. Mr. Bigman,
a Principal of Morgan Stanley & Co. Incorporated ("Morgan Stanley"), joined
MSAM in 1995. Together with Russell Platt, he is responsible for MSAM's real
estate securities research. Prior to joining MSAM, he was a Director at CS
First Boston, where he worked for eight years in the Real Estate Group. Mr.
Bigman graduated from Brandeis University with a B.A. in Economics and received
an M.B.A. from Harvard University. Russell Platt joined MSAM in 1994.
Mr. Platt, a Managing Director of Morgan Stanley, previously served as a
Director of the General Partner of The Morgan Stanley Real Estate Fund I, where
he was involved in capital raising, acquisitions, oversight of investments and
investor relations. From 1991 to 1993, Mr. Platt was head of Morgan Stanley
Realty's Transaction Development Group. As such, he was actively involved in
Morgan Stanley's worldwide real estate business. Mr. Platt graduated from
Williams College with a B.A. in Economics and received an M.B.A. from Harvard
Business School. Mr. Bigman and Mr. Platt have had primary responsibility for
managing the Portfolio's assets since inception.

GLOBAL EQUITY PORTFOLIO -- Frances Campion. Frances Campion, a Principal of
Morgan Stanley, joined MSAM in January 1990 as a Global Equity Fund Manager.
Her responsibilities include day-to-day management of the Global
Equity product. She is a graduate of University of College, Dublin. Ms. Campion
has had primary responsibility for managing the Portfolio's assets since
inception.

INTERNATIONAL MAGNUM PORTFOLIO -- Francine J. Bovich. Francine Bovich joined
Morgan Stanley as a Principal in 1993. She is responsible for product
development, portfolio management and communication of MSAM's asset allocation
strategy to institutional investor clients. Previously, Ms. Bovich was a
Principal and Executive Vice President of Westwood Management Corp. She holds a
B.A. in Economics from Connecticut College and an M.B.A. in Finance from New
York University. Ms. Bovich has had primary responsibility for managing the
Portfolio's assets since inception.

EMERGING MARKETS EQUITY PORTFOLIO -- Madhav Dhar and Marianne L. Hay. Madhav
Dhar is a Managing Director of MSAM and Morgan Stanley. He joined MSAM in 1984
to focus on global asset allocation and investment strategy and now is a co-
head of MSAM's emerging markets group. He holds a B.S. (honors) from St.
Stephens College, Delhi University (India), and an M.B.A. from Carnegie-Mellon
University. Marianne L. Hay, a Managing Director of Morgan Stanley, is a co-
head of the Adviser's emerging markets group. She joined the Adviser in June,
1993 to work with the Adviser's senior management covering all emerging markets
assets allocation, product development and client services. Ms. Hay has 17
years of investment experience. Prior to joining the Adviser, she was a
director of Martin Currie Investment Management, Ltd. where her
responsibilities included geographic asset allocation and portfolio management
for global and emerging markets funds, as well as being director in charge of
the company's North American clients. She graduated with an honors degree in
genetics from Edinburgh University and holds a Diploma in Education and the
qualification of the Association of the Institute of Bankers in Scotland. Mr.
Dhar and Ms. Hay have shared primary responsibility for managing the
Portfolio's assets since its inception.

ASIAN EQUITY PORTFOLIO -- Ean Wah Chin and Seah Kiat Seng. Ean Wah Chin is a
Managing Director of Morgan Stanley, and is responsible for MSAM's regional
Asia ex-Japan operations based in Singapore. Prior to joining Morgan Stanley in
1986, Ms. Chin spent eight years with the Monetary Authority of Singapore and
the Government of Singapore Investment Corporation, where she was a portfolio
manager of one of the largest portfolios in Asia. Ms. Chin was an ASEAN scholar
educated at the University of Singapore. Seah Kiat Seng joined the Adviser's
Singapore office in 1990 as a portfolio manager/analyst specializing in the
Southeast Asian markets. He is currently a Vice President, responsible for
investments in Thailand. He has had primary management responsibility for the
Investment Fund since its inception. Kiat Seng is a Chartered Financial Analyst
and a qualified real estate valuer who has worked for the Singapore Ministry of
Finance. He was a Colombo Plan Scholar educated in New Zealand. Ms. Chin and
Mr. Seng have shared primary responsibility for managing the Portfolio's assets
since inception.

OTHER SERVICES

DISTRIBUTOR. Under its Distribution Agreement with the Fund, Morgan Stanley
serves as the exclusive Distributor of the Fund and sells shares of each
Portfolio upon the terms

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and at the current offering price described in this Prospectus. Morgan Stanley
is not obligated to sell any certain number of shares of any Portfolio. Morgan
Stanley, as principal underwriter, or the insurance companies whose variable
products are funded by the Fund, will bear all of the Fund's marketing
expenses. This includes the cost of reproducing prospectuses, statements of
additional information or any other Fund documents (such as semiannual reports)
used as sales materials.

ADMINISTRATOR. MSAM also provides the Portfolios of the Fund with
administrative services pursuant to an Administration Agreement. The services
provided under the Administration Agreement are subject to the supervision of
the officers and the Board of Directors of the Fund, and include day-to-day
administration of matters related to the corporate existence of the Fund,
maintenance of its records, preparation of reports, supervision of the Fund's
arrangements with its Custodian, and assistance in the preparation of the
Fund's registration statements under federal and state laws. The Administration
Agreement also provides that the Administrator through its agents will provide
the Fund with dividend disbursing and transfer agent services. For its services
under the Administration Agreement, the Fund pays MSAM a monthly fee which on
an annual basis equals 0.25% of the average daily net assets of each Portfolio.

MSAM has entered into a Sub-Administration Agreement with Chase Global Funds
Services Company ("Chase Global"), a subsidiary of The Chase Manhattan Bank
("Chase"), pursuant to which Chase Global has agreed to provide certain
administrative services to the Fund. MSAM supervises and monitors such
administrative services provided by Chase Global. The services provided under
the Administration Agreement and the Sub-Administration Agreement are also
subject to the supervision of the Board of Directors of the Fund. The Board of
Directors of the Fund has approved the provision of services described above
pursuant to the Administration Agreement and the Sub-Administration Agreement
as being in the best interests of the Fund. Chase Global's business address is
73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information
regarding the Administration Agreement or the Sub-Administration Agreement, see
"Management of the Fund" in the SAI.

Chase Global calculates the NAV and dividends, maintains the general accounting
records and administers the securities lending program for each Portfolio.

CUSTODIANS. Chase serves as the Custodian of domestic securities and cash of
the Portfolios. Chase is not an affiliate of the Adviser or the Distributor.
Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of MSAM
and the Distributor, acts as the Fund's Custodian for foreign assets held
outside the United States (including, through sub-custodians, securities held
in Russia) and employs sub-custodians approved by the Board of Directors of the
Fund in accordance with regulations of the SEC for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the Custodians, see "General
Information--Custody Arrangements" in the SAI.

DIVIDEND DISBURSING AND TRANSFER AGENT. Chase Global acts as dividend
disbursing and transfer agent for the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and will audit the annual financial statements of each Portfolio.

LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.

BREAKDOWN OF EXPENSES

The Portfolios pay fees and other costs related to their daily operations.
Expenses paid out of a Portfolio's assets are reflected in its share price.
Each Portfolio pays a management fee to its Adviser for managing its
investments and business affairs. MSAM pays fees to affiliates who provide
assistance with these services. Each Portfolio also pays other expenses, which
are explained below. The Adviser may, from time to time, reduce its fees or
reimburse the Portfolios for expenses above a specified limit. These fee
reductions or expense reimbursements, which may be terminated at any time
without notice, can decrease a Portfolio's expenses and boost its performance.

MANAGEMENT FEE

The Adviser assigned to a Portfolio is entitled to receive from such Portfolio
a management fee, payable quarterly, at an annual rate as a percentage of
average daily net assets as set forth in the table below.

PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
===============================================================
U.S. Emerging
Real Global International Markets Asian
Assets Estate Equity Magnum Equity Equity
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First $500
million 0.80% 0.80% 0.80% 1.25% 0.80%
- ---------------------------------------------------------------
From $500
million to
$1 billion 0.75% 0.75% 0.75% 1.20% 0.75%
- ---------------------------------------------------------------
More than
$1 billion 0.70% 0.70% 0.70% 1.15% 0.70%
===============================================================
</TABLE>

However, the Adviser, with respect to certain of the Portfolios, has
voluntarily waived receipt of its management fees and agreed to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of

24
<PAGE>

the Portfolio to exceed the respective percentage of average daily net assets
set forth in the table below.

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Portfolio Fee Waivers
- --------- ------------------------
<S> <C>
U.S. Real Estate....................................... 1.10%
Global Equity.......................................... 1.15%
International Magnum................................... 1.15%
Emerging Markets Equity................................ 1.75%
Asian Equity........................................... 1.20%
</TABLE>

These fee reductions are voluntary and may be terminated by MSAM at any time
without notice.

OTHER EXPENSES

In addition to investment advisory and certain administrative expenses charged
by the Administrator, each Portfolio pays all expenses not assumed by MSAM.
Such expenses include or could include investment-related expenses, such as
brokers' commissions, transfer taxes and fees related to the purchase, sale, or
loan of securities; fees and expenses for Directors not affiliated with MSAM;
fees and expenses of its independent accountants and legal counsel; costs of
Directors and shareholder meetings; SEC fees; expenses of preparing and filing
registration statements; the cost of providing proxy statements, prospectuses
and statements of additional information to existing variable annuity contract
and variable life insurance policy owners; expenses of preparing and printing
the annual and semiannual shareholder reports to variable annuity contract and
variable life insurance policy owners; bank transaction charges and certain
custodians' fees and expenses; federal, state or local income or other taxes;
costs of maintaining the Portfolio's corporate existence; membership fees for
the Investment Company Institute and similar organizations; fidelity bond and
Directors' liability insurance premiums; and any extraordinary expenses such as
indemnification payments or damages awarded in litigation or settlements made.
All these expenses that are incurred by the Portfolio will be passed on to the
shareholders through a daily charge made to the assets held in the Portfolios,
which will be reflected in share prices.

PORTFOLIO TRANSACTIONS

The Investment Advisory Agreement authorizes MSAM to select the brokers or
dealers that will execute the purchases and sales of investment securities for
the Portfolios and directs MSAM to use its best efforts to obtain the best
available price and most favorable execution with respect to all transactions
for the Portfolios. The Fund has authorized MSAM to pay higher commissions in
recognition of brokerage services which, in the opinion of MSAM, are necessary
for the achievement of better execution, provided MSAM believes this to be in
the best interest of the Fund.

Since shares of the Portfolios are not marketed through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.

In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by MSAM. If the purchase or sale of securities
consistent with the investment policies of the Portfolios and one or more of
these other clients serviced by the MSAM is considered at or about the same
time, transactions in such securities will be allocated among the Portfolios
and such other clients in a manner deemed fair and reasonable by MSAM. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by MSAM, and the results of such allocations, are
subject to periodic review by the Fund's Board of Directors.

Subject to the overriding objective of obtaining the best possible execution of
orders, MSAM may allocate a portion of the Portfolio's brokerage transactions
to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan
Stanley or its affiliates to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Morgan Stanley or such
affiliates must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those Directors who are not
"interested persons", as defined in the 1940 Act, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.

Portfolio securities will not be purchased from or through, or sold to or
through, MSAM or Morgan Stanley or any "affiliated persons", as defined in the
1940 Act of Morgan Stanley when such entities are acting as principals, except
to the extent permitted by law.

PORTFOLIO TURNOVER

25
<PAGE>

Income Securities could result in high portfolio turnover. As a result of their
investment strategies, the U.S. Real Estate Portfolio's annual portfolio
turnover rate is expected to be as high as 200%. Higher portfolio turnover
rates for the Portfolios can result in corresponding increases in expenses such
as brokerage commissions and transaction costs. Although none of the Portfolios
will invest for short-term trading purposes, investment securities may be sold
from time to time without regard to the length of time they have been held and
the Portfolios will not consider portfolio turnover rate a limiting factor in
making investment decisions consistent with their respective objectives and
policies.

PERFORMANCE OF PORTFOLIOS

Each Portfolio's total return and yield may be quoted in advertising if
accompanied by performance of your insurance company's separate account.
Performance is based on historical results and is not intended to indicate
future performance. For additional performance information, contact your
insurance company for a free annual report.

TOTAL RETURN. Total return is the change in value of an investment in a
Portfolio over a given period, assuming reinvestment of any dividends and
capital gains. A cumulative total return reflects actual performance over a
stated period of time. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative
total return if performance had been constant over the entire period. Average
annual total returns smooth out variations in performance; they are not the
same as actual year-by-year results.

Average annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.

YIELD. Yield refers to the income generated by an investment in a Portfolio
over a given period of time, expressed as an annual percentage rate. When a
yield assumes that income is reinvested, it is called an effective yield.

Total returns and yields quoted for the Portfolios include each Portfolio's
expenses, but may not include charges and expenses attributable to any
particular insurance product. Since shares of the Portfolios may be purchased
only through variable annuity contracts and variable life insurance policies
and by tax qualified investors, such as qualified pension and retirement plans,
you should carefully review the prospectus of the insurance product you have
chosen for information on relevant charges and expenses. Excluding these
charges from quotations of each Portfolio's performance has the effect of
increasing the performance quoted. You should bear in mind the effect of these
charges when comparing a Portfolio's performance to that of other mutual funds.

26
<PAGE>

PERFORMANCE OF INVESTMENT ADVISER

The Adviser manages portfolios of Morgan Stanley Institutional Fund, Inc.
("MSIF"), which served as the models for the Portfolios of the Fund. The
portfolios of MSIF have substantially the same investment objectives, policies
and strategies as the Portfolios of the Fund. In addition, the Adviser intends
the Portfolios of the Fund and the corresponding portfolios of MSIF to be
managed by the same personnel and to continue to have closely similar
investment strategies, techniques and characteristics. The following table sets
forth the name of each Portfolio of the Fund and the name of the corresponding
portfolio of MSIF from which the Portfolio is cloned.

<TABLE>
<CAPTION>
Corresponding
MSIF
Fund Portfolio portfolio
-------------- -------------
<S> <C>
U.S. Real Estate U.S. Real Estate
Global Equity Global Equity
International Magnum International Magnum
Emerging Markets Equity Emerging Markets
Asian Equity Asian Equity
</TABLE>

Past investment performance of the Class A Shares of the portfolios of MSIF, as
shown in the table below, may be relevant to your consideration of the
Portfolios. The investment performance of the Class A Shares of the portfolios
of MSIF is not necessarily indicative of future performance of the Portfolios
of the Fund. Also, the operating expenses of each of the Portfolios of the Fund
will be different from, and may be higher than, the operating expenses of the
corresponding Class A Shares of the portfolio of MSIF. The investment
performance of the Class A Shares of the portfolios of MSIF is provided merely
to indicate the experience of the Adviser in managing similar portfolios.

<TABLE>
<CAPTION>
Average
Annual Average
Total Return Total Return Total Return Annual
One Year Five Years Five Years Total Return
Inception Ended Ended Ended Since
MSIF Fund Name Date 12/31/96 12/31/96 12/31/96 Inception
- -------------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
U.S. Real Estate........ 2/24/95 39.56% NA NA 32.73%
Global Equity........... 7/15/92 22.83% NA NA 19.22%
International Magnum.... 3/15/96 8.25%* NA NA NA
Emerging Markets........ 9/25/92 12.19% NA NA 12.93%
Asian Equity............ 7/01/91 3.49% 142.14% 19.35% 18.28%
</TABLE>
- -------
* Cumulative (unannualized) total return since inception.

27
<PAGE>

PERSONS CONTROLLING CERTAIN PORTFOLIOS

As of April 7, 1997, MSGI owned more than 25% of the outstanding voting
securities of the U.S. Real Estate, Global Equity, International Magnum,
Emerging Markets Equity and Asian Equity Portfolios and, therefore, may be
deemed a controlling person of these Portfolios under the 1940 Act.

In addition, The New York Life Insurance and Annuity Corporation ("NYLIAC")
owned more than 25% of the voting securities of the Emerging Markets Equity
Portfolio for variable annuity contracts and variable life insurance policies
that it has issued to the public. As required by law, NYLIAC votes the
securities in accordance with instructions received from its variable annuity
contract and variable life insurance policy owners.

For more information, see "Control Persons and Principal Security Holders" in
the SAI.

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

The Fund intends each of its Portfolios to qualify as a separate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and to qualify as a
"regulated investment company" under Subchapter M of the Code. As a regulated
investment company under the Code, net income and net realized gains of each
Portfolio will be distributed to shareholders at least once a year.

As stated on the cover of this prospectus, shares of the Portfolios will be
purchased by life insurance companies for their separate accounts under
variable annuity contracts and variable life insurance policies and by other
entities under qualified pension and retirement plans. Under the provisions of
the Code currently in effect, net income and realized capital gains are not
currently taxable when left to accumulate within a variable annuity contract or
variable life insurance policy or under a qualified pension or retirement plan.

TRANSACTION DETAILS

The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. Each of the U.S. Real Estate, Global Equity, International
Magnum, Emerging Markets Equity and Asian Equity Portfolio's NAV is determined
as of the close of business of the NYSE (normally 4:00 p.m. Eastern Time) on
each day that the NYSE is open for business. The NYSE is currently scheduled to
be closed on New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and on the
preceding Friday or subsequent Monday when any of these holidays falls on a
Saturday or Sunday, respectively.

Each Portfolio's NAV is the value of a single share. The NAV is computed by
adding the value of the Portfolio's investments, cash and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.

Each Portfolio's assets are valued primarily on the basis of market quotations.
Foreign securities are valued on the basis of quotations from the primary
market in which they are traded, and are translated from the local currency
into U.S. dollars using current exchange rates. If quotations are not readily
available or if the values have been materially affected by events occurring
after the closing of a foreign
market, assets are valued by a method that the Fund's Board of Directors
believes accurately reflects fair value.

Each Portfolio's offering price (price to buy one share) and redemption price
(price to sell one share) are its NAV.

Each Portfolio reserves the right to suspend the offering of shares for a
period of time. Each Portfolio also reserves the right to reject any specific
order. Purchase orders may be refused if, in the Adviser's opinion, they would
disrupt management of a Portfolio.

Each participating insurance company receives orders from its variable annuity
contract and variable life insurance policy owners to purchase or redeem shares
of the Portfolios each business day. That night, all orders received by that
insurance company on that business day are aggregated, and the insurance
company places a net purchase or redemption order for shares of one or more
Portfolios the morning of the next business day. These orders are normally
executed at the NAV that was computed at the close of the previous business day
in order to provide a match between the variable contract and policy owners'
orders to the insurance companies and the insurance companies' orders to a
Portfolio. In some cases, an insurance company's orders for Portfolio shares
may be executed at the NAV next computed after the order is actually
transmitted to a Portfolio.

Redemption proceeds will normally be wired to the insurance company on the next
business day after receipt of the redemption instructions by a Portfolio but in
no event later than seven days following receipt of instructions. Each
Portfolio may suspend redemptions or postpone payment dates on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.

28
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY MILLER
ASSET MANAGEMENT INC. ANDERSON &
SHERRERD, LLP

MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A MUTUAL FUND DESIGNED TO
PROVIDE INVESTMENT VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES AND FOR CERTAIN TAX-QUALIFIED INVESTORS. THIS PROSPECTUS
DESCRIBES FIVE PORTFOLIOS MANAGED BY EITHER MORGAN STANLEY ASSET MANAGEMENT
INC. ("MSAM") OR MILLER ANDERSON & SHERRERD, LLP ("MAS"). THE FUND MAKES
AVAILABLE IN A SINGLE PRODUCT THE COMBINED STRENGTH OF THESE LEADING INVESTMENT
MANAGEMENT FIRMS. THE FUND ALSO OFFERS TWELVE OTHER PORTFOLIOS MANAGED BY MSAM
OR MAS.

A STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED MAY 1, 1997, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED HEREIN BY
REFERENCE, AND, THEREFORE, LEGALLY FORMS A PART OF THE PROSPECTUS. FOR A COPY
OF THE SAI, AT NO CHARGE, CONTACT THE FUND BY CALLING 1-800-422-6464 EXT. 7182
OR CONTACT YOUR INSURANCE COMPANY.

THE PORTFOLIOS:

Fixed Income U.S. Real Estate
Value Emerging Markets Equity
Mid Cap Value

AN INVESTMENT IN ANY PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. YOU MAY RECEIVE MORE OR LESS THAN YOU INVESTED WHEN YOU REDEEM YOUR
SHARES.

Prospectus dated May 1, 1997
MORGAN STANLEY UNIVERSAL FUNDS, INC.

P.O. Box 2798, Boston, MA 02208-2798
<PAGE>

THE FUND

MANAGEMENT

Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") advises the
following Portfolios:

U.S. Real Estate Emerging Markets Equity

MSAM conducts a worldwide investment advisory business. As of February 28,
1997, MSAM and its affiliated asset management companies (exclusive of MAS and
Van Kampen American Capital, Inc. ("Van Kampen")) managed assets of
approximately $74 billion.

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the following
Portfolios:

Fixed Income Mid Cap Value
Value

MAS's institutional investment advisory business was established in 1969. As of
February 28, 1997, MAS managed assets of approximately $44.4 billion. Also as
of February 28, 1997, MSAM and MAS, and all of their affiliated asset
management companies, managed assets totalling approximately $176.9 billion.

OFFERING OF SHARES

The Fund is intended to be a funding vehicle for all types of variable annuity
contracts and variable life insurance policies offered by various insurance
companies. Shares of the Fund may also be offered to certain tax-qualified
investors, including qualified pension and retirement plans. It is possible
that material conflicts among the various insurance companies and other
investors in the Fund may arise. The Fund's Board of Directors will monitor
events in order to identify the existence of any material conflicts and to
determine what action, if any, should be taken in response to any such
conflicts.

PROSPECTUS OUTLINE Page
----

FINANCIAL HIGHLIGHTS 3
- --------------------

Financial highlights tables as
of December 31, 1996.

PORTFOLIO SUMMARIES 3
- -------------------

For each Portfolio, the investment
objective and a summary of strategy,
potential investors, and investment
characteristics and risks.

THE PORTFOLIOS' INVESTMENTS 4
- ---------------------------

A more detailed review of how
each Portfolio invests and investment
characteristics and risks.

SECURITIES AND INVESTMENT TECHNIQUES 7
- ------------------------------------

More information about the types
of investment strategies that may be used
by some or all of the Portfolios and
information about investment risks and
limitations.

FUNDAMENTAL INVESTMENT LIMITS 22
- -----------------------------

Certain policies that may be
changed only by shareholders.

MANAGEMENT OF THE FUND 22
- ----------------------

General information on
organization and operations of the
Fund, including details about
MSAM, MAS and the individual
portfolio managers, as well as fees,
expenses and performance calculations.

ACCOUNT POLICIES 28
- ----------------

Information on net asset
value calculation, income and gain
distributions, taxes and share
purchases and redemptions.

2
<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1996
- ---------------------------------- -------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Invested Income......................................... 0.01
Net Realized and Unrealized Loss............................ (0.21)
-------
Total From Investment Operations.......................... (0.20)
-------
DISTRIBUTIONS
Net Invested Income......................................... (0.02)
-------
Total Distributions....................................... (0.02)
-------
NET ASSET VALUE, END OF PERIOD................................ $9.78
=======
TOTAL RETURN.................................................. (2.03)%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)............................. $11,789
Ratio of Expenses to Average Net Assets....................... 1.75%**
Ratio of Net Investment Income to Average Net Assets.......... 0.32%**
Portfolio Turnover Rate....................................... 9%
Average Commission Rate#...................................... $0.0013
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net
Investment Income (Loss)................................... $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net
Assets..................................................... 6.17%**
Net Investment Income (Loss) to Average Net Assets.......... (4.06)%**
</TABLE>
- -------
*Commencement of operations.
**Annualized.
# For the period ended December 31, 1996, the average commission rate paid on
trades on which commissions were charged was 0.45% of the trade amount.

PORTFOLIO SUMMARIES

Certain investment terms used below have initial capital letters ("Common
Stocks," for example). These terms are further described under "Securities and
Investment Techniques" below.

FIXED INCOME PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of U.S.
Governments and Agencies, Corporate Bonds, Mortgage-Backed Securities ("MBSs"),
Foreign Bonds and other Fixed Income Securities and Derivatives. The
Portfolio's average weighted maturity will ordinarily exceed five years and
will usually be between five and fifteen years.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of Fixed Income Securities.

RISK PROFILE: Moderate potential risk and reward. The Portfolio will focus on
medium- to high-quality investments of intermediate maturity. The level of
risk, and potential reward, depends on the quality and maturity of the
investments. The Portfolio's share price can normally be expected to vary
inversely to changes in prevailing interest rates. While securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are also subject to greater market fluctuations as a result of
changes in interest rates.

VALUE PORTFOLIO

OBJECTIVE AND STRATEGY: 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 MAS to be relatively
undervalued based on various measures such as price/earnings ratios and
price/book ratios.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from Common Stocks of issuers with equity capitalizations
usually greater than $300 million that are deemed to be undervalued in the
marketplace.

RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price will fluctuate with changes in market, economic and foreign currency
exchange conditions.

3
<PAGE>

MID CAP VALUE PORTFOLIO

OBJECTIVE AND STRATEGY: 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 Standard & Poor's Ratings Group ("S&P") MidCap 400 Index. Such range is
currently $100 million to $8 billion but the range fluctuates over time with
changes in the equity market.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average total return from Common Stocks of medium-size companies that are
deemed to be undervalued in the marketplace.

RISK PROFILE: High potential risk and reward. The Portfolio's share price will
fluctuate with changes in market and economic conditions.

U.S. REAL ESTATE PORTFOLIO

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, the Portfolio's investments may be subject to the risks
associated with the direct ownership of real estate and direct investments of
REITs.

EMERGING MARKETS EQUITY PORTFOLIO

RISK PROFILE: Very high potential risk and reward. In addition to the general
risks involved in Equity Securities, including fluctuations in the stock market
and changes in the economy, international investing involves different or
increased risks. The performance of the Portfolio will be affected by foreign
currency values, the greater volatility of securities exchanges, and the
overall political, regulatory and economic environment in the countries in
which the Portfolio invests. The risks of Foreign Investing are exacerbated in
the case of Emerging Markets Equity Securities.

THE PORTFOLIOS' INVESTMENTS

INVESTMENT CHARACTERISTICS AND RISKS

The Portfolios spread investment risk by limiting, to varying degrees, holdings
in any one company or industry. Nevertheless, each Portfolio will experience
price volatility the extent of which will be affected by the types of
securities and techniques the particular Portfolio uses. In the short term,
Common Stock prices can fluctuate dramatically in response to these factors.
Over time, however, Common Stocks have shown greater growth potential than
other types of securities. The prices of Fixed Income Securities also fluctuate
and generally move in the opposite direction from interest rates.

Foreign Investment may involve risks in addition to those of U.S. investments.
The performance of the Portfolios investing in foreign securities will be
affected by foreign currency values, the political and regulatory environment,
and overall economic factors in the countries in which investments are made.

Because the U.S. Real Estate and Emerging Markets Equity Portfolios are non-
diversified portfolios and are permitted greater flexibility to invest their
assets in the obligations of a single issuer, they are exposed to increased
risk of loss if such an investment underperforms expectations. See "Non-
Diversified Status" in this Prospectus and "Investment Limitations" in the SAI.

Investments in securities rated below investment grade, sometimes called high
risk or High Yield Securities or junk bonds, carry a high degree of risk and
are considered speculative. MSAM and MAS may use various investment techniques
to hedge risks, including investments in Derivatives, but there is no guarantee
that these strategies will work as intended. When Portfolio shares are
redeemed, they may be worth more or less than their original cost. An
investment in any one Portfolio is not in itself a balanced investment plan. As
with any mutual fund, there is no assurance that a Portfolio will achieve its
goal.

4
<PAGE>

Each Portfolio will be invested according to its investment strategy. However,
the Portfolios also have the ability to invest without limitation in high
quality Money Market Instruments or Temporary Investments for temporary,
defensive purposes. See "Securities and Investment Techniques" below.

FIXED INCOME PORTFOLIO

The Portfolio seeks to achieve above-average total return over a market cycle
of three to five years by investing in a diversified portfolio of U.S.
Governments and Agencies, Corporate Bonds, Foreign Bonds, MBSs of domestic
issuers, and other Fixed Income Securities and Derivatives. The Portfolio's
average weighted maturity will ordinarily exceed five years and will usually be
between five and fifteen years.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Fixed Income Securities, not more than 20% of which will be below
investment grade (commonly referred to as High Yield Securities or junk bonds).
Permissible investments include Municipals, Loan Participations and
Assignments, Investment Company Securities, When-Issued and Delayed Delivery
Securities and Derivatives, including but not limited to CMOs, Structured
Notes, Foreign Currency Transactions, Futures, Options and Swaps. For
additional investment information, see "Securities and Investment Techniques"
below.

The Adviser's approach is to actively manage the maturity and duration
structure of the Portfolio in anticipation of long-term trends in interest
rates and inflation. Investments are diversified among a wide variety of Fixed
Income Securities in all market sectors. For additional information about
strategies employed in managing the Portfolio, see "Maturity and Duration
Management," "Value Investing," "Mortgage Investing," "High Yield Investing,"
"Foreign Fixed Income Investing" and "Foreign Investing" in "Securities and
Investment Techniques" below.

VALUE PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in Common and Preferred Stocks, Convertible
Securities, Rights and Warrants to purchase Common Stocks, American Depositary
Receipts ("ADRs") and other Equity Securities of companies with equity
capitalizations usually greater than $300 million.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may invest up to 5% of its total
assets in Foreign Equities (other than ADRs). The Portfolio may also invest in
U.S. Governments and Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons,
Repurchase Agreements, Cash Equivalents, Foreign Currency Transactions,
Investment Company
Securities, When-Issued or Delayed Delivery Securities and Derivatives,
including but not limited to Forwards, Futures, Options and Swaps. For
additional information about investments, see "Securities and Investment
Techniques" below.

The Adviser's approach is to select Equity Securities that it deems to be
undervalued relative to the stock market in general as measured by the S&P 500
Index ("S&P 500"), based on value measures such as price/earnings ratios and
price/book ratios, as well as fundamental research. While capital return will
be emphasized somewhat more than income return, the Portfolio's total return
will consist of both capital and income returns. Stocks that are deemed to be
under-valued in the marketplace have, under most market conditions, provided
higher dividend income returns than stocks that are deemed to have long-term
earnings growth potential which normally sell at higher price/earnings ratios.
For additional information about strategies employed in managing the Portfolio,
see "Value Stock Investing" in "Securities and Investment Techniques."

MID CAP VALUE PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in Common and Preferred Stocks, Convertible
Securities, Rights and Warrants to purchase Common Stocks, ADRs and other
Equity Securities of issuers with equity capitalizations in the range of the
companies represented in the S&P MidCap 400 Index. Such range is currently $100
million to $8 billion but the range fluctuates over time with changes in the
equity market.

Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in Equity Securities of mid-cap companies deemed to be undervalued.
The Portfolio may invest up to 5% of its total assets in Foreign Equities
(other than ADRs). The Portfolio may also invest in U.S. Governments and
Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons, Repurchase Agreements,
Cash Equivalents, Foreign Currency Transactions, Investment Company Securities,
When-Issued and Delayed Delivery Securities and Derivatives, including but not
limited to Forwards, Futures, Options and Swaps. For additional information
about investments, see "Securities and Investment Techniques" below.

The Adviser's approach is to select Common Stocks that are deemed to be
relatively undervalued at the time of purchase based on certain proprietary
measures of value. The Portfolio will typically exhibit a lower price/earnings
value ratio than the S&P MidCap 400 Index. The Portfolio will be structured
taking into account the economic sector weights of the S&P MidCap 400 Index,
with sector weights normally being within 5% of the sector weights of the
Index. For additional information about strategies employed in managing the

5
<PAGE>

Portfolio, see "Value Stock Investing" in "Securities and Investment
Techniques."

U.S. REAL ESTATE PORTFOLIO

The Portfolio may also invest in Fixed Income Securities issued or guaranteed
by real estate companies or secured by real estate assets and are Investment
Grade Securities, high-quality Money Market Instruments, such as notes,
certificates of deposit or bankers' acceptances issued by domestic or foreign
issuers, or high-grade debt securities, consisting of corporate debt securities
and U.S. Governments and Agencies. The Portfolio may also invest in certain
securities or obligations, including Non-Publicly Traded Securities, Private
Placements, Restricted Securities, Repurchase Agreements, When-Issued and
Delayed Delivery Securities, Temporary Investments and Derivatives, including
but not limited to Options and Futures and may engage in Loans of Portfolio
Securities. For additional information about the Portfolio's investments, see
"Securities and Investment Techniques" and "Non-Diversified Status" below.

The Adviser's approach is to invest in Equity Securities of companies that it
believes will provide a dividend yield that exceeds the composite dividend
yield of securities comprising the S&P 500. A substantial portion of the
Portfolio's total assets will be invested in Equity Securities of REITs. REITs
pool investors' funds for investment primarily in income producing real estate
or real estate related loans or interests, with certain tax advantages if
regulatory requirements are met. Generally, REITs can be classified as Equity
REITs, Mortgage REITs or Hybrid REITs. Equity REITs invest the majority of
their assets directly in real property and derive their income primarily from
rents and capital gains from appreciation realized through property sales.
Equity REITs are further categorized according to the types of real estate
securities they own, e.g., apartment properties, retail shopping centers,
office and industrial properties, hotels, health-care facilities, manufactured
housing and mixed-property types. Mortgage REITs invest the majority of their
assets in real estate mortgages and derive their income primarily from interest
payments. Hybrid REITs combine the characteristics of both Equity and Mortgage
REITs. The Portfolio will invest primarily in Equity REITs. A shareholder in
the Portfolio investing in REITs indirectly through the Portfolio will bear not
only his or her proportionate share of the expenses of the Portfolio, but also
indirectly, the management expenses of underlying REITs.

EMERGING MARKETS EQUITY PORTFOLIO

The 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. Under normal circumstances, at
least 65% of the Portfolio's total assets will be invested in Emerging Market
Country Equity Securities.

6
<PAGE>

purposes, the Portfolio may invest less than 65% of its total assets in
Emerging Market Country Equity Securities, in which case the Portfolio may
invest in other Equity Securities or may invest in Fixed Income Securities as
described in "Securities and Investment Techniques--Temporary Investments"
below. The Portfolio also has the ability to invest without limitation in high
quality Money Market Instruments or Temporary Investments for temporary
defensive purposes. For additional information about investments, see
"Securities and Investment Techniques" and "Non-Diversified Status" below.

The Portfolio intends to invest primarily in some or all of the following
emerging market countries:

<TABLE>

<S> <C> <C> <C>
Argentina Botswana Brazil Chile
China Colombia Egypt Greece
Hong Kong Hungary India Indonesia
Israel Jamaica Jordan Kenya
Malaysia Mexico Nigeria Pakistan
Peru Philippines Poland Portugal
Russia South Africa South Korea Sri Lanka
Taiwan Thailand Turkey Venezuela
Zimbabwe
</TABLE>

As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging market countries in which it invests. The
Portfolio does not intend to invest in any security in a country where the
currency is not freely convertible to U.S. dollars, unless the Portfolio has
obtained the necessary governmental licensing to convert such currency or other
appropriately licensed or sanctioned contractual guarantees to protect such
investment against loss of that currency's external value, or the Portfolio has
a reasonable expectation at the time the investment is made that such
governmental licensing or other appropriately licensed or sanctioned guarantees
would be obtained or that the currency in which the security is quoted would be
freely convertible at the time of any proposed sale of the security by the
Portfolio. The Adviser will analyze assets, revenues and earnings of an issuer.
In selecting industries and particular issuers, the Adviser will evaluate costs
of labor and raw materials, access to technology, export of products and
government regulation. Although the Portfolio seeks to invest in larger
companies, it may invest in small- and medium-size companies that, in the
Adviser's view, have potential for growth.

Emerging Market Country Securities pose greater liquidity risks and other risks
than securities of companies located in developed countries and traded in more
established markets. The Portfolio may not be able to hedge foreign currency
risk adequately. For a description of special considerations and certain risks
associated with investment in foreign issuers, see "Securities and Investment
Techniques--Foreign Investment." Also, the registration, clearing and
settlement of securities transactions in Russia are subject to significant
risks not normally associated with securities transactions in the United States
and other more developed markets. See "Securities and Investment Techniques--
Russian Securities."

When Portfolio shares are redeemed, they may be worth more or less than their
original cost. An investment in the Portfolio is not in itself a balanced
investment plan. As with any mutual fund, there is no assurance that the
Portfolio will achieve its goal.

SECURITIES AND INVESTMENT TECHNIQUES

The following pages contain more detailed information about types of
instruments in which a Portfolio may invest and strategies each Adviser may
employ in pursuit of a Portfolio's investment objective. A summary of risks and
restrictions associated with these instruments and investment practices is
included as well. A complete listing of each Portfolio's policies and
limitations and more detailed information about each Portfolio's investments is
contained in the SAI. Policies and limitations are considered at the time such
investments are purchased; the sale of instruments is not required in the event
of a subsequent change in circumstances, for example, a rating's downgrade.

The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.

The Advisers may not buy all of these instruments or use all of these
techniques to the full extent permitted unless they believe that doing so will
help a Portfolio achieve its investment objective. Current holdings and recent
investment strategies are described in the Portfolios' financial reports, which
will be sent to the Portfolios' shareholders twice a year. For a copy of an SAI
or financial report, at no charge, contact the Fund or your insurance company.

STRATEGIES

7
<PAGE>

As used in this Prospectus, the term emerging markets describes any country
which is generally considered to be an emerging, or developing country by the
international financial community such as the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which
are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.

FOREIGN FIXED INCOME INVESTING: The Adviser seeks to invest in Foreign Bonds
and other Fixed Income Securities denominated in foreign currencies, where, in
the opinion of the Adviser, the combination of current yield and currency value
offer attractive expected returns. When the total return opportunities in a
foreign bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable currency risk exists, Foreign Currency
Transactions and Swaps may be used to hedge the currency risk.

Because non-U.S. companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to U.S. companies, there may be less publicly available information
about certain foreign companies than about U.S. companies. Securities of some
non-U.S. companies may be less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the United
States. With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.

HIGH YIELD INVESTING: The Adviser seeks to invest in High Yield Securities
based on the Adviser's analysis of economic and industry trends and individual
security characteristics. The Adviser conducts a credit analysis for each
security considered for investment to evaluate its attractiveness relative to
its risk. A high level of diversification is also maintained to limit credit
exposure to individual issuers.

To the extent a Portfolio invests in High Yield Securities it will be exposed
to a substantial degree of credit risk. Lower-rated bonds are considered
speculative by traditional investment standards. High Yield Securities may be
issued as a consequence of corporate restructuring or similar events. Also,
High Yield Securities are often issued by smaller, less credit worthy
companies, or by highly leveraged (indebted) companies, which are generally
less able than more established or less leveraged companies to make scheduled
payments of interest and principal. The risks posed by securities issued under
such circumstances are substantial.

8
<PAGE>

Securities by various dealers. Under such conditions, a Portfolio may find it
difficult to value its securities accurately. A Portfolio may also be forced to
sell securities at a significant loss in order to meet shareholder redemptions.
These factors add to the risks associated with investing in High Yield
Securities.

High Yield Securities may also present risks based on payment expectations. For
example, High Yield Securities may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, a
Portfolio would have to replace the security with a lower yielding security,
resulting in a decreased return for investors. Conversely, a High Yield
Security's value will decrease in a rising interest rate market.

Certain types of High Yield Securities are non-income paying securities. For
example, Zero Coupons pay interest only at maturity and Pay-In-Kind Securities
pay interest in the form of additional securities. Payment in the form of
additional securities, or interest income recognized through discount
accretion, will, however, be treated as ordinary income which will be
distributed to shareholders even though the Portfolio does not receive periodic
cash flow from these investments.

MATURITY AND DURATION MANAGEMENT: One of two primary components of the
Adviser's fixed income investment strategy is Maturity and Duration Management.
The second primary component of fixed income strategy is Value Investing. See
"Value Investing" below.

The maturity and duration structure of a Portfolio investing in Fixed Income
Securities is actively managed in anticipation of cyclical interest rate
changes. Adjustments are not made in an effort to capture short-term, day-to-
day movements in the market, but instead are implemented in anticipation of
longer-term shifts in the levels of interest rates. Adjustments made to shorten
Portfolio maturity and duration are made to limit capital losses during periods
when interest rates are expected to rise. Conversely, adjustments made to
lengthen maturity are intended to produce capital appreciation in periods when
interest rates are expected to fall. The foundation for maturity and duration
strategy lies in analysis of the U.S. and global economies, focusing on levels
of real interest rates, monetary and fiscal policy actions, and cyclical
indicators.

Most Fixed Income Securities provide interest (coupon) payments in addition to
a final (par) payment at maturity. Some securities also have call provisions.
Depending on the relative magnitude of these payments and the nature of the
call provisions, the market values of Fixed Income Securities may respond
differently to changes in the level and structure of interest rates.

Traditionally, a Fixed Income Security's term-to-maturity has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the interest rate risk or volatility of the security). However, term-
to-maturity measures only the time until a Fixed Income Security provides its
final payment, taking no account of the pattern of the security's payments
prior to maturity.

Duration is a measure of the expected life of a Fixed Income Security on a
present value basis that was developed as a more precise alternative to the
concept of term-to-maturity. Duration incorporates a Fixed Income Security's
yield, coupon interest payments, final maturity and call features into one
measure. Duration is one of the fundamental tools used by the Adviser in the
selection of Fixed Income Securities.

Duration takes the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled or, in the case
of a callable bond, expected to be received, and weights them by the present
values of the cash to be received at each future point in time. For any Fixed
Income Security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a Fixed
Income Security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a Fixed Income Security, the
shorter the duration of the security.

There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
Floaters often have final maturities of ten or more years; however, their
interest rate exposure corresponds to the frequency of the coupon reset.
Another example where the interest rate exposure is not properly captured by
duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Adviser's analysis of interest rate
exposure incorporates the economic life of a security.

MORTGAGE INVESTING: At times it is anticipated that greater than 50% of a fixed
income Portfolio's assets may be invested in MBSs. These include securities
which represent pools of mortgage loans made by lenders such as commercial
banks, savings and loan associations, mortgage bankers and others. The pools
are assembled by various Governmental, Government-related and private
organizations. A Portfolio will invest in securities issued by the Government
National Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), other Government
agencies, and private issuers. It is expected that the Portfolio's primary
emphasis will be in MBSs issued by the various Government-related
organizations. However, a Portfolio may invest, without limit, in MBSs issued
by private issuers when the Adviser deems that the quality of the investment,
the quality of the issuer, and market conditions

9
<PAGE>

warrant such investments. Securities issued by private issuers will be rated
investment grade by Moody's or S&P or be deemed by the Adviser to be of
comparable investment quality.

VALUE INVESTING: One of two primary components of the Adviser's fixed income
strategy is Value Investing, whereby the Adviser seeks to identify undervalued
sectors and securities through analysis of credit quality, Option
characteristics and liquidity. Quantitative models are used in conjunction with
judgement and experience to evaluate and select securities with embedded put or
call Options which are attractive on a risk- and option-adjusted basis.
Successful Value Investing will permit a Portfolio to benefit from the price
appreciation of individual securities during periods when interest rates are
unchanged. See "Maturity and Duration Management" for a description of the
other key component of the Adviser's fixed income investment strategy.

VALUE STOCK INVESTING: Emphasizes Common Stocks which are deemed by the Adviser
to be undervalued relative to the stock market in general as measured by the
appropriate market index, based on value measures such as price/earnings ratios
and price/book ratios. Value stocks are generally dividend paying Common
Stocks. However, non-dividend paying stocks may also be selected for their
value characteristics.

INSTRUMENTS AND INVESTMENTS

ABSS. Asset-backed securities ("ABSs") are securities collateralized by
shorter-term loans such as automobile loans, home equity loans, computer leases
or credit card receivables. The payments from the collateral are passed through
to the security holder. The collateral behind ABSs tends to have prepayment
rates that usually do not vary with interest rates. In addition, the short-term
nature of the loans reduces the impact of any change in prepayment level. Due
to amortization, the average life for ABSs is also the conventional proxy for
maturity.

Due to the possibility that prepayments (on automobile loans and other
collateral) will alter the cash flow on ABSs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

BRADY BONDS. Brady Bonds are Fixed Income Securities that are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury (the "Brady
Plan"). Brady Bonds have been issued only in relatively recent years, and,
accordingly, do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market. For further information on these securities, see the SAI. A
Portfolio will invest in Brady Bonds only if they are consistent with quality
specifications.

CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:

10
<PAGE>

(2)Commercial paper rated at time of purchase by one or more NRSROs in one of
their two highest categories, (e.g., A-1 or A-1+ by S&P or Prime 1 by Moody's,
or, if not rated, issued by a corporation having an outstanding unsecured debt
issue rated high-grade by an NRSRO (e.g., A or better by Moody's, S&P or Fitch
Investors Service, Inc. ("Fitch")).

(3)Short-term corporate obligations rated high-grade at the time of purchase by
an NRSRO (e.g., A or better by Moody's, S&P or Fitch).

(4)U.S. Governments and Agencies.

(5)Repurchase Agreements collateralized by securities listed above.

Due to the possibility that prepayments (on home mortgages and other
collateral) will alter the cash flow on CMOs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

CORPORATE BONDS. Corporate Bonds are Fixed Income Securities issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. A Portfolio will buy
Corporate Bonds subject to any quality constraints. If a security held by a
Portfolio is down-graded, the Portfolio may retain the security.

DEPOSITARY RECEIPTS. Depositary Receipts are securities representing ownership
interests in securities of foreign companies (an "underlying issuer") and are
deposited with the depositary. Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities. Depositary
Receipts include ADRs, Global Depositary Receipts ("GDRs") and other types of
Depositary Receipts (which, together with ADRs and GDRs, are hereinafter
collectively referred to as "Depositary Receipts"). ADRs are dollar-denominated
Depositary Receipts typically issued by a U.S. financial institution which
evidence ownership interests in a security or pool of securities issued by a
foreign issuer. ADRs are listed and traded in the United States. GDRs and other
types of Depositary Receipts are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. financial institutions, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States.

Depositary Receipts may be "sponsored" or "unsponsored". Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
Depositary Receipt generally bear all the costs associated with establishing
the unsponsored Depositary Receipt. In addition, the issuers of the securities
underlying unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts. For
purposes of a Portfolio's investment policies, the Portfolio's investments in
Depositary Receipts will be deemed to be investments in the underlying
securities except as noted.

DERIVATIVES. Derivatives are financial products or instruments that derive
their value from the value of an
underlying asset, reference rate or index. Derivatives include, but are not
limited to, the following: CMOs, SMBSs (i.e., Stripped Mortgage-Backed
Securities), Convertible

11
<PAGE>

Securities, Warrants, Forwards, Futures, Options, Structured Notes and Swaps.

EASTERN EUROPEAN SECURITIES. The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment associated
with the transition to market economics. Unstable economic and political
conditions may adversely affect security values. Upon the accession to power of
Communist regimes approximately 40 years ago, the governments of a number of
Eastern European countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
In the event of the return to power of the Communist Party, there can be no
assurance that a Portfolio's investments in Eastern Europe would not be
expropriated, nationalized or otherwise confiscated.

EMERGING MARKET COUNTRY SECURITIES. An Emerging Market Country Security is one
issued by a company that has one or more of the following characteristics: (i)
its principal securities trading market is in an emerging market, (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in emerging markets, or
(iii) it is organized under the laws of, and has a principal office in, an
emerging market country. The Adviser will base determinations as to eligibility
on publicly available information and inquiries made to the companies.

Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud.

With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value
of a Portfolio's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.

EQUITY SECURITIES. Equity Securities commonly include, but are not limited to,
Common Stocks, Preferred Stocks, Depositary Receipts, Rights, Warrants, and
Foreign Equities. Preferred Stock is contained in both the definition of Equity
Securities and Fixed Income Securities because it exhibits characteristics
commonly associated with each type of security. See the "The Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

FLOATERS. Floaters are Fixed Income Securities with a floating or variable rate
of interest, i.e. the rate of interest varies with changes in specified market
rates or indices, such

12
<PAGE>

as the prime rate, or at specified intervals. Certain Floaters may carry a
demand feature that permits the holder to tender them back to the issuer of the
underlying instrument, or to a third party, at par value prior to maturity.
When the demand feature of certain Floaters represents an obligation of a
foreign entity, the demand feature will be subject to certain risks discussed
under "Foreign Investment".

Forex Futures are standardized contracts for the future delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Forex Futures traded in the United States are traded on regulated
futures exchanges. A Portfolio will incur brokerage fees when it purchases or
sells Forex Futures and it will be required to maintain margin deposits.
Parties to a Forex Future must make initial margin deposits to secure
performance of the contract, which generally range from 2% to 5% of the
contract price. There also are requirements to make "variation" margin deposits
as the value of the Futures contract fluctuates.

13
<PAGE>

can be no assurance that the Adviser will be able to do so. When a Portfolio
enters into a forward contract for purposes of creating a synthetic security,
it will generally be required to hold liquid assets in a segregated account
with a daily value at least equal to its obligation under the forward contract.

FOREIGN INVESTMENT. Investment in securities and obligations of foreign issuers
and in foreign branches of domestic banks involves somewhat different
investment risks than those affecting obligations of U.S. issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States. Many foreign securities markets have substantially less volume than
U.S. national securities exchanges, and securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and
interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on Foreign Investments as
compared to dividends and interest paid by U.S. companies. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction will impose or change withholding taxes on income payable
with respect to foreign securities, and the possible adoption of foreign
governmental restrictions such as exchange controls.

FUTURES. The Portfolios may purchase and sell futures contracts and options on
futures contracts, including but not limited to financial futures, securities
index futures, foreign currency exchange futures, and interest rate futures
contracts (collectively, "Futures").

The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase
securities index futures contracts in order to gain market exposure. Subject to
applicable laws, the Portfolios may engage in transactions in securities index
futures contracts (and options thereon) which are traded on a recognized
securities or futures exchange, or may purchase or sell such instruments in the
over-the-counter market. There currently are limited securities index futures
and options on such futures in many countries, particularly emerging countries.
The nature of the strategies adopted by

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<PAGE>

the Adviser, and the extent to which those strategies are used, may depend on
the development of such markets.

The Portfolios may engage in transactions involving foreign currency exchange
futures contracts. For more information, see "Foreign Currency Transactions"
above.

The Portfolios may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolios may engage in interest
rate futures contracts to hedge holdings of debt instruments against future
changes in interest rates.

Financial futures are futures contracts relating to financial instruments, such
as U.S. Governments, foreign currencies, and certificates of deposit. Such
contracts involve an obligation to purchase or sell a specific security,
instrument or basket thereof at a specified future date at a specified price.
Like interest rate futures contracts, the value of financial futures contracts
rises and falls inversely with changes in interest rates. The Portfolios may
engage in financial futures contracts for hedging and non-hedging purposes.

Under rules adopted by the Commodity Futures Trading Commission, each Portfolio
may enter into futures contracts and options thereon for both hedging and non-
hedging purposes, provided that not more than 5% of such Portfolios' total
assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-
hedging activities. The U.S. Real Estate and Emerging Markets Equity Portfolios
may enter into futures contracts to the extent that their outstanding
obligations to purchase securities under such contracts in combination with
their outstanding obligations with respect to options transactions (including
options to purchase securities or instruments) would not exceed 20% of their
total assets or in the case of the Fixed Income, Value and Mid Cap Value
Portfolios outstanding obligations would not exceed 50% of their respective
total assets. In addition, the Emerging Markets Equity Portfolio will not enter
into any futures contract or option if immediately thereafter the value of all
the foreign currencies underlying its futures contracts would exceed 10% of the
value of its total assets.

Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by a Portfolio and the prices of futures and
options relating to investments purchased or sold by the Portfolio, and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position. The risk that a Portfolio will
be unable to close out a futures position or options contract will be minimized
by only entering into futures contracts or options transactions for which there
appears to be a liquid exchange or secondary market. The risk of loss in
trading on futures contracts in some strategies can be substantial, due both to
the low margin deposits required and the extremely high degree of leverage
involved in futures pricing.

S&P: BB-rated bonds have "less near-term vulnerability to default" than
B- or CCC-rated securities but face major ongoing uncertainties..... which
may lead to inadequate capacity to pay interest or principal. B-rated
bonds have a ""greater vulnerability to default than BB-rated bonds and
the ability to pay interest or principal will likely be impaired by
adverse business conditions.'' CCC-rated bonds have a currently
identifiable ""vulnerability to default'' and, without favorable business
conditions, will be ""unable to repay interest and principal.'' The
rating C is reserved for income bonds on which ""no interest is being
paid.'' Debt rated D is in default, and "payment of interest and/or
repayment of principal is in arrears."

While such securities offer high yields, they also normally carry with them a
greater degree of risk than securities with

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<PAGE>

higher ratings. Lower-rated bonds are considered speculative by traditional
investment standards. High Yield Securities may be issued as a consequence of
corporate restructuring or similar events. Also, High Yield Securities are
often issued by smaller, less creditworthy companies, or by highly leveraged
(indebted) firms, which are generally less able than more established or less
leveraged firms to make scheduled payments of interest and principal. The price
movement of these securities is influenced less by changes in interest rates
and more by the financial and business position of the issuing corporation when
compared to Investment Grade Securities.

The risks posed by securities issued under such circumstances are substantial.
If a security held by a Portfolio is down-graded, the Portfolio may retain the
security.

INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities, which have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an Inverse Floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an Inverse Floater causes an increase
in the coupon rate. Inverse Floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality,
redemption provisions and maturity, and Inverse Floater CMOs exhibit greater
price volatility than the majority of mortgage pass-through securities or CMOs.
In addition, some Inverse Floater CMOs exhibit extreme sensitivity to changes
in prepayments. As a result, the yield to maturity of an Inverse Floater CMO is
sensitive not only to changes in interest rates but also to changes in
prepayment rates on the related underlying mortgage assets.

INVESTMENT COMPANY SECURITIES. Investments in investment companies are
securities of other open-end or closed-end investment companies. The 1940 Act
generally prohibits a Portfolio from acquiring more than 3% of the outstanding
voting shares of an investment company and limits such investments to no more
than 5% of the Portfolio's total assets in any one investment company and no
more than 10% in any combination of investment companies. The 1940 Act also
prohibits a Portfolio from acquiring any security of a registered closed-end
investment company if the Portfolio and other investment companies with the
same adviser would own more than 10% of the outstanding voting shares of the
company.

INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment in the securities of their companies.
However, indirect investment in the securities of companies listed and traded
on the stock exchanges in these countries is permitted by certain emerging
market countries through Investment Funds that have been specifically
authorized. A Portfolio may invest in these Investment Funds subject to the
provisions of the 1940 Act, as applicable, and other applicable laws as
discussed in "Investment Limitations" in the SAI. The Emerging Markets Equity
Portfolio will invest in such Investment Funds only where appropriate given
that the Portfolio's shareholders will bear not only their proportionate share
of the expenses of the Portfolio (including operating expenses and the fees of
the Adviser), but also will indirectly bear similar expenses of the underlying
Investment Funds.

Certain Investment Funds are advised by an Adviser. The Portfolios may, to the
extent permitted under the 1940 Act and other applicable law, invest in these
Investment Funds. If a Portfolio does elect to make an investment in such an
Investment Fund, it will only purchase the securities of such Investment Fund
in the secondary market.

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<PAGE>

A Portfolio will have the right to receive payments of principal, interest and
any fees to which it is entitled only from the Lender selling the Participation
and only upon receipt by the Lender of the payments from the borrower. In the
event of the insolvency of the Lender selling a Participation, a Portfolio may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. Certain Participations may be
structured in a manner designed to avoid purchasers of Participations being
subject to the credit risk of the Lender with respect to the Participation.
Even under such a structure, in the event of the Lender's insolvency, the
Lender's servicing of the Participation may be delayed and the assignability of
the Participation may be impaired. A Portfolio will acquire Participations only
if the Lender interpositioned between a Portfolio and the borrower is
determined by the Adviser to be creditworthy.

Direct debt instruments involve the risk of loss in case of default or
insolvency of the borrower. Direct debt instruments may offer less legal
protection to a Portfolio in the event of fraud or misrepresentation and may
involve a risk of insolvency of the lending bank or other financial
intermediary. Direct debt instruments may also include standby financing
commitments that obligate the investing Portfolio to supply additional cash to
the borrower on demand. Participations involving emerging market country
issuers may relate to Loans as to which there has been or currently exists an
event of default or other failure to make payment when due, and may represent
amounts owed to financial institutions that are themselves subject to political
and economic risks, including the risk of currency devaluation, expropriation,
or failure. Such Participations present additional risks of default or loss.

MBSS. Mortgage-Backed Securities ("MBSs") are instruments that entitle the
holder to a share of all interest and principal payments from pools of
residential and commercial mortgage loans underlying the instruments, and may
take the form of pass-through securities or CMOs (see "CMOs", above).
Generally, these securities are designed to provide monthly payments of
interest and principal to the investor.

Pass-Through Securities. The mortgagee's monthly payments to his or her lending
institution are passed through to investors such as the Portfolio. Most issuers
or poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. The guarantees made by issuers or poolers are
supported by various forms of credit, collateral, guarantees or insurance,
including individual loan, title, pool and hazard insurance purchased by the
issuer or pooler. The pools are assembled by various governmental, Government-
related and private organizations. A Portfolio may invest in securities issued
or guaranteed by the GNMA, FHLMC, FNMA, private issuers and other government
agencies. There can be no assurance that the private insurers can meet their
obligations under the policies. MBSs issued by non-agency issuers, whether or
not such securities are subject to guarantees, may entail greater risk. If
there is no guarantee provided by the issuer, MBSs purchased by a Portfolio
will be those which at the time of purchase are rated investment grade by one
or more NRSRO, or, if

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<PAGE>

unrated, are deemed by the Advisers to be of comparable quality.

MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income that is
exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and municipal notes
(those securities with maturities of less than five years). Municipal bonds are
issued for a wide variety of reasons: to construct public facilities, such as
airports, highways, bridges, schools, hospitals, mass transportation, streets,
water and sewer works; to obtain funds for operating expenses; to refund
outstanding municipal obligations; and to loan funds to various public
institutions and facilities. Certain industrial development bonds are also
considered municipal bonds if their interest is exempt from federal income
taxes. Industrial development bonds are issued by or on behalf of public
authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewer works. Industrial development
bonds are ordinarily dependent on the credit quality of a private user, not the
public issuer.

NON-DIVERSIFIED STATUS. The U.S. Real Estate and Emerging Markets Equity
Portfolios are non-diversified portfolios under the 1940 Act, which means that
the Portfolios are not limited by the 1940 Act in the proportion of their
assets that may be invested in the obligations of a single issuer. Thus, the
Portfolios may invest a greater proportion of their assets in the securities of
a small number of issuers and, as a result, will be subject to greater risk
with respect to their portfolio securities. However, the Portfolios intend to
comply with diversification requirements imposed by the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as regulated investment
companies. See "Investment Limitations" and "Taxes" in the SAI.

NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The U.S. Real Estate, Emerging Markets Equity, Fixed Income, Value
and Mid Cap Value Portfolios may invest in securities that are neither listed
on a stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted Equity Securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be
less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Portfolio or less than
what may be considered the fair value of such securities. Furthermore,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.

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<PAGE>

sold to qualified institutional buyers under Rule 144A under the 1933 Act
("Rule 144A Securities") may be deemed to be liquid under guidelines adopted by
the Fund's Board of Directors. The Emerging Markets Equity Portfolio may invest
up to 25% of its total assets, in Rule 144A Securities that are deemed to be
liquid.

The Portfolios also may write (i.e., sell) put and call Options on investments
held in its portfolio, as well as with respect to foreign currency. A Portfolio
that has written an Option receives a premium, which increases the Portfolio's
return on the underlying security or instrument in the event the Option expires
unexercised or is closed out at a profit. However, by writing a call Option, a
Portfolio will limit its opportunity to profit from an increase in the market
value of the underlying security or instrument above the exercise price of the
Option for as long as the Portfolio's obligation as writer of the Option
continues. The Portfolios may only write options that are "covered." A covered
call Option means that so long as the Portfolio is obligated as the writer of
the Option, it will own (i) the underlying security or instrument subject to
the Option or (ii) securities or instruments convertible or exchangeable
without the payment of any consideration into the security or instrument
subject to the Option.

By writing (or selling) a put Option, a Portfolio incurs an obligation to buy
the security or instrument underlying the Option from the purchaser of the put
at the Option's exercise price at any time during the Option period, at the
purchaser's election. Options written by a Portfolio may be exercisable by the
purchaser only up to a specified date. A Portfolio that has written a put
Option will earmark or segregate sufficient liquid assets to cover its
obligations under the Option.

As a matter of operating policy, the value of the underlying securities on
which stock Options will be written at any one time will not exceed 5% of a
Portfolio's total assets.

The Portfolios may engage in transactions in Options which are traded on
recognized exchanges or over-the-counter. There currently are limited Options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such Option markets. The primary risks associated with the use of Options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by a Portfolio and the prices of Options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
Option.

PREFERRED STOCKS. Preferred Stocks are non-voting securities which evidence
ownership in a corporation and which pay a fixed or variable stream of
dividends.

Pursuant to an order expected to be issued by the SEC, the Portfolios may pool
their daily uninvested cash balances in order to invest in Repurchase
Agreements on a joint basis. By entering into Repurchase Agreements on a joint
basis, it is expected that the Portfolios will incur lower transaction costs
and potentially obtain higher rates of interest on such Repurchase Agreements.
Each Portfolio's participation in the income from jointly purchased Repurchase
Agreements will be based on that Portfolio's percentage share in the total
Repurchase Agreement. The Portfolios' ability to invest in Repurchase
Agreements on a joint basis will be contingent upon issuance of the order by
the SEC described above.

REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into Reverse Repurchase
Agreements with brokers,

19
<PAGE>

dealers, domestic and foreign banks or other financial institutions. In a
Reverse Repurchase Agreement, the Portfolio sells a security and agrees to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. It may also be viewed as the
borrowing of money by the Portfolio. The Portfolio's investment of the proceeds
of a Reverse Repurchase Agreement is the speculative factor known as leverage.
The Portfolio may enter into a Reverse Repurchase Agreement only if the
interest income from investment of the proceeds is greater than the interest
expense of the transaction and the proceeds are invested for a period no longer
than the term of the agreement. The Portfolio will maintain with the Custodian
a separate account with a segregated portfolio of liquid assets in an amount at
least equal to its purchase obligations under these agreements. If interest
rates rise during a Reverse Repurchase Agreement, it may adversely affect the
Portfolio's ability to maintain a stable NAV.

RUSSIAN SECURITIES. The registration, clearing and settlement of securities
transactions involving Russian issuers are subject to significant risks not
normally associated with securities transactions in the United States and other
more developed markets. Ownership of Equity Securities in Russian companies is
evidenced by entries in a company's share register (except where shares are
held through depositories that meet the requirements of the 1940 Act) and the
issuance of extracts from the register or, in certain limited cases, by formal
share certificates. However, Russian share registers are frequently unreliable
and a Portfolio could possibly lose its registration through oversight,
negligence or fraud. Moreover, Russia lacks a centralized registry to record
securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In
addition, while registrars are liable under law for losses resulting from their
errors, it may be difficult for a Portfolio to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by law to employ an independent registrar, in practice, such companies
have not always followed this law. Because of this lack of independence of
registrars, management of a Russian company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions on the share
register. Furthermore, these practices may prevent a Portfolio from investing
in the securities of certain Russian companies deemed suitable by the Adviser
and could cause a delay in the sale of Russian Securities by the Portfolio if
the company deems a purchaser unsuitable, which may expose the Portfolio to
potential loss on its investment.

