MORGAN STANLEY UNIVERSAL FUNDS INC, 497, 1998-05-05

MORGAN STANLEY UNIVERSAL FUNDS INC
497, 1998-05-05

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<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. ("MSAM"). THE FUND ALSO OFFERS SEVENTEEN
OTHER PORTFOLIOS MANAGED BY EITHER MSAM OR MILLER ANDERSON & SHERRERD, LLP
("MAS"), AN AFFILIATE OF MSAM.

SHARES OF THE EMERGING MARKETS EQUITY 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. 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
FOR THE INSURANCE PRODUCT WHICH ACCOMPANIES THIS PROSPECTUS.

A STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED MAY 1, 1998 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.

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, 1998
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 the
Fund's Emerging Markets Equity Portfolio (the "Portfolio") uses in seeking to
achieve 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
Portfolio.

MSAM conducts a worldwide investment advisory business. As of February 28,
1998, MSAM and its affiliated institutional asset management companies
(exclusive of MAS) had approximately $88.1 billion in assets under management
or fiduciary advice.

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
----
<S> <C>
FINANCIAL HIGHLIGHTS 3
- --------------------

The Portfolio's financial highlights as of December 31, 1997.

PORTFOLIO SUMMARY 4
- -----------------

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

THE PORTFOLIO'S INVESTMENTS 4
- ---------------------------

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 that may be used
by the Portfolio and information about investment risks and limitations.

FUNDAMENTAL INVESTMENT LIMITS 18
- -----------------------------

Certain policies that may be changed only by shareholders.

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

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 22
- ----------------

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

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following table provides audited financial highlights for the Portfolio for
the periods presented. The audited financial highlights for the periods
presented have been audited by Price Waterhouse LLP, whose unqualified report
thereon appears in the Fund's Annual Report to Shareholders and is incorporated
by reference in the Statement of Additional Information. The Annual Report and
the financial statements therein, as well as 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>
EMERGING MARKETS EQUITY
PORTFOLIO
-------------------------
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS 1997 1996
- ---------------------------------- ------------ ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................. $ 9.78 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................... 0.04 0.01
Net Realized and Unrealized Loss.................... -- (0.21)
------- -------
Total From Investment Operations.................. 0.04 (0.20)
------- -------
DISTRIBUTIONS
Net Investment Income............................... (0.07) (0.02)
Net Realized Gain................................... (0.02) --
In Excess of Net Realized Gain...................... (0.28) --
------- -------
Total Distributions............................... (0.37) (0.02)
------- -------
NET ASSET VALUE, END OF PERIOD........................ $ 9.45 $ 9.78
======= =======
TOTAL RETURN.......................................... 0.52% (2.03)%
======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)..................... $34,098 $11,789
Ratio of Expenses to Average Net Assets............... 1.80% 1.79%**
Ratio of Expenses to Average Net Assets Excluding
Interest Expense and Foreign Tax Expense............. 1.75% 1.75%**
Ratio of Net Investment Income to Average Net Assets.. 0.47% 0.32%**
Portfolio Turnover Rate............................... 87% 9%
Average Commission Rate
Per Share........................................... $0.0018 $0.0013
As a Percentage of Trade Amount..................... 0.40% 0.45%
- ----------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period:
Per Share Benefit to Net Investment Income.......... $ 0.17 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets...................... 4.12% 6.17%**
Net Investment Loss to Average Net Assets........... (1.84)% (4.06)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

3
<PAGE>

PORTFOLIO SUMMARY
- -----------------

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.

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 Securities in their portfolio,
investors can achieve additional diversification and participate in growth
opportunities in emerging market countries.

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, Depositary Receipts 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, Brady Bonds, 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 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 20%
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). As of the date of this Prospectus, less
than 5% of the Portfolio's total assets were invested in High Yield Securities.
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. 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 Bulgaria
Chile China (mainland Colombia Egypt
Ghana and Hong Kong) Greece Hungary
India Indonesia Israel Jamaica
Jordan Kenya Malaysia Mexico
Morocco Nigeria Pakistan Peru
Philippines Poland Russia Singapore
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.

4
<PAGE>

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."

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

The following pages contain more detailed information about types of
instruments in which the Portfolio may invest and strategies the Adviser 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 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 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.

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 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 an SAI
or financial report, at no charge, contact the Fund or your insurance company.

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.

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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.

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. 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

5
<PAGE>

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 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 nationally
recognized statistical rating organizations (each, an "NRSRO") in one of their
two highest categories, (e.g., A-1 or A-1+ by Standard & Poor's Ratings Group
("S&P") or Prime 1 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 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.

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 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.

6
<PAGE>

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 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. The Portfolio is permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolio may invest in other Derivatives that are
developed over time if their use would be consistent with the objective of the
Portfolio. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). The Portfolio will limit its use of Derivatives
to 33 1/3% of its total assets measured by the aggregate notional amount of
outstanding Derivatives. The Portfolio's investments in forward foreign
currency contracts and Derivatives used for hedging purposes are not subject to
the foregoing limits.

The Portfolio may use Derivatives under a number of different circumstances to
further its investment objective. The Portfolio may use Derivatives when doing
so provides more liquidity than the direct purchase of the securities
underlying such Derivatives. For example, the Portfolio may purchase
Derivatives to quickly gain exposure to a market in response to changes in the
Portfolio's asset allocation policy or upon the inflow of investable cash and
at that time the Derivative provides greater liquidity than the underlying
securities market. The Portfolio may also use Derivatives when it is restricted
from directly owning the underlying securities due to foreign investment
restrictions or other reasons or when doing so provides a price advantage over
purchasing the underlying securities directly, either because of a pricing
differential between the Derivatives and securities markets or because of lower
transaction costs associated with the Derivatives transaction. Derivatives may
also be used by the Portfolio for hedging purposes and under other
circumstances in which the Portfolio's portfolio managers believe it
advantageous to do so consistent with the Portfolio's investment objective. The
Portfolio will not, however, use Derivatives in a manner that creates leverage,
except to the extent that the use of leverage is expressly permitted by the
Portfolio's investment policies, and then only in a manner consistent with such
policies.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolio will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolio may invest and the risks related
thereto are described in more detail below.

Futures Contracts (Futures) and Forward Contracts (Forwards). The Portfolio may
purchase and sell futures contracts, such as futures on securities indices,
baskets of securities, foreign currencies and interest rates of the type
generally known as financial futures. These are standardized contracts that are
bought and sold on organized exchanges. A futures contract obligates a party to
buy or sell a specific amount of the "underlying," such as for example, a
particular foreign currency, on a specified future date at a specified price or
to settle the value in cash.

The Portfolio may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolio may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Transactions " below. These forward
contracts are privately negotiated and are bought and sold in the over-the-
counter market. Like a future, a forward contract obligates a party to buy or
sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.

In some cases, the Portfolio may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolio will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolio may utilize futures contracts, forward contracts and related options
are described below.

7
<PAGE>

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 Portfolio may also purchase and sell foreign currency futures
to hedge its holdings and commitments against changes in the level of future
currency rates or to adjust its exposure to a particular currency.

The Portfolio may engage in transactions in interest rate futures and related
products. The value of these contracts 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 or for
other purposes.

The Portfolio may also purchase or sell futures and forwards on other financial
instruments, such as U.S. Government securities and certificates of deposit.
The value of these contracts also rises and falls inversely with changes in
interest rates. The Portfolio may engage in financial futures and forward
contracts for both hedging and non-hedging purposes.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by the Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that the
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

Under rules adopted by the Commodity Futures Trading Commission (the "CFTC"),
the Portfolio may, without registering with the CFTC as a Commodity Pool
Operator, 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-bona
fide hedging activities.

Options Transactions (Options). The Portfolio may seek to increase its returns
or may hedge its portfolio investments through options transactions with
respect to individual securities, indices or baskets in which the Portfolio may
invest; other financial instruments; and foreign currency. Various options may
be purchased and sold on either the exchange-traded or over-the-counter
markets.

The Portfolio may purchase put and call options. Purchasing a put option gives
the Portfolio the right, but not the obligation, to sell the underlying (such
as a securities index or a particular foreign currency) at the exercise price
either on a specific date or during a specified exercise period. Purchasing a
call option gives the Portfolio a similar right, but not the obligation, to
purchase the underlying. The purchaser pays a premium to the seller (also known
as the writer) of the option.

The Portfolio also may write put and call options on investments held in its
portfolio, as well as foreign currency options. If the Portfolio writes an
option, it will receive a premium that increases the Portfolio's return on the
underlying 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
above the exercise price of the option. By writing a put option, the Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.

By writing an option, the Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Portfolio may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either
earmark or segregate sufficient liquid assets to cover its obligations under
the option or will continue to own (i) the underlying; (ii) securities or
instruments convertible or exchangeable without the payment of any
consideration into the underlying; or (iii) a call option on the same
underlying with a strike price no higher than the price at which the underlying
was sold pursuant to a short option position. In the case of a put option, the
Portfolio will either earmark or segregate sufficient liquid assets to cover
its obligations under the option or will own another put option on the same
underlying with an equal or higher strike price.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolio's use of options as described include (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.

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index, instrument or certain securities and a particular "notional amount." As
with many of the other derivative products available to the Portfolio, the
underlying may include an interest rate (fixed or floating), a currency
exchange rate, a commodity price index, and a security, securities index or a
combination thereof. A great deal of flexibility is possible in the way the
products may be structured, with the effect being that the parties may have
exchanged amounts equal to the return on one rate, index or group of securities
for another. For example, in a simple fixed-to-floating interest rate swap, one
party makes payments equivalent to a fixed interest rate, and the other makes
payments equivalent to a specified interest rate index. The Portfolio may
engage in simple or more complex swap transactions involving a wide variety of
underlyings. The currency swaps that 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.

Caps, collars and floors are privately-negotiated option-based derivative
products. The Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign
currency swaps), the entire notional amount is not exchanged and thus is not at
risk. A collar is a combination product in which the same party, such as the
Portfolio, buys a cap from and sells a floor to the other party. As with put
and call options, the amount at risk is limited for the buyer, but, if the cap
or floor is not hedged or covered, may be unlimited for the seller. Under
current market practice, caps, collars and floors between the same two parties
are generally documented under the same "master agreement." In some cases,
options and forward agreements may also be governed by the same master
agreement. In the event of a default, amounts owed under all transactions
entered into under, or covered by, the same master agreement would be netted
and only a single payment would be made.

Swaps, caps, collars and floors are credit-intensive products. If the Portfolio
enters into a swap transaction, it will bear the risk of default, i.e.
nonpayment, by the other party. The guidelines under which the Portfolio enters
derivative transactions, along with some features of the transactions
themselves, are intended to reduce these risks to the extent reasonably
practicable, although they cannot eliminate the risks entirely. Under
guidelines established by the Board of Directors, the Portfolio may enter into
swaps only with parties that meet certain credit rating guidelines. Consistent
with current market practices, the Portfolio will generally enter into swap
transactions on a net basis, and all swap transactions with the same party will
be documented under a single master agreement to provide for net payment upon
default. In addition, the Portfolio's obligations under an agreement will be
accrued daily (offset against any amounts owing to the Portfolio) and any
accrued, but unpaid, net amounts owed to the other party to a master agreement
will be covered by the maintenance of a segregated account consisting of cash
or liquid securities.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, the Portfolio's risk of loss will consist of the
payments that the Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, the Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Stock Index ("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 Portfolio may use structured notes to
tailor its investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.

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.

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<PAGE>

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 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 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, Foreign Bonds and Yankee 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.

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 Union, 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 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.

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

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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.

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 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 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 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 Investment Company Act of 1940, as amended (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 Stocks, Preferred Stocks, 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.

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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 exchange rates and in exchange control regulations and
the Portfolio may incur costs in connection with conversions between various
currencies.

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."

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 High Yield Securities are substantial. If a security held by
the Portfolio is down-graded, the Portfolio may retain the security.

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<PAGE>

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 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 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.

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 the Adviser), but
also will indirectly bear similar expenses of the underlying Investment Funds.

Certain Investment Funds are advised by the Adviser. 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 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. The Portfolio 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. The 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"). The 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. 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 the Adviser to be
creditworthy.

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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 Net Asset
Value ("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 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. Pursuant
to an order issued by the SEC, the Fund may lend portfolio securities to
affiliated broker-dealers. 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.

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. The Portfolio may invest in securities
issued or guaranteed by GNMA, FHLMC, Fannie Mae, 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 the
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 the 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.

There are two methods of trading MBSs. A specified pool transaction is a trade
in which the pool number of the
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<PAGE>

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 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 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 "Internal Revenue Code"), for
qualification as a 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 ("Rule 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
Rule 144A Securities that are deemed to be liquid.

The Fund's Board of Directors has adopted guidelines and delegated to the
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 the Portfolio's total assets in Restricted Securities may
be considered a speculative activity and may involve greater risk and expense
to the Portfolio.

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 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

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<PAGE>

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, the Portfolio may pool
its daily uninvested cash balances with other of the Fund's Portfolios 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 Portfolio will
incur lower transaction costs and potentially obtain higher rates of interest
on such Repurchase Agreements. The Portfolio's participation in the income from
jointly purchased Repurchase Agreements will be based on the Portfolio's
percentage share in the total Repurchase Agreement. The Portfolio's 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. 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 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.

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.

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 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 the 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 the Portfolio will not
invest in the Equity 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.

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<PAGE>

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, 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.

TEMPORARY INVESTMENTS. During periods in which the Adviser 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 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 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 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).

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
"Securities and Investment Techniques -- 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 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 liquid
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.

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<PAGE>

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 non-fundamental 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 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 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 Portfolio 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 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 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 subsidiary of
Morgan Stanley Dean Witter & Co. ("MSDW"), which is a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses--securities, asset management and credit services.
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 well as to employee benefit plans, endowment funds,
foundations and other institutional investors. As of February 28, 1998, MSAM
and its institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice. See
"Management of the Fund" in the SAI.

YEAR 2000. The services provided to the Fund by the Adviser and Morgan Stanley
& Co. Incorporated ("Morgan Stanley") depend on the smooth functioning of their
computer systems. Many computer software systems in use today cannot recognize
the year 2000, but revert to 1900 or some other date, due to the manner in
which dates were encoded and calculated. That failure could have a negative
impact on the handling of securities trades, pricing and account services. The
Adviser and Morgan Stanley have been actively working on necessary changes to
their own computer systems to prepare for the year 2000 and expect that their
systems will be adapted before that date, but there can be no assurance that
they will be successful, or that interaction with other non-complying computer
systems will not impair their services at that time. The Adviser and Morgan
Stanley are

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<PAGE>

contacting their vendors and service providers to obtain assurances that such
vendors and service providers have taken appropriate measures to address the
"Year 2000" problem.

In addition, it is possible that the markets for securities in which the Fund
invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues.
Furthermore, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.

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

Madhav Dhar and Robert L. Meyer. Madhav Dhar joined MSAM in 1984. He is a
Managing Director of MSAM and of Morgan Stanley. He is a member of MSAM's
executive committee, head of MSAM's emerging markets group and chief investment
officer of MSAM's global emerging market equity portfolios. He holds a B.S.
(honors) from St. Stephen's College, Delhi University India and an M.B.A. from
Carnegie-Mellon University. Mr. Dhar has been primarily responsible for
managing the Portfolio's assets since its inception. Robert L. Meyer joined
MSAM in 1989. He is a Managing Director of MSAM and of Morgan Stanley and co-
manager of MSAM's emerging markets group and head of MSAM's Latin American
team. He was born in Argentina and graduated from Yale University with a B.A.
in Economics and Political Science. He received a J.D. from Harvard Law School.
In addition, he is also a Chartered Financial Analyst. Mr. Meyer has worked
with Mr. Dhar in managing the Portfolio's assets since its inception.

OTHER SERVICES

DISTRIBUTOR. Under its Distribution Agreement with the Fund, Morgan Stanley, a
subsidiary of MSDW, 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 semi-annual reports) used as sales materials.
Morgan Stanley does not receive compensation for providing distribution
services.

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. As compensation for its services,
Chase is paid by MSAM out of its administration fee. 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.

Certain administrative and record-keeping services that would otherwise be
performed by the Adviser or its service providers may be performed by insurance
companies that purchase shares of the Portfolio. The Adviser may make payments
to these insurance companies to defray the costs of providing those services.

Chase Global calculates the NAV and dividends and maintains the general
accounting records for the Portfolio.

CUSTODIANS. Chase serves as the Custodian of domestic securities and cash of
the Portfolio. Chase is not an affiliate of the Adviser or the Distributor.
Morgan Stanley Trust Company ("MSTC"), Brooklyn, New York, 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.

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<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 will audit 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 the Adviser for managing its investments
and business affairs. The Adviser pays fees to affiliates who provide
assistance with these services. The Portfolio also pays other expenses, which
are explained below. The Adviser 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

MSAM 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% for the first $500 million, 1.20% for the next $500 million, and
1.15% of net assets in excess of $1 billion.

However, MSAM, with respect to the Portfolio, 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 the Portfolio to
exceed 1.75% of average daily net assets. These fee waivers and reimbursements
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, 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 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 semi-annual 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 share prices.

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 Portfolio and direct the Adviser 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 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.

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 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 Portfolio, 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 Portfolio 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 Portfolio 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 Portfolio 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

20
<PAGE>

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.

PORTFOLIO TURNOVER

Under certain market conditions, the Portfolio may experience high portfolio
turnover as a result of its investment strategies. For example, the purchase or
sale of securities by the Portfolio in anticipation of a rise or decline in
interest rate or to take advantage of yield disparities among different issues
of Fixed Income Securities could result in high portfolio turnover. High
portfolio turnover rates for the Portfolio can result in corresponding
increases in expenses such as brokerage commissions and transaction costs.
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 and the Portfolio will not consider
portfolio turnover rate a limiting factor in making investment decisions
consistent with its respective objectives and policies.

PERFORMANCE OF THE PORTFOLIO

The 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 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.

YIELD. Yield refers to the income generated by an investment in the 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 Portfolio include 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 the Emerging Markets Portfolio of Morgan Stanley Institutional
Fund, Inc. ("MSIF"), which served as the model for the Portfolio. The Emerging
Markets Portfolio of MSIF has substantially the same investment objectives,
policies and strategies as the Portfolio. In addition, MSAM intends the
Portfolio of the Fund and the Emerging Markets Portfolio of MSIF to be managed
by the same personnel and to continue to have substantially similar investment
strategies, techniques and characteristics.

Past investment performance of the Class A Shares of the Emerging Markets
Portfolio of MSIF, as shown in the table below, may be relevant to your
consideration of the Portfolio. The investment performance of the Emerging
Markets Portfolio of MSIF 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 Emerging
Markets Portfolio of MSIF. The investment performance of the Class A Shares of
the Emerging Markets Portfolio of MSIF is provided merely to indicate the
experience of MSAM in managing a similar portfolio.

<TABLE>
<CAPTION>
Total Return Total Return Total Return Average Annual Average Annual Average Annual
One Year Three Years Five Years Total Return Total Return Total Return
Inception Ended Ended Ended Three Years Five Years Since
Fund Name Date 12/31/97 12/31/97 12/31/97 Ended 12/31/97 Ended 12/31/97 Inception
- --------- --------- ------------ ------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Emerging Markets........ 9/25/92 (1.03)% (3.09)% 62.71% (1.04)% 10.23% 10.13%
</TABLE>

21
<PAGE>

PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, New York Life Insurance and Annuity Corporation owned
more than 25% of the outstanding voting securities of the Emerging Markets
Equity Portfolio, pursuant to variable annuity contracts and variable life
insurance policies it has issued to the public.

As currently required under law, insurance companies vote their shares of the
Portfolio in accordance with instructions received from their variable annuity
contract and variable life insurance policy owners. MSDW will vote shares of
the Portfolio that it owns in the same proportions as shares of the Portfolio
are voted by the insurance companies. Accordingly, neither MSDW nor the
insurance companies are deemed to be in control of the Portfolio.

For more information, see "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 and to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. As a regulated investment company
under the Internal Revenue 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 Internal Revenue 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,
Martin Luther King, Jr. 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.

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.

Certain securities from time to time may be listed primarily on foreign
exchanges that trade on days when the NYSE is closed (such as Saturday). As a
result, the NAV of the Portfolio may be affected significantly by such trading
on days when shareholders can not purchase or redeem shares of the Portfolio.

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 the Adviser's opinion, they would disrupt
management of the Portfolio.

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.

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.

22
<PAGE>

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.

23
<PAGE>

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
DESCRIBES FIVE PORTFOLIOS MANAGED BY MORGAN STANLEY ASSET MANAGEMENT, INC.
("MSAM"). THE FUND ALSO OFFERS THIRTEEN OTHER PORTFOLIOS MANAGED BY EITHER MSAM
OR MILLER ANDERSON & SHERRERD, LLP ("MAS"), AN AFFILIATE MSAM.

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 FOR THE 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.