In light of the risks described above, the Board of Directors of the Fund has
approved certain procedures concerning the Fund's investments in Russian
Securities. Among these procedures is a requirement that a Portfolio will not
invest in the securities of a Russian company unless that issuer's registrar
has entered into a contract with the Fund's sub-custodian containing certain
protective conditions, including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Portfolio. This
requirement will likely have the effect of precluding investments in certain
Russian companies that a Portfolio would otherwise make.

SMBSs are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest ("interest-only" or "IO class"),
while the other class will receive all of the principal ("principal-only" or
"PO class"). The yield to maturity on IO classes and PO classes is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the portfolio yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, a Portfolio may fail to fully recoup its initial investment in these
securities, even if the security is in one of the highest rating categories.

Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to a Portfolio's limitations on investment in illiquid
securities.

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<PAGE>

and LIBOR) and stock indices such as the S&P 500. In some cases, the impact of
the movements of these factors may increase or decrease through the use of
multipliers or deflators. The use of Structured Notes allows a Portfolio to
tailor its investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.

SWAPS. Swap contracts ("Swaps") are Derivatives in the form of a contract or
other similar instrument which is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Portfolio may agree to swap the return generated by a fixed income index for
the return generated by a second fixed income index. The currency Swaps in
which a Portfolio may enter will generally involve an agreement to pay interest
streams in one currency based on a specified index in exchange for receiving
interest streams denominated in another currency. Such Swaps may involve
initial and final exchanges that correspond to the agreed upon notional amount.

Interest rate and total rate of return Swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate or total rate of return Swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that a Portfolio is contractually entitled to receive. In contrast,
currency Swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency Swap is subject to the risk
that the other party to the Swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
Swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized Swap documentation. As a result, the Swap market has
become relatively liquid. Swaps that include caps, floors, and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than "traditional" Swaps.

The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of a Portfolio would be less favorable than it would have been if this
investment technique was not used.

WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-Issued and Delayed Delivery
Securities are securities

21
<PAGE>

purchased with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous yield or price at the time of
the transaction. Delivery of and payment for these securities may take as long
as a month or more after the date of the purchase commitment, but will take
place no more than 120 days after the trade date. The payment obligation and
the interest rates that will be received are each fixed at the time a Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if the general
level of interest rates has changed. The Portfolio will maintain with the
Custodian a separate account with a segregated portfolio of liquid securities
or cash in an amount at least equal to these commitments. The U.S. Real Estate
and Emerging Markets Equity Portfolios will not enter into When-Issued or
Delayed Delivery Securities commitments exceeding, in the aggregate, 15% of the
Portfolio's total assets other than the obligations created by these
commitments.

FUNDAMENTAL INVESTMENT LIMITS

EACH PORTFOLIO (excluding the U.S. Real Estate and Emerging Markets Equity
Portfolios) is a diversified investment company and is therefore subject to the
following fundamental limitations: as to 75% of its total assets, a Portfolio
may not (a) invest more than 5% of its total assets in the securities of any
one issuer, except obligations of the U.S. Government, its agencies and
instrumentalities, or (b) own more than 10% of the outstanding voting
securities of any one issuer.

MANAGEMENT OF THE FUND

The Fund is governed by a Board of Directors which is responsible for the
management of the business and affairs of the Fund as provided in the laws of
the State of Maryland and the Fund's Articles of Incorporation and By-Laws. The
Board of Directors of the Fund has undertaken to monitor the Fund for the
existence of any material irreconcilable conflict among the interests of
variable annuity contract owners, variable life insurance policy owners and
qualified plans that invest in the Fund due to differences in tax treatment and
other considerations, and shall report any such conflict to the boards of the
respective life insurance companies that use the Fund as an investment vehicle
for their respective variable annuity contracts and variable life insurance
policies and to qualified plans. The Boards of Directors of those life
insurance companies and the fiduciaries of certain qualified plans and the
Adviser, have agreed or will agree to be responsible for reporting any
potential or existing conflicts to the Directors of the Fund. If a material
irreconcilable conflict exists that affects those life insurance companies,
they will be required, at their own cost, to remedy such conflict up to and
including establishing a new registered management investment company and
segregating the assets underlying the variable annuity contracts and the
variable life insurance policies. Qualified plans which acquire more than 10%
of the assets of a Portfolio will be required to report any potential or
existing conflicts to the Directors of the Fund, and if a material
irreconcilable conflict exists, to remedy such conflict, up to and including
redeeming shares of the Portfolios held by the qualified plans. The majority of
the Fund's Directors are not affiliated with MSAM, MAS, any of their
affiliates, any of the other companies that provide services to the Fund or any
of their affiliates. The officers of the Fund conduct and supervise its daily
business operations.

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<PAGE>

insurance company issuing a variable annuity contract or variable life
insurance policy that participates in the Portfolios will vote shares held in
its separate account as required by law and interpretations thereof, as may be
amended or changed from time to time. In accordance with current law and
interpretations thereof, a participating insurance company is required to
request voting instructions from contract or policy owners and must vote shares
in the separate account in proportion to the voting instructions received. For
a further discussion, please refer to your insurance company's separate account
prospectus.

INVESTMENT MANAGEMENT

INVESTMENT ADVISERS. The Adviser assigned to a Portfolio provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. MSAM serves as the Adviser for the U.S. Real Estate and Emerging
Markets Equity Portfolios. MAS serves as the adviser for the Fixed Income,
Value and Mid Cap Value Portfolios. MSAM, with principal offices at 1221 Avenue
of the Americas, New York, New York 10020, conducts a worldwide investment
management business, providing a broad range of portfolio management services
to customers in the United States and abroad. MSAM is a wholly-owned subsidiary
of Morgan Stanley Group Inc. ("MSGI"), which is a publicly owned financial
services corporation listed on the New York, London and Pacific stock
exchanges. MSAM, a registered Investment Adviser under the Investment Advisers
Act of 1940, as amended, serves as investment adviser to numerous open-end and
closed-end investment companies. MAS is a Pennsylvania limited liability
partnership founded in 1969 with principal offices at One Tower Bridge, West
Conshohocken, Pennsylvania 19428. As of January 1996, MAS is also indirectly
wholly-owned by MSGI. MAS provides investment services to employee benefit
plans, endowment funds, foundations and other institutional investors and has
served as investment adviser to several open-end investment companies since
1984. As of February 28, 1997, MSAM, together with its affiliated asset
management companies (other than MAS and Van Kampen), managed assets totaling
approximately $74 billion, MAS managed assets totaling approximately $44.4
billion and MSAM and MAS and all of their affiliated asset management companies
managed assets totalling approximately $176.9 billion. See "Management of the
Fund" in the SAI.

On February 5, 1997, MSGI and Dean Witter, Discover & Co. ("Dean Witter
Discover") announced that they had entered into an Agreement and Plan of Merger
to form Morgan Stanley, Dean Witter, Discover & Co. Presently, Dean Witter,
Discover is a financial services company with three major businesses: full
service brokerage, credit services and asset management. Subject to certain
conditions being met, it is currently anticipated that the transaction will
close in mid-1997. Thereafter, MSAM and MAS will be subsidiaries of Morgan
Stanley, Dean Witter, Discover & Co.

PORTFOLIO MANAGERS. The following individuals have primary responsibility for
the Portfolios as indicated below.

FIXED INCOME PORTFOLIO -- Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley. Thomas L. Bennett, a Managing Director of Morgan Stanley & Co. Inc.
("Morgan Stanley"), joined MAS in 1984. He assumed responsibility for the MAS
Funds Fixed Income Portfolio in 1984, the MAS Funds Domestic Fixed Income
Portfolio in 1987, the MAS Funds High Yield Portfolio in 1985, the MAS Funds
Fixed Income Portfolio II in 1990, the MAS Funds Special Purpose Fixed Income
and Balanced Portfolios in 1992 and the MAS Funds Multi-Asset-Class Portfolio
in 1994. Mr. Bennett is Chairman of the Board of Trustees of MAS Funds, a
member of the Executive Committee of MAS and a Director of MAS Fund
Distributors, Inc. Mr. Bennett holds a B.S. in Chemistry and an M.B.A. from
University of Cincinnati. Kenneth B. Dunn, a Managing Director of Morgan
Stanley, joined MAS in 1987. He assumed responsibility for the MAS Funds Fixed
Income and Domestic Fixed Income Portfolios in 1987, the MAS Funds Fixed Income
II Portfolio in 1990, the MAS Funds Mortgage-Backed Securities and Special
Purpose Fixed Income Portfolios in 1992, and the MAS Funds Municipal and PA
Municipal Portfolios in 1994. Mr. Dunn received a B.S. and an M.B.A. from The
Ohio State University and a Ph.D. from Purdue University. Richard B. Worley, a
Managing Director of Morgan Stanley, joined MAS in 1978. He assumed
responsibility for the MAS Funds Fixed Income Portfolio in 1984, the MAS Funds
Domestic Fixed Income Portfolio in 1987, the MAS Funds Fixed Income Portfolio
II in 1990, the MAS Funds Balanced and Special Purpose Fixed Income Portfolios
in 1992, the MAS Funds Global Fixed Income and International Fixed Income
Portfolios in 1993 and the MAS Funds Multi-Asset-Class Portfolio in 1994.
Mr. Worley received a B.A. in Economics from University of Tennessee and
attended the Graduate School of Economics at University of Texas. Messrs.
Bennett, Dunn, and Worley have shared primary responsibility for managing the
Portfolio's assets since inception.

VALUE PORTFOLIO -- Robert S. Marcin, Richard M. Behler and Nicholas J. Kovich.
Robert J. Marcin, a Managing Director of Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the MAS Funds Value Portfolio in 1990 and the MAS
Funds Equity Portfolio in 1994. Mr. Marcin holds a B.A. from Dartmouth College.
Richard M. Behler, a Principal of Morgan Stanley, joined MAS in 1995. He served
as a Portfolio Manager from 1992 through 1995 for Moore Capital Management and
as Senior Vice President for Merrill Lynch Economics from 1987 through 1992. He
assumed responsibility for the MAS Fund's Value Portfolio in 1996. Mr. Behler
received a B.A. (Cum Laude) in

23
<PAGE>

Economics from Villanova University and an M.A. and a Ph.D. in Economics from
University of Notre Dame. Nicholas J. Kovich, Managing Director, Morgan
Stanley, joined MAS in 1988. He assumed responsibility for the Equity Portfolio
in 1994 and the Value Portfolio in 1997. Mr. Behler and Mr. Marcin have shared
primary responsibility for managing the Portfolio's assets since inception.

MID CAP VALUE PORTFOLIO -- William B. Gerlach and Gary G. Schlarbaum. William
B. Gerlach, a Vice President of Morgan Stanley, joined MAS in 1991. He holds a
B.A. in Economics from Haverford College. Gary G. Schlarbaum, a Managing
Director of Morgan Stanley, joined MAS in 1987. He assumed responsibility for
the MAS Funds Equity and Small Cap Value Portfolios in 1987, the MAS Funds
Balanced Portfolio in 1992 and the MAS Funds Multi-Asset-Class and Mid Cap
Value Portfolios in 1994. Mr. Schlarbaum holds a B.A. from Coe College and a
Ph.D. from University of Pennsylvania. Mr. Gerlach and Mr. Schlarbaum have had
primary responsibility for managing the Portfolio's assets since inception.

U.S. REAL ESTATE PORTFOLIO -- Theodore R. Bigman and Russell Platt. Mr. Bigman,
a Principal of Morgan Stanley, joined MSAM in 1995. Together with Russell
Platt, he is responsible for MSAM's real estate securities research. Prior to
joining MSAM, he was a Director at CS First Boston, where he worked for eight
years in the Real Estate Group. Mr. Bigman graduated from Brandeis University
with a B.A. in Economics and received an M.B.A. from Harvard University.
Russell Platt joined MSAM in 1994. Mr. Platt, a Managing Director of Morgan
Stanley, previously served as a Director of the General Partner of The Morgan
Stanley Real Estate Fund I, where he was involved in capital raising,
acquisitions, oversight of investments and investor relations. From 1991 to
1993, Mr. Platt was head of Morgan Stanley Realty's Transaction Development
Group. As such, he was actively involved in Morgan Stanley's worldwide real
estate business. Mr. Platt graduated from Williams College with a B.A. in
Economics and received an M.B.A. from Harvard Business School. Mr. Bigman and
Mr. Platt have had primary responsibility for managing the Portfolio's assets
since inception.

EMERGING MARKETS EQUITY PORTFOLIO -- Madhav Dhar and Marianne L. Hay. Madhav
Dhar is a Managing Director of MSAM and Morgan Stanley. He joined MSAM in 1984
to focus on global asset allocation and investment strategy and now heads
MSAM's emerging markets group and serves as the group's principal Portfolio
Manager. Mr. Dhar also coordinates MSAM's developing country funds effort and
has been involved in the launching of MSAM's country funds. He is a Director of
the Morgan Stanley Emerging Markets Fund, Inc. (a closed-end investment
company). He holds a B.S. (honors) from St. Stephens College, Delhi University
(India), and an M.B.A. from Carnegie-Mellon University. Marianne L. Hay, a
Managing Director of Morgan Stanley, joined the Adviser in June 1993 to work
with the Adviser's senior management covering all emerging markets assets
allocation, product development and client services. Ms. Hay has 17 years of
investment experience. Prior to joining the Adviser, she was a director of
Martin Currie Investment Management, Ltd. ("Martin Currie") where her
responsibilities included geographic asset allocation and portfolio management
for global and emerging markets funds, as well as being director in charge of
the company's North American clients. She graduated with an honors degree in
genetics from Edinburgh University and holds a Diploma in Education and the
qualification of the Association of the Institute of Bankers in Scotland. Mr.
Dhar and Ms. Hay have shared primary responsibility for managing the
Portfolio's assets since its inception.

OTHER SERVICES

DISTRIBUTOR. Under its Distribution Agreement with the Fund, Morgan Stanley
serves as the exclusive Distributor of the Fund and sells shares of each
Portfolio upon the terms and at the current offering price described in this
Prospectus. Morgan Stanley is not obligated to sell any certain number of
shares of any Portfolio. Morgan Stanley, as principal underwriter, or the
insurance companies whose variable products are funded by the Fund, will bear
all of the Fund's marketing expenses. This includes the cost of reproducing
prospectuses, statements of additional information or any other Fund documents
(such as semiannual reports) used as sales materials.

ADMINISTRATOR. MSAM and MAS also provide the respective Portfolios of the Fund
which they manage with administrative services pursuant to Administration
Agreements. The services provided under the respective Administration
Agreements are subject to the supervision of the officers and the Board of
Directors of the Fund, and include day-to-day administration of matters related
to the corporate existence of the Fund, maintenance of its records, preparation
of reports, supervision of the Fund's arrangements with its Custodian, and
assistance in the preparation of the Fund's registration statements under
federal and state laws. The Administration Agreements also provide that the
Administrators through their agents will provide the Fund with dividend
disbursing and transfer agent services. For their services under the
Administration Agreements, the Fund pays MSAM and MAS a monthly fee which on an
annual basis equals 0.25% of the average daily net assets of each Portfolio
that they administer.

24
<PAGE>

supervision of the Board of Directors of the Fund. The Board of Directors of
the Fund has approved the provision of services described above pursuant to the
Administration Agreements and the Sub-Administration Agreements as being in the
best interests of the Fund. Chase Global's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. For additional information regarding
the Administration Agreements or the Sub-Administration Agreements, see
"Management of the Fund" in the SAI.

Certain administrative and recordkeeping services that would otherwise be
performed by the Advisers or their service providers may be performed by
insurance companies that purchase shares of the Portfolios. An Adviser may make
payments to these insurance companies to defray the cost of providing those
types of services.

Chase Global calculates the NAV and dividends, maintains the general accounting
records and administers the securities lending program for each Portfolio.

CUSTODIANS. Chase serves as the Custodian of domestic securities and cash of
the Portfolios. Chase is not an affiliate of either of the Advisers or the
Distributor. Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an
affiliate of MSAM, MAS and the Distributor, acts as the Fund's Custodian for
foreign assets held outside the United States (including, through sub-
custodians, securities held in Russia) and employs sub-custodians approved by
the Board of Directors of the Fund in accordance with regulations of the SEC
for the purpose of providing custodial services for such assets. MSTC may also
hold certain domestic assets for the Fund. For more information on the
Custodians, see "General Information--Custody Arrangements" in the SAI.

DIVIDEND DISBURSING AND TRANSFER AGENT. Chase Global acts as dividend
disbursing and transfer agent for the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and audits the annual financial statements of each Portfolio.

LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.

BREAKDOWN OF EXPENSES

The Portfolios pay fees and other costs related to their daily operations.
Expenses paid out of a Portfolio's assets are reflected in its share price.
Each Portfolio pays a management fee to its Adviser for managing its
investments and business affairs. MSAM and MAS pay fees to affiliates who
provide assistance with these services. Each Portfolio also pays other
expenses, which are explained below. The Advisers may, from time to time,
reduce their fees or reimburse the Portfolios for expenses above a specified
limit. These fee reductions or expense reimbursements, which may be terminated
at any time without notice, can decrease a Portfolio's expenses and boost its
performance.

MANAGEMENT FEE

PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Mid U.S. Emerging
Fixed Cap Real Markets
Assets Income Value Value Estate Equity
- -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
First $500
million 0.40% 0.55% 0.75% 0.80% 1.25%
- -----------------------------------------------------
From $500
million to $1
billion 0.35% 0.50% 0.70% 0.75% 1.20%
- -----------------------------------------------------
More than $1
billion 0.30% 0.45% 0.65% 0.70% 1.15%
</TABLE>

However, the Advisers, with respect to certain of the Portfolios, have
voluntarily waived receipt of their management fees and agreed to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed the respective percentage of average daily
net assets set forth in the table below.

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Portfolio Fee Waivers
- --------- ------------------------
<S> <C>
Fixed Income........................................... 0.70%
Value.................................................. 0.85%
Mid Cap Value.......................................... 1.05%
U.S. Real Estate....................................... 1.10%
Emerging Markets Equity................................ 1.75%
</TABLE>

These fee waivers are voluntary and may be terminated by the Adviser at any
time without notice.

OTHER EXPENSES

In addition to investment advisory and certain administrative expenses charged
by the administrators, each Portfolio pays all expenses not assumed by MSAM or
MAS. Such expenses include or could include investment-related expenses, such
as brokers' commissions, transfer taxes and fees related to the purchase, sale,
or loan of securities; fees and expenses for Directors not affiliated with MSAM
or MAS; fees and expenses of its independent accountants and legal counsel;
costs of Directors and shareholder meetings; SEC fees; expenses of preparing
and filing registration statements; the cost of providing proxy statements,
prospectuses and statements of additional information to existing variable
annuity contract and variable life insurance policy owners; expenses of
preparing and printing the annual and semiannual shareholder reports to
variable annuity contract and variable life insurance policy owners; bank
transaction charges and certain custodians' fees and expenses; federal, state
or local income or other taxes; costs of maintaining the Portfolio's corporate
existence; membership fees for the Investment

25
<PAGE>

Company Institute and similar organizations; fidelity bond and Directors'
liability insurance premiums; and any extraordinary expenses such as
indemnification payments or damages awarded in litigation or settlements made.
All these expenses that are incurred by the Portfolio will be passed on to the
shareholders through a daily charge made to the assets held in the Portfolios,
which will be reflected in share prices.

PORTFOLIO TRANSACTIONS

In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by MSAM. If the purchase or sale of securities
consistent with the investment policies of the Portfolios and one or more of
these other clients serviced by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolios
and such other clients in a manner deemed fair and reasonable by MSAM. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by MSAM, and the results of such allocations, are
subject to periodic review by the Fund's Board of Directors.

Subject to the overriding objective of obtaining the best possible execution of
orders, MSAM may allocate a portion of the Portfolio's brokerage transactions
to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan
Stanley or its affiliates to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Morgan Stanley or such
affiliates must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those Directors who are not
"interested persons", as defined in the 1940 Act, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.

PORTFOLIO TURNOVER

Under certain market conditions, a Portfolio may experience high portfolio
turnover as a result of its investment strategies. For example, the purchase or
sale of securities by a Portfolio in anticipation of a rise or decline in
interest rates or to take advantage of yield disparities among different issues
of Fixed Income Securities could result in high portfolio turnover. As a result
of their investment strategies, the Fixed Income, U.S. Real Estate and Mid Cap
Value Portfolios' annual portfolio turnover rates are expected to be as high as
200%. Higher portfolio turnover rates for the Portfolios can result in
corresponding increases in expenses such as brokerage commissions and
transaction costs. Although none of the Portfolios will invest for short-term
trading purposes, investment securities may be sold from time to time without
regard to the length of time they have been held and the Portfolios will not
consider portfolio turnover rate a limiting factor in making investment
decisions consistent with their respective objectives and policies.

PERFORMANCE OF PORTFOLIOS

TOTAL RETURN is the change in value of an investment in a Portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. Average annual total
returns smooth out variations in performance; they are not the same as actual
year-by-year results.

26
<PAGE>

Average annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.

Yield refers to the income generated by an investment in a Portfolio over a
given period of time, expressed as an annual percentage rate. When a yield
assumes that income is reinvested, it is called an effective yield.

27
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

The Advisers manage portfolios of Morgan Stanley Institutional Fund, Inc.
("MSIF") and MAS Funds, which served as the models for the Portfolios of the
Fund. The portfolios of MSIF and MAS Funds have substantially the same
investment objectives, policies and strategies as the Portfolios of the Fund.
In addition, the Advisers intend the Portfolios of the Fund and the
corresponding portfolios of MSIF and MAS Funds to be managed by the same
personnel and to continue to have closely similar investment strategies,
techniques and characteristics. The following table sets forth the name of each
Portfolio of the Fund and the name of the corresponding portfolio of MSIF or
MAS Funds from which the Portfolio is cloned.

<TABLE>
<CAPTION>
Corresponding Corresponding
MSIF MAS Funds
Fund Portfolio portfolio portfolio
-------------- ------------- -------------
<S> <C> <C>
Fixed Income Fixed Income
Value Value
Mid Cap Value Mid Cap Value
U.S. Real Estate U.S. Real Estate
Emerging Markets Equity Emerging Markets
</TABLE>

<TABLE>
<CAPTION>
Average Average
Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Annual
One Year Five Years Ten Years Five Years Ten Years Total Return
Inception Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSIF:
U.S. Real Estate........ 2/24/95 39.56% NA NA NA NA 32.73%
Emerging Markets........ 9/25/92 12.19% NA NA NA NA 12.93%
MAS Funds:
Fixed Income............ 11/14/84 7.63% 63.46% 145.13% 8.94% 9.38% 10.92%
Value................... 11/5/84 18.41% 127.75% 297.08% 17.89% 14.79% 16.86%
Mid Cap Value........... 12/30/94 22.30% NA NA NA NA 32.88%
</TABLE>

PERSONS CONTROLLING CERTAIN PORTFOLIOS

As of April 7, 1997, MSGI owned more than 25% of the outstanding voting
securities of the Fixed Income, Value, Mid Cap Value, U.S. Real Estate, and
Emerging Markets Equity Portfolios and therefore, may be deemed a controlling
person of these Portfolios under the 1940 Act.

For more information, see "Control Persons and Principal Holders of Securities"
in the SAI.

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

28
<PAGE>

As stated on the cover of this Prospectus, shares of the Portfolios will be
purchased by life insurance companies for their separate accounts under
variable annuity contracts and variable life insurance policies and by other
entities under qualified pension and retirement plans. Under the provisions of
the Code currently in effect, net income and realized capital gains are not
currently taxable when left to accumulate within a variable annuity contract or
variable life insurance policy or under a qualified pension or retirement plan.

TRANSACTION DETAILS

The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. Each of the Value, Mid Cap Value, U.S. Real Estate and
Emerging Markets Equity Portfolio's NAV is determined as of the close of
business of the NYSE (normally 4:00 p.m. Eastern Time) on each day that the
NYSE is open for business. The NYSE is currently scheduled to be closed on New
Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day, and on the preceding Friday or
subsequent Monday when any of these holidays falls on a Saturday or Sunday,
respectively.

The Fixed Income Portfolio's NAV is determined as of one hour after the close
of the bond markets (normally 4:00 p.m. Eastern time) on each day that the
Portfolios are open for business.

Each Portfolio's assets are valued primarily on the basis of market quotations.
Foreign securities are valued on the basis of quotations from the primary
market in which they are traded, and are translated from the local currency
into U.S. dollars using current exchange rates. If quotations are not readily
available or if the values have been materially affected by events occurring
after the closing of a foreign market, assets are valued by a method that the
Fund's Board of Directors believes accurately reflects fair value.

Each Portfolio's offering price (price to buy one share) and redemption price
(price to sell one share) are its NAV.

INVESTMENTS AND REDEMPTIONS. Investments and redemptions are made by insurance
companies for their variable annuity contracts and variable life insurance
policies and by tax qualified investors, such as qualified pension and
retirement plans. Please refer to the prospectus of your insurance company's
separate account or the qualified plan documents for information on how to
invest in and redeem shares of each Portfolio.

Each participating insurance company receives orders from its variable annuity
contract and variable life insurance policy owners to purchase or redeem shares
of the Portfolios each business day. That night, all orders received by that
insurance company on that business day are aggregated, and the insurance
company places a net purchase or redemption order for shares of one or more
Portfolios the morning of the next business day. These orders are normally
executed at the NAV that was computed at the close of the previous business day
in order to provide a match between the variable contract and policy owners'
orders to the insurance companies and the insurance companies' orders to a
Portfolio. In some cases, an insurance company's orders for Portfolio shares
may be executed at the NAV next computed after the order is actually
transmitted to a Portfolio.

29
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY MILLER
ASSET MANAGEMENT ANDERSON &
INC. SHERRERD, LLP

MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A MUTUAL FUND DESIGNED TO
PROVIDE INVESTMENT VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES AND FOR CERTAIN TAX-QUALIFIED INVESTORS. THIS PROSPECTUS
DESCRIBES TWO PORTFOLIOS MANAGED BY EITHER MORGAN STANLEY ASSET MANAGEMENT INC.
("MSAM") OR MILLER ANDERSON & SHERRERD, LLP ("MAS"). THE FUND MAKES AVAILABLE
IN A SINGLE PRODUCT THE COMBINED STRENGTH OF THESE LEADING INVESTMENT
MANAGEMENT FIRMS. THE FUND ALSO OFFERS FIFTEEN OTHER PORTFOLIOS MANAGED BY MSAM
OR MAS.

A STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED MAY 1, 1997, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED HEREIN BY
REFERENCE, AND, THEREFORE, LEGALLY FORMS A PART OF THE PROSPECTUS. FOR A COPY
OF THE SAI, AT NO CHARGE, CONTACT THE FUND BY CALLING 1-800-422-6464 EXT. 7182
OR CONTACT YOUR INSURANCE COMPANY.

THE PORTFOLIOS:

Fixed Income Portfolio

U.S. Real Estate Portfolio

AN INVESTMENT IN ANY PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. YOU MAY RECEIVE MORE OR LESS THAN YOU INVESTED WHEN YOU REDEEM YOUR
SHARES.

Prospectus dated May 1, 1997
MORGAN STANLEY UNIVERSAL FUNDS, INC.

P.O. Box 2798, Boston, MA 02208-2798
<PAGE>

THE FUND

The Fund is an open-end management investment company, or mutual fund. Each of
the two separate investment portfolios (each, a "Portfolio") described in this
Prospectus has a distinct investment objective. The following pages describe
the types of securities and investment techniques each Portfolio uses to seek
its objective, as well as the risks inherent in those types of securities and
investment techniques.

MANAGEMENT

Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") advises the U.S.
Real Estate Portfolio. MSAM conducts a worldwide investment advisory business.
As of February 28, 1997, MSAM and its affiliated asset management companies
(exclusive of MAS and Van Kampen American Capital, Inc. ("Van Kampen")) managed
assets of approximately $74 billion.

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the Fixed
Income Portfolio. MAS's institutional investment advisory business was
established in 1969. As of February 28, 1997, MAS managed assets of
approximately $44.4 billion. Also as of February 28, 1997, MSAM and MAS, and
all of their affiliated asset management companies, managed assets totalling
approximately $176.9 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE

PAGE
----

PORTFOLIO SUMMARIES 3
- -------------------

For each Portfolio, the investment objective and a summary
of strategy, potential investors, and investment characteristics
and risks.

THE PORTFOLIOS' INVESTMENTS 3
- ---------------------------
A more detailed review of how each Portfolio invests and
investment characteristics and risks.

SECURITIES AND INVESTMENT TECHNIQUES 5
- ------------------------------------

More information about the types of investment strategies
that may be used by some or all of the Portfolios and information
about investment risks and limitations.

FUNDAMENTAL INVESTMENT LIMITS 17
- -----------------------------

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 18
- ----------------------

General information on organization and operations of the
Fund, including details about MSAM, MAS and the individual portfolio
managers, as well as fees, expenses and performance calculations.

ACCOUNT POLICIES 24
- ----------------

Information on net asset value calculation, income and gain
distributions, taxes and share purchases and redemptions.

2
<PAGE>

PORTFOLIO SUMMARIES

Certain investment terms used below have initial capital letters ("Common
Stocks," for example). These terms are further described under "Securities and
Investment Techniques" below.

FIXED INCOME PORTFOLIO

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of Fixed Income Securities.

U.S. REAL ESTATE PORTFOLIO

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, the Portfolio's investments may be subject to the risks
associated with the direct ownership of real estate and direct investments of
REITs.

THE PORTFOLIOS' INVESTMENTS

INVESTMENT CHARACTERISTICS AND RISKS

Because the U.S. Real Estate is a non-diversified portfolio and is permitted
greater flexibility to invest its assets in the obligations of a single issuer,
it is exposed to increased risk of loss if such an investment underperforms
expectations. See "Non-Diversified Status" in this Prospectus and "Investment
Limitations" in the SAI.

Investments in securities rated below investment grade, sometimes called high
risk or High Yield Securities or junk bonds, carry a high degree of risk and
are considered speculative. MSAM and MAS may use various investment techniques
to hedge risks, including investments in Derivatives, but there is no guarantee
that these strategies will work as intended. When Portfolio shares are
redeemed, they may be worth more or less than their original cost. An
investment in any one Portfolio is not in itself a balanced investment plan. As
with any mutual fund, there is no assurance that a Portfolio will achieve its
goal.

Each Portfolio will be invested according to its investment strategy. However,
the Portfolios also have the ability to invest without limitation in high
quality Money Market Instruments or Temporary Investments for temporary
defensive purposes. See "Securities and Investment Techniques" below.

3
<PAGE>

FIXED INCOME PORTFOLIO

U.S. REAL ESTATE PORTFOLIO

The Portfolio may also invest in Fixed Income Securities issued or guaranteed
by real estate companies or secured by real estate assets and are Investment
Grade Securities, Money Market Instruments, such as notes, certificates of
deposit or bankers' acceptances issued by domestic or foreign issuers, or high-
grade debt securities, consisting of corporate debt securities and U.S.
Governments and Agencies. The Portfolio may also invest in certain securities
or obligations, including Non-Publicly Traded Securities, Private Placements,
Restricted Securities, Repurchase Agreements, When-Issued and Delayed Delivery
Securities, Temporary Investments and Derivatives, including but not limited to
Options and Futures and may engage in Loans of Portfolio Securities. For
additional information about the Portfolio's investments, see "Securities and
Investment Techniques" and "Non-Diversified Status" below.

The Adviser's approach is to invest in Equity Securities of companies that it
believes will provide a dividend yield that exceeds the composite dividend
yield of securities comprising the S&P 500. A substantial portion of the
Portfolio's total assets will be invested in Equity Securities of REITs. REITs
pool investors' funds for investment primarily in income producing real estate
or real estate related loans or interests, with certain tax advantages if
regulatory requirements are met. Generally, REITs can be classified as Equity
REITs, Mortgage REITs or Hybrid REITs. Equity REITs invest the majority of
their assets directly in real property and derive their income primarily from
rents and capital gains from appreciation realized through property sales.
Equity REITs are further categorized according to the types of real estate
securities they own, e.g., apartment properties, retail shopping centers,
office and industrial properties, hotels, health-care facilities, manufactured
housing and mixed-property types. Mortgage REITs invest the majority of their
assets in real estate mortgages and derive their income primarily from interest
payments. Hybrid REITs combine the characteristics of both Equity and Mortgage
REITs. The Portfolio will invest primarily in Equity REITs. A shareholder in
the Portfolio investing in REITs indirectly through the Portfolio will bear not
only his or her proportionate share of the expenses of the Portfolio, but also
indirectly, the management expenses of underlying REITs.

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SECURITIES AND INVESTMENT TECHNIQUES

The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.

STRATEGIES

HIGH YIELD INVESTING: The Adviser seeks to invest in High Yield Securities
based on the Adviser's analysis of economic and industry trends and individual
security characteristics. The Adviser conducts credit analysis for each
security considered for investment to evaluate its attractiveness relative to
its risk. A high level of diversification is also maintained to limit credit
exposure to individual issuers.

To the extent a Portfolio invests in High Yield Securities it will be exposed
to a substantial degree of credit risk. Lower-rated bonds are considered
speculative by traditional investment standards. High Yield Securities may be
issued as a consequence of corporate restructuring or similar events. Also,
High Yield Securities are often issued by smaller, less creditworthy companies,
or by highly leveraged (indebted) companies, which are generally less able than
more established or less leveraged companies to make scheduled payments of
interest and principal. The risks posed by securities issued under such
circumstances are substantial.

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market liquidity, High Yield Security prices may become more volatile, and both
the high yield market and a Portfolio may experience sudden and substantial
price declines. This lower liquidity might have an effect on a Portfolio's
ability to value or dispose of such securities. Also, there may be significant
disparities in the prices quoted for High Yield Securities by various dealers.
Under such conditions, a Portfolio may find it difficult to value its
securities accurately. A Portfolio may also be forced to sell securities at a
significant loss in order to meet shareholder redemptions. These factors add to
the risks associated with investing in High Yield Securities.

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agencies, and private issuers. It is expected that the Portfolio's primary
emphasis will be in MBSs issued by the various Government-related
organizations. However, a Portfolio may invest, without limit, in MBSs issued
by private issuers when the Adviser deems that the quality of the investment,
the quality of the issuer, and market conditions warrant such investments.
Securities issued by private issuers will be rated investment grade by Moody's
or S&P or be deemed by the Adviser to be of comparable investment quality.

INSTRUMENTS AND INVESTMENTS

ABSS. Asset-backed securities ("ABSs") are securities collateralized by
shorter-term loans such as automobile loans, home equity loans, computer leases
or credit card receivables. The payments from the collateral are passed through
to the security holder. The collateral behind ABSs tends to have prepayment
rates that usually do not vary with interest rates. In addition, the short-term
nature of the loans reduces the impact of any change in prepayment level. Due
to amortization, the average life for ABSs is also the conventional proxy for
maturity.

Due to the possibility that prepayments (on automobile loans and other
collateral) will alter the cash flow on ABSs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

BRADY BONDS. Brady Bonds are Fixed Income Securities that are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury (the "Brady
Plan"). Brady Bonds have been issued only in relatively recent years, and,
accordingly, do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market. For further information on these securities, see the SAI. A
Portfolio will invest in Brady Bonds only if they are consistent with quality
specifications.

CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:

(2)Commercial paper rated at time of purchase by one or more NRSROs in one of
their two highest categories,

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(e.g., A-1 or A-1+ by S&P or Prime 1 by Moody's, or, if not rated, issued by a
corporation having an outstanding unsecured debt issue rated high-grade by an
NRSRO (e.g., A or better by Moody's, S&P or Fitch Investors Service, Inc.
("Fitch")).

(3)Short-term corporate obligations rated high-grade at the time of purchase by
an NRSRO (e.g., A or better by Moody's, S&P or Fitch).

(4)U.S. Governments and Agencies.

(5)Repurchase Agreements collateralized by securities listed above.

Due to the possibility that prepayments (on home mortgages and other
collateral) will alter the cash flow on CMOs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

CORPORATE BONDS. Corporate Bonds are Fixed Income Securities issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. A Portfolio will buy
Corporate Bonds subject to any quality constraints. If a security held by a
Portfolio is down-graded, the Portfolio may retain the security.

DERIVATIVES. Derivatives are financial products or instruments that derive
their value from the value of an
underlying asset, reference rate or index. Derivatives include, but are not
limited to, the following: CMOs, SMBSs (i.e., Stripped Mortgage-Backed
Securities), Convertible Securities, Warrants, Forwards, Futures, Options,
Structured Notes and Swaps.

EQUITY SECURITIES. Equity Securities commonly include, but are not limited to,
Common Stocks, Preferred Stocks, Depositary Receipts, Rights, Warrants, and
Foreign Equities. Preferred Stock is contained in both the definition of Equity
Securities and Fixed Income Securities because it exhibits characteristics
commonly associated with each type of security. See the "The Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

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Convertible Securities, Brady Bonds, Floaters, Inverse Floaters, Cash
Equivalents, Municipals, Repurchase Agreements, Preferred Stocks and Foreign
Bonds. Preferred Stock is contained in both the definition of Equity Securities
and Fixed Income Securities since it exhibits characteristics commonly
associated with each type of security. See the "The Portfolios' Investments"
section applicable to a particular Portfolio to determine in which of the above
a Portfolio may invest.

FOREIGN CURRENCY TRANSACTIONS. Portfolios investing in foreign securities will
regularly transact security purchases and sales in foreign currencies. The
Portfolio may hold foreign currency or engage in the Foreign Currency
Transactions discussed below.

Forex Futures are standardized contracts for the future delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Forex Futures traded in the United States are traded on regulated
futures exchanges. A Portfolio will incur brokerage fees when it purchases or
sells Forex Futures and it will be required to maintain margin deposits.
Parties to a Forex Future must make initial margin deposits to secure
performance of the contract, which generally range from 2% to 5% of the
contract price. There also are requirements to make "variation" margin deposits
as the value of the Futures contract fluctuates.

A Portfolio may use Forwards in the normal course of business to lock in an
exchange rate in connection with purchases and sales of securities (transaction
hedge) or to lock in the dollar value of portfolio positions (position hedge).
In addition a Portfolio may cross-hedge currencies by entering into a
transaction to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which a Portfolio has or
expects to have portfolio exposure. A Portfolio may also engage in proxy
hedging which is defined as entering into positions in one currency to hedge
investments denominated in another currency, where the two currencies are
economically linked. Forwards will be used only as a protective measure against
the effects of fluctuating rates of currency exchange and exchange control
regulations. While such contracts may limit losses to the Portfolio as a result
of exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.

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<PAGE>

exchange U.S. dollars for the contract's underlying currency at a future date.
By matching the amount of U.S. dollars to be exchanged with the anticipated
value of the U.S. dollar-denominated security, a Portfolio may be able to lock
in the foreign currency value of the security and adopt a synthetic investment
position reflecting the credit quality of the U.S. dollar-denominated security.

There is a risk in adopting a synthetic investment position to the extent that
the value of a security denominated in U.S. dollars or other foreign currency
is not exactly matched with a Portfolio's obligation under the forward
contract. On the date of maturity, a Portfolio may be exposed to some risk of
loss from fluctuations in that currency. Although the Adviser will attempt to
hold such mismatching to a minimum, there can be no assurance that the Adviser
will be able to do so. When a Portfolio enters into a forward contract for
purposes of creating a synthetic security, it will generally be required to
hold liquid assets in a segregated account with a daily value at least equal to
its obligation under the forward contract.

FOREIGN INVESTMENT. Investment in securities and obligations of foreign issuers
and in foreign branches of domestic banks involves somewhat different
investment risks than those affecting obligations of U.S. issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States. Many foreign securities markets have substantially less volume than
U.S. national securities exchanges, and securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and
interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on Foreign Investments as
compared to dividends and interest paid by U.S. companies. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction will impose or change withholding taxes on income payable
with respect to foreign securities, and the possible adoption of foreign
governmental restrictions such as exchange controls.

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<PAGE>

applicable laws, the Portfolios may engage in transactions in securities index
futures contracts (and options thereon) which are traded on a recognized
securities or futures exchange, or may purchase or sell such instruments in the
over-the-counter market. There currently are limited securities index futures
and options on such futures in many countries, particularly emerging countries.
The nature of the strategies adopted by the Adviser, and the extent to which
those strategies are used, may depend on the development of such markets.

The Portfolios may engage in transactions involving foreign currency exchange
futures contracts. For more information, see "Foreign Currency Transactions"
above.

The Portfolios may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolios may engage in interest
rate futures contracts to hedge holdings of debt instruments against future
changes in interest rates.

Under rules adopted by the Commodity Futures Trading Commission, each Portfolio
may enter into futures contracts and options thereon for both hedging and non-
hedging purposes, provided that not more than 5% of such Portfolio's total
assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-
hedging activities. The U.S. Real Estate Portfolio may enter into futures
contracts to the extent that its outstanding obligations to purchase securities
under such contracts in combination with its outstanding obligations with
respect to options transactions (including options to purchase securities or
instruments) would not exceed 20% of its total assets or in the case of the
Fixed Income Portfolio outstanding obligations would not exceed 50% of its
respective total assets.

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While such securities offer high yields, they also normally carry with them a
greater degree of risk than securities with higher ratings. Lower-rated bonds
are considered speculative by traditional investment standards. High Yield
Securities may be issued as a consequence of corporate restructuring or similar
events. Also, High Yield Securities are often issued by smaller, less credit
worthy companies, or by highly leveraged (indebted) firms, which are generally
less able than more established or less leveraged firms to make scheduled
payments of interest and principal. The price movement of these securities is
influenced less by changes in interest rates and more by the financial and
business position of the issuing corporation when compared to Investment Grade
Securities.

The risks posed by securities issued under such circumstances are substantial.
If a security held by a Portfolio is down-graded, the Portfolio may retain the
security.

INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities which have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an Inverse Floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an Inverse Floater causes an increase
in the coupon rate. Inverse Floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality,
redemption provisions and maturity, and Inverse Floater CMOs exhibit greater
price volatility than the majority of mortgage pass-through securities or CMOs.
In addition, some Inverse Floater CMOs exhibit extreme sensitivity to changes
in prepayments. As a result, the yield to maturity of an Inverse Floater CMO is
sensitive not only to changes in interest rates but also to changes in
prepayment rates on the related underlying mortgage assets.

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<PAGE>

assignors, the rights and obligations acquired by a Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, a
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and a Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet a Portfolio's liquidity needs or in response to a specific economic
event such as a deterioration in the creditworthiness of the borrower. The lack
of a liquid secondary market for Assignments and Participations also may make
it more difficult for a Portfolio to assign a value to these securities for
purposes of valuing a Portfolio's securities and calculating its NAV.

MBSS. Mortgage-Backed Securities ("MBSs") are instruments that entitle the
holder to a share of all interest and principal payments from pools of
residential and commercial mortgage loans underlying the instruments, and may
take the form of pass-through securities or CMOs (see "CMOs", above).
Generally, these securities are designed to provide monthly payments of
interest and principal to the investor.

Pass-Through Securities. The mortgagee's monthly payments to his or her lending
institution are passed through to investors such as the Portfolio. Most issuers
or poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. The guarantees made by issuers or poolers are
supported by various forms of credit, collateral, guarantees or insurance,
including individual loan, title, pool and hazard insurance purchased by the
issuer or pooler. The pools are assembled by various governmental, Government-
related and private organizations. A Portfolio may invest in securities issued
or guaranteed by the GNMA, FHLMC, FNMA, private issuers and other government
agencies. There can be no assurance that the private insurers can meet their
obligations under the policies. MBSs issued by non-agency issuers, whether or
not such securities are subject to guarantees, may entail greater risk. If
there is no guarantee provided by the issuer, MBSs purchased by a Portfolio
will be those which at the time of purchase are rated investment grade by one
or more NRSRO, or, if unrated, are deemed by the Advisers to be of comparable
quality.

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<PAGE>

Adviser will look for those that offer a higher yield to compensate for any
variation in average maturity.

MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income that is
exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and municipal notes
(those securities with maturities of less than five years). Municipal bonds are
issued for a wide variety of reasons: to construct public facilities, such as
airports, highways, bridges, schools, hospitals, mass transportation, streets,
water and sewer works; to obtain funds for operating expenses; to refund
outstanding municipal obligations; and to loan funds to various public
institutions and facilities. Certain industrial development bonds are also
considered municipal bonds if their interest is exempt from federal income
taxes. Industrial development bonds are issued by or on behalf of public
authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewer works. Industrial development
bonds are ordinarily dependent on the credit quality of a private user, not the
public issuer.

NON-DIVERSIFIED STATUS. The U.S. Real Estate is a non-diversified portfolio
under the 1940 Act, which means that the U.S. Real Estate Portfolio is not
limited by the 1940 Act in the proportion of its assets that may be invested in
the obligations of a single issuer. Thus, the U.S. Real Estate Portfolio may
invest a greater proportion of its assets in the securities of a small number
of issuers and, as a result, will be subject to greater risk with respect to
their portfolio securities. However, the U.S. Real Estate Portfolio intends to
comply with diversification requirements imposed by the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as regulated investment
companies. See "Investment Limitations" and "Taxes" in the SAI.

NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The U.S. Real Estate and Fixed Income Portfolio may invest in
securities that are neither listed on a stock exchange nor traded over-the-
counter, including privately placed securities. Such unlisted Equity Securities
may involve a higher degree of business and financial risk that can result in
substantial losses. As a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid
by the Portfolio or less than what may be considered the fair value of such
securities. Furthermore, companies whose securities are not publicly traded may
not be subject to the disclosure and other investor protection requirements
which might be applicable if their securities were publicly traded. If such
securities are required to be registered under the securities laws of one or
more jurisdictions before being resold, the Portfolio may be required to bear
the expenses of registration.

as with respect to foreign currency. Purchasing a put Option gives a Portfolio
the right to sell a specified security,

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currency or basket of securities or currencies at the exercise price until the
expiration of the Option. Purchasing a call Option gives a Portfolio the right
to purchase a specified security, currency or basket of securities or
currencies at the exercise price until the expiration of the Option.

As a matter of operating policy, the value of the underlying securities on
which stock Options will be written at any one time may not exceed 5% of a
Portfolio's total assets.

The Portfolios may engage in transactions in Options which are traded on
recognized exchanges or over-the-counter. The primary risks associated with the
use of Options are (i) imperfect correlation between the change in market value
of investments held, purchased or sold by a Portfolio and the prices of Options
relating to such investments; and (ii) possible lack of a liquid secondary
market for an Option.

PREFERRED STOCKS. Preferred Stocks are non-voting securities which evidence
ownership in a corporation and which pay a fixed or variable stream of
dividends.

REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into Reverse Repurchase
Agreements with brokers, dealers, domestic and foreign banks or other financial
institutions. In a Reverse Repurchase Agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Portfolio. The Portfolio's
investment of the proceeds of a Reverse Repurchase Agreement is the speculative
factor known as leverage. The Portfolio may enter into a Reverse Repurchase
Agreement only if the interest income from investment of the proceeds is
greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement. The Portfolio
will maintain with the Custodian a separate account with a segregated portfolio
of liquid assets in an amount at least equal to its purchase obligations under
these agreements. If interest rates rise during a Reverse Repurchase Agreement,
it may adversely affect the Portfolio's ability to maintain a stable NAV.

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SMBSs are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest ("interest-only" or "IO class"),
while the other class will receive all of the principal ("principal-only" or
"PO class"). The yield to maturity on IO classes and PO classes is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the portfolio yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, a Portfolio may fail to fully recoup its initial investment in these
securities, even if the security is in one of the highest rating categories.

Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to a Portfolio's limitations on investment in illiquid
securities.

SWAPS. Swap contracts ("Swaps") are Derivatives in the form of a contract or
other similar instrument which is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Portfolio may agree to swap the return generated by a fixed income index for
the return generated by a second fixed income index. The currency Swaps in
which a Portfolio may enter will generally involve an agreement to pay interest
streams in one currency based on a specified index in exchange for receiving
interest streams denominated in another currency. Such Swaps may involve
initial and final exchanges that correspond to the agreed upon notional amount.

Interest rate and total rate of return Swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate or total rate of return Swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that a Portfolio is contractually entitled to receive. In contrast,
currency Swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency Swap is subject to the risk
that the other party to the Swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
Swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized Swap documentation. As a result, the Swap market has
become relatively liquid. Swaps that include caps, floors, and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than "traditional" Swaps.

The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment

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performance of a Portfolio would be less favorable than it would have been if
this investment technique was not used.

WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment, but will take place no more than 120 days after the trade date. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. The Portfolio will maintain with
the Custodian a separate account with a segregated portfolio of liquid
securities or cash in an amount at least equal to these commitments. The U.S.
Real Estate Portfolio will not enter into When-Issued or Delayed Delivery
Securities commitments exceeding, in the aggregate, 15% of the Portfolio's
total assets other than the obligations created by these commitments.

FUNDAMENTAL INVESTMENT LIMITS

The Fixed Income Portfolio is a diversified investment company and is therefore
subject to the following fundamental limitations: as to 75% of its total
assets, a Portfolio may not (a) invest more than 5% of its total assets in the
securities of any one issuer, except obligations of the U.S. Government, its
agencies and instrumentalities, or (b) own more than 10% of the outstanding
voting securities of any one issuer.

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<PAGE>

variable annuity contracts and variable life insurance policies. For additional
information, see "Investment Limitations" in the SAI.

MANAGEMENT OF THE FUND

The Fund is governed by a Board of Directors which is responsible for the
management of the business and affairs of the Fund as provided in the laws of
the State of Maryland and the Fund's Articles of Incorporation and By-Laws. The
Board of Directors of the Fund has undertaken to monitor the Fund for the
existence of any material irreconcilable conflict among the interests of
variable annuity contract owners, variable life insurance policy owners and
qualified plans that invest in the Fund due to differences in tax treatment and
other considerations, and shall report any such conflict to the boards of the
respective life insurance companies that use the Fund as an investment vehicle
for their respective variable annuity contracts and variable life insurance
policies and to qualified plans. The Boards of Directors of those life
insurance companies and the fiduciaries of certain qualified plans and the
Advisers, have agreed or will agree to be responsible for reporting any
potential or existing conflicts to the Directors of the Fund. If a material
irreconcilable conflict exists that affects those life insurance companies,
they will be required, at their own cost, to remedy such conflict up to and
including establishing a new registered management investment company and
segregating the assets underlying the variable annuity contracts and the
variable life insurance policies. Qualified plans which acquire more than 10%
of the assets of a Portfolio will be required to report any potential or
existing conflicts to the Directors of the Fund, and if a material
irreconcilable conflict exists, to remedy such conflict, up to and including
redeeming shares of the Portfolios held by the qualified plans. The majority of
the Fund's Directors are not affiliated with MSAM, MAS, any of their
affiliates, any of the other companies that provide services to the Fund or any
of their affiliates. The officers of the Fund conduct and supervise its daily
business operations.

THE FUND MAY HOLD SPECIAL MEETINGS. The Fund will not hold annual shareholder
meetings, but may call special meetings when required by law, when requested by
a sufficient number of shareholders or for other reasons. An insurance company
issuing a variable annuity contract or variable life insurance policy that
participates in the Portfolios will vote shares held in its separate account as
required by law and interpretations thereof, as may be amended or changed from
time to time. In accordance with current law and interpretations thereof, a
participating insurance company is required to request voting instructions from
contract or policy owners and must vote shares in the separate account in
proportion to the voting instructions received. For a further discussion,
please refer to your insurance company's separate account prospectus.

INVESTMENT MANAGEMENT

INVESTMENT ADVISERS. The Adviser assigned to a Portfolio provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. MSAM serves as the Adviser for the U.S. Real Estate Portfolio. MAS
serves as the adviser for the Fixed Income Portfolio. MSAM, with principal
offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a
worldwide investment management business, providing a broad range of portfolio
management services to customers in the United States and abroad. MSAM is a
wholly-owned subsidiary of Morgan Stanley Group Inc. ("MSGI"), which is a
publicly owned financial services corporation listed on the New York, London
and Pacific stock exchanges. MSAM, a registered Investment Adviser under the
Investment Advisers Act of 1940, as amended, serves as investment adviser to
numerous open-end and closed-end investment companies. MAS is a Pennsylvania
limited liability partnership founded in 1969 with principal offices at One
Tower Bridge, West Conshohocken, Pennsylvania 19428. As of January 1996, MAS is
also indirectly wholly-owned by MSGI. MAS provides investment services to
employee benefit plans, endowment funds, foundations and other institutional
investors and has served as investment adviser to several open-end investment
companies since 1984. As of February 28, 1997, MSAM, together with its
affiliated asset management companies (other than MAS and Van Kampen), managed
assets totaling approximately $74 billion, MAS managed assets totaling
approximately $44.4 billion and MSAM and MAS and all of their affiliated asset
management companies managed assets totalling approximately $176.9 billion. See
"Management of the Fund" in the SAI.

On February 5, 1997, MSGI and Dean Witter, Discover & Co. ("Dean Witter
Discover") announced that they had entered into an Agreement and Plan of Merger
to form Morgan Stanley, Dean Witter, Discover & Co. Presently, Dean Witter,
Discover is a financial services company with three major businesses: full
service brokerage, credit services and asset management. Subject to certain
conditions being met, it is currently anticipated that the transaction will
close in mid-1997. Thereafter, MSAM and MAS will be subsidiaries of Morgan
Stanley, Dean Witter, Discover & Co.

PORTFOLIO MANAGERS. The following individuals have primary responsibility for
the Portfolios as indicated below.

18
<PAGE>

MAS Funds Domestic Fixed Income Portfolio in 1987, the MAS Funds High Yield
Portfolio in 1985, the MAS Funds Fixed Income Portfolio II in 1990, the MAS
Funds Special Purpose Fixed Income and Balanced Portfolios in 1992 and the MAS
Funds Multi-Asset-Class Portfolio in 1994. Mr. Bennett is Chairman of the Board
of Trustees of MAS Funds, a member of the Executive Committee of MAS and a
Director of MAS Fund Distributors, Inc. Mr. Bennett holds a B.S. in Chemistry
and an M.B.A. from University of Cincinnati. Kenneth B. Dunn, a Managing
Director of Morgan Stanley, joined MAS in 1987. He assumed responsibility for
the MAS Funds Fixed Income and Domestic Fixed Income Portfolios in 1987, the
MAS Funds Fixed Income II Portfolio in 1990, the MAS Funds Mortgage-Backed
Securities and Special Purpose Fixed Income Portfolios in 1992, and the MAS
Funds Municipal and PA Municipal Portfolios in 1994. Mr. Dunn received a B.S.
and an M.B.A. from The Ohio State University and a Ph.D. from Purdue
University. Richard B. Worley, a Managing Director of Morgan Stanley, joined
MAS in 1978. He assumed responsibility for the MAS Funds Fixed Income Portfolio
in 1984, the MAS Funds Domestic Fixed Income Portfolio in 1987, the MAS Funds
Fixed Income Portfolio II in 1990, the MAS Funds Balanced and Special Purpose
Fixed Income Portfolios in 1992, the MAS Funds Global Fixed Income and
International Fixed Income Portfolios in 1993 and the MAS Funds Multi-Asset-
Class Portfolio in 1994. Mr. Worley received a B.A. in Economics from
University of Tennessee and attended the Graduate School of Economics at
University of Texas. Messrs. Bennett, Dunn, and Worley have shared primary
responsibility for managing the Portfolio's assets since inception.

OTHER SERVICES

MSAM and MAS have each entered into a Sub-Administration Agreement with Chase
Global Funds Services Company ("Chase Global"), a subsidiary of The Chase
Manhattan Bank ("Chase"), pursuant to which Chase Global has agreed to provide
certain administrative services to the Fund. MSAM and MAS supervise and monitor
such administrative services provided by Chase Global. The services provided
under the Administration Agreements and the Sub-Administration Agreements are
also subject to the supervision of the Board of Directors of the Fund. The
Board of Directors of the Fund has approved the provision of services described
above pursuant to the Administration Agreements and the Sub-Administration
Agreements as being in the best interests of the Fund. Chase Global's business
address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional
information regarding the
Administration Agreements or the Sub-Administration Agreements, see "Management
of the Fund" in the SAI.

Chase Global calculates the NAV and dividends, maintains the general accounting
records and administers the securities lending program for each Portfolio.

19
<PAGE>

DIVIDEND DISBURSING AND TRANSFER AGENT. Chase Global acts as dividend
disbursing and transfer agent for the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and audits the annual financial statements of each Portfolio.

LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.

BREAKDOWN OF EXPENSES

The Portfolios pay fees and other costs related to their daily operations.
Expenses paid out of a Portfolio's assets are reflected in its share price.
Each Portfolio pays a management fee to its Adviser for managing its
investments and business affairs. MSAM and MAS pay fees to affiliates who
provide assistance with these services. Each Portfolio also pays other
expenses, which are explained below. The Advisers may, from time to time,
reduce their fees or reimburse the Portfolios for expenses above a specified
limit. These fee reductions or expense reimbursements, which may be terminated
at any time without notice, can decrease a Portfolio's expenses and boost its
performance.

MANAGEMENT FEE

20
<PAGE>

PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Assets Fixed Income U.S. Real Estate
- -------------------------------------------------------------------------------------
<S> <C> <C>
First $500 million 0.40% 0.80%
- -------------------------------------------------------------------------------------
From $500 million to $1
billion 0.35% 0.75%
- -------------------------------------------------------------------------------------
More than $1 billion 0.30% 0.70%
</TABLE>
However, the Advisers, with respect to certain of the Portfolios, have
voluntarily waived receipt of their management fees and agreed to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed the respective percentage of average daily
net assets set forth in the table below.

These fee reductions are voluntary and may be terminated by the Adviser at any
time.

OTHER EXPENSES

PORTFOLIO TRANSACTIONS

The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the Portfolios and directs the Adviser to use its best efforts to obtain
the best available price and most favorable execution with respect to all
transactions for the Portfolios. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion
of the Adviser, are necessary for the achievement of better execution, provided
the Adviser believes this to be in the best interest of the Fund.

In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by the Adviser. If the purchase or sale of securities
consistent with the investment policies of the Portfolios and one or more of
these other clients serviced by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolios
and such other clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

21
<PAGE>

securities being purchased or sold on a securities exchange during a comparable
period of time. Furthermore, the Board of Directors of the Fund, including a
majority of those Directors who are not "interested persons", as defined in the
1940 Act, have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to Morgan Stanley or such
affiliates are consistent with the foregoing standard.

Portfolio securities will not be purchased from or through, or sold to or
through, an Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.

PORTFOLIO TURNOVER

Under certain market conditions, a Portfolio may experience high portfolio
turnover as a result of its investment strategies. For example, the purchase or
sale of securities by a Portfolio in anticipation of a rise or decline in
interest rates or to take advantage of yield disparities among different issues
of Fixed Income Securities could result in high portfolio turnover. As a result
of their investment strategies, the Fixed Income and U.S. Real Estate
Portfolios' annual portfolio turnover rates are expected to be as high as 200%.
Higher portfolio turnover rates for the Portfolios can result in corresponding
increases in expenses such as brokerage commissions and transaction costs.
Although none of the Portfolios will invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the
length of time they have been held and the Portfolios will not consider
portfolio turnover rate a limiting factor in making investment decisions
consistent with their respective objectives and policies.

PERFORMANCE OF PORTFOLIOS

Average annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.

22
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

Past investment performance of the Class A Shares of the MSIF U.S. Real Estate
Fund and the Institutional Class Shares of the MAS Fixed Income Fund, as shown
in the table below, may be relevant to your consideration of the Portfolios.
The investment performance of the portfolios of MSIF and MAS Funds is not
necessarily indicative of future performance of the Portfolios of the Fund.
Also, the operating expenses of each of the Portfolios of the Fund will be
different from, and may be higher than, the operating expenses of the
corresponding portfolio of the MSIF or MAS Funds. The investment performance of
the Class A Shares of the MSIF U.S. Real Estate Fund and the Institutional
Class Shares of the MAS Fixed Income Fund is provided merely to indicate the
experience of the Advisers in managing similar portfolios.

<TABLE>
<CAPTION>
Average Average
Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Annual
One Year Five Years Ten Years Five Years Ten Years Total Return
Inception Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSIF:
U.S. Real Estate........ 2/24/95 39.56% NA NA NA NA 32.73%
MAS Funds:
Fixed Income............ 11/14/84 7.63% 63.46% 145.13% 8.94% 9.38% 10.92%
</TABLE>

23
<PAGE>

PERSONS CONTROLLING CERTAIN PORTFOLIOS

As of April 7, 1997, MSGI owned more than 25% of the outstanding voting
securities of the Fixed Income and U.S. Real Estate Portfolios and therefore,
may be deemed a controlling person of these Portfolios under the 1940 Act.

For more information, see "Control Persons and Principal Holders of Securities"
in the SAI.

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

TRANSACTION DETAILS

The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. The U.S. Real Estate's NAV is determined as of the close of
business of the NYSE (normally 4:00 p.m. Eastern Time) on each day that the
NYSE is open for business. The NYSE is currently scheduled to be closed on New
Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day, and on the preceding Friday or
subsequent Monday when any of these holidays falls on a Saturday or Sunday,
respectively.

The Fixed Income Portfolio's NAV is determined as of one hour after the close
of the bond markets (normally 4:00 p.m. Eastern time) on each day that the
Portfolios are open for business.

Each Portfolio's assets are valued primarily on the basis of market quotations.
Foreign securities are valued on the basis of quotations from the primary
market in which they are traded, and are translated from the local currency
into U.S. dollars using current exchange rates. If quotations are not readily
available or if the values have been materially affected by events occurring
after the closing of a foreign market, assets are valued by a method that the
Fund's Board of Directors believes accurately reflects fair value.

Each Portfolio's offering price (price to buy one share) and redemption price
(price to sell one share) are its NAV.

Each participating insurance company receives orders from its variable annuity
contract and variable life insurance policy owners to purchase or redeem shares
of the Portfolios each business day. That night, all orders received by that
insurance company on that business day are aggregated, and the insurance
company places a net purchase or redemption order for shares of one or more
Portfolios the morning of the next business day. These orders are normally
executed at the NAV that was computed at the close of the previous business day
in order to provide a match between the variable contract and policy owners'
orders to the insurance companies and the insurance companies' orders to a
Portfolio. In some cases, an insurance company's orders for Portfolio shares
may be executed at the NAV next computed after the order is actually
transmitted to a Portfolio.

24
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY MILLER
ASSET MANAGEMENT INC. ANDERSON &
SHERRERD, LLP

MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A MUTUAL FUND DESIGNED TO
PROVIDE INVESTMENT VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES AND FOR CERTAIN TAX-QUALIFIED INVESTORS. THIS PROSPECTUS
DESCRIBES EIGHT PORTFOLIOS MANAGED BY EITHER MORGAN STANLEY ASSET MANAGEMENT
INC. ("MSAM") OR MILLER ANDERSON & SHERRERD, LLP ("MAS"). THE FUND MAKES
AVAILABLE IN A SINGLE PRODUCT THE COMBINED STRENGTH OF THESE LEADING INVESTMENT
MANAGEMENT FIRMS. THE FUND ALSO OFFERS NINE OTHER PORTFOLIOS MANAGED BY MSAM OR
MAS.

A STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED MAY 1, 1997, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED HEREIN BY
REFERENCE, AND, THEREFORE, LEGALLY FORMS A PART OF THE PROSPECTUS. FOR A COPY
OF THE SAI AT NO CHARGE, CONTACT THE FUND BY CALLING 1-800-422-6464 EXT. 7182
OR CONTACT YOUR INSURANCE COMPANY.