THE PORTFOLIOS:

U.S. Real Estate Emerging Market 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, 1998
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 in
seeking to achieve 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 Equity
Global Equity Asian Equity
International Magnum

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE
----

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

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES 4
- -------------------

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 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 27
- ----------------

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

2
<PAGE>

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

The following table provides audited financial highlights for the Portfolios
for the periods presented. The audited financial highlights for the periods
presented have been audited by Price Waterhouse LLP, whose unqualified report
thereon appears in the Fund's Annual Report to Shareholders and is incorporated
by reference in the Statement of Additional Information. The Annual Report and
the financial statements therein, as well as 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>
U.S. REAL GLOBAL INTERNATIONAL ASIAN
ESTATE EQUITY MAGNUM EMERGING MARKETS EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------- ------------------------- ------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
MARCH 3, JANUARY 2, JANUARY 2, OCTOBER 1, MARCH 3,
1997* TO 1997* TO 1997* TO YEAR ENDED 1996* TO 1997* TO
SELECTED PER SHARE DATA AND DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
RATIOS 1997 1997 1997 1997 1996 1997
- --------------------------- ------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $ 10.00 $ 10.00 $ 10.00 $ 9.78 $ 10.00 $ 10.00
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.... 0.17 0.08 0.13 0.04 0.01 0.01
Net Realized and
Unrealized Gain (Loss).. 1.61 1.92 0.59 -- (0.21) (4.36)
------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 1.78 2.00 0.72 0.04 (0.20) (4.35)
------- ------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income.... (0.17) (0.08) (0.32) (0.07) (0.02) (0.01)
Net Realized Gain........ (0.20) (0.18) (0.02) (0.02) -- --
In Excess of Net Realized
Gain.................... -- -- -- (0.28) -- --
------- ------- ------- ------- ------- -------
Total Distributions.... (0.37) (0.26) (0.34) (0.37) (0.02) (0.01)
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD.................... $ 11.41 $ 11.74 $ 10.38 $ 9.45 $ 9.78 $ 5.64
======= ======= ======= ======= ======= =======
TOTAL RETURN............... 17.99% 20.04% 7.31% 0.52% (2.03)% (43.52)%
======= ======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(000's)................... $13,055 $14,707 $18,855 $34,098 $11,789 $12,571
Ratio of Expenses to
Average Net Assets........ 1.10%** 1.15%** 1.16%** 1.80% 1.79%** 1.35%**
Ratio of Expenses to
Average Net Assets
Excluding Interest
Expense................... -- -- 1.15%** -- -- --
Ratio of Expenses to
Average Net Assets
Excluding Interest Expense
and Foreign Tax Expense... -- -- -- 1.75% 1.75%** 1.20%**
Ratio of Net Investment
Income to Average Net
Assets.................... 3.14%** 1.24%** 1.43%** 0.47% 0.32%** 0.32%**
Portfolio Turnover Rate.... 114% 20% 41% 87% 9% 130%
Average Commission Rate
Per Share................ $0.0542 $0.0350 $0.0181 $0.0018 $0.0013 $0.0134
As a Percentage of Trade
Amount.................. -- 0.25% 0.20% 0.40% 0.45% 0.50%
- ------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the
Period:
Per Share Benefit to Net
Investment Income....... $ 0.07 $ 0.09 $ 0.15 $ 0.17 $ 0.08 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets.................. 2.32%** 2.43%** 2.78%** 4.12% 6.17%** 3.10%**
Net Investment Income
(Loss) to Average Net
Assets.................. 1.92%** (0.04)%** (0.19)%** (1.84)% (4.06)%** (1.43)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

3
<PAGE>

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. 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 Foreign 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 foreign 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).

INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets outside the United States. By
including Foreign 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 foreign securities exchanges and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

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 Securities, Foreign Investment

4
<PAGE>

involves different or increased risks. The performance of the Portfolio will be
affected by foreign currency values, the greater volatility of foreign
securities exchanges, and the overall political, economic and regulatory
environment in the countries in which the Portfolio invests. Because the
Portfolio invests in a small group of geographically and economically related
countries, its performance is expected to be more volatile than more
geographically diversified investment portfolios.

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.

The Portfolios spread investment risk by limiting, to varying degrees, 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,
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 greater volatility of foreign
securities exchanges, and the overall political, economic and regulatory
environment in the countries in which investments are made.

Because the International Magnum, 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 may use various investment techniques to hedge
risks, including investment in Derivatives, but there is no guarantee that
these strategies will work as intended.

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.

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. 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. Risks relating to investments in securities of issuers primarily
engaged in the real estate industry are similar to those of direct investments
in real estate and include fluctuations in real estate values, changes in
zoning laws, increases in property taxes, environmental risks, and increases in
interest rates. Generally, increases in interest rates will increase the costs
of obtaining financing, which could directly and indirectly decrease the value
of the Portfolio's investments.

5
<PAGE>

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. Risks associated with investments in REITs
include changes in the values of their underlying properties and defaults by
borrowers or tenants. In addition, some REITs are not diversified and their
value may be affected by events related to a small number of properties.

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, 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.

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, Non-Publicly Traded Securities, Restricted Securities and Private
Placements, 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 "Securities and
Investment Techniques" 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 primarily 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"). The Portfolio may
invest up to 5% of its total assets in the securities of issuers domiciled in
non-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 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 listed 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.

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Money Market Instruments, Non-Publicly Traded Securities, Restricted
Securities, Repurchase Agreements, Cash or Cash Equivalents, When-Issued or
Delayed Delivery Securities, and Derivatives, and may engage in Loans of
Portfolio Securities. The Portfolio may also invest up to 10% of its total
assets in (i) Investment Funds with investment objectives similar to that of
the Portfolio and (ii) for temporary purposes, money market funds 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.

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, Depositary Receipts 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 intends to invest primarily in some or all of the following
emerging market countries:

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<PAGE>

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.

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: China
(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 United States, notes, debentures and
bonds of companies in Asia, U.S. Money Market Instruments, Foreign Currency
Transactions, Investment Funds, Investment Company Securities, Non-Publicly
Traded Securities, Private Placements and Restricted Securities, Repurchase
Agreements, When-Issued or Delayed Delivery Securities and Derivatives 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 Global Equity 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
- ------------------------------------

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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 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.

INSTRUMENTS AND INVESTMENTS

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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:

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 nationally
recognized statistical rating organizations (each, an "NRSRO") in one of their
two highest categories,

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<PAGE>

(e.g., A-1 or A-1+ by S&P or Prime 1 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.

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 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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<PAGE>

swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). Each Portfolio will limit its use of Derivatives
to 33 1/3% of its total assets measured by the aggregate notional amount of
outstanding Derivatives. The Portfolios' investments in forward foreign
currency contracts and Derivatives used for hedging purposes are not subject to
the foregoing limits.

The Portfolios may use Derivatives under a number of different circumstances to
further their investment objectives. The Portfolios may use Derivatives when
doing so provides more liquidity than the direct purchase of the securities
underlying such Derivatives. For example, a Portfolio may purchase Derivatives
to quickly gain exposure to a market in response to changes in the Portfolio's
asset allocation policy or upon the inflow of investable cash and at that time
the Derivative provides greater liquidity than the underlying securities
market. A Portfolio may also use Derivatives when it is restricted from
directly owning the underlying securities due to foreign investment
restrictions or other reasons or when doing so provides a price advantage over
purchasing the underlying securities directly, either because of a pricing
differential between the Derivatives and securities markets or because of lower
transaction costs associated with the Derivatives transaction. Derivatives may
also be used by a Portfolio for hedging purposes and under other circumstances
in which a Portfolio's portfolio managers believe it advantageous to do so
consistent with the Portfolio's investment objective. The Portfolios will not,
however, use Derivatives in a manner that creates leverage, except to the
extent that the use of leverage is expressly permitted by a particular
Portfolio's investment policies, and then only in a manner consistent with such
policies.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

Futures Contracts (Futures) and Forward Contracts (Forwards). The Portfolios
may purchase and sell futures contracts, such as futures on securities indices,
baskets of securities, foreign currencies and interest rates of the type
generally known as financial futures. These are standardized contracts that are
bought and sold on organized exchanges. A futures contract obligates a party to
buy or sell a specific amount of the "underlying," such as for example, a
particular foreign currency, on a specified future date at a specified price or
to settle the value in cash.

The Portfolios may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolios may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Transactions " below. These forward
contracts are privately negotiated and are bought and sold in the over-the-
counter market. Like a future, a forward contract obligates a party to buy or
sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.

In some cases, the Portfolios may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolios will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolios may utilize futures contracts, forward contracts and related options
are described below.

The Portfolios may sell securities index futures contracts and/or index 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 may purchase
securities index futures or options in order to gain market exposure. 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 also purchase and
sell foreign currency futures to hedge their respective holdings and
commitments against changes in the level of future currency rates or to adjust
their exposure to a particular currency.

The Portfolios may engage in transactions in interest rate futures and related
products. The value of these contracts rises and falls inversely with changes
in interest rates. The Portfolios may engage in such transactions to hedge
their holdings of debt instruments against future changes in interest rates or
for other purposes.

The Portfolios may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolios may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.

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<PAGE>

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

Under rules adopted by the Commodity Futures Trading Commission (the "CFTC"),
each Portfolio may, without registering with the CFTC as a Commodity Pool
Operator, 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-bona
fide hedging activities.

Options Transactions ("Options"). The Portfolios may seek to increase their
returns or may hedge their portfolio investments through options transactions
with respect to individual securities, indices or baskets in which such
Portfolios may invest; other financial instruments; and foreign currency.
Various options may be purchased and sold on either the exchange-traded or
over-the-counter markets.

Each Portfolio may purchase put and call options. Purchasing a put option gives
a Portfolio the right, but not the obligation, to sell the underlying (such as
a securities index or a particular foreign currency) at the exercise price
either on a specific date or during a specified exercise period. Purchasing a
call option gives a Portfolio a similar right, but not the obligation, to
purchase the underlying. The purchaser pays a premium to the seller (also known
as the writer) of the option.

Each Portfolio also may write put and call options on investments held in its
portfolio, as well as foreign currency options. A Portfolio that has written an
option receives a premium that increases the Portfolio's return on the
underlying 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
above the exercise price of the option. By writing a put option, a Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.

By writing an option, a Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Portfolios may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either
earmark or segregate sufficient liquid assets to cover its obligations under
the option or will continue to own (i) the underlying; (ii) securities or
instruments convertible or exchangeable without the payment of any
consideration into the underlying; or (iii) a call option on the same
underlying with a strike price no higher than the price at which the underlying
was sold pursuant to a short option position. In the case of a put option, the
Portfolio will either earmark or segregate sufficient liquid assets to cover
its obligations under the option or will own another put option on the same
underlying with an equal or higher strike price.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

Interest Rate, Currency, Commodity and Equity Swaps, Caps, Collars and
Floors. Swaps are privately negotiated over-the-counter derivative products in
which two parties agree to exchange payment streams calculated in relation to a
rate, index, instrument or certain securities and a particular "notional
amount." As with many of the other derivative products available to the
Portfolios, the underlying may include an interest rate (fixed or floating), a
currency exchange rate, a commodity price index, and a security, securities
index or a combination thereof. A great deal of flexibility is possible in the
way the products may be structured, with the effect being that the parties may
have exchanged amounts equal to the return on one rate, index or group of
securities for another. For example, in a simple fixed-to-floating interest
rate swap, one party makes payments equivalent to a fixed interest rate, and
the other makes payments equivalent to a specified interest rate index. A
Portfolio may engage in simple or more complex swap transactions involving a
wide variety of underlyings. The currency swaps that 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.

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Caps, collars and floors are privately-negotiated option-based derivative
products. A Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign
currency swaps), the entire notional amount is not exchanged and thus is not at
risk. A collar is a combination product in which the same party, such as the
Portfolio, buys a cap from and sells a floor to the other party. As with put
and call options, the amount at risk is limited for the buyer, but, if the cap
or floor is not hedged or covered, may be unlimited for the seller. Under
current market practice, caps, collars and floors between the same two parties
are generally documented under the same "master agreement." In some cases,
options and forward agreements may also be governed by the same master
agreement. In the event of a default, amounts owed under all transactions
entered into under, or covered by, the same master agreement would be netted
and only a single payment would be made.

Swaps, caps, collars and floors are credit-intensive products. A Portfolio that
enters into a swap transaction bears the risk of default, i.e. nonpayment, by
the other party. The guidelines under which each Portfolio enters derivative
transactions, along with some features of the transactions themselves, are
intended to reduce these risks to the extent reasonably practicable, although
they cannot eliminate the risks entirely. Under guidelines established by the
Board of Directors, a Portfolio may enter into swaps only with parties that
meet certain credit rating guidelines. Consistent with current market
practices, a Portfolio will generally enter into swap transactions on a net
basis, and all swap transactions with the same party will be documented under a
single master agreement to provide for net payment upon default. In addition, a
Portfolio's obligations under an agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued, but unpaid, net
amounts owed to the other party to a master agreement will be covered by the
maintenance of a segregated account consisting of cash or liquid securities.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

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,

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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 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 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.

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.

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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 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.

A Portfolio engaging in Forwards will comply with the segregation requirements
required by the Investment Company Act of 1940, as amended (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 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

15
<PAGE>

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.

The risks posed by High Yield Securities 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

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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.

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 a 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.

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.

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<PAGE>

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 Net Asset Value ("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 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.

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. Pursuant to an order
issued by the SEC, the Fund may lend portfolio securities to affiliated broker-
dealers. 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 (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 GNMA, FHLMC, Fannie Mae, 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.

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

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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.

NON-DIVERSIFIED STATUS. The International Magnum, 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 "Internal Revenue 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 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, Emerging Markets Equity and Asian Equity Portfolios may each invest up
to 25% of their total assets in Rule 144A Securities that are deemed to be
liquid. Other Portfolios may invest an unlimited amount 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.

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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<PAGE>

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 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.

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 Equity 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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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 ("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.

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. Each
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.

21
<PAGE>

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 International Magnum, 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.

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 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 ADVISER. MSAM 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, 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 subsidiary of
Morgan Stanley Dean Witter & Co. ("MSDW"), which is a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses--securities, asset management and credit services.
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 well as to employee benefit plans, endowment funds,
foundations and other institutional investors. As of February 28, 1998, MSAM
and its institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice. See
"Management of the Fund" in the SAI.

22
<PAGE>

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 and MSAM, 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 and MSAM, 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 its inception.

GLOBAL EQUITY PORTFOLIO -- Frances Campion. Frances Campion, a Managing
Director of Morgan Stanley and MSAM, 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 Odier 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 its inception.

INTERNATIONAL MAGNUM PORTFOLIO -- Francine J. Bovich. Francine Bovich, a
Managing Director of Morgan Stanley and MSAM, joined MSAM 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 its inception.

EMERGING MARKETS EQUITY PORTFOLIO -- Madhav Dhar and Robert L. Meyer. Madhav
Dhar joined MSAM in 1984. He is a Managing Director of MSAM and of Morgan
Stanley. He is a member of MSAM's executive committee, head of MSAM's emerging
markets group and chief investment officer of MSAM's global emerging market
equity portfolios. He holds a B.S. (honors) from St. Stephen's College, Delhi
University India and an M.B.A. from Carnegie-Mellon University. Mr. Dhar has
been primarily responsible for managing the Portfolio's assets since its
inception. Robert L. Meyer joined MSAM in 1989. He is a Managing Director of
MSAM and of Morgan Stanley and co-manager of MSAM's emerging markets group and
head of MSAM's Latin American team. He was born in Argentina and graduated from
Yale University with a B.A. in Economics and Political Science. He received a
J.D. from Harvard Law School. In addition, he is also a Chartered Financial
Analyst. Mr. Meyer has worked with Mr. Dhar in managing the Portfolio's assets
since its inception.

ASIAN EQUITY PORTFOLIO -- Vinod Sethi. Vinod Sethi joined MSAM in 1989 and
since then, has been actively involved in MSAM's emerging market group. Mr.
Sethi is a Managing Director of Morgan Stanley and MSAM and is MSAM's Chief
Investment Officer for the Asian region. He received his undergraduate degree
in Chemical Engineering from I.I.T. (Bombay) and his M.B.A. from New York
University School of Business. Mr. Sethi has had primary responsibility for
managing the Portfolio's assets since April 1998.

OTHER SERVICES

23
<PAGE>

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 semi-annual reports) used as sales materials.
Morgan Stanley does not receive compensation for providing distribution
services.

ADMINISTRATOR. MSAM also provides the Portfolios 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 that it
administers.

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. As compensation for its services,
Chase is paid by MSAM out of its administration fees. 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.

Certain administrative and record-keeping services that would otherwise be
performed by the Adviser or its service providers may be performed by insurance
companies that purchase shares of the Portfolios. The Adviser may make payments
to these insurance companies to defray the costs of providing those services.

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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 ("MSTC"), Brooklyn, New York, 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 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 the Adviser for managing its
investments and business affairs. The Adviser 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 is entitled to receive from each 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

24
<PAGE>

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
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<S> <C>
U.S. Real Estate....................................... 1.10%
Global Equity.......................................... 1.15%
International Magnum................................... 1.15%
Asian Equity........................................... 1.20%
Emerging Markets Equity................................ 1.75%
</TABLE>

These fee waivers and reimbursements 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 semi-annual 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 the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the Portfolios and direct 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.

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 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 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

25
<PAGE>

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. For the period ended December 31, 1997, the
Portfolio turnover rates for the U.S. Real Estate and Asian Equity Portfolios
were 114% and 130%, respectively. 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 substantially 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 MSIF portfolios, as
shown in the table below, may be relevant to your consideration of the
Portfolios. The investment performance 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 portfolio of MSIF. The investment performance of the Class A
Shares of the MSIF portfolios is provided merely to indicate the experience of
the Adviser in managing similar portfolios.

<TABLE>
<CAPTION>
Average Average Average
Annual Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Total Return Total Return Annual
One Year Three Years Five Years Ten Years Three Years Five Years Ten Years Total Return
Inception Ended Ended Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MSIF:
U.S. Real
Estate......... 2/24/95 27.62% NA NA NA NA NA NA 30.92%
Global Equity... 7/15/92 23.75% 80.38% 178.25% NA 21.73% 22.71% NA 20.03%
International
Magnum......... 3/15/96 6.58% NA NA NA NA NA NA 8.28%
Emerging
Markets........ 9/25/92 (1.03)% (3.09)% 62.71% NA (1.04)% 10.23% NA 10.13%
Asian Equity.... 7/1/91 (48.29)% (42.81)% (0.96)% NA (16.99)% (0.19)% NA 4.16%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the U.S. Real Estate, Global Equity and Asian Equity Portfolios.
General American Life Insurance and American General Life Insurance Company
each owned more than 25% of the International Magnum Portfolio, New York Life
Insurance and Annuity Corporation owned more than 25% of the Emerging Markets
Equity Portfolio, Fidelity Investments Life Insurance Company owned more than
25% of the Global Equity Portfolio, and Integrity Life Insurance Company owned
more than 25% of the Asian Equity Portfolio, pursuant to variable annuity
contracts and variable life insurance policies they have issued to the public.

As currently required under law, insurance companies vote their shares of the
Portfolios in accordance with instructions received from their variable annuity
contract and variable life insurance policy owners. MSDW will vote the shares
of each Portfolio that it owns in the same proportions as shares of the
Portfolio are voted by the insurance companies. Accordingly, neither MSDW nor
the insurance companies are deemed to be in control of the Portfolios.

For more information, see "Principal Holders of Securities" 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 and to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. As a regulated investment
company under the Internal Revenue 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 Internal Revenue 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.

27
<PAGE>

TRANSACTION DETAILS

The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. Each 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, Martin Luther King, Jr. 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'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 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.

For Portfolios that engage in Foreign Investment, certain securities from time
to time may be listed primarily on foreign exchanges that trade on days when
the NYSE is closed (such as Saturday). As a result, the NAV of these Portfolios
may be affected significantly by such trading on days when shareholders can not
purchase or redeem shares of the Portfolio.

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 ASSET MANAGEMENT INC. MILLER 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 THIRTEEN OTHER PORTFOLIOS MANAGED BY
MSAM OR MAS.

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, 1998
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

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, 1998, MAS managed assets of approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE

FINANCIAL HIGHLIGHTS____________________3

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES_____________________4

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____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_________________23

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_______________________28

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

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<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FIXED INCOME VALUE MID CAP VALUE U.S. REAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------- ------------------- ------------------- -----------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
SELECTED PER SHARE JANUARY 2, 1997* TO JANUARY 2, 1997* TO JANUARY 2, 1997* TO MARCH 3, 1997* TO
DATA AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
- ------------------ ------------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PE-
RIOD............ $ 10.00 $ 10.00 $ 10.00 $ 10.00
------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income......... 0.46 0.10 0.02 0.17
Net Realized and
Unrealized Gain
(Loss)......... 0.53 1.99 4.05 1.61
------- ------- ------- -------
Total From In-
vestment Opera-
tions.......... 0.99 2.09 4.07 1.78
------- ------- ------- -------
DISTRIBUTIONS
Net Investment
Income......... (0.45) (0.10) (0.02) (0.17)
In Excess of Net
Investment In-
come........... -- 0.00 + -- --
Net Realized
Gain........... (0.13) (0.21) (0.73) (0.20)
In Excess of Net
Realized Gain.. -- 0.00 + -- --
------- ------- ------- -------
Total Distribu-
tions.......... (0.58) (0.31) (0.75) (0.37)
------- ------- ------- -------
NET ASSET VALUE,
END OF PERIOD... $ 10.41 $ 11.78 $ 13.32 $ 11.41
======= ======= ======= =======
TOTAL RETURN..... 9.93% 20.98% 40.93% 17.99%
======= ======= ======= =======
RATIOS AND SUP-
PLEMENTAL DATA:
Net Assets, End
of Period
(000's)......... $12,760 $14,664 $11,461 $13,055
Ratio of Expenses
to Average Net
Assets.......... 0.70%** 0.85%** 1.05%** 1.10%**
Ratio of Expenses
to Average Net
Assets,
Excluding
Interest Expense
and Foreign Tax
Expense......... -- -- -- --
Ratio of Net
Investment
Income to
Average Net
Assets.......... 5.66%** 1.70%** 0.19%** 3.14%*
Portfolio
Turnover Rate... 185% 34% 141% 114%
Average
Commission Rate
Per Share....... -- $0.0585 $0.0490 $0.0542
As a Percentage
of Trade
Amount......... -- -- -- --
- -------------------------------------------------------------------------------------------------
Effect of
Voluntary
Expense
Limitation
During the
Period:
Per Share
Benefit to Net
Investment
Income......... $ 0.08 $ 0.06 $ 0.08 $ 0.07
Ratios Before
Expense
Limitation:
Expenses to
Average Net
Assets......... 1.71%** 1.87%** 2.13%** 2.32%**
Net Investment
Income (Loss)
to Average Net
Assets......... 4.65%** 0.68%** (0.89)%** 1.92%**
<CAPTION>
EMERGING MARKETS EQUITY
PORTFOLIO
-------------------------------------
PERIOD FROM
SELECTED PER SHARE YEAR ENDED OCTOBER 1, 1996* TO
DATA AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1996
- ------------------ ----------------- -------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PE-
RIOD............ $ 9.78 $ 10.00
----------------- -------------------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income......... 0.04 0.01
Net Realized and
Unrealized Gain
(Loss)......... -- (0.21)
----------------- -------------------
Total From In-
vestment Opera-
tions.......... 0.04 (0.20)
----------------- -------------------
DISTRIBUTIONS
Net Investment
Income......... (0.07) (0.02)
In Excess of Net
Investment In-
come........... --
Net Realized
Gain........... (0.02) --
In Excess of Net
Realized Gain.. (0.28) --
----------------- -------------------
Total Distribu-
tions.......... (0.37) (0.02)
----------------- -------------------
NET ASSET VALUE,
END OF PERIOD... $ 9.45 $ 9.78
================= ===================
TOTAL RETURN..... 0.52% (2.03)%
================= ===================
RATIOS AND SUP-
PLEMENTAL DATA:
Net Assets, End
of Period
(000's)......... $34,098 $11,789
Ratio of Expenses
to Average Net
Assets.......... 1.80% 1.79%**
Ratio of Expenses
to Average Net
Assets,
Excluding
Interest Expense
and Foreign Tax
Expense......... 1.75% 1.75%**
Ratio of Net
Investment
Income to
Average Net
Assets.......... 0.47% 0.32%**
Portfolio
Turnover Rate... 87% 9%
Average
Commission Rate
Per Share....... $0.0018 $0.0013
As a Percentage
of Trade
Amount......... 0.40% 0.45%
- -------------------------------------------------------------------------------------------------
Effect of
Voluntary
Expense
Limitation
During the
Period:
Per Share
Benefit to Net
Investment
Income......... $ 0.17 $ 0.08
Ratios Before
Expense
Limitation:
Expenses to
Average Net
Assets......... 4.12% 6.17%**
Net Investment
Income (Loss)
to Average Net
Assets......... (1.84)% (4.06)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized
+Amount is less than $0.01 per share.