THE PORTFOLIOS:

U.S. FIXED INCOME PORTFOLIOS

Fixed Income High Yield

U.S. EQUITY PORTFOLIOS

Equity Growth Mid Cap Value
Value

GLOBAL PORTFOLIOS

Global Equity Emerging Markets Equity
International Magnum

AN INVESTMENT IN ANY PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. YOU MAY RECEIVE MORE OR LESS THAN YOU INVESTED WHEN YOU REDEEM YOUR
SHARES.

Prospectus dated May 1, 1997
MORGAN STANLEY UNIVERSAL FUNDS, INC.

P.O. Box 2798, Boston, MA 02208-2798
<PAGE>

THE FUND

The Fund is an open-end management investment company, or mutual fund. Each of
the eight separate investment portfolios (each, a "Portfolio") described in
this Prospectus has a distinct investment objective. The following pages
describe the types of securities and investment techniques each Portfolio uses
to seek its objective, as well as the risks inherent in those types of
securities and investment techniques.

MANAGEMENT

Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") advises the
following Portfolios:

Global Equity Equity Growth
International Magnum Emerging Markets
Equity

MSAM conducts a worldwide investment advisory business. As of February 28,
1997, MSAM and its affiliated asset management companies (exclusive of MAS and
Van Kampen American Capitol, Inc. ("Van Kampen")) managed assets of
approximately $74 billion.

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the following
Portfolios:

Fixed Income Mid Cap Value
High Yield Value

MAS's institutional investment advisory business was established in 1969. As of
February 28, 1997 MAS managed assets of approximately $44.4 billion. Also as of
February 28, 1997, MSAM and MAS, and all of their affiliated asset management
companies managed assets totalling approximately $176.9 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE
----
<S> <C>
FINANCIAL HIGHLIGHTS 3
- --------------------

Financial highlights tables as of December 31, 1996

PORTFOLIO SUMMARIES 3
- -------------------

For each Portfolio, the investment objective and a summary of
strategy, potential investors, and investment characteristics and
risks.

THE PORTFOLIOS' INVESTMENTS 5
- ---------------------------

A more detailed review of how each Portfolio invests and
investment characteristics and risks.

SECURITIES AND INVESTMENT TECHNIQUES 9
- ------------------------------------

More information about the types of investment strategies
that may be used by some or all of the Portfolios and information
about investment risks and limitations.

FUNDAMENTAL INVESTMENT LIMITS 25
- -----------------------------

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 25
- ----------------------

General information on organization and operations of the
Fund, including details about MSAM, MAS and the individual portfolio
managers, as well as fees, expenses and performance calculations.

ACCOUNT POLICIES 33
- ----------------

Information on net asset value calculation, income and gain
distributions, taxes and share purchases and redemptions.
</TABLE>

2
<PAGE>

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

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1996
- ---------------------------------- -------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Invested Income......................................... 0.01
Net Realized and Unrealized Loss............................ (0.21)
-------
Total From Investment Operations.......................... (0.20)
-------
DISTRIBUTIONS
Net Invested Income......................................... (0.02)
-------
Total Distributions....................................... (0.02)
-------
NET ASSET VALUE, END OF PERIOD................................ $9.78
=======
TOTAL RETURN.................................................. (2.03)%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)............................. $11,789
Ratio of Expenses to Average Net Assets....................... 1.75%**
Ratio of Net Investment Income to Average Net Assets.......... 0.32%**
Portfolio Turnover Rate....................................... 9%
Average Commission Rate#...................................... $0.0013
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net
Investment Income (Loss)................................... $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net
Assets..................................................... 6.17%**
Net Investment Income (Loss) to Average Net Assets.......... (4.06)%**
</TABLE>
- -------

*Commencement of operations.

**Annualized.

# For the period ended December 31, 1996, the average commission rate paid on
trades on which commissions were charged was 0.45% of the trade amount.

PORTFOLIO SUMMARIES
- -------------------

Certain investment terms used below have initial capital letters ("Common
Stocks," for example). These terms are further described under "Securities and
Investment Techniques" below.

U.S. FIXED INCOME PORTFOLIOS

FIXED INCOME PORTFOLIO

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of Fixed Income Securities.

HIGH YIELD PORTFOLIO

OBJECTIVE AND STRATEGY: 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.

INVESTOR PROFILE: The Portfolio may be appropriate for long-term, aggressive
investors who understand the potential risks and rewards of investing in lower-
quality securities, including defaulted securities, and are willing to accept
their greater price movements and credit risks.

RISK PROFILE: High potential risk and reward. Securities rated below investment
grade, as well as unrated securities of lower quality, usually entail greater
risk (including the possibility of default or bankruptcy of the issuers), and
generally involve greater price volatility and risk of principal and income,
and may be less liquid than securities in higher rated categories.

3
<PAGE>

U.S. EQUITY PORTFOLIOS

EQUITY GROWTH PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of medium and large capitalization companies that, in
MSAM's judgment, provide above-average potential for capital growth.

INVESTOR PROFILE: The Portfolio is designed for those who want to be invested
in the stock market for its long-term growth potential and who want to
diversify over a large number of individual stocks.

RISK PROFILE: Moderate to high potential risk and reward. An investor in the
Portfolio should be comfortable with the volatility of the U.S. stock market
and able to ride out market fluctuations in anticipation of greater long-term
growth.

VALUE PORTFOLIO

RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price will fluctuate with changes in market, economic and foreign currency
exchange conditions.

MID CAP VALUE PORTFOLIO

RISK PROFILE: High potential risk and reward. The Portfolio's share price will
fluctuate with changes in market and economic conditions.

GLOBAL PORTFOLIOS

GLOBAL EQUITY PORTFOLIO

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, Foreign Investment involves different or increased
risks. The performance of the Portfolio will be affected by foreign currency
values, the greater volatility of securities exchanges, and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

INTERNATIONAL MAGNUM PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of non-U.S. issuers domiciled in EAFE countries.

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, international investing involves different or increased
risks. The performance of the Portfolio will be affected by foreign currency
values, the greater volatility of securities exchanges, and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

4
<PAGE>

portfolio, investors can achieve additional diversification and participate in
growth opportunities in emerging market countries.

RISK PROFILE: Very high potential risk and reward. In addition to the general
risks involved in Equity Securities, including fluctuations in the stock market
and changes in the economy, international investing involves different or
increased risks. The performance of the Portfolio will be affected by foreign
currency values, the greater volatility of securities exchanges, and the
overall political, economic and regulatory environment in the countries in
which the Portfolio invests. The risks of Foreign Investment are exacerbated in
the case of Emerging Market Country Securities.

THE PORTFOLIOS' INVESTMENTS
- ---------------------------

INVESTMENT CHARACTERISTICS AND RISKS

Foreign Investment may involve risks in addition to those of U.S. investments.
The performance of the Portfolios investing in foreign securities will be
affected by foreign currency values, the greater volitility of securities
exchanges, and the overall political, economic and regulatory environment in
the countries in which investments are made.

Because the International Magnum and Emerging Markets Equity Portfolios are
non-diversified portfolios and are permitted greater flexibility to invest
their assets in the obligations of a single issuer, they are exposed to
increased risk of loss if such an investment underperforms expectations. See
"Non-Diversified Status" in this Prospectus and "Investment Limitations" in the
Statement of Additional Information ("SAI").

Investments in securities rated below investment grade, sometimes called high
risk or High Yield Securities or junk bonds, carry a high degree of risk and
are considered speculative. MSAM and MAS may use various investment techniques
to hedge risks, including investment in Derivatives, but there is no guarantee
that these strategies will work as intended. When Portfolio shares are
redeemed, they may be worth more or less than their original cost. An
investment in any one Portfolio is not in itself a balanced investment plan. As
with any mutual fund, there is no assurance that a Portfolio will achieve its
goal.

U.S. FIXED INCOME PORTFOLIOS

FIXED INCOME PORTFOLIO

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Fixed Income Securities, not more than 20% of which will be below
investment grade (commonly referred to as High Yield Securities or junk bonds).
Permissible investments include Municipals, Loan Participations and
Assignments, Investment Company Securities, When-Issued and Delayed Delivery
Securities and Derivatives, including but not limited to CMOs, Structured
Notes, Foreign Currency Transactions, Futures, Options and Swaps and may engage
in Loans of Portfolio Securities. For additional investment information, see
"Securities and Investment Techniques" below.

HIGH YIELD PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing at least 65% of its total assets in High Yield
Securities of U.S. and foreign issuers including Corporate Bonds and other
Fixed Income Securities. High Yield Securities are rated below investment grade
and are commonly referred to as high yield bonds or junk bonds. The Portfolio
expects to achieve its objective through maximizing current income, although
the Portfolio may seek capital growth opportunities when consistent with its
objective. The Portfolio's average weighted maturity
5
<PAGE>

ordinarily will exceed five years and will usually be between five and fifteen
years.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in High Yield Securities. The Portfolio may also invest in Investment
Grade Fixed Income Securities of domestic and foreign issuers, including
Eastern European and Emerging Market Country Securities, and in Foreign
Currency Transactions, Investment Company Securities, Foreign Equities, Loan
Participations and Assignments, Municipals, Brady Bonds, ABSs, When-Issued or
Delayed Delivery Securities, and Derivatives, including but not limited to
SMBSs, CMOs, Structured Notes, Forwards, Futures, Options and Swaps and may
engage in Loans of Portfolio Securities. For risks associated with High Yield
Securities and additional information about investments, see "Securities and
Investment Techniques" below.

The Adviser's approach is to use equity and fixed income valuation techniques
and analyses of economic and industry trends to determine portfolio structure.
Individual securities are selected and monitored by fixed income portfolio
managers who specialize in credit analysis of Fixed Income Securities and use
in-depth financial analysis to uncover opportunities in undervalued issues. For
additional information about strategies employed in managing the Portfolio, see
"High Yield Investing," "Maturity and Duration Management," "Value Investing,"
"Mortgage Investing," "Foreign Fixed Income Investing," "Foreign Investing" and
"Emerging Markets Investing" in "Securities and Investment Techniques" below.

U.S. EQUITY PORTFOLIOS

EQUITY GROWTH PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
growth-oriented Common and Preferred Stocks, Convertible Securities, Rights and
Warrants to purchase Common Stocks, Depositary Receipts and other Equity
Securities.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may also invest in Foreign Currency
Transactions, Non-Publicly Traded Securities, Private Placements, Restricted
Securities, Money Market Instruments, Investment Company Securities, Repurchase
Agreements, When-Issued and Delayed Delivery Securities, other Fixed Income
Securities and Derivatives, including but not limited to Forwards, Futures,
Options and Swaps, and may engage in Loans of Portfolio Securities. For
additional information about investments, see "Securities and Investment
Techniques" below.

The Portfolio will focus its investments on Equity Securities of medium and
large capitalization U.S. corporations and, subject to an overall 25% limit,
Foreign Equities. The Portfolio may invest in securities of foreign issuers
directly or in the form of Depositary Receipts. Since the Portfolio invests in
both Common Stocks and Convertible Securities (when due to market conditions,
it is more advantageous to purchase Convertible Securities), the risks of
investing in the general equity markets may be tempered to a degree by the
Portfolio's investments in Convertible Securities which are often not as
volatile as Common Stock.

The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objectives. In selecting stocks for the Portfolio,
the Adviser concentrates on a universe of rapidly growing, high-quality
companies and lower, but accelerating, earnings growth situations. The
Adviser's universe of potential investments generally comprises companies with
market capitalizations of $500 million or more. The Adviser concentrates on
companies with strong, communicative managements and clearly defined strategies
for growth. In addition, the Adviser rigorously assesses company developments,
including changes in strategic direction, management focus and current and
likely future earnings results. Valuation is important to the Adviser but is
viewed in the context of prospects for sustainable earnings growth and the
potential for positive earnings surprises vis-a-vis consensus expectations. The
Portfolio may invest in any Equity Security that, in the Adviser's judgment,
provides above-average potential for capital appreciation.

In selecting investments for the Portfolio, the Adviser emphasizes individual
security selection. The Portfolio's investments will generally be diversified
by number of issues but concentrated sector positions may result from the
investment process. The Portfolio has a long-term investment perspective;
however, the Adviser may take advantage of short-term opportunities that are
consistent with the Portfolio's objective by selling recently purchased
securities which have increased in value.

VALUE PORTFOLIO

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may invest up to 5% of its total
assets in Foreign Equities (other than ADRs). The Portfolio may also invest in
U.S. Governments and Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons,
Repurchase Agreements, Cash Equivalents, Foreign Currency, Investment Company
Securities, When-Issued or Delayed Delivery Securities and Derivatives,
including but not limited to Forwards, Futures, Options and Swaps and may
engage in Loans of Portfolio Securities. For additional information about
investments, see "Securities and Investment Techniques" below.

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MID CAP VALUE PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in Common and Preferred Stocks, Convertible
Securities, Rights and Warrants to purchase Common Stocks, ADRs and other
Equity Securities of issuers with equity capitalizations in the range of the
companies represented in the S&P MidCap 400 Index. Such range is currently $100
million to $8 billion but the range fluctuates over time with changes in the
equity market.

GLOBAL PORTFOLIOS

GLOBAL EQUITY PORTFOLIO

The Portfolio may also invest in Forwards, Money Market Instruments, Repurchase
Agreements and When-Issued or Delayed Delivery Securities, and may engage in
Loans of Portfolio Securities. For additional information about investments,
see "Securities and Investment Techniques" below.

The Adviser's approach is oriented to individual stock selection and is value
driven. In selecting stocks for the Portfolio, the Adviser initially identifies
those stocks that it believes to be undervalued in relation to the issuer's
assets, cash flow, earnings and revenues, and then evaluates the future value
of such stocks by running the results of an in-depth study of the issuer
through a dividend discount model. In selecting investments, the Adviser
utilizes the research of a number of sources, including Morgan Stanley Capital
International, an affiliate of the Adviser located in Geneva, Switzerland.
Portfolio holdings are regularly reviewed and subjected to fundamental analysis
to determine whether they continue to conform to the Adviser's value criteria.
Equity Securities that no longer conform to such investment criteria will be
sold.

Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the
length of time they have been held. Investing in foreign countries and emerging
market countries subjects the Portfolio to additional risk, see "Foreign
Investment" below.

INTERNATIONAL MAGNUM PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights or Warrants to
purchase Common Stocks and other Equity Securities of non-U.S. issuers in
domiciled in EAFE countries (defined below) weightings determined by the
Adviser. The production of any current income is incidental to this objective.
The Equity Securities in which the Portfolio may invest may be denominated in
any currency.

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Although the Portfolio intends to invest primarily in Equity Securities listed
on a stock exchange in an EAFE country, the Portfolio may invest without limit
in Equity Securities that are traded over the counter or that are not admitted
to listing on a stock exchange or dealt in on a regulated market. As a result
of the absence of a public trading market, such securities may pose liquidity
risks.

The Portfolio may also invest in Private Placements or initial public offerings
in the form of oversubscriptions, certain short-term (less than twelve months
to maturity) and medium-term (not greater than five years to maturity) Fixed
Income Securities, Foreign Currency Transactions, Investment Company
Securities, Temporary Investments, Money Market Instruments, Non-Publicly
Traded Securities, Private Placements, Restricted Securities, Repurchase
Agreements, Cash or Cash Equivalents, When-Issued or Delayed Delivery
Securities, and Derivatives, including but not limited to Forwards, Futures
(including stock index futures) and Options, and may engage in Loans of
Portfolio Securities. The Portfolio may also invest up to 10% of its total
assets in (i) Investment Company Securities with investment objectives similar
to that of the Portfolio and (ii) for temporary purposes, Money Market
Instruments and pooled investment vehicles. In addition, for temporary
defensive purposes during periods in which the Adviser believes changes in
economic, financial or political conditions make it advisable, the Portfolio
may invest up to 100% of its total assets in such short-term and medium-term
Fixed Income Securities or hold cash. The Portfolio will not invest in Fixed
Income Securities that are not Investment Grade Securities. Although the
Portfolio will not invest for short-term trading purposes, investment
securities may be sold from time to time without regard to the length of time
they have been held. For additional information about investments, see
"Securities and Investment Techniques" and "Non-Diversified Status" below.

EMERGING MARKETS EQUITY PORTFOLIO

The 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. Under normal circumstances, at
least 65% of the Portfolio's total assets will be invested in Emerging Market
Country Equity Securities.

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The Portfolio intends to invest primarily in some or all of the following
emerging market countries:

As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging market countries in which it invests. The
Portfolio does not intend to invest in any security in a country where the
currency is not freely convertible to U.S. dollars, unless the Portfolio has
obtained the necessary governmental licensing to convert such currency or other
appropriately licensed or sanctioned contractual guarantees to protect such
investment against loss of that currency's external value, or the Portfolio has
a reasonable expectation at the time the investment is made that such
governmental licensing or other appropriately licensed or sanctioned guarantees
would be obtained or that the currency in which the security is quoted would be
freely convertible at the time of any proposed sale of the security by the
Portfolio. The Adviser will analyze assets, revenues and earnings of an issuer.
In selecting industries and particular issuers, the Adviser will evaluate costs
of labor and raw materials, access to technology, export of products and
government regulation. Although the Portfolio seeks to invest in larger
companies, it may invest in small- and medium-size companies that, in the
Adviser's view, have potential for growth.

SECURITIES AND INVESTMENT TECHNIQUES
- ------------------------------------

The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.

STRATEGIES

As used in this Prospectus, emerging markets describes any country which is
generally considered to be an emerging, or developing country by the
international financial community such as the International Bank for
Reconstruction and Development (commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which
are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.

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The market for High Yield Securities is still relatively new. Because of this,
a long-term track record for bond default rates does not exist. In addition,
the secondary market for High Yield Securities is generally less liquid than
that for investment grade corporate securities. In periods of reduced market
liquidity, High Yield Security prices may become more volatile, and both the
high yield market and a Portfolio may experience sudden and substantial price
declines. This lower liquidity might have an effect on a Portfolio's ability to
value or dispose of such securities. Also, there may be significant disparities
in the prices quoted for High Yield Securities by various dealers. Under such
conditions, a Portfolio may find it difficult to value its securities
accurately. A Portfolio may also be forced to sell securities at a significant
loss in order to meet shareholder redemptions. These factors add to the risks
associated with investing in High Yield Securities.

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VALUE INVESTING: One of two primary components of the Adviser's fixed income
strategy is Value Investing, whereby the Adviser seeks to identify undervalued
sectors and

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securities through analysis of credit quality, Option characteristics and
liquidity. Quantitative models are used in conjunction with judgement and
experience to evaluate and select securities with embedded put or call Options
which are attractive on a risk- and option-adjusted basis. Successful Value
Investing will permit a Portfolio to benefit from the price appreciation of
individual securities during periods when interest rates are unchanged. See
"Maturity and Duration Management" for a description of the other key component
of the Adviser's fixed income investment strategy.

INSTRUMENTS AND INVESTMENTS

ABSS. Asset-backed securities ("ABSs") are securities collateralized by
shorter-term loans such as automobile loans, home equity loans, computer leases
or credit card receivables. The payments from the collateral are passed through
to the security holder. The collateral behind ABSs tends to have prepayment
rates that usually do not vary with interest rates. In addition, the short-term
nature of the loans reduces the impact of any change in prepayment level. Due
to amortization, the average life for ABSs is also the conventional proxy for
maturity.

Due to the possibility that prepayments (on automobile loans and other
collateral) will alter the cash flow on ABSs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

BRADY BONDS. Brady Bonds are Fixed Income Securities that are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury (the "Brady
Plan"). Brady Bonds have been issued only in relatively recent years, and,
accordingly, do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market. For further information on these securities, see the SAI. A
Portfolio will invest in Brady Bonds only if they are consistent with quality
specifications.

CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:

(2)Commercial paper rated at time of purchase by one or more NRSROs in one of
their two highest categories, (e.g., A-1 or A-1+ by S&P or Prime 1 by Moody's,
or, if not rated, issued by a corporation having an outstanding unsecured debt
issue rated high-grade by an NRSRO (e.g., A or better by Moody's, S&P or Fitch
Investors Service, Inc. ("Fitch")).

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<PAGE>

(3)Short-term corporate obligations rated high-grade at the time of purchase by
an NRSRO (e.g., A or better by Moody's, S&P or Fitch).

(4)U.S. Governments and Agencies.

(5)Repurchase Agreements collateralized by securities listed above.

Due to the possibility that prepayments (on home mortgages and other
collateral) will alter the cash flow on CMOs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

CORPORATE BONDS. Corporate Bonds are Fixed Income Securities issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. A Portfolio will buy
Corporate Bonds subject to any quality constraints. If a security held by a
Portfolio is down-graded, the Portfolio may retain the security.

DEPOSITARY RECEIPTS. Depositary Receipts are securities representing ownership
interests in securities of foreign companies (an "underlying issuer") and are
deposited with the depositary. Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities. Depositary
Receipts include ADRs, Global Depositary Receipts ("GDRs") and other types of
Depositary Receipts (which, together with ADRs and GDRs, are hereinafter
collectively referred to as "Depositary Receipts"). ADRs are dollar-denominated
Depositary Receipts typically issued by a U.S. financial institution which
evidence ownership interests in a security or pool of securities issued by a
foreign issuer. ADRs are listed and traded in the United States. GDRs and other
types of Depositary Receipts are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. financial institutions, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States.

Depositary Receipts may be "sponsored" or "unsponsored". Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
Depositary Receipt generally bear all the costs associated with establishing
the unsponsored Depositary Receipt. In addition, the issuers of the securities
underlying unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts. For
purposes of a Portfolio's investment policies, the Portfolio's investments in
Depositary Receipts will be deemed to be investments in the underlying
securities except as noted.

DERIVATIVES. Derivatives are financial products or instruments that derive
their value from the value of an
underlying asset, reference rate or index. Derivatives include, but are not
limited to, the following: CMOs, SMBSs (i.e., Stripped Mortgage-Backed
Securities), Convertible Securities, Warrants, Forwards, Futures, Options,
Structured Notes and Swaps.

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<PAGE>

could be achieved in the Portfolio using only traditional investment
securities. In addition, the Adviser will not use Derivatives to acquire
exposure to changes in the value of assets or indexes of assets that are not
allowable investments for the Portfolio. A Portfolio may enter into over-the-
counter derivative transactions (Swaps, Caps, Floors, etc., but excluding CMOs,
Forwards, Futures, Options, and SMBSs) with counterparties approved by the
Adviser in accordance with guidelines established by the Fund's Board of
Directors. These guidelines provide for a minimum credit rating for each
counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties with ratings below AA.

EASTERN EUROPEAN SECURITIES. The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment associated
with the transition to market economics. Unstable economic and political
conditions may adversely affect security values. Upon the accession to power of
Communist regimes approximately 40 years ago, the governments of a number of
Eastern European countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
In the event of the return to power of the Communist Party, there can be no
assurance that a Portfolio's investments in Eastern Europe would not be
expropriated, nationalized or otherwise confiscated.

EMERGING MARKET COUNTRY SECURITIES. An Emerging Market Country Security is one
issued by a company that has one or more of the following characteristics: (i)
its principal securities trading market is in an emerging market, (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in emerging markets, or
(iii) it is organized under the laws of, and has a principal office in, an
emerging market country. The Adviser will base determinations as to eligibility
on publicly available information and inquiries made to the companies.

Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud.

With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value
of a Portfolio's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.

EQUITY SECURITIES. Equity Securities commonly include, but are not limited to,
Common Stocks, Preferred Stocks, Depositary Receipts, Rights, Warrants, and
Foreign Equities. Preferred Stock is contained in both the definition of Equity
Securities and Fixed Income Securities because it exhibits characteristics
commonly associated with each type of security. See the "The Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

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<PAGE>

company and corporate commercial paper and other short-term corporate debt
obligations of corporations organized under the laws of any member state of the
OECD, including the United States, meeting the Portfolio's credit quality
standards, provided that no more than 20% of the Portfolio's assets are
invested in any one of such issuers. The short-term and medium-term securities
in which the Portfolio may invest will be rated investment grade by an NRSRO
(e.g., rated A or higher by Moody's or S&P), or if unrated, will be determined
to be of comparable quality by the Adviser.

Forex Futures are standardized contracts for the future delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Forex Futures traded in the United States are traded on regulated
futures exchanges. A Portfolio will incur brokerage fees when it purchases or
sells Forex Futures and it will be required to maintain margin deposits.
Parties to a Forex Future must make initial margin deposits to secure
performance of the contract, which generally range from 2% to 5% of the
contract price. There also are requirements to make "variation" margin deposits
as the value of the Futures contract fluctuates.

A Portfolio may use Forwards in the normal course of business to lock in an
exchange rate in connection with purchases and sales of securities (transaction
hedge) or to lock in the dollar value of portfolio positions (position hedge).
In addition a Portfolio may cross-hedge currencies by entering into a
transaction to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which a Portfolio has or
expects to have portfolio exposure. A Portfolio may also engage in proxy
hedging which is defined as entering into positions in one currency to hedge
investments denominated in another currency, where the two currencies are
economically linked. Forwards will be used only as a protective measure against
the effects of fluctuating rates of currency exchange and exchange control
regulations. While such contracts may limit losses to the Portfolio as a result
of exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.

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<PAGE>

at a future date. By matching the amount of U.S. dollars to be exchanged with
the anticipated value of the U.S. dollar-denominated security, a Portfolio may
be able to lock in the foreign currency value of the security and adopt a
synthetic investment position reflecting the credit quality of the U.S. dollar-
denominated security.

There is a risk in adopting a synthetic investment position to the extent that
the value of a security denominated in U.S. dollars or other foreign currency
is not exactly matched with a Portfolio's obligation under the forward
contract. On the date of maturity, a Portfolio may be exposed to some risk of
loss from fluctuations in that currency. Although the Adviser will attempt to
hold such mismatching to a minimum, there can be no assurance that the Adviser
will be able to do so. When a Portfolio enters into a forward contract for
purposes of creating a synthetic security, it will generally be required to
hold liquid assets in a segregated account with a daily value at least equal to
its obligation under the forward contract.

FOREIGN INVESTMENT. Investment in securities and obligations of foreign issuers
and in foreign branches of domestic banks involves somewhat different
investment risks than those affecting obligations of U.S. issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States. Many foreign securities markets have substantially less volume than
U.S. national securities exchanges, and securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and
interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on Foreign Investments as
compared to dividends and interest paid by U.S. companies. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction will impose or change withholding taxes on income payable
with respect to foreign securities, and the possible adoption of foreign
governmental restrictions such as exchange controls.

The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market

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<PAGE>

decline to attempt to offset the decrease in market value of investments in its
portfolio, or purchase securities index future contracts in order to gain
market exposure. Subject to applicable laws, the Portfolios may engage in
transactions in securities index futures contracts (and options thereon) which
are traded on a recognized securities or futures exchange, or may purchase or
sell such instruments in the over-the-counter market. There currently are
limited securities index futures and options on such futures in many countries,
particularly emerging countries. The nature of the strategies adopted by the
Adviser, and the extent to which those strategies are used, may depend on the
development of such markets.

The Portfolios may engage in transactions involving foreign currency exchange
futures contracts. For more information, see "Foreign Currency Transactions"
above.

The Portfolios may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolios may engage in interest
rate futures contracts to hedge holdings of debt instruments against future
changes in interest rates.

Under rules adopted by the Commodity Futures Trading Commission, each Portfolio
may enter into futures contracts and options thereon for both hedging and non-
hedging purposes, provided that not more than 5% of such Portfolio's total
assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-
hedging activities. The Equity Growth, Global Equity, International Magnum and
Emerging Markets Equity Portfolios may enter into futures contracts to the
extent that their outstanding obligations to purchase securities under such
contracts in combination with their outstanding obligations with respect to
options transactions (including options to purchase securities or instruments)
would exceed 20% of their total assets or in the case of the Fixed Income, High
Yield, Mid Cap Value and Value Portfolios outstanding obligations would not
exceed 50% of their respective total assets. In addition, the Emerging Markets
Equity Portfolio will not enter into any futures contract or option if
immediately thereafter the value of all the foreign currencies underlying its
futures contracts would exceed 10% of the value of its total assets.

HIGH YIELD SECURITIES. High Yield Securities are generally considered to
include Corporate Bonds, Preferred Stocks and Convertible Securities rated qBa
through C by Moody's or BB through D by S&P, and unrated securities considered
to be of equivalent quality. Securities rated less than Baa by Moody's or BBB
by S&P are classified as non-Investment Grade Securities and are commonly
referred to as junk bonds or High Yield Securities. Such securities carry a
high degree of risk and are considered speculative by the major credit rating
agencies. The following are excerpts from the Moody's and S&P definitions for
speculative-grade debt obligations:

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"vulnerability to default" and, without favorable business conditions,
will be "unable to repay interest and principal." The rating C is
reserved for income bonds on which "no interest is being paid." Debt
rated D is "in default," and "payment of interest and/or repayment of
principal is in arrears."

While such securities offer high yields, they also normally carry with them a
greater degree of risk than securities with higher ratings. Lower-rated bonds
are considered speculative by traditional investment standards. High Yield
Securities may be issued as a consequence of corporate restructuring or similar
events. Also, High Yield Securities are often issued by smaller, less credit
worthy companies, or by highly leveraged (indebted) firms, which are generally
less able than more established or less leveraged firms to make scheduled
payments of interest and principal. The price movement of these securities is
influenced less by changes in interest rates and more by the financial and
business position of the issuing corporation when compared to Investment Grade
Securities.

The risks posed by securities issued under such circumstances are substantial.
If a security held by a Portfolio is down-graded, the Portfolio may retain the
security.

INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities, which have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an Inverse Floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an Inverse Floater causes an increase
in the coupon rate. Inverse Floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality,
redemption provisions and maturity, and Inverse Floater CMOs exhibit greater
price volatility than the majority of mortgage pass-through securities or CMOs.
In addition, some Inverse Floater CMOs exhibit extreme sensitivity to changes
in prepayments. As a result, the yield to maturity of an Inverse Floater CMO is
sensitive not only to changes in interest rates but also to changes in
prepayment rates on the related underlying mortgage assets.

INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment in the securities of their companies.
However, indirect investment in the securities of companies listed and traded
on the stock exchanges in these countries is permitted by certain emerging
market countries through Investment Funds that have been specifically
authorized. A Portfolio may invest in these Investment Funds subject to the
provisions of the 1940 Act, as applicable, and other applicable laws as
discussed in "Investment Limitations" in the SAI. The Emerging Markets Equity
Portfolio will invest in such Investment Funds only where appropriate given
that the Portfolio's shareholders will bear not only their proportionate share
of the expenses of the Portfolio (including operating expenses and the fees of
the Adviser), but also will indirectly bear similar expenses of the underlying
Investment Funds.

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<PAGE>

services (trade claims or other receivables), or to other parties. A Portfolio
may invest in fixed rate and floating rate loans ("Loans") arranged through
private negotiations between an issuer of sovereign debt obligations and one or
more financial institutions ("Lenders"). A Portfolio's investments in Loans are
expected in most instances to be in the form of participation in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. A Portfolio will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In the event of the insolvency of the Lender selling a
Participation, a Portfolio may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower.
Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender
with respect to the Participation. Even under such a structure, in the event of
the Lender's insolvency, the Lender's servicing of the Participation may be
delayed and the assignability of the Participation may be impaired. A Portfolio
will acquire Participations only if the Lender interpositioned between a
Portfolio and the borrower is determined by the Adviser to be creditworthy.

MBSS. Mortgage-Backed Securities ("MBSs") are instruments that entitle the
holder to a share of all interest and principal payments from pools of
residential and commercial mortgage loans underlying the instruments, and may
take the form of pass-through securities or CMOs (see "CMOs" above). Generally,
these securities are designed to provide monthly payments of interest and
principal to the investor.

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<PAGE>

can meet their obligations under the policies. MBSs issued by non-agency
issuers, whether or not such securities are subject to guarantees, may entail
greater risk. If there is no guarantee provided by the issuer, MBSs purchased
by a Portfolio will be those which at the time of purchase are rated investment
grade by one or more NRSRO, or, if unrated, are deemed by the Advisers to be of
comparable quality.

MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income that is
exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and municipal notes
(those securities with maturities of less than five years). Municipal bonds are
issued for a wide variety of reasons: to construct public facilities, such as
airports, highways, bridges, schools, hospitals, mass transportation, streets,
water and sewer works; to obtain funds for operating expenses; to refund
outstanding municipal obligations; and to loan funds to various public
institutions and facilities. Certain industrial development bonds are also
considered municipal bonds if their interest is exempt from federal income
taxes. Industrial development bonds are issued by or on behalf of public
authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewer works. Industrial development
bonds are ordinarily dependent on the credit quality of a private user, not the
public issuer.

NON-DIVERSIFIED STATUS. The International Magnum and Emerging Markets Equity
Portfolios are non-diversified portfolios under the 1940 Act, which means that
the Portfolios are not limited by the 1940 Act in the proportion of their
assets that may be invested in the obligations of a single issuer. Thus, the
Portfolios may invest a greater proportion of their assets in the securities of
a small number of issuers and, as a result, will be subject to greater risk
with respect to their portfolio securities. However, the Portfolios intend to
comply with diversification requirements imposed by the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as regulated investment
companies. See "Investment Limitations" and "Taxes" in the SAI.

NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Equity Growth, Global Equity, International Magnum, Emerging
Markets Equity, Fixed Income, High Yield, Value and Mid Cap Value Portfolios
may invest in securities that are neither listed on a stock exchange nor traded
over-the-counter, including privately placed securities. Such unlisted Equity
Securities may involve a higher degree of business and financial risk that can
result in substantial losses. As a result of the absence of a public trading
market for these securities, they may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Portfolio or less than what may be considered the fair
value of such securities. Furthermore, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements which might be applicable if their securities were
publicly traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Portfolio
may be required to bear the expenses of registration.

20
<PAGE>

As a general matter, a Portfolio may not invest more than 15% of its net assets
in illiquid securities, including securities for which there is no readily
available secondary market and securities that are restricted from sale to the
public without registration ("Restricted Securities") under the Securities Act
of 1933, as amended (the "1933 Act") and are deemed to be illiquid. Restricted
Securities that can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("Rule 144A Securities") may be deemed to be
liquid under guidelines adopted by the Fund's Board of Directors. The
International Magnum and Emerging Markets Equity Portfolios may each invest up
to 25% of their total assets, and the Equity Growth Portfolio may invest up to
35% of its total assets, in Rule 144A Securities that are deemed to be liquid.

As a matter of operating policy, the value of the underlying securities on
which stock Options will be written at any one time may not exceed 5% of a
Portfolio's total assets.

PREFERRED STOCKS. Preferred Stocks are non-voting securities which evidence
ownership in a corporation and which pay a fixed or variable stream of
dividends.

In these transactions, the securities received by a Portfolio have a market
value at least equal to the purchase price (including accrued interest) of the
Repurchase Agreement as collateral, and this value is maintained during the
term of the agreement. These securities are held by the Portfolio's Custodian
or an approved third party for the benefit of the Portfolio until repurchased.
Repurchase Agreements permit a Portfolio to keep all its assets invested while
retaining overnight flexibility in pursuit of investments of a longer-term
nature. If the seller defaults and the collateral value declines, the Portfolio
might incur a loss. If bankruptcy proceedings are commenced with respect to the
seller, the Portfolio's realization upon the collateral may be delayed or
limited.

21
<PAGE>

costs and potentially obtain higher rates of interest on such Repurchase
Agreements. Each Portfolio's participation in the income from jointly purchased
Repurchase Agreements will be based on that Portfolio's percentage share in the
total Repurchase Agreement. The Portfolios' ability to invest in Repurchase
Agreements on a joint basis will be contingent upon issuance of the order by
the SEC described above.

REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into Reverse Repurchase
Agreements with brokers, dealers, domestic and foreign banks or other financial
institutions. In a Reverse Repurchase Agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Portfolio. The Portfolio's
investment of the proceeds of a Reverse Repurchase Agreement is the speculative
factor known as leverage. The Portfolio may enter into a Reverse Repurchase
Agreement only if the interest income from investment of the proceeds is
greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement. The Portfolio
will maintain with the Custodian a separate account with a segregated portfolio
of liquid assets in an amount at least equal to its purchase obligations under
these agreements. If interest rates rise during a Reverse Repurchase Agreement,
it may adversely affect the Portfolio's ability to maintain a stable NAV.

RUSSIAN SECURITIES. The registration, clearing and settlement of securities
transactions involving Russian issuers are subject to significant risks not
normally associated with securities transactions in the United States and other
more developed markets. Ownership of Equity Securities in Russian companies is
evidenced by entries in a company's share register (except where shares are
held through depositories that meet the requirements of the 1940 Act) and the
issuance of extracts from the register or, in certain limited cases, by formal
share certificates. However, Russian share registers are frequently unreliable
and a Portfolio could possibly lose its registration through oversight,
negligence or fraud. Moreover, Russia lacks a centralized registry to record
securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In
addition, while registrars are liable under law for losses resulting from their
errors, it may be difficult for a Portfolio to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by law to employ an independent registrar, in practice, such companies
have not always followed this law. Because of this lack of independence of
registrars, management of a Russian company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions on the share
register. Furthermore, these practices may prevent a Portfolio from investing
in the securities of certain Russian companies deemed suitable by the Adviser
and could cause a delay in the sale of Russian Securities by the Portfolio if
the company deems a purchaser unsuitable, which may expose the Portfolio to
potential loss on its investment.

In light of the risks described above, the Board of Directors of the Fund has
approved certain procedures concerning the Fund's investments in Russian
Securities. Among these procedures is a requirement that a Portfolio will not
invest in the securities of a Russian company unless that issuer's registrar
has entered into a contract with the Fund's sub-custodian containing certain
protective conditions, including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Portfolio. This
requirement will likely have the effect of precluding investments in certain
Russian companies that a Portfolio would otherwise make.

SMBSs are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest ("interest-only" or "IO class"),
while the other class will receive all of the principal ("principal-only" or
"PO class"). The yield to maturity on IO classes and PO classes is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the portfolio yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, a Portfolio may fail to fully recoup its initial investment in these
securities, even if the security is in one of the highest rating categories.

Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as

22
<PAGE>

brokers or dealers, these securities were only recently developed. As a result,
established trading markets have not yet developed and, accordingly, certain of
these securities may be deemed illiquid and subject to a Portfolio's
limitations on investment in illiquid securities.

SWAPS. Swap contracts ("Swaps") are Derivatives in the form of a contract or
other similar instrument which is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Portfolio may agree to swap the return generated by a fixed income index for
the return generated by a second fixed income index. The currency Swaps in
which a Portfolio may enter will generally involve an agreement to pay interest
streams in one currency based on a specified index in exchange for receiving
interest streams denominated in another currency. Such Swaps may involve
initial and final exchanges that correspond to the agreed upon notional amount.

Interest rate and total rate of return Swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate or total rate of return Swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that a Portfolio is contractually entitled to receive. In contrast,
currency Swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency Swap is subject to the risk
that the other party to the Swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
Swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized Swap documentation. As a result, the Swap market has
become relatively liquid. Swaps that include caps, floors, and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than "traditional" Swaps.

The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of a Portfolio would be less favorable than it would have been if this
investment technique was not used.

23
<PAGE>

and U.S. Government sponsored instrumentalities. For further information on
these securities, see "Description of U.S. Government Securities" in the SAI.

WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment, but will take place no more than 120 days after the trade date. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. The Portfolio will maintain with
the Custodian a separate account with a segregated portfolio of liquid
securities or cash in an amount at least equal to these commitments. The
Growth, Global Equity, International Magnum and Emerging Markets Equity
Portfolios will not enter into When-Issued or Delayed Delivery Securities
commitments exceeding, in the aggregate, 15% of the Portfolio's total assets
other than the obligations created by these commitments.

FUNDAMENTAL INVESTMENT LIMITS
- -----------------------------

EACH PORTFOLIO (excluding the International Magnum and Emerging Markets Equity
Portfolios) is a diversified investment company and is therefore subject to the
following fundamental limitations: as to 75% of its total assets, a Portfolio
may not (a) invest more than 5% of its total assets in the securities of any
one issuer, except obligations of the U.S. Government, its agencies and
instrumentalities, or (b) own more than 10% of the outstanding voting
securities of any one issuer.

MANAGEMENT OF THE FUND
- ----------------------

The Fund is governed by a Board of Directors which is responsible for the
management of the business and affairs of the Fund as provided in the laws of
the State of Maryland and the Fund's Articles of Incorporation and By-Laws. The
Board of Directors of the Fund has undertaken to monitor the Fund for the
existence of any material irreconcilable conflict among the interests of
variable annuity contract owners, variable life insurance policy owners and
qualified plans that invest in the Fund due to differences in tax treatment and
other considerations, and shall report any such conflict to the boards of the
respective life insurance companies that use the Fund as an investment vehicle
for their respective variable annuity contracts and variable life insurance
policies and to qualified plans. The Boards of Directors of those life
insurance companies and the fiduciaries of certain qualified plans and the
Adviser, have agreed or will agree to be responsible for reporting any
potential or existing conflicts to the Directors of the Fund. If a material
irreconcilable conflict exists that affects those life insurance companies,
they will be required, at their own cost, to remedy such conflict up to and
including establishing a new registered management investment company and
segregating the assets underlying the variable annuity contracts and the
variable life insurance policies. Qualified plans which acquire more than 10%
of the assets of a Portfolio will be required to report any potential or
existing conflicts to the Directors of the Fund, and if a

24
<PAGE>

material irreconcilable conflict exists, to remedy such conflict, up to and
including redeeming shares of the Portfolios held by the qualified plans. The
majority of the Fund's Directors are not affiliated with MSAM, MAS, any of
their affiliates, any of the other companies that provide services to the Fund
or any of their affiliates. The officers of the Fund conduct and supervise its
daily business operations.

THE FUND MAY HOLD SPECIAL MEETINGS. The Fund will not hold annual shareholder
meetings, but may call special meetings when required by law, when requested by
a sufficient number of shareholders or for other reasons. An insurance company
issuing a variable annuity contract or variable life insurance policy that
participates in the Portfolios will vote shares held in its separate account as
required by law and interpretations thereof, as may be amended or changed from
time to time. In accordance with current law and interpretations thereof, a
participating insurance company is required to request voting instructions from
contract or policy owners and must vote shares in the separate account in
proportion to the voting instructions received. For a further discussion,
please refer to your insurance company's separate account prospectus.

INVESTMENT MANAGEMENT

INVESTMENT ADVISERS. The Adviser assigned to a Portfolio provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. MSAM serves as the Adviser for the Growth, Global Equity,
International Magnum and Emerging Markets Equity Portfolios. MAS serves as the
adviser for the Fixed Income, High Yield, Value, and Mid Cap Value Portfolios.
MSAM, with principal offices at 1221 Avenue of the Americas, New York, New York
10020, conducts a worldwide investment management business, providing a broad
range of portfolio management services to customers in the United States and
abroad. MSAM is a wholly-owned subsidiary of Morgan Stanley Group Inc.
("MSGI"), which is a publicly owned financial services corporation listed on
the New York, London and Pacific stock exchanges. MSAM, a registered Investment
Adviser under the Investment Advisers Act of 1940, as amended, serves as
investment adviser to numerous open-end and closed-end investment companies.
MAS is a Pennsylvania limited liability partnership founded in 1969 with
principal offices at One Tower Bridge, West Conshohocken, Pennsylvania 19428.
As of January 1996, MAS is also indirectly wholly-owned by MSGI. MAS provides
investment services to employee benefit plans, endowment funds, foundations and
other institutional investors and has served as investment adviser to several
open-end investment companies since 1984. As of February 28, 1997, MSAM,
together with its affiliated asset management companies (other than MAS and Van
Kampen), managed assets totaling approximately $74 billion, MAS managed assets
totaling approximately $44.4 billion and MSAM and MAS and all of their
affiliated asset management companies managed assets totalling approximately
$176.9 billion. See "Management of the Fund" in the SAI.

On February 5, 1997, MSGI and Dean Witter, Discover & Co. ("Dean Witter
Discover") announced that they had entered into an Agreement and Plan of Merger
to form Morgan Stanley, Dean Witter, Discover & Co. Presently, Dean Witter,
Discover is a financial services company with three major businesses: full
service brokerage, credit services and asset management. Subject to certain
conditions being met, it is currently anticipated that the transaction will
close in mid-1997. Thereafter, MSAM and MAS will be subsidiaries of Morgan
Stanley, Dean Witter, Discover & Co.

PORTFOLIO MANAGERS. The following individuals have primary responsibility for
the Portfolios as indicated below.

FIXED INCOME PORTFOLIO -- Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley. Thomas L. Bennett, a Managing Director of Morgan Stanley & Co. Inc.
("Morgan Stanley"), joined MAS in 1984. He assumed responsibility for the MAS
Funds Fixed Income Portfolio in 1984, the MAS Funds Domestic Fixed Income
Portfolio 1987, the MAS Funds High Yield Portfolio in 1985, the MAS Funds Fixed
Income Portfolio II in 1990, the MAS Funds Special Purpose Fixed Income and
Balanced Portfolios in 1992 and the MAS Funds Multi-Asset-Class Portfolio in
1994. Mr. Bennett is Chairman of the Board of Trustees of MAS Funds, a member
of the Executive Committee of MAS and a Director of MAS Fund Distributors, Inc.
Mr. Bennett holds a B.S. in Chemistry and an M.B.A. from University of
Cincinnati. Kenneth B. Dunn, a Managing Director of Morgan Stanley, joined MAS
in 1987. He assumed responsibility for the MAS Funds Fixed Income and Domestic
Fixed Income Portfolios in 1987, the MAS Funds Fixed Income II Portfolio in
1990, the MAS Funds Mortgage-Backed Securities and Special Purpose Fixed Income
Portfolios in 1992, and the MAS Funds Municipal and PA Municipal Portfolios in
1994. Mr. Dunn received a B.S. and an M.B.A. from The Ohio State University and
a Ph.D. from Purdue University. Richard B. Worley, a Managing Director of
Morgan Stanley, joined MAS in 1978. He assumed responsibility for the MAS Funds
Fixed Income Portfolio in 1984, the MAS Funds Domestic Fixed Income Portfolio
in 1987, the MAS Funds Fixed Income Portfolio II in 1990, the MAS Funds
Balanced and Special Purpose Fixed Income Portfolios in 1992, the MAS Funds
Global Fixed Income and International Fixed Income Portfolios in 1993 and the
MAS Funds Multi-Asset-Class Portfolio in 1994. Mr. Worley received a B.A. in
Economics from University of Tennessee and attended the Graduate School of
Economics at University of Texas. Messrs. Bennett, Dunn, and Worley have shared
primary responsibility for managing the Portfolio's assets since inception.

25
<PAGE>

HIGH YIELD PORTFOLIO -- Stephen F. Esser, Robert E. Angevine and Thomas L.
Bennett. Stephen F. Esser, a Managing Director of Morgan Stanley, joined MAS in
1988. He assumed responsibility for the MAS Funds High Yield Portfolio in 1989.
Mr. Esser holds a B.S. from University of Delaware. Robert Angevine is a
Principal of Morgan Stanley and the Portfolio Manager for high yield
investments. Mr. Angevine received an M.B.A. from Fairleigh Dickinson
University and a B.A. in Economics from Lafayette College. Information about
Thomas L. Bennett is included under Fixed Income Portfolio above. Messrs.
Esser, Bennett and Angevine have shared primary responsibility for managing the
Portfolio's assets since inception.

EQUITY GROWTH PORTFOLIO -- Kurt Feuerman, Margaret K. Johnson, and Daniel
Lascano. Kurt Feuerman is a Managing Director of MSAM and heads MSAM's Equity
Group. He joined MSAM in July 1993 after spending three years as a Managing
Director of Morgan Stanley's Research Department, where he was responsible for
emerging growth stocks, gaming and restaurants. Mr. Feuerman earned an M.B.A.
from Columbia University, an M.A. from Syracuse University and a B.A. from
McGill University. Margaret Johnson is a Principal of MSAM and a Portfolio
Manager in the Institutional Equity Group. She joined MSAM in 1984. She holds a
B.A. degree from Yale College and is a Chartered Financial Analyst. Daniel
Lascano is a Vice President of MSAM. He joined MSAM in 1993. Mr. Lascano
graduated from the University of California at Berkeley, with a B.A. in
Economics and Statistics. Mr. Feuerman, Ms. Johnson and Mr. Lascano have shared
primary responsibility for managing the Portfolio's assets since inception.

VALUE PORTFOLIO -- Robert J. Marcin, Richard M. Behler and Nicholas J. Kovich.
Robert J. Marcin, a Managing Director of Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the MAS Funds Value Portfolio in 1990 and the MAS
Funds Equity Portfolio in 1994. Mr. Marcin holds a B.A. from Darmouth College.
Richard M. Behler, a Principal of Morgan Stanley, joined MAS in 1995. He served
as a Portfolio Manager from 1992 through 1995 for Moore Capital Management and
as Senior Vice President for Merrill Lynch Economics from 1987 through 1992. He
assumed responsibility for the MAS Fund's Value Portfolio in 1996. Mr. Behler
received a B.A. (Cum Laude) in Economics from Villanova University and an M.A.
and a Ph.D. in Economics from University of Notre Dame. Mr. Kovich, Managing
Director, Morgan Stanley, joined MAS in 1988. He received a B.S. in Chemical
Engineering and an M.B.A. from University of Kansas. Mr. Behler and Mr. Marcin
have shared primary responsibility for managing the Portfolio's assets since
inception. Mr. Kovich assumed responsibilities with the Value Portfolio in
1997.

MID CAP VALUE PORTFOLIO -- William B. Gerlach, Gary G. Schlarbaum and Barry S.
Daniels. William B. Gerlach, a Vice President of Morgan Stanley, joined MAS in
1991. He holds a B.A. in Economics from Haverford College. Gary G. Schlarbaum,
a Managing Director of Morgan Stanley, joined MAS in 1987. He assumed
responsibility for the MAS Funds Equity and Small Cap Value Portfolios in 1987,
the MAS Funds Balanced Portfolio in 1992 and the MAS Funds Multi-Asset-Class
and Mid Cap Value Portfolios in 1994. Mr. Schlarbaum holds a B.A. from Coe
College and a Ph.D. from University of Pennsylvania. Bradley S. Daniels, a Vice
President of Morgan Stanley, joined MAS in 1985. Messrs. Gerlach, Schlarbaum
and Daniels have had primary responsibility for managing the Portfolio's assets
since inception.

GLOBAL EQUITY PORTFOLIO -- Frances Campion. Frances Campion, a Principal of
Morgan Stanley, joined MSAM in January 1990 as a Global Equity Fund Manager.
Her responsibilities include day-to-day management of the Global Equity
product. She is a graduate of University of College, Dublin. Ms. Campion has
had primary responsibility for managing the Portfolio's assets since inception.

EMERGING MARKETS EQUITY PORTFOLIO -- Madhav Dhar and Marianne L. Hay. Madhav
Dhar is a Managing Director of MSAM and Morgan Stanley. He joined MSAM in 1984
to focus on global asset allocation and investment strategy and now heads
MSAM's emerging markets group and serves as the group's principal Portfolio
Manager. Mr. Dhar also coordinates MSAM's developing country funds effort and
has been involved in the launching of MSAM's country funds. He is a Director of
the Morgan Stanley Emerging Markets Fund, Inc. (a closed-end investment
company). He holds a B.S. (honors) from St. Stephens College, Delhi University
(India), and an M.B.A. from Carnegie-Mellon University. Marianne L. Hay, a
Managing Director of Morgan Stanley, joined the Adviser in June 1993 to work
with the Adviser's senior management covering all emerging markets assets
allocation, product development and client services. Ms. Hay has 17 years of
investment experience. Prior to joining the Adviser, she was a director of
Martin Currie Investment Management, Ltd. ("Martin Currie") where her
responsibilities included geographic asset allocation and portfolio management
for global and emerging markets funds, as well as being director in charge of
the company's North American clients. She graduated with an honors degree in
genetics from Edinburgh University and holds a Diploma in Education and the
qualification of the Association of the Institute of Bankers in Scotland. Mr.
Dhar and Ms. Hay have shared primary responsibility for managing the
Portfolio's assets since its inception.

26
<PAGE>

OTHER SERVICES

MSAM and MAS have each entered into a Sub-Administration Agreement with Chase
Global Funds Services Company ("Chase Global"), a subsidiary of The Chase
Manhattan Bank ("Chase"), pursuant to which Chase Global has agreed to provide
certain administrative services to the Fund. MSAM and MAS supervise and monitor
such administrative services provided by Chase Global. The services provided
under the Administration Agreements and the Sub-Administration Agreements are
also subject to the supervision of the Board of Directors of the Fund. The
Board of Directors of the Fund has approved the provision of services described
above pursuant to the Administration Agreements and the Sub-Administration
Agreements as being in the best interests of the Fund. Chase Global's business
address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional
information regarding the Administration Agreements or the Sub-Administration
Agreements, see "Management of the Fund" in the SAI.

Certain administrative and recordkeeping services that would otherwise be
performed by the Advisers or their service providers, may be performed by
insurance companies that purchase shares of the Portfolios. An Adviser may make
payments to these insurance companies to defray the cost of providing those
services.

Chase Global calculates the NAV and dividends, maintains the general accounting
records and administers the securities lending program for each Portfolio.

DIVIDEND DISBURSING AND TRANSFER AGENT. Chase Global acts as dividend
disbursing and transfer agent for the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and audits the annual financial statements of each Portfolio.

LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.

BREAKDOWN OF EXPENSES

The Portfolios pay fees and other costs related to their daily operations.
Expenses paid out of a Portfolio's assets are reflected in its share price.
Each Portfolio pays a management fee to its Adviser for managing its
investments and business affairs. MSAM and MAS pay fees to affiliates who
provide assistance with these services. Each Portfolio also pays other
expenses, which are explained below. The Advisers may, from time to time,
reduce their fees or reimburse the Portfolios for expenses above a specified
limit. These fee reductions or expense reimbursements, which may be terminated
at any time without notice, can decrease a Portfolio's expenses and boost its
performance.

MANAGEMENT FEE

27
<PAGE>

U.S. FIXED INCOME PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Assets Fixed Income High Yield
- ---------------------------------------------------------------------------
<S> <C> <C>
First $500 million 0.40% 0.50%
- ---------------------------------------------------------------------------
From $500 million to $1 billion 0.35% 0.45%
- ---------------------------------------------------------------------------
More than $1 billion 0.30% 0.40%
</TABLE>

U.S. EQUITY PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Mid Cap
Assets Equity Growth Value Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.55% 0.55% 0.75%
- ---------------------------------------------------------------------------------------
From $500 million to $1
billion 0.50% 0.50% 0.70%
- ---------------------------------------------------------------------------------------
More than $1 billion 0.45% 0.45% 0.65%
</TABLE>

GLOBAL PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Emerging
Global International Markets
Assets Equity Magnum Equity
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.80% 0.80% 1.25%
- ----------------------------------------------------------------------------------------
From $500 million to $1
billion 0.75% 0.75% 1.20%
- ----------------------------------------------------------------------------------------
More than $1 billion 0.70% 0.70% 1.15%
</TABLE>

28
<PAGE>

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Portfolio Fee Waivers
- --------- ------------------------
<S> <C>
Fixed Income........................................... 0.70%
High Yield............................................. 0.80%
Growth................................................. 0.85%
Value.................................................. 0.85%
Mid Cap Value.......................................... 1.05%
Global Equity.......................................... 1.15%
International Magnum................................... 1.15%
Emerging Markets Equity................................ 1.75%
</TABLE>

The fee restrictions are voluntary and may be terminated by the Adviser at any
time.

OTHER EXPENSES

PORTFOLIO TRANSACTIONS

In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by the Adviser. If the purchase or sale of securities
consistent with the investment policies of the Portfolios and one or more of
these other clients serviced by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolios
and such other clients in a

manner deemed fair and reasonable by the Adviser. Although there is no
specified formula for allocating such transactions, the various allocation
methods used by the Adviser, and the results of such allocations, are subject
to periodic review by the Fund's Board of Directors.

Subject to the overriding objective of obtaining the best possible execution of
orders, the Adviser may allocate a portion of the Portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan
Stanley or such affiliates must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time. Furthermore,
the Board of Directors of the Fund, including a majority of those Directors who
are not "interested persons", as defined in the 1940 Act, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Morgan Stanley or such affiliates are consistent
with the foregoing standard.

Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons", as defined
in the 1940 Act of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.

29
<PAGE>

PORTFOLIO TURNOVER

Under certain market conditions, a Portfolio may experience high portfolio
turnover as a result of its investment strategies. For example, the purchase or
sale of securities by a Portfolio in anticipation of a rise or decline in
interest rates or to take advantage of yield disparities among different issues
of Fixed Income Securities could result in high portfolio turnover. As a result
of their investment strategies, the Fixed Income and Mid Cap Value Portfolios'
annual portfolio turnover rates are expected to be as high as 200%. The High
Yield Portfolio's rate is expected to be as high as 150%. Higher portfolio
turnover rates for the Portfolios can result in corresponding increases in
expenses such as brokerage commissions and transaction costs. Although none of
the Portfolios will invest for short-term trading purposes, investment
securities may be sold from time to time without regard to the length of time
they have been held and the Portfolios will not consider portfolio turnover
rate a limiting factor in making investment decisions consistent with their
respective objectives and policies.

PERFORMANCE OF PORTFOLIOS

Average annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.

30
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

<TABLE>
<CAPTION>
Corresponding Corresponding
MSIF MAS Funds
Fund Portfolio portfolio portfolio
-------------- ------------- -------------
<S> <C> <C>
Fixed Income Fixed Income
High Yield High Yield
Equity Growth Equity Growth
Value Value
Mid Cap Value Mid Cap Value
Global Equity Global Equity
International Magnum International Magnum
Emerging Markets Equity Emerging Markets
</TABLE>

Past investment performance of the Class A Shares of the MSIF portfolios and
the Institutional Class Shares of the MAS Funds, as shown in the table below,
may be relevant to your consideration of the Portfolios. The investment
performance of the portfolios of MSIF and MAS Funds is not necessarily
indicative of future performance of the Portfolios of the Fund. Also, the
operating expenses of each of the Portfolios of the Fund will be different
from, and may be higher than, the operating expenses of the corresponding
portfolio of the MSIF or MAS Funds. The investment performance of the Class A
Shares of the MSIF portfolios and the Institutional Class Shares of the MAS
Funds is provided merely to indicate the experience of the Advisers in managing
similar portfolios.
<TABLE>
<CAPTION>
Average Average
Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Annual
One Year Five Years Ten Years Five Years Ten Years Total Return
Inception Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Equity Growth........... 4/2/91 30.97% [119.49%] NA 16.99% NA 17.06%
Global Equity........... 7/15/92 22.83% NA NA NA NA 19.22%
International Magnum.... 3/15/96 8.25%* NA NA NA NA NA
Emerging Markets
Equity................. 9/25/92 12.19% NA NA NA NA 12.93%
MAS Funds:
Fixed Income............ 11/14/84 7.63% 63.46% 145.13% 8.94% 9.38% 10.92%
High Yield.............. 2/28/89 13.83% 97.01% NA 14.52% NA 11.45%
Value................... 11/5/84 18.41% 127.75% 297.08% 17.89% 14.79% 16.86%
Mid Cap Value........... 12/30/94 22.30% NA NA NA NA 32.88%
</TABLE>
- -------
* Cumulative (unannualized) total return since inception.

PERSONS CONTROLLING CERTAIN PORTFOLIOS

As of April 7, 1997, MSGI owned more than 25% of the outstanding voting
securities of the Fixed Income, High Yield, Equity Growth, Value, Mid Cap
Value, Global Equity, International Magnum, and Emerging Markets Equity and
therefore, may be deemed a controlling person of these Portfolios under the
1940 Act.

For more information, see "Control Persons and Principal Holders of Securities"
in the SAI.

31
<PAGE>

ACCOUNT POLICIES
- ----------------

DISTRIBUTIONS AND TAXES

TRANSACTION DETAILS

THE PORTFOLIOS ARE OPEN FOR BUSINESS each day the New York Stock Exchange
("NYSE") is open. Each of the Equity Growth, Value, Mid Cap Value, Global
Equity, International Magnum and Emerging Markets Equity Portfolio's NAV is
determined as of the close of business of the NYSE (normally 4:00 p.m. Eastern
Time) on each day that the NYSE is open for business. The NYSE is currently
scheduled to be closed on New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day,
and on the preceding Friday or subsequent Monday when any of these holidays
falls on a Saturday or Sunday, respectively.

Each of the Fixed Income and High Yield Portfolio's NAV is determined as of one
hour after the close of the bond markets (normally 4:00 p.m. Eastern time) on
each day that the Portfolios are open for business.

Each Portfolio's assets are valued primarily on the basis of market quotations.
Foreign securities are valued on the basis of quotations from the primary
market in which they are traded, and are translated from the local currency
into U.S. dollars using current exchange rates. If quotations are not readily
available or if the values have been materially affected by events occurring
after the closing of a foreign market, assets are valued by a method that the
Fund's Board of Directors believes accurately reflects fair value.

Each Portfolio's Offering Price (price to buy one share) and redemption price
(price to sell one share) are its NAV.

Each portfolio reserves the right to suspend the offering of shares for a
period of time. Each Portfolio also reserves the right to reject any specific
order. Purchase orders may be refused if, in the Adviser's opinion, they would
disrupt management of a Portfolio.

Each participating insurance company receives orders from its variable annuity
contract and variable life insurance policy owners to purchase or redeem shares
of the Portfolios each business day. That night, all orders received by that
insurance company on that business day are aggregated, and the insurance
company places a net purchase or redemption order for shares of one or more
Portfolios the morning of the next business day. These orders are normally
executed at the NAV that was computed at the close of the previous business day
in order to provide a match between the variable contract and policy owners'
orders to the insurance companies and the insurance companies' orders to a
Portfolio. In some cases, an insurance company's orders for Portfolio shares
may be executed at the NAV next computed after the order is actually
transmitted to a Portfolio.

32
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY MILLER
ASSET MANAGEMENT ANDERSON &
INC. SHERRERD, LLP

MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A MUTUAL FUND DESIGNED TO
PROVIDE INVESTMENT VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES AND FOR CERTAIN TAX-QUALIFIED INVESTORS. THE FUND OFFERS 17
PORTFOLIOS MANAGED BY EITHER MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM") OR
MILLER ANDERSON & SHERRERD, LLP ("MAS"). THE FUND MAKES AVAILABLE IN A SINGLE
PRODUCT THE COMBINED STRENGTH OF THESE LEADING INVESTMENT MANAGEMENT FIRMS.

A STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED MAY 1, 1997, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED HEREIN BY
REFERENCE, AND, THEREFORE, LEGALLY FORMS A PART OF THE PROSPECTUS. FOR A COPY
OF THE SAI, AT NO CHARGE, CONTACT THE FUND BY CALLING 1-800-422-6464 EXT. 7182
OR CONTACT YOUR INSURANCE COMPANY.

THE FUND'S PORTFOLIOS:

U.S. FIXED INCOME PORTFOLIOS

Money Market High Yield
Fixed Income

U.S. EQUITY PORTFOLIOS

Core Equity Mid Cap Growth

Equity Growth
Mid Cap Value
Value U.S. Real Estate

GLOBAL PORTFOLIOS

International International Magnum
Fixed Emerging Markets Equity
Income Asian Equity
Emerging Markets Debt
Global Equity

ASSET ALLOCATION PORTFOLIOS

Balanced Multi-Asset-Class

AN INVESTMENT IN ANY PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. YOU MAY RECEIVE MORE OR LESS THAN YOU INVESTED WHEN YOU REDEEM YOUR
SHARES. THE MONEY MARKET PORTFOLIO ATTEMPTS TO MAINTAIN A STABLE $1.00 NET
ASSET VALUE PER SHARE BUT THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO
SO.