3
<PAGE>

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.

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.

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.

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
generally $500 million to $6 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

4
<PAGE>

THE PORTFOLIOS' INVESTMENTS

INVESTMENT CHARACTERISTICS AND RISKS

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 investment in Derivatives, but there is no guarantee
that these strategies will work as intended.

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).
The Portfolio may invest up to 50% of its assets in MBSs. The Portfolio may
also invest in Municipals, Loan Participations and Assignments, Investment
Company Securities, When-Issued and Delayed Delivery Securities, CMOs,
Derivatives, Foreign Currency Transactions, and may engage in Loans of
Portfolio Securities. 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

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, 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

5
<PAGE>

general as measured by the S&P 500 Stock 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 generally $500
million to $6 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, 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 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. The Portfolio will invest primarily in Equity
REITs which 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. The Portfolio may also invest in Mortgage
REITs and Hybrid REITs. 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.
Risks associated with investments in REITs include changes in the values of
their underlying properties and defaults by borrowers or tenants. In addition,
some REITs are not diversified and their value may be affected by events
related to a small number of properties.

6
<PAGE>

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, 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.

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, Depositary Receipts 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 intends to invest primarily in some or all of the following
emerging market countries:

Argentina Botswana Brazil Bulgaria
Chile China (mainland and Hong Kong) Colombia Egypt
Ghana Greece Hungary India
Indonesia Israel Jamaica Jordan
Kenya Malaysia Mexico Morocco
Nigeria Pakistan Peru Philippines
Poland Russia Singapore South Africa
South Korea Sri Lanka Taiwan Thailand
Turkey Venezuela Zimbabwe

SECURITIES AND INVESTMENT TECHNIQUES

7
<PAGE>

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

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.

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.

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.

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.

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 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.

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

8
<PAGE>

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 the
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"), Fannie Mae, 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
warrant such investments. Securities issued by private issuers will be rated
investment grade by Moody's Investors Service, Inc. ("Moody's") or S&P or be
deemed by the Adviser to be of comparable investment quality.

9
<PAGE>

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 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

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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:

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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.

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 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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rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). Each of the U.S. Real Estate and Emerging
Markets Equity Portfolios will limit its use of Derivatives to 33 1/3% of its
total assets measured by the aggregate notional amount of outstanding
Derivatives. The Fixed Income, Value and Mid Cap Value Portfolios will not
enter into futures to the extent that each Portfolio's outstanding obligations
to purchase securities under these contracts, in combination with its
outstanding obligations with respect to options, would exceed 50% of its total
assets. The Portfolios' investments in forward foreign currency contracts and
Derivatives used for hedging purposes are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

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Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

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Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

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.

Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent,

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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 Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

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.

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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.

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

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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.

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

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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 a 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.

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 Net Asset
Value ("NAV").

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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.

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 GNMA, FHLMC, Fannie Mae, 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.

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.

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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.

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 "Internal Revenue Code"), for qualification as
regulated investment companies. See "Investment Limitations" and "Taxes" in the
SAI.

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 Emerging
Markets Equity Portfolio may invest up to 25% of its total assets in Rule 144A
Securities that are deemed to be liquid. Other Portfolios may invest an
unlimited amount in Rule 144A Securities that are deemed to be liquid.

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.

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 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.

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 Equity 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.

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.

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 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

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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
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 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 subsidiary of Morgan
Stanley Dean Witter & Co. ("MSDW"), which is a preeminent global financial
services firm that maintains leading market positions in each of its three
primary businesses--securities, asset management and credit services. 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 well as to employee benefit plans, endowment funds,
foundations and other institutional investors. MAS is a Pennsylvania limited
liability partnership founded in 1969 with principal offices at One Tower
Bridge, West Conshohocken, Pennsylvania 19428. MAS is also a subsidiary of
MSDW. 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, 1998, MSAM and its institutional investment advisory affiliates
(exclusive of MAS) had approximately $88.1 billion in assets under management
or fiduciary advice and MAS managed assets of approximately $68.4 billion. See
"Management of the Fund" in the SAI.

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encoded and calculated. That failure could have a negative impact on the
handling of securities trades, pricing and account services. The Advisers and
Morgan Stanley have been actively working on necessary changes to their own
computer systems to prepare for the year 2000 and expect that their systems
will be adapted before that date, but there can be no assurance that they will
be successful, or that interaction with other non-complying computer systems
will not impair their services at that time. The Advisers and Morgan Stanley
are contacting their vendors and service providers to obtain assurances that
such vendors and service providers have taken appropriate measures to address
the "Year 2000" problem.

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, 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 its 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. (Cum Laude) from
Dartmouth College and is a Chartered Financial Analyst. 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 the University of Notre Dame. 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. Mr.
Behler and Mr. Marcin have shared primary responsibility for managing the
Portfolio's assets since its inception. Mr. Kovich assumed responsibilities
with the Value Portfolio in 1997.

MID CAP VALUE PORTFOLIO -- William B. Gerlach, Gary G. Schlarbaum, Bradley S.
Daniels and Chris Leavy. 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.
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. Chris Leavy
joined MAS in 1997. He served as a Portfolio Manager for Capitoline Investment
Services from 1995-1997; a Portfolio Manager for Premier Trust Company from
1994 to 1995; and as a Research Analyst for Leavy Investment Management from
1993-1994. Messrs. Gerlach, Schlarbaum, Daniels and Leavy have had primary
responsibility for managing the Portfolio's assets since its inception.

24
<PAGE>

OTHER SERVICES

DISTRIBUTOR. Under its Distribution Agreement with the Fund, Morgan Stanley, a
subsidiary of MSDW, 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 semi-annual reports) used as sales materials.
Morgan Stanley does not receive compensation for providing distribution
services.

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.

MSAM and MAS have each 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 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. As
compensation for its services, Chase is paid by MSAM and MAS out of their
respective administration fees. 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 those
services.

Chase Global calculates the NAV and dividends and maintains the general
accounting records for each Portfolio.

25
<PAGE>

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 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

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>
- -------------------------------------------------------------------------------------
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.

These fee waivers and reimbursements are voluntary and may be terminated by
MSAM or MAS 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 semi-annual 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 Agreements authorize the Advisers to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the Portfolios and direct the Advisers 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 Advisers to pay
higher commissions in recognition of brokerage services which, in the opinion
of the Advisers, are necessary for the achievement of better execution,
provided the Advisers believe this to be in the best interest of the Fund.

26
<PAGE>

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 Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, 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 Advisers 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 Advisers 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. For the
periods ended December 31, 1997, the Portfolio turnover rates for the Fixed
Income, Mid Cap Value and U.S. Real Estate Portfolios were 185%, 141% and 114%,
respectively. 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.

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

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 substantially 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 MAS Funds
Fund Portfolio MSIF 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>

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the U.S. Real Estate and Mid Cap Value Portfolios. Also, as of
that date, General American Life Insurance and Allmerica Financial Life
Insurance & Annuity Company each owned more than 25% of the Fixed Income
Portfolio, American General Life Insurance Company owned more than 25% of the
Mid Cap Value and Value Portfolios and New York Life Insurance and Annuity
Corporation owned more than 25% of the Emerging Markets Equity Portfolio,
pursuant to variable annuity contracts and variable life insurance policies
they have issued to the public.

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

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

28
<PAGE>

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, Martin Luther King, Jr. 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.

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
Portfolio is open for business.

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.

29
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 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 SIXTEEN OTHER PORTFOLIOS MANAGED BY MSAM
OR MAS.

THE PORTFOLIOS:

Fixed Income U.S. Real Estate

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, 1998
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 in
seeking to achieve 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, 1998, MSAM and its affiliated institutional asset management
companies (exclusive of MAS) had approximately $88.1 billion in assets under
management or fiduciary advice.

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, 1998, MAS managed assets of
approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE

FINANCIAL HIGHLIGHTS 3

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES 4

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 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 20

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 20

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 25

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

2
<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
U.S. REAL
FIXED INCOME ESTATE
PORTFOLIO PORTFOLIO
------------------- -----------------
PERIOD FROM PERIOD FROM
JANUARY 2, 1997* TO MARCH 3, 1997* TO
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997
- ---------------------------------- ------------------- -----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..... $ 10.00 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................... 0.46 0.17
Net Realized and Unrealized Gain........ 0.53 1.61
------- -------
Total From Investment Operations........ 0.99 1.78
------- -------
DISTRIBUTIONS
Net Investment Income................... (0.45) (0.17)
Net Realized Gain....................... (0.13) (0.20)
------- -------
Total Distributions..................... (0.58) (0.37)
------- -------
NET ASSET VALUE, END OF PERIOD........... $ 10.41 $ 11.41
======= =======
TOTAL RETURN............................. 9.93% 17.99%
======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)........ $12,760 $13,055
Ratio of Expenses to Average Net Assets.. 0.70%** 1.10%**
Ratio of Net Investment Income to Average
Net Assets.............................. 5.66%** 3.14%**
Portfolio Turnover Rate.................. 185% 114%
Average Commission Rate
Per Share............................... -- $0.0542
- --------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period:
Per Share Benefit to Net Investment
Income................................. $ 0.08 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets.......... 1.71%** 2.32%**
Net Investment Income to Average Net
Assets................................. 4.65%** 1.92%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

3
<PAGE>

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.

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 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 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.

FIXED INCOME PORTFOLIO

4
<PAGE>

U.S. REAL ESTATE PORTFOLIO

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
Stock Index ("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. The Portfolio will invest primarily in Equity REITs which 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. The Portfolio may also invest in Mortgage REITs and Hybrid
REITs. 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. Risks
associated with investments in REITs include changes in the values of their
underlying properties and defaults by borrowers or tenants. In addition, some
REITs are not diversified and their value may be affected by events related to
a small number of properties.

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.

5
<PAGE>

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 Securities may also present risks based on payment expectations. For
example, High Yield Securities

6
<PAGE>

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.

7
<PAGE>

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

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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 nationally
recognized statistical rating organizations (each, an "NRSRO") 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.

8
<PAGE>

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 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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). The U.S. Real Estate Portfolio will limit its
use of Derivatives to 33 1/3% of its total assets measured by the aggregate
notional amount of outstanding Derivatives. The Fixed Income Portfolio will not
enter into futures to the extent that the Portfolio's outstanding obligations
to purchase securities under these contracts, in combination with its
outstanding obligations with respect to options, would exceed 50% of its total
assets. The Portfolios'
9
<PAGE>

investments in forward foreign currency contracts and Derivatives used for
hedging purposes are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there
10
<PAGE>

appears to be a liquid exchange or secondary market. In some strategies, the
risk of loss in trading on futures and related transactions can be substantial,
due both to the low margin deposits required and the extremely high degree of
leverage involved in pricing.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

11
<PAGE>

combination product in which the same party, such as the Portfolio, buys a cap
from and sells a floor to the other party. As with put and call options, the
amount at risk is limited for the buyer, but, if the cap or floor is not hedged
or covered, may be unlimited for the seller. Under current market practice,
caps, collars and floors between the same two parties are generally documented
under the same "master agreement." In some cases, options and forward
agreements may also be governed by the same master agreement. In the event of a
default, amounts owed under all transactions entered into under, or covered by,
the same master agreement would be netted and only a single payment would be
made.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

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 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,

12
<PAGE>

High Yield Securities, MBSs, SMBSs, CMOs, ABSs, Convertible Securities, Brady
Bonds, Floaters, Inverse Floaters, Cash Equivalents, Municipals, Repurchase
Agreements, Preferred Stocks, Foreign Bonds and Yankee 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.

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>

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.

Moody's: Ba-rated bonds have "speculative elements" so their future
"cannot be considered
14
<PAGE>

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.

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

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 a 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.

INVESTMENT GRADE SECURITIES. Investment Grade Securities are those rated by one
or more NRSROs in one of

15
<PAGE>

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.

16
<PAGE>

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.

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 GNMA, FHLMC, Fannie Mae, 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.

NON-DIVERSIFIED STATUS. The U.S. Real Estate 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

17
<PAGE>

Portfolio intends to comply with diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), for
qualification as a regulated investment company. See "Investment Limitations"
and "Taxes" in the SAI.

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 in Rule 144A
Securities that are deemed to be liquid. The Fixed Income Portfolio may invest
an unlimited amount in Rule 144A Securities that are deemed to be liquid.

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.

18
<PAGE>

interest rates rise during a Reverse Repurchase Agreement, it may adversely
affect the Portfolio's ability to maintain a stable NAV.

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.

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.

19
<PAGE>

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 Fixed Income Portfolio is a diversified investment company and is therefore
subject to the following fundamental limitations: as to 75% of its total
assets, the 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
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

20
<PAGE>

subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"), which is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses--securities, asset management and credit
services. 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 well as to employee benefit plans, endowment
funds, foundations and other institutional investors. MAS is a Pennsylvania
limited liability partnership founded in 1969 with principal offices at One
Tower Bridge, West Conshohocken, Pennsylvania 19428. MAS is also a subsidiary
of MSDW. 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, 1998, MSAM and its institutional investment advisory affiliates
(exclusive of MAS) had approximately $88.1 billion in assets under management
or fiduciary advice and MAS managed assets of approximately $68.4 billion. See
"Management of the Fund" in the SAI.

YEAR 2000. The services provided to the Fund by the Advisers and Morgan Stanley
& Co. Incorporated ("Morgan Stanley") depend on the smooth functioning of their
computer systems. Many computer software systems in use today cannot recognize
the year 2000, but revert to 1900 or some other date, due to the manner in
which dates were encoded and calculated. That failure could have a negative
impact on the handling of securities trades, pricing and account services. The
Advisers and Morgan Stanley have been actively working on necessary changes to
their own computer systems to prepare for the year 2000 and expect that their
systems will be adapted before that date, but there can be no assurance that
they will be successful, or that interaction with other non-complying computer
systems will not impair their services at that time. The Advisers and Morgan
Stanley are contacting their vendors and service providers to obtain assurances
that such vendors and service providers have taken appropriate measures to
address the "Year 2000" problem.

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

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<PAGE>

OTHER SERVICES

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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

22
<PAGE>

PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
U.S.
Fixed Real
Assets Income 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>

These fee waivers and reimbursements are voluntary and may be terminated by
MSAM or MAS 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 semi-annual 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 respectively. 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 the Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

23
<PAGE>

remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.

PORTFOLIO TURNOVER

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.

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

24
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

Past investment performance of the Class A Shares of the MSIF U.S. Real Estate
Portfolio and the Institutional Class Shares of the Fixed Income Portfolio 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 U.S. Real Estate
Portfolio and the Institutional Class Shares of the Fixed Income Portfolio of
the MAS Funds is provided merely to indicate the experience of the Advisers in
managing similar portfolios.

<TABLE>
<CAPTION>
Average Average Average
Annual Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Total Return Total Return Annual
One Year Three Years Five Years Ten Years Three Years Five Years Ten Years Total Return
Inception Ended Ended Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MSIF:
U.S. Real
Estate......... 2/24/95 27.62% NA NA NA NA NA NA 30.92%
MAS FUNDS:
Fixed Income.... 11/14/84 9.61% 40.07% 50.75% 157.81% 11.89% 8.56% 9.93% 10.92%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the U.S. Real Estate Portfolio. Also, as of that date, General
American Life Insurance and Allmerica Financial Life Insurance & Annuity
Company each owned more than 25% of the Fixed Income Portfolio, pursuant to
variable annuity contracts and variable life insurance policies they have
issued to the public.

For more information, see "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

25
<PAGE>

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, Martin Luther King,
Jr. 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.

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
Portfolio is open for business.

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.

26
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 NINE 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.

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 Asian Equity

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 HIGH YIELD PORTFOLIO 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.

Prospectus dated May 1, 1998
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 nine 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 in
seeking to achieve 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:

Equity Growth Emerging Markets Equity
Global Equity Asian Equity
International Magnum

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

Fixed Income Value
High Yield Mid Cap Value

MAS's institutional investment advisory business was established in 1969. As of
February 28, 1998, MAS managed assets of approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE

FINANCIAL HIGHLIGHTS____________________3

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES_____________________5

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

THE PORTFOLIOS' INVESTMENTS_____________6

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

SECURITIES AND INVESTMENT TECHNIQUES___11

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__________27

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND_________________27

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_______________________35

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

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following tables provide audited financial highlights for the Portfolios
for the periods presented. The audited financial highlights for the periods
presented have been audited by Price Waterhouse LLP, whose unqualified report
thereon appears in the Fund's Annual Report to Shareholders and is incorporated
by reference in the Statement of Additional Information. The Annual Report and
the financial statements therein, as well as 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>
FIXED INCOME HIGH YIELD EQUITY GROWTH VALUE MID CAP VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------- ------------------- ------------------- ------------------- -------------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
SELECTED PER SHARE DATA JANUARY 2, 1997* TO JANUARY 2, 1997* TO JANUARY 2, 1997* TO JANUARY 2, 1997* TO JANUARY 2, 1997* TO
AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
- ----------------------- ------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD........ $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment In-
come................. 0.46 0.63 0.02 0.10 0.02
Net Realized and
Unrealized Gain...... 0.53 0.72 3.27 1.99 4.05
------- ------- ------- ------- -------
Total From Investment
Operations........... 0.99 1.35 3.29 2.09 4.07
------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment In-
come................. (0.45) (0.63) (0.02) (0.10) (0.02)
In Excess of Net In-
vestment Income...... -- -- -- 0.00 + --
Net Realized Gain..... (0.13) (0.13) (0.53) (0.21) (0.73)
In Excess of Net Real-
ized Gain............ -- -- -- 0.00 + --
------- ------- ------- ------- -------
Total Distributions... (0.58) (0.76) (0.55) (0.31) (0.75)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................ $ 10.41 $ 10.59 $ 12.74 $ 11.78 $ 13.32
======= ======= ======= ======= =======
TOTAL RETURN........... 9.93% 13.53% 33.05% 20.98% 40.93%
======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000's)........ $12,760 $12,490 $12,419 $14,664 $11,461
Ratio of Expenses to
Average Net Assets.... 0.70%** 0.81%** 0.85%** 0.85%** 1.05%**
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense............... -- 0.80%** -- -- --
Ratio of Net Investment
Income to Average Net
Assets................ 5.66%** 7.41%** 0.41%** 1.70%** 0.19%**
Portfolio Turnover
Rate.................. 185% 78% 172% 34% 141%
Average Commission Rate
Per Share............. -- -- $0.0542 $0.0585 $0.0490
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment
Income............... $ 0.08 $ 0.08 $ 0.07 $ 0.06 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average
Net Assets........... 1.71%** 1.68%** 2.05%** 1.87%** 2.13%**
Net Investment Income
(Loss) to Average Net
Assets............... 4.65%** 6.53%** (0.80)%** 0.68%** (0.89)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized
+Amount is less than $0.01 per share.

3
<PAGE>

FINANCIAL HIGHLIGHTS (CONCLUDED)

<TABLE>
<CAPTION>
GLOBAL INTERNATIONAL ASIAN
EQUITY MAGNUM EMERGING MARKETS EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------- ------------------------- ------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 2, JANUARY 2, OCTOBER 1, MARCH 3,
1997* TO 1997* TO YEAR ENDED 1996* TO 1997* TO
SELECTED PER SHARE DATA AND DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
RATIOS 1997 1997 1997 1996 1997
- --------------------------- ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $ 10.00 $ 10.00 $ 9.78 $ 10.00 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.... 0.08 0.13 0.04 0.01 0.01
Net Realized and
Unrealized Gain (Loss).. 1.92 0.59 -- (0.21) (4.36)
------- ------- ------- ------- -------
Total From Investment
Operations............ 2.00 0.72 0.04 (0.20) (4.35)
------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income.... (0.08) (0.32) (0.07) (0.02) (0.01)
Net Realized Gain........ (0.18) (0.02) (0.02) -- --
In Excess of Net Realized
Gain.................... -- -- (0.28) -- --
------- ------- ------- ------- -------
Total Distributions.... (0.26) (0.34) (0.37) (0.02) (0.01)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD.................... $ 11.74 $ 10.38 $ 9.45 $ 9.78 $ 5.64
======= ======= ======= ======= =======
TOTAL RETURN............... 20.04% 7.31% 0.52% (2.03)% (43.52)%
======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(000's)................... $14,707 $18,855 $34,098 $11,789 $12,571
Ratio of Expenses to
Average Net Assets........ 1.15%** 1.16%** 1.80% 1.79%** 1.35%**
Ratio of Expenses to
Average Net Assets
Excluding Interest
Expense................... -- 1.15%** -- -- --
Ratio of Expenses to
Average Net Assets
Excluding Interest Expense
and Foreign Tax Expense... -- -- 1.75% 1.75%** 1.20%**
Ratio of Net Investment
Income to Average Net
Assets.................... 1.24%** 1.43%** 0.47% 0.32%** 0.32%**
Portfolio Turnover Rate.... 20% 41% 87% 9% 130%
Average Commission Rate
Per Share................ $0.0350 $0.0181 $0.0018 $0.0013 $0.0134
As a Percentage of Trade
Amount.................. 0.25% 0.20% 0.40% 0.45% 0.50%
- ----------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the
Period:
Per Share Benefit to Net
Investment Income....... $ 0.09 $ 0.15 $ 0.17 $ 0.08 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets.................. 2.43%** 2.78%** 4.12% 6.17%** 3.10%**
Net Investment Income
(Loss) to Average Net
Assets.................. (0.04)%** (0.19)%** (1.84)% (4.06)%** (1.43)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

4
<PAGE>

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

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.

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 be 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.

5
<PAGE>

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 foreign 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).

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 foreign securities exchanges and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

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.