THE HIGH YIELD AND EMERGING MARKETS DEBT PORTFOLIOS MAY INVEST WITHOUT
LIMITATION IN LOWER-QUALITY DEBT SECURITIES, SOMETIMES CALLED "JUNK BONDS." YOU
SHOULD CONSIDER THAT THESE SECURITIES CARRY GREATER RISKS, SUCH AS THE RISK OF
DEFAULT, THAN OTHER DEBT SECURITIES. REFER TO "SECURITIES AND INVESTMENT
TECHNIQUES--HIGH YIELD SECURITIES" FOR FURTHER INFORMATION.

THE EMERGING MARKETS DEBT AND EMERGING MARKETS EQUITY PORTFOLIOS MAY INVEST IN
EQUITY SECURITIES OF RUSSIAN COMPANIES. RUSSIA'S SYSTEM OF SHARE REGISTRATION
AND CUSTODY INVOLVES CERTAIN RISKS OF LOSS THAT ARE NOT NORMALLY ASSOCIATED
WITH INVESTMENTS IN OTHER SECURITIES MARKETS. SEE "SECURITIES AND INVESTMENT
TECHNIQUES--RUSSIAN SECURITIES" FOR FURTHER INFORMATION.

Prospectus dated May 1, 1997
Morgan Stanley Universal Funds, Inc.
P.O. Box 2798, Boston, MA 02208-2798

<PAGE>

THE FUND

The Fund is an open-end management investment company, or mutual fund. At
present it offers 17 separate investment portfolios (each, a "Portfolio"),
each with a distinct investment objective. The following pages describe the
types of securities and investment techniques each Portfolio uses to seek its
objective, as well as the risks inherent in those types of securities and
investment techniques.

MANAGEMENT

Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") advises the
following Portfolios:

Money Market Global Equity

Equity Growth
International Magnum
U.S. Real EstateEmerging Markets Equity
Emerging Markets Debt

Asian Equity

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the following
Portfolios:

Fixed Income Mid Cap Value
High Yield International Fixed Income
Core Equity Balanced
Value Multi-Asset-Class
Mid Cap Growth

MAS's institutional investment advisory business was established in 1969. As
of February 28, 1997, MAS managed assets of approximately $44.4 billion. Also
as of February 28, 1997, MSAM and MAS, and all of their affiliated asset
management companies, managed assets totaling approximately$176.9 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE

FINANCIAL HIGHLIGHTS 3

Financial highlights tables as of December 31, 1996.

PORTFOLIO SUMMARIES 3

For each Portfolio, the investment objective and a summary of strategy,
potential investors, and investment characteristics and risks.

THE PORTFOLIOS' INVESTMENTS 7

A more detailed review of how each Portfolio invests and investment
characteristics and risks.

SECURITIES AND INVESTMENT TECHNIQUES 16

More information about the types of investment strategies that may be
used by some or all of the Portfolios and information about investment risks
and limitations.

FUNDAMENTAL INVESTMENT LIMITS 31

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 31

General information about the organization and operations of the Fund,
including details about MSAM, MAS and the individual portfolio managers, as
well as fees, expenses and performance calculations.

ACCOUNT POLICIES 41

Information on net asset value calculation, income and gain
distributions, taxes and share purchases and redemptions.

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following table provides financial highlights for the shares of the
Emerging Markets Equity Portfolio for the period presented. The Emerging
Markets Equity Portfolio was the only Portfolio of the Fund operational in the
fiscal year ended December 31, 1996 and, therefore, is the only Portfolio with
audited financial highlights for this period. These audited financial
highlights are part of the Fund's financial statements which appear in the
Fund's December 31, 1996 Annual Report to Shareholders and which are included
in the Fund's Statement of Additional Information. The Emerging Markets Equity
Portfolio's financial highlights for the period ended December 31, 1996 have
been audited by Price Waterhouse LLP, whose unqualified report thereon is also
included in the Statement of Additional Information. Additional performance
information for the Emerging Markets Equity Portfolio is included in the Annual
Report. The Annual Report and the financial statements therein, along with the
Statement of Additional Information, are available at no cost from the Fund at
the toll-free number noted on the cover page to this Prospectus or from your
insurance company.

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1996
- ---------------------------------- -------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Invested Income......................................... 0.01
Net Realized and Unrealized Loss............................ (0.21)
-------
Total From Investment Operations.......................... (0.20)
-------
DISTRIBUTIONS
Net Invested Income......................................... (0.02)
-------
Total Distributions....................................... (0.02)
-------
NET ASSET VALUE, END OF PERIOD................................ $ 9.78
=======
TOTAL RETURN.................................................. (2.03)%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)............................. $11,789
Ratio of Expenses to Average Net Assets....................... 1.75%**
Ratio of Net Investment Income to Average Net Assets.......... 0.32%**
Portfolio Turnover Rate....................................... 9%
Average Commission Rate#...................................... $0.0013
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net
Investment Income (Loss)................................... $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net
Assets..................................................... 6.17%**
Net Investment Income (Loss) to Average Net Assets.......... (4.06)%**
</TABLE>
- -------

*Commencement of operations.

**Annualized.

# For the period ended December 31, 1996, the average commission rate paid on
trades on which commissions were charged was 0.45% of the trade amount.
PORTFOLIO SUMMARIES

Certain investment terms used below have initial capital letters ("Money Market
Instruments," for example). These terms are further described under "Securities
and Investment Techniques" below.

U.S. FIXED INCOME PORTFOLIOS

MONEY MARKET PORTFOLIO

OBJECTIVE AND STRATEGY: Maximize current income and preserve capital while
maintaining high levels of liquidity through investing in high quality Money
Market Instruments with effective maturities of 397 days or less. While the
Portfolio is managed with the goal of keeping its share price stable at $1.00,
there can be no assurance this goal will be achieved. The rate of income will
vary from day-to-day, generally reflecting short-term interest rates.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking to
earn income at current money market rates while preserving the value of their
investment.

RISK PROFILE: Low potential risk and reward. The Portfolio seeks a conservative
rate of return in exchange for capital preservation.

FIXED INCOME PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of U.S.
Governments and Agencies, Corporate Bonds, MBSs, Foreign Bonds and other Fixed
Income Securities and Derivatives. The Portfolio's average weighted maturity
will ordinarily exceed five years and will usually be between five and fifteen
years.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of Fixed Income Securities.

HIGH YIELD PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in

3
<PAGE>

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.

U.S. EQUITY PORTFOLIOS

CORE EQUITY PORTFOLIO

OBJECTIVE AND STRATEGY: 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 of companies that are deemed by MAS to have
earnings growth potential greater than the economy in general and greater than
the expected rate of inflation.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from Common Stocks of companies that represent a well-
diversified exposure to the U.S. stock market.

RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price will fluctuate with changes in the stock market and economic conditions.

EQUITY GROWTH PORTFOLIO

VALUE PORTFOLIO

RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price will fluctuate with changes in market, economic and foreign currency
exchange conditions.

MID CAP GROWTH PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital growth by investing primarily in
Common Stocks and other Equity Securities of issuers with equity
capitalizations in the range of the companies represented in the Standard &
Poor's Ratings Group ("S&P") MidCap 400 Index. Such range is currently $100
million to $8 billion but the range fluctuates over time with changes in the
equity market.

INVESTOR PROFILE: The Portfolio may be appropriate for investors who are
willing to ride out stock market fluctuations in pursuit of potentially greater
long-term returns and who understand that investments in small- and medium-
size companies may result in greater price fluctuations than the stock market
in general.

RISK PROFILE: High potential risk and reward. The Portfolio's share price will
fluctuate with changes in market and economic conditions.

MID CAP VALUE PORTFOLIO

OBJECTIVE AND STRATEGY: 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. Such range is currently $100 million to $8 billion
but the range fluctuates over time with changes in the equity market.

RISK PROFILE: High potential risk and reward. The Portfolio's share price will
fluctuate with changes in market and economic conditions.

4
<PAGE>

U.S. REAL ESTATE PORTFOLIO

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, the Portfolio's investments may be subject to the risks
associated with the direct ownership of real estate and direct investments of
REITs.

GLOBAL PORTFOLIOS

INTERNATIONAL FIXED INCOME PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in investment grade Foreign Bonds and
other Fixed Income Securities of foreign issuers and Derivatives. The
Portfolio's average weighted maturity will ordinarily exceed five years and
will usually be between three and fifteen years.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from high-grade Foreign Bonds and willing to accept
currency risk.

RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price can be expected to vary inversely to changes in prevailing interest
rates. In addition, the performance of the Portfolio will be affected by
foreign currency values, the greater volatility of securities exchanges, and
the overall political, economic and regulatory environment in the countries in
which the Portfolio invests.

EMERGING MARKETS DEBT PORTFOLIO

OBJECTIVE AND STRATEGY: High total return by investing primarily in Fixed
Income Securities of government and government-related issuers located in
emerging market countries, which securities provide a high level of current
income, while at the same time holding the potential for capital appreciation
if the perceived creditworthiness of the issuer improves due to improving
economic, financial, political, social or other conditions in the country in
which the issuer is located.

INVESTOR PROFILE: The Portfolio is designed for those who seek a high level of
current income from Emerging Market Country Securities that are Fixed Income
Securities, while holding the potential for capital appreciation.

RISK PROFILE: Very high potential risk and reward. The Portfolio's performance
is subject to high risk and will not be required to meet a minimum rating
standard and may purchase securities that are not rated for creditworthiness by
any internationally recognized credit rating organization. These types of debt
obligations are predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with their terms and generally
involve a greater risk of default and of volatility in price than securities in
higher rating categories. In addition, international investing involves
different or increased risks. The performance of the Portfolio will be affected
by foreign currency values, the greater volatility of securities exchanges,
risks in connection with registration, clearing and settlement of securities
transactions and the overall political, economic and regulatory environment in
the countries in which the Portfolio invests. The risks of Foreign Investment
are exacerbated in the case of Emerging Market Country Securities.

GLOBAL EQUITY PORTFOLIO

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, Foreign Investment involves different or increased
risks. The performance of the Portfolio will be affected by foreign currency
values, the greater volatility of securities exchanges, and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

INTERNATIONAL MAGNUM PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of non-U.S. issuers domiciled in EAFE countries (defined
herein).

5
<PAGE>

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, Foreign Investment involves different or increased
risks. The performance of the Portfolio will be affected by foreign currency
values, the greater volatility of securities exchanges and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

RISK PROFILE: Very high potential risk and reward. In addition to the general
risks involved in Equity Securities, including fluctuations in the stock market
and changes in the economy, international investing involves different or
increased risks. The performance of the Portfolio will be affected by foreign
currency values, the greater volatility of securities exchanges, and the
overall political, economic and regulatory environment in the countries in
which the Portfolio invests. The risks of Foreign Investment are exacerbated in
the case of Emerging Market Country Securities.

ASIAN EQUITY PORTFOLIO

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets of Asian countries other than Japan.

ASSET ALLOCATION PORTFOLIOS

BALANCED PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of Equity and
Fixed Income Securities and Derivatives. The average weighted maturity of the
fixed income portion of the Portfolio ordinarily will exceed five years and
will usually be between three and fifteen years.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of both Equity Securities and
a wide range of Fixed Income Securities.

When MAS judges the relative outlook for each asset class to be neutral, the
mix of assets will be 60% Equity Securities and 40% Fixed Income Securities,
although the Portfolio may hold between 45-75% Equity Securities and between
25-55% Fixed Income Securities.

The Adviser will continually review the Portfolio's holdings and rebalance the
securities held by the Portfolio to attempt to maintain the appropriate asset
mix.

RISK PROFILE: Moderate potential risk and reward. The Portfolio's equity
investments will fluctuate with changes in the stock market and changes in the
economy. The value of the Portfolio's Fixed Income Securities can be expected
to vary inversely to changes in prevailing interest rates. While securities
with longer maturities tend to produce higher yields, the prices of longer
maturity securities are also subject to greater market fluctuations as a result
of changes in interest rates.

MULTI-ASSET-CLASS PORTFOLIO

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of Equity and
Fixed Income Securities (including High Yield Securities) of domestic and
foreign issuers and Derivatives. The average weighted maturity of the fixed
income portion of the Portfolio will ordinarily exceed five years and will
usually be between three and fifteen years.

INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of both Equity Securities of
domestic and foreign issuers and a wide range of domestic and foreign Fixed
Income Securities ranging from high yield to high grade.

When MAS judges the relative outlook for each asset class to be neutral, the
mix of assets will be 50% in Equity Securities of domestic issuers, 14% in
Equity Securities of foreign issuers, 24% in Fixed Income Securities of
domestic issuers, 6% in Fixed Income Securities of foreign issuers, and 6% in

6
<PAGE>

High Yield Securities. However, the normal ranges for these different asset
classes will be:

<TABLE>
<S> <C>
Equity Securities-domestic issuers 70%-30%
Equity Securities-foreign issuers 25%-5%
Fixed Income Securities-domestic issuers 60%-15%
Fixed Income Securities-foreign issuers 12%-0%
High Yield Securities 12%-0%
</TABLE>
The Adviser will continually review the Portfolio's holdings and actively
rebalance the securities held by the Portfolio.

RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's
Equity Securities will fluctuate with changes in the stock market and changes
in the economy. The value of the Portfolio's Fixed Income Securities can be
expected to vary inversely to changes in prevailing interest rates. While
securities with longer maturities tend to produce higher yields, the prices of
longer maturity securities are also subject to greater market fluctuations as a
result of changes in interest rates. Securities rated below investment grade,
as well as unrated securities, usually entail greater risk (including the
possibility of default or bankruptcy of the issuers), and generally involve
greater price volatility and risk of principal and income, and may be less
liquid, than securities in higher rating categories. In addition, Foreign
Investment involves different or increased risks. The performance of the
Portfolio will be affected by foreign currency values, the greater volatility
of securities exchanges, and the overall political, economic and regulatory
environment in the countries in which the Portfolio invests.

THE PORTFOLIOS' INVESTMENTS

INVESTMENT CHARACTERISTICS AND RISKS

The Portfolios spread investment risk by limiting, to varying degrees, its
holdings in any one company or industry. Nevertheless, each Portfolio, other
than the Money Market Portfolio, will experience price volatility the extent of
which will be affected by the types of securities and techniques the particular
Portfolio uses. (The Money Market Portfolio expects to maintain a net asset
value ("NAV") of $1.00 per share but there can be no assurance of that result.)
In the short term, Common Stock prices can fluctuate dramatically in response
to these factors. Over time, however, Common Stocks have shown greater growth
potential than other types of securities. The prices of bonds also fluctuate
and generally move in the opposite direction from interest rates.

Foreign Investment may involve risks in addition to those of U.S. investments.
The performance of the Portfolios investing in foreign securities will be
affected by foreign currency values, the greater volatility of securities
exchanges, and the overall political, economic and regulatory environment in
the countries in which investments are made.

Because the International Fixed Income, International Magnum, U.S. Real Estate,
Emerging Markets Equity and Emerging Markets Debt Portfolios are non-
diversified portfolios and are permitted greater flexibility to invest their
assets in the obligations of a single issuer, they are exposed to increased
risk of loss if such an investment underperforms expectations. See "Non-
Diversified Status" in this Prospectus and "Investment Limitations" in the
"SAI".

When Portfolio shares are redeemed, they may be worth more or less than their
original cost. An investment in any one Portfolio is not in itself a balanced
investment plan. As with any mutual fund, there is no assurance that a
Portfolio will achieve its goal.

U.S. FIXED INCOME PORTFOLIOS

MONEY MARKET PORTFOLIO

The Portfolio seeks to realize maximum current income and preserve capital
while maintaining high levels of liquidity through investing in high-quality
Money Market Instruments which have effective maturities of 397 days or less.
The Portfolio's average maturity (on a dollar-weighted basis) will not exceed
90 days. The Portfolio is expected to maintain a net asset value of $1.00 per
share, but there can be no assurance of this result.

The Portfolio utilizes the amortized cost method of valuation in accordance
with regulations issued by the Securities and Exchange Commission ("SEC").
Accordingly, the Portfolio will limit its portfolio investments to those
instruments that present minimal credit risks and are of "eligible quality" as
determined by the Adviser under the supervision of the Board of Directors in
accordance with regulations of the SEC, as they may from time to time be
amended. For this purpose, "eligible quality" means a security rated in one of
the two highest rating categories (i) by at least two nationally recognized
statistical rating organizations (each an "NRSRO") assigning a rating to the
security or issuer, or
7
<PAGE>

(ii) if only one NRSRO has assigned a rating, by that NRSRO, or if the security
is unrated, of comparable quality as determined by the Adviser. The Money
Market Portfolio will not purchase any bank or corporate obligation unless it
is rated at least Aa or Prime-1 by Moody's Investors Service, Inc. ("Moody's")
or AA or A-1 by S&P, or it is unrated, and in the determination of the Adviser,
it is of comparable quality.

The Portfolio may invest in Repurchase Agreements, Reverse Repurchase
Agreements to a limited extent, may purchase securities on a When-Issued or
Delayed Delivery basis, and may engage in Loans of Portfolio Securities. For
additional investment information, see "Securities and Investment Techniques"
below.

FIXED INCOME PORTFOLIO

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Fixed Income Securities, not more than 20% of which will be below
investment grade (commonly referred to as High Yield Securities or junk bonds).
Permissible investments include Municipals, Loan Participations and
Assignments, Investment Company Securities, When-Issued and Delayed Delivery
Securities and Derivatives, including but not limited to CMOs, Structured
Notes, Foreign Currency Transactions, Futures, Options and Swaps and may engage
in Loans of Portfolio Securities. For additional investment information, see
"Securities and Investment Techniques" below.

HIGH YIELD PORTFOLIO

The Portfolio may also invest in Investment Grade Fixed Income Securities of
domestic and foreign issuers, including Eastern European and Emerging Market
Country Securities, and in Foreign Currency Transactions, Investment Company
Securities, Foreign Equities, Loan Participations and Assignments, Municipals,
Brady Bonds, ABSs, When-Issued or Delayed Delivery Securities, and Derivatives,
including but not limited to SMBSs, CMOs, Structured Notes, Forwards, Futures,
Options and Swaps and may engage in Loans of Portfolio Securities. For risks
associated with High Yield Securities and additional information about
investments, see "Securities and Investment Techniques" below.

U.S. EQUITY PORTFOLIOS

CORE EQUITY PORTFOLIO

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may invest up to 5% of its total
assets in Foreign Equities (other than ADRs). The Portfolio may also invest in
U.S. Governments and Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons,
Repurchase Agreements, Cash Equivalents, Foreign Currency Transactions,
Investment Company Securities, securities purchased on a When-Issued and
Delayed Delivery basis, and Derivatives, including but not limited to Forwards,
Futures, Options and Swaps and may engage in Loans of Portfolio Securities. For
additional information about investments, see "Securities and Investment
Practices" below.

8
<PAGE>

The Adviser's approach entails selecting Equity Securities of companies which
are deemed by the Adviser to demonstrate long-term earnings growth that is
greater than the economy in general and greater than the expected rate of
inflation. The Adviser evaluates both short-term and long-term economic trends
and their impact on corporate profits and the relative value offered by
different sectors and securities within the equity markets. Individual
securities are selected based on fundamental business and financial factors
(such as earnings growth, financial position, price volatility, and dividend
payment records) and the measurement of those factors relative to the current
market price of the security.

EQUITY GROWTH PORTFOLIO

VALUE PORTFOLIO

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may invest up to 5% of its total
assets in Foreign Equities (other than ADRs). The Portfolio may also invest in
U.S. Governments and Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons,
Repurchase Agreements, Cash Equivalents, Foreign Currency Transactions,
Investment Company Securities, When-Issued or Delayed Delivery Securities and
Derivatives, including but not limited to Forwards, Futures, Options and Swaps
and may engage in Loans of Portfolio Securities. For additional information
about investments, see "Securities and Investment Techniques" below.

The Adviser's approach is to select Equity Securities that it deems to be
undervalued relative to the stock market in general as measured by the S&P 500
Index, based on value measures such as price/earnings ratios and price/book
ratios, as well as fundamental research. While capital return will be
emphasized somewhat more than income return, the Portfolio's total return will
consist of both capital and income returns. Stocks that are deemed to be under-
valued in the marketplace have, under most market conditions, provided higher
dividend income returns than stocks that are deemed to have long-term earnings
growth potential which normally sell at higher price/earnings ratios. For
additional information about strategies employed in managing the Portfolio, see
"Value Stock Investing" in "Securities and Investment Techniques."

MID CAP GROWTH PORTFOLIO

The Portfolio seeks long-term capital growth by investing primarily in Common
and Preferred Stocks, Convertible Securities, Rights and Warrants to purchase
Common Stocks, ADRs and other Equity Securities of issuers with equity
capitalizations in the range of the companies represented in
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<PAGE>

the S&P MidCap 400 Index. Such range is currently $100 million to $8 billion
but the range fluctuates over time with changes in the equity market. Due to
its emphasis on long-term capital growth, dividend income for the Portfolio may
be lower than for the other equity Portfolios.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities of smaller and medium-size companies. The Portfolio
may invest up to 5% of its total assets in Foreign Equities (other than ADRs).
The Portfolio may also invest in U.S. Governments and Agencies, Corporate
Bonds, Foreign Bonds, Zero Coupons, Repurchase Agreements, Cash Equivalents,
Foreign Currency Transactions, Investment Company Securities, When-Issued and
Delayed Delivery Securities and Derivatives, including but not limited to
Forwards, Futures, Options and Swaps and may engage in Loans of Portfolio
Securities. For additional information about investments, see "Securities and
Investment Techniques" below.

The Adviser uses a four-part process combining quantitative, fundamental and
valuation analysis with a strict sales discipline. Equity Securities that pass
an initial screen based on estimate revisions undergo detailed fundamental
research. Valuation analysis is used to eliminate the most over-valued
securities. Holdings are sold when their estimate-revision scores fall to
unacceptable levels, when fundamental research uncovers unfavorable trends, or
when their valuations exceed the level that the Adviser believes is reasonable
given their growth prospects.

MID CAP VALUE PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in Common and Preferred Stocks, Convertible
Securities, Rights and Warrants to purchase Common Stocks, ADRs and other
Equity Securities of issuers with equity capitalizations in the range of the
companies represented in the S&P MidCap 400 Index. Such range is currently $100
million to $8 billion but the range fluctuates over time with changes in the
equity market.

Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in Equity Securities of mid-cap companies deemed to be under-
valued. The Portfolio may invest up to 5% of its total assets in Foreign
Equities (other than ADRs). The Portfolio may also invest in U.S. Governments
and Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons, Repurchase
Agreements, Cash Equivalents, Foreign Currency Transactions, Investment Company
Securities, When-Issued and Delayed Delivery Securities and Derivatives,
including but not limited to Forwards, Futures, Options and Swaps and may
engage in Loans of Portfolio Securities. For additional information about
investments, see "Securities and Investment Techniques" below.

The Adviser's approach is to select Common Stocks that are deemed to be
relatively under-valued at the time of purchase based on certain proprietary
measures of value. The Portfolio will typically exhibit a lower price/earnings
value ratio than the S&P MidCap 400 Index. The Portfolio will be structured
taking into account the economic sector weights of the S&P MidCap 400 Index,
with sector weights normally being within 5% of the sector weights of the
Index. For additional information about strategies employed in managing the
Portfolio, see "Value Stock Investing" in "Securities and Investment
Techniques."

U.S. REAL ESTATE PORTFOLIO

The Portfolio may also invest in Fixed Income Securities issued or guaranteed
by real estate companies or secured by real estate assets that are Investment
Grade Securities, high-quality Money Market Instruments such as notes,
certificates of deposit or bankers' acceptances issued by domestic or foreign
issuers, or high-grade debt securities, consisting of corporate debt securities
and U.S. Governments and Agencies. The Portfolio may also invest in certain
securities or obligations, including Non-Publicly Traded Securities, Private
Placements, Restricted Securities, Repurchase Agreements, When-Issued and
Delayed Delivery Securities, Temporary Investments and Derivatives, including
but not limited to Options and Futures and may engage in Loans of Portfolio
Securities. For additional information about the Portfolio's investments, see
"Securities and Investment Techniques" and "Non-Diversified Status" below.

The Adviser's approach is to invest in Equity Securities of companies that it
believes will provide a dividend yield that exceeds the composite dividend
yield of securities comprising

10
<PAGE>

the S&P 500. A substantial portion of the Portfolio's total assets will be
invested in Equity Securities of REITs. REITs pool investors' funds for
investment primarily in income producing real estate or real estate related
loans or interests, with certain tax advantages if regulatory requirements are
met. Generally, REITs can be classified as Equity REITs, Mortgage REITs or
Hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains from
appreciation realized through property sales. Equity REITs are further
categorized according to the types of real estate securities they own, e.g.,
apartment properties, retail shopping centers, office and industrial
properties, hotels, health-care facilities, manufactured housing and mixed-
property types. Mortgage REITs invest the majority of their assets in real
estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both Equity and Mortgage REITs. The
Portfolio will invest primarily in Equity REITs. A shareholder in the Portfolio
investing in REITs indirectly through the Portfolio will bear not only his or
her proportionate share of the expenses of the Portfolio, but also indirectly,
the management expenses of underlying REITs.

GLOBAL PORTFOLIOS

INTERNATIONAL FIXED INCOME PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in investment grade Foreign Bonds and other
Fixed Income Securities of foreign issuers. Under normal circumstances, at
least 95% of the Fixed Income Securities in which the Portfolio will invest
will be Investment Grade Securities. The Portfolio's average weighted maturity
ordinarily will exceed five years and will usually be between three and fifteen
years. Under normal circumstances, the Portfolio will invest at least 80% of
its total assets in Fixed Income Securities of issuers in at least three
countries other than the United States, including Emerging Market Country
Securities and Eastern European Securities. Derivatives may be used to
represent country investments.

The Portfolio may also invest in U.S. Fixed Income Securities, Foreign Currency
Transactions, Investment Funds, Investment Company Securities, Loan
Participations and Assignments, Preferred Stock, When-Issued and Delayed
Delivery Securities and Derivatives, including but not limited to, Structured
Notes, Forwards, Futures, Options and Swaps and may engage in Loans of
Portfolio Securities. For additional information about investments, see
"Securities and Investment Techniques" below.

The Adviser's approach is to manage the duration, country, and currency
exposure of the Portfolio by combining fundamental research on relative values
with analyses of economic, interest-rate, and exchange-rate trends. The Adviser
will invest in MBSs and Corporate Bonds when it believes they offer the most
value, although most foreign currency denominated investments are in Fixed
Income Securities issued by governments or supranational organizations. For
other information about strategies employed in managing the Portfolio, see
"Maturity and Duration Management," "Value Investing," "Foreign Fixed Income
Investing," "Non-Diversified Status," "Emerging Markets Investing," "Mortgage
Investing" and "Foreign Investing" in "Securities and Investment Techniques"
below.

EMERGING MARKETS DEBT PORTFOLIO

The Portfolio seeks high total return by investing primarily in Fixed Income
Securities of issuers in emerging market countries. Under normal circumstances,
the Portfolio will invest at least 65% of its total assets in government Fixed
Income Securities, including Loan Participations and Assignments between
governments and financial institutions, securities issued by government owned,
controlled or sponsored entities and securities of entities organized to
restructure outstanding debt of such issuers.

The Portfolio may also invest in Fixed Income Securities of corporate issuers
located in or organized under the laws of emerging market countries, Brady
Bonds, Zero Coupon, Pay-In-Kind or Deferred Payment Securities, ADRs, Foreign
Currency Transactions, Investment Company Securities, Investment Funds, Loan
Participations and Assignments, Money Market Instruments, Repurchase
Agreements, Reverse Repurchase Agreements, Temporary Investments, Non-Publicly
Traded Securities, Private Placements, Restricted Securities, When-Issued or
Delayed Delivery Securities, Derivatives, including but not limited to
Forwards, Futures and Options, and may engage in Loans of Portfolio Securities.
The Portfolio may also invest up to 5% of its total assets in MBSs, CMOs and in
other ABSs issued by non-governmental entities, such as banks and other
financial institutions. Also, the Portfolio is authorized to borrow up to 33
1/3% of its total assets (including the amount borrowed), less all liabilities
and indebtedness other than the borrowing, for investment purposes to increase
the opportunity for greater return and for payment of dividends. Such
borrowings would constitute leverage, which is a speculative characteristic.
Leveraging will magnify declines as well as increases in the NAV of the
Portfolio's shares and increases in the yield on the Portfolio's investments.
For additional information about investments, see "Securities and Investment
Practices" and "Non-Diversified Status" below.

The Adviser's approach is to invest the Portfolio's assets in Emerging Market
Country Fixed Income Securities that provide a high level of current income,
while at the same time holding the potential for capital appreciation if the
perceived creditworthiness of the issuer improves due to improving economic,
financial, political, social or other conditions in the country in which the
issuer is located. Currently, investing in many emerging market countries is
not feasible or may involve unacceptable political risks. Initially, the
Portfolio expects that its investments in Emerging Market Country Fixed Income

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<PAGE>

Securities will be made primarily in some or all of the following emerging
market countries:

<TABLE>
<S> <C> <C> <C>
Algeria Argentina Brazil Bulgaria
Chile China Colombia Costa Rica
Czech Republic Dominican Republic Ecuador Egypt
Greece Hungary India Indonesia
Ivory Coast Jamaica Jordan Malaysia
Mexico Morocco Nicaragua Nigeria
Pakistan Panama Paraguay Peru
Philippines Poland Portugal Russia
Slovakia South Africa Thailand Trinidad &
Tunisia Turkey Uruguay Tobago
Venezuela Zaire
</TABLE>

In selecting Emerging Market Country Fixed Income Securities for investment by
the Portfolio, the Adviser will apply a market risk analysis contemplating
assessment of factors such as liquidity, volatility, tax implications, interest
rate sensitivity, counterparty risks and technical market considerations. As
opportunities to invest in debt securities in other countries develop, the
Portfolio expects to expand and further diversify the universe of emerging
market countries in which it invests. While the Portfolio generally is not
restricted in the portion of its assets which may be invested in a single
country or region, it is anticipated that, under normal conditions, the
Portfolio's assets will be invested in issuers in at least three countries.

Interests in issuers organized and operated for the purpose of restructuring
the investment characteristics of instruments issued by governments, government
agencies or instrumentalities, political subdivisions or government owned,
controlled or sponsored entities involves the deposit with or purchase by an
entity of specific instruments and the issuance by that entity of one or more
classes of securities backed by, or representing interests in, the underlying
instruments. Certain issuers of such structured securities may be deemed to be
"Investment Companies" as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). As a result, the Portfolio's investment in such
securities may be limited by certain investment restrictions contained in the
1940 Act.

The Portfolio's investments in Fixed Income Securities of governments, and
government-related and restructured Fixed Income Securities are subject to
special risks, including the inability or unwillingness of the issuer to repay
principal and interest, requests to reschedule or restructure outstanding debt
and requests to extend additional loan amounts. The Portfolio may have limited
recourse in the event of default on such Fixed Income Securities. Also, the
registration, clearing and settlement of securities transactions in Russia are
subject to significant risks not normally associated with securities
transactions in the United States and other more developed markets. See
"Securities and Investment Techniques --Russian Securities."

The portion of the Portfolio's assets invested in securities denominated in
currencies other than the U.S. dollar is not restricted and will vary depending
on market conditions. Although the Portfolio is permitted to engage in
investment practices to hedge against currency exchange rate risks with respect
to such assets, the Portfolio may be limited in its ability to hedge against
these risks.

Emerging Market Country Fixed Income Securities in which the Portfolio may
invest will be subject to high risk and will not be required to meet a minimum
rating standard and may not be rated for creditworthiness by any
internationally recognized credit rating organization. These types of Fixed
Income Securities are predominantly speculative and generally involve a greater
risk of default and of volatility in price than securities in higher rating
categories. Ratings of Fixed Income Securities of foreign issuers, to the
extent that those ratings are undertaken, are related to evaluations of the
country in which the issuer of the instrument is located and generally take
into account the currency in which the Fixed Income Securities of a foreign
issuer is denominated.

GLOBAL EQUITY PORTFOLIO

The Portfolio may also invest in Foreign Currency Transactions, Money Market
Instruments, Repurchase Agreements and When-Issued or Delayed Delivery
Securities, and may engage in Loans of Portfolio Securities. For additional
information about investments, see "Securities and Investment Techniques"
below.

12
<PAGE>

sources, including Morgan Stanley Capital International, an affiliate of the
Adviser located in Geneva, Switzerland. Portfolio holdings are regularly
reviewed and subjected to fundamental analysis to determine whether they
continue to conform to the Adviser's value criteria. Equity Securities that no
longer conform to such investment criteria will be sold.

Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the
length of time they have been held. Investing in foreign countries and emerging
market countries subjects the Portfolio to additional risk, see "Securities and
Investment Techniques" below.

INTERNATIONAL MAGNUM PORTFOLIO

The Portfolio may also invest in Private Placements or initial public offerings
in the form of oversubscriptions, certain short-term (less than twelve months
to maturity) and medium-term (not greater than five years to maturity) Fixed
Income Securities, Foreign Currency Transactions, Investment Company
Securities, Temporary Investments, Money Market Instruments, Non-Publicly
Traded Securities, Restricted Securities, Repurchase Agreements, Cash or Cash
Equivalents, When-Issued or Delayed Delivery Securities, and Derivatives,
including but not limited to Forwards, Futures (including stock index futures)
and Options, and may engage in Loans of Portfolio Securities. The Portfolio may
also invest up to 10% of its total assets in (i) Investment Company Securities
with investment objectives similar to that of the Portfolio and (ii) for
temporary purposes, Money Market Instruments and pooled investment vehicles. In
addition, for temporary defensive purposes during periods in which the Adviser
believes changes in economic, financial or political conditions make it
advisable, the Portfolio may invest up to 100% of its total assets in short-
term and medium-term Fixed Income Securities or hold cash. The Portfolio will
not invest in Fixed Income Securities that are not Investment Grade Securities.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the
length of time they have been held. For additional information about
investments, see "Securities and Investment Techniques" and "Non-Diversified
Status" below.

EMERGING MARKETS EQUITY PORTFOLIO

The 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. Under normal circumstances, at
least 65% of the Portfolio's total assets will be invested in Emerging Market
Country Equity Securities.

13
<PAGE>

Restricted Securities, Temporary Investments, When-Issued and Delayed Delivery
Securities, and Derivatives, including but not limited to Forwards, Futures and
Options and may engage in Loans of Portfolio Securities. It is likely that many
of the Fixed Income Securities in which the Portfolio will invest will be
unrated, and whether or not rated, such securities may have speculative
characteristics.

The Portfolio intends to invest primarily in some or all of the following
emerging market countries:

As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging market countries in which it invests. The
Portfolio does not intend to invest in any security in a country where the
currency is not freely convertible to U.S. dollars, unless the Portfolio has
obtained the necessary governmental licensing to convert such currency or other
appropriately licensed or sanctioned contractual guarantees to protect such
investment against loss of that currency's external value, or the Portfolio has
a reasonable expectation at the time the investment is made that such
governmental licensing or other appropriately licensed or sanctioned guarantees
would be obtained or that the currency in which the security is quoted would be
freely convertible at the time of any proposed sale of the security by the
Portfolio. The Adviser will analyze assets, revenues and earnings of an issuer.
In selecting industries and particular issuers, the Adviser will evaluate costs
of labor and raw materials, access to technology, export of products and
government regulation. Although the Portfolio seeks to invest in larger
companies, it may invest in small- and medium-size companies that, in the
Adviser's view, have potential for growth.

ASIAN EQUITY PORTFOLIO

The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights and Warrants to
purchase Common Stocks, Depositary Receipts and other Equity Securities that
are traded on recognized stock exchanges of the countries in Asia described
below and such Equity Securities of companies organized under the laws of any
such Asian country whose business is conducted principally in Asia. Although
the Portfolio intends to invest primarily in Equity Securities listed on stock
exchanges, it will also invest in Equity Securities traded in over-the-counter
markets. Securities traded in over-the-counter markets pose liquidity risks.
The production of any current income is incidental to the Portfolio's
objective.

The Portfolio does not intend to invest in Asian Equity Securities that are
principally traded in markets in Japan or in companies organized under the laws
of Japan. The Asian countries to be represented in the Portfolio, which include
the following countries, have the more established markets in the region: Hong
Kong, Singapore, Malaysia, Thailand, the Philippines and Indonesia. The
Portfolio may also invest in Common Stocks traded in markets in Taiwan, South
Korea, India, Pakistan, Sri Lanka and other developing markets that are open to
Foreign Investment. Under normal circumstances, the Portfolio will invest at
least 65% of the total assets of the Portfolio in such Asian Equity Securities.

The Portfolio may also invest in Fixed Income Securities, bills and bonds of
governmental entities in Asia and the

14
<PAGE>

United States, notes, debentures and bonds of companies in Asia, U.S. Money
Market Instruments, Foreign Currency Transactions, Investment Company
Securities and Repurchase Agreements, When-Issued or Delayed Delivery
Securities and Derivatives, including but not limited to Forwards and Futures,
and may engage in Loans of Portfolio Securities. Although the Portfolio will
not invest for short-term trading purposes, portfolio securities may be sold
from time to time without regard to the length of time they have been held.
Pending investment or settlement, and for liquidity purposes, the Portfolio may
invest in domestic, Eurodollar and foreign short-term Money Market Instruments.
The Portfolio may also purchase such instruments to temporarily reduce its
equity holdings for defensive purposes in response to adverse market
conditions. Because of the lack of hedging facilities in the currency markets
of Asia, no active currency hedging strategy is anticipated currently. Instead,
each investment will be considered on a total currency adjusted basis with the
U.S. dollar as a base currency.

The Adviser's approach is oriented to individual stock selection and is value
driven, similar to the approach described for the International Magnum
Portfolio discussed above. There is no requirement that the Fund, at any given
time, invest in any or all of the countries listed above or in any other Asian
countries. The Fund has no set policy for allocating investments among the
various Asian countries. Allocation of investments will depend on the relative
attractiveness of the stocks of issuers in the respective countries. Government
regulation and restrictions in many of the countries of interest may limit the
amount, mode and extent of investment in companies of such countries. The
Adviser will analyze assets, revenues and earnings of an issuer. In selecting
industries and particular issuers, the Adviser will evaluate costs of labor and
raw materials, access to technology, export of products and government
regulation. Although the Portfolio seeks to invest in larger companies, it may
invest in small- and medium-size companies that, in the Adviser's view, have
potential for growth.

ASSET ALLOCATION PORTFOLIOS

BALANCED PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing in a diversified portfolio of Equity and Fixed Income
Securities. The average weighted maturity of the Portfolio's Fixed Income
Securities ordinarily will exceed five years and will usually be between three
and fifteen years.

When the Adviser judges the relative outlook for the equity and fixed income
markets to be neutral, the portfolio will be invested 60% in Equity Securities
and 40% in Fixed Income Securities. The asset mix may be changed, however, with
Equity Securities ordinarily representing between 45% and 75% of the total
investment.

The Portfolio may invest up to 25% of its total assets in Foreign Bonds and
Foreign Equities, other than ADRs, and an additional 10% of its total assets in
Brady Bonds. The Portfolio will invest at least 25% of its total assets in
senior Fixed Income Securities.

Subject to the foregoing limits, the Portfolio may invest in Foreign Currency
Transactions, High Yield Securities, Investment Company Securities, Investment
Funds, Eastern European Securities, Emerging Market Country Securities, Loan
Participations and Assignments, Municipals, When-Issued or Delayed Delivery
Securities, and Derivatives, including but not limited to Structured Notes,
Forwards, Futures, Options and Swaps. For additional information about
investments, see "Securities and Investment Techniques" below.

The Adviser's approach is to determine investment strategies for the equity and
fixed income portions of the Portfolio separately and then determine the mix of
those strategies expected to maximize the return available from both the stock
and bond markets. Strategic judgments on the equity/fixed income asset mix are
based on valuation disciplines and tools for analysis developed by the Adviser
over its twenty-eight year history of managing balanced accounts. For other
information about strategies employed in managing the Portfolio, see "Asset
Allocation Management," "Maturity and Duration Management," "Value Investing,"
"Mortgage Investing," "High Yield Investing," "Foreign Fixed Income Investing"
and "Foreign Investing" in "Securities and Investment Techniques" below.

MULTI-ASSET-CLASS PORTFOLIO

The Portfolio seeks above-average total return over a market cycle of three to
five years by investing in a diversified portfolio of Equity Securities and
Fixed Income Securities of domestic and foreign issuers.

Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in issuers located in at least three countries, including the United
States. The average weighted maturity of the fixed income portion of the
Portfolio ordinarily will exceed five years and will usually be between three
and fifteen years.

The Portfolio may also invest in Municipals, Loan Participations and
Assignments, Investment Funds, Investment Company Securities, Eastern European
Securities,
15
<PAGE>

Emerging Market Countries Securities, Foreign Currency Transactions, CMOs,
Brady Bonds, Zero Coupons, Cash Equivalents, ADRs, When-Issued and Delayed-
Delivery Securities and Derivatives, including but not limited to Futures and
Options, Swaps, and Structured Notes. For additional information about
investments, see "Securities and Investment Techniques" below.

The Adviser's approach is to determine the mix of investments in domestic and
foreign Equity Securities, Fixed Income Securities and High Yield Securities
expected to maximize available total return. Strategic judgments on the asset
mix are based on valuation disciplines and tools for analysis which have been
developed by the Adviser to compare the relative potential returns and risks of
global stock and bond markets. For other information about strategies employed
in managing the Portfolio, see "Asset Allocation Management," "International
Equity Investing," "Maturity and Duration Management," "Value Investing,"
"Emerging Markets Investing," "High Yield Investing," "Foreign Fixed Income
Investing" and "Foreign Investing" in "Securities and Investment Techniques"
below.

SECURITIES AND INVESTMENT TECHNIQUES

The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.

STRATEGIES

ASSET ALLOCATION MANAGEMENT: The Adviser's approach to Asset Allocation
Management is to determine investment strategies for each asset class in a
Portfolio separately, and then determine the mix of those strategies expected
to maximize the return available from each market. Strategic judgments on the
mix among asset classes are based on evaluation disciplines and tools for
analysis which have been developed over the Adviser's twenty-eight year history
of managing balanced accounts.

Tactical asset-allocation shifts are based on comparisons of prospective risks,
returns, and the likely risk-reducing benefits derived from combining different
asset classes into a single Portfolio. Experienced teams of equity, fixed
income, and international investment professionals manage the investments of
each asset class.

As used in this Prospectus, emerging markets describes any country which is
generally considered to be an emerging or developing country by the
international financial community such as the International Bank for
Reconstruction and Development (commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which
are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.

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opportunities in a foreign bond market appear attractive in local currency
terms, but where in the Adviser's judgment unacceptable currency risk exists,
Foreign Currency Transactions and Swaps may be used to hedge the currency risk.

To the extent a Portfolio invests in High Yield Securities it will be exposed
to a substantial degree of credit risk. Lower-rated bonds are considered
speculative by traditional investment standards. High Yield Securities may be
issued as a consequence of corporate restructuring or similar events. Also,
High Yield Securities are often issued by smaller, less creditworthy companies,
or by highly leveraged (indebted) companies, which are generally less able than
more established or less leveraged companies to make scheduled payments of
interest and principal. The risks posed by securities issued under such
circumstances are substantial.

INTERNATIONAL EQUITY INVESTING: The Adviser's approach to International Equity
Investing is based on its evaluation of

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both short-term and long-term international economic trends and the relative
attractiveness of non-U.S. equity markets and individual securities.

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conjunction with judgement and experience to evaluate and select securities
with embedded put or call Options which are attractive on a risk- and option-
adjusted basis. Successful Value Investing will permit a Portfolio to benefit
from the price appreciation of individual securities during periods when
interest rates are unchanged. See "Maturity and Duration Management" for a
description of the other key component of the Adviser's fixed income investment
strategy.

INSTRUMENTS AND INVESTMENTS

ABSS. Asset-backed securities ("ABSs") are securities collateralized by
shorter-term loans such as automobile loans, home equity loans, computer leases
or credit card receivables. The payments from the collateral are passed through
to the security holder. The collateral behind ABSs tends to have prepayment
rates that usually do not vary with interest rates. In addition, the short-term
nature of the loans reduces the impact of any change in prepayment level. Due
to amortization, the average life for ABSs is also the conventional proxy for
maturity.

Due to the possibility that prepayments (on automobile loans and other
collateral) will alter the cash flow on ABSs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

BRADY BONDS. Brady Bonds are Fixed Income Securities that are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury. Brady Bonds
have been issued only in relatively recent years, and, accordingly, do not have
a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are U.S. dollar-denominated) and
they are actively traded in the over-the-counter secondary market. For further
information on these securities, see the SAI. A Portfolio will invest in Brady
Bonds only if they are consistent with quality specifications.

CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:

(2)Commercial paper rated at time of purchase by one or more NRSROs in one of
their two highest categories, (e.g., A-1 or A-1+ by S&P or Prime 1 by Moody's,
or, if not rated, issued by a corporation having an outstanding unsecured debt
issue rated high-grade by an NRSRO (e.g., A or better by Moody's, S&P or Fitch
Investors Service, Inc. ("Fitch")).

(3)Short-term corporate obligations rated high-grade at the time of purchase by
an NRSRO (e.g., A or better by Moody's, S&P or Fitch).

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(4)U.S. Governments and Agencies.

(5)Repurchase Agreements collateralized by securities listed above.

CMOS. Collateralized Mortgage Obligations ("CMOs") are Derivatives which are
collateralized by mortgage pass-through securities. Cash flows from the
mortgage pass-through securities are allocated to various tranches (a "tranche"
is essentially a separate security) in a predetermined, specified order. Each
tranche has a stated maturity--the latest date by which the tranche can be
completely repaid, assuming no prepayments--and has an average life--the
average of the time to receipt of a principal payment weighted by the size of
the principal payment. The average life is typically used as a proxy for
maturity because the debt is amortized (repaid a portion at a time), rather
than paid off entirely at maturity, as would be the case in a straight debt
instrument.

Due to the possibility that prepayments (on home mortgages and other
collateral) will alter the cash flow on CMOs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.

CORPORATE BONDS. Corporate Bonds are Fixed Income Securities issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. A Portfolio will buy
Corporate Bonds subject to any quality constraints. If a security held by a
Portfolio is down-graded, the Portfolio may retain the security.

DEPOSITARY RECEIPTS. Depositary Receipts are securities representing ownership
interests in securities of foreign companies (an "underlying issuer") and are
deposited with the depositary. Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities. Depositary
Receipts include ADRs, Global Depositary Receipts ("GDRs") and other types of
Depositary Receipts (which, together with ADRs and GDRs, are hereinafter
collectively referred to as "Depositary Receipts"). ADRs are dollar-denominated
Depositary Receipts typically issued by a U.S. financial institution which
evidence ownership interests in a security or pool of securities issued by a
foreign issuer. ADRs are listed and traded in the United States. GDRs and other
types of Depositary Receipts are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. financial institutions, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States.

Depositary Receipts may be "sponsored" or "unsponsored". Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
Depositary Receipt generally bear all the costs associated with establishing
the unsponsored Depositary Receipt. In addition, the issuers of the securities
underlying unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts. For
purposes of a Portfolio's investment policies, the Portfolio's investments in
Depositary Receipts will be deemed to be investments in the underlying
securities except as noted.

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derivative transactions (Swaps, Caps, Floors, etc., but excluding CMOs,
Forwards, Futures, Options, and SMBSs) with counterparties approved by the
Adviser in accordance with guidelines established by the Fund's Board of
Directors. These guidelines provide for a minimum credit rating for each
counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties with ratings below AA.

EASTERN EUROPEAN SECURITIES. The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment associated
with the transition to market economics. Unstable economic and political
conditions may adversely affect security values. Upon the accession to power of
Communist regimes approximately 40 years ago, the governments of a number of
Eastern European countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
In the event of the return to power of the Communist Party, there can be no
assurance that a Portfolio's investments in Eastern Europe would not be
expropriated, nationalized or otherwise confiscated.

EMERGING MARKET COUNTRY SECURITIES. An Emerging Market Country Security is one
issued by a company that has one or more of the following characteristics: (i)
its principal securities trading market is in an emerging market, (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in emerging markets, or
(iii) it is organized under the laws of, and has a principal office in, an
emerging market country. The Adviser will base determinations as to eligibility
on publicly available information and inquiries made to the companies.

Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud.

With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value
of a Portfolio's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.

EQUITY SECURITIES. Equity Securities commonly include, but are not limited to,
Common Stocks, Preferred Stocks, Depositary Receipts, Rights, Warrants, and
Foreign Equities. Preferred Stock is contained in both the definition of Equity
Securities and Fixed Income Securities because it exhibits characteristics
commonly associated with each type of security. See the "The Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

FIXED INCOME SECURITIES. Fixed Income Securities commonly include, but are not
limited to, debentures, U.S. Governments, Zero Coupons, Agencies, Corporate
Bonds, High Yield Securities, MBSs, SMBSs, CMOs, Asset-Backeds, Convertible
Securities, Brady Bonds, Floaters, Inverse Floaters, Cash Equivalents,
Municipals, Repurchase Agreements, Preferred Stocks and Foreign Bonds.
Preferred Stock is contained in both the definition of Equity Securities and
Fixed Income Securities since it exhibits characteristics commonly associated
with each type of security. See the "The Portfolios' Investments" section
applicable to a particular Portfolio to determine in which of the above a
Portfolio may invest.

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<PAGE>

assets are invested in any one of such issuers. The short-term and medium-term
securities in which the Portfolio may invest will be rated investment grade by
an NRSRO (e.g., rated A or higher by Moody's or S&P), or if unrated, will be
determined to be of comparable quality by the Adviser.

As a means of reducing the risks associated with investing in securities
denominated in foreign currencies, a Portfolio may also purchase or sell
foreign currency on a forward basis ("Forwards" or "forward contracts"), enter
into foreign currency futures contracts and options on futures contracts
("Forex Futures") and foreign currency options ("Forex Options"). These
investment techniques are designed primarily to hedge against anticipated
future changes in currency prices that otherwise might adversely affect the
value of the Portfolio's investments.

Foreign currency futures contracts ("Forex Futures") are standardized contracts
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Forex Futures traded in the
United States are traded on regulated futures exchanges. A Portfolio will incur
brokerage fees when it purchases or sells Forex Futures and it will be required
to maintain margin deposits.

Parties to a Forex Future must make initial margin deposits to secure
performance of the contract, which generally range from 2% to 5% of the
contract price. There also are requirements to make "variation" margin deposits
as the value of the Futures contract fluctuates.

A Portfolio may use Forwards in the normal course of business to lock in an
exchange rate in connection with purchases and sales of securities (transaction
hedge) or to lock in the dollar value of portfolio positions (position hedge).
In addition a Portfolio may cross-hedge currencies by entering into a
transaction to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which a Portfolio has or
expects to have portfolio exposure. A Portfolio may also engage in proxy
hedging which is defined as entering into positions in one currency to hedge
investments denominated in another currency, where the two currencies are
economically linked. Forwards will be used only as a protective measure against
the effects of fluctuating rates of currency exchange and exchange control
regulations. While such contracts may limit losses to the Portfolio as a result
of exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.

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<PAGE>

foreign currency value of the security and adopt a synthetic investment
position reflecting the credit quality of the U.S. dollar-denominated security.

There is a risk in adopting a synthetic investment position to the extent that
the value of a security denominated in U.S. dollars or other foreign currency
is not exactly matched with a Portfolio's obligation under the forward
contract. On the date of maturity, a Portfolio may be exposed to some risk of
loss from fluctuations in that currency. Although the Adviser will attempt to
hold such mismatching to a minimum, there can be no assurance that the Adviser
will be able to do so. When a Portfolio enters into a forward contract for
purposes of creating a synthetic security, it will generally be required to
hold liquid assets in a segregated account with a daily value at least equal to
its obligation under the forward contract.

FOREIGN INVESTMENT. Investment in securities and obligations of foreign issuers
and in foreign branches of domestic banks involves somewhat different
investment risks than those affecting obligations of U.S. issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States. Many foreign securities markets have substantially less volume than
U.S. national securities exchanges, and securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and
interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on Foreign Investments as
compared to dividends and interest paid by U.S. companies. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction will impose or change withholding taxes on income payable
with respect to foreign securities, and the possible adoption of foreign
governmental restrictions such as exchange controls.

Investments in securities of foreign issuers are frequently denominated in
foreign currencies. Because a Portfolio may temporarily hold uninvested
reserves in bank deposits in Foreign Currencies, the value of the Portfolio's
assets, as measured in U.S. dollars, may be affected favorably or unfavorably
by changes in currency exchange rates and in exchange control regulations and a
Portfolio may incur costs in connection with conversions between various
currencies.

The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market
23
<PAGE>

decline to attempt to offset the decrease in market value of investments in its
portfolio, or purchase securities index futures contracts in order to gain
market exposure. Subject to applicable laws, the Portfolios may engage in
transactions in securities index futures contracts (and options thereon) which
are traded on a recognized securities or futures exchange, or may purchase or
sell such instruments in the over-the-counter market. There currently are
limited securities index futures and options on such futures in many countries,
particularly emerging countries. The nature of the strategies adopted by the
Adviser, and the extent to which those strategies are used, may depend on the
development of such markets.

The Portfolios may engage in transactions involving foreign currency exchange
futures contracts. For more information, see "Foreign Currency Transactions"
above.

Financial futures contracts are futures contracts relating to financial
instruments, such as U.S. Governments, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a
specified price. Like interest rate futures contracts, the value of financial
futures contracts rises and falls inversely with changes in interest rates. The
Portfolios may engage in financial futures contracts for hedging and non-
hedging purposes.

The Money Market, Equity Growth, U.S. Real Estate, Emerging Markets Debt,
Global Equity, International Magnum, Emerging Markets Equity and Asian Equity
Portfolios may enter into futures contracts to the extent that their
outstanding obligations to purchase securities under such contracts in
combination with their outstanding obligations with respect to options
transactions (including options to purchase securities or instruments) would
not exceed 20% of their total assets or in the case of the Fixed Income, High
Yield, International Fixed Income, Balanced, Multi-Asset-Class, Value, Core
Equity, Mid Cap Growth and Mid Cap Value Portfolios' outstanding obligations
would not exceed 50% of their respective total assets. In addition, the
Emerging Markets Equity Portfolio will not enter into any futures contract or
option if immediately thereafter the value of all the foreign currencies
underlying its futures contracts would exceed 10% of the value of its total
assets.

Gains and losses on futures contracts and options thereon depend on Adviser's
ability to predict correctly the direction of security prices, interest rates
and other economic factors. Other risks associated with the use of futures and
options are (i) imperfect correlation between the change in market value of
investments held by a Portfolio and the prices of futures and options relating
to investments purchased or sold by the Portfolio, and (ii) possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Portfolio will be unable to close out
a futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a
liquid exchange or secondary market. The risk of loss in trading on futures
contracts in some strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in futures
pricing.

HIGH YIELD SECURITIES. High Yield Securities are generally considered to
include Corporate Bonds, Preferred Stocks and Convertible Securities rated Ba
through C by Moody's or BB through D by S&P, and unrated securities considered
to be of equivalent quality. Securities rated less than Baa by Moody's or BBB
by S&P are classified as non-Investment Grade Securities and are commonly
referred to as
junk bonds or High Yield Securities. Such securities carry a high degree of
risk and are considered speculative by the major credit rating agencies. The
following are excerpts from the Moody's and S&P definitions for speculative-
grade debt obligations:

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<PAGE>

vulnerability to default than BB-rated bonds and the ability to pay
interest or principal will likely be impaired by adverse business
conditions." CCC-rated bonds have a currently identifiable "vulnerability
to default" and, without favorable business conditions, will be "unable
to repay interest and principal." The rating C is reserved for income
bonds on which "no interest is being paid." Debt rated D is "in default,"
and "payment of interest and/or repayment of principal is in arrears."

The risks posed by securities issued under such circumstances are substantial.
If a security held by a Portfolio is down-graded, the Portfolio may retain the
security.

INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities, which have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an Inverse Floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an Inverse Floater causes an increase
in the coupon rate. Inverse Floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality,
redemption provisions and maturity, and Inverse Floater CMOs exhibit greater
price volatility than the majority of mortgage pass-through securities or CMOs.
In addition, some Inverse Floater CMOs exhibit extreme sensitivity to changes
in prepayments. As a result, the yield to maturity of an Inverse Floater CMO is
sensitive not only to changes in interest rates, but also to changes in
prepayment rates on the related underlying mortgage assets.

INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment in the securities of their companies.
However, indirect investment in the securities of companies listed and traded
on the stock exchanges in these countries is permitted by certain emerging
market countries through Investment Funds that have been specifically
authorized. A Portfolio may invest in these Investment Funds subject to the
provisions of the 1940 Act, as applicable, and other applicable laws as
discussed in "Investment Limitations" in the SAI. The Portfolios will invest in
such Investment Funds only where appropriate given that the Portfolios'
shareholders will bear not only their proportionate share of the expenses of
the Portfolio (including operating expenses and the fees of the Adviser), but
also will indirectly bear similar expenses of the underlying Investment Funds.

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<PAGE>

MONEY MARKET INSTRUMENTS. Each Portfolio may invest in Money Market
Instruments, although the Portfolios intend to stay invested in securities
satisfying their primary investment objective to the extent practical. Each
Portfolio may invest in Money Market Instruments pending other investment or
settlement for liquidity, or in adverse market conditions. The Money Market
Instruments permitted for the Portfolios include obligations of the U.S.
Government and its agencies and instrumentalities; obligations of foreign
sovereignties; obligations of the International Bank for Reconstruction and
Development; other debt securities; commercial paper, including bank
obligations; certificates of deposit (including Eurodollar certificates of
deposit); and Repurchase Agreements. For more detailed information about these
Money Market Instruments, see "Description of Certain Securities and Ratings"
in the SAI.

MBSS. Mortgage-Backed Securities ("MBSs") are instruments that entitle the
holder to a share of all interest and principal payments from pools of
residential and commercial mortgage loans underlying the instruments, and may
take the form of pass-through securities or CMOs (see ("CMOs" above).
Generally, these securities are designed to provide monthly payments of
interest and principal to the investor.

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<PAGE>

credit, collateral, guarantees or insurance, including individual loan, title,
pool and hazard insurance purchased by the issuer or pooler. The pools are
assembled by various governmental, Government-related and private
organizations. A Portfolio may invest in securities issued or guaranteed by
GNMA, FHLMC, FNMA, private issuers and other government agencies. There can be
no assurance that the private insurers can meet their obligations under the
policies. MBSs issued by non-agency issuers, whether or not such securities are
subject to guarantees, may entail greater risk. If there is no guarantee
provided by the issuer, MBSs purchased by a Portfolio will be those which at
the time of purchase are rated investment grade by one or more NRSRO, or, if
unrated, are deemed by the Adviser to be of comparable quality.

MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income that is
exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and municipal notes
(those securities with maturities of less than five years). Municipal bonds are
issued for a wide variety of reasons: to construct public facilities, such as
airports, highways, bridges, schools, hospitals, mass transportation, streets,
water and sewer works; to obtain funds for operating expenses; to refund
outstanding municipal obligations; and to loan funds to various public
institutions and facilities. Certain industrial development bonds are also
considered municipal bonds if their interest is exempt from federal income
taxes. Industrial development bonds are issued by or on behalf of public
authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewer works. Industrial development
bonds are ordinarily dependent on the credit quality of a private user, not the
public issuer.

NON-DIVERSIFIED STATUS. The International Fixed Income, International Magnum,
U.S. Real Estate, Emerging Markets Equity and Emerging Markets Debt Portfolios
are non-diversified portfolios under the 1940 Act, which means that the
Portfolios are not limited by the 1940 Act in the proportion of their assets
that may be invested in the obligations of a single issuer. Thus, the
Portfolios may invest a greater proportion of their assets in the securities of
a small number of issuers and, as a result, will be subject to greater risk
with respect to their portfolio securities. However, the Portfolios intend to
comply with diversification requirements imposed by the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as regulated investment
companies. See "Investment Limitations" and "Taxes" in the SAI.

NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Equity Growth, Global Equity, U.S. Real Estate, International
Magnum, Emerging Markets Equity, Fixed Income, High Yield, Core Equity, Value,
Mid Cap Growth, Mid Cap Value, International Fixed Income, Balanced and Multi-
Asset-Class Portfolios may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted Equity Securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be
less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally

27
<PAGE>

paid by the Portfolio or less than what may be considered the fair value of
such securities. Furthermore, companies whose securities are not publicly
traded may not be subject to the disclosure and other investor protection
requirements which might be applicable if their securities were publicly
traded. If such securities are required to be registered under the securities
laws of one or more jurisdictions before being resold, the Portfolio may be
required to bear the expenses of registration.

As a general matter, a Portfolio may not invest more than 15% of its net assets
in illiquid securities, including securities for which there is no readily
available secondary market and securities that are restricted from sale to the
public without registration ("Restricted Securities") under the Securities Act
of 1933, as amended (the "1933 Act") and are deemed to be illiquid. Restricted
Securities that can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("Rule 144A Securities") may be deemed to be
liquid under guidelines adopted by the Fund's Board of Directors. The U.S. Real
Estate Portfolio may invest up to 15% of its total assets, the Emerging Markets
Debt, International Magnum and Emerging Markets Equity Portfolios may each
invest up to 25% of their total assets, and the Growth Portfolio may invest up
to 35% of its total assets, in Rule 144A Securities that are deemed to be
liquid.

OPTIONS. The Portfolios may seek to increase their returns or may hedge their
portfolio investments through Options transactions with respect to securities,
instruments, indices or baskets thereof in which the Portfolios may invest, as
well as with respect to foreign currency. Purchasing a put Option gives a
Portfolio the right to sell a specified security, currency or basket of
securities or currencies at the exercise price until the expiration of the
Option. Purchasing a call Option gives a Portfolio the right to purchase a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the Option.

The Portfolios also may write (i.e., sell) put and call Options on investments
held in its portfolio, as well as with respect to foreign currency. A Portfolio
that has written an Option receives a premium, which increases the Portfolio's
return on the underlying security or instrument in the event the Option expires
unexercised or is closed out at a profit. However, by writing a call Option, a
Portfolio will limit its opportunity to profit from an increase in the market
value of the underlying security or instrument above the exercise price of the
Option for as long as the Portfolio's obligation as writer of the Option
continues. The Portfolios may only write Options that are "covered." A covered
call option means that so long as the Portfolio is obligated as the writer of
the Option, it will own (i) the underlying security or instrument subject to
the Option or (ii) securities or instruments convertible or exchangeable
without the payment of any consideration into the security or instrument
subject to the Option.

By writing (or selling) a put option, a Portfolio incurs an obligation to buy
the security or instrument underlying the option from the purchaser of the put
at the Option's exercise price at any time during the option period, at the
purchaser's election. Options written by a Portfolio may be exercisable by the
purchaser only up to a specific date. A Portfolio that has written a put Option
will earmark or segregate sufficient liquid assets to cover its obligations
under the Option.

As a matter of operating policy, the value of the underlying securities on
which stock Options will be written at any one time will not exceed 5% of a
Portfolio's total assets.

The Portfolios may engage in transactions in Options which are traded on
recognized exchanges or over-the-counter. There currently are limited Options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of Options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by a Portfolio and the prices of Options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
Option.

PREFERRED STOCKS. Preferred Stocks are non-voting securities which evidence
ownership in a corporation and which pay a fixed or variable stream of
dividends.

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Portfolio to keep all its assets invested while retaining overnight flexibility
in pursuit of investments of a longer-term nature. If the seller defaults and
the collateral value declines, the Portfolio might incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, the Portfolio's
realization upon the collateral may be delayed or limited.

REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into Reverse Repurchase
Agreements with brokers, dealers, domestic and foreign banks or other financial
institutions. In a Reverse Repurchase Agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Portfolio. The Portfolio's
investment of the proceeds of a Reverse Repurchase Agreement is the speculative
factor known as leverage. The Portfolio may enter into a Reverse Repurchase
Agreement only if the interest income from investment of the proceeds is
greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement. The Portfolio
will maintain with the Custodian a separate account with a segregated portfolio
of liquid assets in an amount at least equal to its purchase obligations under
these agreements. If interest rates rise during a Reverse Repurchase Agreement,
it may adversely affect the Portfolio's ability to maintain a stable NAV.