RISK PROFILE: High potential risk and reward. In addition to general risks
involved in Equity Securities, Foreign Investment involves different or
increased risks. The performance of the Portfolio will be affected by foreign
currency values, the greater volatility of foreign securities exchanges, and
the overall political, economic and regulatory environment in the countries in
which the Portfolio invests. Because the Portfolio invests in a small group of
geographically and economically related countries, its performance is expected
to be more volatile than more geographically diversified investment portfolios.

THE PORTFOLIOS' INVESTMENTS

INVESTMENT CHARACTERISTICS AND RISKS

6
<PAGE>

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.

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
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.

U.S. FIXED INCOME PORTFOLIOS

FIXED INCOME PORTFOLIO

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 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, SMBSs, CMOs, Derivatives, 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

7
<PAGE>

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, Fixed Income
Securities and Derivatives, 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 Stocks.

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 Portfolio is not restricted
to investments in specific market sectors. 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
in relation to 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

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
Stock 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

8
<PAGE>

GLOBAL PORTFOLIOS

GLOBAL EQUITY PORTFOLIO

INTERNATIONAL MAGNUM PORTFOLIO

9
<PAGE>

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, and
may engage in Loans of Portfolio Securities. The Portfolio may also invest up
to 10% of its total assets in (i) Investment Funds with investment objectives
similar to that of the Portfolio and (ii) for temporary purposes, money market
funds 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, Depositary Receipts 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 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

10
<PAGE>

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.

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 Adviser's approach is oriented to individual stock selection and is value
driven, similar to the approach described for the Global Equity 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.

SECURITIES AND INVESTMENT TECHNIQUES

The following pages contain more detailed information about types of
instruments in which a Portfolio may invest and

11
<PAGE>

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.

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 (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, 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 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).

12
<PAGE>

Portfolio receives from the companies comprising the Portfolio's investments.

13
<PAGE>

MORTGAGE INVESTING: At times it is anticipated that greater than 50% of the
Fixed Income and High Yield Portfolios' 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. The Portfolios will invest in securities issued by the
Government National Mortgage Association ("GNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC"), Fannie Mae, other Government agencies, and private
issuers. It is expected that the Portfolios' primary emphasis will be in MBSs
issued by the various Government-related organizations. However, the Portfolios
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 Investors Service, Inc. ("Moody's") or S&P
or be deemed by the Adviser to be of comparable investment quality.

INSTRUMENTS AND INVESTMENTS

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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:

14
<PAGE>

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).

(2)Commercial paper rated at time of purchase by one or more nationally
recognized securities rating organizations (each, an "NRSRO") 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.

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.

15
<PAGE>

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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). Each of the Equity Growth, Global Equity,
International Magnum, Emerging Markets Equity and Asian Equity Portfolios will
limit its use of Derivatives to 33 1/3% of its total assets measured by the
aggregate notional amount of outstanding Derivatives. The Fixed Income, High
Yield, Value and Mid Cap Value Portfolios will not enter into futures to the
extent that each Portfolio's outstanding obligations to purchase securities
under these contracts, in combination with its outstanding obligations with
respect to options, would exceed 50% of its total assets. The Portfolios'
investments in forward foreign currency contracts and Derivatives used for
hedging purposes are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

16
<PAGE>

contracts that are negotiated directly with an individual counterparty, subject
the Portfolio to the risk of counterparty default.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

17
<PAGE>

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

18
<PAGE>

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.

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 Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

19
<PAGE>

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.

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.

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.

20
<PAGE>

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.

21
<PAGE>

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 High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

The following tables provide a summary of ratings assigned to all debt holdings
of the High Yield Portfolio, the only Portfolio with more than 5% invested in
High Yield Securities as of December 31, 1997 (not including Money Market
Instruments). These figures do not necessarily indicate the Portfolio's current
or future debt holdings.

HIGH YIELD PORTFOLIO+

<TABLE>
<S> <C>
QUALITY
AAA 23.22%
AA 0.00%
A 0.00%
BBB 4.31%
BB 50.36%
B 19.44%
CCC 0.17%
Not Rated 2.49%
B 2.49%*
TOTAL 100.00%**
</TABLE>
- -------
+ Ratings by S&P
* The Adviser believes that these non-rated securities are equivalent to the
rating indicated.
** The figures provided do not total to exactly 100% due to rounding.

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 a 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.

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

22
<PAGE>

(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.

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. In addition, the High
Yield Portfolio may lend its portfolio securities to certain institutional
investors. 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. Pursuant to an order issued by the SEC, the Fund may lend
portfolio securities to affiliated broker-dealers. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

23
<PAGE>

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.

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 GNMA, FHLMC, Fannie Mae, 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.

24
<PAGE>

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
"Internal Revenue Code"), for qualification as regulated investment companies.
See "Investment Limitations" and "Taxes" in the SAI.

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, Emerging Markets Equity and Asian Equity Portfolios may
each invest up to 25% of their total assets in Rule 144A Securities that are
deemed to be liquid. Other Portfolios may invest an unlimited amount in Rule
144A Securities that are deemed to be liquid.

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.

25
<PAGE>

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 Equity 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.

26
<PAGE>

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 Equity
Growth, 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 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

27
<PAGE>

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 Equity Growth, Global Equity,
International Magnum, Emerging Markets Equity and Asian 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 subsidiary of Morgan Stanley Dean Witter &
Co. ("MSDW"), which is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses--
securities, asset management and credit services. 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
well as to employee benefit plans, endowment funds, foundations and other
institutional investors. MAS is a Pennsylvania limited liability partnership
founded in 1969 with principal offices at One Tower Bridge, West Conshohocken,
Pennsylvania 19428. MAS is also a subsidiary of MSDW. 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, 1998, MSAM and its
institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice and
MAS managed assets of approximately $68.4 billion. See "Management of the Fund"
in the SAI.

28
<PAGE>

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

EQUITY GROWTH PORTFOLIO -- Kurt Feuerman and Margaret K. Johnson. Kurt Feuerman
is a Managing Director of Morgan Stanley and 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 Morgan Stanley and MSAM
and a Portfolio Manager in MSAM's Institutional Equity Group. She joined MSAM
in 1984. She holds a B.A. degree from Yale College and is a Chartered Financial
Analyst. Mr. Feuerman and Ms. Johnson have shared primary responsibility for
managing the Portfolio's assets since its 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. (Cum Laude) from
Dartmouth College and is a Chartered Financial Analyst. 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 the University of Notre Dame. 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.A. 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 its inception. Mr. Kovich assumed responsibilities
with the Value Portfolio in 1997.

29
<PAGE>

Messrs. Gerlach, Schlarbaum, Daniels and Leavy have had primary responsibility
for managing the Portfolio's assets since its inception.

OTHER SERVICES

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

30
<PAGE>

purchase shares of the Portfolios. An Adviser may make payments to these
insurance companies to defray the costs of providing those services.

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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. MSTC, Brooklyn, New York, 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 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

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 bil-
lion 0.30% 0.40%
</TABLE>

U.S. EQUITY PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Equity Mid Cap
Assets 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 Asian
Assets Equity Magnum Equity Equity
- -------------------------------------------------------
<S> <C> <C> <C> <C>
First $500
million 0.80% 0.80% 1.25% 0.80%
- -------------------------------------------------------
From $500
million to $1
billion 0.75% 0.75% 1.20% 0.75%
- -------------------------------------------------------
More than $1
billion 0.70% 0.70% 1.15% 0.70%
</TABLE>

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<S> <C>
Fixed Income........................................... 0.70%
High Yield............................................. 0.80%
Equity Growth.......................................... 0.85%
Value.................................................. 0.85%
Mid Cap Value.......................................... 1.05%
Global Equity.......................................... 1.15%
International Magnum................................... 1.15%
Asian Equity........................................... 1.20%
Emerging Markets Equity................................ 1.75%
</TABLE>

These fee waivers and reimbursements are voluntary and may be terminated by
MSAM or MAS at any time without notice.

OTHER EXPENSES

31
<PAGE>

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 semi-annual
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

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 Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

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. For the
periods ended December 31, 1997, the Portfolio turnover rates for the Fixed
Income, Equity Growth, Mid Cap Value and Asian Equity Portfolios were 185%,
172%, 141% and 130%, respectively. 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

32
<PAGE>

performance. For additional performance information, contact your insurance
company for a free annual report.

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

33
<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
Asian Equity Asian Equity
</TABLE>

34
<PAGE>

PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the Mid Cap Value, Global Equity, High Yield and Asian Equity
Portfolios. Also, as of that date, General American Life Insurance owned more
than 25% of the International Magnum, Equity Growth and Fixed Income
Portfolios, American General Life Insurance Company owned more than 25% of the
International Magnum, Mid Cap Value, Value and Equity Growth Portfolios, New
York Life Insurance and Annuity Corporation owned more than 25% of the Emerging
Markets Equity Portfolio, Fidelity Investments Life Insurance Company owned
more than 25% of the Global Equity Portfolio, Allmerica Financial Life
Insurance & Annuity Company owned more than 25% of the Fixed Income Portfolio,
and Integrity Life Insurance Company owned more than 25% of the Asian Equity
Portfolio pursuant to variable annuity contracts and variable life insurance
policies they have issued to the public.

For more information, see "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 Equity Growth, Value, Mid Cap Value, 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, Martin Luther King,
Jr. 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 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 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.

36
<PAGE>

EMERGING MARKETS DEBT 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 DEBT PORTFOLIO WHICH IS MANAGED BY
MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"). THE FUND ALSO OFFERS SEVENTEEN
OTHER PORTFOLIOS MANAGED BY EITHER MSAM OR MILLER ANDERSON & SHERRERD, LLP
("MAS"), AN AFFILIATE OF MSAM.

SHARES OF THE EMERGING MARKETS DEBT 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. THE EMERGING MARKETS DEBT 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 DEBT PORTFOLIO
IN YOUR STATE. IF THE EMERGING MARKETS DEBT 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 DEBT
PORTFOLIO'S INVESTMENTS AND SERVICES. YOU SHOULD READ IT BEFORE INVESTING, AND
KEEP IT ON FILE FOR FUTURE REFERENCE ALONG WITH THE PROSPECTUS FOR THE
INSURANCE PRODUCT WHICH ACCOMPANIES THIS PROSPECTUS.

AN INVESTMENT IN THE EMERGING MARKETS DEBT 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 EMERGING MARKETS DEBT PORTFOLIO 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.

Prospectus dated May 1, 1998
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 the
Fund's Emerging Markets Debt Portfolio (the "Portfolio") uses in seeking to
achieve 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
Portfolio.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE

FINANCIAL HIGHLIGHTS____________________3

The Portfolio's financial highlights as of December 31, 1997.

PORTFOLIO SUMMARY_______________________4

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

THE PORTFOLIO'S INVESTMENTS_____________4

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 that may be used
by the Portfolio and information about investment risks and limitations.

FUNDAMENTAL INVESTMENT LIMITS__________18

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND_________________18

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

ACCOUNT POLICIES_______________________22

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

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following table provides audited financial highlights for the Portfolio for
the period presented. The audited financial highlights for the period presented
have been audited by Price Waterhouse LLP, whose unqualified report thereon
appears in the Fund's Annual Report to Shareholders and is incorporated by
reference in the Statement of Additional Information. The Annual Report and the
financial statements therein, as well as 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>
EMERGING
MARKETS DEBT
PORTFOLIO
------------
PERIOD FROM
JUNE 16,
1997* TO
DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS 1997
- ---------------------------------- ------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................................ $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................................. 0.28
Net Realized and Unrealized Loss.................................. (0.22)
-------
Total From Investment Operations................................ 0.06
-------
DISTRIBUTIONS
Net Investment Income............................................. (0.27)
Net Realized Gain................................................. (0.02)
In Excess of Net Realized Gain.................................... (0.10)
-------
Total Distributions............................................. (0.39)
-------
NET ASSET VALUE, END OF PERIOD...................................... $ 9.67
=======
TOTAL RETURN........................................................ 0.76%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)................................... $26,378
Ratio of Expenses to Average Net Assets............................. 1.35%**
Ratio of Expenses to Average Net Assets Excluding Interest Expense.. 1.30%**
Ratio of Net Investment Income to Average Net Assets................ 8.10%**
Portfolio Turnover Rate............................................. 173%
- ----------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income........................ $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets.................................... 2.06%**
Net Investment Income to Average Net Assets....................... 7.39%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

3
<PAGE>

PORTFOLIO SUMMARY

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.

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, Foreign Investment involves different or
increased risks. The performance of the Portfolio will be affected by foreign
currency values, the greater volatility of foreign 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.

THE PORTFOLIO'S INVESTMENTS

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, Depositary
Receipts, 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, Zero Coupons and
Derivatives, 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 may engage in Borrowing. For a
discussion of certain considerations and risks associated with Borrowing, see
"Securities and Investment Techniques" 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
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 (mainland Colombia Costa Rica
Czech Republic and Hong Kong) Democratic Dominican
Ecuador Egypt Republic Republic
Greece Hungary of Congo India
Indonesia Ivory Coast Jamaica Jordan
Malaysia Mexico Morocco Nicaragua
Nigeria Pakistan Panama Paraguay
Peru Philippines Poland Russia
Slovakia South Africa Thailand Trinidad
Tunisia Turkey Uruguay & Tobago
Venezuela
</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 Fixed Income 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,

4
<PAGE>

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.

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 (with risks similiar to High Yield 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.

SECURITIES AND INVESTMENT TECHNIQUES

INSTRUMENTS AND INVESTMENTS

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

5
<PAGE>

BORROWING. The Portfolio is authorized to borrow money ("Borrowing") from banks
and other entities in an amount up to 33 1/3% of its total assets (including
the amount borrowed) less all liabilities and indebtedness other than the
Borrowing, and may use the proceeds of the Borrowing for investment purposes or
to pay dividends. Borrowing for investment purposes creates leverage which is a
speculative characteristic. The Portfolio will only engage in Borrowing when
the Adviser believes that Borrowing will benefit the Portfolio after taking
into account considerations such as the costs of Borrowing and the likely
investment returns on securities purchased with borrowed monies. Borrowing by
the Portfolio will create the opportunity for increased net income but, at the
same time, will involve special risk considerations. Leverage that results from
Borrowing will magnify declines as well as increases in the Portfolio's net
asset value per share and net yield. The Portfolio expects that all of its
Borrowing will be made on a secured basis. The Portfolio's custodian will
either segregate the assets securing the Borrowing for the benefit of the
lenders or arrangements will be made with a suitable sub-custodian. If assets
used to secure the Borrowing decrease in value, the Portfolio may be required
to pledge additional collateral to the lender in the form of cash or securities
to avoid liquidation of those assets.

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

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.

(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

6
<PAGE>

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.

7
<PAGE>

however, use Derivatives in a manner that creates leverage, except to the
extent that the use of leverage is expressly permitted by the Portfolio's
investment policies, and then only in a manner consistent with such policies.

Some of the Derivatives in which the Portfolio may invest and the risks related
thereto are described in more detail below.

The Portfolio may sell securities index futures contracts and/or index 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 may purchase
securities index futures or options in order to gain market exposure. 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 Portfolio may also purchase and
sell foreign currency futures to hedge its holdings and commitments against
changes in the level of future currency rates or to adjust its exposure to a
particular currency.

8
<PAGE>

Interest Rate, Currency, Commodity and Equity Swaps, Caps, Collars and
Floors. Swaps are privately negotiated over-the-counter derivative products in
which two parties agree to exchange payment streams calculated in relation to a
rate, index, instrument or certain securities and a particular "notional
amount." As with many of the other derivative products available to the
Portfolio, the underlying may include an interest rate (fixed or floating), a
currency exchange rate, a commodity price index, and a security, securities
index or a combination thereof. A great deal of flexibility is possible in the
way the products may be structured, with the effect being that the parties may
have exchanged amounts equal to the return on one rate, index or group of
securities for another. For example, in a simple fixed-to-floating interest
rate swap, one party makes payments equivalent to a fixed interest rate, and
the other makes payments equivalent to a specified interest rate index. The
Portfolio may engage in simple or more complex swap transactions involving a
wide variety of underlyings. The currency swaps that 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.

9
<PAGE>

with current market practices, the Portfolio will generally enter into swap
transactions on a net basis, and all swap transactions with the same party will
be documented under a single master agreement to provide for net payment upon
default. In addition, the Portfolio's obligations under an agreement will be
accrued daily (offset against any amounts owing to the Portfolio) and any
accrued, but unpaid, net amounts owed to the other party to a master agreement
will be covered by the maintenance of a segregated account consisting of cash
or liquid 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 Stock Index. In some cases, the impact of
the movements of these factors may increase or decrease through the use of
multipliers or deflators. The Portfolio may use structured notes to tailor its
investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.

10
<PAGE>

exhibits characteristics commonly associated with each type of security.

11
<PAGE>

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.

Moody's: Ba-rated bonds have "speculative elements" so their future
"cannot be considered

12
<PAGE>

The risks posed by High Yield Securities are substantial. If a security held by
the Portfolio is down-graded, the Portfolio may retain the security.

The following table provides a summary of ratings assigned to all debt holdings
of the Emerging Markets Debt Portfolio, which has more than 5% invested in High
Yield Securities as of December 31, 1997 (not including Money Market
Instruments). These figures do not necessarily indicate the Portfolio's current
or future debt holdings.

EMERGING MARKETS DEBT PORTFOLIO+

<TABLE>
<S> <C>
QUALITY
AAA-Baa3 0.00%
Ba1 10.91%
Ba2 25.09%
Ba3 12.68%
B1 21.04%
B2 14.15%
B3 4.04%
Cash 5.70%
Not Rated 6.37%
Ba2 1.51%*
Ba3 1.03%*
B1 0.83%*
B2 2.53%*
B3 0.47%*
TOTAL 100.00%**
</TABLE>
- -------
+ Ratings by Moody's
* The Adviser believes that these non-rated securities are equivalent to the
rating indicated.
** The figures provided do not total to exactly 100% due to rounding.

To the extent the Portfolio invests a portion of its assets in Investment
Company Securities, those assets will be subject

13
<PAGE>

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").

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 Net Asset Value ("NAV").

14
<PAGE>

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.

15
<PAGE>

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

16
<PAGE>

obtain higher rates of interest on such Repurchase Agreements. The Portfolio's
participation in the income from jointly purchased Repurchase Agreements will
be based on the Portfolio's percentage share in the total Repurchase Agreement.
The Portfolio's ability to invest in Repurchase Agreements on a joint basis
will be contingent upon issuance of the order by the SEC described above.

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.

17
<PAGE>

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 liquid
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.

FUNDAMENTAL INVESTMENT LIMITS

MANAGEMENT OF THE FUND

INVESTMENT MANAGEMENT

INVESTMENT ADVISER. MSAM serves as the Adviser for the Portfolio. It provides
investment advice and portfolio management services, pursuant to an Investment
Advisory Agreement and, subject to the supervision of the Fund's

18
<PAGE>

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 subsidiary of Morgan Stanley Dean
Witter & Co. ("MSDW"), which is a preeminent global financial services firm
that maintains leading market positions in each of its three primary
businesses--securities, asset management and credit services. 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 well as to employee benefit plans, endowment funds,
foundations and other institutional investors. As of February 28, 1998, MSAM
and its institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice. See
"Management of the Fund" in the SAI.

PORTFOLIO MANAGER. The following individual has primary responsibility for the
Portfolio.

Paul Ghaffari. Paul Ghaffari is a Managing Director of MSAM and Morgan Stanley.
He joined MSAM in June 1993 as a Vice President and Portfolio Manager for the
Morgan Stanley Emerging Markets Debt Fund (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 Pomona College and an
M.S. in Foreign Service from Georgetown University. Mr. Ghaffari has had
primary responsibility for managing the Portfolio's assets since its inception.

OTHER SERVICES

19
<PAGE>

the Fund. As compensation for its services, Chase is paid by MSAM out of its
administration fee. 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 and maintains the general
accounting records for the 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 the Portfolio.

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

BREAKDOWN OF EXPENSES

MANAGEMENT FEE

MSAM 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: 0.80% for the first $500 million, 0.75% for the next $500 million, and
0.70% of net assets in excess of $1 billion.

However, MSAM, with respect to the Portfolio, 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 the Portfolio to
exceed 1.30% of average daily net assets. These fee waivers and reimbursements
are voluntary and may be terminated by MSAM at any time without notice.

OTHER EXPENSES

PORTFOLIO TRANSACTIONS

20
<PAGE>

PORTFOLIO TURNOVER

Under certain market conditions, the Portfolio may experience high portfolio
turnover as a result of its investment strategies. For example, the purchase or
sale of securities by the Portfolio in anticipation of a rise or decline in
interest rate or to take advantage of yield disparities among different issues
of Fixed Income Securities could result in high portfolio turnover. For the
period ended December 31, 1997, the portfolio turnover rate for the Portfolio
was 173%. Higher portfolio turnover rates for the Portfolio can result in
corresponding increases in expenses such as brokerage commissions and
transaction costs. 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 and the Portfolio will not
consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its respective objectives and policies.

PERFORMANCE OF THE PORTFOLIO

The 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.

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

21
<PAGE>

PERFORMANCE OF MSAM

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

Past investment performance of the Class A Shares of the Emerging Markets Debt
Portfolio of MSIF, as shown in the table below, may be relevant to your
consideration of the Portfolio. The investment performance of the Emerging
Markets Debt Portfolio of MSIF 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
Emerging Markets Debt Portfolio of MSIF. The investment performance of the
Class A Shares of the Emerging Markets Debt Portfolio of MSIF is provided
merely to indicate the experience of MSAM in managing a similar portfolio.

<TABLE>
<CAPTION>
Total Return Total Return Average Annual Average Annual
One Year Three Years Total Return Total Return
Inception Ended Ended Three Years Since
Fund Name Date 12/31/97 12/31/97 Ended 12/31/97 Inception
- --------- --------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
MSIF:
Emerging Markets Debt... 2/1/94 18.29% 126.72% 31.37% 18.77%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, Nationwide Life Insurance Company owned more than 25% of
the outstanding voting securities of the Emerging Markets Debt Portfolio,
pursuant to variable annuity contracts and variable life insurance policies it
has issued to the public.

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

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

TRANSACTION DETAILS

22
<PAGE>

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.

23
<PAGE>

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
DESCRIBES FOUR PORTFOLIOS MANAGED BY MORGAN STANLEY ASSET MANAGEMENT INC.
("MSAM"). THE FUND ALSO OFFERS FOURTEEN OTHER PORTFOLIOS MANAGED BY EITHER MSAM
OR MILLER ANDERSON & SHERRERD, LLP ("MAS"), AN AFFILIATE OF MSAM.