RUSSIAN SECURITIES. The registration, clearing and settlement of securities
transactions involving Russian issuers are subject to significant risks not
normally associated with securities transactions in the United States and other
more developed markets. Ownership of Equity Securities in Russian companies is
evidenced by entries in a company's share register (except where shares are
held through depositories that meet the requirements of the 1940 Act) and the
issuance of extracts from the register or, in certain limited cases, by formal
share certificates. However, Russian share registers are frequently unreliable
and a Portfolio could possibly lose its registration through oversight,
negligence or fraud. Moreover, Russia lacks a centralized registry to record
securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In
addition, while registrars are liable under law for losses resulting from their
errors, it may be difficult for a Portfolio to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by Russian law to employ an independent registrar, in practice, such
companies have not always followed this law. Because of this lack of
independence of registrars, management of a Russian company may be able to
exert considerable influence over who can purchase and sell the company's
shares by illegally instructing the registrar to refuse to record transactions
on the share register. Furthermore, these practices may prevent a Portfolio
from investing in the securities of certain Russian companies deemed suitable
by the Adviser and could cause a delay in the sale of Russian Securities by the
Portfolio if the company deems a purchaser unsuitable, which may expose the
Portfolio to potential loss on its investment.

In light of the risks described above, the Board of Directors of the Fund has
approved certain procedures concerning the Fund's investments in Russian
Securities. Among these procedures is a requirement that a Portfolio will not
invest in the securities of a Russian company unless that issuer's registrar
has entered into a contract with the Fund's sub-custodian containing certain
protective conditions, including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Portfolio. This
requirement will likely have the effect of precluding investments in certain
Russian companies that a Portfolio would otherwise make.

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class will receive all of the principal ("principal-only" or "PO class"). The
yield to maturity on IO classes and PO classes is extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets, and a rapid rate of principal repayments may have a material
adverse effect on the portfolio yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, a
Portfolio may fail to fully recoup its initial investment in these securities,
even if the security is in one of the highest rating categories.

Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to a Portfolio's limitations on investment in illiquid
securities.

SWAPS. Swap contracts ("Swaps") are Derivatives in the form of a contract or
other similar instrument which is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Portfolio may agree to swap the return generated by a fixed income index for
the return generated by a second fixed income index. The currency Swaps in
which a Portfolio may enter will generally involve an agreement to pay interest
streams in one currency based on a specified index in exchange for receiving
interest streams denominated in another currency. Such Swaps may involve
initial and final exchanges that correspond to the agreed upon notional amount.

Interest rate and total rate of return Swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate or total rate of return Swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that a Portfolio is contractually entitled to receive. In contrast,
currency Swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency Swap is subject to the risk
that the other party to the Swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
Swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized Swap documentation. As a result, the Swap market has
become relatively liquid. Swaps that include caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than "traditional" Swaps.

The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of a Portfolio would be less favorable than it would have been if this
investment technique was not used.

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Portfolio's credit quality standards; and (e) Repurchase Agreements with banks
and broker-dealers with respect to such securities. For temporary defensive
purposes, the Portfolios intend to invest only in short-term and medium-term
debt obligations that the Adviser believes to be of high quality, i.e., subject
to relatively low risk of loss of interest or principal (there is currently no
rating system for foreign debt obligations).

WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment, but will take place no more than 120 days after the trade date. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. The Portfolio will maintain with
the Custodian a separate account with a segregated portfolio of liquid
securities or cash in an amount at least equal to these commitments. The Money
Market, Equity Growth, U.S. Real Estate, Emerging Markets Debt, Global Equity,
International Magnum, Emerging Markets Equity and Asian Equity Portfolios will
not enter into When-Issued or Delayed Delivery Securities commitments
exceeding, in the aggregate, 15% of the Portfolio's total assets other than the
obligations created by these commitments.

FUNDAMENTAL INVESTMENT LIMITS

EACH PORTFOLIO (excluding the International Fixed Income, International Magnum,
U.S. Real Estate, Emerging Markets Equity and Emerging Markets Debt Portfolios)
is a diversified investment company and is therefore subject to the following
fundamental limitations: as to 75% of its total assets, a Portfolio may not (a)
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
or (b) own more than 10% of the outstanding voting securities of any one
issuer.

INTERNAL REVENUE SERVICE ("IRS") LIMITATIONS. In addition to the above, each
Portfolio also follows certain limitations imposed by the IRS on separate
accounts of insurance companies relating to the tax-deferred status of variable
annuity contracts and variable life insurance policies. For Additional
Information, see "Investment Limitations" in the SAI.

MANAGEMENT OF THE FUND

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other considerations, and shall report any such conflict to the boards of the
respective life insurance companies that use the Fund as an investment vehicle
for their respective variable annuity contracts and variable life insurance
policies and to qualified plans. The boards of directors of those life
insurance companies and the fiduciaries of certain qualified plans and the
Adviser, have agreed or will agree to be responsible for reporting any
potential or existing conflicts to the Directors of the Fund. If a material
irreconcilable conflict exists that affects those life insurance companies,
they will be required, at their own cost, to remedy such conflict up to and
including establishing a new registered management investment company and
segregating the assets underlying the variable annuity contracts and the
variable life insurance policies. Qualified plans which acquire more than 10%
of the assets of a Portfolio will be required to report any potential or
existing conflicts to the Directors of the Fund, and if a material
irreconcilable conflict exists, to remedy such conflict, up to and including
redeeming shares of the Portfolios held by the qualified plans. The majority of
the Fund's Directors are not affiliated with MSAM, MAS, any of their
affiliates, any of the other companies that provide services to the Fund or any
of their affiliates. The officers of the Fund conduct and supervise its daily
business operations.

THE FUND MAY HOLD SPECIAL MEETINGS. The Fund will not hold annual shareholder
meetings, but may call special meetings when required by law, when requested by
a sufficient number of shareholders or for other reasons. An insurance company
issuing a variable annuity contract or variable life insurance policy that
participates in the Portfolios will vote shares held in its separate account as
required by law and interpretations thereof, as may be amended or changed from
time to time. In accordance with current law and interpretations thereof, a
participating insurance company is required to request voting instructions from
contract or policy owners and must vote shares in the separate account in
proportion to the voting instructions received. For a further discussion,
please refer to your insurance company's separate account prospectus.

INVESTMENT MANAGEMENT

INVESTMENT ADVISERS. The Adviser assigned to a Portfolio provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. MSAM serves as the Adviser for the Money Market, Emerging Markets
Debt, Equity Growth, U.S. Real Estate, Global Equity, International Magnum,
Emerging Markets Equity and Asian Equity Portfolios. MAS serves as the adviser
for the Fixed Income, High Yield, International Fixed Income, Balanced, Multi-
Asset-Class, Value, Core Equity, Mid Cap Growth and Mid Cap Value Portfolios.
MSAM, with principal offices at 1221 Avenue of the Americas, New York, New York
10020, conducts a worldwide investment management business, providing a broad
range of portfolio management services to customers in the United States and
abroad. MSAM is a wholly-owned subsidiary of Morgan Stanley Group Inc.
("MSGI"), which is a publicly owned financial services corporation listed on
the New York, London and Pacific stock exchanges. MSAM, a registered Investment
Adviser under the Investment Advisers Act of 1940, as amended, serves as
investment adviser to numerous open-end and closed-end investment companies.
MAS is a Pennsylvania limited liability partnership founded in 1969 with
principal offices at One Tower Bridge, West Conshohocken, Pennsylvania 19428.
As of January 1996, MAS is also indirectly wholly-owned by MSGI. MAS provides
investment advisory services to employee benefit plans, endowment funds,
foundations and other institutional investors and has served as investment
adviser to several open-end investment companies since 1984. As of February 28,
1997, MSAM and its investment advisory affiliates (exclusive of MAS and Van
Kampen) managed assets of approximately $74 billion, MAS managed assets of
approximately $44.4 billion, and MSAM and MAS and all of their affiliated asset
management companies managed assets totaling approximately $176.9 billion. See
"Management of the Fund" in the SAI.

On February 5, 1997, MSGI and Dean Witter, Discover & Co. ("Dean Witter
Discover") announced that they had entered into an Agreement and Plan of Merger
to form Morgan Stanley, Dean Witter, Discover & Co. Presently, Dean Witter,
Discover is a financial services company with three major businesses: full
service brokerage, credit services and asset management. Subject to certain
conditions being met, it is currently anticipated that the transaction will
close in mid-1997. Thereafter, MSAM and MAS will be subsidiaries of Morgan
Stanley, Dean Witter, Discover & Co.

PORTFOLIO MANAGERS. The following individuals have primary responsibility for
the Portfolios as indicated below.

MONEY MARKET PORTFOLIO -- Abigail Jones Feder and Kenneth R. Holley. Abigail
Feder is a Principal in MSAM's Fixed Income Group. She is responsible for
managing short-term taxable and tax-exempt portfolios. Ms. Feder holds a B.A.
from Vassar College. Kenneth R. Holley joined MSAM as a short-term fixed income
portfolio manager in July, 1993. Prior thereto, he worked for 2 1/2 years as a
Finance Officer for the African Development Bank ("ADB") implementing trading
strategies for the bank's $1 billion short to intermediate U.S. dollar
portfolio. Mr. Holley holds a B.S. degree in Engineering from University of
Pennsylvania and an M.B.A. from the Wharton School. Ms. Feder and Mr. Holley
have shared primary responsibility for managing the Portfolio's assets since
inception.

FIXED INCOME PORTFOLIO -- Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley. Thomas L. Bennett, a Managing Director of Morgan Stanley & Co.
Incorporated ("Morgan Stanley"), joined MAS in 1984. He assumed

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responsibility for the MAS Funds Fixed Income Portfolio in 1984, the MAS Funds
Domestic Fixed Income Portfolio in 1987, the MAS Funds High Yield Portfolio in
1985, the MAS Funds Fixed Income Portfolio II in 1990, the MAS Funds Special
Purpose Fixed Income and Balanced Portfolios in 1992 and the MAS Funds Multi-
Asset-Class Portfolio in 1994. Mr Bennett is Chairman of the Board of Trustees
of MAS Funds, a member of the Executive Committee of MAS and a Director of MAS
Fund Distributors, Inc. Mr. Bennett holds a B.S. in Chemistry and an M.B.A.
from University of Cincinnati. Kenneth B. Dunn, a Managing Director of Morgan
Stanley, joined MAS in 1987. He assumed responsibility for the MAS Funds Fixed
Income and Domestic Fixed Income Portfolios in 1987, the MAS Funds Fixed Income
II Portfolio in 1990, the MAS Funds Mortgage-Backed Securities and Special
Purpose Fixed Income Portfolios in 1992, and the MAS Funds Municipal and PA
Municipal Portfolios in 1994. Mr. Dunn received a B.S. and an M.B.A. from The
Ohio State University and a Ph.D. from Purdue University. Richard B. Worley, a
Managing Director of Morgan Stanley, joined MAS in 1978. He assumed
responsibility for the MAS Funds Fixed Income Portfolio in 1984, the MAS Funds
Domestic Fixed Income Portfolio in 1987, the MAS Funds Fixed Income Portfolio
II in 1990, the MAS Funds Balanced and Special Purpose Fixed Income Portfolios
in 1992, the MAS Funds Global Fixed Income and International Fixed Income
Portfolios in 1993 and the MAS Funds Multi-Asset-Class Portfolio in 1994. Mr.
Worley received a B.A. in Economics from University of Tennessee and attended
the Graduate School of Economics at University of Texas. Messrs. Bennett, Dunn,
and Worley have shared primary responsibility for managing the Portfolio's
assets since inception.

CORE EQUITY PORTFOLIO -- Arden C. Armstrong, Kurt Feuerman, James J. Jolinger,
Nicholas J. Kovich, Robert J. Marcin and Gary G. Schlarbaum. Arden C.
Armstrong, a Managing Director of Morgan Stanley, joined MAS in 1986. She
assumed responsibility for the MAS Funds Mid Cap Growth Portfolio in 1990, the
MAS Funds Growth Portfolio in 1993 and the MAS Funds Equity Portfolio in 1994.
Ms. Armstrong received a B.A. (Magna Cum Laude) in Economics from Brown
University, an M.B.A. from the Wharton School at University of Pennsylvania and
is a Chartered Financial Analyst. Kurt Feuerman is a Managing Director of MSAM
and heads MSAM's Equity Group. He joined MSAM in July 1993 after spending three
years as a Managing Director of Morgan Stanley's Research Department, where he
was responsible for emerging growth stocks, gaming and restaurants. Mr.
Feuerman earned an M.B.A. from Columbia University, an M.A. from Syracuse
University, and a B.A. from McGill University. James J. Jolinger, a Vice
President of Morgan Stanley, joined MAS in 1994. He served as Equity Analyst
for Oppenheimer Capital from 1987-1994. Nicholas J. Kovich, a Managing Director
of Morgan Stanley, joined MAS in 1988. He assumed responsibility for the MAS
Funds Equity Portfolio in 1994. Mr. Kovich received a B.S. in Chemical
Engineering and an M.B.A. from University of Kansas. Robert J. Marcin, a
Managing Director of Morgan Stanley, joined MAS in 1988. He assumed
responsibility for the MAS Funds Value Portfolio in 1990 and the MAS Funds
Equity Portfolio in 1994. Mr. Marcin holds a B.A. (Cum Laude) from Dartmouth
College and is a Chartered Financial Analyst. Gary G. Schlarbaum, a Managing
Director of Morgan Stanley, joined MAS in 1987. He assumed responsibility for
the MAS Funds Equity and Small Cap Value Portfolios in 1987, the MAS Funds
Balanced Portfolio in 1992 and the MAS Funds Multi-Asset-Class and Mid Cap
Value Portfolios in 1994. Mr. Schlarbaum holds a B.A. from Coe College and a
Ph.D. from University of Pennsylvania. Ms. Armstrong, Mr. Kovich, Mr. Marcin
and Mr. Schlarbaum have shared primary responsibility for managing the
Portfolio's assets since inception.

EQUITY GROWTH PORTFOLIO -- Kurt Feuerman, Margaret K. Johnson, and Daniel
Lascano. Information about Kurt Feuerman is included under Core Equity
Portfolio above. Margaret Johnson is a Principal of MSAM and a Portfolio
Manager in the Institutional Equity Group. She joined MSAM in 1984. She holds a
B.A. degree from Yale College and is a Chartered Financial Analyst. Daniel
Lascano is a Vice President of MSAM. He joined MSAM in 1993. Mr. Lascano
graduated from the University of California at Berkeley, with a B.A. in
Economics and Statistics. Mr. Feuerman, Ms. Johnson and Mr. Lascano have shared
primary responsibility for managing the Portfolio's assets since inception.

VALUE PORTFOLIO -- Robert J. Marcin, Richard M. Behler and Nicholas J. Kovich.
Richard M. Behler, a Principal of Morgan Stanley, joined MAS in 1995. He served
as a Portfolio Manager from 1992 through 1995 for Moore Capital Management and
as Senior Vice President for Merrill Lynch Economics from 1987 through 1992. He
assumed responsibility for the MAS Fund's Value Portfolio in 1996. Mr. Behler
received a B.A. (Cum Laude) in Economics from Villanova University and an M.A.
and a Ph.D. in Economics from University of Notre Dame. Information about
Robert J. Marcin and Nicholas Kovich is included under Core Equity Portfolio
above. Mr. Behler and Mr. Marcin have shared

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<PAGE>

primary responsibility for managing the Portfolio's assets since inception. Mr.
Kovich assumed responsibilities with the Value Portfolio in 1997.

MID CAP GROWTH PORTFOLIO -- Arden C. Armstrong and Abhi Y. Kanitkar.
Information about Arden C. Armstrong is included under Core Equity Portfolio
above. Abhi Y. Kanitkar, a Vice-President of Morgan Stanley, joined MAS in
1994. He served as an Investment Analyst from 1993 through 1994 for Newbold's
Asset Management and as Director & Investment Analyst from 1990 through 1993
for Kanitkar Investment Services, Inc. He assumed responsibility for the MAS
Fund's Mid Cap Growth Portfolio in 1996. Mr. Kanitkar received a B.S. (Magna
Cum Laude, Tau Beta Pi) in Electrical Engineering from University of Michigan
and an M.B.A. from the Wharton School at University of Pennsylvania. Ms.
Armstrong and Mr. Kanitkar have shared primary responsibility for managing the
Portfolio's assets since inception.

MID CAP VALUE PORTFOLIO -- William B. Gerlach, Gary G. Schlarbaum and Bradley
S. Daniels. William B. Gerlach, a Vice President of Morgan Stanley, joined MAS
in 1991. He served as a Programmer in Applications Software Development at
Alphametrics Corporation from 1987 through 1991 and as a Data Analyst and
Inflation Economist at Wharton Econometric Forecasting Associates from 1984
through 1987. He holds a B.A. in Economics from Haverford College. Information
about Gary G. Schlarbaum is included under Core Equity Portfolio above Bradley
S. Daniels, a Vice President of Morgan Stanley, joined MAS in 1985. Messrs.
Gerlach, Schlarbaum and Daniels have had primary responsibility for managing
the Portfolio's assets since inception.

INTERNATIONAL FIXED INCOME PORTFOLIO -- J. David Germany, Michael Kushma, Paul
F. O'Brien and Richard B. Worley. J. David Germany, a Managing Director of
Morgan Stanley, joined MAS in 1991. He assumed responsibility for the MAS Funds
Global Fixed Income and International Fixed Income Portfolios in 1993 and the
MAS Funds Multi-Asset-Class Portfolio in 1994. Mr. Germany holds an A.B. from
Princeton University and a Ph.D. in Economics from Massachusetts Institute of
Technology. Michael Kushma joined Morgan Stanley in 1988. He assumed
responsibility for the Morgan Stanley Institutional Fund, Inc. ("MSIF") Global
Fixed Income and MSIF International Fixed Income Portfolio in 1996. Mr. Kushma
holds an A.B. from Princeton University, an M.S. from London School of
Economics and an M.A. in Philosophy from Columbia University. Paul F. O'Brien,
a Principal of Morgan Stanley, joined MAS in 1996. He served as Head of
European Economics from 1993 through 1995 for JP Morgan and as Principal
Administrator from 1991 through 1992 for the Organization for Economic
Cooperation and Development. He assumed responsibility for the Global Fixed
Income and International Fixed Income Portfolios in 1996. Mr. O'Brien attended
the United States Naval Academy, holds a B.S. from Massachusetts Institute of
Technology and a Ph.D. in Economics from University of Minnesota. Information
about Richard B. Worley is included under Fixed Income Portfolio above. Messrs.
Germany, Kushma, O'Brien and Worley have shared primary responsibility for
managing the Portfolio's assets since inception.

EMERGING MARKETS DEBT PORTFOLIO -- Paul Ghaffari. Paul Ghaffari is a Managing
Director of Morgan Stanley. He joined MSAM in June 1993 as a Vice President and
Portfolio Manager for the Morgan Stanley Emerging Markets Debt Fund Inc. (a
closed-end investment company). Prior to joining MSAM, Mr. Ghaffari was a Vice
President in the Fixed Income Division of the Emerging Markets Sales and
Trading Department at Morgan Stanley. He holds a B.A. in International
Relations from Pamona College and an M.S. in Foreign Service from Georgetown
University. Mr. Ghaffari has had primary responsibility for managing the
Portfolio's assets since inception.

GLOBAL EQUITY PORTFOLIO -- Frances Campion. Frances Campion, a Principal of
Morgan Stanley, joined MSAM in January 1990 as a Global Equity Fund Manager.
Her responsibilities include day-to-day management of the Global Equity
product. Prior to joining MSAM, Ms. Campion was a U.S. equity analyst with
Lombard Odler Limited where she had responsibility for the management of global
portfolios. She is a graduate of University of College, Dublin. Ms. Campion has
had primary responsibility for managing the Portfolio's assets since inception.

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<PAGE>

strategy to institutional investor clients. Previously, Ms. Bovich was a
Principal and Executive Vice President of Westwood Management Corp. She holds a
B.A. in Economics from Connecticut College and an M.B.A. in Finance from New
York University. Ms. Bovich has had primary responsibility for managing the
Portfolio's assets since inception.

EMERGING MARKETS EQUITY PORTFOLIO -- Madhav Dhar and Marianne L. Hay. Madhav
Dhar is a Managing Director of MSAM and Morgan Stanley. He joined MSAM in 1984
to focus on global asset allocation and investment strategy and now is a co-
head of MSAM's emerging markets group. He holds a B.S. (honors) from St.
Stephens College, Delhi University (India), and an M.B.A. from Carnegie-Mellon
University. Marianne L. Hay, a Managing Director of Morgan Stanley, is a co-
head of the Adviser's emerging markets group. She joined the Adviser in June
1993 to work with the Adviser's senior management covering all emerging markets
assets allocation, product development and client services. Ms. Hay has 17
years of investment experience. Prior to joining the Adviser, she was a
director of Martin Currie Investment Management, Ltd. where her
responsibilities included geographic asset allocation and portfolio management
for global and emerging markets funds, as well as being director in charge of
the company's North American clients. She graduated with an honors degree in
genetics from Edinburgh University and holds a Diploma in Education and the
qualification of the Association of the Institute of Bankers in Scotland. Mr.
Dhar and Ms. Hay have shared primary responsibility for managing the
Portfolio's assets since its inception.

BALANCED PORTFOLIO -- Thomas L. Bennett, John D. Connolly, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley. Information about Thomas L. Bennett
and Richard B. Worley is included under Fixed Income Portfolio above.
Information about John D. Connolly and Gary G. Schlarbaum is included under
Core Equity Portfolio above and information about Horacio A. Valeiras is
included under Multi-Asset-Class Portfolio below. Messrs. Bennett, Connolly,
Schlarbaum, Valeiras and Worley have shared primary responsibility for managing
the Portfolio's assets since inception.

MULTI-ASSET-CLASS PORTFOLIO -- Thomas L. Bennett, John D. Connolly, J. David
Germany, Gary G. Schlarbaum, Horacio A. Valeiras and Richard B. Worley.
Information about Thomas L. Bennett and Richard B. Worley is included under
Fixed Income Portfolio above. Information about John D. Connolly and Gary G.
Schlarbaum is included under Core Equity Portfolio above. Information about J.
David Germany is included under International Fixed Income Portfolio above.
Horacio A. Valeiras, a Principal of Morgan Stanley, joined MAS in 1992. He
served as an International Strategist from 1989 through 1992 for Credit Suisse
First Boston and as Director-Equity Research in 1992. He assumed responsibility
for the International Equity Portfolio in 1992, the MAS Funds Emerging Markets
Portfolio in 1993 and the MAS Funds Multi-Asset-Class Portfolio in 1994 and the
Balanced Portfolio in 1996. Mr. Valeiras received a B.S. in Chemical
Engineering from Virginia Tech, an M.S. and Engineer's Degree from
Massachusetts Institute of Technology and an M.B.A. from University of
California, Berkeley. Messrs. Bennett, Connolly, Germany, Schlarbaum, Valeiras
and Worley have shared primary responsibility for managing the Portfolio's
assets since inception.

OTHER SERVICES

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<PAGE>

provide that the Administrators through their agents will provide the Fund with
dividend disbursing and transfer agent services. For their services under the
Administration Agreements, the Fund pays MSAM and MAS a monthly fee which on an
annual basis equals 0.25% of the average daily net assets of each Portfolio
that they administer.

MSAM and MAS have each entered into a Sub-Administration Agreement with Chase
Global Funds Services Company ("Chase Global"), a subsidiary of The Chase
Manhattan Bank ("Chase"), pursuant to which Chase Global has agreed to provide
certain administrative services to the Fund. MSAM and MAS supervise and monitor
such administrative services provided by Chase Global. The services provided
under the Administration Agreements and the Sub-Administration Agreements are
also subject to the supervision of the Board of Directors of the Fund. The
Board of Directors of the Fund has approved the provision of services described
above pursuant to the Administration Agreements and the Sub-Administration
Agreements as being in the best interests of the Fund. Chase Global's business
address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional
information regarding the Administration Agreements or the Sub-Administration
Agreements, see "Management of the Fund" in the SAI.

Certain administrative and record-keeping services that would otherwise be
performed by the Advisers or their service providers may be performed by
insurance companies that purchase shares of the Portfolios. An Adviser may make
payments to these insurance companies to defray the costs of providing of those
services.

Chase Global calculates the NAV and dividends, maintains the general accounting
records and administers the securities lending program for each Portfolio.

DIVIDEND DISBURSING AND TRANSFER AGENT. Chase Global acts as dividend
disbursing and transfer agent for the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and will audit the annual financial statements of each Portfolio.

LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.

BREAKDOWN OF EXPENSES

The Portfolios pay fees and other costs related to their daily operations.
Expenses paid out of a Portfolio's assets are reflected in its share price.
Each Portfolio pays a management fee to its Adviser for managing its
investments and business affairs. MSAM and MAS pay fees to affiliates who
provide assistance with these services. Each Portfolio also pays other
expenses, which are explained below. The Advisers may, from time to time,
reduce their fees or reimburse the Portfolios for expenses above a specified
limit. These fee reductions or expense reimbursements, which may be terminated
at any time without notice, can decrease a Portfolio's expenses and boost its
performance.

MANAGEMENT FEE

36
<PAGE>

U.S. FIXED INCOME PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Assets Money Market Fixed Income High Yield
- -----------------------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.30% 0.40% 0.50%
- -----------------------------------------------------------------------
From $500 million to $1 billion 0.25% 0.35% 0.45%
- -----------------------------------------------------------------------
More than $1 billion 0.20% 0.30% 0.40%
</TABLE>

U.S. EQUITY PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Equity Mid Cap Mid Cap U.S. Real
Assets Core Equity Growth Value Growth Value Estate
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $500 million 0.55% 0.55% 0.55% 0.75% 0.75% 0.80%
- -----------------------------------------------------------------------------
From $500 million to $1
billion 0.50% 0.50% 0.50% 0.70% 0.70% 0.75%
- -----------------------------------------------------------------------------
More than $1 billion 0.45% 0.45% 0.45% 0.65% 0.65% 0.70%
</TABLE>

GLOBAL PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
International Emerging
Fixed Emerging Global International Markets Asian
Assets Income Markets Debt Equity Magnum Equity Equity
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $500 million 0.50% 0.80% 0.80% 0.80% 1.25% 0.80%
- ------------------------------------------------------------------------------------------
From $500 million to $1
billion 0.45% 0.75% 0.75% 0.75% 1.20% 0.75%
- ------------------------------------------------------------------------------------------
More than $1 billion 0.40% 0.70% 0.70% 0.70% 1.15% 0.70%
</TABLE>

ASSET ALLOCATION PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Assets Balanced Multi-Asset-Class
- -------------------------------------------------------------
<S> <C> <C>
First $500 million 0.50% 0.65%
- -------------------------------------------------------------
From $500 million to $1 billion 0.45% 0.60%
- -------------------------------------------------------------
More than $1 billion 0.40% 0.55%
</TABLE>

37
<PAGE>

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Portfolio Fee Waivers
- --------- ------------------------
<S> <C>
Money Market........................................... 0.55%
Fixed Income........................................... 0.70%
High Yield............................................. 0.80%
International Fixed Income............................. 0.80%
Balanced............................................... 0.80%
Equity Growth.......................................... 0.85%
Value.................................................. 0.85%
Core Equity............................................ 0.85%
Multi-Asset-Class...................................... 0.95%
Mid Cap Growth......................................... 1.05%
Mid Cap Value.......................................... 1.05%
U.S. Real Estate....................................... 1.10%
Global Equity.......................................... 1.15%
International Magnum................................... 1.15%
Asian Equity........................................... 1.20%
Emerging Markets Debt.................................. 1.30%
Emerging Markets Equity................................ 1.75%
</TABLE>

These fee waivers are voluntary and may be terminated by MSAM or MAS at any
time without notice.

OTHER EXPENSES

PORTFOLIO TRANSACTIONS

In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by the Adviser. If the purchase or sale of securities
consistent with the investment policies of the Portfolios and one or more of
these other clients serviced by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolios
and such other clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

38
<PAGE>

1940 Act, have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to Morgan Stanley or such
affiliates are consistent with the foregoing standard.

PORTFOLIO TURNOVER

Under certain market conditions, a Portfolio may experience high portfolio
turnover as a result of its investment strategies. For example, the purchase or
sale of securities by a Portfolio in anticipation of a rise or decline in
interest rates or to take advantage of yield disparities among different issues
of Fixed Income Securities could result in high portfolio turnover. As a result
of their investment strategies, the Fixed Income, Mid Cap Value, U.S. Real
Estate and Emerging Markets Debt Portfolios' annual portfolio turnover rates
are expected to be as high as 200%. The High Yield, Mid Cap Growth and
International Fixed Income Portfolios' rates are expected to be as high as
150%. The International Fixed Income Portfolio and the fixed income portion of
the Balanced Portfolio will ordinarily exceed annual portfolio turnover rates
of 100%. Higher portfolio turnover rates for the Portfolios can result in
corresponding increases in expenses such as brokerage commissions and
transaction costs. Although none of the Portfolios other than the Money Market
Portfolio will invest for short-term trading purposes, investment securities
may be sold from time to time without regard to the length of time they have
been held and the Portfolios will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with their respective
objectives and policies.

PERFORMANCE OF PORTFOLIOS

Average annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.

Seven-day yield illustrates the income earned by an investment in the Money
Market Portfolio over a recent seven-day period. Since the Money Market
Portfolio attempts to maintain a stable $1.00 share price, current seven-day
yields are the most common illustration of the Money Market Portfolio
performance.

39
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

<TABLE>
<CAPTION>
Corresponding MSIF Corresponding MAS Funds
Fund Portfolio portfolio portfolio
-------------- --------------------- --------------------------
<S> <C> <C>
Money Market Money Market
Fixed Income Fixed Income
High Yield High Yield
Core Equity Equity
Equity Growth Equity Growth
Value Value
Mid Cap Growth Mid Cap Growth
Mid Cap Value Mid Cap Value
U.S. Real Estate U.S. Real Estate
International Fixed
Income International Fixed Income
Emerging Markets Debt Emerging Markets Debt
Global Equity Global Equity
International Magnum International Magnum
Emerging Markets Equity Emerging Markets
Asian Equity Asian Equity
Balanced Balanced
Multi-Asset-Class Multi-Asset-Class
</TABLE>

Past investment performance of the Class A Shares of the MSIF portfolios and
the Institutional Class Shares of the MAS Funds, as shown in the table below,
may be relevant to your consideration of the Portfolios. The investment
performance of the portfolios of MSIF and MAS Funds is not necessarily
indicative of future performance of the Portfolios of the Fund. Also, the
operating expenses of each of the Portfolios of the Fund will be different
from, and may be higher than, the operating expenses of the corresponding
portfolio of MSIF or MAS Funds. The investment performance of the Class A
Shares of the MSIF portfolios and the Institutional Class Shares of the MAS
Funds is provided merely to indicate the experience of the Advisers in managing
similar portfolios.
<TABLE>
<CAPTION>
Average Average
Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Annual
One Year Five Years Ten Years Five Years Ten Years Total Return
Inception Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Equity Growth........... 4/2/91 30.97% 121.15% NA 16.99% NA 17.06%
U.S. Real Estate........ 2/24/95 39.56% NA NA NA NA 32.73%
Emerging Markets Debt... 2/1/94 50.52% NA NA NA NA 18.94%
Global Equity........... 7/15/92 22.83% NA NA NA NA 19.22%
International Magnum.... 3/15/96 8.25%* NA NA NA NA NA
Emerging Markets
Equity................. 9/25/92 12.19% NA NA NA NA 12.93%
Asian Equity............ 7/1/91 3.49% 142.14% NA 19.35% NA 18.28%
MAS Funds:
Fixed Income............ 11/14/84 7.36% 49.18% 143.25% 8.33% 9.30% 11.03%
High Yield.............. 2/28/89 15.29% 96.04% NA 14.41% NA 11.66%
Equity.................. 11/14/84 20.59% 85.31% 289.52% 13.13% 14.57% 16.38%
Value................... 11/5/84 27.63% 140.12% 333.56% 19.15% 15.80% 17.57%
Mid Cap Growth.......... 3/30/90 18.79% 86.31% NA 13.25% NA 19.11%
Mid Cap Value........... 12/30/94 40.77% NA NA NA NA 36.62%
International Fixed
Income................. 4/29/94 6.20% NA NA NA NA 9.87%
Balanced................ 12/31/92 15.37% NA NA NA NA 12.30%
Multi-Asset-Class....... 7/29/94 15.93% NA NA NA NA 15.71%
</TABLE>
- -------
*Cumulative (unannualized) total return since inception.

40
<PAGE>

PERSONS CONTROLLING CERTAIN PORTFOLIOS

As of April 7, 1997, MSGI owned more than 25% of the outstanding voting
securities of the Fixed Income, High Yield, Equity Growth, Value, Mid-Cap
Value, U.S. Real Estate, Global Equity, International Magnum, Emerging Markets
Equity and Asian Equity Portfolios and, therefore, may be deemed a controlling
person of these Portfolios under the 1940 Act.

For more information, see "Control Persons and Principal Holders of Securities"
in the SAI.

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

TRANSACTION DETAILS

The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. Each of the Core Equity, Equity Growth, Value, Mid Cap
Growth, Mid Cap Value, U.S. Real Estate, Emerging Markets Debt, Global Equity,
International Magnum, Emerging Markets Equity and Asian

Equity Portfolio's NAV is determined as of the close of business of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. The NYSE is currently scheduled to be closed on New Year's Day,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and on the preceding Friday or subsequent
Monday when any of these holidays falls on a Saturday or Sunday, respectively.

Each of the Fixed Income, High Yield and International Fixed Income Portfolio's
NAV is determined as of one hour after the close of the bond markets (normally
4:00 p.m. Eastern time) on each day that the Portfolios are open for business.

Each of the Balanced and Multi-Asset-Class Portfolio's NAV is determined as of
the later of the close of the NYSE or one hour after the close of the bond
markets on each day the Portfolios are open for business.

Except for the Money Market Portfolio, each Portfolio's investments are valued
primarily on the basis of market quotations. The Money Market Portfolio values
its assets by the amortized cost method, as described in the SAI, which
approximates market value. Foreign securities are valued on the basis of
quotations from the primary market in which they are traded, and are translated
from the local currency into U.S. dollars using current exchange rates. If
quotations are not readily available or if the values have been materially
affected by events occurring after the closing of a foreign market, assets are
valued by a method that the Fund's Board of Directors believes accurately
reflects fair value.

Each Portfolio's offering price (price to buy one share) and redemption price
(price to sell one share) are its NAV.

Each participating insurance company receives orders from its variable annuity
contract and variable life insurance policy owners to purchase or redeem shares
of the Portfolios each

41
<PAGE>

business day. That night, all orders received by that insurance company on that
business day are aggregated, and the insurance company places a net purchase or
redemption order for shares of one or more Portfolios the morning of the next
business day. These orders are normally executed at the NAV that was computed
at the close of the previous business day in order to provide a match between
the variable contract and policy owners' orders to the insurance companies and
the insurance companies' orders to a Portfolio. In some cases, an insurance
company's orders for Portfolio shares may be executed at the NAV next computed
after the order is actually transmitted to a Portfolio.

42
<PAGE>

PAGE

MORGAN STANLEY UNIVERSAL FUNDS, INC.

P.O. BOX 2798, BOSTON, MA 02208-2798

STATEMENT OF ADDITIONAL INFORMATION

MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A NO-LOAD, OPEN-END
MANAGEMENT INVESTMENT COMPANY WITH DIVERSIFIED AND NON-DIVERSIFIED SERIES
("PORTFOLIOS"). THE FUND CURRENTLY CONSISTS OF SEVENTEEN PORTFOLIOS OFFERING A
BROAD RANGE OF INVESTMENT CHOICES. SHARES OF EACH PORTFOLIO ARE OFFERED WITH
NO SALES CHARGE OR EXCHANGE OR REDEMPTION FEE. SHARES OF EACH PORTFOLIO MAY BE
PURCHASED ONLY BY THE SEPARATE ACCOUNTS OF INSURANCE COMPANIES FOR THE PURPOSE
OF FUNDING VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE INSURANCE POLICIES AND
BY CERTAIN TAX-QUALIFIED INVESTORS. THE VARIABLE ANNUITY CONTRACT AND VARIABLE
LIFE INSURANCE POLICY HOLDERS INCUR FEES AND EXPENSES SEPARATE FROM THE FEES
AND EXPENSES CHARGED BY THE PORTFOLIOS. THIS STATEMENT OF ADDITIONAL
INFORMATION ADDRESSES INFORMATION OF THE FUND APPLICABLE TO EACH OF THE
SEVENTEEN PORTFOLIOS. THE FUND WAS INCORPORATED UNDER THE LAWS OF THE STATE OF
MARYLAND ON MARCH 26, 1996. THE FUND FILED A REGISTRATION STATEMENT WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC") REGISTERING ITSELF AS AN OPEN-
END MANAGEMENT INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940, AS
AMENDED (THE "1940 ACT"), AND ITS SHARES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.

THE PORTFOLIOS ARE MANAGED BY EITHER MORGAN STANLEY ASSET MANAGEMENT INC.
("MSAM" OR AN "ADVISER") OR MILLER ANDERSON & SHERRERD, LLP ("MAS" OR AN
"ADVISER") THEREBY MAKING AVAILABLE IN A SINGLE PRODUCT THE COMBINED STRENGTH
OF THESE LEADING INVESTMENT MANAGEMENT FIRMS.

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE FUND'S PORTFOLIO(S) (THE
"PROSPECTUS"). THIS STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED BY
REFERENCE INTO THE PROSPECTUS IN ITS ENTIRETY. TO OBTAIN THE PROSPECTUS,
PLEASE CONTACT THE FUND OR YOUR INSURANCE COMPANY.
TABLE OF CONTENTS

<TABLE>
PAGE
<S> <C>
SECURITIES AND INVESTMENT TECHNIQUES 2
TAXES 12
PURCHASE OF SHARES 14
REDEMPTION OF SHARES 14
INVESTMENT LIMITATIONS 14
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS 15
MANAGEMENT OF THE FUND 16
NET ASSET VALUE FOR THE MONEY MARKET PORTFOLIO 22
PORTFOLIO TRANSACTIONS 22
PERFORMANCE INFORMATION 23
GENERAL INFORMATION 26
DESCRIPTION OF CERTAIN SECURITIES AND RATINGS 27
FINANCIAL STATEMENTS 32
</TABLE>

Statement of Additional Information dated May 1, 1997 relating to:

Prospectus dated May 1, 1997, for the Money Market, Fixed Income, High Yield,
Core Equity, Equity Growth, Value, Mid Cap Growth, Mid Cap Value, U.S. Real
Estate, International Fixed Income, Emerging Markets Debt, Global Equity,
International Magnum, Emerging Markets Equity, Asian Equity, Balanced and
Multi-Asset-Class Portfolios

Prospectus dated May 1, 1997, for the Emerging Markets Equity Portfolio.

Prospectus dated May 1, 1997 for the Fixed Income, High Yield, Equity Growth,
Value, Mid Cap Value, Global Equity, International Magnum and Emerging Markets
Equity Portfolios.

Prospectus dated May 1, 1997 for the U.S. Real Estate, Global Equity,
International Magnum, Emerging Markets Equity and Asian Equity Portfolios.

Prospectus dated May 1, 1997 for the Fixed Income, Value, U.S. Real Estate,
Mid Cap Value and Emerging Markets Equity Portfolios.

Prospectus dated May 1, 1997 for the U.S. Real Estate and Fixed Income
Portfolios.
<PAGE>

SECURITIES AND INVESTMENT TECHNIQUES

MSAM provides overall investment management for the following Portfolios: Money
Market, Equity Growth, U.S. Real Estate, Emerging Markets Debt, Global Equity,
International Magnum, Emerging Markets Equity and Asian Equity Portfolios.

MAS provides overall investment management for the following Portfolios: Fixed
Income, High Yield, Core Equity, Value, Mid Cap Growth, Mid Cap Value,
International Fixed Income, Balanced and Multi-Asset-Class Portfolios.

The following discussion of the securities and investment techniques
supplements the discussion of investment policies, securities and investment
techniques set forth in the Fund's Prospectus:

EMERGING MARKET COUNTRY SECURITIES

Each of the Emerging Markets Equity and Emerging Markets Debt Portfolio's
definition of Emerging Market Country Equity Securities or Fixed Income
Securities includes securities of companies that may have characteristics and
business relationships common to companies in a country or countries other than
an emerging market country. As a result, the value of the securities of such
companies may reflect economic and market forces applicable to other countries,
as well as to an emerging market country. The Adviser believes, however, that
investment in such companies will be appropriate because each Portfolio will
invest only in those companies which, in its view, have sufficiently strong
exposure to economic and market forces in an emerging market country such that
their value will tend to reflect developments in such emerging market country
to a greater extent than developments in another country or countries. For
example, each of these Portfolios may invest in companies organized and located
in countries other than an emerging market country, including companies having
their entire production facilities outside of an emerging market country, when
securities of such companies meet one or more elements of the Portfolio's
definition of an Emerging Market Country Equity Security or Fixed Income
Security and so long as the Adviser believes at the time of investment that the
value of the company's securities will reflect principally conditions in such
emerging market country.

The Emerging Markets Debt Portfolio is subject to no restrictions on the
maturities of the Emerging Market Country Fixed Income Securities it holds. The
value of Fixed Income Securities held by each Portfolio generally will vary
inversely to changes in prevailing interest rates. Each Portfolio's investments
in fixed-rated Fixed Income Securities with longer terms to maturity are
subject to greater volatility than the Portfolio's investments in shorter-term
obligations. Debt obligations acquired at a discount are subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which are not subject to such discount.

Investments in emerging market country government Fixed Income Securities
involve special risks. Certain emerging market countries have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
balance of payments and trade difficulties and extreme poverty and
unemployment. The issuer or governmental authority that controls the repayment
of an emerging market country's debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, the Portfolio may have limited legal
recourse against the issuer and/or guarantor. Remedies must, in some cases, be
pursued in the courts of the defaulting party itself, and the ability of the
holder of foreign government Fixed Income Securities to obtain recourse may be
subject to the political climate in the relevant country. In addition, no
assurance can be given that the holders of commercial bank debt will not
contest payments to the holders of other foreign government debt obligations in
the event of default under their commercial bank loan agreements.

BRADY BONDS

Portfolios may invest in certain Fixed Income Securities customarily referred
to as "Brady Bonds," which are created through the exchange of existing
commercial bank loans to foreign entities for new obligations in connection
with debt restructuring under a plan introduced by former U.S. Secretary of the
Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued
only in recent years, and, accordingly, do not have a long payment history.
They may be collateralized or uncollateralized and issued in various currencies
(although most are U.S. dollar-denominated) and they are actively traded in the
over-the- counter secondary market. The Portfolio may purchase Brady Bonds
either in the primary or secondary markets. The price and yield of Brady Bonds
purchased in the secondary market will reflect the market conditions at the
time of purchase, regardless of the stated face amount and the stated interest
rate. With respect to Brady Bonds with no or limited collateralization, each
Portfolio will rely for payment of interest and principal primarily on the
willingness and ability of the issuing government to make payment in accordance
with the terms of the bonds.

U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at

2
<PAGE>

regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady
Bonds are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as
speculative.

EURODOLLAR AND YANKEE DOLLAR OBLIGATIONS

The Portfolios may invest in Eurodollar and Yankee Obligations. Eurodollar bank
obligations are dollar-denominated certificates of deposit and time deposits
issued outside the U.S. capital markets by foreign branches of U.S. banks and
by foreign banks. Yankee dollar bank obligations are dollar- denominated
obligations issued in the U.S. capital markets by foreign banks.

Eurodollar and Yankee dollar obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity
risk. Additionally, Eurodollar (and to a limited extent, Yankee dollar)
obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from flowing across their borders. Other risks include adverse
political and economic developments; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes; and the expropriation or nationalization of foreign issuers.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The U.S. dollar value of the assets of the Portfolios may be

affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and a Portfolio may incur costs in connection
with conversions between various currencies. The Portfolios will conduct their
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. The Portfolios generally will not enter into a forward contract with
a term greater than one year. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for such trades.

The Portfolios may enter into forward foreign currency exchange contracts in
several circumstances. When a Portfolio enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when a Portfolio
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Portfolio may desire to "lock-in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for a
fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, each Portfolio will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend or interest payment is declared, and the date on which
such payments are made or received.

Additionally, when any of these Portfolios anticipates that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
such Portfolio's securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the
value of these securities between the date on which the forward contract is
entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. None of the Portfolios intend
to enter into such forward contracts to protect the value of portfolio
securities on a continuous basis.

Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the long-term investment decisions made with regard
to overall diversification strategies. However, the management of the Fund
believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of each Portfolio
will thereby be served. Except under circumstances where a segregated account
is not required under the 1940 Act or the rules adopted thereunder,

3
<PAGE>

the Fund's custodian will place liquid, unencumbered assets, the value of which
is marked to market daily, into a segregated account of a Portfolio in an
amount equal to the value of such Portfolio's total assets committed to the
consummation of forward currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will be equal to the amount of such Portfolio's commitments with
respect to such contracts.

At the maturity of a forward contract, a Portfolio may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.

It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for a Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that such Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.

If a Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between a Portfolio entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, such Portfolio would suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.

The Portfolios are not required to enter into such transactions with regard to
their foreign currency-denominated securities. It also should be realized that
this method of protecting the value of portfolio securities against a decline
in the value of a currency does not eliminate fluctuations in the underlying
prices of the securities. It simply establishes a rate of exchange which one
can achieve at some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

The Portfolios may enter into futures contracts and options on futures
contracts for the purpose of remaining fully invested and reducing transactions
costs. The Portfolios may also enter into futures contracts for hedging
purposes. Futures contracts provide for the future sale by one party and
purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts, which are
standardized as to maturity date and underlying financial instrument, are
traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. government agency.

Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or
taking of delivery. Closing out an open futures position is done by taking an
opposite position ("buying" a contract which has previously been "sold" or
"selling" a contract previously "purchased") in an identical contract to
terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.

Futures contracts on securities indices or other indices do not require the
physical delivery of securities, but merely provide for profits and losses
resulting from changes in the market value of a contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures position is simply closed out. Changes in the
market value of a particular futures contract reflect changes in the level of
the index on which the futures contract is based.

Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.

After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder.

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Variation margin payments are made to and from the futures broker for as long
as the contract remains open. The Portfolios expect to earn interest income on
their margin deposits. With respect to each long position in a futures contract
or option thereon, the underlying commodity value of such contract will always
be covered by cash and cash equivalents set aside plus accrued profits held at
the futures commission merchant.

The Portfolios may purchase and write call and put options on futures contracts
which are traded on a U.S. exchange and enter into closing transactions with
respect to such options to terminate an existing position. In addition, a
Portfolio may purchase and write call and put options on futures that are
traded on an international exchange, traded over-the-counter or which are
synthetic options or futures or equity swaps, and may enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a
specified exercise price at any time during the term of the option. Upon
exercise of the option, the accumulated balance in the writer's futures margin
account is delivered to the option holder, which represents the amount by which
the market price of the futures contract at the time of exercise exceeds, in
the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract.

The Portfolios will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.

Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators". Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
underlying securities with futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from market fluctuations.

Regulations of the CFTC applicable to the Portfolios permit the use of futures
transactions for bona fide hedging purposes without regard to the percentage of
assets committed to futures margins and for options premiums. In addition, CFTC
regulations also allow the Portfolios to employ futures transactions for other
non-hedging purposes to the extent that aggregate initial futures margins and
options premiums do not exceed 5% of the liquidation value of a Portfolio's
total assets. The Portfolios will only sell futures contracts to protect
securities owned against declines in price or purchase futures contracts to
protect against an increase in the price of securities intended for purchase.
As evidence of this hedging interest, each of the Portfolios expect that
approximately 75% of its futures contracts will be "completed"; that is,
equivalent amounts of related securities will have been purchased or are being
purchased by the Portfolios upon sale of open futures contracts.

Although techniques other than the sale and purchase of futures contracts could
be used to control the Portfolios' exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Portfolios will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A Portfolio will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of its total assets. The Fixed Income, High Yield, International Fixed
Income, Balanced, Multi-Asset-Class, Value, Core Equity, Mid Cap Growth and Mid
Cap Value Portfolios will not enter into futures contracts to the extent that
their outstanding obligations to purchase securities under these contracts in
combination with their outstanding obligations with respect to options
transactions would exceed 50% of their respective total assets, or in the case
of the Emerging Markets Debt, Equity Growth, U.S. Real Estate, International
Magnum and Emerging Markets Equity Portfolios, outstanding obligations would
not exceed 20% of their respective total assets. In addition, the Emerging
Markets Equity Portfolio will not enter into any futures contract or option if
immediately thereafter the value of all the foreign currencies underlying its
futures contracts and foreign currency options would exceed 10% of the value of
its total assets. The Portfolios will maintain assets sufficient to meet their
respective obligations under such contracts in a segregated account with the
custodian bank or will otherwise comply with the SEC's position on asset
coverage.

RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contracts at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Portfolios would continue to be required to make daily cash
payments to maintain their required margin. In such situations, if a Portfolio
has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, a Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on a Portfolio's ability to
effectively hedge.

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The Portfolios will minimize the risk that they will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
Portfolios may engage in futures strategies only for hedging purposes, the
Advisers do not believe that the Portfolios are subject to the risks of loss
frequently associated with futures transactions. A Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying security or currency and sold it after the decline.

Utilization of futures transactions by the Portfolios does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that a Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by a Portfolio of margin deposits in the event
of bankruptcy of a broker with whom the Portfolio has an open position in a
futures contract or related option.

Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.

LOAN PARTICIPATIONS AND ASSIGNMENTS

The Portfolios may invest in loans and other direct debt instruments ("Loans")
from third parties ("Lenders"). A Portfolio's investments in Loans are expected
in most instances to be in the form of participations in Loans
("Participations") and assignments of all or portions of Loans ("Assignments")
from third parties. Each Portfolio's investment in Participations typically
will result in each Portfolio having a contractual relationship only with the
Lender and not with the borrower. Each Portfolio will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, each
Portfolio generally will have no right to enforce compliance by the borrower
with the terms of the loan agreement relating to the Loan, nor any rights of
set-off against the borrower, and each Portfolio may not directly benefit from
any collateral supporting the Loan in which it has purchased the Participation.
As a result, each Portfolio may be subject to the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, each Portfolio may be treated
as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the borrower. Certain Participations may be structured
in a manner designed to avoid purchasers of Participations being subject to the
credit risk of the Lender with respect to the Participation, but even under
such a structure, in the event of the Lender's insolvency, the Lender's
servicing of the Participation may be delayed and the assignability of the
Participation impaired. Each Portfolio will acquire Participations only if the
Lender interpositioned between the Portfolio and the borrower is determined by
the Adviser to be creditworthy. The Emerging Markets Equity and Emerging
Markets Debt Portfolios may invest in fixed and floating rate loans arranged
through private negotiations between an issuer of sovereign debt obligations
and one or more financial institutions.

When a Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by each Portfolio as
the purchaser of an Assignment may differ from, and be more limited than, those
held by the assigning Lender. The assignability of certain sovereign debt
obligations is restricted by the governing documentation as to the nature of
the assignee such that the only way in which each Portfolio may acquire an
interest in a loan is through a Participation and not an Assignment. Each
Portfolio may have difficulty disposing of Assignments and Participations
because to do so it will have to assign such securities to a third party.
Because there is no liquid market for such securities, the Portfolio
anticipates that such securities could be sold only to a limited number of
institutional investors.

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The lack of a liquid secondary market may have an adverse impact on the value
of such securities and each Portfolio's ability to dispose of particular
Assignments or Participations when necessary to meet each Portfolio's liquidity
needs or in response to a specific economic event such as a deterioration in
the creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for each
Portfolio to assign a value to these securities for purposes of valuing the
Portfolio's securities and calculating its net asset value.

MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX

The International Magnum Portfolio uses the Morgan Stanley Capital
International EAFE (Europe, Australia and the Far East) Index (the "EAFE
Index") as a tool for investment decisions. The investment objective of the
International Magnum Portfolio is to provide long-term capital appreciation.
The International Magnum Portfolio seeks to achieve its objective by investing
primarily in Equity Securities of non-U.S. issuers in accordance with the EAFE
country (defined below) weightings determined by the Adviser. After
establishing regional allocation strategies, the Adviser then selects Equity
Securities among issuers of a region. The International Magnum Portfolio
invests in countries comprising the EAFE Index (each, an "EAFE country").

The EAFE Index is one of seven international indices, twenty national indices
and thirty-eight international industry indices making up the Morgan Stanley
Capital International Indices. The Morgan Stanley Capital International EAFE
Index is based on the share prices of 1,066 companies listed on the stock
exchanges of Europe, Australia, New Zealand and the Far East. "Europe" includes
Austria, Belgium, Denmark, Finland, France, Germany, Italy, The Netherlands,
Norway, Spain, Sweden, Switzerland and the United Kingdom. "Far East" includes
Japan, Hong Kong and Singapore/Malaysia.

OPTIONS

GENERAL INFORMATION. As stated in the Prospectus, the Portfolios may purchase
and sell options on Equity Securities. Additional information with respect to
option transactions is set forth below. Call and put options on Equity
Securities are listed on various U.S. and foreign securities exchanges ("listed
options") and are written in over-the-counter transactions ("OTC options").

Listed options are issued or guaranteed by the exchange on which they trade or
by a clearing corporation, such as Options Clearing Corporation ("OCC") in the
United States. Ownership of a listed call option gives the fund the right to
buy from the clearing corporation or exchange, the underlying security covered
by the option at the stated exercise price (the price per unit of the
underlying security or currency) by filing an exercise notice prior to the
expiration date of the option. The writer (seller) of the option would then
have the obligation to sell to the clearing corporation or exchange, the
underlying security or currency at that exercise price prior to the expiration
date of the option, regardless of its current market price. Ownership of a
listed put option would give each Portfolio the right to sell the underlying
security or currency to the clearing corporation or exchange at the stated
exercise price. Upon notice of exercise of the put option, the writer of the
option would have the obligation to purchase the underlying security from the
clearing corporation or exchange at the exercise price.

OTC options are purchased from or sold (written) to dealers or financial
institutions which have entered into direct agreements with each Portfolio.
With OTC options, such variables as expiration date exercise price and premium
will be agreed upon between each Portfolio and the transactions dealer, without
the intermediary of a third party such as a clearing corporation or exchange.
If the transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that
option, each Portfolio would lose the premium paid for the option as well as
any anticipated benefit of the transaction.

COVERED CALL WRITING. Each of the Portfolios may write (i.e., sell) covered
call options on portfolio securities. By doing so, the Portfolio would become
obligated during the term of the option to deliver the securities underlying
the option should the option holder choose to exercise the option before the
option's termination date. In return for the call it has written, each
Portfolio will receive from the purchaser (or option holder) a premium which is
the price of the option, less a commission charged by a broker. Each Portfolio
will keep the premium regardless of whether the option is exercised. A call
option is "covered" if the Portfolio owns the security underlying the option it
has written or has an absolute or immediate right to acquire the security by
holding a call option on such security, or maintains in a segregated account a
sufficient amount of cash, cash equivalents or liquid securities to purchase
the underlying security. When the Portfolio writes covered call options, it
augments its income by the premiums received and is thereby hedged to the
extent of that amount against a decline in the price of the underlying
securities and the premiums received will offset a portion of the potential
loss incurred by the Portfolio if the securities underlying the options are
ultimately sold by the Portfolio at a loss. However, during the option period,
each Portfolio has, in return for the premium on the option, given up the
opportunity for capital appreciation above the exercise price should the market
price of the underlying security increase, but has retained the risk of loss
should the price of the underlying security decline. The size of premiums will
fluctuate with varying market conditions.

COVERED PUT WRITING. Each of the Portfolios may write covered put options on
portfolio securities. By doing so, the Portfolio incurs an obligation to buy
the security underlying the option from the purchaser of the put at the
option's
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exercise price at any time during the option period, at the purchaser's
election (certain listed and OTC options written by the Portfolio will be
exercisable by the purchaser only on a specific date). Generally, a put option
is "covered" if the Portfolio maintains in a segregated account an amount of
cash, U.S. Government securities or other high grade debt obligations equal to
the exercise price of the option or if the Portfolio holds a put option on the
same underlying security with a similar or higher exercise price.

Each of the Portfolios will write put options (i) to receive the premiums paid
by purchasers; (ii) when the Adviser wishes to purchase the security underlying
the option at a price lower than its current market price, in which case it
will write the covered put at an exercise price reflecting the lower purchase
price sought; and (iii) to close out a long put option position.

PURCHASE OF PUT AND CALL OPTIONS. Each of the Portfolios may purchase listed or
OTC put or call options on its portfolio securities. When each Portfolio
purchases a call option it acquires the right to purchase a designated security
at a designated price (the "exercise price"), and when each Portfolio purchases
a put option it acquires the right to sell a designated security at the
exercise price, in each case on or before a specified date (the "termination
date"), usually not more than nine months from the date the option is issued.

Each Portfolio may purchase call options to close out a covered call position
or to protect against an increase in the price of a security it anticipates
purchasing. Each Portfolio may purchase put options on securities which it
holds in its portfolio only to protect itself against a decline in the value of
the security. If the value of the underlying security were to fall below the
exercise price of the put purchased in an amount greater than the premium paid
for the option, each Portfolio would incur no additional loss. Each Portfolio
may also purchase put options to close out written put positions in a manner
similar to call option closing purchase transactions.

The amount each Portfolio pays to purchase an option is called a "premium," and
the risk assumed by the Portfolio when it purchases an option is the loss of
this premium. Because the price of an option tends to move with that of its
underlying security, if a Portfolio is to make a profit, the price of the
underlying security must change and the change must be sufficient to cover the
premium and commissions paid. A price change in the security underlying the
option does not assure a profit since prices in the options market may not
always reflect such a change.

SPECIAL RISKS ASSOCIATED WITH FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND OPTIONS THEREON AND OPTIONS ON FOREIGN CURRENCIES.

Transactions in forward contracts, as well as futures and options on foreign
currencies, are subject to the risk of governmental actions affecting trading
in or the prices of currencies underlying such contracts, which could restrict
or eliminate trading and could have a substantial adverse effect on the value
of positions held by each Portfolio permitted to engage in such hedging
transactions. In addition, the value of such positions could be adversely
affected by a number of other complex political and economic factors applicable
to the countries issuing the underlying currencies.

Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which a Portfolio's trading systems will
be based may not be as complete as the comparable data on which such Portfolio
makes investment and trading decisions in connection with other securities and
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing a Portfolio from responding to such events in a timely
manner.

Settlements of over-the-counter forward contracts or of the exercise of foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires parties to such contracts to accept or make
delivery of such currencies in conformity with any United States or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.

Unlike currency futures contracts and exchange-traded options, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. In an over- the-counter trading environment, many of the
protections associated with transactions on exchanges will not be available.
For example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer could lose amounts substantially in excess of its
initial investment due to the margin and collateral requirements associated
with such option positions. Similarly, there is no limit on the amount of
potential losses on forward contracts to which a Portfolio is a party.

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In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with such Portfolio.
Where no such counterparty is available, it will not be possible to enter into
a desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and a Portfolio may be unable to close
out options purchased or written, or forward contracts entered into, until
their exercise, expiration or maturity. This in turn could limit a Portfolio's
ability to realize profits or to reduce losses on open positions and could
result in greater losses.

Furthermore, over-the-counter transactions are not backed by the guarantee of
an exchange's clearing corporation. A Portfolio will therefore be subject to
the risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue its role as market-maker in a particular currency, thereby
restricting a Portfolio's ability to enter into desired hedging transactions. A
Portfolio will enter into over-the-counter transactions only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.

Over-the-counter options on foreign currencies, like exchange-traded commodity
futures contracts and commodity option contracts, are within the exclusive
regulatory jurisdiction of the CFTC. The CFTC currently permits the trading of
such options, but only subject to a number of conditions regarding the
commercial purpose of the purchaser of such options. Forward contracts and
currency swaps are not presently subject to regulation by the CFTC, although
the CFTC may in the future assert or be granted authority to regulate such
instruments. In such event, a Portfolio's ability to utilize forward contracts
and currency swaps in the manner set forth above and in the applicable
Prospectus could be restricted.

Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency options positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting a Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.

The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effect of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For
example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on
exercise.

PORTFOLIO TURNOVER

The portfolio turnover rate for a year is calculated by dividing the lesser of
the value of the purchases or sales for the year by the average monthly market
value of the Portfolio for the year, excluding from this calculation securities
with maturities of one year or less. The rate of portfolio turnover will not be
a limiting factor when a Portfolio deems it appropriate to purchase or sell
securities for the Portfolio. However, the U.S. federal tax requirement that a
Portfolio derive less than 30% of its gross income from the sale or disposition
of securities held less than three months may limit a Portfolio's ability to
dispose of its securities. For additional information, see "Taxes."

REPURCHASE AGREEMENTS

Each Portfolio may invest in repurchase agreements collateralized by liquid,
unencumbered assets, the value of which is marked to market daily. Repurchase
agreements are transactions by which a Portfolio purchases a security and
simultaneously commits to resell that security to the seller (a bank or
securities dealer) at an agreed upon price on an agreed upon date (usually
within seven days of purchase). The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or date of maturity of the purchased security. In these transactions, the
securities purchased by a Portfolio have a total value in excess of the value
of the repurchase agreement and are held by the Portfolio's custodian bank
until repurchased. Such agreements permit a Portfolio to keep all its assets at
work while retaining "overnight" flexibility in pursuit of investments of a
longer- term nature. The Portfolio's Adviser and the Administrator will
continually monitor the value of the underlying securities to ensure that their
value always equals or exceeds the repurchase price.

The use of repurchase agreements involves certain risks. For example, if the
seller of the agreements defaults on its

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obligation to repurchase the underlying securities at a time when the value of
these securities has declined, a Portfolio may incur a loss upon disposition of
them. If the seller of the agreement becomes insolvent and subject to
liquidation or reorganization under the Bankruptcy Code or other laws, a
bankruptcy court may determine that the underlying securities are collateral
not within the control of a Portfolio and therefore subject to sale by the
trustee in bankruptcy. Finally, it is possible that a Portfolio may not be able
to substantiate its interest in the underlying securities. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through stringent security selection criteria and careful monitoring
procedures.

SECURITIES LENDING

Each Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Portfolio attempts to increase its net investment income through
the receipt of interest on the loan. Any gain or loss in the market price of
the securities loaned that might occur during the term of the loan would be for
the account of the Portfolio. Each Portfolio may lend its investment securities
to qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, structure and the aggregate amount of such
loans are not inconsistent with the 1940 Act or the Rules and Regulations or
interpretations of the SEC thereunder, which currently require that (a) the
borrower pledge and maintain with the Portfolio collateral consisting of
liquid, unencumbered assets having a value at all times not less than 100% of
the value of the securities loaned, (b) the borrower add to such collateral
whenever the price of the securities loaned rises (i.e., the borrower "marks to
the market" on a daily basis), (c) the loan be made subject to termination by
the Portfolio at any time, and (d) the Portfolio receive reasonable interest on
the loan (which may include the Portfolio investing any cash collateral in
interest bearing short-term investments), any distributions on the loaned
securities and any increase in their market value. There may be risks of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. However, loans will only be
made to borrowers deemed by the Adviser to be of good standing and when, in the
judgment of the Adviser, the consideration which can be earned currently from
such securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Directors of the Fund.

At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities,
so long as such fees are set forth in a written contract and approved by the
investment company's Board of Directors. In addition, voting rights may pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.