THE PORTFOLIOS:

Emerging Markets Debt International Magnum
Global Equity Emerging Markets Equity

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, 1998
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 four 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 in
seeking to achieve 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:

Emerging Markets Debt International Magnum
Global Equity Emerging Markets
Equity

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE
----

FINANCIAL HIGHLIGHTS 3
- --------------------
Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES 4
- -------------------
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 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 27
- ----------------
Information on net asset value calculation, income and gain
distributions, taxes and share purchases and redemptions.

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following table provides audited financial highlights for the Portfolios
for the periods presented. The audited financial highlights for the periods
presented have been audited by Price Waterhouse LLP whose unqualified report
thereon appears in the Fund's Annual Report to Shareholders and is incorporated
by reference in the Statement of Additional Information. The Annual Report and
the financial statements therein, as well as 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>
EMERGING GLOBAL INTERNATIONAL
MARKETS DEBT EQUITY MAGNUM EMERGING MARKETS EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------- -------------------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
JUNE 16, JANUARY 2, JANUARY 2, OCTOBER 1,
1997* TO 1997* TO 1997* TO YEAR ENDED 1996* TO
SELECTED PER SHARE DATA AND DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
RATIOS 1997 1997 1997 1997 1996
- --------------------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $ 10.00 $ 10.00 $ 10.00 $ 9.78 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.... 0.28 0.08 0.13 0.04 0.01
Net Realized and
Unrealized Gain (Loss).. (0.22) 1.92 0.59 -- (0.21)
------- ------- ------- ------- -------
Total From Investment
Operations............ 0.06 2.00 0.72 0.04 (0.20)
------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income.... (0.27) (0.08) (0.32) (0.07) (0.02)
Net Realized Gain........ (0.02) (0.18) (0.02) (0.02) --
In Excess of Net Realized
Gain.................... (0.10) -- -- (0.28) --
------- ------- ------- ------- -------
Total Distributions.... (0.39) (0.26) (0.34) (0.37) (0.02)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD.................... $ 9.67 $ 11.74 $ 10.38 $ 9.45 $ 9.78
======= ======= ======= ======= =======
TOTAL RETURN............... 0.76% 20.04% 7.31% 0.52% (2.03)%
======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(000's)................... $26,378 $14,707 $18,855 $34,098 $11,789
Ratio of Expenses to
Average Net Assets........ 1.35%** 1.15%** 1.16%** 1.80% 1.79%**
Ratio of Expenses to
Average Net Assets
Excluding Interest
Expense................... 1.30%** -- 1.15%** -- --
Ratio of Expenses to
Average Net Assets
Excluding Interest Expense
and Foreign Tax Expense... -- -- -- 1.75% 1.75%**
Ratio of Net Investment
Income to Average Net
Assets.................... 8.10%** 1.24%** 1.43%** 0.47% 0.32%**
Portfolio Turnover Rate.... 173% 20% 41% 87% 9%
Average Commission Rate
Per Share................ -- $0.0350 $0.0181 $0.0018 $0.0013
As a Percentage of Trade
Amount.................. -- 0.25% 0.20% 0.40% 0.45%
- ---------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the
Period:
Per Share Benefit to Net
Investment Income....... $ 0.02 $ 0.09 $ 0.15 $ 0.17 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets.................. 2.06%** 2.43%** 2.78%** 4.12% 6.17%**
Net Investment Income
(Loss) to Average Net
Assets.................. 7.39%** (0.04)%** (0.19)%** (1.84)% (4.06)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

3
<PAGE>

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.

EMERGING MARKETS DEBT PORTFOLIO

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 foreign 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).

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 foreign securities exchanges and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

4
<PAGE>

THE PORTFOLIOS' INVESTMENTS

INVESTMENT CHARACTERISTICS AND RISKS

Because the International Magnum, 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.

EMERGING MARKETS DEBT PORTFOLIO

<TABLE>
<S> <C> <C> <C>
Algeria Argentina Brazil Bulgaria
Chile China (mainland Colombia Costa Rica
and Hong Kong)
Czech Democratic Dominican
Republic Ecuador Republic Republic
Egypt Greece of Congo Hungary
India Indonesia Ivory Coast Jamaica
Jordan Malaysia Mexico Morocco
Nicaragua Nigeria Pakistan Panama
Paraguay Peru Philippines Poland
Russia Slovakia South Africa Thailand
Trinidad Tunisia Turkey Uruguay
& Tobago Venezuela
</TABLE>

5
<PAGE>

rate sensitivity, counterparty risks and technical market considerations. As
opportunities to invest in Fixed Income 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.

GLOBAL EQUITY PORTFOLIO

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

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<PAGE>

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 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, and
may engage in Loans of Portfolio Securities. The Portfolio may also invest up
to 10% of its total assets in (i) Investment Funds with investment objectives
similar to that of the Portfolio and (ii) for temporary purposes, money market
funds 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, Depositary Receipts 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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<PAGE>

"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:

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.

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.

8
<PAGE>

ADRs. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

BORROWING: The Emerging Markets Debt Portfolio is authorized to borrow money
("Borrowing") from banks and other entities in an amount up to 33 1/3% of its
total assets (including the amount borrowed) less all liabilities and
indebtedness other than the Borrowing, and may use the proceeds of the
Borrowing for investment purposes or to pay dividends. Borrowing for investment
purposes creates leverage which is a speculative characteristic. The Portfolio
will only borrow when the Adviser believes that Borrowing will benefit the
Portfolio after taking into account considerations such as the costs of
Borrowing and the likely investment returns on securities purchased with
borrowed monies. Borrowing by the Portfolio will create the opportunity for
increased net income but, at the same time, will involve special risk
considerations. Leverage that results from Borrowing will magnify declines as
well as increases in the Portfolio's net asset value per share and net yield.
The Portfolio expects that all of its Borrowing will be made on a secured
basis. The Portfolio's custodian will either segregate the assets securing the
Borrowing for the benefit of the lenders or arrangements will be made with a
suitable sub-custodian. If assets used to secure the Borrowing decrease in
value, the Portfolio may be required to pledge additional collateral to the
lender in the form of cash or securities to avoid liquidation of those assets.

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:

(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.

9
<PAGE>

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.

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 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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). Each of the Portfolios will limit its use of
Derivatives to 33 1/3% of its total assets measured by the aggregate notional
amount of outstanding Derivatives. The Portfolios' investments in forward
foreign currency contracts and Derivatives used for hedging purposes are not
subject to the foregoing limits.

10
<PAGE>

purchase Derivatives to quickly gain exposure to a market in response to
changes in the Portfolio's asset allocation policy or upon the inflow of
investable cash and at that time the Derivative provides greater liquidity than
the underlying securities market. A Portfolio may also use Derivatives when it
is restricted from directly owning the underlying securities due to foreign
investment restrictions or other reasons or when doing so provides a price
advantage over purchasing the underlying securities directly, either because of
a pricing differential between the Derivatives and securities markets or
because of lower transaction costs associated with the Derivatives transaction.
Derivatives may also be used by a Portfolio for hedging purposes and under
other circumstances in which a Portfolio's portfolio managers believe it
advantageous to do so consistent with the Portfolio's investment objective. The
Portfolios will not, however, use Derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by a particular Portfolio's investment policies, and then only in a manner
consistent with such policies.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

Under rules adopted by the Commodity Futures Trading Commission (the "CFTC"),
each Portfolio may, without registering with the CFTC as a Commodity Pool
Operator,

11
<PAGE>

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-bona
fide hedging activities.

Options Transactions (Options). The Portfolios may seek to increase their
returns or may hedge their portfolio investments through options transactions
with respect to individual securities, indices or baskets in which such
Portfolios may invest; other financial instruments; and foreign currency.
Various options may be purchased and sold on either the exchange-traded or
over-the-counter markets.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

12
<PAGE>

event of a default, amounts owed under all transactions entered into under, or
covered by, the same master agreement would be netted and only a single payment
would be made.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Stock Index ("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 Portfolios may use structured notes to
tailor their investments to the specific risks and returns the Adviser wishes
to accept while avoiding or reducing certain other risks.

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.

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.

13
<PAGE>

security. See the "The Portfolios' Investments" section applicable to a
particular Portfolio to determine in which of the above a Portfolio may invest.

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.

14
<PAGE>

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.

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.

15
<PAGE>

such repatriation controls will be considered illiquid if it appears reasonably
likely that this process will take more than seven days.

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."

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

The following table provides a summary of ratings assigned to all debt holdings
of the Emerging Markets Debt Portfolio, the only portfolio with more than 5%
invested in High Yield Securities as of December 31, 1997 (not including Money
Market Instruments). These figures do not necessarily indicate a Portfolio's
current or future debt holdings.

EMERGING MARKETS DEBT PORTFOLIO+

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<PAGE>

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 a 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.

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.

17
<PAGE>

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
Net Asset Value ("NAV").

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 GNMA, FHLMC, Fannie Mae, 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

18
<PAGE>

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

NON-DIVERSIFIED STATUS. The International Magnum, 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 "Internal Revenue Code"), for
qualification as regulated investment companies. See "Investment Limitations"
and "Taxes" in the SAI.

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 Emerging
Markets Debt, 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. Other Portfolios may invest an unlimited amount in Rule
144A Securities that are deemed to be liquid.

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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<PAGE>

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.

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 Equity 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.

20
<PAGE>

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.

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. Each
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.

21
<PAGE>

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 Global Equity Portfolio is a diversified investment company and is
therefore subject to the following fundamental limitations: as to 75% of its
total assets, the 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.

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. MSAM 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, 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 subsidiary of
Morgan Stanley Dean Witter & Co. ("MSDW"), which is a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses--securities, asset management and credit services.
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 well as to employee benefit plans, endowment funds,
foundations and other institutional investors. As of February 28, 1998, MSAM
and its institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice. See
"Management of the Fund" in the SAI.

22
<PAGE>

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

EMERGING MARKETS DEBT PORTFOLIO -- Paul Ghaffari. Paul Ghaffari is a Managing
Director of MSAM and Morgan Stanley. He joined MSAM in June 1993 as a Vice
President and Portfolio Manager for the Morgan Stanley Emerging Markets Debt
Fund (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 Pomona College and an M.S. in Foreign Service from Georgetown
University. Mr. Ghaffari has had primary responsibility for managing the
Portfolio's assets since its inception.

OTHER SERVICES

23
<PAGE>

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 that it administers.

Certain administrative and record-keeping services that would otherwise be
performed by the Adviser or its service providers may be performed by insurance
companies that purchase shares of the Portfolios. The Adviser may make payments
to these insurance companies to defray the costs of providing those services.

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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 ("MSTC"), Brooklyn, New York, 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 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

MANAGEMENT FEE

The Adviser is entitled to receive from each 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>
<S> <C> <C> <C> <C>
Emerging Emerging
Markets Global International Markets
Assets Debt Equity Magnum Equity
- ----------------------------------------------------------
First $500 mil-
lion 0.80% 0.80% 0.80% 1.25%
- ----------------------------------------------------------
From $500 mil-
lion to $1 bil-
lion 0.75% 0.75% 0.75% 1.20%
- ----------------------------------------------------------
More than $1
billion 0.70% 0.70% 0.70% 1.15%
</TABLE>

However, the Adviser, with respect to certain 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 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
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<S> <C>
Global Equity.......................................... 1.15%
International Magnum................................... 1.15%
Emerging Markets Debt.................................. 1.30%
Emerging Markets Equity................................ 1.75%
</TABLE>

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

24
<PAGE>

OTHER EXPENSES

PORTFOLIO TRANSACTIONS

PORTFOLIO TURNOVER

25
<PAGE>

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.

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 substantially 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>
Emerging Markets Debt Emerging Markets Debt
Global Equity Global Equity
International Magnum International Magnum
Emerging Markets Equity Emerging Markets
</TABLE>

<TABLE>
<CAPTION>
Average Average Average
Annual Annual Annual
Total Return Total Return Total Return Total Return Total Return Total Return Total Return
One Year Three Years Five Years Ten Years Three Years Five Years Ten Years
Inception Ended Ended Ended Ended Ended Ended Ended
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Emerging Markets
Debt........... 2/1/94 18.29% 126.72% NA NA 31.37% NA NA
Global Equity... 7/15/92 23.75% 80.38% 178.25% NA 21.73% 22.71% NA
International
Magnum......... 3/15/96 6.58% NA NA NA NA NA NA
Emerging
Markets........ 9/25/92 (1.03)% (3.09)% 62.71% NA (1.04)% 10.23% NA
<CAPTION>
Average
Annual
Total Return
Since
Fund Name Inception
- --------- ------------
<S> <C>
MSIF:
Emerging Markets
Debt........... 18.77%
Global Equity... 20.03%
International
Magnum......... 8.28%
Emerging
Markets........ 10.13%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the Global Equity Portfolio. Also, as of that date, Nationwide
Life Insurance owned more than 25% of the Emerging Markets Debt Portfolio,
General American Life Insurance and American General Life Insurance Company
each owned more than 25% of the International Magnum Portfolio, Fidelity
Investments owned more than 25% of the Global Equity Portfolio and New York
Life Insurance and Annuity Corporation owned more than 25% of the Emerging
Markets Equity Portfolio, pursuant to variable annuity contracts and variable
life insurance policies they have issued to the public.
26
<PAGE>

For more information, see "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 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, Martin Luther King, Jr. 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'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.

27
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 FOUR 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 FOURTEEN OTHER PORTFOLIOS MANAGED BY
MSAM OR MAS.

THE PORTFOLIOS:

High Yield Emerging Markets Debt
U.S. Real Estate Asian Equity

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 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.

Prospectus dated May 1, 1998
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 Asian Equity
Emerging Markets
Debt

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the High Yield
Portfolio.

MAS's institutional investment advisory business was established in 1969. As of
February 28, 1998, MAS managed assets of approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE

FINANCIAL HIGHLIGHTS____________________3

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES_____________________4

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____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__________23

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND_________________23

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_______________________29

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

2
<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
U.S. REAL EMERGING ASIAN
HIGH YIELD ESTATE MARKETS DEBT EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------ ------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 2, MARCH 3, JUNE 16, MARCH 3,
1997* TO 1997* TO 1997* TO 1997* TO
SELECTED PER SHARE DATA DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
AND RATIOS 1997 1997 1997 1997
- ----------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD.......... $ 10.00 $ 10.00 $ 10.00 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income... 0.63 0.17 0.28 0.01
Net Realized and
Unrealized Gain
(Loss)................. 0.72 1.61 (0.22) (4.36)
------- ------- ------- -------
Total From Investment
Operations............. 1.35 1.78 0.06 (4.35)
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income... (0.63) (0.17) (0.27) (0.01)
Net Realized Gain....... (0.13) (0.20) (0.02) --
In Excess of Net Real-
ized Gain.............. -- -- (0.10) --
------- ------- ------- -------
Total Distributions..... (0.76) (0.37) (0.39) (0.01)
------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD.................. $ 10.59 $ 11.41 $ 9.67 $ 5.64
======= ======= ======= =======
TOTAL RETURN............. 13.53% 17.99% 0.76% (43.52)%
======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(000's)................. $12,490 $13,055 $26,378 $12,571
Ratio of Expenses to
Average Net Assets...... 0.81%** 1.10%** 1.35%** 1.35%**
Ratio of Expenses to
Average Net Assets
Excluding Interest
Expense................. 0.80%** -- 1.30%** --
Ratio of Expenses to
Average Net Assets
Excluding Interest
Expense
and Foreign Tax
Expense................. -- -- -- 1.20%**
Ratio of Net Investment
Income to Average Net
Assets.................. 7.41%** 3.14%** 8.10%** 0.32%**
Portfolio Turnover Rate.. 78% 114% 173% 130%
Average Commission Rate
Per Share............... -- $0.0542 -- $0.0134
As a Percentage of Trade
Amount................. -- -- -- 0.50%
- ----------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to Net
Investment Income...... $ 0.08 $ 0.07 $ 0.02 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets................. 1.68%** 2.32%** 2.06%** 3.10%**
Net Investment Income
(Loss) to Average Net
Assets................. 6.53%** 1.92%** 7.39%** (1.43)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

3
<PAGE>

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.

HIGH YIELD PORTFOLIO

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 DEBT PORTFOLIO

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.

4
<PAGE>

THE PORTFOLIOS' INVESTMENTS

INVESTMENT CHARACTERISTICS AND RISKS

Because the U.S. Real Estate 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.

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.

HIGH YIELD PORTFOLIO

U.S. REAL ESTATE PORTFOLIO

5
<PAGE>

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. Risks relating to investments in securities of issuers
primarily engaged in the real estate industry are similar to those of direct
investments in real estate and include fluctuations in real estate values,
changes in zoning laws, increases in property taxes, environmental risks, and
increases in interest rates. Generally, increases in interest rates will
increase the costs of obtaining financing, which could directly and indirectly
decrease the value of the Portfolio's investments.

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
Stock Index (" 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. The Portfolio will invest primarily in Equity REITs which 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. The Portfolio may also invest in Mortgage REITs and Hybrid
REITs. 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. Risks
associated with investments in REITs include changes in the values of their
underlying properties and defaults by borrowers or tenants. In addition, some
REITs are not diversified and their value may be affected by events related to
a small number of properties.

EMERGING MARKETS DEBT PORTFOLIO

<TABLE>
<S> <C> <C> <C>
Algeria Argentina Brazil Bulgaria
Chile China (mainland Colombia Costa Rica
Czech and Hong Kong) Democratic Dominican
Republic Ecuador Republic Republic
Egypt Greece of Congo Hungary
India Indonesia Ivory Coast Jamaica
Jordan Malaysia Mexico Morocco
Nicaragua Nigeria Pakistan Panama
Paraguay Peru Philippines Poland
Russia Slovakia South Africa Thailand
Trinidad Tunisia Uruguay Venezuela
& Tobago

</TABLE>

6
<PAGE>

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 (with risks similar to High Yield 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.

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 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 Funds, Investment Company Securities, Non-Publicly
Traded Securities, Private Placements and Restricted Securities, Repurchase
Agreements, When-Issued or Delayed Delivery Securities and Derivatives, 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. In selecting stocks for the

7
<PAGE>

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.

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.

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

8
<PAGE>

9
<PAGE>

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.

MORTGAGE INVESTING: At times it is anticipated that greater than 50% of the
High Yield 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. The Portfolio will invest in securities issued by the Government
National Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), Fannie Mae, 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, the 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 Investors Service, Inc. ("Moody's") or S&P or be
deemed by the Adviser to be of comparable investment quality.

INSTRUMENTS AND INVESTMENTS

10
<PAGE>

ADRS. For information concerning American Depositary Receipts ("ADRs") see
"Depositary Receipts" below.

BORROWING: The Emerging Markets Debt Portfolio is authorized to borrow money
("Borrowing") from banks and other entities in an amount up to 33 1/3% of its
total assets (including the amount borrowed) less all liabilities and
indebtedness other than the Borrowing, and may use the proceeds of the
Borrowing for investment purposes or to pay dividends. Borrowing for investment
purposes creates leverage which is a speculative characteristic. The Portfolio
will only Borrow when the Adviser believes that Borrowing will benefit the
Portfolio after taking into account considerations such as the costs of
Borrowing and the likely investment returns on securities purchased with
borrowed monies. Borrowing by the Portfolio will create the opportunity for
increased net income but, at the same time, will involve special risk
considerations. Leverage that results from Borrowing will magnify declines as
well as increases in the Portfolio's net asset value per share and net yield.
The Portfolio expects that all of its Borrowing will be made on a secured
basis. The Portfolio's custodian will either segregate the assets securing the
Borrowing for the benefit of the lenders or arrangements will be made with a
suitable sub-custodian. If assets used to secure the Borrowing decrease in
value, the Portfolio may be required to pledge additional collateral to the
lender in the form of cash or securities to avoid liquidation of those assets.

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 nationally
recognized statistical rating organizations (each, an "NRSRO") 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.

11
<PAGE>

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.

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 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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). Each of the U.S. Real Estate, Emerging Markets
Debt, and Asian Equity Portfolios will limit its use of Derivatives to 33 1/3%
of its total assets measured by the aggregate notional amount of outstanding
Derivatives. The High Yield Portfolio will not enter into futures to the extent
that the Portfolio's outstanding obligations to purchase securities under these
contracts, in combination with its outstanding obligations with respect to
options, would exceed 50% of its total assets. The Portfolios' investments in
forward foreign currency contracts and Derivatives used for hedging purposes
are not subject to the foregoing limits.

12
<PAGE>

underlying such Derivatives. For example, a Portfolio may purchase Derivatives
to quickly gain exposure to a market in response to changes in the Portfolio's
asset allocation policy or upon the inflow of investable cash and at that time
the Derivative provides greater liquidity than the underlying securities
market. A Portfolio may also use Derivatives when it is restricted from
directly owning the underlying securities due to foreign investment
restrictions or other reasons or when doing so provides a price advantage over
purchasing the underlying securities directly, either because of a pricing
differential between the Derivatives and securities markets or because of lower
transaction costs associated with the Derivatives transaction. Derivatives may
also be used by a Portfolio for hedging purposes and under other circumstances
in which a Portfolio's portfolio managers believe it advantageous to do so
consistent with the Portfolio's investment objective. The Portfolios will not,
however, use Derivatives in a manner that creates leverage, except to the
extent that the use of leverage is expressly permitted by a particular
Portfolio's investment policies, and then only in a manner consistent with such
policies.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

13
<PAGE>

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

14
<PAGE>

agreement." In some cases, options and forward agreements may also be governed
by the same master agreement. In the event of a default, amounts owed under all
transactions entered into under, or covered by, the same master agreement would
be netted and only a single payment would be made.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

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.

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.

15
<PAGE>

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.

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 also combine forward contracts with investments in securities
denominated in other currencies in

16
<PAGE>

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 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.

17
<PAGE>

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:

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

The following tables provide a summary of ratings assigned to all debt holdings
of those Portfolios with more than 5% invested in High Yield Securities as of
December 31, 1997 (not including Money Market Instruments). These figures do
not necessarily indicate a Portfolio's current or future debt holdings.

HIGH YIELD PORTFOLIO+

<TABLE>
<S> <C>
QUALITY
AAA 23.22%
AA 0.00%
A 0.00%
BBB 4.31%
BB 50.36%
B 19.44%
CCC 0.17%
Not Rated 2.49%
B 2.49%*
TOTAL 100.00%**
</TABLE>
- -------
+Ratings by S&P
* The Adviser believes that these non-rated securities are equivalent to the
rating indicated.
**The figures provided do not total to exactly 100% due to rounding.