SHORT SALES

The Portfolios may from time to time sell securities short without limitation
but consistent with applicable legal requirements. A short sale is a
transaction in which the Portfolio would sell securities it owns or has the
right to acquire at no added cost (i.e., "against the box") or does not own
(but has borrowed) in anticipation of a decline in the market price of the
securities. When the Portfolio makes a short sale of borrowed securities, the
proceeds it receives from the sale will be held on behalf of a broker until the
Portfolio replaces the borrowed securities. To deliver the securities to the
buyer, the Portfolio will need to arrange through a broker to borrow the
securities and, in so doing, the Portfolio will become obligated to replace the
securities borrowed at their market price at the time of replacement, whatever
that price may be. The Portfolio may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.

The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of liquid unencumbered assets. In addition, if the short sale is not
"against the box," the Portfolio will place in a segregated account with its
custodian, or designated sub-custodian, an amount of unencumbered liquid assets
equal to the difference, if any, between (1) the market value of the securities
sold at the time they were sold short and (2) any unencumbered liquid assets
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Until it replaces the borrowed
securities, the Portfolio will maintain the segregated account daily at a level
so that (1) the amount deposited in the account plus the amount deposited with
the broker (not including the proceeds from the short sale) will equal the
current market value of the securities sold short and (2) the amount deposited
in the account plus the amount deposited with the broker (not including the
proceeds from the short sale) will not be less than the market value of the
securities at the time they were sold short.

Short sales by the Portfolio involve certain risks and special considerations.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.

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<PAGE>

STRUCTURED SECURITIES

Each of the Fixed Income, Balanced, International Fixed Income, Multi-Asset-
Class, High Yield, Emerging Markets Equity, and Emerging Markets Debt
Portfolios may invest a portion of its assets in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans or Brady Bonds)
and the issuance by that entity of one or more classes of securities
("Structured Securities") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Securities to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Securities of the type
in which each Portfolio anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. Each Portfolio is permitted to invest in a class of
Structured Securities that is either subordinated or unsubordinated to the
right of payment of another class. Subordinated Structured Securities typically
have higher yields and present greater risks than unsubordinated Structured
Securities. Certain issuers of Structured Securities may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, each
Portfolio's investment in these Structured Securities may be limited by
restrictions contained in the 1940 Act. Structured Securities are typically
sold in private placement transactions, and there currently is no active
trading market for Structured Securities.

SWAP CONTRACTS

The Portfolios may enter into swap contracts. A swap is an agreement to
exchange the return generated by one instrument for the return generated by
another instrument. The payment streams are calculated by reference to a
specified index and agreed upon notional amount. The term "specified index"
includes currencies, fixed interest rates, prices, total return on interest
rate indices, fixed income indices, stock indices and commodity indices (as
well as amounts derived from arithmetic operations on these indices). For
example, a Portfolio may agree to swap the return generated by a fixed income
index for the return generated by a second fixed income index. The currency
swaps in which the Portfolios may enter will generally involve an agreement to
pay interest streams in one currency based on a specified index in exchange for
receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.

The swaps in which the Portfolios may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that a Portfolio is
contractually obligated to make. If the other party to a swap defaults, a
Portfolio's risk of loss consists of the net amount of payments that a
Portfolio is contractually entitled to receive. Currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the
swap will default on its contractual delivery obligations. If there is a
default by the counterparty, the Portfolios may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has
grown substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.

The Portfolios will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with a Portfolio receiving or paying, as the
case may be, only the net amount of the two payments. A Portfolio's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Portfolio) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of unencumbered liquid assets, to avoid any potential leveraging of
the Portfolio. To the extent that these swaps, caps, floors, and collars are
entered into for hedging purposes, the Adviser believes such obligations do not
constitute "senior securities" under the 1940 Act and, accordingly, will not
treat them as being subject to a Portfolio's borrowing restrictions. The Fixed
Income, High Yield, International Fixed Income, Balanced, Value, Core Equity,
Mid Cap Growth, Mid Cap Value and Multi-Asset-Class Portfolios may enter into
OTC Derivatives transactions (swaps, caps, floors, puts, etc., but excluding
foreign exchange contracts) with counterparties that are approved by the
Adviser in accordance with guidelines established by the Board of Directors.
These guidelines provide for a minimum credit rating for each counterparty and
various credit enhancement techniques (for example, collateralization of
amounts due from counterparties) to limit exposure to counterparties that have
a rating below AA.

The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment

11
<PAGE>

performance of the Portfolios would be less favorable than it would have been
if this investment technique were not used.

ZERO COUPONS

The Portfolios may invest in zero coupon bonds. Zero coupon bonds is a term
used to describe notes and bonds which have been stripped of their unmatured
interest coupons, or the coupons themselves, and also receipts or certificates
representing interest in such stripped debt obligations and coupons. With
respect to U.S. Governments, as defined in the Prospectus, the timely payment
of coupon interest and principal on these instruments remains guaranteed by the
"full faith and credit" of the United States Government.

A zero coupon bond does not pay interest. Instead, it is issued at a
substantial discount to its "face value" (what it will be worth at maturity).
The difference between a security's issue or purchase price and its face value
represents the accreted interest an investor will earn if the security is held
until maturity. For tax purposes, a portion of this accreted interest is deemed
as income received by zero coupon bondholders each year. The Fund, which
expects to qualify as a regulated investment company, intends to pass along
such interest as a component of a Portfolio's distributions of net investment
income.

Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary
Fixed Income Securities because of the manner in which their principal and
interest is returned to the investor.

With respect to U.S. Governments, Zero Coupon Bonds are sold under a variety of
different names, such as: Certificate of Accrual on Treasury Securities (CATS),
Treasury Receipts (TRs), Separate Trading of Registered Interest and Principal
of Securities (STRIPS) and Treasury Investment Growth Receipts (TIGERS).

TAXES

The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.

Each Portfolio within the Fund is generally treated as a separate corporation
for federal income tax purposes, and thus the provisions of the Code generally
will be applied to each Portfolio separately, rather than to the Fund as a
whole.

The Fund intends that each of its Portfolios qualify and elect to be treated
for each taxable year as a regulated investment company ("RIC") under
Subchapter M of the Code. Accordingly, each Portfolio must, among other things,
(a) derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, and certain other
related income, including, generally, certain gains from options, futures and
forward contracts; (b) derive less than 30% of its gross income each taxable
year from the sale or other disposition of the following items if held less
than three months (A) stock or securities, (B) options, futures or forward
contracts (other than options, futures or forward contracts on foreign
currencies), and (C) foreign currencies (or options, futures, or forward
contracts on foreign currencies) that are not directly related to the
Portfolio's principal business of investing in stocks or securities (or options
or futures with respect to stock or securities) (the "short-short test") and
(c) diversify its holdings so that, at the end of each fiscal quarter of the
Portfolio's taxable year, (i) at least 50% of the market value of the
Portfolio's total assets is represented by cash and cash items, United States
Government securities, securities of other RICs, and other securities, with
such other securities limited, in respect to any one issuer, to an amount not
greater than 5% of the value of the Portfolio's total assets or 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities (other than United
States Government securities or securities of other RICs) of any one issuer or
two or more issuers which the Portfolio controls and which are engaged in the
same, similar, or related trades or business. For purposes of the 90% of gross
income requirement described above, foreign currency gains which are not
directly related to a Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or securities) may be
excluded from income that qualifies under the 90% requirement.

In addition to the requirements described above, in order to qualify as a RIC,
each Portfolio must distribute at least 90% of each Portfolio's net investment
income (which generally includes dividends, taxable interest, and the excess of
net short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, if any, to
shareholders. If a Portfolio meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.

If a Portfolio fails to qualify as a RIC for any year, all of its income will
be subject to tax at corporate rates.

Each Portfolio will generally be subject to a nondeductible 4% federal excise
tax to the extent it fails to distribute by the end of any calendar year at
least 98% of its ordinary income for that year and 98% of its capital gain net
income (the

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<PAGE>

excess of short- and long-term capital gains over short- and long-term capital
losses) for the one-year period ending on October 31 of that year, plus certain
other amounts.

Dividends declared by the Fund in October, November, or December of any year
and payable to shareholders of record on a date in such month will be deemed to
have been paid by the Fund and received by the shareholders on December 31 of
that year if paid by the Fund at any time during the following January.

For certain transactions, each Portfolio is required for federal income tax
purposes to recognize as gain or loss its net unrealized gains and losses on
forward currency and futures contracts as of the end of each taxable year, as
well as those actually realized during the year. In most cases, any such gain
or loss recognized with respect to a regulated futures contract is considered
to be 60% long-term capital gain or loss and 40% short-term capital gain or
loss, without regard to the holding period of the contract. Realized gain or
loss attributable to a foreign currency forward contract is treated as 100%
ordinary income. Furthermore, foreign currency futures contracts which are
intended to hedge against a change in the value of securities held by a
Portfolio may affect the holding period of such securities and, consequently,
the nature of the gain or loss on such securities upon disposition.

As discussed above, in order for each Portfolio to continue to qualify for
federal income tax treatment as a RIC, at least 90% of its gross income for a
taxable year must be derived from certain qualifying income, including
dividends, interest, income derived from loans of securities, and gains from
the sale or other disposition of stock, securities or foreign currencies, or
other related income, including gains from options, futures and forward
contracts, derived with respect to its business of investing in stock,
securities or currencies. Any net gain realized from the closing out of futures
contracts will therefore generally be qualifying income for purposes of the 90%
requirement. Qualification as a RIC also requires that less than 30% of a
Portfolio's gross income be derived from the sale or other disposition of
stock, securities, options, futures or forward contracts (including certain
foreign currencies not directly related to the Portfolio's business of
investing in stock or securities) held less than three months. In order to
avoid realizing excessive gains on futures contracts held less than three
months, the Portfolio may be required to defer the closing out of futures
contracts beyond the time when it would otherwise be advantageous to do so.

Short sales engaged in by a Portfolio may reduce the holding period of property
held by a Portfolio which is substantially identical to the property sold
short. This rule may make it more difficult for the Portfolio to satisfy the
short-short test. This rule may also have the effect of converting capital
gains recognized by the Portfolio from long-term to short-term as well as
converting capital losses recognized by the Portfolio from short-term to long-
term.

FOREIGN INVESTMENTS

Gains or losses attributable to foreign currency contracts, or to fluctuations
in exchange rates that occur between the time a Portfolio accrues interest or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Portfolio actually collects such receivables
or pays such liabilities are treated as ordinary income or ordinary loss to the
Portfolio. Similarly, gains or losses on disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss to the Portfolio.
These gains or losses increase or decrease the amount of a Portfolio's net
investment income available to be distributed to its shareholders as ordinary
income.

Each Portfolio that invests in foreign securities may be subject to foreign
withholding taxes with respect to its dividend and interest income from foreign
countries, and a Portfolio may be subject to foreign income taxes with respect
to other income. So long as more than 50% in value of a Portfolio's total
assets at the close of the taxable year consists of stock or securities of
foreign corporations, the Fund may elect to treat certain foreign income taxes
imposed on a Portfolio for United States federal income tax purposes as paid
directly by its shareholders. The Fund will make such an election for a
Portfolio only if it deems it to be in the best interest of its shareholders
and will notify shareholders in writing each year if it makes an election and
of the amount of foreign income taxes, if any, to be treated as paid by the
shareholders. If a Portfolio makes the election, shareholders will be required
to include in income their proportionate shares of the amount of foreign income
taxes treated as imposed on the Portfolio and will be entitled to claim either
a credit (subject to the limitations discussed below) or, if they itemize
deductions, a deduction, for their shares of the foreign income taxes.

The foregoing is a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders. It does not
constitute a detailed explanation of the federal, state or local tax treatment
of the Fund or its shareholders, and the discussion here and in the Fund's
Prospectus is not intended as a substitute for careful tax planning.

Shares of the Portfolios will be purchased by life insurance companies for
their separate accounts under variable annuity contracts and variable life
insurance policies and by other entities under qualified pension and retirement
plans. Under the provisions of the Code currently in effect, net income and
realized capital gains of Portfolios of the Fund are not currently taxable when
left to accumulate within a variable annuity contract or variable life
insurance policy or under a qualified pension or retirement plan.

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<PAGE>

For information on federal income taxation of a life insurance company's with
respect to its receipt of distributions from the Fund and federal income
taxation of owners of the company's variable annuity contracts or variable life
insurance policies, refer to the life insurance company's variable annuity
contract or variable life insurance policy prospectus.

PURCHASE OF SHARES

The purchase price of each Portfolio of the Fund, except the Money Market
Portfolio, is the net asset value next determined after the order is received.
For each Portfolio of the Fund other than the Money Market Portfolio, an order
received prior to the regular close of the New York Stock Exchange (the "NYSE")
will be executed at the price computed on the date of receipt; and an order
received after the regular close of the NYSE will be executed at the price
computed on the next day the NYSE is open as long as the Fund's transfer agent
receives payment by check or in Federal Funds prior to the regular close of the
NYSE on such day. Shares of the Money Market Portfolio may be purchased at the
net asset value per share at the price next determined after Federal Funds are
available to such Portfolio. Shares of the Fund may be purchased on any day the
NYSE is open. The NYSE will be closed on the following days: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and on the preceding Friday or subsequent
Monday when any of these holidays falls on a Saturday or Sunday, respectively.

Each Portfolio reserves the right in its sole discretion to suspend the
offering of its shares and to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Portfolio.

REDEMPTION OF SHARES

REDEMPTIONS. Each Portfolio may suspend redemption privileges or postpone the
date of payment (i) during any period that the NYSE is closed, or trading on
the NYSE is restricted as determined by the SEC, (ii) during any period when an
emergency exists as defined by the rules of the SEC as a result of which it is
not reasonably practicable for a Portfolio to dispose of securities owned by
it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.

DISTRIBUTIONS IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the shareholders of a Portfolio to make a
redemption payment wholly in cash, and subject to applicable agreements with
life insurance companies and entities qualified under qualified pension and
profit sharing plans, the Fund may pay any portion of a redemption by
distribution in kind of portfolio securities in lieu of cash. Securities issued
in a distribution in kind will be readily marketable, although shareholders
receiving distributions in kind may incur brokerage commissions when
subsequently redeeming shares of those securities.

INVESTMENT LIMITATIONS

FUNDAMENTAL LIMITATIONS

Each current Portfolio has adopted the following restrictions, which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of the Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Portfolio. Each Portfolio of the Fund will
not:

(1)purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling futures contracts or options thereon or
from investing in securities or other instruments backed by physical
commodities);

(2)purchase or sell real estate, although it may purchase and sell securities
of companies that deal in real estate and may purchase and sell securities that
are secured by interests in real estate;

(3)lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limitation does
not apply to purchases of debt securities or repurchase agreements;

(4)except with respect to the International Fixed Income, Emerging Markets
Equity, Emerging Markets Debt, International Magnum and U.S. Real Estate
Portfolios (i) purchase more than 10% of any class of the outstanding voting
securities of any issuer and (ii) purchase securities of an issuer (except
obligations of the U.S. Government and its agencies and instrumentalities) if
as a result, with respect to 75% of its total assets, more than 5% of the
Portfolio's total assets, at market value, would be invested in the securities
of such issuer;

(5)issue senior securities and will not borrow, except from banks in an amount
not in excess of 33 1/3% of its total assets (including the amount borrowed)
less liabilities;

(6)underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the Securities
Act of 1933, as amended (the "1933 Act") in the disposition of restricted
securities; and

(7)acquire any securities of companies within one industry if, as a result of
such acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in

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<PAGE>

securities of companies within such industry; provided, that (i) there shall be
no limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or (in the case of the Money
Market Portfolio) instruments issued by U.S. Banks; (ii) utility companies will
be divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (iii)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (iv) ABSs will be
classified according to the underlying assets securing such securities; and
provided further that the U.S. Real Estate Portfolio may invest more than 25%
of its total assets in the U.S. real estate industry.

NON-FUNDAMENTAL LIMITATIONS

In addition, each current Portfolio of the Fund has adopted non-fundamental
investment limitations as stated below. Such limitations may be changed without
shareholder approval. Each current Portfolio of the Fund will not:

(1)sell short (other than "against the box") unless the Portfolio's obligation
is covered by unencumbered liquid assets in a segregated account and by
collateral held by the lending broker; provided that transactions in futures
contracts and options are not deemed to constitute selling securities short;

(2)invest for the purpose of exercising control over management of any company;

(3)invest its assets in securities of any investment company except as may be
permitted by the 1940 Act;

(4)invest more than an aggregate of 15% of the net assets of the Portfolio (10%
in the case of the Money Market Portfolio), determined at the time of
investment, in illiquid securities.

(5)make loans except (i) by purchasing bonds, debentures or similar obligations
(including repurchase agreements, subject to the limitations as described in
the prospectus) that are publicly distributed, and (ii) by lending its
portfolio securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the 1940 Act or
the Rules and Regulations or interpretations of the SEC thereunder;

(6)purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, but it may make margin
deposits in connection with transactions in options, futures, and options on
futures; and

(7) except in the case of the Emerging Markets Debt Portfolio, borrow money,
other than temporarily or for extraordinary or emergency purposes or purchase
additional securities when borrowings exceed 5% of total (gross) assets.

Each of the International Fixed Income, Emerging Markets Debt, Emerging Markets
Equity, International Magnum and U.S. Real Estate Portfolios will diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at
least 50% of the market value of the Portfolio's total assets is represented by
cash (including cash items and receivables), U.S. Government securities, and
other securities, with such other securities limited, in respect of any one
issuer, for purposes of this calculation to an amount not greater than 5% of
the value of the Portfolio's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities).

The percentage limitations contained in these restrictions apply at the time of
purchase of securities. Future Portfolios of the Fund may adopt different
limitations.

The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.

In addition, Section 817(h) of the Internal Revenue Code requires that the
assets of each Portfolio be adequately diversified so that insurance companies,
and not variable contract owners, are considered the owners for federal income
tax purposes of the assets held in the separate accounts. To meet the
diversification requirements of regulations issued under Section 817(h), each
Portfolio will meet the following test: no more than 55% of the assets will be
invested in any one investment; no more than 70% of the assets will be invested
in any two investments; no more than 80% of the assets will be invested in any
three investments; and no more than 90% will be invested in any four
investments. Each Portfolio must meet the above diversification requirements
within 30 days of the end of each calendar quarter.

DETERMINING MATURITIES OF CERTAIN INSTRUMENTS

Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (a) a
government obligation with a variable rate of interest readjusted no less
frequently than annually may be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate; (b) an instrument
with a variable rate of interest, the principal amount of which is scheduled on
the

15
<PAGE>

face of the instrument to be paid in one year or less, may be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate; (c) an instrument with a variable rate of interest that is
subject to a demand feature may be deemed to have a maturity equal to the
longer of the period remaining until the next readjustment of the interest rate
or the period remaining until the principal amount can be recovered through
demand; (d) an instrument with a floating rate of interest that is subject to a
demand feature may be deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand; and (e) a
repurchase agreement may be deemed to have a maturity equal to the period
remaining until the date on which the repurchase of the underlying securities
is scheduled to occur, or where no date is specified, but the agreement is
subject to demand, the notice period applicable to a demand for the repurchase
of the securities. In addition, for securities that are subject to prepayments,
the weighted average life of the security will be used in the weighted average
maturity calculation instead of the stated maturity date on the instrument. The
weighted average life of a security takes into consideration the impact of
prepayments on the length of time the security will be outstanding and
typically indicates an actual maturity that is shorter than the maturity date
stated on the face of the instrument.

MANAGEMENT OF THE FUND

OFFICERS AND DIRECTORS

The Fund's officers, under the supervision of the Board of Directors, manage
the day-to-day operations of the Fund. The Directors set broad policies for the
Fund and choose its officers. Directors and officers of the Fund are also
directors and officers of some or all of the other investment companies
managed, administered, advised or distributed by Morgan Stanley Asset
Management Inc., Miller Anderson & Sherrerd, LLP or their affiliates. Two
Directors and all of the officers of the Fund are directors, officers or
employees of the Fund's advisers, distributor or administrators. The other
Directors have no affiliation with the Fund's advisers, distributor or
administrators. A list of the Directors and officers of the Fund and a brief
statement of their present positions and principal occupations during the past
five years is set forth below:

<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ---------------------------- -------------------------------------------
<S> <C> <C>
Barton M. Biggs* Chairman and Director Chairman and Director of Morgan Stanley
1221 Avenue of the Asset Management Inc. and Morgan Stanley
Americas Asset Management Limited; Managing Director
New York, NY 10020 of Morgan Stanley & Co. Incorporated;
11/26/32 Director of Morgan Stanley Group Inc.;
Member of Investment Advisory Counsel of
the Thailand Fund; Director of the Rand
McNally Company; Member of the Yale
Development Board; Director and Officer of
various investment companies managed by
Morgan Stanley Asset Management Inc.
Warren J. Olsen* Director and President Principal of Morgan Stanley Asset
1221 Avenue of the Management Inc.; President and Director of
Americas various investment companies managed by
New York, NY 10020 Morgan Stanley Asset Management Inc.
12/21/56
John D. Barrett, II Director Chairman and Director of Barrett
521 Fifth Avenue Associates, Inc. (investment counseling);
New York, NY 10135 Director of the Ashforth Company (real
8/21/35 estate); Director of the Morgan Stanley
Fund, Inc. and the Morgan Stanley
Institutional Fund, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law
43 Arch Street firm); Director of the Morgan Stanley Fund,
Greenwich, CT 06830 Inc., and the Morgan Stanley Institutional
1/23/37 Fund, Inc.
Andrew McNally IV Director Chairman and Chief Executive Officer of
8255 North Central Rand McNally (publication); Director of
Park Avenue Allendale Insurance Co., Mercury Finance
Skokie, IL 60076 (consumer finance); Zenith Electronics,
11/11/39 Hubbell, Inc. (industrial electronics);
Director of the Morgan Stanley Fund, Inc.
and the Morgan Stanley Institutional Fund,
Inc.
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ---------------------------- -------------------------------------------
<S> <C> <C>
Samuel T. Reeves Director Chairman of the Board and CEO, Pinacle
8211 North Fresno Street Trading L.L.C. (investment firm); Director,
Fresno, CA 93720 Pacific Gas and Electric and PG&E
7/28/34 Enterprises (utilities); Director of the
Morgan Stanley Fund, Inc. and the Morgan
Stanley Institutional Fund, Inc.
Fergus Reid Director Chairman and Chief Executive Officer of
85 Charles Colman Blvd LumeLite Corporation (injection molding
Pawling, NY 12564 firm); Trustee and Director of Vista Mutual
8/12/32 Fund Group; Director of the Morgan Stanley
Fund, Inc. and the Morgan Stanley
Institutional Fund, Inc.
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin & Boehm,
2800 North Central P.C. and Rake, Copple, Downey & Black, P.C.
Avenue (law firms); Director of the Morgan Stanley
Phoenix, AZ 85004 Fund, Inc. and the Morgan Stanley
1/24/34 Institutional Fund, Inc.
Michael F. Klein* Vice President Principal of Morgan Stanley Asset
1221 Avenue of the Management Inc.; Officer of various
Americas investment companies managed by Morgan
New York, NY 10020 Stanley Asset Management Inc. Previously
12/12/58 practiced law with the New York law firm of
Rogers & Wells.
Douglas W. Kugler* Vice President Treasurer, MAS Funds; Head of Mutual Fund
One Tower Bridge Administration, Miller Anderson & Sherrerd,
West Conshohocken, PA LLP; Vice President of Morgan Stanley Asset
19428 Management Inc.; formerly Assistant Vice
11/19/61 President, Provident Financial Processing
Corporation.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co.
1221 Avenue of the Amer- Incorporated; General Counsel and Secretary
icas of Morgan Stanley Asset Management Inc.;
New York, NY 10020 Officer of various investment companies
6/10/60 managed by Morgan Stanley Asset Management
Inc.
Joseph P. Stadler* Vice President Vice President of Morgan Stanley Asset
1221 Avenue of the Amer- Management Inc.; Previously with Price
icas Waterhouse LLP (accounting); Officer of
New York, NY 10020 various investment companies managed by
6/7/54 Morgan Stanley Asset Management Inc.
Lorraine Truten* Vice President Vice President, MAS Funds; Head of Mutual
One Tower Bridge Fund Services, Miller Anderson & Sherrerd,
West Conshohocken, PA LLP; Principal of Morgan Stanley Asset
19428 Management Inc.; President, MAS Fund
5/11/61 Distribution, Inc.
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley Asset
1221 Avenue of the Amer- Management Inc.; Previously with Citicorp
icas (banking); Officer of various investment
New York, NY 10020 companies managed by Morgan Stanley Asset
3/26/56 Management Inc.
Karl O. Hartmann* Assistant Secretary Senior Vice President, Secretary and
73 Tremont Street General Counsel of Chase Global Funds
Boston, MA 02108-3913 Services Company; Previously with Leland,
3/7/55 O'Brien, Rubinstein Associates, Inc.
(investments).
James R. Rooney* Treasurer Vice President, Director of Fund
73 Tremont Street Administration and Compliance Services,
Boston, MA 02108-3913 Chase Global Funds Services Company;
10/21/58 Director of Fund Administration; Officer of
various investment companies managed by
Morgan Stanley Asset Management Inc.;
Previously with Scudder, Stevens & Clark,
Inc. (investments) and Ernst & Young LLP
(accounting).
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ---------------------------- -------------------------------------------
<S> <C> <C>
Joanna Haigney* Assistant Treasurer Manager of Fund Administration and
73 Tremont Street Compliance Services, Chase Global Funds
Boston, MA 02108-3913 Services Company; Officer of various
10/10/66 investment companies managed by Morgan
Stanley Asset Management Inc.; Previously
with Coopers & Lybrand LLP.
</TABLE>
- -------
* "Interested Person" within the meaning of the 1940 Act.

18
<PAGE>

REMUNERATION OF DIRECTORS AND OFFICERS

Members of the Board of Directors who are not "interested persons" within the
meaning of the 1940 Act ("Noninterested Directors") receive compensation from
the Fund and from other investment companies advised by MSAM or MAS (or by
affiliated companies) (the Fund and such other investment companies are
referred to as the "Fund Complex"). The open-end investment companies in the
Fund Complex pay each of the Noninterested Directors an annual aggregate
compensation of $65,000, plus out-of-pocket expenses, and pay each of the
Noninterested Directors on the Board Audit Committees additional annual
aggregate compensation of $10,000 for serving on such committees. The
aggregate of such compensation for each Noninterested Director is allocated
among the open-end investment companies in direct proportion to their
respective average annual net assets. Column (2) in the following table sets
forth the portions of the annual aggregate compensation paid by the Fund to
each Director for serving as a Director of the Fund for the period August 15,
1996 to December 31, 1996. Column (5) in the table sets forth aggregate
compensation paid by the Fund and Fund Complex to each Director during the
fiscal year ended December 31, 1996. Compensation amounts do not include
reimbursements of out-of-pocket expenses. Directors who are officers or
otherwise "interested persons" receive no renumeration for their services as
Directors.

COMPENSATION TABLE
<TABLE>
<CAPTION>
(5)
Total
(3) (4) Compensation
Pension or Estimated From Fund
(2) Retirement Annual and Fund
(1) Aggregate Benefits Accrued Benefits Complex
Name of Compensation as Part of Fund Upon Paid to
Director From Fund(a) Expenses Retirement Directors(b)
-------- ------------ ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Barton M. Biggs $ 0 $0 $0 $ 0
Warren J. Olsen 0 0 0 0
Thomas L. Bennett* 0 0 0 0
John D. Barrett, II(c) 34 0 0 68,777(d)
Gerard E. Jones(c) 34 0 0 75,877(d)(e)
Andrew McNally, IV 29 0 0 63,195(d)
Samuel T. Reeves 29 0 0 61,331(d)
Fergus Reid(c) 34 0 0 77,220(d)(e)
Frederick O. Robertshaw 29 0 0 58,777(d)
Frederick B. Whittemore* 0 0 0 0
</TABLE>
- -------

* Resigned as of March 14, 1997.

(a) The portion of the annual aggregate compensation that will be paid by the
Fund in 1997 is dependent upon the average annual net assets of the Fund
in 1997 in relation to the average annual net assets of all of the
investment companies in the Fund Complex.

(b) Amounts include $24,657, $24,657 and $28,450 of deferred compensation for
Messrs. McNally, Reeves and Reid, respectively.

(d) Number of other investment companies in Fund Complex from whom Director is
expected to receive compensation: Mr. Barrett--3; Mr. Jones--4; Mr.
McNally--3; Mr. Reeves--3; Mr. Reid--4; Mr. Robertshaw--3.

(e) Includes amounts paid for service as Director of a closed-end investment
company in the Fund Complex, in addition to amounts paid by the open-end
investment companies.

INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS

MSAM is a wholly owned subsidiary of Morgan Stanley Group Inc. ("MSGI"). The
principal offices of MSAM are at 1221 Avenue of the Americas, New York, New
York 10020. As compensation for advisory services to the Portfolios of the
Fund it manages ("MSAM Advised Portfolios"), MSAM received compensation of
$32,000 in the fiscal year ended December 31, 1996 and waived all such fees.
MAS is an indirectly owned subsidiary of MSGI. The principal offices of MAS
are located at One Tower Bridge Road, Conshohocken, Pennsylvania 19428. As
none of the Portfolios of the Fund managed by MAS ("MAS Advised Portfolios")
were operational in the fiscal year ended December 31, 1996, MAS did not
receive any compensation for advisory services from the Fund.

Pursuant to separate Administration agreements with the Fund, MSAM and MAS
provide administrative services to the MSAM Advised Portfolios and MAS Advised
Portfolios, respectively. For its services under the Administration agreement,
the Fund pays

19
<PAGE>

each Adviser a monthly fee which on an annual basis equals 0.25% of 1% of the
average daily net assets of each Portfolio managed by that Adviser. For the
fiscal year ended December 31, 1996, the Fund paid administrative fees of
$9,000 to MSAM. As no MAS Advised Portfolio was operational in the fiscal year
ended 1996, the Fund did not pay any administrative fees to MAS.

Under a Sub-Administration Agreement between each Adviser and the Chase
Manhattan Bank, N.A. ("Chase," successor in interest to the United States Trust
Company of New York), Chase Global Services Company ("Chase Global," a
subsidiary of Chase) provides certain administrative services to the Fund.
Chase Global's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.

DISTRIBUTION OF FUND SHARES

Under a Distribution Agreement with the Fund, Morgan Stanley & Co. Incorporated
("Morgan Stanley"), a wholly owned subsidiary of MSGI, serves as exclusive
distributor of the Portfolios and sells shares of each Portfolio on the terms
described in the Fund's Prospectus.

CODE OF ETHICS

The Board of Directors of the Fund has adopted a Code of Ethics under Rule 17j-
1 of the 1940 Act which incorporates the Code of Ethics of each Adviser
(together, the "Codes"). The Codes restrict the personal investing activities
of all employees of each Adviser and, as described below, impose additional,
more onerous, restrictions on the Fund's investment personnel.

The Codes require that all employees of each Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Adviser include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by that
Adviser. Furthermore, the Codes provide for trading "blackout periods" that
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security.

20
<PAGE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of April 7, 1997, the following persons were record or beneficial owners
of 5% or more of the outstanding shares of the following Portfolios:

<TABLE>
<CAPTION>
PERCENT OF
OUTSTANDING
PORTFOLIO NAME OF BENEFICIAL OWNER SHARES
- --------- ------------------------ -----------
<S> <C> <C>
Fixed Income Portfolio Morgan Stanley Group Inc. 97%
1585 Broadway
New York, NY 10036
High Yield Portfolio Morgan Stanley Group Inc. 98%
1585 Broadway
New York, NY 10036
Equity Growth Portfolio Morgan Stanley Group Inc. 90%
1585 Broadway
New York, NY 10036
American General Life 10%
Insurance Company*
P.O. Box 1591
Houston, TX 77251
Value Portfolio Morgan Stanley Group Inc. 93%
1585 Broadway
New York, NY 10036
American General Life 7%
Insurance Company*
P.O. Box 1591
Houston, TX 77251
Mid Cap Value Portfolio Morgan Stanley Group Inc. 90%
1585 Broadway
New York, NY 10036
American General Life 10%
Insurance Company*
P.O. Box 1591
Houston, TX 77251
U.S. Real Estate Portfolio Morgan Stanley Group Inc. 100%
1585 Broadway
New York, NY 10036
Global Equity Portfolio Morgan Stanley Group Inc. 97%
1585 Broadway
New York, NY 10036
International Magnum Portfolio Morgan Stanley Group Inc. 96%
1585 Broadway
New York, NY 10036
Emerging Markets Equity Portfolio Morgan Stanley Group Inc. 50%
1585 Broadway
New York, NY 10036
New York Life Insurance 48%
and Annuity Corporation*
300 Interpace Parkway
Parsippany, NJ 07054
Asian Equity Portfolio Morgan Stanley Group Inc. 100%
1585 Broadway
New York, NY 10036
</TABLE>
- -------

* Shares of the Portfolio are sold to insurance companies for their variable
annuity and variable life insurance contracts and for their variable life
insurance policies.

21
<PAGE>

As of April 7, 1997, MSGI a Delaware corporation located at 1585 Broadway, New
York, New York 10036, owned of record 97%, 98%, 90%, 93%, 90%, 100%, 97%, 96%,
50%, and 100% of the outstanding voting securities of the Fixed Income
Portfolio, the High Yield Portfolio, the Equity Growth Portfolio, the Value
Portfolio, the Mid Cap Value Portfolio, the U.S. Real Estate Portfolio, the
Global Equity Portfolio, the International Magnum Portfolio, the Emerging
Markets Equity Portfolio and the Asian Equity Portfolio, respectively.

MSGI has voting or its investment power with respect to the voting securities
in its ownership. Consequently, under the 1940 Act, MSGI may be deemed to be a
controlling person of the Fixed Income, High Yield, Equity Growth, Value, Mid
Cap Value, U.S. Real Estate, Global Equity, International Magnum, Emerging
Markets Equity and Asian Equity Portfolios.

To the best knowledge of the Fund, MSGI's ownership of such securities is for
investment only, not for the purposes of control, but may materially affect the
voting rights of other shareholders.

As of April 7, 1997, New York Life Insurance and Annuity Corporation ("NYLIAC")
a Delaware corporation located at 300 Interpace Parkway, Parsippany, New
Jersey, 07054 owned of record 48% of the outstanding voting securities of the
Emerging Markets Equity Portfolio. NYLIAC is a wholly owned subsidiary of New
York Life Insurance Company. As required by law, NYLIAC votes its securities in
accordance with instructions received from its variable annuity contract and
variable life insurance policy owners.

NET ASSET VALUE FOR THE MONEY MARKET PORTFOLIO

The Money Market Portfolio seeks to maintain a stable net asset value per share
of $1.00. The Portfolio uses the amortized cost method of valuing its
securities, which does not take into account unrealized gains or losses. The
use of amortized cost and the maintenance of the Portfolio's per share net
asset value at $1.00 is based on the Portfolio's election to operate under the
provisions of Rule 2a-7 under the 1940 Act. As a condition of operating under
that Rule, the Money Market Portfolio must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days or less, and invest only in securities which
are of "eligible quality" as determined in accordance with regulations of the
SEC.

The Rule also requires that the Directors, as a particular responsibility
within the overall duty of care owed to shareholders, establish procedures
reasonably designed, taking into account current market conditions and the
Portfolio's investment objectives, to stabilize the net asset value per share
as computed for the purposes of sales and redemptions at $1.00. These
procedures include periodic review, as the Directors deem appropriate and at
such intervals as are reasonable in light of current market conditions, of the
relationship between the amortized cost value per share and a net asset value
per share based upon available indications of market value. In such review,
investments for which market quotations are readily available are valued at the
most recent bid price or quoted yield available for such securities or for
securities of comparable maturity, quality and type as obtained from one or
more of the major market makers for the securities to be valued. Other
investments and assets are valued at fair value, as determined in good faith by
the Directors.

In the event of a deviation of over 1/2 of 1% between the Portfolio's net asset
value based upon available market quotations or market equivalents and $1.00
per share based on amortized cost, the Directors will promptly consider what
action, if any, should be taken. The Directors will also take such action as
they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise
from differences between the two. Such action may include redemption in kind,
selling instruments prior to maturity to realize capital gains or losses or to
shorten the average maturity, withholding dividends, paying distributions from
capital or capital gains or utilizing a net asset value per share as determined
by using available market quotations.

The Money Market Portfolio values its assets at amortized cost while also
monitoring the available market bid price, or yield equivalents. Since
dividends from net investment income will be declared daily and paid monthly,
the net asset value per share of the Portfolio will ordinarily remain at $1.00,
but the Portfolio's daily dividends will vary in amount. Net realized gains, if
any, will normally be declared and paid monthly.

PORTFOLIO TRANSACTIONS

In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices,
through responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity,

22
<PAGE>

financial condition, general execution and operational capabilities of
competing broker-dealers, and the brokerage and research services which they
provide to the Fund. Some securities considered for investment by a Portfolio
may also be appropriate for other clients served by the Adviser. If purchase
or sale of securities consistent with the investment policies of a Portfolio
and one or more of these other clients served by the Adviser is considered at
or about the same time, transactions in such securities will be allocated
among the Portfolio and clients in a manner deemed fair and reasonable by the
Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Fund's
Directors.

Subject to the overriding objective of obtaining the best execution of orders,
the Adviser may allocate a portion of the Fund's portfolio brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley under
procedures adopted by the Board of Directors. For the fiscal year ended
December 31, 1996, the Fund paid brokerage commissions of approximately $26,
to Morgan Stanley, an affiliated broker-dealer. For the fiscal year ended
December 31, 1996, commissions paid to Morgan Stanley represented
approximately 0.06% of the total amount of brokerage commissions paid in such
period and which were paid on transactions that represented 0.11%, of the
aggregate dollar amount of transactions that incurred commissions paid by the
Fund during such period.

Portfolio securities will not be purchased from, or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as
principals, except to the extent permitted by law.

PERFORMANCE INFORMATION

The Fund may from time to time quote various performance figures to illustrate
a Portfolios' past performance.

Performance quotations by investment companies are subject to rules adopted by
the SEC, which require the use of standardized performance quotations. In the
case of total return, non-standardized performance quotations may be furnished
by the Fund but must be accompanied by certain standardized performance
information computed as required by the SEC. Current yield and average annual
compounded total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC. An
explanation of those and other methods used by the Fund to compute or express
performance follows.

TOTAL RETURN

From time to time each Portfolio may advertise total return for the shares of
the Portfolio. Total return figures are based on historical earnings and are
not intended to indicate future performance. The average annual total return
is determined by finding the average annual compounded rates of return over 1-
, 5-, and 10-year periods (or over the life of the Portfolio) that would
equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes that all dividends and distributions are
reinvested when paid. The quotation assumes the amount was completely redeemed
at the end of each 1-, 5-, and 10-year period (or over the life of the
Portfolio) and the deduction of all applicable Fund expenses on an annual
basis.

These total returns are calculated according to the following formula:

P(1 + T)/n = ERV

where:

P=a hypothetical initial payment of $1,000

T=average annual total return

n=number of years

ERV= ending redeemable value of hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or
10-year periods (or fractional portion thereof).

Calculated using the formula above, the average annual total return for the
Emerging Markets Equity Portfolio for the period from its inception through
December 31, 1996 was (2.03%).

The average annual total return for the Global Equity, International Magnum,
Mid Cap Value, Equity Growth, Value, Fixed Income, and High Yield Portfolios
for the period from their inception to the date of the unaudited financial
statements included herein is 1.80%, 3.00%, 1.30%, 3.30%, 1.30%, (0.10%), and
(0.10%), respectively.

CALCULATION OF YIELD FOR NON-MONEY MARKET PORTFOLIOS

From time to time certain of the Fund's Portfolios may advertise yield.

Current yield reflects the income per share earned by a Portfolio's
investments.

Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for
the period include any fees charged to all shareholders during the base
period.

23
<PAGE>

Yield is obtained using the following formula:

Yield = 2[(a--b + 1)/6/--1]
-----
cd
where:

a= dividends and interest earned during the period

b= expenses accrued for the period (net of reimbursements)

c= the average daily number of shares outstanding during the period that were
entitled to receive income distributions

d= the maximum offering price per share on the last day of the period.

CALCULATION OF YIELD FOR THE MONEY MARKET PORTFOLIO

The current yield of the Money Market Portfolio is calculated daily on a base
period return for a hypothetical account having a beginning balance of one
share for a particular period of time (generally 7 days). The return is
determined by dividing the net change (exclusive of any capital changes in such
account) by its average net asset value for the period, and then multiplying it
by 365/7 to determine the annualized current yield. The calculation of net
change reflects the value of additional shares purchased with the dividends by
the Portfolio, including dividends on both the original share and on such
additional shares. An effective yield, which reflects the effects of
compounding and represents an annualization of the current yield with all
dividends reinvested, may also be calculated for the Portfolio by dividing the
base period return by 7, adding 1 to the quotient, raising the sum to the 365th
power, and subtracting 1 from the result.

The yield of a Portfolio will fluctuate. The annualization of a week's dividend
is not a representation by the Portfolio as to what an investment in the
Portfolio will actually yield in the future. Actual yields will depend on such
variables as investment quality, average maturity, the type of instruments the
Portfolio invests in, changes in interest rates on instruments, changes in the
expenses of the Fund and other factors. Yields are one basis investors may use
to analyze the Portfolios of the Fund, and other investment vehicles; however,
yields of other investment vehicles may not be comparable because of the
factors set forth in the preceding sentence, differences in the time periods
compared, and differences in the methods used in valuing portfolio instruments,
computing net asset value and calculating yield.

COMPARISONS

To help investors better evaluate how an investment in a Portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages. The
following publications may be used:

(a)CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.

(b)Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global
Investor, Investor's Daily, Lipper Analytical Services, Inc., Morningstar,
Inc., New York Times, Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service--publications that rate fund performance over
specified time periods.

(c)Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg L.P.

(d)Lipper Analytical Services--Mutual Fund Performance Analysis and Lipper--
Fixed Income Fund Performance Analysis--measures total return and average
current yield for the mutual fund industry. Ranks individual mutual fund
performance over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.

(e)Mutual Fund Source Book, published by Morningstar, Inc.--analyzes price,
yield, risk and total return for equity funds.

(f)Savings and Loan Historical Interest Rates--as published in the U.S. Savings
& Loan League Fact Book.

(g)Stocks, Bonds, Bills and Inflation, published by Hobson Associates--
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. Treasury bills and inflation.

The following indices and averages may also be used:

(a)Composite Indices--70% Standard & Poor's 500 Stock Index and 30% NASDAQ
Industrial Index; 35% Standard & Poor's 500 Stock Index and 65% Salomon
Brothers High Grade Bond Index; and 65% Standard & Poor's 500 Stock Index and
35% Salomon Brothers High Grade Bond Index.

(b)Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics--a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.

(c)Donoghue's Money Fund Average--an average of all major money market fund
yields, published weekly for 7 and 30-day yields.

24
<PAGE>

(d)Dow Jones Composite Average or its component averages--an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks and 20 transportation stocks. Comparisons
of performance assume reinvestment of dividends.

(e)First Boston High Yield Index--generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.

(f)First Boston Upper/Middle Tier High Yield Index--an unmanaged index of bonds
rated B to BBB.

(g)Goldman Sachs 100 Convertible Bond Index--currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.

(h)IFC Global Total Return Composite Index--an unmanaged index of common stocks
and includes 18 developing countries in Latin America, East and South Asia,
Europe, the Middle East and Africa (net of dividends reinvested).

(i)Indata Balanced-Median Index--an unmanaged index and includes an asset
allocation of 7% cash, 39% bonds and 54% equity based on $37.8 billion in
assets among 538 portfolios for the year ended December 31, 1995 (assumes
dividends reinvested).

(j)Indata Equity-Median Stock Index--an unmanaged index which includes an
average asset allocation of 5% cash and 95% equity based on $30.6 billion in
assets among 562 portfolios for the year ended December 31, 1995.

(k)J.P. Morgan Emerging Markets Bond Index--a market-weighted index composed of
all Brady bonds outstanding and includes Argentina, Brazil, Bulgaria, Mexico,
Nigeria, the Philippines, Poland and Venezuela.

(l)JP Morgan Emerging Markets Bond Index Plus--The Emerging Markets Bond Index
Plus (EMBI+) reflects total returns for external debt instruments which have
been traded in the emerging markets. Brady bonds are included among such
instruments, as well as Eurobonds, loans, and US dollar denominated local
market instruments. Countries included in the index are Argentina, Brazil,
Bulgaria, Ecuador, Mexico, Morocco, Nigeria, Panama, Peru, the Philippines,
Poland, Russia, South Africa, and Venezuela. The EMBI+ is an expansion of the
JP Morgan EMBI, which only tracks Brady bonds.

(m)J.P. Morgan Traded Global Bond Index--an unmanaged index of securities which
includes Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
The Netherlands, Spain, Sweden, United Kingdom and the United States.

(n)Lehman Brothers Aggregate Bond Index--an unmanaged index made up of the
Government/Corporate Index, the Mortgage Backed Securities Index and the Asset-
Backed Securities Index.

(o)Lehman Brothers LONG-TERM Treasury Bond--composed of all bonds covered by
the Lehman Brothers Treasury Bond Index with maturities of 10 years or greater.

(p)The Lehman 7 Year Municipal Bond Index--an unmanaged index which consists of
investment grade bonds with maturities between 6-8 years rated Baa or better.
All bonds have been taken from deals done within the last 5 years, with assets
of $50 million or greater.

(q)Lipper Capital Appreciation Index--a composite of mutual funds managed for
maximum capital gains.

(r)Morgan Stanley Capital International Combined Far East Free ex-Japan Index--
a market-capitalization weighted index comprising stocks in Hong Kong,
Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Korea
is included in the MSCI Combined Far East Free ex-Japan Index at 20% of its
market capitalization.

(s)Morgan Stanley Capital International EAFE Index--an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.

(t)Morgan Stanley Capital International Emerging Markets Global Latin American
Index--an unmanaged, arithmetic, market value-weighted average of the
performance of over 196 securities on the stock exchanges of Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela (assumes reinvestment of
dividends).

(u)Morgan Stanley Capital International Europe Index-- an unmanaged index of
common stocks and includes 14 countries throughout Europe.

(v)Morgan Stanley Capital International Japan Index--an unmanaged index of
common stocks.

(w)Morgan Stanley Capital International Latin America Index--a broad-based
market capitalization-weighted composite index covering at least 60% of markets
in Mexico, Argentina, Brazil, Chile, Colombia, Peru and Venezuela (assumes
dividends reinvested).

(x)Morgan Stanley Capital International World Index--an arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on
the stock exchanges of countries in Europe, Australia, the Far East, Canada and
the United States.

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(y)NASDAQ Composite Index--an unmanaged index of common stocks.

(z)NASDAQ Industrial Index--a capitalization-weighted index composed of more
than 3,000 domestic stocks taken from the following industry sectors:
agriculture, mining, construction, manufacturing, electronic components,
services and public administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.

(aa)National Association of Real Estate Investment Trusts ("NAREIT") Index--an
unmanaged market-weighted index of tax qualified REITs (excluding healthcare
REITs) listed on the New York Stock Exchange, American Stock Exchange and the
NASDAQ National Market System including dividends.

(bb)The New York Stock Exchange composite or component indices--unmanaged
indices of all industrial, utilities, transportation and finance company stocks
listed on the New York Stock Exchange.

(cc)The Russell 1000 Growth--contains the securities of the Russell 1000 which
possess an above-average growth orientation. These securities tend to exhibit
higher price-to-book and price-earnings ratios, lower dividend yields and
higher forecasted growth.

(dd)Russell 2500 Index--comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately $1.3
billion.

(ee)Salomon Brothers GNMA Index--includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.

(ff)Salomon Brothers High Grade Corporate Bond Index--consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-
weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.

(gg)Salomon Brothers Broad Investment Grade Bond Index--a market-weighted index
that contains approximately 4700 individually priced investment grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-
through securities.

(hh)Standard & Poor's 500 Stock Index or its component indices--unmanaged index
composed of 400 industrial stocks, 40 financial stocks, 40 utilities company
stocks and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.

(ii)Standard & Poor's MidCap 400 Index--a market-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.

(jj)Standard & Poor's Small Cap 600 Index--a capitalization-weighted index of
600 domestic stocks having market capitalizations which reside within the 50th
and the 83rd percentiles of the market capitalization of the entire stock
market, chosen for certain liquidity characteristics and for industry
representation.

(kk)Wilshire 5000 Equity Index or its component indices--represents the return
on the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.

In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the composition of investments in the Fund's Portfolios, that
the averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its futures. In addition, there can be no assurance that the
Fund will continue this performance as compared to such other averages.

GENERAL INFORMATION

DESCRIPTION OF SHARES AND VOTING RIGHTS

The Fund's Articles of Incorporation permit the Directors to issue nine billion
shares of common stock, par value $.001 per share, from an unlimited number of
classes ("Portfolios") of shares. Currently the Fund consists of shares of
seventeen Portfolios.

The shares of each Portfolio of the Fund are fully paid and nonassessable, and
have no preference as to conversion, exchange, dividends, retirement or other
features. The shares of each Portfolio of the Fund have no pre-emptive rights.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. A shareholder is entitled
to one vote for each full share held (and a fractional vote for each fractional
share held), then standing in his name on the books of the Fund.

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at

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the times that will avoid both income (including taxable gains) taxes on it and
the imposition of the federal excise tax on income and capital gains (see
discussion under "Taxes" in this Statement of Additional Information). However,
the Fund may also choose to retain net realized capital gains and pay taxes on
such gains. The amounts of any income dividends or capital gains distributions
cannot be predicted. Any dividend or distribution paid shortly after the
purchase of shares of a Portfolio by an investor may have the effect of
reducing the per share net asset value of that Portfolio by the per share
amount of the dividend or distribution.

As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and capital gains distributions for a class of shares
are automatically received in additional shares of such class of that Portfolio
of the Fund at the net asset value as of the business day following the record
date. This automatic reinvestment of dividends and distributions will remain in
effect until the Fund is notified by the shareholder in writing at least three
days prior to the record date that either the Income Option (income dividends
in cash and capital gains distributions in additional shares at net asset
value) or the Cash Option (both income dividends and capital gains
distributions in cash) has been elected.

CUSTODY ARRANGEMENTS

The Chase Manhattan Bank ("Chase") is the Fund's custodian for domestic and
certain foreign assets. Chase is not affiliated with Morgan Stanley. Morgan
Stanley Trust Company, Brooklyn, New York, acts as the Fund's custodian for
foreign assets held outside the United States and employs sub-custodians who
have been or will be approved by the Directors of the Fund in accordance with
Rule 17f-5 adopted by the SEC under the 1940 Act. Morgan Stanley Trust Company
is an affiliate of Morgan Stanley & Co. Incorporated. In the selection of
foreign sub-custodians, the Directors consider a number of factors, including,
but not limited to, the reliability and financial stability of the institution,
the ability of the institution to provide efficiently the custodial services
required for the Fund, and the reputation of the institution in the particular
country or region.

DESCRIPTION OF CERTAIN SECURITIES AND RATINGS

DESCRIPTION OF U.S. GOVERNMENT SECURITIES

The term "U.S. Government securities" refers to a variety of securities which
are issued or guaranteed by the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government.

U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
against the United States itself in the event the agency or instrumentality
does not meet its commitment. Agencies which are backed by the full faith and
credit of the United States include the Export-Import Bank, Farmers Home
Administration, Federal Financing Bank, and others. Certain agencies and
instrumentalities, such as the Government National Mortgage Association, are,
in effect, backed by the full faith and credit of the United States through
provisions in their charters that they may make "indefinite and unlimited"
drawings on the Treasury, if needed to service debt. Debt from certain other
agencies and instrumentalities, including the Federal Home Loan Bank and
Federal National Mortgage Association, are not guaranteed by the United States,
but those institutions are protected by the discretionary authority for the
U.S. Treasury to purchase certain amounts of their securities to assist the
institution in meeting its debt obligations. However, the U.S. Treasury has no
lawful obligation to assume the financial liabilities of these agencies or
others. Finally, other agencies and instrumentalities, such as the Farm Credit
System and the Federal Home Loan Mortgage Corporation, are federally chartered
institutions under Government supervision, but their debt securities are backed
only by the creditworthiness of those institutions, not the U.S. Government.

Some of the U.S. Government agencies that issue or guarantee securities include
the Export-Import Bank of the United States, Farmers Home Administration,
Federal Housing Administration, Maritime Administration, Small Business
Administration, and the Tennessee Valley Authority.

An instrumentality of the U.S. Government is a Government agency organized
under Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Immediate Credit
Banks, and the Federal National Mortgage Association.

DESCRIPTION OF MUNICIPAL BONDS

Municipal Bonds generally include debt obligations issued by states and their
political subdivisions, and duly constituted authorities and corporations, to
obtain funds to construct, repair or improve various public facilities such as
airports, bridges, highways, hospitals, housing, schools, streets and water and
sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions and facilities.

The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" or "special tax" bonds.

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General obligation bonds are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue or
special tax bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other tax, but not from general tax revenues.

Industrial revenue bonds (i.e., private activity bonds) in most cases are
revenue bonds and generally do not have the pledge of the credit of the issuer.
The payment of the principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. Short-term
municipal obligations issued by states, cities, municipalities or municipal
agencies include Tax Anticipation Notes, Revenue Anticipation Notes, Bond
Anticipation Notes, Construction Loan Notes and Short-Term Discount Notes.
Project Notes are instruments guaranteed by the Department of Housing and Urban
Development but issued by a state or local housing agency. While the issuing
agency has the primary obligation on such Project notes, they are also secured
by the full faith and credit of the United States.

Note obligations with demand or put options may have a stated maturity in
excess of one year, but allow any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the notes plus accrued interest upon a specific number
of days' notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals.

The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and S&P represent their opinions of the quality
of the Municipal Bonds. It should be emphasized that such ratings are general
and are not absolute standards of quality. Consequently, Municipal Bonds with
the same maturity, coupon and rating may have different yields, while Municipal
Bonds of the same maturity and coupon, but with different ratings, may have the
same yield.

Municipal Bonds are sometimes purchased on a "when issued" basis meaning the
buyer has committed to purchasing certain specified securities at an agreed-
upon price when they are issued. The period between commitment date and
issuance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.

From time to time proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal Bonds.
Similar proposals may be introduced in the future.

Similarly, from time to time proposals have been introduced before State and
local legislatures to restrict or eliminate the State and local income tax
exemption (to the extent such an exemption applies, which may not apply in all
cases) for interest on Municipal Bonds. Similar proposals may be introduced in
the future.

DESCRIPTION OF MORTGAGE-BACKED SECURITIES

"Mortgage-Backed Securities" are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage
loans on real property. Mortgage-backed securities include collateralized
mortgage obligations and mortgage pass-through securities issued or guaranteed
by agencies or instrumentalities of the U.S. government or by private sector
entities.

COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. government or by private originators
or investors in mortgage loans. They are backed by Mortgage Pass-Through
Securities (discussed below) or whole loans (all such assets, the "Mortgage
Assets") and are evidenced by a series of bonds or certificates issued in
multiple classes or "tranches." The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways.

CMOs may be issued by agencies or instrumentalities of the U.S. government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity
having the credit status of a governmental agency or instrumentality are
generally structured with one or more types of credit enhancement as described
below. An issuer of CMOs may elect to be treated, for federal income tax
purposes, as a Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer
of CMOs issued after 1991 must elect to be treated as a REMIC or it will be
taxable as a corporation under rules regarding taxable mortgage pools.

In a CMO, a series of bonds or certificates are issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. Principal prepayments on the underlying
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Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final scheduled distribution dates. Interest is paid
or accrues on CMOs on a monthly, quarterly or semi-annual basis. The principal
of and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. The general goal in allocating cash flows on
Mortgage Assets to the various classes of a CMO is to create certain tranches
on which the expected cash flows have a higher degree of predictability than
the underlying Mortgage Assets. As a general matter, the more predictable the
cash flow is on a particular CMO tranche, the lower the anticipated yield will
be on that tranche at the time of issuance relative to prevailing market yields
on Assets. As part of the process of creating more predictable cash flows on
certain tranches of a CMO, one or more tranches generally must be created that
absorb most of the changes in the cash flows on the underlying Mortgage Assets.
The yields on these tranches are generally higher than prevailing market yields
on Mortgage-Backed Securities with similar average lives. Because of the
uncertainty of the cash flows on these tranches, the market prices of and
yields on these tranches are more volatile.

Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience
on the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.

MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities issued or
guaranteed by private sector originators of or investors in mortgage loans and
are structured similarly to governmental pass-through securities. Because
private pass-throughs typically lack a guarantee by an entity having the credit
status of a governmental agency or instrumentality, they are generally
structured with one or more types of credit enhancement described below. FNMA
and FHLMC obligations are not backed by the full faith and credit of the U.S.
government as GNMA certificates are, but FNMA and FHLMC securities are
supported by the instrumentalities' right to borrow from the United States
Treasury. Each of GNMA, FNMA and FHLMC guarantees timely distributions of
interest to certificate holders. Each of GNMA and FNMA also guarantees timely
distributions of scheduled principal. FHLMC has in the past guaranteed only the
ultimate collection of principal of the underlying mortgage loan; however,
FHLMC has now issued Mortgage-Backed Securities (FHLMC Gold PCs) which also
guarantee timely payment of monthly principal reductions. REFCORP obligations
are backed, as to principal payments, by zero coupon U.S. Treasury bonds, and
as to interest payment, ultimately by the U.S. Treasury. Obligations issued by
such U.S. governmental agencies and instrumentalities are described more fully
below.

GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate instrumentality
of the United States within the Department of Housing and Urban Development.
The National Housing Act of 1934, as amended (the "Housing Act"), authorizes
Ginnie Mae to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans insured
by the Federal Housing Administration under the Housing Act, or Title V of the
Housing Act of 1949 ("FHA Loans"), or guaranteed by the Department of Veterans
Affairs under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act provides
that the full faith and credit of the United States government is pledged to
the payment of all amounts that may be required to be paid under any guaranty.
In order to meet its obligations under such guaranty, Ginnie Mae is authorized
to borrow from the United States Treasury with no limitations as to amount.

Each Ginnie Mae Certificate will represent a pro rata interest in one or more
of the following types of mortgage loans: (i) fixed rate level payment mortgage
loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate
growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used
to reduce the borrower's monthly payments during the early years of the
mortgage loans ("buydown" mortgage loans); (viii) mortgage loans that provide
for adjustments in payments based on periodical changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgage-backed serial
notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as
otherwise specified above, will be fully-amortizing loans secured by first
liens on one- to four-family housing units.

FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of Fannie Mae are not backed
by the full faith and credit of the United States government.

Each Fannie Mae Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans;

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(ii) fixed rate growing equity mortgage loans; (iii) fixed rate graduated
payment mortgage loans; (iv) variable rate California mortgage loans; (v) other
adjustable rate mortgage loans; and (vi) fixed rate and adjustable mortgage
loans secured by multi-family projects.

FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. government.

Freddie Mac Certificates represent a pro rata interest in a group of mortgage
loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.

CREDIT ENHANCEMENT. Mortgage-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties. To lessen
the effect of failure by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection generally refers to the provision of advances, typically
by the entity administering the pool of assets, to ensure that the pass-through
of payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties
(referred to herein as "third party credit support"), through various means of
structuring the transaction or through a combination of such approaches.

The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.

Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with defaults on the underlying assets being
borne first by the holders of the most subordinated class), creation of
"reserve funds" (where cash or investments, sometimes funded from a portion of
the payments on the underlying assets, are held in reserve against future
losses) and "over- collateralization" (where the scheduled payments on, or the
principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each security is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such a security.

FOREIGN INVESTMENTS

The Asian Equity, International Fixed Income, Global Equity Emerging Markets
Debt, International Magnum and Emerging Markets Equity Portfolios will invest,
and the High Yield, International Fixed Income, Balanced, Equity Growth and
Multi-Asset-Class Portfolios may invest, in securities of foreign issuers.
Investors should recognize that investing in such foreign securities involves
certain special considerations which are not typically associated with
investing in U.S. issuers. For a description of the effect on the Portfolios of
currency exchange rate fluctuation, see "Investment Objectives and Policies--
Forward Foreign Currency Exchange Contracts" above. As foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards and may have policies that are not comparable to those of domestic
issuers, there may be less information available about certain foreign
companies than about domestic issuers. Securities of some foreign issuers are
generally less liquid and more volatile than securities of comparable domestic
issuers. There is generally less government supervision and regulation of stock
exchanges, brokers and listed issuers than in the U.S. In addition, with
respect to certain foreign countries, there is the possibility of expropriation
or confiscatory taxation, political or social instability, or diplomatic
developments which could affect U.S. investments in those countries.

Although the Portfolios will endeavor to achieve the most favorable execution
costs in their portfolio transactions, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions on U.S. exchanges.

Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Except in the

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case of the Asian Equity, International Magnum, Emerging Markets Equity, Multi-
Asset-Class, International Fixed Income, Emerging Markets Debt and Global
Equity Portfolios, it is not expected that a Portfolio or its shareholders
would be able to claim a credit for U.S. tax purposes with respect to any such
foreign taxes. However, these foreign withholding taxes may not have a
significant impact on such Portfolios, because each Portfolio's investment
objective is to seek long-term capital appreciation, which generally (but not
always) is subject to tax and any dividend or interest income should be
considered incidental.

DESCRIPTION OF COMMERCIAL PAPER--RATINGS

DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-1--best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2--high quality with margins of protection ample
although not so large as in the preceding group; MIG-3--favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.

DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1")--Judged
to be of the best quality. Their short-term debt obligations carry the smallest
degree of investment risk.

EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: S-1+ --very strong capacity
to pay principal and interest; SP-2--strong capacity to pay principal and
interest.

DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ --this designation
indicates the degree of safety regarding timely payment is overwhelming. A-1--
this designation indicates the degree of safety regarding timely payment is
very strong.

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:

AAA -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

AA -- Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as for Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.

A -- Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

BAA -- Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

BA -- Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.

B -- Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.

CAA -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.

CA -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.

C -- Bonds rated C are the lowest-rated class of bonds and issued so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.

Moody's applies numerical modifiers 1, 2 and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:

AAA -- Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.

31
<PAGE>

AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.

A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.

BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments.

B -- Debt rated B has greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.

CCC -- Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal.

CC -- Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.

C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed but debt
service payments are continued.

CI -- The rating CI is reserved for income bonds on which no interest is being
paid.

D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating will also be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.

FINANCIAL STATEMENTS

The audited financial statements of the Emerging Markets Equity Portfolio for
the fiscal year ended December 31, 1996 and the unaudited financial statements
of the Fixed Income, High Yield, Growth (currently known as Equity Growth),
Value, Mid Cap Value, Global Equity and International Magnum Portfolios for the
period ending March 31, 1997 are set forth in the following pages.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of Morgan Stanley Universal Funds,
Inc.

In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Emerging Markets Equity Portfolio (constituting Morgan Stanley Universal Funds,
Inc., hereafter referred to as the "Fund") at December 31, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for the period October 1, 1996 (commencement of operations) through
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit, which included confirmation of
securities at December 31, 1996 by correspondence with the custodians and
brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provides a reasonable basis for
the opinion expressed above.