EMERGING MARKETS DEBT PORTFOLIO+

<TABLE>
<S> <C>
QUALITY
AAA-Baa3 0.00%
Ba1 10.91%
Ba2 25.09%
Ba3 12.68%
B1 21.04%
B2 14.15%
B3 4.04%
Cash 5.70%
Not Rated 6.37%
Ba2 1.51%*
Ba3 1.03%*
B1 0.83%*
B2 2.53%*
B3 0.47%*
TOTAL 100.00%**
</TABLE>
- -------
+Ratings by Moody's
* The Adviser believes that these non-rated securities are equivalent to the
rating indicated.
**The figures provided do not total to exactly 100% due to rounding.

18
<PAGE>

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 a 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.

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.

19
<PAGE>

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 Net Asset
Value ("NAV").

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. In addition, the High
Yield Portfolio may lend its portfolio securities to certain institutional
investors. 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. Pursuant to an order issued by the SEC, the Fund may lend
portfolio securities to affiliated broker-dealers. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

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 GNMA, FHLMC, Fannie Mae, 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.

20
<PAGE>

NON-DIVERSIFIED STATUS. The U.S. Real Estate 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 "Internal Revenue Code"), for qualification as
regulated investment companies. See "Investment Limitations" and "Taxes" in the
SAI.

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 Emerging
Markets Debt and Asian Equity Portfolios may each invest up to 25% of their
total assets in Rule 144A Securities that are deemed to be liquid. The High
Yield Portfolio may invest an unlimited amount in Rule 144A Securities that are
deemed to be liquid.

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

21
<PAGE>

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.

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.

22
<PAGE>

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 U.S.
Real Estate, Emerging Markets Debt 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 U.S. Real Estate 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.

MANAGEMENT OF THE FUND

23
<PAGE>

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 Emerging Markets Debt, U.S.
Real Estate and Asian Equity Portfolios. MAS serves as the Adviser for the High
Yield 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 subsidiary of Morgan Stanley Dean Witter &
Co. ("MSDW"), which is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses--
securities, asset management and credit services. 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
well as to employee benefit plans, endowment funds, foundations and other
institutional investors. MAS is a Pennsylvania limited liability partnership
founded in 1969 with principal offices at One Tower Bridge, West Conshohocken,
Pennsylvania 19428. MAS is also a subsidiary of MSDW. 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, 1998, MSAM and its
institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice and
MAS managed assets of approximately $68.4 billion. See "Management of the Fund"
in the SAI.

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

24
<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, a
Principal of Morgan Stanley and the Portfolio Manager for high yield
investments, joined Morgan Stanley in October 1988. Mr. Angevine received an
M.B.A. from Fairleigh Dickinson University and a B.A. in Economics from
Lafayette College. Thomas L. Bennett, a Managing Director of 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. Messrs.
Esser, Bennett and Angevine have shared primary responsibility for managing the
Portfolio's assets since its inception.

OTHER SERVICES

25
<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. As compensation for its services, Chase is paid by
MSAM and MAS out of their respective administration fees. 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 and maintains the general
accounting records 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

PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
U.S. Real Emerging Asian
Assets High Yield Estate Markets Debt Equity
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
First $500
million 0.50% 0.80% 0.80% 0.80%
- -----------------------------------------------------------
From $500
million to
$1 billion 0.45% 0.75% 0.75% 0.75%
- -----------------------------------------------------------
More than
$1 billion 0.40% 0.70% 0.70% 0.70%
</TABLE>

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<S> <C>
High Yield............................................. 0.80%
U.S. Real Estate....................................... 1.10%
Asian Equity........................................... 1.20%
Emerging Markets Debt.................................. 1.30%
</TABLE>

These fee waivers and reimbursements are voluntary and may be terminated by
MSAM or MAS at any time without notice.

OTHER EXPENSES

26
<PAGE>

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

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 Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

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. For the
periods ended December 31, 1997, the Portfolio turnover rates for the U.S. Real
Estate, Emerging Markets Debt and Asian Equity Portfolios were 114%, 173% and
130%, respectively. 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.

27
<PAGE>

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.

<TABLE>
<CAPTION>
Corresponding
Corresponding MSIF MAS Funds
Fund Portfolio portfolio portfolio
-------------- --------------------- -------------
<S> <C> <C>
High Yield High Yield
U.S. Real Estate U.S. Real Estate
Emerging Markets Debt Emerging Markets Debt
Asian Equity Asian Equity
</TABLE>

<TABLE>
<CAPTION>
Average Average
Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Annual
One Year Three Years Five Years Three Years Five Years Total Return
Inception Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSIF:
U.S. Real Estate........ 2/24/95 27.62% NA NA NA NA 30.92%
Emerging Markets Debt... 2/1/94 18.29% 126.72% NA 31.37% NA 18.77%
Asian Equity............ 7/1/91 (48.29)% (42.81)% (0.96)% (16.99)% (0.19)% 4.16%
MAS FUNDS:
High Yield.............. 2/28/89 15.98% 65.72% 91.86% 18.34% 13.92% 12.14%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the U.S. Real Estate, High Yield and Asian Equity Portfolios.
Also, as of that date, Nationwide Life Insurance owned more than 25% of the
Emerging Markets Debt Portfolio and Integrity Life Insurance Company owned more
than 25% of the Asian Equity Portfolio, pursuant to variable annuity contracts
and variable life insurance policies they have issued to the public.

28
<PAGE>

Portfolio are voted by the insurance companies. Accordingly, neither MSDW nor
the insurance companies are deemed to be in control of the Portfolios.

For more information, see "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 U.S. Real Estate, Emerging Markets Debt 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,
Martin Luther King, Jr. 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.

The 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
Portfolio is open for business.

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.

29
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 THREE PORTFOLIOS MANAGED BY EITHER MORGAN STANLEY ASSET MANAGEMENT
INC. ("MSAM") OR MILLER ANDERSON & SHERRERD, LLP ("MAS"). THE FUND ALSO OFFERS
FIFTEEN OTHER PORTFOLIOS MANAGED BY MSAM OR MAS. THE FUND MAKES AVAILABLE IN A
SINGLE PRODUCT THE COMBINED STRENGTH OF THESE LEADING INVESTMENT MANAGEMENT
FIRMS.

THE PORTFOLIOS:

Fixed Income International Magnum
High Yield

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, 1998
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 three 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
in seeking to achieve 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
International Magnum Portfolio. MSAM conducts a worldwide investment advisory
business. As of February 28, 1998, MSAM and its affiliated institutional asset
management companies (exclusive of MAS) had approximately $88.1 billion in
assets under management or fiduciary advice.

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the Fixed
Income and High Yield Portfolios. MAS's institutional investment advisory
business was established in 1969. As of February 28, 1998, MAS managed assets
of approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE
PAGE

FINANCIAL HIGHLIGHTS____________________3

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES_____________________4

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____6

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__________21

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND_________________21

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_______________________27

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

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following table provides audited financial highlights for the Portfolios
for the period presented. The audited financial highlights for the period
presented have been audited by Price Waterhouse LLP, whose unqualified report
thereon appears in the Fund's Annual Report to Shareholders and is incorporated
by reference in the Statement of Additional Information. The Annual Report and
the financial statements therein, as well as 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>
INTERNATIONAL
FIXED INCOME HIGH YIELD MAGNUM
PORTFOLIO PORTFOLIO PORTFOLIO
------------------- ------------------- -------------------
PERIOD FROM PERIOD FROM PERIOD FROM
SELECTED PER SHARE DATA JANUARY 2, 1997* TO JANUARY 2, 1997* TO JANUARY 2, 1997* TO
AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
- ----------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 10.00 $ 10.00 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.. 0.46 0.63 0.13
Net Realized and
Unrealized Gain....... 0.53 0.72 0.59
------- ------- -------
Total From Investment
Operations............ 0.99 1.35 0.72
------- ------- -------
DISTRIBUTIONS
Net Investment Income.. (0.45) (0.63) (0.32)
Net Realized Gain...... (0.13) (0.13) (0.02)
------- ------- -------
Total Distributions.... (0.58) (0.76) (0.34)
------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 10.41 $ 10.59 $ 10.38
======= ======= =======
TOTAL RETURN............ 9.93% 13.53% 7.31%
======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000's)......... $12,760 $12,490 $18,855
Ratio of Expenses to
Average Net Assets..... 0.70%** 0.81%** 1.16%**
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense................ -- 0.80%** 1.15%**
Ratio of Net Investment
Income to Average Net
Assets................. 5.66%** 7.41%** 1.43%**
Portfolio Turnover
Rate................... 185% 78% 41%
Average Commission Rate
Per Share.............. -- -- $0.0181
As a Percentage of
Trade Amount.......... -- -- 0.20%
- -------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment
Income................ $ 0.08 $ 0.08 $ 0.15
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets................ 1.71%** 1.68%** 2.78%**
Net Investment Income
(Loss) to Average Net
Assets................ 4.65%** 6.53%** (0.19)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

3
<PAGE>

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.

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

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).

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 foreign 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

Because the International Magnum 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 SAI.

Investments in securities rated below investment grade, sometimes called high
risk or High Yield Securities or junk

4
<PAGE>

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.

FIXED INCOME PORTFOLIO

HIGH YIELD PORTFOLIO

INTERNATIONAL MAGNUM PORTFOLIO

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

6
<PAGE>

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 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).

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

7
<PAGE>

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.

MORTGAGE INVESTING: At times it is anticipated that greater than 50% of the
Fixed Income and High Yield Portfolios' 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. The Portfolios will invest in securities issued by the
Government National Mortgage Association ("GNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC"), Fannie Mae, other Government agencies, and private
issuers. It is expected that the Portfolios' primary emphasis will be in MBSs
issued by the various Government-related organizations. However, the Portfolios
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 Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P") or be deemed by the Adviser to be of
comparable investment quality.

8
<PAGE>

INSTRUMENTS AND INVESTMENTS

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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 nationally
recognized statistical rating organizations (each, an "NRSRO") 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.

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.

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 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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). The International Magnum Portfolio will limit
its use of Derivatives to 33 1/3% of its total assets measured by the aggregate
notional amount of outstanding Derivatives. The Fixed Income and High Yield
Portfolios will not enter into futures to the extent that each Portfolio's
outstanding obligations to purchase securities under these contracts, in
combination with its outstanding obligations with respect to options, would
exceed 50% of its total assets. The Portfolios' investments in forward foreign
currency contracts and Derivatives used for hedging purposes are not subject to
the foregoing limits.

10
<PAGE>

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

Under rules adopted by the Commodity Futures Trading Commission (the "CFTC"),
each Portfolio may, without registering with the CFTC as a Commodity Pool
Operator,

11
<PAGE>

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

12
<PAGE>

event of a default, amounts owed under all transactions entered into under, or
covered by, the same master agreement would be netted and only a single payment
would be made.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Stock Index. In some cases, the impact of
the movements of these factors may increase or decrease through the use of
multipliers or deflators. The Portfolios may use structured notes to tailor
their investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.

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.

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.

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.

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.

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.

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

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

15
<PAGE>

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

The following table provides a summary of ratings assigned to all debt holdings
of the High Yield Portfolio, the only Portfolio with more than 5% invested in
High Yield Securities as of December 31, 1997 (not including Money Market
Instruments). These figures do not necessarily indicate the Portfolio's current
or future debt holdings.

HIGH YIELD PORTFOLIO+

16
<PAGE>

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 a 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.

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.

17
<PAGE>

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 Net Asset Value ("NAV").

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. In addition, the High
Yield Portfolio may lend its portfolio securities to certain institutional
investors. 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. Pursuant to an order issued by the SEC, the Fund may lend
portfolio securities to affiliated broker-dealers. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

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 GNMA, FHLMC, Fannie Mae, 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

18
<PAGE>

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

NON-DIVERSIFIED STATUS. The International Magnum 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
"Internal Revenue Code"), for qualification as a regulated investment company.
See "Investment Limitations" and "Taxes" in the SAI.

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 Portfolio may invest up to 25% of its total assets in Rule
144A Securities that are deemed to be liquid. Other Portfolios may invest an
unlimited amount in Rule 144A Securities that are deemed to be liquid.

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

19
<PAGE>

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.

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.

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
International Magnum 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

Each Portfolio (excluding the International Magnum 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.

MANAGEMENT OF THE FUND

21
<PAGE>

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 International Magnum Portfolio.
MAS serves as the Adviser for the Fixed Income and High Yield 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 subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"),
which is a preeminent global financial services firm that maintains leading
market positions in each of its three primary businesses--securities, asset
management and credit services. 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 well as to employee
benefit plans, endowment funds, foundations and other institutional investors.
MAS is a Pennsylvania limited liability partnership founded in 1969 with
principal offices at One Tower Bridge, West Conshohocken, Pennsylvania 19428.
MAS is also a subsidiary of MSDW. 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, 1998, MSAM and its institutional
investment advisory affiliates (exclusive of MAS) had approximately $88.1
billion in assets under management or fiduciary advice and MAS managed assets
of approximately $68.4 billion. See "Management of the Fund" in the SAI.

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

22
<PAGE>

OTHER SERVICES

23
<PAGE>

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 and maintains the general
accounting records 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

PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
High International
Assets Fixed Income Yield Magnum
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.40% 0.50% 0.80%
- -------------------------------------------------------------------------------------------
From $500 million
to $1 billion 0.35% 0.45% 0.75%
- -------------------------------------------------------------------------------------------
More than $1 billion 0.30% 0.40% 0.70%
</TABLE>

These fee waivers and reimbursements are voluntary and may be terminated by
MSAM or MAS at any time without notice.

OTHER EXPENSES

24
<PAGE>

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 the Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

PORTFOLIO TURNOVER

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.
25
<PAGE>

<TABLE>
<CAPTION>
Corresponding MSIF Corresponding MAS
Fund Portfolio portfolio Funds portfolio
-------------- -------------------- -----------------
<S> <C> <C>
Fixed Income Fixed Income
High Yield High Yield
International Magnum International Magnum
</TABLE>

Past investment performance of the Class A Shares of the MSIF portfolio 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 portfolio 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 Average
Annual Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Total Return Total Return Annual
One Year Three Years Five Years Ten Years Three Years Five Years Ten Years Total Return
Inception Ended Ended Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MSIF:
International
Magnum......... 3/15/96 6.58% NA NA NA NA NA NA 8.28%
MAS FUNDS:
Fixed Income.... 11/14/84 9.61% 40.07% 50.75% 157.81% 11.89% 8.56% 9.93% 10.92%
High Yield...... 2/28/89 15.98% 65.72% 91.86% NA 18.34% 13.92% NA 12.14%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the High Yield Portfolio. Also, as of that date, General American
Life Insurance owned more than 25% of the International Magnum and Fixed Income
Portfolios, American General Life Insurance Company owned more than 25% of the
International Magnum Portfolio, and Allmerica Financial Life Insurance &
Annuity Company owned more than 25% of the Fixed Income Portfolio, pursuant to
variable annuity contracts and variable life insurance policies they have
issued to the public.

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

26
<PAGE>

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

TRANSACTION DETAILS

The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. The International Magnum 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, Martin Luther King, Jr. 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'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.

27
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 FOUR 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 FOURTEEN OTHER PORTFOLIOS MANAGED BY
MSAM OR MAS.

THE PORTFOLIOS:

Fixed Income U.S. Real Estate
Value Emerging Markets Debt

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, 1998
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 four separate investment portfolios (each, a "Portfolio") has a distinct
investment objective. The following pages describe the types of securities and
investment techniques each Portfolio uses in seeking to achieve 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 and Emerging Markets Debt Portfolios. MSAM conducts a worldwide
investment advisory business. As of February 28, 1998, MSAM and its affiliated
institutional asset management companies (exclusive of MAS) had approximately
$88.1 billion in assets under management or fiduciary advice.

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the Fixed
Income and Value Portfolios. MAS's institutional investment advisory business
was established in 1969. As of February 28, 1998, MAS managed assets of
approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE
----

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

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES 4
- -------------------

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

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

2
<PAGE>

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

<TABLE>
<CAPTION>
EMERGING
U.S. REAL MARKETS
FIXED INCOME VALUE ESTATE DEBT
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------- ------------------- ----------------- -----------------
PERIOD FROM
PERIOD FROM PERIOD FROM PERIOD FROM JUNE 16, 1997*
SELECTED PER SHARE DATA JANUARY 2, 1997* TO JANUARY 2, 1997* TO MARCH 3, 1997* TO TO
AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
- ----------------------- ------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 10.00 $ 10.00 $ 10.00 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.. 0.46 0.10 0.17 0.28
Net Realized and
Unrealized Gain
(Loss)................ 0.53 1.99 1.61 (0.22)
------- ------- ------- -------
Total From Investment
Operations............ 0.99 2.09 1.78 0.06
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income.. (0.45) (0.10) (0.17) (0.27)
In Excess of Net In-
vestment Income....... -- 0.00 + -- --
Net Realized Gain...... (0.13) (0.21) (0.20) (0.02)
In Excess of Net Real-
ized Gain............. -- 0.00 + -- (0.10)
------- ------- ------- -------
Total Distributions.... (0.58) (0.31) (0.37) (0.39)
------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 10.41 $ 11.78 $ 11.41 $ 9.67
======= ======= ======= =======
TOTAL RETURN............ 9.93% 20.98% 17.99% 0.76%
======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000's)......... $12,760 $14,664 $13,055 $26,378
Ratio of Expenses to
Average Net Assets..... 0.70%** 0.85%** 1.10%** 1.35%**
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense................ -- -- -- 1.30%**
Ratio of Net Investment
Income to Average Net
Assets................. 5.66%** 1.70%** 3.14%** 8.10%**
Portfolio Turnover
Rate................... 185% 34% 114% 173%
Average Commission Rate
Per Share.............. -- $0.0585 $0.0542 --
- -----------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment
Income................ $ 0.08 $ 0.06 $ 0.07 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets................ 1.71%** 1.87%** 2.32%** 2.06%**
Net Investment Income
to Average Net
Assets................ 4.65%** 0.68%** 1.92%** 7.39%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized
+Amount is less than $0.01 per share.

3
<PAGE>

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.

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.

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.

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 DEBT PORTFOLIO

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,

4
<PAGE>

political, or economic news both in the United States and abroad.

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.

FIXED INCOME PORTFOLIO

VALUE PORTFOLIO

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 Standard
& Poor's Ratings Group ("S&P") 500 Stock 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

5
<PAGE>

about strategies employed in managing the Portfolio, see "Value Stock
Investing" in "Securities and Investment Techniques."

U.S. REAL ESTATE PORTFOLIO

EMERGING MARKETS DEBT PORTFOLIO

6
<PAGE>

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 Securities will be made primarily in some or all of the
following emerging market countries:

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.

7
<PAGE>

STRATEGIES

MATURITY AND DURATION MANAGEMENT: One of two primary components of the
Adviser's fixed income

8
<PAGE>

investment strategy is Maturity and Duration Management. The second primary
component of fixed income strategy is Value Investing. See "Value Investing"
below.

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.

9
<PAGE>

INSTRUMENTS AND INVESTMENTS

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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:

10
<PAGE>

(2)Commercial paper rated at time of purchase by one or more nationally
recognized statistical rating organizations (each, an "NRSRO") 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.

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 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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures

11
<PAGE>

contracts and forward contracts, options, structured notes and swaps.
Additionally, the Portfolios may invest in other Derivatives that are developed
over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). Each of the U.S. Real Estate and Emerging
Markets Debt Portfolios will limit its use of Derivatives to 33 1/3% of its
total assets measured by the aggregate notional amount of outstanding
Derivatives. The Fixed Income and Value Portfolios will not enter into futures
to the extent that each Portfolio's outstanding obligations to purchase
securities under these contracts, in combination with its outstanding
obligations with respect to options, would exceed 50% of its total assets. The
Portfolios' investments in forward foreign currency contracts and Derivatives
used for hedging purposes are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

The Portfolios may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these

12
<PAGE>

contracts also rises and falls inversely with changes in interest rates. The
Portfolios may engage in financial futures and forward contracts for both
hedging and non-hedging purposes.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

13
<PAGE>

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 (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

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.

14
<PAGE>

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.

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.

15
<PAGE>

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.

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.

16
<PAGE>

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 risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

The following table provides a summary of ratings assigned to all debt holdings
of the Emerging Markets Debt Portfolio, the only Portfolio with more than 5%
invested in High Yield Securities as of December 31, 1997 (not including Money
Market Instruments). These figures do not necessarily indicate the Portfolio's
current or future debt holdings.

EMERGING MARKETS DEBT PORTFOLIO+

<TABLE>
<S> <C>
QUALITY
AAA-Baa3 0.00%
Ba1 10.91%
Ba2 25.09%
Ba3 12.68%
B1 21.04%
B2 14.15%
B3 4.04%
Cash 5.70%
Not Rated 6.37%
Ba2 1.51%*
Ba3 1.03%*
B1 0.83%*
B2 2.53%*
B3 0.47%*
TOTAL 100.00%**
</TABLE>
- -------
+Ratings by Moody's
* The Adviser believes that these non-rated securities are equivalent to the
rating indicated.
**The figures provided do not total to exactly 100% due to rounding.

17
<PAGE>

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 a 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.

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.

18
<PAGE>

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 Net Asset Value ("NAV").

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 GNMA, FHLMC, Fannie Mae, 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.

19
<PAGE>

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.

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 Emerging
Markets Debt Portfolio may invest up to 25% of its total assets in Rule 144A
Securities that are deemed to be liquid. Other Portfolios may invest an
unlimited amount in Rule 144A Securities that are deemed to be liquid.

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

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.

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 ("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.

21
<PAGE>

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 U.S.
Real Estate and Emerging Markets Debt 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
- -----------------------------

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

22
<PAGE>

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 and Emerging
Markets Debt Portfolios. MAS serves as the Adviser for the Fixed Income and
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 subsidiary of Morgan Stanley Dean Witter &
Co. ("MSDW"), which is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses--
securities, asset management and credit services. 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
well as to employee benefit plans, endowment funds, foundations and other
institutional investors. MAS is a Pennsylvania limited liability partnership
founded in 1969 with principal offices at One Tower Bridge, West Conshohocken,
Pennsylvania 19428. MAS is also a subsidiary of MSDW. 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, 1998, MSAM and its
institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice and
MAS managed assets of approximately $68.4 billion. See "Management of the Fund"
in the SAI.

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

23
<PAGE>

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 its inception.

OTHER SERVICES

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.

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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

PORTFOLIO ADVISORY FEES

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

These fee waivers and reimbursements are voluntary and may be terminated by
MSAM or MAS at any time without notice.

OTHER EXPENSES

25
<PAGE>

statements of additional information to existing variable annuity contract and
variable life insurance policy owners; expenses of preparing and printing the
annual and semi-annual 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
respectively. 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 the Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

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. For the
periods ended December 31, 1997, the Portfolio turnover rates for the Fixed
Income, U.S. Real Estate and Emerging Markets Debt Portfolios were 185%, 114%
and 173%, respectively. 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. 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

26
<PAGE>

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.

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

27
<PAGE>

PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the U.S. Real Estate Portfolio. Also, as of that date, Nationwide
Life Insurance owned more than 25% of the Emerging Markets Debt Portfolio,
General American Life Insurance and Allmerica Financial Life Insurance &
Annuity Company each owned more than 25% of the Fixed Income Portfolio and
American General Life Insurance Company owned more than 25% of the Value
Portfolio, pursuant to variable annuity contracts and variable life insurance
policies they have issued to the public.

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

ACCOUNT POLICIES
- ----------------

DISTRIBUTIONS AND TAXES

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 Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. Each of the Value, U.S. Real Estate and Emerging Markets Debt
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, Martin Luther King,
Jr. 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.

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
Portfolio is open for business.

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

28
<PAGE>

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 MILLER
STANLEY ANDERSON &
ASSET SHERRERD,
MANAGEMENT LLP
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
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 SIXTEEN OTHER PORTFOLIOS MANAGED BY MSAM
OR MAS.

THE PORTFOLIOS:

High Yield Equity Growth

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, 1998
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
Equity Growth Portfolio. MSAM conducts a worldwide investment advisory
business. As of February 28, 1998, MSAM and its affiliated institutional asset
management companies (exclusive of MAS) had approximately $88.1 billion in
assets under management or fiduciary advice.

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the High Yield
Portfolio. MAS's institutional investment advisory business was established in
1969. As of February 28, 1998, MAS managed assets of approximately $68.4
billion.

OFFERING OF SHARES

PAGE

PROSPECTUS OUTLINE

FINANCIAL HIGHLIGHTS____________________3

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES_____________________4

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____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__________20

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND_________________20

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_______________________25

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

2
<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
HIGH YIELD EQUITY GROWTH
PORTFOLIO PORTFOLIO
------------------- -------------------
PERIOD FROM PERIOD FROM
JANUARY 2, 1997* TO JANUARY 2, 1997* TO
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997
- ---------------------------------- ------------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD... $ 10.00 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................. 0.63 0.02
Net Realized and Unrealized Gain...... 0.72 3.27
------- -------
Total From Investment Operations...... 1.35 3.29
------- -------
DISTRIBUTIONS
Net Investment Income................. (0.63) (0.02)
Net Realized Gain..................... (0.13) (0.53)
------- -------
Total Distributions................... (0.76) (0.55)
------- -------
NET ASSET VALUE, END OF PERIOD......... $ 10.59 $ 12.74
======= =======
TOTAL RETURN........................... 13.53% 33.05%
======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)...... $12,490 $12,419
Ratio of Expenses to Average Net
Assets................................ 0.81%** 0.85%**
Ratio of Expenses to Average Net
Assets, Excluding Interest Expense.... 0.80%** --
Ratio of Net Investment Income to
Average Net Assets.................... 7.41%** 0.41%**
Portfolio Turnover Rate................ 78% 172%
Average Commission Rate
Per Share............................. -- $0.0542
- --------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period:
Per Share Benefit to Net Investment
Income............................... $ 0.08 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets........ 1.68%** 2.05%**
Net Investment Income (Loss) to
Average Net Assets................... 6.53%** (0.80)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

3
<PAGE>

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.

HIGH YIELD PORTFOLIO

EQUITY GROWTH PORTFOLIO

THE PORTFOLIOS' INVESTMENTS

INVESTMENT CHARACTERISTICS AND RISKS

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.

HIGH YIELD PORTFOLIO

4
<PAGE>

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, SMBSs, CMOs, Derivatives, 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.

EQUITY GROWTH PORTFOLIO

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.

5
<PAGE>

STRATEGIES

6
<PAGE>

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.

7
<PAGE>

the Portfolio's primary emphasis will be in MBSs issued by the various
Government-related organizations. However, the 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 Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P") or be deemed by the Adviser to be of comparable
investment quality.

INSTRUMENTS AND INVESTMENTS

ADRS. For information concerning American Depositary Receipts ("ADR"), see
"Depositary Receipts" below.

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:

8
<PAGE>

(2)Commercial paper rated at time of purchase by one or more nationally
recognized statistical rating organizations (each, an "NRSRO") 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.

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 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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging

9
<PAGE>

purposes. Derivatives include caps, floors and collars, futures contracts and
forward contracts, options, structured notes and swaps. Additionally, the
Portfolios may invest in other Derivatives that are developed over time if
their use would be consistent with the objectives of the Portfolios. These
Derivatives may be based upon a wide variety of underlying rates, indicies,
instruments, securities and other products, such as interest rates, foreign
currencies, foreign and domestic fixed income and equity securities, group or
"baskets" of Securities and Securities indicies (for each Derivative, the
"underlying"). The Equity Growth Portfolio will limit its use of Derivatives to
33 1/3% of its total assets measured by the aggregate notional amount of
outstanding Derivatives. The High Yield Portfolio will not enter into futures
to the extent that the Portfolio's outstanding obligations to purchase
securities under these contracts, in combination with its outstanding
obligations with respect to options, would exceed 50% of its total assets. The
Portfolios' investments in forward foreign currency contracts and Derivatives
used for hedging purposes are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

The Portfolios may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these

10
<PAGE>

contracts also rises and falls inversely with changes in interest rates. The
Portfolios may engage in financial futures and forward contracts for both
hedging and non-hedging purposes.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

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 (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Stock Index. In some cases, the impact of
the movements of these factors may increase or decrease through the use of
multipliers or deflators. The Portfolios may use structured notes to tailor
their investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.

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.

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 Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

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>

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.

14
<PAGE>

individual companies in emerging countries to prevent, among other concerns,
violation of Foreign Investment limitations.

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

HIGH YIELD PORTFOLIO+

<TABLE>
<S> <C>
QUALITY
AAA 23.22%
AA 0.00%
A 0.00%
BBB 4.31%
BB 50.36%
B 19.44%
CCC 0.17%
Not Rated 2.49%
B 2.49%*
TOTAL 100.00%**
</TABLE>
- -------
+ Ratings by S&P
* The Adviser believes that these non-rated securities are equivalent to the
rating indicated.
**The figures provided do not total to exactly 100% due to rounding.

INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities, which have coupon rates that vary inversely at a
multiple of a

15
<PAGE>

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 a 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.

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.

16
<PAGE>

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. In addition, the High
Yield Portfolio may lend its portfolio securities to certain institutional
investors. 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. Pursuant to an order issued by the SEC, the Fund may lend
portfolio securities to affiliated broker-dealers. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

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 GNMA, FHLMC, Fannie Mae, 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.

17
<PAGE>

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.

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
Portfolios may invest an unlimited amount in Rule 144A Securities that are
deemed to be liquid.

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

18
<PAGE>

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.

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.

19
<PAGE>

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 Equity
Growth 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

Each 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.

MANAGEMENT OF THE FUND

20
<PAGE>

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 Equity Growth Portfolio. MAS
serves as the Adviser for the High Yield 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
subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"), which is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses--securities, asset management and credit
services. 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 well as to employee benefit plans, endowment
funds, foundations and other institutional investors. MAS is a Pennsylvania
limited liability partnership founded in 1969 with principal offices at One
Tower Bridge, West Conshohocken, Pennsylvania 19428. MAS is also a subsidiary
of MSDW. 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, 1998, MSAM and its institutional investment advisory affiliates
(exclusive of MAS) had approximately $88.1 billion in assets under management
or fiduciary advice and MAS managed assets of approximately $68.4 billion. See
"Management of the Fund" in the SAI.

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

21
<PAGE>

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. Messrs.
Esser, Bennett and Angevine have shared primary responsibility for managing the
Portfolio's assets since its inception.

OTHER SERVICES

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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.

22
<PAGE>

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>
High Equity
Assets Yield Growth
- --------------------------------------------
<S> <C> <C>
First $500 million 0.50% 0.55%
- --------------------------------------------
From $500 million to $1 0.45% 0.50%
billion
- --------------------------------------------
More than $1 billion 0.40% 0.45%
</TABLE>

These fee waivers and reimbursements 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 Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

23
<PAGE>

PORTFOLIO TURNOVER

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.

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

24
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

<TABLE>
<CAPTION>
Corresponding Corresponding
Fund MSIF MAS Funds
Portfolio portfolio portfolio
--------- ------------- -------------
<S> <C> <C>
High Yield High Yield
Equity Growth Equity Growth
</TABLE>

Past investment performance of the Class A Shares of the MSIF Equity Growth
Portfolio and the Institutional Class Shares of the High Yield Portfolio 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 Equity Growth Portfolio and the Institutional Class
Shares of the High Yield Portfolio 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 Three Years Five Years Three Years Five Years Total Return
Inception Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Equity Growth........... 4/2/91 31.32% 149.21% 168.69% 35.58% 21.86% 19.07%
MAS FUNDS:
High Yield.............. 2/28/89 15.98% 65.72% 91.86% 18.34% 13.92% 12.14%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the High Yield Portfolio. Also, as of that date, General American
Life Insurance and American General Life Insurance Company each owned more than
25% of the Equity Growth Portfolio, pursuant to variable annuity contracts and
variable life insurance policies they have issued to the public.

For more information, see "Principal Holders of Securities" 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 and to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). As a regulated investment company under the Internal
Revenue Code, net income and net realized gains of each Portfolio will be
distributed to shareholders at least once a year.

25
<PAGE>

TRANSACTION DETAILS

The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. The Equity Growth 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, Martin Luther King, Jr. 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.

The 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
Portfolio is open for business.

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.

26
<PAGE>

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
DESCRIBES FOUR PORTFOLIOS MANAGED BY MORGAN STANLEY ASSET MANAGEMENT INC.
("MSAM"). THE FUND ALSO OFFERS FOURTEEN OTHER PORTFOLIOS MANAGED BY EITHER MSAM
OR MILLER ANDERSON & SHERRERD, LLP ("MAS"), AN AFFILIATE OF MSAM.

THE PORTFOLIOS:

Equity Growth International Magnum
U.S. Real Estate Emerging Markets Equity

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, 1998
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
Portfolios. MSAM conducts a worldwide investment advisory business. As of
February 28, 1998, MSAM and its affiliated institutional asset management
companies (exclusive of MAS) had approximately $88.1 billion in assets under
management or fiduciary advice.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE
----

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

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES 4
- -------------------

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 21
- -----------------------------

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 21
- ----------------------

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 26
- ----------------

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

2
<PAGE>

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

<TABLE>
<CAPTION>
EQUITY GROWTH U.S. REAL ESTATE INTERNATIONAL EMERGING MARKETS
PORTFOLIO PORTFOLIO MAGNUM PORTFOLIO EQUITY PORTFOLIO
------------------- ----------------- ------------------- -------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
SELECTED PER SHARE DATA JANUARY 2, 1997* TO MARCH 3, 1997* TO JANUARY 2, 1997* TO YEAR ENDED OCTOBER 1, 1996* TO
AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996
- ----------------------- ------------------- ----------------- ------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 10.00 $ 10.00 $ 10.00 $ 9.78 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.. 0.02 0.17 0.13 0.04 0.01
Net Realized and
Unrealized Gain
(Loss)................ 3.27 1.61 0.59 -- (0.21)
------- ------- ------- ------- -------
Total From Investment
Operations............ 3.29 1.78 0.72 0.04 (0.20)
------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income.. (0.02) (0.17) (0.32) (0.07) (0.02)
Net Realized Gain...... (0.53) (0.20) (0.02) (0.02) --
In Excess of Net Real-
ized Gain............. -- -- -- (0.28) --
------- ------- ------- ------- -------
Total Distributions.... (0.55) (0.37) (0.34) (0.37) (0.02)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 12.74 $ 11.41 $ 10.38 $ 9.45 $ 9.78
======= ======= ======= ======= =======
TOTAL RETURN............ 33.05% 17.99% 7.31% 0.52% (2.03)%
======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000's)......... $12,419 $13,055 $18,855 $34,098 $11,789
Ratio of Expenses to
Average Net Assets..... 0.85%** 1.10%** 1.16%** 1.80% 1.79%**
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense................ -- -- 1.15%** -- --
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense and Foreign Tax
Expense................ -- -- -- 1.75% 1.75%**
Ratio of Net Investment
Income to Average Net
Assets................. 0.41%** 3.14%** 1.43%** 0.47% 0.32%**
Portfolio Turnover
Rate................... 172% 114% 41% 87% 9%
Average Commission Rate
Per Share.............. $0.0542 $0.0542 $0.0181 $0.0018 $0.0013
As a Percentage of
Trade Amount.......... -- -- 0.20% 0.40% 0.45%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment
Income................ $ 0.07 $ 0.07 $ 0.15 $ 0.17 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets................ 2.05%** 2.32%** 2.78%** 4.12% 6.17%**
Net Investment Income
(Loss) to Average Net
Assets................ (0.80)%** 1.92%** (0.19)%** (1.84)% (4.06)%**
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations
**Annualized

3
<PAGE>

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.

EQUITY GROWTH PORTFOLIO

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.

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).

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 foreign securities exchanges and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

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

4
<PAGE>

in foreign securities will be affected by foreign currency values, the greater
volatility of foreign securities exchanges, and the overall political, economic
and regulatory environment 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.

EQUITY GROWTH PORTFOLIO

U.S. REAL ESTATE PORTFOLIO

5
<PAGE>

real estate holdings, such as hotel companies, residential builders and land-
rich companies. Risks relating to investments in securities of issuers
primarily engaged in the real estate industry are similar to those of direct
investments in real estate and include fluctuations in real estate values,
changes in zoning laws, increases in property taxes, environmental risks, and
increases in interest rates. Generally, increases in interest rates will
increase the costs of obtaining financing, which could directly and indirectly
decrease the value of the Portfolio's investments.

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
Stock Index ("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. The Portfolio will invest primarily in Equity REITs which 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. The Portfolio may also invest in Mortgage REITs and Hybrid
REITs. 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. Risks
associated with investments in REITs include changes in the values of their
underlying properties and defaults by borrowers or tenants. In addition, some
REITs are not diversified and their value may be affected by events related to
a small number of properties.

INTERNATIONAL MAGNUM PORTFOLIO

6
<PAGE>

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.

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, Depositary Receipts 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 intends to invest primarily in some or all of the following
emerging market countries:

Argentina Botswana Brazil Bulgaria
Chile China (mainland Colombia Egypt
Ghana and Hong Kong) Greece Hungary
India Indonesia Israel Jamaica
Jordan Kenya Malaysia Mexico
Morocco Nigeria Pakistan Peru
Philippines Poland Russia Singapore
South Africa South Korea Sri Lanka Taiwan
Thailand Turkey Venezuela Zimbabwe

7
<PAGE>

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.

The Adviser 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.

INSTRUMENTS AND INVESTMENTS

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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:

(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).

8
<PAGE>

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 nationally
recognized securities rating organizations (each, an "NRSRO") in one of their
two highest categories, (e.g., A-1 or A-1+ by S&P or Prime 1 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.

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 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.

9
<PAGE>

DERIVATIVES. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). Each Portfolio will limit its use of Derivatives
to 33 1/3% of its total assets measured by the aggregate notional amount of
outstanding Derivatives. The Portfolios' investments in forward foreign
currency contracts and Derivatives used for hedging purposes are not subject to
the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

The Portfolios may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these

10
<PAGE>

contracts also rises and falls inversely with changes in interest rates. The
Portfolios may engage in financial futures and forward contracts for both
hedging and non-hedging purposes.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

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 (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

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.

12
<PAGE>

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 Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

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.

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.

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 risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

15
<PAGE>

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 a 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 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.

16
<PAGE>

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 GNMA, FHLMC, Fannie Mae, 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.
17
<PAGE>

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 "Internal Revenue Code"), for
qualification as regulated investment companies. See "Investment Limitations"
and "Taxes" in the SAI.

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
Equity Growth Portfolio may invest an unlimited amount in Rule 144A Securities
that are deemed to be liquid.

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

18
<PAGE>

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.

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 Equity 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.

19
<PAGE>

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.

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.

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 the Equity Growth 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.

The Equity Growth Portfolio is a diversified investment portfolio and is
therefore subject to the following fundamental limitations: as to 75% of its
total assets, the 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.

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. MSAM 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 Portfolios' day-to-day
investment decisions, arranges for the execution of portfolio transactions and
generally manages the Portfolios' 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 subsidiary of
Morgan Stanley Dean Witter & Co. ("MSDW"), which is a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses--securities, asset management and credit services.
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 well as to employee benefit plans, endowment funds,
foundations and other institutional investors. As of February 28, 1998, MSAM
and its institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice. See
"Management of the Fund" in the SAI.

21
<PAGE>

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

OTHER SERVICES

22
<PAGE>

of the Fund's marketing expenses. This includes the cost of reproducing
prospectuses, statements of additional information or any other Fund documents
(such as semi-annual reports) used as sales materials. Morgan Stanley does not
receive compensation for providing distribution services.

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. As compensation for its services,
Chase is paid by MSAM out of its administration fees. 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.

Certain administrative and record-keeping services that would otherwise be
performed by the Adviser or its service providers may be performed by insurance
companies that purchase shares of the Portfolios. The Adviser may make payments
to these insurance companies to defray the costs of providing those services.

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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

MANAGEMENT FEE

The Adviser is entitled to receive from each 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
Equity Real International Markets
Assets Growth Estate Magnum Equity
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $500 million 0.55% 0.80% 0.80% 1.25%
- --------------------------------------------------------------------------------
From $500 million to
$1 billion 0.50% 0.75% 0.75% 1.20%
- --------------------------------------------------------------------------------
More than $1 billion 0.45% 0.70% 0.70% 1.15%
================================================================================
</TABLE>

exceed the respective percentage of average daily net assets set forth in the
table below.
<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<S> <C>
Equity Growth.......................................... 0.85%
U.S. Real Estate....................................... 1.10%
International Magnum................................... 1.15%
Emerging Markets Equity................................ 1.75%
</TABLE>

These fee waivers and reimbursements 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 administrators, 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 semi-annual 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 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.

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.

PORTFOLIO TURNOVER

24
<PAGE>

Income Securities could result in high portfolio turnover. For the periods
ended December 31, 1997, the Portfolio turnover rates for the Equity Growth and
U.S. Real Estate Portfolios were 172% and 114%, respectively. 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.

<TABLE>
<CAPTION>
Average Average
Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Annual
One Year Three Years Five Years Three Years Five Years Total Return
Inception Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Equity Growth........... 4/2/91 31.32% 149.21% 168.69% 35.58% 21.86% 19.07%
U.S. Real Estate........ 2/24/95 27.62% NA NA NA NA 30.92%
International Magnum.... 3/15/96 6.58% NA NA NA NA 8.28%
Emerging Markets........ 9/25/92 (1.03)% (3.09)% 62.71% (1.04)% 10.23% 10.13%
</TABLE>

25
<PAGE>

PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the U.S. Real Estate Portfolio. Also, as of that date, General
American Life Insurance and American General Life Insurance Company each owned
more than 25% of the International Magnum and Equity Growth Portfolios and New
York Life Insurance and Annuity Corporation owned more than 25% of the Emerging
Markets Equity Portfolio, pursuant to variable annuity contracts and variable
life insurance policies they have issued to the public.

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

ACCOUNT POLICIES
- ----------------

DISTRIBUTIONS AND TAXES

TRANSACTION DETAILS

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

26
<PAGE>

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.

27
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 THREE 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.

THE PORTFOLIOS:

High Yield Emerging Markets Debt
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, 1998
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 three 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
in seeking to achieve 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
Emerging Markets Debt Portfolio. MSAM conducts a worldwide investment advisory
business. As of February 28, 1998, MSAM and its affiliated institutional asset
management companies (exclusive of MAS) had approximately $88.1 billion in
assets under management or fiduciary advice.

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the High Yield
and Mid Cap Value Portfolios. MAS's institutional investment advisory business
was established in 1969. As of February 28, 1998, MAS managed assets of
approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE
----

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

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES 4
- -------------------

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

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, MAS and the individual portfolio managers, as
well as fees, expenses and performance calculations.

ACCOUNT POLICIES 27
- ----------------

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

2
<PAGE>

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

<TABLE>
<CAPTION>
HIGH YIELD MID CAP VALUE EMERGING MARKETS
PORTFOLIO PORTFOLIO DEBT PORTFOLIO
------------------- ------------------- -----------------
PERIOD FROM PERIOD FROM PERIOD FROM
SELECTED PER SHARE DATA JANUARY 2, 1997* TO JANUARY 2, 1997* TO JUNE 16, 1997* TO
AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
- ----------------------- ------------------- ------------------- -----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 10.00 $ 10.00 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.. 0.63 0.02 0.28
Net Realized and
Unrealized Gain
(Loss)................ 0.72 4.05 (0.22)
------- ------- -------
Total From Investment
Operations............ 1.35 4.07 0.06
------- ------- -------
DISTRIBUTIONS
Net Investment Income.. (0.63) (0.02) (0.27)
Net Realized Gain...... (0.13) (0.73) (0.02)
In Excess of Net Real-
ized Gain............. -- -- (0.10)
------- ------- -------
Total Distributions.... (0.76) (0.75) (0.39)
------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 10.59 $ 13.32 $ 9.67
======= ======= =======
TOTAL RETURN............ 13.53% 40.93% 0.76%
======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000's)......... $12,490 $11,461 $26,378
Ratio of Expenses to
Average Net Assets..... 0.81%** 1.05%** 1.35%**
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense................ 0.80%** -- 1.30%**
Ratio of Net Investment
Income to Average Net
Assets................. 7.41%** 0.19%** 8.10%**
Portfolio Turnover
Rate................... 78% 141% 173%
Average Commission Rate
Per Share.............. -- $0.0490 --
- -----------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment
Income................ $ 0.08 $ 0.08 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets................ 1.68%** 2.13%** 2.06%**
Net Investment Income
(Loss) to Average Net
Assets................ 6.53%** (0.89)%** 7.39%**
- -----------------------------------------------------------------------------------
</TABLE>
*Commencement of operations
**Annualized

3
<PAGE>

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.

HIGH YIELD PORTFOLIO

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.

EMERGING MARKETS DEBT PORTFOLIO

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

INVESTMENT CHARACTERISTICS AND RISKS

4
<PAGE>

Because the Emerging Markets Debt 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 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.