PRICE WATERHOUSE LLP

1177 Avenue of the Americas

New York, New York 10036

January 28, 1997

32
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

STATEMENT OF NET ASSETS

DECEMBER 31, 1996

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

COMMON STOCKS (82.0%)
ARGENTINA (2.0%)
1,700 Telecom Argentina ADR.................................... $ 69
4,100 Telefonica de Argentina ADR.............................. 106
2,360 YPF ADR.................................................. 60
--------
235
--------
BRAZIL (6.6%)
180 Cia Energetica de Minas Gerais ADR....................... 6
666,000 Eletrobras............................................... 238
2,190 Eletrobras ADR........................................... 39
32,000 Light.................................................... 11
1,410 Multicanal Participaccoes ADR............................ 18
2,478,000 Telebras................................................. 178
3,445 Telebras ADR............................................. 264
(a)120,000 Telecom de Sao Paulo..................................... 26
--------
780
--------
CHILE (0.4%)
1,080 Cia Cervecerias Unidas ADR............................... 17
1,150 Santa Isabel ADR......................................... 26
--------
43
--------
CHINA (0.9%)
(a)130,000 Guangshen Railway Co. Ltd.,
Class H................................................. 56
96,000 Yizheng Chemical Fibre Co. Ltd., Class H................. 23
64,000 Zhenhai Refining & Chemical Co. Ltd., Class H............ 24
--------
103
--------
COLOMBIA (0.3%)
86,000 Banco de Colombia........................................ 35
--------
EGYPT (0.9%)
175 Commercial International Bank............................ 26
1,200 Eastern Tobacco.......................................... 18
1,000 Helwan Portland Cement................................... 18
650 North Cairo Mills Co. ................................... 26
1,000 Torah Portland Cement.................................... 20
--------
108
--------
HONG KONG (9.1%)
(a)7,000 Asia Satellite Telecommunications Holdings Ltd. ......... 16
12,000 Cheung Kong Holdings Ltd. ............................... 107
(a)15,000 Cheung Kong Infrastructure Holdings...................... 40
(a)43,000 China Resources Beijing Land............................. 27
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
----------- --------
<C> <S> <C>

62,000 China Resources Enterprise Ltd. ........................ $ 139
21,000 Citic Pacific Ltd. ..................................... 122
30,000 Cosco Pacific Ltd. ..................................... 35
1,000 Hang Seng Bank Ltd. .................................... 12
6,000 Henderson Land Development Co. Ltd. .................... 60
14,000 Hong Kong Ferry Holdings................................ 27
15,600 Hong Kong Telecommunications Ltd. ...................... 25
17,000 Hutchison Whampoa Ltd. ................................. 134
18,000 New World Development Co. Ltd........................... 122
(a)9,000 Shanghai Industrial Holdings Ltd. ...................... 33
7,000 Sun Hung Kai Properties Ltd. ........................... 86
6,000 Swire Pacific Ltd., Class A............................. 57
(a)118,000 Tingyi (Cayman Islands) Holdings Co. ................... 31
--------
1,073
--------
HUNGARY (0.5%)
400 Graboplast Rt........................................... 13
950 MOL Magyar Olaj-es Gazipari Rt GDR...................... 12
450 Pannonplast Rt.......................................... 17
(a)1,200 Tisza Vegyi Kombinat Rt GDR............................. 14
--------
56
--------
INDIA (10.0%)
2,500 Century Textiles and Industries Ltd. GDR................ 127
(a)60,000 Crompton Greaves Ltd. GDR............................... 239
25,000 Indian Petrochemicals Corp. Ltd. GDR.................... 291
(a,g)55,500 Morgan Stanley India Investment Fund, Inc. ............. 527
--------
1,184
--------
INDONESIA (6.3%)
37,000 Astra International (Foreign)........................... 102
(d)48,000 Bank International Indonesia (Foreign).................. 47
(d)37,000 Bimantara Citra (Foreign)............................... 49
(a,d)75,000 Daya Guna Samudera (Foreign)............................ 87
(d)18,000 Gudang Garam (Foreign).................................. 78
(d)21,000 Hanjaya Mandala Sampoerna (Foreign)..................... 112
(d)64,000 Indah Kiat Pulp & Paper Corp. (Foreign)................. 47
(d)129,000 Telekomunikasi Indonesia (Foreign)...................... 223
--------
745
--------
ISRAEL (3.6%)
5,150 Blue Square-Israel Ltd. ADR............................. 73
1,940 Elbit Ltd. ............................................. 14
6,466 Elbit Medical Imaging Ltd. ............................. 27
6,466 Elbit Systems Ltd. ..................................... 50
800 First International Bank of Israel Ltd., Class 5........ 92
</TABLE>

F-1
<PAGE>

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

ISRAEL--(CONTINUED)
940 Koor Industries Ltd. .................................... $ 82
3,750 Supersol Ltd. ........................................... 92
--------
430
--------
KOREA (4.3%)
(a)2,800 Cho Hung Bank Co. Ltd. GDR............................... 21
(a)2,600 Kookmin Bank GDR......................................... 47
2,600 Korea Electric Power Corp. ADR........................... 54
8,333 Korea Mobile Telecommunications ADR...................... 107
1,570 Pohang Iron & Steel Co. Ltd. ADR......................... 32
(a,e)5,800 Samsung Electronics GDR.................................. 240
--------
501
--------
MEXICO (9.1%)
4,800 Apasco................................................... 33
(a)50,920 Banacci, Class B......................................... 107
44,030 Cemex CPO................................................ 157
1,300 Cemex, Class B........................................... 5
(a)30,400 Cifra, Class B........................................... 37
(a)1,740 Desc ADR................................................. 38
(a)945 Empresas ICA Sociedad Controladora ADR................... 14
61,350 FEMSA, Class B........................................... 210
(a)4,260 Gruma, Class B........................................... 26
(a)810 Gruma GDR................................................ 20
(e)200 Grupo Carso ADR.......................................... 2
13,560 Grupo Carso, Class A1.................................... 71
(a)308,555 Grupo Financiero Bancomer, Class B....................... 123
14,000 Grupo Industrial Maseca, Class B......................... 18
(a)7,255 Grupo Televisa GDR....................................... 186
460 Panamerican Beverages, Inc.,
Class A................................................. 22
--------
1,069
--------
PAKISTAN (2.5%)
84,000 Fauji Fertilizer Co. Ltd. ............................... 141
(a)246,700 Pakistan Telecommunications.............................. 155
--------
296
--------
PERU (0.3%)
1,645 Telefonica del Peru ADR.................................. 31
--------
PHILIPPINES (1.8%)
25,000 Ayala Land, Inc., Class B................................ 29
(a)42,000 DMCI Holdings, Inc. ..................................... 27
185,200 JG Summit Holdings, Inc., Class B........................ 52
7,000 Manila Electric Co., Class B............................. 57
960 Philippine Long Distance Telephone Co. .................. 53
--------
218
--------
POLAND (1.5%)
1,000 Bank Rozwoju Eksportu S.A. .............................. 30
300 Bank Slaski S.A. ........................................ 31
(a)1,000 Debica S.A. ............................................. 22
4,200 Elektrim S.A. ........................................... 38
(a)2,100 Exbud S.A. .............................................. 20
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
--------- --------
<C> <S> <C>

3,000 Wielkopolski Bank Kredytowy S.A. ......................... $ 20
350 Zywiec.................................................... 16
--------
177
--------
RUSSIA (7.1%)
(a)9,000 Gazprom ADR............................................... 155
4,500 LUKoil Holding ADR........................................ 206
6,500 Mosenergo ADR............................................. 198
(a)45,000 Rostelecom................................................ 109
(a)3,500 Tatneft ADR............................................... 164
--------
832
--------
SOUTH AFRICA (3.4%)
27,500 Gencor Ltd. .............................................. 100
56,500 Polfin Ltd. .............................................. 94
17,100 Sasol Ltd. ............................................... 203
--------
397
--------
TAIWAN (2.7%)
16,000 Cathay Life Insurance Co. Ltd. ........................... 102
54,000 China Steel Corp. ........................................ 51
13,000 Formosa Plastics Corp. ................................... 32
(a)30,000 Pacific Construction...................................... 26
(a)25,000 Siliconware Precision Industries Co. ..................... 53
41,000 Yang Ming Marine Transport................................ 54
--------
318
--------
THAILAND (4.4%)
(d)9,800 Advanced Info Service PCL (Foreign)....................... 92
11,800 Bangkok Bank PCL (Foreign)................................ 114
17,300 Finance One PCL (Foreign)................................. 35
(d)9,600 Shinawatra Computer Co. plc (Foreign)..................... 116
13,600 Siam Commercial Bank PCL (Foreign)........................ 99
11,100 Thai Farmers Bank PCL (Foreign)........................... 69
--------
525
--------
TURKEY (3.6%)
892,000 Bossa..................................................... 75
1,160,000 Eregli Demir Celik........................................ 139
2,562,000 Turkiye Garanti Bankasi A.S. ............................. 116
3,785,000 Yapi ve Kredi Bankasi A.S. ............................... 94
--------
424
--------
VENEZUELA (0.2%)
910 Cia Anonima Nacional Telefonos de Venezuela ADR........... 26
--------
ZIMBABWE (0.5%)
8,300 Delta Corp. .............................................. 29
18,900 Meikles Africa Ltd. ...................................... 28
--------
57
--------
TOTAL COMMON STOCKS
(COST $9,792)....................................................... 9,663
--------
</TABLE>

F-2
<PAGE>

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

PREFERRED STOCKS (6.0%)
BRAZIL (NON-VOTING STOCKS) (6.0%)
15,780,000 Banco Bradesco.......................................... $ 114
180,000 Banco Itau.............................................. 78
276,000 Brahma.................................................. 151
1,194,000 Cia Energetica de Minas Gerais.......................... 41
60,000 Coteminas............................................... 19
900 Eletrobras ADR.......................................... 17
319,000 Eletrobras, Class B..................................... 118
(e)1,500 Pao de Acucar ADR....................................... 26
589,000 Petrobras............................................... 94
624,000 Telebras................................................ 48
--------
TOTAL PREFERRED STOCKS
(COST $711)........................................................ 706
--------
TOTAL FOREIGN SECURITIES (88.0%)
(COST $10,503)..................................................... 10,369
--------
<CAPTION>
FACE
AMOUNT
(000)
----------
<C> <S> <C>
SHORT-TERM INVESTMENT (10.0%)
REPURCHASE AGREEMENT (10.0%)
$ 1,183 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/2/97, to be repurchased at $1,183, collateralized by
U.S. Treasury Bonds, 7.25%, due 5/15/16, valued at
$1,200 (Cost $1,183)................................... 1,183
--------
FOREIGN CURRENCY (2.2%)
BRL 14 Brazilian Real.......................................... 13
EGP 380 Egyptian Pound.......................................... 112
HKD 10 Hong Kong Dollar........................................ 2
MXP 33 Mexican Peso............................................ 4
PKR 4,293 Pakistani Rupee......................................... 107
PHP 1 Philippines Peso........................................ --
TWD 580 Taiwan Dollar........................................... 21
--------
TOTAL FOREIGN CURRENCY
(COST $258)........................................................ 259
--------
TOTAL INVESTMENTS (100.2%)
(COST $11,944*).................................................... $ 11,811
--------
</TABLE>

The accompanying notes are an integral part of the financial statements.

<TABLE>
<CAPTION>
VALUE
(000)
-----------
<S> <C> <C>
OTHER ASSETS (4.0%)
Cash............................................................ $ 1
Deferred Organization Costs..................................... 342
Due from Adviser................................................ 82
Receivable for Portfolio Shares Sold............................ 32
Dividends Receivable............................................ 8
Receivable for Investments Sold................................. 3
-----
468
LIABILITIES (-4.2%)
Payable for Investments Purchased............................... (275)
Organization Costs Payable...................................... (105)
Custodian Fees Payable.......................................... (39)
Professional Fees Payable....................................... (39)
Sub-Administrative Fees Payable................................. (10)
Administrative Fees Payable..................................... (9)
Deferred Foreign Taxes Payable.................................. (2)
Other Liabilities............................................... (11)
-----
(490)
-------
NET ASSETS (100%)............................................... $11,789
=======
</TABLE>

<TABLE>
<CAPTION>
AMOUNT
(000)
-------
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 1,205,732 outstanding $0.001 par value shares, unlim-
ited number authorized.............................................. $ 9.78
=======
NET ASSETS CONSIST OF:
Paid in Capital...................................................... $11,978
Undistributed Net Investment Income.................................. 3
Accumulated Net Realized Loss........................................ (57)
Unrealized Depreciation on Investments and Foreign Currency
Translations (Net of foreign taxes of $2)........................... (135)
-------
NET ASSETS........................................................... $11,789
=======
</TABLE>

FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:

Under the terms of forward foreign currency exchange contracts open at December
31, 1996, 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>
$2 $ 2 1/02/97 BRL 2 $ 2 $--
</TABLE>
(a)--Non-income producing security.
(d)--Security valued at fair value--See note A-1 to financial statements. Fair
valued securities totaled $851,000 or 7.2% of net assets at December 31,
1996.
(e)--144A Security--Certain conditions for public sale may exist.
(g)--The fund is advised by Morgan Stanley Asset Management Inc. The Portfolio
earned no income from this security for the period ended December 31, 1996.

F-3
<PAGE>

ADR--American Depositary Receipt
CPO--Ordinary Participating Certificate (no voting rights)
GDR--Global Depositary Receipt
PCL--Public Company Limited
* At December 31, 1996, cost, unrealized appreciation, unrealized depreciation
and net unrealized depreciation, for U.S. Federal income tax purposes, of the
investments of the Portfolio were:

<TABLE>
<CAPTION>
UNREALIZED UNREALIZED NET UNREALIZED
COST APPRECIATION DEPRECIATION DEPRECIATION
(000) (000) (000) (000)
- ------- ------------ ------------ --------------
<S> <C> <C> <C>
$11,688 $627 $(763) $(136)
</TABLE>

For the period ended December 31, 1996, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $11,337,000 and $777,000,
respectively. There were no long-term purchases and sales of U.S. Government
securities during the period.

At December 31, 1996, the Emerging Markets Equity Portfolio had available
capital loss carryforwards to offset future net capital gains, to the extent
provided by regulations, through December 31, 2004 of approximately $9,000. To
the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by a Portfolio for gains realized and not distributed. To the extent that
capital gains are so offset, such gains will not be distributed to
shareholders.

Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1996 to December 31, 1996,
the Emerging Markets Equity Portfolio incurred and elected to defer until
January 1, 1997, for U.S. Federal income tax purposes, net capital losses of
approximately $45,000.

SUMMARY OF INVESTMENTS BY INDUSTRY CLASSIFICATION
(UNAUDITED)

<TABLE>
<CAPTION>
MARKET % OF NET
SECTOR DIVERSIFICATION VALUE ASSETS
---------------------- ------- --------
<S> <C> <C>
Capital Equipment............................................. $ 1,081 9.2%
Consumer Goods................................................ 1,588 13.5
Energy........................................................ 1,091 9.3
Finance....................................................... 1,984 16.8
Foreign Currency.............................................. 259 2.2
Materials..................................................... 1,355 11.5
Multi-Industry................................................ 989 8.4
Repurchase Agreement.......................................... 1,183 10.0
Services...................................................... 2,281 19.3
------- -----
Total Investments............................................. $11,811 100.2%
Other Assets and Liabilities (Net)............................ (22) (0.2)
------- -----
Net Assets.................................................... $11,789 100.0%
======= =====
</TABLE>

The accompanying notes are an integral part of the financial statements.

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996*
TO
DECEMBER 31, 1996
(000)
-----------------
<S> <C>
INVESTMENT INCOME:
Dividends.................................................. $ 19
Interest................................................... 36
-----
Total Income............................................... 55
-----
EXPENSES:
Investment Advisory Fees................................... 32
Less: Fees Waived......................................... (32)
-----
Net Investment Advisory Fees............................... --
Custodian Fees............................................. 39
Professional Fees.......................................... 38
Amortization of Organizational Costs....................... 18
Shareholder Reports........................................ 11
Sub-Administrative Fees.................................... 10
Administrative Fees........................................ 9
Other...................................................... 4
Expenses Reimbursed by Adviser............................. (82)
-----
Net Expenses.............................................. 47
-----
Net Investment Income....................................... 8
-----
NET REALIZED LOSS ON:
Investments Sold........................................... (57)
Foreign Currency Transactions.............................. (3)
-----
Net Realized Loss......................................... (60)
-----
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments and Foreign Currency Translations**............ (135)
-----
Change in Unrealized Appreciation/Depreciation............ (135)
-----
Net Realized Loss and Change in Unrealized
Appreciation/Depreciation.................................. (195)
-----
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(187)
=====
</TABLE>
- -------
* Commencement of operations
** Net of foreign taxes of $2 on unrealized appreciation.

The accompanying notes are an integral part of the financial statements.

F-4
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996*
TO
DECEMBER 31, 1996
(000)
-----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income....................................... $ 8
Net Realized Loss........................................... (60)
Change in Unrealized Appreciation/Depreciation.............. (135)
-------
Net Decrease in Net Assets Resulting from Operations........ (187)
-------
DISTRIBUTIONS:
Net Investment Income....................................... (20)
-------
Total Distributions......................................... (20)
-------
CAPITAL SHARE TRANSACTIONS(1):
Subscribed.................................................. 11,993
Distributions Reinvested.................................... 3
-------
Net Increase in Net Assets Resulting from Capital Share
Transactions............................................... 11,996
-------
Total Increase in Net Assets................................ 11,789
NET ASSETS:
Beginning of Period......................................... --
-------
End of Period............................................... $11,789
=======
Undistributed net investment income included in end of period
net assets.................................................. $ 3
=======
(1) Capital Share Transactions:
Shares Subscribed.......................................... 1,205
Shares Issued for Distributions Reinvested................. 1
-------
Net Increase in Capital Shares Outstanding.................. 1,206
=======
</TABLE>
- -------
* Commencement of operations

The accompanying notes are an integral part of the financial statements.

FINANCIAL HIGHLIGHTS

* Commencement of operations.

** Annualized.

# For the period ended December 31, 1996, the average commission rate paid on
trades on which commissions were charged was 0.45% of the trade amount.

F-5
<PAGE>

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

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 December 31, 1996, the Fund was comprised of one
active, non-diversified portfolio, the Emerging Markets Equity Portfolio
(referred to as the "Portfolio"). The Portfolio commenced operations on October
1, 1996.

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 ("Participating 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 the 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.

The 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: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, 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 as 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 forward foreign 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 accrued 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.

F-6
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

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.

5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Portfolio may enter into
forward foreign currency exchange contracts to attempt to protect securities
and related receivables and payables against changes in future foreign currency
exchange rates. A forward 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 using the forward rate
and the change in market value is recorded by the Portfolio as unrealized gain
or loss. The Portfolio records realized gains or losses when the contract is
closed equal to the difference between the value of the contract at the time it
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. 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 Portfolio's commencement of operations. Morgan Stanley Asset Management
Inc. has agreed that in the event any of it's initial shares in the Portfolio
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.

7. 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 specific 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. Distributions from the
Portfolio are recorded on the ex-date.

The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for foreign currency
transactions and for organizational expenses.

Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications among undistributed net investment income
(loss), accumulated net realized gain (loss) and paid in capital.

Permanent book and tax differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income/accumulated
net investment loss for the purpose of calculating net investment income (loss)
per share in the Financial Highlights.

B. ADVISER: Morgan Stanley Asset Management Inc. (the "Adviser" or "MSAM"), a
wholly-owned subsidiary of Morgan Stanley Group, Inc., provides the Portfolio
with investment advisory services for a fee, paid quarterly, at the annual rate
of 1.25% of the first $500 million of average daily net assets, 1.20% of the
next $500 million of average daily net assets and 1.15% of average daily net
assets exceeding $1 billion. The Adviser has agreed to reduce fees payable to
it and to reimburse the Portfolio, if necessary, if the annual operating
expenses, expressed as a percentage of average daily net assets, exceed the
maximum ratio of 1.75%.

C. ADMINISTRATOR: MSAM also provides the Portfolio 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 the Portfolio, plus
reimbursement of out-of-pocket expenses. Under an agreement between MSAM and
Chase Global Funds Services Company ("CGFSC"), a subsidiary of The Chase
Manhattan Bank ("Chase"), CGFSC provides certain administrative services to the
Portfolio. CGFSC is compensated for such services by MSAM from the fee it
receives from the Portfolio. Certain employees of CGFSC are officers of the
Fund. In addition, the Portfolio incurs local administration fees in doing
business in certain emerging market countries.

F-7
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

D. CUSTODIANS: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley Group, Inc., 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 U.S. 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 December 31, 1996, the Portfolio incurred custody fees with MSTC totaling
approximately $38,000 which were payable to MSTC at December 31, 1996.

In addition, for the period ended December 31, 1996, the Portfolio earned
interest income of approximately $400 and incurred interest expense of
approximately $1,000 on balances maintained with MSTC.

E. OTHER: At December 31, 1996, the net assets of the Portfolio 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, the Portfolio has shareholders that hold a significant
portion of the Portfolio's outstanding shares. Investment activities of these
shareholders could have a material impact on the Portfolio. At December 31,
1996, a significant number of the shares outstanding were owned by MSAM and its
affiliates.

F-8
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

STATEMENT OF NET ASSETS
(UNAUDITED)

MARCH 31, 1997

<TABLE>
<CAPTION>
VALUE
SHARES (000)
-------- --------
<C> <S> <C>
COMMON STOCKS (94.5%)
AUSTRALIA (1.1%)
14,300 CSR Ltd. .................................................. $ 55
--------
BELGIUM (1.9%)
1,220 Delhaize Freres et Cie, "Le Lion' S.A...................... 68
600 G.I.B. Holdings Ltd........................................ 28
--------
96
--------
CANADA (1.3%)
880 Potash Corp. of Saskatchewan............................... 67
--------
FRANCE (3.7%)
1,300 Banque National de Paris................................... 58
400 Groupe Danone.............................................. 63
370 PSA Peugeot Citroen S.A.................................... 42
700 Scor S.A................................................... 29
--------
192
--------
GERMANY (8.4%)
1,300 BASF AG.................................................... 50
3,100 Bayer AG................................................... 130
100 Karstadt AG................................................ 34
1,300 VEBA AG.................................................... 75
50 Viag AG.................................................... 24
225 Volkswagen AG.............................................. 124
--------
437
--------
HONG KONG (1.9%)
28,000 Jardin Strategic Holdings, Inc. ........................... 97
--------
IRELAND (3.3%)
3,600 Clondalkin Group plc....................................... 34
26,500 Irish Life plc............................................. 139
--------
173
--------
JAPAN (12.0%)
11 East Japan Railway Co...................................... 45
4,000 Fuji Photo Film Ltd........................................ 132
5,000 Hitachi Ltd................................................ 44
13,000 Kao Corp. ................................................. 142
5,000 Matsushita Electric Industries Co. ........................ 78
12,000 Sumitomo Marine & Fire Insurance Co. ...................... 73
1,000 TDK Corp................................................... 69
2,200 Toyo Seikan Kaisha Ltd..................................... 41
--------
624
--------
NETHERLANDS (3.2%)
200 Akzo Nobel N.V. ........................................... 28
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------- --------
<C> <S> <C>
2,100 ING Groep N.V............................................... $ 83
1,200 Philips Electronics N.V..................................... 56
--------
167
--------
SPAIN (0.8%)
3,600 Iberdrola S.A. ............................................. 40
--------
SWITZERLAND (3.8%)
35 Ascom Holdings AG (Bearer).................................. 37
70 Holderbank Financiere Glarus AG (Bearer).................... 54
70 Nestle S.A. (Registered).................................... 82
40 Sulzer AG (Registered)...................................... 26
--------
199
--------
UNITED KINGDOM (11.5%)
3,000 BAT Industries plc.......................................... 26
1,750 Burmah Castrol plc.......................................... 29
9,156 Christian Salvesan plc...................................... 43
6,500 Grand Metropolitan plc...................................... 52
20,000 Matthews (Bernard) plc...................................... 42
5,000 Penninsular & Oriental Steam................................ 51
8,200 Reckitt & Colman plc........................................ 110
2,300 Scottish Hydro Electric..................................... 14
9,400 Tate & Lyle plc............................................. 67
4,200 Unilever plc................................................ 112
11,600 WPP Group plc............................................... 48
--------
594
--------
UNITED STATES (41.6%)
900 AMR Corp. .................................................. 74
1,200 AT&T Corp. ................................................. 42
2,100 Albertson's, Inc. .......................................... 71
1,600 Bank of Boston Corp......................................... 107
1,600 Boise Cascade Corp.......................................... 49
1,350 Borg-Warner Automotive, Inc. ............................... 58
3,800 Browning-Ferris Industries, Inc. ........................... 110
4,100 Comsat Corp................................................. 100
5,200 Data General Corp........................................... 88
2,100 Enhance Financial Services Group, Inc. ..................... 83
2,000 Equitable Companies, Inc.................................... 54
2,200 Federal-Mogul Corp. ........................................ 54
800 Finova Group, Inc. ......................................... 54
3,100 GenRad, Inc................................................. 48
700 Georgia Pacific Corp........................................ 51
3,230 Greenfield Industries, Inc. ................................ 71
1,600 Greenpoint Financial Corp. ................................. 82
1,900 Houghton Mifflin Co......................................... 103
750 IBP, Inc.................................................... 18
6,900 InteliData Technologies Corp................................ 34
2,700 Limited, Inc. .............................................. 50
500 MBIA, Inc. ................................................. 48
1,500 MCI Communications Corp..................................... 53
700 Mellon Bank Corp............................................ 51
1,400 Penncorp Financial Group, Inc............................... 45
</TABLE>

F-9
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
-------- ---------
<C> <S> <C>
900 Pennzoil Co.............................................. $ 47
1,100 Philip Morris Cos., Inc.................................. 126
1,200 Rohr, Inc. .............................................. 21
1,700 Tandy Corp. ............................................. 85
1,700 Tecumseh Products Co., Class A........................... 97
950 Toys 'R' Us, Inc......................................... 27
2,400 UST Corp................................................. 48
3,800 Waban, Inc. ............................................. 106
---------
2,155
---------
TOTAL COMMON STOCKS (COST $4,827).................................. 4,896
---------
<CAPTION>
FACE
AMOUNT
(000)
--------
<C> <S> <C>
SHORT-TERM INVESTMENTS (5.4%)
REPURCHASE AGREEMENT (5.4%)
$ 283 Chase Securities, Inc. 6.00%, dated 3/31/97, due 4/1/97,
to be repurchased at $283, collateralized by U.S.
Treasury Notes, 7.875%, due 11/15/04, valued at $293
(Cost $283)............................................. 283
---------
FOREIGN CURRENCY (1.0%)
GBP 32 British Pound............................................ 52
JPY 1 Japanese Yen............................................. --
---------
TOTAL FOREIGN CURRENCY (COST $52).................................. 52
TOTAL INVESTMENTS (100.9%) (COST $5,162*).......................... $ 5,231
---------
</TABLE>

The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
VALUE
(000)
--------------
<C> <S> <C>
OTHER ASSETS (6.0%)
Cash...................................... $ 3
Receivable for Investments Sold........... 279
Receivable from Investment Adviser........ 16
Dividends Receivable...................... 9
Foreign Withholding Tax Reclaim Receivable 1
-----
308
LIABILITIES (-6.9%)
Payable for Investments Purchased......... (329)
Custodian Fees Payable.................... (8)
Administrative Fees Payable............... (5)
Directors' Fees and Expenses Payable...... (1)
Other Liabilities......................... (14)
-----
(357)
------
NET ASSETS (100%)......................... $5,182
======
</TABLE>

<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 509,097 outstanding $0.001 par value shares, unlimited
number authorized..................................................... $10.18
======
NET ASSETS CONSIST OF:
Paid in Capital........................................................ $5,093
Undistributed Net Investment Income.................................... 16
Accumulated Net Realized Gain.......................................... 4
Unrealized Appreciation on Investments and Foreign Currency
Translations.......................................................... 69
------
NET ASSETS............................................................. $5,182
======
</TABLE>
- -------
* At March 31,1997, cost, unrealized appreciation, unrealized depreciation and
net unrealized appreciation for U.S. Federal income tax purposes of the
investments (exclusive of foreign currency) of the Portfolio were:

<TABLE>
<CAPTION>
UNREALIZED UNREALIZED NET
COST APPRECIATION DEPRECIATION APPRECIATION
(000) (000) (000) (000)
----- ------------ ------------ ------------
<S> <C> <C> <C>
$5,110 $235 $(166) $69
</TABLE>

For the period ended March 31, 1997, purchases of investment securities for the
Portfolio other than long-term U.S. Government securities and short-term
investments were $4,828,000. There were no long-term purchases of U.S.
Government securities. There were no long-term sales.

F-10
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

STATEMENT OF NET ASSETS
(UNAUDITED)

MARCH 31, 1997

<TABLE>
<CAPTION>
VALUE
SHARES (000)
------ -------
<C> <S> <C>
COMMON STOCKS (93.9%)
AUSTRALIA (2.8%)
5,300 Broken Hill Proprietary Co., Ltd.............................. $ 71
2,300 Lend Lease Corp. Ltd.......................................... 39
5,800 News Corp. Ltd................................................ 27
6,400 Nintendo Corp. Ltd............................................ 81
12,200 WMC Ltd....................................................... 77
-------
295
-------
AUSTRIA (0.8%)
880 Boehler-Uddeholm AG........................................... 61
540 Radex-Heraklith Industriebeteiligungs AG...................... 21
-------
82
-------
BELGIUM (1.0%)
175 Arbed S.A..................................................... 19
500 Delhaize Freres et Cie, "Le Lion' S.A......................... 28
1,300 G.I.B. Holdings Ltd........................................... 60
-------
107
-------
DENMARK (1.6%)
1,320 BG Bank A/S................................................... 62
350 Jyske Bank A/S (Registered)................................... 28
1,600 Unidanmark A/S, Class A (Registered).......................... 86
-------
176
-------
FINLAND (0.7%)
150 Kone Corp., Class B........................................... 18
8,000 Merita Ltd., Class A.......................................... 28
3,200 Rautaruukki OY................................................ 29
-------
75
-------
FRANCE (7.1%)
1,700 Banque National de Paris...................................... 76
650 Cie de Saint Gobain........................................... 99
700 Elf Aquitaine S.A............................................. 72
350 Eridania Beghin-Say S.A....................................... 55
600 Groupe Danone................................................. 95
1,030 Lafarge S.A................................................... 72
1,570 Legris Industries S.A......................................... 72
700 SGS-Thompson Microelectronics N.V............................. 49
1,190 Total S.A., Class B........................................... 103
3,900 Usinor Sacilor................................................ 64
-------
757
-------
GERMANY (5.7%)
1,600 BASF AG....................................................... 61
2,100 Bayer AG...................................................... 88
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------ -------
<C> <S> <C>
2,700 Gerresheimer Glas AG.......................................... $ 55
100 Karstadt AG................................................... 35
4,000 Lufthansa AG.................................................. 58
300 Metro AG...................................................... 31
1,500 VEBA AG....................................................... 86
140 Viag AG....................................................... 66
230 Volkswagen AG................................................. 127
-------
607
-------
HONG KONG (4.8%)
8,000 Cheung Kong Holdings Ltd...................................... 70
18,000 China Resources Enterprise Ltd................................ 39
10,000 Citic Pacific Ltd............................................. 50
4,000 HSBC Holdings plc............................................. 93
38,000 Hong Kong Telecommunications Ltd.............................. 65
10,000 Hutchison Whampoa Ltd......................................... 75
9,000 New World Development Co. Ltd................................. 49
4,000 Sun Hung Kai Properties Ltd................................... 42
3,000 Swire Pacific Ltd., Class A................................... 24
-------
507
-------
ITALY (3.1%)
18,000 Editoriale L'Expresso S.p.A................................... 62
9,000 Marzotto (Gaetano) & Figli S.p.A.............................. 71
29,000 Sogefi S.p.A.................................................. 65
19,000 Stet Di Risp (NCS)............................................ 68
31,000 Telecom Italia S.p.A. Di Risp (NCS)........................... 66
-------
332
-------
JAPAN (29.3%)
8,000 Amada Co., Ltd................................................ 58
7,000 Asahi Tec Corp................................................ 30
4,000 Canon, Inc.................................................... 86
4,000 Daibiru Corp.................................................. 39
4,000 Dai Nippon Printing Co., Ltd.................................. 67
11,000 Daicel Chemical Industry Ltd.................................. 40
6,000 Daifuku Co., Ltd.............................................. 65
5,000 Daikin Industries Ltd......................................... 37
6,000 Daiwa Securities Co., Ltd..................................... 43
2,200 FamilyMart.................................................... 83
7,000 Fujitsu General............................................... 71
3,000 Fuji Machine Manufacturing Co................................. 78
2,000 Fuji Photo Film Ltd........................................... 66
7,000 Furukawa Electric Co.......................................... 31
11,000 Hitachi Ltd................................................... 98
2,000 Hitachi Credit Corp........................................... 29
5,000 Inabata & Co.................................................. 30
11,000 Kaneka Corp................................................... 59
2,000 Kurita Water Industries....................................... 39
1,000 Kyocera Ltd................................................... 57
4,000 Kyudenko Co., Ltd............................................. 30
6,000 Matsushita Electric Industries Ltd............................ 94
19,000 Mitsubishi Chemical Corp...................................... 58
6,000 Mitsubishi Estate Co., Ltd.................................... 64
12,000 Mitsubishi Heavy Industries Ltd............................... 78
</TABLE>

F-11
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
------ --------
<C> <S> <C>
3,000 Mitsumi Electric Co., Ltd.................................... $ 55
2,000 Murata Manufacturing Co., Ltd................................ 72
8,000 NEC Corp..................................................... 91
3,000 Nifco, Inc................................................... 26
1,000 Nintendo Corp., Ltd.......................................... 72
2,000 Nippon Pillar Packing........................................ 11
12 Nippon Telephone & Telegraph................................. 84
12,000 Nissan Motor Co.............................................. 72
4,000 Nomura Securities Co., Ltd................................... 44
10,000 Obayashi Corp................................................ 59
7,000 Ricoh Co., Ltd............................................... 80
3,000 Rinnai Corp.................................................. 51
1,000 Sangetsu Co., Ltd............................................ 17
7,000 Sanwa Shutter................................................ 51
1,000 Secom Co., Ltd............................................... 56
6,000 Sekisui Chemical Co.......................................... 59
6,000 Sekisui House Ltd............................................ 59
1,000 Shimamura Co., Ltd........................................... 29
1,500 Sony Corp.................................................... 105
6,000 Stanley Electric Co.......................................... 29
8,000 Sumitomo Marine & Fire Insurance Co.......................... 49
6,000 Suzuki Motor Co., Ltd........................................ 58
1,000 TDK Corp..................................................... 69
13,000 Taisei Corp., Ltd............................................ 50
2,200 Tokyo Electron Ltd........................................... 73
14,000 Toshiba Corp................................................. 77
10,000 Tsubakimoto Chain............................................ 58
3,000 Yamanouchi Pharmaceutical Co................................. 62
--------
3,131
--------
MALAYSIA (3.0%)
5,000 Commerce Asset Holding Bhd................................... 35
1,000 Dialog Group Bhd............................................. 16
3,000 Genting Bhd.................................................. 20
6,000 IJM Corp. Bhd................................................ 15
2,000 Malayan Banking Bhd.......................................... 23
5,000 Malaysian International Shipping Bhd (Foreign)............... 13
13,000 Renong Bhd................................................... 22
5,000 Resorts World Bhd............................................ 22
19,000 Sime Darby Bhd............................................... 69
6,000 Tanjong plc.................................................. 24
4,000 Telekom Malaysia Bhd......................................... 31
3,000 United Engineers (Malaysia) Ltd.............................. 26
--------
316
--------
NETHERLANDS (6.4%)
980 ABN Amro Holdings N.V........................................ 67
600 Akzo Nobel N.V............................................... 86
306 Hollandsche Beton Groep N.V.................................. 70
2,400 ING Groep N.V................................................ 95
2,400 KLM Royal Dutch Airlines N.V................................. 72
900 Koninklijke Bijenkorf Beheer................................. 68
2,600 Koninklijke KNP BT........................................... 55
1,480 Koninklijke Van Ommeren N.V.................................. 65
2,300 Philips Electronics N.V...................................... 107
--------
685
--------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------ --------
<C> <S> <C>
NORWAY (1.4%)
11,300 Den Norsk Bank ASA........................................... $ 49
1,700 Saga Petroleum A/S, Class B.................................. 27
11,400 Storebrand ASA............................................... 78
--------
154
--------
SINGAPORE (2.2%)
17,000 Comfort Group Ltd............................................ 13
2,000 Development Bank of Singapore Ltd. (Foreign)................. 23
3,000 Keppel Corp. Ltd............................................. 19
2,000 Oversea-Chinese Banking Corp. (Foreign)...................... 24
6,000 Sembawang Corp............................................... 29
2,000 Singapore Press Holdings (Foreign)........................... 36
3,000 United Overseas Bank Ltd. (Foreign).......................... 31
32,000 Uraco Holdings Ltd........................................... 20
9,000 Want Want Holdings........................................... 26
6,000 Wing Tai Holdings Ltd........................................ 18
--------
239
--------
SPAIN (3.3%)
900 Banco Bilbao Vizcaya S.A. (Registered)....................... 55
5,300 Iberdrola S.A................................................ 59
1,500 Repsol S.A................................................... 63
3,700 Telefonica de Espana S.A..................................... 89
11,100 Uralita S.A.................................................. 90
--------
356
--------
SWEDEN (2.6%)
400 Electrolux AB, Series B...................................... 25
2,300 Nordbanken AB................................................ 79
1,000 Skandia Forsakrings AB....................................... 32
2,100 S.K.F. AB, Class B........................................... 55
1,700 Sparbaken Sverige AB, Class A................................ 32
1,900 Svenska Handelsbanken, Class A............................... 58
--------
281
--------
SWITZERLAND (6.5%)
25 Baloise Holdings............................................. 51
50 Bobst AG (Bearer)............................................ 74
50 Ciba Specialty Chemicals (Registered)........................ 4
170 Forbo Holdings AG (Registered)............................... 70
91 Holderbank Financiere Glarus AG (Bearer)..................... 70
100 Nestle S.A. (Registered)..................................... 117
50 Novartis AG (Registered)..................................... 62
600 Oerlikon-Buehrle Holding AG (Registered)..................... 61
20 Schindler Holding AG (Registered)............................ 23
60 Schweizerische Industrie-Gesellschaft (Registered)........... 74
90 Sulzer AG (Registered)....................................... 59
100 Zurich Versicherungsgesellschaft (Registered)................ 32
--------
697
--------
</TABLE>

F-12
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
------ --------
<C> <S> <C>
UNITED KINGDOM (11.6%)
8,050 Associated British Foods plc............................... $ 73
5,700 Bass plc................................................... 76
8,400 BAT Industries plc......................................... 72
10,700 British Telecommunications plc............................. 78
4,000 Burmah Castrol plc......................................... 67
15,555 Christian Salvesen plc..................................... 73
17,100 Courtaulds Textiles plc.................................... 79
12,000 Grand Metropolitan plc..................................... 97
11,300 Imperial Tobacco Group plc................................. 78
23,500 John Mowlem & Co. plc...................................... 44
14,000 Kwik Save Group plc........................................ 71
5,800 Racal Electronics plc...................................... 28
7,800 Reckitt & Colman plc....................................... 105
11,500 Royal & Sun Alliance Insurance Group plc................... 84
3,500 Scottish Hydro-Electric plc................................ 21
15,500 Tate & Lyle plc............................................ 111
3,000 Unilever plc............................................... 80
--------
1,237
--------
TOTAL COMMON STOCKS (COST $10,005).................................. 10,034
--------
PREFERRED STOCKS (1.3%)
GERMANY (1.3%)
230 Dyckerhoff AG.............................................. 83
900 Hornbach Holding AG........................................ 59
--------
TOTAL PREFERRED STOCKS (COST $130).................................. 142
--------
<CAPTION>
FACE
AMOUNT
(000)
------
<C> <S> <C>
SHORT-TERM INVESTMENTS (3.3%)
$351 Chase Securities, Inc. 6.00%, dated 3/31/97, due 4/1/97, to
be repurchased at $351, collateralized by U.S. Treasury
Notes, 7.875%, due 11/15/04, valued at $358 (Cost $351).... $351
FOREIGN CURRENCY (1.5%)
GBP 13 British Pound.............................................. 21
DKK 3 Danish Krone............................................... --
FIM 1 Finnish Markka............................................. --
FRF3 90 French Franc............................................... 70
MYR 19 Malaysian Ringgit.......................................... 8
NLG 48 Netherlands Guilder........................................ 26
NOK 43 Norwegian Krona............................................ 6
CHF 36 Swiss Franc................................................ 25
--------
TOTAL FOREIGN CURRENCY (COST $154).................................. 156
--------
TOTAL INVESTMENTS (100.0%)
(COST $10,640*).................................................... $ 10,683
--------
</TABLE>

The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
VALUE
(000)
-----
<S> <C> <C>
OTHER ASSETS (4.5%)
Cash............................................................ $ 1
Receivable for Investments Sold................................. 399
Receivable from Investment Adviser.............................. 30
Dividends Receivable............................................ 26
Net Unrealized Gain on Foreign Currency Exchange Contracts...... 18
Receivable for Portfolio Shares Sold............................ 2
Foreign Withholding Tax Reclaim Receivable...................... 1
-----
477
LIABILITIES (-4.5%)
Payable for Investments Purchased............................... (425)
Custodian Fees Payable.......................................... (32)
Administrative Fees Payable..................................... (4)
Other Liabilities............................................... (18)
-----
(479)
-------
NET ASSETS (100%)............................................... $10,681
=======
</TABLE>

<TABLE>
<CAPTION>
AMOUNT
(000)
-------
<S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 1,036,965 outstanding $0.001 par value shares, unlimited
number authorized.................................................... $ 10.30
=======
NET ASSETS CONSIST OF:
Paid in Capital....................................................... $10,378
Undistributed Net Investment Income................................... 31
Accumulated Net Realized Gain......................................... 212
Unrealized Appreciation on Investments and Foreign Currency
Translations......................................................... 60
-------
NET ASSETS............................................................ $10,681
=======
</TABLE>

F-13
<PAGE>

FOREIGN CURRENCY EXCHANGE INFORMATION:

Under the terms of foreign currency contracts open at March 31, 1997, the
Portfolio is obligated to deliver or is to receive foreign currency in exchange
for U.S. dollars as indicated below:

<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ---------- ------ ---------- --------- ------ -----------
<S> <C> <C> <C> <C> <C>
U.S.$ 10 $ 10 4/1/97 ATS 125 $ 10 $--
CHF 36 25 4/1/97 U.S.$ 25 25 --
DKK 3 1 4/1/97 U.S.$ 1 1 --
NLG 48 25 4/1/97 U.S.$ 25 25 --
NOK 30 5 4/1/97 U.S.$ 5 5 --
NOK 12 2 4/2/97 U.S.$ 2 2 --
U.S.$ 15 15 4/2/97 SGD 22 15 --
U.S.$ 14 14 4/30/97 BEF 491 14 --
BEF 1,952 57 4/30/97 U.S.$ 58 58 1
BEF 446 13 4/30/97 U.S.$ 13 13 --
DEM 441 265 4/30/97 U.S.$ 271 271 6
DEM 110 66 4/30/97 U.S.$ 66 66 --
CHF 463 324 5/16/97 U.S.$ 328 328 4
NLG 409 219 5/16/97 U.S.$ 222 222 3
NLG 155 83 5/16/97 U.S.$ 83 83 --
FRF 566 101 5/27/97 U.S.$ 101 101 --
FRF 1,651 295 5/27/97 U.S.$ 291 291 (4)
JPY 30,299 247 5/27/97 U.S.$ 250 250 3
JPY 63,252 517 6/13/97 U.S.$ 520 520 3
JPY 59,970 492 6/27/97 U.S.$ 494 494 2
------ ------ ----
$2,776 $2,794 $ 18
====== ====== ====
</TABLE>

NCS--Non Convertible Shares.
BEF--Belgian Franc
DEM--Deutsche Mark
JPY--Japanese Yen

* At March 31, 1997, cost, unrealized appreciation, unrealized depreciation and
net unrealized appreciation for U.S. Federal income tax purposes of the
investments (exclusive of foreign currency) of the Portfolio were:

<TABLE>
<CAPTION>
UNREALIZED UNREALIZED NET
COST APPRECIATION DEPRECIATION APPRECIATION
(000) (000) (000) (000)
- ------- ------------ ------------ ------------
<S> <C> <C> <C>
$10,486 $447 $(406) $41
</TABLE>

For the period ended March 31, 1997, purchases and sales of investment
securities for the Portfolio other than long-term U.S. Government securities
and short-term investments were $10,563,000 and $438,000, respectively. There
were no long-term purchases and sales of U.S. Government securities.

The accompanying notes are an integral part of the financial statements.

F-14
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

GROWTH PORTFOLIO

STATEMENT OF NET ASSETS

(UNAUDITED)

MARCH 31, 1997

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

COMMON STOCKS (92.6%)
CAPITAL GOODS--CONSTRUCTION (6.6%)
AEROSPACE & DEFENSE (6.4%)
200 Boeing Co. .................................................... $ 20
800 Loral Space & Communications................................... 11
300 McDonnell Douglas Corp. ....................................... 18
300 Rockwell International Corp. .................................. 19
350 Textron, Inc. ................................................. 37
1,000 United Technologies Corp. ..................................... 75
------
180
------
ENVIRONMENTAL CONTROLS (0.2%)
200 WMX Technologies, Inc. ........................................ 6
------
TOTAL CAPITAL GOODS--CONSTRUCTION...................................... 186
------
CONSUMER--CYCLICAL (33.8%)
AUTOMOBILES (1.8%)
400 Ford Motor Co. ................................................ 13
400 Goodyear Tire & Rubber Co. .................................... 21
500 O'Reilly Automotive, Inc. ..................................... 18
------
52
------
BROADCAST--RADIO & TELEVISION (3.0%)
1,500 Clear Channel Communications, Inc. ............................ 60
500 Heftel Broadcasting Corp., Class A............................. 23
------
83
------
ENTERTAINMENT & LEISURE (3.0%)
2,500 GTECH Holdings Corp. .......................................... 75
500 WMS Industries, Inc. .......................................... 9
------
84
------
FOOD SERVICE (7.6%)
3,200 Boston Chicken, Inc. .......................................... 98
400 CKE Restaurants, Inc. ......................................... 9
1,700 Cracker Barrel Old Country Store, Inc. ........................ 44
1,600 Einstein/Noah Bagel Corp. ..................................... 40
400 Lone Star Steakhouse & Saloon, Inc. ........................... 9
200 McDonald's Corp. .............................................. 9
200 Rainforest Cafe, Inc. ......................................... 4
------
213
------
GAMING & LODGING (10.6%)
200 Doubletree Corp. .............................................. 7
4,600 HFS, Inc. ..................................................... 265
1,600 International Game Technology.................................. 26
------
298
------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------ ------
<C> <S> <C>

PHOTOGRAPHY & OPTICAL (0.8%)
300 Eastman Kodak Co. ............................................ $ 23
------
PUBLISHING (2.9%)
200 Gannett Co., Inc. ............................................ 17
300 Hollinger International, Inc., Class A........................ 3
5,400 K-III Communications Corp. ................................... 61
------
81
------
RETAIL--FOODS (0.4%)
500 Dominick's Supermarkets, Inc.................................. 12
RETAIL--GENERAL (3.7%)
400 COMPUSA Inc................................................... 6
1,400 Home Depot, Inc............................................... 75
1,200 PetSmart Inc.................................................. 24
------
105
------
TOTAL CONSUMER--CYCLICAL.............................................. 951
------
CONSUMER--STAPLES (14.6%)
BEVERAGES & TOBACCO (2.6%)
200 Coca Cola Enterprises, Inc.................................... 11
1,900 RJR Nabisco Holdings Corp..................................... 61
------
72
------
DRUGS (0.6%)
200 Pfizer, Inc................................................... 17
------
FOOD (2.8%)
1,600 Campbell Soup Co.............................................. 74
100 Interstate Bakeries Corp...................................... 5
------
79
------
HEALTH CARE SUPPLIES & SERVICES (0.5%)
400 Columbia/HCA Healthcare Corp.................................. 13
HOSPITAL SUPPLIES & SERVICES (3.1%)
700 Aetna, Inc.................................................... 60
600 Becton Dickinson & Co......................................... 27
------
87
------
PERSONAL CARE PRODUCTS (0.5%)
200 Gillette Co................................................... 15
------
CIGARETTES (4.5%)
1,000 Consolidated Cigar Holdings Inc............................... 24
1,700 Philip Morris Cos., Inc....................................... 103
127
------
TOTAL CONSUMER--STAPLES............................................... 410
------
DIVERSIFIED (8.9%)
400 Allied Signal, Inc............................................ 29
2 Berkshire Hathaway, Inc., Class A............................. 72
1,000 Hillenbrand Industries........................................ 40
300 Loews Corp.................................................... 27
1,300 Service Corp. International................................... 39
600 U.S. Industries, Inc.......................................... 21
1,300 Viad Corp..................................................... 21
------
TOTAL DIVERSIFIED..................................................... 249
------
</TABLE>

F-15
<PAGE>

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

ENERGY (2.6%)
COAL, GAS, & OIL (2.0%)
200 Amoco Corp..................................................... $ 17
200 Diamond Offshore Drilling, Inc................................. 14
200 Halliburton Co................................................. 14
100 Schlumberger, Ltd.............................................. 11
------
56
------
UTILITIES (0.6%)
300 AES Corp....................................................... 17
------
TOTAL ENERGY........................................................... 73
------
FINANCE (14.1%)
BANKING (5.1%)
400 Chase Manhattan Corp........................................... 37
200 Citicorp....................................................... 22
300 Wells Fargo & Co............................................... 85
------
144
------
FINANCIAL SERVICES (4.0%)
500 American Express Co............................................ 30
100 Capital One Financial Corp..................................... 4
300 Franklin Resources, Inc........................................ 15
300 Merrill Lynch & Co. ........................................... 26
500 Nationwide Financial Services, Inc., Class A................... 13
200 Ocwen Financial Corp........................................... 6
200 Student Loan Marketing Association............................. 19
------
113
------
INSURANCE (5.0%)
800 Ace Ltd........................................................ 51
1,700 CMAC Investment Corp........................................... 57
200 Equitable of Iowa Cos.......................................... 10
500 Exel Ltd....................................................... 21
139
------
396
------
MATERIALS (0.5%)
CHEMICALS (0.5%)
400 Monsanto Co.................................................... 15
------
SERVICES (1.8%)
PROFESSIONAL SERVICES (0.9%)
200 Catalina Marketing Corp. ...................................... 8
400 CUC International, Inc......................................... 9
400 Snyder Communications, Inc..................................... 9
------
26
------
TRANSPORTATION (0.9%)
300 AMR Corp....................................................... 25
------
TOTAL SERVICES......................................................... 51
------
TECHNOLOGY (9.7%)
COMPUTERS (0.9%)
200 Compaq Computer Corp. ......................................... 15
100 Dell Computer Corp............................................. 7
100 Sun Microsystems, Inc.......................................... 3
------
25
------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------ -------
<C> <S> <C>

ELECTRONICS (3.8%)
300 Applied Materials, Inc. ...................................... $ 14
200 Cisco Systems, Inc. .......................................... 10
300 Intel Corp.................................................... 42
300 Linear Technology Corp........................................ 13
200 Motorola, Inc................................................. 12
200 Texas Instruments, Inc. ...................................... 15
-------
106
-------
OFFICE EQUIPMENT (1.4%)
300 International Business Machines Corp. ........................ 41
-------
SOFTWARE SERVICES (2.7%)
300 Adobe Systems, Inc............................................ 12
400 Microsoft Corp. .............................................. 37
100 Netscape Communications Corp.................................. 3
400 Oracle System, Corp........................................... 15
300 Sterling Commerce, Inc. ...................................... 9
-------
76
-------
TELECOMMUNICATIONS (0.9%)
300 AirTouch Communications, Inc.................................. 7
200 Ascend Communications, Inc.................................... 8
500 WorldCom, Inc. ............................................... 11
-------
26
-------
TOTAL TECHNOLOGY...................................................... 274
-------
TOTAL COMMON STOCKS
(COST $2,597)........................................................ 2,605
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
------
<C> <S> <C> <C>
SHORT-TERM INVESTMENTS (8.1%)
REPURCHASE AGREEMENT (8.1%)
$229 Chase Securities, Inc. 6.00%. dated 3/31/97, due 4/1/97,
to be repurchased at $229, collateralized by U.S. Treasury
Notes, 7.875%, due 11/16/04, valued
at $234
(Cost $229)............................................... 229
------
TOTAL INVESTMENTS (100.7%)
(COST $2,826*)................................................... $2,834
------
</TABLE>

F-16
<PAGE>

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

OTHER ASSETS
(9.7%)
Cash............ $ 5
Receivable for
Investments
Sold........... 230
Receivable from
Investment Ad-
viser.......... 35
Dividends Re-
ceivable....... 3
----
273
LIABILITIES (-
10.4%)
Payable for In-
vestments Pur-
chased......... (253)
Custodian Fees
Payable........ (17)
Administrative
Fees Payable... (5)
Directors' Fees
and Expenses
Payable........ (1)
Other Liabili-
ties........... (16)
----
(292)
NET ASSETS
(100%)......... $2,815
======
NET ASSET VALUE,
OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to
272,370
outstanding
$0.001 par
value shares,
unlimited
number
authorized..... $10.33
======
</TABLE>

<TABLE>
<CAPTION>
AMOUNT
(000)
------
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital......................................................... $2,742
Undistributed Net Investment Income..................................... 4
Accumulated Net Realized Gain........................................... 61
Unrealized Appreciation on Investments.................................. 8
------
NET ASSETS.............................................................. $2,815
======
</TABLE>
- -------
* At March 31, 1997, cost and unrealized appreciation, unrealized depreciation,
and net unrealized appreciation for U.S. Federal income tax purposes of the
investments of the Portfolio were:

<TABLE>
<CAPTION>
NET
UNREALIZED UNREALIZED UNREALIZED
COST APPRECIATION DEPRECIATION APPRECIATION
(000) (000) (000) (000)
----- ------------ ------------ ------------
<S> <C> <C> <C>
$2,826 $98 $(90) $ 8
</TABLE>
For the period ended March 31, 1997, purchases and sales of investment
securities for the Portfolio other than long-term U.S. Government securities
and short-term investments were $3,670,000 and $1,134,000 respectively. There
were no long-term purchases and sales of U.S. Government securities.

The accompanying notes are an integral part of the financial statements.

F-17
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

STATEMENT OF NET ASSETS

(UNAUDITED)

MARCH 31, 1997

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

COMMON STOCK (95.9%)
BANKS (14.3%)
1,000 Astoria Financial Corp......................................... $ 36
900 Comerica, Inc.................................................. 51
1,000 Commerce Bancshares, Inc....................................... 45
900 Community First Bankshares, Inc................................ 28
1,000 Cullen/Frost Bankers, Inc...................................... 36
900 First of America Bank Corp..................................... 54
500 FirstBank Puerto Rico.......................................... 13
400 North Fork Bancorp., Inc....................................... 14
2,000 Northern Trust Corp............................................ 75
2,000 ONBANCorp, Inc................................................. 93
600 Southtrust Corp................................................ 22
------
467
------
BASIC RESOURCES (2.9%)
500 H. B. Fuller Co. .............................................. 24
1,100 P.H. Glatfelter Co............................................. 18
500 Rohm & Haas Co. ............................................... 38
540 Sinter Metals, Inc., Class A................................... 15
------
95
------
CONSUMER DURABLES (5.9%)
500 Champion Enterprises, Inc...................................... 8
300 Ethan Allen Interiors, Inc..................................... 13
500 Harley-Davidson, Inc........................................... 17
500 Lone Star Industries........................................... 19
1,000 PACCAR, Inc. .................................................. 67
600 Premark International, Inc. ................................... 12
500 Southdown, Inc................................................. 17
1,300 USG Corp....................................................... 41
------
194
------
CONSUMER SERVICES (1.6%)
200 MGM Grand, Inc................................................. 7
500 McClatchy Newspapers, Inc., Class A............................ 12
100 Washington Post Co., Class B................................... 34
------
53
------
CREDIT & FINANCE (1.3%)
700 CMAC Investment Corp........................................... 23
200 Student Loan Marketing Association............................. 19
------
42
------
ENERGY (7.9%)
700 BJ Services Co................................................. 34
1,200 Columbia Gas System, Inc....................................... 70
1,500 Global Marine, Inc. ........................................... 32
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------ ------
<C> <S> <C>

900 NICOR, Inc. ................................................... $ 29
1,100 Noble Drilling Corp. .......................................... 19
400 ONEOK, Inc..................................................... 10
400 Pacific Enterprises............................................ 12
500 Phillips Petroleum Co.......................................... 20
400 Union Texas Petro Holdings, Inc................................ 7
900 Vastar Resources, Inc.......................................... 26
------
259
------
FOOD, TOBACCO & OTHER (4.8%)
200 Dean Foods Co. ................................................ 7
300 Lancaster Colony Corp.......................................... 14
1,100 Schweitzer-Mauduit International, Inc. ........................ 33
3,000 Tyson Foods, Inc., Class A..................................... 58
1,600 Universal Foods Corp........................................... 46
------
158
------
HEALTH CARE (9.0%)
1,000 Biogen, Inc.................................................... 38
2,400 Healthdyne Technologies, Inc................................... 34
800 Living Centers of America, Inc................................. 28
500 Marquette Medical Systems, Class A............................. 10
2,100 Merit Medical Systems, Inc..................................... 17
700 Nellcor, Inc................................................... 12
3,100 Sullivan Dental Products, Inc.................................. 45
2,100 Revco D.S., Inc................................................ 85
500 Watson Pharmaceuticals, Inc.................................... 18
200 Wellpoint Health Networks, Inc................................. 8
------
295
------
HEAVY INDUSTRY/TRANSPORTATION (11.0%)
1,700 AccuStaff, Inc................................................. 28
800 CDI Corp....................................................... 30
300 Coltec Industries, Inc......................................... 6
2,400 Crane Co....................................................... 75
1,200 DONCASTERS plc ADR............................................. 23
700 Hvide Marine, Inc., Class A.................................... 16
1,300 Ingersoll Rand Co.............................................. 57
1,200 Interim Services, Inc.......................................... 47
2,000 JLG Industries, Inc............................................ 39
600 Midwest Express Holdings....................................... 23
300 Offshore Logistics, Inc........................................ 5
300 Wallace Computer Services, Inc................................. 10
------
359
------
INSURANCE (1.6%)
1,300 Nationwide Financial Services, Inc.,
Class A....................................................... 33
300 Progressive Corp............................................... 19
------
52
------
INVESTMENT COMPANIES (4.7%)
2,500 Franklin Resources, Inc........................................ 128
700 Hambrecht & Quist Group........................................ 12
600 United Asset Management Corp. ................................. 15
------
155
------
</TABLE>

F-18
<PAGE>

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

REAL ESTATE INVESTMENT TRUSTS (0.4%)
500 Kilroy Realty Corp............................................. $ 13
------
RETAIL (4.9%)
500 American Stores Co............................................. 22
400 Brylane, Inc................................................... 10
500 CVS Corp....................................................... 23
500 Costco Companies, Inc.......................................... 14
400 Designer Holdings Ltd.......................................... 3
300 Fruit of the Loom, Inc., Class A............................... 13
600 Hughes Supply, Inc............................................. 20
400 Ross Stores, Inc............................................... 10
500 Saks Holdings, Inc............................................. 14
500 V.F. Corp...................................................... 33
------
162
------
TECHNOLOGY (21.8%)
1,000 ADC Telecommunications, Inc.................................... 27
500 Applied Magnetics Corp......................................... 14
1,300 Cadence Design Systems, Inc.................................... 45
500 Ceridian Corp.................................................. 18
900 Compaq Computer Corp........................................... 69
1,400 Computer Products, Inc......................................... 20
600 Dell Computer Corp............................................. 41
300 ESS Technology, Inc............................................ 7
500 FactSet Research Systems, Inc.................................. 10
1,000 Fiserv, Inc.................................................... 37
1,000 Gateway 2000, Inc.............................................. 51
1,200 HMT Technology Corp............................................ 15
600 Inacom Corp.................................................... 14
1,500 Ingram Micro, Inc., Class A.................................... 31
600 Intevac, Inc................................................... 8
1,700 Overland Data, Inc............................................. 8
500 Parametric Technology Corp..................................... 23
1,200 Penn Engineering & Manufacturing Corp.......................... 23
1,000 Quantum Corp................................................... 39
800 SCI Systems, Inc............................................... 41
300 Solectron Corp................................................. 15
500 Tech Data Corp................................................. 12
900 Tektronix, Inc................................................. 45
900 Teradyne, Inc.................................................. 26
400 USCS International, Inc........................................ 7
1,200 Western Digital Corp........................................... 68
------
714
------
UTILITIES (3.8%)
600 Black Hills Corp............................................... 16
500 GPU, Inc....................................................... 16
1,200 IPALCO Enterprises, Inc........................................ 36
500 Nevada Power Co................................................ 10
700 Puget Sound Power & Light Co................................... 18
1,700 Washington Water Power Co...................................... 29
------
125
------
TOTAL INVESTMENTS (95.9%)
(COST $3,145*)........................................................ 3,143
------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
-----------
<C> <S> <C> <C>

OTHER ASSETS
(5.5%)
Cash............ $ 24
Receivable for
Investments
Sold........... 146
Receivable from
Investment
Adviser........ 7
Dividends
Receivable..... 3
----
180
------
LIABILITIES (-
1.4%)
Payable for
Investments
Purchased...... (34)
Custodian Fees
Payable........ (5)
Administrative
Fees Payable... (1)
Other
Liabilities.... (7)
----
(47)
------
NET ASSETS
(100%)......... $3,276
======
NET ASSET VALUE,
OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 323,541
outstanding $0.001
par value shares,
unlimited number
authorized.......... $10.13
======
NET ASSETS CONSIST
OF:
Paid in Capital...... $3,252
Undistributed Net
Investment Income... 4
Accumulated Net
Realized Gain....... 22
Unrealized
Depreciation on
Investments......... (2)
------
NET ASSETS........... $3,276
======
</TABLE>

ADR--American Depositary Receipt
* At March 31, 1997, cost, unrealized appreciation, unrealized depreciation and
net unrealized depreciation for U.S. Federal income tax purposes of the
investments of the Portfolio were:

For the period ended March 31, 1997, purchases and sales of investment
securities for the Portfolio other than long-term U.S. Government securities
and short-term investments were $3,660,000 and $552,000 respectively. There
were no long-term purchases and sales of U.S. Government securities.

The accompanying notes are an integral part of the financial statements.

F-19
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

STATEMENT OF NET ASSETS
(UNAUDITED)

MARCH 31, 1997

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

COMMON STOCKS (87.9%)
BANKS (8.5%)
200 Banc One Corp. ................................................ $ 8
700 Bank of New York Co............................................ 26
600 Capital One Financial Corp..................................... 22
300 Chase Manhattan Corp........................................... 28
300 Citicorp....................................................... 32
400 Crestar Financial Corp. ....................................... 14
400 First Chicago NBD Corp. ....................................... 22
300 First Union Corp............................................... 24
300 Mellon Bank Corp. ............................................. 22
300 Republic New York Corp. ....................................... 26
700 Signet Banking Corp. .......................................... 21
400 Standard Federal Bancorp. ..................................... 23
------
268
------
BASIC RESOURCES (5.6%)
700 Cabot Oil & Gas Corp., Class A................................. 17
600 Cyprus Amax Minerals Co. ...................................... 14
200 Dow Chemical Co. .............................................. 16
400 E.I. DuPont de Nemours & Co. .................................. 42
1,000 Great Lakes Chemical Corp. .................................... 46
400 Rohm & Haas Co. ............................................... 30
500 Westvaco Corp. ................................................ 13
------
178
------
CONSUMER DURABLES (6.8%)
2,500 Ford Motor Co.................................................. 78
900 General Motors Corp. .......................................... 50
1,200 Goodyear Tire & Rubber Co...................................... 63
600 Premark International, Inc. ................................... 12
400 Tupperware Corp................................................ 13
------
216
------
CONSUMER SERVICES (0.4%)
400 Standard Register Co. ......................................... 13
------
CREDIT & FINANCIAL/INVESTMENT COMPANIES (2.4%)
400 Federal Home Loan Mortgage Corp................................ 11
600 Federal National Mortgage Association.......................... 22
600 Great Western Financial........................................ 24
400 Salomon, Inc................................................... 20
------
77
------
ENERGY (9.2%)
400 Amoco Corp..................................................... 35
300 Atlantic Richfield Co. ........................................ 40
300 British Petroleum plc ADR...................................... 41
400 El Paso Natural Gas Co. ....................................... 23
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------ ------
<C> <S> <C>

900 MAPCO, Inc..................................................... $ 28
400 PanEnergy Corp. ............................................... 17
600 Phillips Petroleum Co.......................................... 24
800 Repsol SA ADR.................................................. 33
600 Ultramar Diamond Shamrock Corp. ............................... 19
1,200 YPF SA ADR..................................................... 32
------
292
------
FOOD, TOBACCO & OTHER (5.2%)
1,100 Archer Daniels Midland Co...................................... 20
1,000 IBP, Inc. ..................................................... 25
600 Philip Morris Co., Inc......................................... 68
800 RJR Nabisco Holdings Corp. .................................... 26
800 Universal Foods Corp........................................... 27
------
166
------
HEALTH CARE (5.3%)
1,000 Beckman Instruments, Inc. ..................................... 42
900 Bergen Brunswig Corp., Class A................................. 27
900 Foundation Health Corp......................................... 33
700 Mallinckrodt, Inc.............................................. 29
600 Maxicare Health Plans, Inc. ................................... 15
1,200 Nellcor, Inc. ................................................. 21
------
167
------
HEAVY INDUSTRY/TRANSPORTATION (21.6%)
300 AMR Corp....................................................... 25
300 Burlington Northern Santa Fe, Inc. ............................ 22
800 Case Corp...................................................... 41
200 Caterpillar, Inc............................................... 16
400 CSX Corp. ..................................................... 19
2,600 Cummins Engine Co., Inc. ...................................... 133
700 Deere & Co. ................................................... 30
500 Eaton Corp. ................................................... 35
500 FMC Corp. ..................................................... 31
900 Harnischfeger Industries, Inc. ................................ 42
800 Kennametal, Inc. .............................................. 29
900 Olsten Corp. .................................................. 14
700 Parker Hannifin Corp. ......................................... 30
500 Raytheon Corp. ................................................ 23
700 Tecumseh Products Co., Class A................................. 40
400 Textron, Inc. ................................................. 42
1,700 Trinova Corp. ................................................. 57
600 TRW, Inc. ..................................................... 31
400 UAL Corp. ..................................................... 26
------
686
------
INSURANCE (6.9%)
500 Allstate Corp. ................................................ 30
600 American General Corp. ........................................ 24
300 Chubb Corp. ................................................... 16
1,000 Everest Reinsurance Holdings, Inc. ............................ 29
300 ITT Hartford Group, Inc. ...................................... 22
900 Old Republic International Corp. .............................. 23
500 Providian Corp. ............................................... 27
</TABLE>

F-20
<PAGE>

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

400 ReliaStar Financial Corp. ..................................... $ 24
300 Transatlantic Holdings, Inc. .................................. 25
------
220
------
RETAIL (3.9%)
700 Dillard Department Stores, Inc., Class A....................... 22
600 Springs Industries, Inc., Class A.............................. 27
300 Talbots, Inc................................................... 9
1,100 Toys R Us, Inc. ............................................... 31
500 V.F. Corp...................................................... 33
------
122
------
TECHNOLOGY (8.1%)
400 Compaq Computer Corp........................................... 31
500 International Business Machines Corp. ......................... 69
1,500 Seagate Technology............................................. 67
1,200 Stratus Computer, Inc.......................................... 37
700 Tektronix, Inc................................................. 35
300 Western Digital Corp. ......................................... 17
------
256
------
UTILITIES (4.0%)
900 Central Maine Power Co......................................... 10
400 CINergy Corp. ................................................. 14
600 DTE Energy Co.................................................. 16
700 Entergy Corp................................................... 17
600 GPU, Inc. ..................................................... 19
500 MCI Communications Corp........................................ 18
800 PECO Energy Co. ............................................... 16
400 Sprint Corp. .................................................. 18
------
128
------
TOTAL COMMON STOCKS (COST $2,788)...................................... 2,789
------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
------
<C> <S> <C> <C>
SHORT-TERM INVESTMENTS (12.2%)
REPURCHASE AGREEMENTS (12.2%)
$387 Chase Securities, Inc. 6.00%, dated 3/31/97, due 4/1/97,
to be repurchased at $387, collateralized by U.S. Treasury
Notes, 7.875%, due 11/15/04, valued at $396,
(Cost $387)............................................... 387
------
TOTAL INVESTMENTS (100.1%)
(COST $3,175*)................................................... 3,176
------
</TABLE>

The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
---------- --------------
<C> <S> <C> <C>

OTHER ASSETS
(0.4%)
Dividends Re-
ceivable....... $ 4
Receivable from
Investment Ad-
viser.......... 9 13
------
LIABILITIES (-
0.5%)
Custodian Fees
Payable........ $ (3)
Payable for In-
vestments Pur-
chased......... (2)
Administrative
Fees Payable... (1)
Other Liabili-
ties........... (10) $ (16)
------ ------
NET ASSETS
(100%)......... $3,173
======
</TABLE>

<TABLE>
<CAPTION>
AMOUNT
(000)
-------
<C> <S> <C> <C>
NET ASSET
VALUE,
OFFERING AND
REDEMPTION
PRICE PER
SHARE
Applicable to
313,289
outstanding
$0.001 par
value shares,
unlimited
number
authorized... $ 10.13
=======
NET ASSETS
CONSIST OF:
Paid in
Capital...... $ 3,139
Undistributed
Net
Investment
Income....... 15
Accumulated
Net Realized
Gain......... 18
Unrealized
Appreciation
on
Investments.. 1
-------
NET ASSETS.... $ 3,173
=======
</TABLE>
- -------
* At March 31, 1997, cost, unrealized appreciation, unrealized depreciation and
net unrealized appreciation for U.S. Federal income tax purposes of the
investments of the Portfolio were:

<TABLE>
<CAPTION>
UNREALIZED UNREALIZED NET
COST APPRECIATION DEPRECIATION APPRECIATION
(000) (000) (000) (000)
------ ------------ ------------ ------------
<S> <C> <C> <C>
$3,175 $93 $(92) $ 1
</TABLE>

For the period ended March 31, 1997, purchases and sales of investment
securities for the Portfolio other than long-term U.S. Government securities
and short-term investments were $2,952,000 and $218,000 respectively. There
were no long-term purchases and sales of U.S. Government securities.

F-21
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

STATEMENT OF NET ASSETS
(UNAUDITED)

MARCH 31, 1997

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

FIXED INCOME SECURITIES (87.3%)
AGENCY FIXED RATE MORTGAGES (42.4%)
Federal Home Loan Mortgage Corporation
Conventional Pool:
$ 40 10.50%, 9/01/16......................................... $ 44
Gold Pools:
March TBA
800 7.50%, 6/15/27.......................................... 787
April TBA
2,000 7.50%, 6/15/26-12/15/26................................. 1,967
Federal National Mortgage Association
Conventional Pools:
20 10.00%, 9/01/10......................................... 22
45 11.50%, 7/01/13......................................... 51
Government National Mortgage Association
Various Pools:
285 7.125%, 7/20/25......................................... 290
195 10.00%, 7/15/16-10/15/16................................ 213
73 10.50%, 1/15/18......................................... 81
30 11.50%, 5/15/13-9/15/15................................. 34
---------
3,489
---------
COLLATERALIZED MORTGAGE OBLIGATIONS--AGENCY COLLATERAL SERIES (1.8%)
Federal Home Loan Mortgage Corporation Series:
5 1709 H PO REMIC, 1/15/24................................ 2
9 1750-C PD PO REMIC, 3/15/24............................. 5
5 1813 K PO, 2/15/24...................................... 3
10 1844 PC PO, 3/15/24..................................... 5
5 1897 I PO, 10/15/22..................................... 3
13 93-149 O PO REMIC, 8/25/23.............................. 7
Federal National Mortgage Association Series:
10 96-14 PC PO REMIC, 12/25/23............................. 4
10 96-46 PB PO REMIC, 9/25/23.............................. 5
5 96-54 PO REMIC, 7/25/23................................. 3
10 96-54 O PO REMIC, 11/25/23.............................. 5
50 97-3 E PO REMIC, 12/25/23............................... 27
50 97-7 AE PO REMIC, 2/15/23............................... 32
75 97-7 EB PO REMIC, 2/25/23............................... 46
---------
147
---------
FOREIGN GOVERNMENTS (3.0%)
Government of Canada
CAD 85 9.75%, 6/01/21.......................................... 78
</TABLE>

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

Government of Sweden
SEK 700 6.00%, 2/09/05......................................... $ 87
500 10.25%, 5/05/03........................................ 79
---------
244
---------
INDUSTRIALS (2.5%)
$ 50 Kmart Corp. 7.75%, 10/01/12............................ 43
50 Paramount Communications, Inc. 8.25%, 8/01/22.......... 46
25 RJR Nabisco, Inc. 8.75%, 4/15/04....................... 25
30 Southland Corp. 5.00%, 12/15/03........................ 25
75 Tele-Communications, Inc.
8.75%, 2/15/23........................................ 69
---------
208
---------
STRIPPED MORTGAGE BACKED SECURITIES--AGENCY COLLATERAL SERIES
(0.3%)
Federal National Mortgage Association Series
42 249 1 PO, 10/25/23..................................... 25
---------
U.S. TREASURY SECURITIES (35.9%)
U.S. Treasury Bond
625 8.75%, 8/15/20......................................... 731
U.S. Treasury Notes
950 7.125%, 9/30/99........................................ 963
1,225 7.50%, 2/15/05......................................... 1,267
---------
2,961
---------
YANKEE (1.4%)
25 National Power Corp.
7.875%, 12/15/06...................................... 24
25 National Power Corp.
8.40%, 12/15/16....................................... 23
# 75 Republic of Argentina
5.25%, 3/31/23........................................ 47
25 Republic of Colombia
8.70%, 2/15/16........................................ 24
---------
118
---------
TOTAL FIXED INCOME SECURITIES
(COST $7,330)..................................................... 7,192
---------
SHORT-TERM INVESTMENTS (46.2%)
REPURCHASE AGREEMENTS (46.2%)
1,277 Chase Securities, Inc. 6.00%, dated 3/31/97, due
4/1/97, to be repurchased at $1,277, collateralized by
U.S. Treasury Notes, 7.875%, due 11/15/04, valued at
$1,303 (Cost $1,277).................................. 1,277
1,266 Goldman Sachs & Co. 6.00%, dated 3/31/97, due 4/1/97,
to be repurchased at $1,266, collateralized by U.S.
Treasury Bonds, 9.125%, due 5/15/09, valued at $1,298
(Cost $1,266)......................................... 1,266
</TABLE>

F-22
<PAGE>

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

$ 1,266 Merrill Lynch & Co., Inc. 6.25%, dated 3/31/97, due
4/1/97, to be repurchased at $1,266, collateralized by
U.S. Treasury Notes, 7.125%,
due 10/15/98, valued at $1,293
(Cost $1,266)......................................... $ 1,266
---------
TOTAL SHORT-TERM INVESTMENTS
(COST $3,809)..................................................... 3,809
---------
TOTAL INVESTMENTS (133.5%)
(COST $11,139*)................................................... 11,001
---------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (5.6%)
Receivable for Investments Sold.............................. $ 400
Interest Receivable.......................................... 41
Receivable from Investment Adviser........................... 10
Net Unrealized Gain on Foreign Currency Exchange Contracts... 5 456
-------
LIABILITIES (-39.1%)
Payable for Investments Purchased............................ (3,194)
Custodian Fees Payable....................................... (5)
Bank Overdraft Payable....................................... (3)
Administrative Fees Payable.................................. (2)
Other Liabilities............................................ (13) (3,217)
------- -------
NET ASSETS (100%)............................................ $ 8,240
=======
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 824,627 outstanding $0.001 par value shares, unlimited
number authorized................................................... $ 9.99
=======
NET ASSETS CONSIST OF:
Paid in Capital...................................................... $ 8,249
Undistributed Net Investment Income.................................. 102
Accumulated Net Realized Gain........................................ 23
Unrealized Depreciation on Investments and Foreign Currency
Translations........................................................ (134)
-------
NET ASSETS........................................................... $ 8,240
=======
</TABLE>

The accompanying notes are an integral part of the financial statements.

FOREIGN CURRENCY EXCHANGE INFORMATION:

Under the terms of foreign currency exchange contracts open at March 31, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:

<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN
(000) (000) DATE (000) (000) (000)
- ---------- ----- ---------- --------- ----- ----------
<S> <C> <C> <C> <C> <C>
DEM 250 $150 4/21/97 U.S.$ 158 $158 8
U.S.$ 154 154 4/21/97 DEM 250 150 (4)
CAD 115 83 5/27/97 U.S.$ 85 85 2
U.S.$ 4 4 5/27/97 CAD 5 4 --
SEK 650 86 5/28/97 U.S.$ 87 87 1
SEK 660 88 5/28/97 U.S.$ 86 86 (2)
U.S.$ 1 1 5/28/97 SEK 5 1 --
---- ---- ---
$566 $571 $ 5
==== ==== ===
</TABLE>

- -------
#--Step Bond--Coupon rate increases in increments to maturity. Rate disclosed
is as of March 31, 1997. Maturity date disclosed is the ultimate
maturity.
PO --Principle Only
REMIC--Real Estate Mortgage Investment Conduit
TBA--Security is subject to delayed delivery. See Note A-6
CAD --Canadian Dollar
DEM --Deutsche Mark
SEK --Swedish Krona
- -------
* At March 31, 1997, cost, unrealized appreciation, unrealized depreciation and
net unrealized depreciation for U.S. Federal income tax purposes of the
investments of the Portfolio were:

<TABLE>
<CAPTION>
UNREALIZED UNREALIZED NET
COST APPRECIATION DEPRECIATION DEPRECIATION
(000) (000) (000) (000)
- ------- ------------ ------------ ------------
<S> <C> <C> <C>
$11,139 $ 3 $(141) $(138)
</TABLE>

For the period ended March 31, 1997, purchases and sales of investment
securities for the Portfolio, were approximately $9,764,000 and $2,430,000,
respectively.

F-23
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

STATEMENT OF NET ASSETS
(UNAUDITED)

MARCH 31, 1997

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

FIXED INCOME SECURITIES (89.4%)
CABLE (6.6%)
$ 150 Cablevision Systems Corp.,
9.875%, 5/15/06............................................ $ 149
120 Comcast Corp., 9.375%, 5/15/05.............................. 123
# 100 Marcus Cable Co., 0.00%, 12/15/05........................... 70
185 Rogers Cablesystems, 10.00%, 3/15/05........................ 195
-------
537
-------
CONSUMER SERVICES/PRODUCTS (6.8%)
155 RJR Nabisco, Inc., 8.75%, 4/15/04........................... 155
150 TLC Beatrice International Holdings, Inc., 11.50%,
10/01/05................................................... 161
250 Viacom, Inc., 8.00%, 7/07/06................................ 235
-------
551
-------
ENERGY (1.2%)
100 Vintage Petroleum, 8.625%, 2/01/09.......................... 95
-------
FINANCE (2.8%)
100 Amresco, Inc., Series 97-A,
10.00%, 3/15/04............................................ 99
130 First Nationwide Holdings, Inc.,
9.125%, 1/15/03............................................ 133
-------
232
-------
INDUSTRIALS (23.2%)
125 Advanced Micro Devices,
11.00%, 8/01/03............................................ 138
175 Boyd Gaming Corp., 9.25%, 10/01/03.......................... 165
177 DR Securitized Lease Trust, Series 93-K1 A1, 6.66%,
8/15/10.................................................... 151
87 DR Securitized Lease Trust, Series 94-K1 A1, 7.60%,
8/15/07.................................................... 81
100 DR Securitized Lease Trust, Series 94-K1 A2, 8.375%,
8/15/15.................................................... 88
# 220 Gaylord Container Corp.,
12.75%, 5/15/05............................................ 242
125 Grand Casinos, Inc., 10.125%, 12/01/03...................... 124
175 Host Marriott Travel Plaza,
9.50%, 5/15/05............................................. 178
245 ISP Holdings, Inc., 9.00%, 10/15/03......................... 247
50 Kmart Corp., 7.75%, 10/01/12................................ 43
# 185 Norcal Waste Systems, Inc.,
13.00%, 11/15/05........................................... 205
100 SD Warren Co., 12.00%, 12/15/04............................. 111
120 Tenet Healthcare Corp., 8.625%, 1/15/07..................... 118
-------
1,891
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<C> <S> <C>

SUPERMARKETS (2.0%)
$ 200 Southland Corp., 5.00%, 12/15/03............................ $ 164
-------
TELECOMMUNICATIONS (15.3%)
# 250 Brooks Fiber Properties, 0.00%, 3/01/06..................... 158
# 110 Brooks Fiber Properties, 0.00%, 11/01/06.................... 66
# 215 EchoStar Satellite Broadcast,
0.00%, 3/15/04............................................. 171
125 IXC Communications Inc., Series B, 12.50%, 10/01/05......... 139
# 480 Nextel Communications, 0.00%, 8/15/04....................... 331
210 Tele-Communications, Inc.,
9.25%, 1/15/23............................................. 202
# 270 Teleport Communications,
0.00%, 7/01/07............................................. 183
-------
1,250
-------
UTILITIES (4.0%)
160 Cleveland Electric Illuminating Co.,
Series B, 8.375%, 12/01/11................................. 156
158 Midland Cogeneration Ltd. Venture LP, Series C-94, 10.33%,
7/23/02.................................................... 168
-------
324
-------
U.S. TREASURY SECURITIES (14.3%)
1,200 U.S. Treasury Note, 6.50%, 10/15/06......................... 1,163
-------
YANKEE (13.2%)
# 500 Republic of Argentina, 5.25%, 3/31/23....................... 311
# 175 Republic of Brazil Front Loaded Interest Reduction Bond,
4.50%, 4/15/09............................................. 129
210 Republic of Colombia, 8.70%, 2/15/16........................ 204
250 Republic of Venezuela, Series A,
6.75%, 3/31/20............................................. 176
125 Russian Interest Arrears Note,
6.75%, 6/30/17............................................. 84
250 United Mexican States, 6.25%, 12/31/19...................... 175
-------
1,079
-------
TOTAL FIXED INCOME SECURITIES
(COST $7,433)....................................................... 7,286
-------
<CAPTION>
SHARES
------
<C> <S> <C>
PREFERRED STOCKS (5.6%)
CABLE (5.6%)
1,375 TCI Pacific Communications, 5.00% (Convertible)............. 126
305 Time Warner, Inc., Series M, 10.25%......................... 329
-------
TOTAL PREFERRED STOCKS
(COST $458)......................................................... 455
-------
</TABLE>

F-24
<PAGE>

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

RIGHTS (0.0%)
YANKEE (0.0%)
250,000 Mexico Recovery Rights, expiring 6/30/03.................... $ --
1,250 Republic of Venezuela Recovery Rights, expiring 3/31/20..... --
-------
TOTAL RIGHTS
(COST $0)........................................................... --
-------
<CAPTION>
FACE
AMOUNT
(000)
------
<C> <S> <C>
SHORT-TERM INVESTMENT (6.7%)
REPURCHASE AGREEMENT (6.7%)
$ 543 Chase Securities, Inc. 6.00%, dated 3/31/97, due 4/1/97, to
be repurchased at $543, collateralized by U.S. Treasury
Notes, 7.875%, due 11/15/04, valued at $554 (Cost $543).... 543
-------
TOTAL INVESTMENTS (101.7%)
(COST $8,434*)...................................................... 8,284
-------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (2.2%)
Interest Receivable.............................................. $ 182 182
-----
LIABILITIES (-3.9%)
Payable for Investments Purchased................................ (305)
Custodian Fees Payable........................................... (3)
Administrative Fees Payable...................................... (2)
Other Liabilities................................................ (8) (318)
----- ------
NET ASSETS (100.0%).............................................. $8,148
======
</TABLE>

The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
VALUE
(000)
-------
<S> <C>

NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 815,887 outstanding $0.001 par value shares, unlimited
number authorized.................................................... $ 9.99
=======
</TABLE>

<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital......................................................... $8,162
Undistributed Net Investment Income..................................... 139
Accumulated Net Realized Loss........................................... (3)
Unrealized Depreciation on Investments.................................. (150)
------
NET ASSETS.............................................................. $8,148
======
</TABLE>
- -------
# Step Bond--Coupon rate increases in increments to maturity. Rate disclosed
is as of March 31, 1997. Maturity date disclosed is the ultimate maturity.
* At March 31, 1997, cost, unrealized appreciation, unrealized depreciation and
net unrealized depreciation for U.S. Federal income tax purposes of the
investments of the Portfolio were:

<TABLE>
<CAPTION>
UNREALIZED UNREALIZED NET
COST APPRECIATION DEPRECIATION DEPRECIATION
(000) (000) (000) (000)
------ ------------ ------------ ------------
<S> <C> <C> <C>
$8,434 $21 $(171) $(150)
</TABLE>

For the period ended March 31, 1997, purchases and sales of investment
securities for the Portfolio, were approximately $10,264,000 and $2,396,000,
respectively.

F-25
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
MID CAP
VALUE GROWTH
PORTFOLIO PORTFOLIO
PERIOD FROM PERIOD FROM
JANUARY 2, JANUARY 2,
1997* TO 1997* TO
MARCH 31, MARCH 31,
1997 1997
(000) (000)
----------- -----------
<S> <C> <C>
INVESTMENT INCOME:
Dividends.............................................. $ 9 $ 7
Interest............................................... 3 3
--- ----
Total Income.......................................... 12 10
--- ----
EXPENSES:
Investment Advisory Fees............................... 6 4
Less: Fees Waived..................................... (6) (4)
--- ----
Net Investment Advisory Fees........................... -- --
Custodian Fees......................................... 5 18
Professional Fees...................................... 4 7
Shareholder Reports.................................... 3 8
Administrative Fees.................................... 2 6
Directors' Fees and Expenses........................... -- 1
Other.................................................. -- 1
Expenses Reimbursed by Adviser......................... (6) (35)
--- ----
Net Expenses.......................................... 8 6
--- ----
Net Investment Income................................... 4 4
--- ----
NET REALIZED GAIN ON INVESTMENTS: 22 61
--- ----
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON
INVESTMENTS: (2) 8
--- ----
Net Realized Gain and Change in Unrealized Appreciation/
Depreciation........................................... 20 69
--- ----
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.... $24 $ 73
=== ====
</TABLE>
- -------
* Commencement of operations

The accompanying notes are an integral part of the financial statements.
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
GLOBAL INTERNATIONAL
EQUITY MAGNUM
PORTFOLIO PORTFOLIO
PERIOD FROM PERIOD FROM
JANUARY 2, JANUARY 2,
1997* TO 1997* TO
MARCH 31, MARCH 31,
1997 1997
(000) (000)
----------- -------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends.......................................... $ 22 $ 48
Interest........................................... 10 19
Less: Foreign Taxes Withheld...................... (2) (7)
---- ----
Total Income...................................... 30 60
---- ----
EXPENSES:
Investment Advisory Fees........................... 10 20
Less: Fees Waived................................. (10) (20)
---- ----
Net Investment Advisory Fees....................... -- --
Administrative Fees................................ 7 8
Custodian Fees..................................... 8 32
Professional Fees.................................. 10 10
Shareholder Reports................................ 3 8
Directors' Fees and Expenses....................... 1 --
Other.............................................. 1 1
Expenses Reimbursed by Adviser..................... (16) (30)
---- ----
Net Expenses...................................... 14 29
---- ----
Net Investment Income............................... 16 31
---- ----
NET REALIZED GAIN (LOSS) ON:
Investments........................................ -- 9
Foreign Currency Transactions...................... 4 203
---- ----
Net Realized Gain................................. 4 212
---- ----
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments........................................ 69 41
Foreign Currency Translations...................... -- 19
---- ----
Change in Unrealized Appreciation/Depreciation.... 69 60
---- ----
Net Realized Gain and Change in Unrealized
Appreciation/ Depreciation......................... 73 272
---- ----
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS......................................... $ 89 $303
==== ====
</TABLE>
- -------
* Commencement of operations

The accompanying notes are an integral part of the financial statements.

F-26
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE FIXED INCOME HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ------------ -----------
PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 2, JANUARY 2, JANUARY 2,
1997* TO 1997* TO 1997* TO
MARCH 31, MARCH 31, MARCH 31,
1997 1997 1997
(000) (000) (000)
----------- ------------ -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................... $15 $ -- $ --
Interest................................ 6 116 155
--- ----- -----
Total Income............................ 21 116 155
--- ----- -----
EXPENSES:
Investment Advisory Fees................ 4 8 10
Less: Fees Waived...................... (4) (8) (10)
--- ----- -----
Net Investment Advisory Fees............ -- -- --
Custodian Fees.......................... 3 5 3
Professional Fees....................... 7 11 5
Shareholder Reports..................... 3 3 3
Administrative Fees..................... 2 5 5
Expenses Reimbursed by Adviser.......... (9) (10) --
--- ----- -----
Net Expenses........................... 6 14 16
--- ----- -----
Net Investment Income.................... 15 102 139
--- ----- -----
NET REALIZED GAIN (LOSS) ON:
Investments Sold........................ 18 18 (3)
Foreign Currency Transactions........... -- 5 --
--- ----- -----
Net Realized Gain (Loss)............... 18 23 (3)
--- ----- -----
CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION ON:
Investments............................. 1 (138) (150)
Foreign Currency Translations........... -- 4 --
--- ----- -----
Change in Unrealized Appreciation/
Depreciation........................... 1 (134) (150)
--- ----- -----
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/
Depreciation............................ 19 (111) (153)
--- ----- -----
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS............... $34 $ (9) $ (14)
=== ===== =====
</TABLE>
- -------
* Commencement of operations

The accompanying notes are an integral part of the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
GLOBAL INTERNATIONAL
EQUITY MAGNUM
PORTFOLIO PORTFOLIO
----------- -------------
PERIOD FROM PERIOD FROM
JANUARY 2, JANUARY 2,
1997* TO 1997* TO
MARCH 31, MARCH 31,
1997 1997
(000) (000)
----------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income.............................. $ 16 $ 31
Net Realized Gain.................................. 4 212
Change in Unrealized Appreciation/
Depreciation...................................... 69 60
------ -------
Net Increase in Net Assets Resulting from
Operations........................................ 89 303
------ -------
CAPITAL SHARE
TRANSACTIONS(1):
Subscribed......................................... 5,093 10,379
Redeemed........................................... -- (1)
------ -------
Net Increase in Net Assets Resulting from Capital
Share Transactions................................ 5,093 10,378
------ -------
Total Increase in Net Assets....................... 5,182 10,681
NET ASSETS:
Beginning of Period................................ -- --
------ -------
End of Period...................................... $5,182 $10,681
====== =======
Undistributed net investment income included in end
of period net assets............................... $ 16 $ 31
====== =======
(1) Capital Share Transactions:
Shares Subscribed.................................. 509 1,037
Shares Redeemed.................................... -- --
------ -------
Net Increase in Capital Shares Outstanding......... 509 1,037
====== =======
</TABLE>
- -------
* Commencement of operations

The accompanying notes are an integral part of the financial statements.

F-27
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
MID CAP
VALUE GROWTH
PORTFOLIO PORTFOLIO
PERIOD FROM PERIOD FROM
JANUARY 2, 1997* JANUARY 2, 1997*
TO TO
MARCH 31, 1997 MARCH 31, 1997
(000) (000)
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS OPERATIONS:
Net Investment Income........................ $ 4 $ 4
Net Realized Gain............................ 22 61
Change in Unrealized Appreciation/
Depreciation................................ (2) 8
------ ------
Net Increase in Net Assets Resulting from
Operations.................................. 24 73
------ ------
CAPITAL SHARE TRANSACTIONS(1):
Subscribed................................... 3,252 2,766
Redeemed..................................... -- (24)
------ ------
Net Increase in Net Assets Resulting from
Capital Share Transactions.................. 3,252 2,742
------ ------
Total Increase in Net Assets................. 3,276 2,815
NET ASSETS:
Beginning of Period.......................... -- --
------ ------
End of Period................................ $3,276 $2,815
====== ======
Undistributed net investment income included
in end of period net assets................. $ 4 $ 4
====== ======
(1) Capital Share Transactions:
Shares Subscribed............................ 324 274
Shares Redeemed.............................. -- (2)
------ ------
Net Increase in Capital Shares Outstanding... 324 272
====== ======
</TABLE>
- -------
* Commencement of operations

The accompanying notes are an integral part of the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE FIXED INCOME HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 2, JANUARY 2, JANUARY 2,
1997* TO 1997* TO 1997* TO
MARCH 31, MARCH 31, MARCH 31,
1997(000) 1997(000) 1997(000)
----------- ------------ -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income.................... $ 15 $ 102 $ 139
Net Realized Gain (Loss)................. 18 23 (3)
Change in Unrealized Appreciation/
Depreciation............................ 1 (134) (150)
------ ------ ------
Net Increase (Decrease) in Net Assets
Resulting from Operations............... 34 (9) (14)
------ ------ ------
CAPITAL SHARE TRANSACTIONS(1):
Subscribed............................... 3,139 8,261 8,173
Redeemed................................. -- (12) (11)
------ ------ ------
Net Increase in Net Assets Resulting from
Capital Share Transactions.............. 3,139 8,249 8,162
------ ------ ------
Total Increase in Net Assets............. 3,173 8,240 8,148
NET ASSETS:
Beginning of Period...................... -- -- --
------ ------ ------
End of Period............................ $3,173 $8,240 $8,148
====== ====== ======
Undistributed net investment income
included in end of period net assets..... $ 15 $ 102 $ 139
====== ====== ======
(1) Capital Share Transactions:
Shares Subscribed........................ 313 826 817
Shares Redeemed.......................... -- (1) (1)
------ ------ ------
Net Increase in Capital Shares
Outstanding.............................. 313 825 816
====== ====== ======
</TABLE>
- -------
* Commencement of operations

The accompanying notes are an integral part of the financial statements.

F-28
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
FINANCIAL HIGHLIGHTS
(UNAUDITED)

<TABLE>
<CAPTION>
GLOBAL INTERNATIONAL
EQUITY MAGNUM
PORTFOLIO PORTFOLIO
-------------- --------------
PERIOD FROM PERIOD FROM
JANUARY 2, JANUARY 2,
1997* TO 1997* TO
SELECTED PER SHARE DATA AND RATIOS MARCH 31, 1997 MARCH 31, 1997
---------------------------------- -------------- --------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 10.00 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................ 0.03 0.03
Net Realized and Unrealized Gain................. 0.15 0.27
------- -------
Total From Investment Operations................ 0.18 0.30
------- -------
NET ASSET VALUE, END OF PERIOD.................... $ 10.18 $ 10.30
======= =======
TOTAL RETURN...................................... 1.80% 3.00%
======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)................. $ 5,182 $10,681
Ratio of Expenses to Average Net Assets........... 1.15%** 1.15%**
Ratio of Net Investment Income to Average Net
Assets........................................... 1.31%** 1.25%**
Portfolio Turnover Rate........................... 0% 6%
Average Commission Rate#.......................... $0.0161 $0.0103
------- -------
Effect of Voluntary Expense Limitation During the
Period
Per Share Benefit to Net Investment Income...... $ 0.05 $ 0.05
Ratios Before Expense Limitation:
Expenses to Average Net Assets.................. 3.22%** 3.16%**
Net Investment Income to Average Net Assets..... (0.76)%** (0.75)%**
------- -------
</TABLE>
- -------
* Commencement of operations
** Annualized
# For the period ended March 31, 1997, the average commission rate paid on
trades on which commissions were charged was 0.11% and 0.09% of the trade
amount for the Global Equity and International Magnum Portfolios,
respectively.

The accompanying notes are an integral part of the financial statements.
FINANCIAL HIGHLIGHTS
(UNAUDITED)

<TABLE>
<CAPTION>
MID CAP
VALUE GROWTH
PORTFOLIO PORTFOLIO
-------------- --------------
PERIOD FROM PERIOD FROM
JANUARY 2, JANUARY 2,
1997* TO 1997* TO
SELECTED PER SHARE DATA AND RATIOS MARCH 31, 1997 MARCH 31, 1997
---------------------------------- -------------- --------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 10.00 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................ 0.01 0.02
Net Realized and Unrealized Gain................. 0.12 0.31
------- -------
Total From Investment Operations................ 0.13 0.33
------- -------
NET ASSET VALUE, END OF PERIOD.................... $ 10.13 $ 10.33
======= =======
TOTAL RETURN...................................... 1.30% 3.30%
======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)................. $ 3,276 $ 2,815
Ratio of Expenses to Average Net Assets........... 1.05%** 0.85%**
Ratio of Net Investment Income to Average Net
Assets........................................... 0.54%** 0.63%**
Portfolio Turnover Rate........................... 23% 58%
Average Commission Rate........................... $0.0341 $0.0469
------- -------
Effect of Voluntary Expense Limitation During the
Period
Per Share Benefit to Net Investment Income...... $ 0.04 $ 0.14
Ratios Before Expense Limitation:
Expenses to Average Net Assets.................. 2.60%** 6.66%**
Net Investment Income to Average Net Assets..... (1.01)%** (5.18)%**
------- -------
</TABLE>
- -------
* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

F-29
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.
FINANCIAL HIGHLIGHTS
(UNAUDITED)

<TABLE>
<CAPTION>
FIXED
VALUE INCOME HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
PERIOD PERIOD PERIOD
FROM FROM FROM
JANUARY 2, JANUARY 2, JANUARY 2,
1997* TO 1997* TO 1997* TO
MARCH 31, MARCH 31, MARCH 31,
SELECTED PER SHARE DATA AND RATIOS 1997 1997 1997
- ---------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $ 10.00 $10.00 $10.00
------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... 0.05 0.12 0.17
Net Realized and Unrealized Gain (Loss)..... 0.08 (0.13) (0.18)
------- ------ ------
Total From Investment Operations.......... 0.13 (0.01) (0.01)
------- ------ ------
NET ASSET VALUE, END OF PERIOD................ $ 10.13 $ 9.99 $ 9.99
======= ====== ======
TOTAL RETURN.................................. 1.30% (0.10)% (0.10)%
======= ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)............. $ 3,173 $8,240 $8,148
Ratio of Expenses to Average Net Assets....... 0.85%** 0.70%** 0.80%**
Ratio of Net Investment Income to Average Net
Assets....................................... 1.90%** 5.13%** 6.99%**
Portfolio Turnover Rate....................... 10% 44% 42%
Average Commission Rate....................... $0.0586 N/A N/A
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment Income.. $ 0.04 $ 0.02 $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets.............. 2.55%** 1.63%** 1.32%**
Net Investment Income to Average Net
Assets..................................... 0.20%** 4.20%** 6.47%**
</TABLE>
- -------
* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

MARCH 31, 1997

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 March 31, 1997, the Fund was comprised of ten
separate active, diversified and non-diversified portfolios (individually
referred to as the "Portfolio", collectively as the "Portfolios"). The Emerging
Markets Equity Portfolio commenced operations on October 1, 1996. The Global
Equity, International Magnum, 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 each commenced operations on March 3, 1997.

The financial statements presented here are for the Global Equity,
International Magnum, Growth, Mid Cap Value, Value, Fixed Income and High Yield
Portfolios only.

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.

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 of 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.

F-30
<PAGE>

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

MARCH 31, 1997

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: The Portfolios may enter into repurchase agreements
under which a Portfolio lends excess 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.

--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.

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

5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter
into forward foreign currency exchange contracts to attempt to protect
securities and related receivables and payables against changes in future
foreign currency exchange rates. A forward 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 using the
forward rate and the change in market value is recorded by the Portfolio as
unrealized gain

F-31
<PAGE>

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

MARCH 31, 1997

or loss. The Portfolio records realized gains or losses when the contract is
closed equal to the difference between the value of the contract at the time it
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 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 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.

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

<TABLE>
<CAPTION>
ASSETS
-----------------------------
FIRST FROM $500 MORE
$500 MILLION TO THAN
PORTFOLIO MILLION $1 BILLION $1 BILLION
- --------- ------- ---------- ----------
<S> <C> <C> <C>
Global Equity..................................... 0.80% 0.75% 0.70%
International Magnum.............................. 0.80 0.75 0.70
Growth............................................ 0.55 0.50 0.45
</TABLE>

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

<TABLE>
<CAPTION>
ASSETS
-----------------------------
FIRST FROM $500 MORE
$500 MILLION TO THAN
PORTFOLIO MILLION $1 BILLION $1 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 and to them to reimburse the
Portfolios, if necessary, if the annual operating expenses exceed the maximum
operating ratios indicated as follows:

<TABLE>
<CAPTION>
MAXIMUM
EXPENSE
PORTFOLIO RATIO
- --------- -------
<S> <C>
Global Equity........................................................... 1.15%
International Magnum.................................................... 1.15
Growth.................................................................. 0.85
Mid Cap Value........................................................... 1.05
Value................................................................... 0.85
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 an agreement 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, the Administrators pay CGFSC a portion of the fee the
Administrators receive from the Fund. In addition, the Fund incurs local
administration fees in connection with doing business with certain emerging
market countries. Certain employees of CGFSC are officers of the Fund.

F-32
<PAGE>

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

MARCH 31, 1997
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 March
31, 1997, the following Portfolios incurred custody fees and had amounts
payable to MSTC at March 31, 1997.

<TABLE>
<CAPTION>
MSTC CUSTODY FEES
CUSTODY FEES PAYABLE TO
INCURRED MSTC
PORTFOLIO (000) (000)
- --------- ------------ ------------
<S> <C> <C>
Global Equity......................................... $ 3 $ 3
International Magnum.................................. 22 22
</TABLE>

E. OTHER: At March 31, 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 the Portfolio.

F-33
<PAGE>

PART C

Morgan Stanley Universal Funds, Inc.
Other Information

Item 24. Financial Statements and Exhibits
---------------------------------

(A) FINANCIAL STATEMENTS
--------------------

1. Includes in Part A (Prospectus)
-------------------------------

The Registrant's audited financial highlights for the Emerging
Markets Equity Portfolio for the fiscal period ended December 31,
1996, are included in Part A (the prospectuses). No other portfolio
was operational in the fiscal period ended December 31, 1996.
Unaudited financial highlights for the Fixed Income, Global Equity,
Growth, High Yield, International Magnum, Mid Cap Value and Value
Portfolios for the fiscal period from January 2, 1997 (commencement
of operations) to March 31, 1997, are included in Part A (the
prospectuses). The U.S. Real Estate and Asian Equity Portfolios
commenced operations on March 3, 1997.

2. Included in Part B (Statement of Additional Information)
--------------------------------------------------------

The Registrant's audited financial statements for the Emerging
Markets Equity Portfolio for the fiscal year ended December 31, 1996,
including Price Waterhouse LLP's report thereon, are included in Part
B (Statement of Additional Information) and are part of the
Registrant's December 31, 1996 Annual Report to Shareholders. No
other portfolio was operational in the fiscal period ended December
31, 1996. The Registrant's unaudited financial statements for the
Fixed Income, Global Equity, Growth, High Yield, International
Magnum, MidCap Value and Value Portfolios for the period from January
2, 1997 (commencement of operations) to March 31, 1997, are included
in Part B (Statement of Additional Information). The financial
statements included in Part B are:

1. Statement of Net Assets
2. Statement of Operations
3. Statement of Changes in Net Assets
4. Financial Highlights
5. Notes to Financial Statements
6. Report of Independent Accountants

The U.S. Real Estate and Asian Equity Portfolios commenced operations
on March 3, 1997.

(B) EXHIBITS
--------

1 Articles of Incorporation between Registrant and Morgan Stanley Asset
Management Inc. are incorporated by reference to Pre-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the SEC via EDGAR on September
16, 1996.

2 By-laws are incorporated by reference to Pre-Effective Amendment No. 1
to the Registrant's Registration Statement on Form N-1A (File Nos. 333-
3013 and 811-7607), as filed with the SEC via EDGAR on September 16,
1996.

3 Not applicable.

4 Not applicable.

5 (a) Form of Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. ("MSAM") with respect to the Money
Market, Emerging Markets Debt, Growth, U.S. Real Estate, Global
Equity, International Magnum, Emerging Markets Equity and Asian
Equity Portfolios is incorporated by reference to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form
N-1A (File Nos. 333-3013 and 811-7607), as filed with the SEC via
EDGAR on September 16, 1996.

(b) Form of investment Advisory Agreement between Registrant and Miller
Anderson & Sherrerd, LLP ("MAS") with respect to the Fixed income,
high Yield, International Fixed Income, Balanced, Multi-Asset-Class,
Value, Core Equity, Mid Cap Growth and Mid Cap Value Portfolios is
incorporated by reference to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File Nos. 333-3013
and 811-7607), as filed with the SEC via EDGAR on September 16,
1996.

6 Form of Distribution Agreement between Registrant and Morgan Stanley &
Co. Incorporated is incorporated by reference to Pre-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the SEC via EDGAR on September 16,
1996.

7 Not applicable.

8 (a) Form of Domestic Mutual Fund Custody Agreement between Registrant
and Chase Manhattan Bank, N.A. is incorporated by reference to Pre-
Effective Amendment No. 1 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-3013 and 811-7607), as filed with the
SEC via EDGAR on September 16, 1996.

(b) Form of International Custody Agreement between the Registrant and
Morgan Stanley Trust Company is incorporated by reference to Pre-
Effective Amendment No. 1 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-3013 and 811-7607), as filed with the
SEC via EDGAR on September 16, 1996.

9 (a) Form of Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc. is incorporated by reference to Pre-
Effective Amendment No. 1 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-3013 and 811-7607), as filed with the
SEC via EDGAR on September 16, 1996.

(b) Form of Administration Agreement between Registrant and Miller
Anderson & Sherrerd, LLP is incorporated by reference to Pre-
Effective Amendment No. 1 to the Registrant's Registration Statement
on Form N-1A (File No. 333-3013 and 811-7607), as filed with the SEC
via EDGAR on September 16, 1996.

(c) Form of Sub-Administration Agreement between Morgan Stanley Asset
Management Inc. and Chase Global Funds Services Company is
incorporated by reference to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File Nos. 333-3013
and 811-7607), as filed with the SEC via EDGAR on September 16,
1996.

C-1
<PAGE>

(d) Form of Sub-Administration Agreement between Miller Anderson &
Sherrerd LLP and Chase Global Funds Services Company is incorporated
by reference to Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-3013 and 811-
7607), as filed with the SEC via EDGAR on September 16, 1996.

10 Opinion of Counsel is incorporated by reference to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-1A
(Filed Nos. 333-3013 and 811-7607), as filed with the SEC via EDGAR on
September 16, 1996.

11 Consent of Independent Accountants is filed herewith.

12 Not applicable.

13 Not applicable.

14 Not applicable.

15 Not applicable.

16 Not applicable.

24 Powers of Attorney are incorporated by reference to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-1A
(File Nos. 333-3013 and 811-7607), as filed with the SEC via EDGAR on
September 16, 1996.

27 Financial Data Schedules are filed herewith.

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

Item 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------

As of April 7, 1997, "MSGI" a Delaware corporation located at 1585
Broadway, New York, New York 10036 owned of record 97%, 98%, 90%, 93%,
90%, 100%, 97%, 96%, 50%, and 100% of the outstanding voting
securities of the Fixed Income Portfolio, the High Yield Portfolio,
the Equity Growth Portfolio, the Value Portfolio, the Mid Cap Value
Portfolio, the U.S. Real Estate Portfolio, the Global Equity
Portfolio, the International Magnum Portfolio, the Emerging Markets
Equity Portfolio and the Asian Equity Portfolio, respectively.

As required by law, NYLIAC will vote the securities it owns in
accordance with voting instructions received from its variable annuity
contract and variable life insurance policy owners.

Item 26. Number of Holders of Securities
-------------------------------

The following information is given as of April 7, 1997.
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Money Market Portfolio............................ 0
Fixed Income Portfolio............................ 2
High Yield Portfolio.............................. 2
International Fixed Income Portfolio.............. 0
Emerging Markets Debt Portfolio................... 0
Balanced Portfolio................................ 0
Multi-Asset-Class Portfolio....................... 0
Growth Portfolio.................................. 2
Value Portfolio................................... 2
</TABLE>
C-2
<PAGE>

Core Equity Portfolio............................. 0
Mid Cap Growth Portfolio.......................... 0
Mid Cap Value Portfolio........................... 2
U.S. Real Estate Portfolio........................ 1
Global Equity Portfolio........................... 2
International Magnum Portfolio.................... 3
Emerging Markets Equity Portfolio................. 5
Asian Equity Portfolio............................ 1

Item 27. Indemnification
---------------

Reference is made to Article SEVEN of the Registrant's Articles
of Incorporation. Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.

Item 28. Business and Other Connections of Investment Advisers
-----------------------------------------------------

Reference is made to the caption "Management of the Fund--Investment
Advisers" in the Prospectus constituting Part A of this Registration Statement
and "Management of the Fund" in Part B of this Registration Statement.

Listed below are the officers and Directors of Morgan Stanley Asset
Management Inc.:

DIRECTORS:
---------

James M. Allwin Director
Barton M. Biggs Director
Gordon S. Gray Director
Peter A. Nadosy Director
Dennis G. Sherva Director

OFFICERS:
--------

Barton M. Biggs Chairman
Managing Director
Peter A. Nadosy Vice Chairman
Managing Director
James M. Allwin President
Managing Director
John R. Alkire Managing Director (MSAM) - Tokyo
P. Dominic Caldecott Managing Director (MSAM) - UK
A. Macdonald Caputo Managing Director
Ean Wah Chin Managing Director (MSAM) - Singapore
Garry B. Crowder Managing Director
Madhav Dhar Managing Director
Kurt A. Feuerman Managing Director
Paul B. Ghaffari Managing Director
Gordon S. Gray Managing Director
Marianne Liang Hay Managing Director (MSAM) - UK
Gary D. Latainer Managing Director
Mahmoud A. Mamdani Managing Director
Roger L. Meyer Managing Director
Russell C. Platt Managing Director
Robert A. Sargent Managing Director (MSAM) - UK
Bidyut C. Sen Managing Director
Vinod R. Sethi Managing Director
Dennis G. Sherva Managing Director
James L. Tanner Managing Director (MSAM) - UK
Richard G. Woolworth, Jr. Managing Director
Debra M. Aaron Principal
Warren Ackerman III Principal
Robert E. Angevine Principal
Suzanne S. Akers Principal
Gerald P. Barth-Wehrenalp Principal
Theodore R. Bigman Principal
Francine J. Bovich Principal
Stuart J. M. Breslow Principal
Andrew C. Brown Principal (MSAM) - UK
Jeffrey P. Brown Principal
Frances Campion Principal (MSAM) - UK
Terence P. Carmichael Principal
Arthur Certosimo Principal

<PAGE>

Stephen C. Cordy Principal
Jacqueline A. Day Principal (MSAM) - UK
Raye L. Dube Principal
Abigail Jones Feder Principal
Eugene Flood, Jr. Principal
Thomas C. Frame Principal
James Wayne Grisham Principal
Perry E. Hall II Principal
Ruth A. Hughes-Guden Principal
Margaret Kinsley Johnson Principal
Michael F. Klein Principal
Michael B. Kushma Principal
Khoon-Min Lim Principal
Marianne J. Lippmann Principal
Yvonne Longley Principal (MSAW) - UK
Andrew Mack Principal (MSAW) - Tokyo
Gary J. Mangino Principal
Jeffery Margolis Principal
M. Paul Martin Principal
Walter Maynard, Jr. Principal
Margaret P. Naylor Principal (MSAW) - UK
Yoshiro Okawa Principal (MSAW) - UK
Warren Olsen Principal
Christopher G. Petrow Principal
Narayan Ramachandran Principal
Gail Hunt Reeke Principal
Christine I. Reilly Principal
Stefano Russo Principal (MSAW) - Milan
Bruce R. Sandberg Principal
Kiat Seng Seah Principal (MSAW) - Singapore
Stephen C. Sexauer Principal
Robert M. Smith Principal
Kunibiko Sugio Principal (MSAW) - Tokyo
Ann D. Thivierge Principal
Philip W. Winters Principal
Alford E. Zick, Jr. Principal
Maryann Savadelis Agre Vice President
Peter Aliprantis Vice President
Jeffery Alvino Vice President
Alistair Anderson Vice President
William S. Auslander Vice President
Kimberly L. Austin Vice President
Marshall T. Bassett Vice President
Christopher Blair Vice President
Richard Boon Vice President
Geraldine Boyle Vice President
Paul Boyne Vice President
L. Kenneth Brooks Vice President
Jonathan Paul Buckeridge Vice President (MSAM) - Melbourne
Carl Kuo-Wei Chien Vice President (MSAM) - Hong Kong

<PAGE>

Lori A. Cohane Vice President
James Colmenares Vice President
Kate Cornish-Bowden Vice President
Nikhil Dhaon Vice President
Chrisine H. du Bois Vice President
Richard S. Farden Vice President
Daniel E. Fox Vice President
Karen T. Frost Vice President
Lisa Gallo Vice President
Josephine M. Glass Vice President
Charles A. Golden Vice President
Dimitri Goulandris Vice President
James A. Grasselino Vice President
Kenneth John Greig Vice President (MSAM)-UK
Maureen A. Grover Vice President
Michael Hewett Vice President
Kenneth R. Holley Vice President
Holly D. Hopps Vice President
Etsuko Fuyeya Jennings Vice President
Donald B. Johnston Vice President
Jaideep Khanna Vice President
Peter L. Kirby Vice President
George Koshy Vice President
Paul Koske Vice President
Daniel R. Lascano Vice President
Arthur J. Lev Vice President
Valerie Y. Lewis Vice President
Jane Likins Vice President (MSAM)-UK
William David Lock Vice President (MSAM)-UK
Gordon W. Loery Vice President
Paula J. Morgan Vice President
Nancy Morton Vice President
Clare K. Mutome Vice President
Terumi Nagata Vice President (MSAM)-Tokyo
Bradley Okita Vice President
Martin O. Pearce Vice President (MSAM)-UK
Alexander A. Pena Vice President
Anthony J. Pesce Vice President
David J. Polansky Vice President
Karen Post Vice President
Akash Prakash Vice President (MSAM)-Muabai
Gregg A. Robinson Vice President
Gerald D. Rubin Vice President
Donald P. Ryan Vice President
Neil Siegel Vice President
Ashutosh Sinha Vice President
Andy B. Skov Vice President
Michael James Smith Vice President (MSAM)-UK
Kim I Spellman Vice President
Joseph P. Stadler Vice President
Christian K. Stadlinger Vice President
Catherine Steinhardt Vice President
Ram K. Sundaram Vice President
Keiko Tamaki-Kuroda Vice President
Shunso Tatsumi Vice President
Louise Teeple Vice President
Joseph Y.S. Tern Vice President (MSAM)-Singapore
Landon Thomas Vice President
Richard Boon Hwee Toh Vice President (MSAM)-Singapore
K.N. Vaidyanathan Vice President (MSAM)-Muabai
Dennis J. Walsh Vice President
Jacob Walthour Vice President
Kevin V. Wasp Vice President
Patricia Woo Vice President
Harold J. Schaaff, Jr. Principal
General Counsel and Secretary
Eileen K. Murray Treasurer
Madeline D. Barkhorn Assistant Secretary
Charlene R. Herzer Assistant Secretary

In addition, MSAM acts as investment adviser to the following registered
investment companies: American Advantage International Equity Fund; The
Brazilian Investment Fund, Inc.: certain portfolios of The Enterprise Group of
Funds, Inc.: Fountain Square International Equity Fund; General American Capital
Co.; The Latin American Discovery Fund, Inc.; certain portfolios of The Legends
Fund. Inc.; The Malaysia Fund, Inc.; Morgan Stanley Africa Investment Fund,
Inc.; Morgan Stanley Asia-Pacific Fund, Inc.; Morgan Stanley Emerging Markets
Debt Fund, Inc.; Morgan Stanley Emerging Markets Fund, Inc.; all funds of the
Morgan Stanley Fund, Inc.; Morgan Stanley Global Opportunity Bond Fund Inc..;
all funds of the Morgan Stanley High Yield Fund, Inc.; Morgan Stanley India
Investment Fund, Inc.; certain portfolios of Morgan Stanley Universal Funds,
Inc.; The Pakistan Investment Fund, Inc.; PCS Cash Fund, Inc.; The Thai Fund,
Inc.; The Turkish Investment Fund, Inc.; Principal Aggressive Growth Fund, Inc.;
Principal Asset Allocation Fund, Inc.; certain portfolios of the SunAmerica
Series Trust and certain portfolios of the Fortis Series Fund.

MAS is a Pennsylvania limited liability partnership founded in 1969. MAS
provides investment services to employee benefit plans, endowment funds,
foundations and other institutional investors as well as serving as investment
advisor to MAS Funds, a registered investment company.

C-3
<PAGE>

The information required by this Item 28 with respect to each
director, officer or partner of MAS together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules B and D of Form ADV filed by MAS pursuant to the
Investment Advisers Act of 1940 (SEC file No. 801-10437).

Item 29. Principal Underwriters
----------------------

Morgan Stanley & Co. Incorporated ("MS&Co.") is distributor for Morgan
Stanley Universal Funds, Inc. and Morgan Stanley Institutional Fund, Inc. Van
Kampen American Capital, Inc. ("VKAC") is distributor for Morgan Stanley Fund,
Inc. The information required by this Item 29 with respect to each Director
and officer of MS&Co. is incorporated by reference to Schedule A of Form BD
filed by MS&Co. pursuant to the Securities and Exchange Act of 1934, as amended
(SEC File No. 8-15869).

Item 30. Location of Accounts and Records
--------------------------------

The books, accounts and other documents required by Section 31(a)
under the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder are maintained in the physical possession of the Registrant;
Registrant's Transfer Agent, Chase Global Funds Services Company, P.O. Box 2798,
Boston, Massachusetts 02208-2798; and the Registrant's custodian banks,
including sub-custodians.

Item 31. Management Services
-------------------

Each of MSAM and MAS have entered into Sub-Administration Agreements
with Chase Global Funds Services Companies ("Chase") (filed as Exhibit No. 9(c)
and 9(d) to Pre-Effective Amendment No.1 to the Registration Statement) pursuant
to which Chase will provide fund administration, fund accounting and transfer
agency services to specified Portfolios of the Registrant.

Item 32. Undertakings
------------

(1) Registrant undertakes to file a post-effective amendment
containing reasonably current financial statements, which need not be certified,
for the Money Market, International Fixed Income, Emerging Markets Debt,
Balanced, Multi-Asset-Class, Equity Growth, Core Equity, Mid Cap Value, U.S.
Real Estate and Asian Equity Portfolios within four to six months from the
effective date or this Registration Statement or the commencement of operations
of each such Investment Fund, whichever is later.

(2) Registrant hereby undertakes that whenever a Shareholder or
Shareholders who meet the requirements of Section 16(c) of the 1940 Act inform
the Board of Directors of his or their desire to communicate with other
Shareholders of the Fund, the Directors will inform such Shareholder(s) as to
the approximate number of Shareholders of record and the approximate costs of
mailing or afford said Shareholders access to a list of Shareholders.

C-6
<PAGE>

SIGNATURES
----------

Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all of the requirements for effectiveness of this Amendment to the
Registration Statement pursuant to Rule 485(b) and has duly caused this
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and State of New
York, on the 30th day of April, 1997.

MORGAN STANLEY UNIVERSAL FUNDS, INC.

By: /s/ Warren J. Olsen
-------------------
Warren J. Olsen
President and Director

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to this Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title(s) Date
- --------- -------- ----
<S> <C> <C>

/s/ Warren J. Olsen
- ----------------------------
Warren J. Olsen Director, President April 30, 1997
Chief Executive
Officer)

*/s/ Barton M. Biggs
- ----------------------------
Barton M. Biggs Director (Chairman) April 30, 1997

*/s/ John D. Barrett, II
- ----------------------------
John D. Barrett, II Director April 30, 1997

*/s/ Gerard E. Jones
- ----------------------------
Gerard E. Jones Director April 30, 1997

*/s/ Andrew McNally, IV
- ----------------------------
Andrew McNally, IV Director April 30, 1997

*/s/ Samuel T. Reeves
- ----------------------------
Samuel T. Reeves Director April 30, 1997

*/s/ Fergus Reid
- ----------------------------
Fergus Reid Director April 30, 1997

*/s/ Frederick O. Robertshaw
- ----------------------------
Frederick O. Robertshaw Director April 30, 1997

*/s/ James R. Rooney
- ----------------------------
James R. Rooney Treasurer, April 30, 1997
Chief Financial Officer

*By: /s/ Warren J. Olsen
------------------------
Warren J. Olsen
Attorney-In-Fact
</TABLE>

C-9
<PAGE>

EXHIBIT INDEX
-------------

(B) EXHIBITS
--------

3 Not applicable.

4 Not applicable.

5 (a) Form of Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. ("MSAM") with respect to the Money
Market, Emerging Markets Debt, Growth, U.S. Real Estate, Global
Equity, International Magnum, Emerging Markets Equity and Asian
Equity Portfolio is incorporated by reference to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form
N-1A (File Nos. 333-3013 and 811-7607), as filed with the SEC via
EDGAR on September 16, 1996.

(b) Form of Investment Advisory Agreement between Registrant and Miller
Anderson & Sherrerd, LLP ("MAS") with respect to the Fixed Income,
High Yield, International Fixed Income, Balanced, Multi-Asset-
Class, Value, Core Equity, Mid Cap Growth and Mid Cap Value
Portfolios is incorporated by reference to Pre-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form N-1A (File
Nos. 333-3013 and 811-7607), as filed with the SEC via EDGAR on
September 16, 1996.

7 Not applicable.

8 (a) Form of Domestic Mutual Fund Custody Agreement between Registrant
and Chase Manhattan Bank, N.A. is incorporated by reference to Pre-
Effective Amendment No. 1 to the Registrant's Registration
Statement on Form N-1A (File Nos. 333-3013 and 811-7607, as filed
with the SEC via EDGAR on September 16, 1996.

(b) Form of International Custody Agreement between Registrant and
Morgan Stanley Trust Company is incorporated by reference to Pre-
Effective Amendment No. 1 to the Registrant's Registration
Statement on Form N-1A (File Nos. 333-3013 and 811-7607, as filed
with the SEC via EDGAR on September 16, 1996.

9 (a) Form of Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc. is incorporated by reference to Pre-
Effective Amendment No. 1 to the Registrant's Registration
Statement on Form N-1A (File Nos. 333-3013 and 811-7607, as filed
with the SEC via EDGAR on September 16, 1996.

(b) Form of Administration Agreement between Registrant and Miller
Anderson & Sherrerd, LLP is incorporated by reference to Pre-
Effective Amendment No. 1 to the Registrant's Registration
Statement on Form N-1A (File Nos. 333-3013 and 811-7607, as filed
with the SEC via EDGAR on September 16, 1996.

(c) Form of Sub-Administration Agreement between Morgan Stanley Asset
Management Inc. and Chase Global Funds Services Company is
incorporated by reference to Pre-Effective Amendment No. 1 to

C-2

<PAGE>

the Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607, as filed with the SEC via EDGAR on September 16,
1996.

(d) Form of Sub-Administration Agreement between Miller Anderson & Sherrerd
LLP and Chase Global Funds Services Company is incorporated by
reference to Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-3013 and 811-7607),
as filed with the SEC via EDGAR on September 16, 1996.

10 Opinion of Counsel is incorporated by reference to Pre-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the SEC via EDGAR on
September 16, 1996.

EX-99.B11

11 Consent of Independent Accountants is filed herewith.

12 Not applicable.

13 Not applicable.

14 Not applicable.

15 Not applicable.

16 Not applicable.

24 Powers of Attorney are incorporated by reference to Pre-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the SEC via EDGAR on
September 16, 1996.

EX-99.B27

27 Financial Data Schedules are filed herewith.

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

C-9

<PAGE>

Consent of Independent Accountants

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 1 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
January 28, 1997, relating to the financial statements and financial highlights
of Emerging Markets Equity Portfolio of Morgan Stanley Universal Funds, Inc.,
which appears in such Statement of Additional Information, and to the
incorporation by reference of our report in the Prospectuses which constitute
parts of this Registration Statement. We also consent to the references to us
under the heading "Financial Statements" in such Statement of Additional
Information, and to the references to us under the headings "Financial
Highlights" and "Other Services--Independent Accounts" in such Prospectuses.

/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 28, 1997

<PAGE>
<ARTICLE> 6
<CIK> 0001011378
<NAME> MORGAN STANLEY UNIVERSAL FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> EMERGING MARKETS EQUITY PORTFOLIO
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 11,944
<INVESTMENTS-AT-VALUE> 11,811
<RECEIVABLES> 125
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 343
<TOTAL-ASSETS> 12,279
<PAYABLE-FOR-SECURITIES> 275
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 215
<TOTAL-LIABILITIES> 490
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,978
<SHARES-COMMON-STOCK> 1,206
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (57)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (135)
<NET-ASSETS> 11,789
<DIVIDEND-INCOME> 19
<INTEREST-INCOME> 36
<OTHER-INCOME> 0
<EXPENSES-NET> (47)
<NET-INVESTMENT-INCOME> 8
<REALIZED-GAINS-CURRENT> (60)
<APPREC-INCREASE-CURRENT> (135)
<NET-CHANGE-FROM-OPS> (187)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,205
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1
<NET-CHANGE-IN-ASSETS> 11,789
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 161
<AVERAGE-NET-ASSETS> 10,320
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> (0.21)
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.78
<EXPENSE-RATIO> 1.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0001011378
<NAME> MORGAN STANLEY UNIVERSAL FUNDS, INC.
<SERIES>
<NUMBER> 2
<NAME> GLOBAL EQUITY PORTFOLIO
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 5,162
<INVESTMENTS-AT-VALUE> 5,231
<RECEIVABLES> 305
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3
<TOTAL-ASSETS> 5,539
<PAYABLE-FOR-SECURITIES> 329
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28
<TOTAL-LIABILITIES> 357
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,093
<SHARES-COMMON-STOCK> 509
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 16
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 69
<NET-ASSETS> 5,182
<DIVIDEND-INCOME> 20
<INTEREST-INCOME> 10
<OTHER-INCOME> 0
<EXPENSES-NET> (14)
<NET-INVESTMENT-INCOME> 16
<REALIZED-GAINS-CURRENT> 4
<APPREC-INCREASE-CURRENT> 69
<NET-CHANGE-FROM-OPS> 89
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 509
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,182
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 40
<AVERAGE-NET-ASSETS> 5,121
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.18
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>
<ARTICLE> 6
<RESTATED>
<CIK> 0001011378
<NAME> MORGAN STANLEY UNIVERSAL FUNDS, INC.

<SERIES>
<NUMBER> 3
<NAME> INTERNATIONAL MAGNUM PORTFOLIO

<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 10,640
<INVESTMENTS-AT-VALUE> 10,683
<RECEIVABLES> 458
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 19
<TOTAL-ASSETS> 11,160
<PAYABLE-FOR-SECURITIES> 425
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54
<TOTAL-LIABILITIES> 479
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,378
<SHARES-COMMON-STOCK> 1,037
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 31
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 212
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 60
<NET-ASSETS> 10,681
<DIVIDEND-INCOME> 41
<INTEREST-INCOME> 19
<OTHER-INCOME> 0
<EXPENSES-NET> (29)
<NET-INVESTMENT-INCOME> 31
<REALIZED-GAINS-CURRENT> 212
<APPREC-INCREASE-CURRENT> 60
<NET-CHANGE-FROM-OPS> 303
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,037
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 10,681
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 20
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 79
<AVERAGE-NET-ASSETS> 10,203
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.27
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.30
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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