HIGH YIELD PORTFOLIO

MID CAP VALUE PORTFOLIO

EMERGING MARKETS DEBT PORTFOLIO

5
<PAGE>

securities issued by government owned, controlled or sponsored entities and
securities of entities organized to restructure outstanding debt of such
issuers.

Algeria Argentina Brazil Bulgaria
Chile China (mainland Colombia Costa Rica
Czech Republic and Hong Kong) Democratic Dominican
Ecuador Egypt Republic Republic
Greece Hungary of Congo India
Indonesia Ivory Coast Jamaica Jordan
Malaysia Mexico Morocco Nicaragua
Nigeria Pakistan Panama Paraguay
Peru Philippines Poland Russia
Slovakia South Africa Thailand Trinidad
Tunisia Turkey Uruguay & Tobago
Venezuela

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

The following pages contain more detailed information about types of
instruments in which a Portfolio may invest and

6
<PAGE>

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

7
<PAGE>

8
<PAGE>

INSTRUMENTS AND INVESTMENTS

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

BORROWING: The Emerging Markets Debt Portfolio is authorized to borrow money
("Borrowing") from banks and other entities in an amount up to 33 1/3% of its
total assets (including the amount borrowed) less all liabilities and
indebtedness other than the Borrowing, and may use the proceeds of the
Borrowing for investment purposes or to pay dividends. Borrowing for investment
purposes creates leverage which is a speculative characteristic. The Portfolio
will only engage in Borrowing when the Adviser believes that Borrowing will
benefit the Portfolio after taking into account considerations such as the
costs of Borrowing and the likely investment returns on securities purchased
with borrowed monies. Borrowing by the Portfolio will create the opportunity
for increased net income but, at the same time, will involve special risk
considerations. Leverage that results from Borrowing will magnify declines as
well as increases in the Portfolio's net asset value per share and net yield.
The Portfolio expects that all of its Borrowing will be made on a secured
basis. The Portfolio's custodian will either segregate the assets securing the
Borrowing for the benefit of the lenders or arrangements will be made with a
suitable sub-custodian. If assets used to secure the Borrowing decrease in
value, the Portfolio may be required to pledge additional

9
<PAGE>

collateral to the lender in the form of cash or securities to avoid liquidation
of those assets.

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:

(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).

(2) Commercial paper rated at time of purchase by one or more nationally
recognized statistical rating organizations (each, an "NRSRO") 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.

10
<PAGE>

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 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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). The Emerging Markets Debt Portfolio will limit
its use of Derivatives to 33 1/3% of its total assets measured by the aggregate
notional amount of outstanding Derivatives. The High Yield and Mid Cap Value
Portfolios will not enter into futures to the extent that each Portfolio's
outstanding obligations to purchase securities under these contracts, in
combination with its outstanding obligations with respect to options, would
exceed 50% of its total assets. The Portfolios' investments in forward foreign
currency contracts and Derivatives used for hedging purposes are not subject to
the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

11
<PAGE>

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

12
<PAGE>

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 above the exercise price of the option. By writing a put option, a
Portfolio will be exposed to the amount by which the price of the underlying is
less than the strike price.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

13
<PAGE>

Portfolio's risk of loss will consist of the payments that a Portfolio is
contractually entitled to receive from the other party. This may not be true
for currency swaps that require the delivery of the entire notional amount of
one designated currency in exchange for the other. If there is a default by the
other party, a Portfolio may have contractual remedies pursuant to the
agreements related to the transaction.

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 Stock Index. In some cases, the impact of
the movements of these factors may increase or decrease through the use of
multipliers or deflators. The Portfolios may use structured notes to tailor
their investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.

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.

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 Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

14
<PAGE>

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.

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.

15
<PAGE>

S&P: BB-rated bonds have "less near-term vulnerability to default" than
B- or CCC-rated securities but face "major ongoing uncertainties . . .

16
<PAGE>

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."

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

HIGH YIELD PORTFOLIO+

EMERGING MARKETS DEBT PORTFOLIO+

To the extent a Portfolio invests a portion of its assets in Investment Company
Securities, those assets will be subject

17
<PAGE>

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 a 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.

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.

18
<PAGE>

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. In addition, the High
Yield Portfolio may lend its portfolio securities to certain institutional
investors. 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. Pursuant to an order issued by the SEC, the Fund may lend
portfolio securities to affiliated broker-dealers. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

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 GNMA, FHLMC, Fannie Mae, 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.

19
<PAGE>

NON-DIVERSIFIED STATUS. The Emerging Markets Debt 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
"Internal Revenue Code"), for qualification as a regulated investment company.
See "Investment Limitations" and "Taxes" in the SAI.

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 Emerging
Markets Debt Portfolio may invest up to 25% of its total assets in Rule 144A
Securities that are deemed to be liquid. Other Portfolios may invest an
unlimited amount in Rule 144A Securities that are deemed to be liquid.

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

20
<PAGE>

Portfolio's realization upon the collateral may be delayed or limited.

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.

21
<PAGE>

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
Emerging Markets Debt 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
- -----------------------------

Each Portfolio (excluding the Emerging Markets Debt 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.

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

22
<PAGE>

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 Emerging Markets Debt
Portfolio. MAS serves as the Adviser for the High Yield 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 subsidiary of Morgan Stanley Dean Witter &
Co. ("MSDW"), which is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses--
securities, asset management and credit services. 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
well as to employee benefit plans, endowment funds, foundations and other
institutional investors. MAS is a Pennsylvania limited liability partnership
founded in 1969 with principal offices at One Tower Bridge, West Conshohocken,
Pennsylvania 19428. MAS is also a subsidiary of MSDW. 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, 1998, MSAM and its
institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice and
MAS managed assets of approximately $68.4 billion. See "Management of the Fund"
in the SAI.

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

23
<PAGE>

Bennett and Angevine have shared primary responsibility for managing the
Portfolio's assets since its inception.

OTHER SERVICES

Chase Global calculates the NAV and dividends and maintains the general
accounting records for each Portfolio.

24
<PAGE>

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 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 Cap Emerging
Assets High Yield Value Markets Debt
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.50% 0.75% 0.80%
- --------------------------------------------------------------------------------
From $500 million
to $1 billion 0.45% 0.70% 0.75%
- --------------------------------------------------------------------------------
More than $1 billion 0.40% 0.65% 0.70%
================================================================================
</TABLE>

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<S> <C>
High Yield............................................. 0.80%
Mid Cap Value.......................................... 1.05%
Emerging Markets Debt.................................. 1.30%
</TABLE>

These fee waivers and reimbursements are voluntary and may be terminated by
MSAM or MAS at any time without notice.

OTHER EXPENSES

PORTFOLIO TRANSACTIONS

Since shares of the Portfolios are not marketed through intermediary brokers or
dealers, it is not the Fund's practice

25
<PAGE>

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 the Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

Portfolio securities will not be purchased from or through, or sold to or
through, the Advisers 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. For the
periods ended December 31, 1997, the Portfolio turnover rates for the Mid Cap
Value and Emerging Markets Debt Portfolios were 141% and 173%, respectively.
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.

26
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

<TABLE>
<CAPTION>
Corresponding
Corresponding MSIF MAS Funds
Fund Portfolio portfolio portfolio
-------------- --------------------- -------------
<S> <C> <C>
High Yield High Yield
Mid Cap Value Mid Cap Value
Emerging Markets Debt Emerging Markets Debt
</TABLE>

<TABLE>
<CAPTION>
Average Average
Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Annual
One Year Three Years Five Years Three Years Five Years Total Return
Inception Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Emerging Markets Debt... 2/1/94 18.29% 126.72% NA 31.37% NA 18.77%
MAS FUNDS:
High Yield.............. 2/28/89 15.98% 65.72% 91.86% 18.34% 13.92% 12.14%
Mid Cap Value........... 12/30/94 39.59% 160.77% NA 37.64% NA 37.60%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the Mid Cap Value and High Yield Portfolios. Also, as of that
date, Nationwide Life Insurance owned more than 25% of the Emerging Markets
Debt Portfolio and American General Life Insurance Company owned more than 25%
of the Mid Cap Value Portfolio, pursuant to variable annuity contracts and
variable life insurance policies they have issued to the public.

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

ACCOUNT POLICIES
- ----------------

DISTRIBUTIONS AND TAXES

27
<PAGE>

TRANSACTION DETAILS

The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. Each of the Mid Cap Value and Emerging Markets Debt
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, Martin Luther King,
Jr. 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.

The 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
Portfolio is open for business.

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.

28
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 FOUR 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 FOURTEEN OTHER PORTFOLIOS MANAGED BY
MSAM OR MAS.

THE PORTFOLIOS:

Value Global Equity
Mid Cap Value Emerging Markets Equity

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, 1998
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 four 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
in seeking to achieve 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
Global Equity and Emerging Markets Equity Portfolios. MSAM conducts a worldwide
investment advisory business. As of February 28, 1998, MSAM and its affiliated
institutional asset management companies (exclusive of MAS) had approximately
$88.1 billion in assets under management or fiduciary advice.

Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser") advises the Value and
Mid Cap Value Portfolios. MAS's institutional investment advisory business was
established in 1969. As of February 28, 1998, MAS managed assets of
approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE
PAGE
----

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

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES 4
- -------------------

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 20
- -----------------------------

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 20
- ----------------------

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 25
- ----------------

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

2
<PAGE>

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

<TABLE>
<CAPTION>
VALUE MID CAP VALUE GLOBAL EQUITY EMERGING MARKETS EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------- ---------------- ---------------- -----------------------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 2, 1997* JANUARY 2, 1997* JANUARY 2, 1997* YEAR ENDED OCTOBER 1, 1996*
SELECTED PER SHARE DATA TO DECEMBER 31, TO DECEMBER 31, TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
AND RATIOS 1997 1997 1997 1997 1996
- ----------------------- ---------------- ---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 10.00 $ 10.00 $ 10.00 $ 9.78 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.. 0.10 0.02 0.08 0.04 0.01
Net Realized and
Unrealized Gain
(Loss)................ 1.99 4.05 1.92 -- (0.21)
------- ------- ------- ------- -------
Total From Investment
Operations............ 2.09 4.07 2.00 0.04 (0.20)
------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income.. (0.10) (0.02) (0.08) (0.07) (0.02)
In Excess of Net
Investment Income..... 0.00 + -- -- -- --
Net Realized Gain...... (0.21) (0.73) (0.18) (0.02) --
In Excess of Net
Realized Gain......... 0.00 + -- -- (0.28) --
------- ------- ------- ------- -------
Total Distributions.... (0.31) (0.75) (0.26) (0.37) (0.02)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 11.78 $ 13.32 $ 11.74 $ 9.45 $ 9.78
======= ======= ======= ======= =======
TOTAL RETURN............ 20.98% 40.93% 20.04% 0.52% (2.03)%
======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000's)......... $14,664 $11,461 $14,707 $34,098 $11,789
Ratio of Expenses to
Average Net Assets..... 0.85%** 1.05%** 1.15%** 1.80% 1.79%**
Ratio of Expenses to
Average Net Assets
Excluding Interest
Expense and Foreign Tax
Expense................ -- -- -- 1.75% 1.75%**
Ratio of Net Investment
Income to Average Net
Assets................. 1.70%** 0.19%** 1.24%** 0.47% 0.32%**
Portfolio Turnover
Rate................... 34% 141% 20% 87% 9%
Average Commission Rate
Per Share.............. $0.0585 $0.0490 $0.0350 $0.0018 $0.0013
As a Percentage of
Trade Amount.......... -- -- 0.25% 0.40% 0.45%
- ----------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment
Income................ $ 0.06 $ 0.08 $ 0.09 $ 0.17 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets................ 1.87%** 2.13%** 2.43%** 4.12% 6.17%**
Net Investment Income
(Loss) to Average Net
Assets................ 0.68%** (0.89)%** (0.04)%** (1.84)% (4.06)%**
- ----------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations
**Annualized
+Amount is less than $0.01 per share.

3
<PAGE>

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.

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 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 foreign securities exchanges, and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

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

INVESTMENT CHARACTERISTICS AND RISKS

4
<PAGE>

Because the Emerging Markets Equity 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 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.

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, and may engage in Loans of Portfolio Securities.
For additional information about investments, see "Securities and Investment
Techniques" below.

MID CAP VALUE PORTFOLIO

GLOBAL EQUITY PORTFOLIO

5
<PAGE>

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.

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, Depositary Receipts 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 intends to invest primarily in some or all of the following
emerging market countries:

6
<PAGE>

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.

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.

INSTRUMENTS AND INVESTMENTS

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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:

(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

7
<PAGE>

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).

(2) Commercial paper rated at time of purchase by one or more nationally
recognized statistical rating organizations (each, an "NRSRO") in one of their
two highest categories, (e.g., A-1 or A-1+ by S&P or Prime 1 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.

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.

8
<PAGE>

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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). Each of the Global Equity and Emerging Markets
Equity Portfolios will limit its use of Derivatives to 33 1/3% of its total
assets measured by the aggregate notional amount of outstanding Derivatives.
The Value and Mid Cap Value Portfolios will not enter into futures to the
extent that each Portfolio's outstanding obligations to purchase securities
under these contracts, in combination with its outstanding obligations with
respect to options, would exceed 50% of its total assets. The Portfolios'
investments in forward foreign currency contracts and Derivatives used for
hedging purposes are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

9
<PAGE>

like other over-the-counter contracts that are negotiated directly with an
individual counterparty, subject the Portfolio to the risk of counterparty
default.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

10
<PAGE>

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

11
<PAGE>

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.

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 Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

12
<PAGE>

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.

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 EQUITIES. Foreign Equity Securities ("Foreign Equities") include, but
are not limited to, Common Stocks, Preferred Stocks, Depositary Receipts,
Rights, Warrants and

13
<PAGE>

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.

14
<PAGE>

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 High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

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 a 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.

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.

15
<PAGE>

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.

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 GNMA, FHLMC, Fannie Mae, 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.

16
<PAGE>

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.

NON-DIVERSIFIED STATUS. The Emerging Markets Equity 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
"Internal Revenue Code"), for qualification as a regulated investment company.
See "Investment Limitations" and "Taxes" in the SAI.

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 Emerging
Markets Equity Portfolio may invest up to 25% of its total assets in Rule 144A
Securities that are

17
<PAGE>

deemed to be liquid. Other Portfolios may invest an unlimited amount in Rule
144A Securities that are deemed to be liquid.

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

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.

18
<PAGE>

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 Equity 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.

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.

19
<PAGE>

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 Global Equity 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 Emerging Markets Equity 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.

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

20
<PAGE>

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 Global Equity and Emerging
Markets Equity Portfolios. MAS serves as the Adviser for the 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 subsidiary of Morgan Stanley Dean Witter &
Co. ("MSDW"), which is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses--
securities, asset management and credit services. 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
well as to employee benefit plans, endowment funds, foundations and other
institutional investors. MAS is a Pennsylvania limited liability partnership
founded in 1969 with principal offices at One Tower Bridge, West Conshohocken,
Pennsylvania 19428. MAS is also a subsidiary of MSDW. 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, 1998, MSAM and its
institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice and
MAS managed assets of approximately $68.4 billion. See "Management of the Fund"
in the SAI.

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

21
<PAGE>

Coe College and a Ph.D. from University of Pennsylvania. Bradley S. Daniels, a
Vice President of Morgan Stanley, joined MAS in 1985. Chris Leavy joined MAS in
1997. He served as a Portfolio Manager for Capitoline Investment Services from
1995-1997; a Portfolio Manager for Premier Trust Company from 1994 to 1995; and
as a Research Analyst for Leavy Investment Management from 1993-1994. Messrs.
Gerlach, Schlarbaum, Daniels and Leavy have had primary responsibility for
managing the Portfolio's assets since its inception.

OTHER SERVICES

Chase Global calculates the NAV and dividends and maintains the general
accounting records for each Portfolio.

22
<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 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

PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
==============================================================================================
Emerging
Mid Cap Global Markets
Assets Value Value Equity Equity
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $500 million 0.55% 0.75% 0.80% 1.25%
- ----------------------------------------------------------------------------------------------
From $500 million
to $1 billion 0.50% 0.70% 0.75% 1.20%
- ----------------------------------------------------------------------------------------------
More than $1 billion 0.45% 0.65% 0.70% 1.15%
==============================================================================================
</TABLE>

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<S> <C>
Value.................................................. 0.85%
Mid Cap Value.......................................... 1.05%
Global Equity.......................................... 1.15%
Emerging Markets Equity................................ 1.75%
</TABLE>

These fee waivers and reimbursements are voluntary and may be terminated by
MSAM or MAS at any time without notice.

OTHER EXPENSES

PORTFOLIO TRANSACTIONS

Since shares of the Portfolios are not marketed through intermediary brokers or
dealers, it is not the Fund's practice

23
<PAGE>

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 the Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

PORTFOLIO TURNOVER

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.

24
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

<TABLE>
<CAPTION>
Corresponding
Corresponding MAS Funds
Fund Portfolio MSIF portfolio portfolio
-------------- ---------------- -------------
<S> <C> <C>
Value Value
Mid Cap Value Mid Cap Value
Global Equity Global Equity
Emerging Markets Equity Emerging Markets
</TABLE>

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the Mid Cap Value and Global Equity Portfolios. Also, as of that
date, American General Life Insurance Company owned more than 25% of the Value
and Mid Cap Value Portfolios, New York Life Insurance and Annuity Corporation
owned more than 25% of the Emerging Markets Equity Portfolio and Fidelity
Investments Life Insurance Company owned more than 25% of the Global Equity
Portfolio, pursuant to variable annuity contracts and variable life insurance
policies they have issued to the public.

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

ACCOUNT POLICIES
- ----------------

DISTRIBUTIONS AND TAXES

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

25
<PAGE>

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

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.

26
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 THIRTEEN OTHER PORTFOLIOS MANAGED BY
MSAM OR MAS.

THE PORTFOLIOS:

High Yield Emerging Markets Debt
Equity Growth Global Equity
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, 1998
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:

Equity Growth Global Equity
Emerging Markets
Debt

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

High Yield Value

MAS's institutional investment advisory business was established in 1969. As of
February 28, 1998, MAS managed assets of approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE

FINANCIAL HIGHLIGHTS____________________3

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES_____________________4

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____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__________24

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND_________________24

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_______________________29

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

2
<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
HIGH YIELD EQUITY GROWTH VALUE EMERGING MARKETS GLOBAL EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO DEBT PORTFOLIO PORTFOLIO
------------------- ------------------- ------------------- ----------------- -------------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
SELECTED PER SHARE DATA JANUARY 2, 1997* TO JANUARY 2, 1997* TO JANUARY 2, 1997* TO JUNE 16, 1997* TO JANUARY 2, 1997* TO
AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
- ----------------------- ------------------- ------------------- ------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment
Income............... 0.63 0.02 0.10 0.28 0.08
Net Realized and
Unrealized Gain
(Loss)............... 0.72 3.27 1.99 (0.22) 1.92
------- ------- ------- ------- -------
Total From Investment
Operations........... 1.35 3.29 2.09 0.06 2.00
------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment
Income............... (0.63) (0.02) (0.10) (0.27) (0.08)
In Excess of Net
Investment Income.... -- -- 0.00 + -- --
Net Realized Gain..... (0.13) (0.53) (0.21) (0.02) (0.18)
In Excess of Net
Realized Gain........ -- -- 0.00 + (0.10) --
------- ------- ------- ------- -------
Total Distributions... (0.76) (0.55) (0.31) (0.39) (0.26)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................ $ 10.59 $ 12.74 $ 11.78 $ 9.67 $ 11.74
======= ======= ======= ======= =======
TOTAL RETURN........... 13.53% 33.05% 20.98% 0.76% 20.04%
======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000's)........ $12,490 $12,419 $14,664 $26,378 $14,707
Ratio of Expenses to
Average Net Assets.... 0.81%** 0.85%** 0.85%** 1.35%** 1.15%**
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense............... 0.80%** -- -- 1.30%** --
Ratio of Net Investment
Income to Average Net
Assets................ 7.41%** 0.41%** 1.70%** 8.10%** 1.24%**
Portfolio Turnover
Rate.................. 78% 172% 34% 173% 20%
Average Commission Rate
Per Share............. -- $0.0542 $0.0585 -- $0.0350
As a Percentage of
Trade Amount......... -- -- -- -- 0.25%
- --------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment
Income............... $ 0.08 $ 0.07 $ 0.06 $ 0.02 $ 0.09
Ratios Before Expense
Limitation:
Expenses to Average
Net Assets........... 1.68%** 2.05%** 1.87%** 2.06%** 2.43%**
Net Investment Income
(Loss) to Average Net
Assets............... 6.53%** (0.80)%** 0.68%** 7.39%** (0.04)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized
+Amount is less than $0.01 per share.

3
<PAGE>

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.

HIGH YIELD PORTFOLIO

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.

EMERGING MARKETS DEBT PORTFOLIO

GLOBAL EQUITY PORTFOLIO

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.

4
<PAGE>

By including Foreign 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 foreign 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

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.

HIGH YIELD PORTFOLIO

5
<PAGE>

EQUITY GROWTH PORTFOLIO

VALUE PORTFOLIO

EMERGING MARKETS DEBT PORTFOLIO

6
<PAGE>

Investments, Non-Publicly Traded Securities, Private Placements, Restricted
Securities, When-Issued or Delayed Delivery Securities, Zero Coupons and
Derivatives, and may engage in Loans of Portfolio Securities.

Algeria Argentina Brazil Bulgaria
Chile China (mainland Colombia Costa Rica
Czech Republic Hong Kong) Democratic Dominican
Ecuador Egypt Republic of Republic
Greece Hungary Congo India
Indonesia Ivory Coast Jamaica Jordan
Malaysia Mexico Morocco Nicaragua
Nigeria Pakistan Panama Paraguay
Peru Philippines Poland Russia
Slovakia South Africa Thailand Trinidad
Tunisia Turkey Uruguay & Tobago
Venezuela

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 (with risks similar to High Yield 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

7
<PAGE>

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.

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

8
<PAGE>

9
<PAGE>

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.

MORTGAGE INVESTING: At times it is anticipated that greater than 50% of the
High Yield 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"), Fannie Mae, 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
warrant such investments. Securities issued by private issuers will be rated
investment grade by Moody's Investors Service, Inc. ("Moody's") or S&P or be
deemed by the Adviser to be of comparable investment quality.

INSTRUMENTS AND INVESTMENTS

10
<PAGE>

ADRs. For information concerning American Depositary Receipts ("ADR"), see
"Depositary Receipts" below.

BORROWING: The Emerging Markets Debt Portfolio is authorized to borrow money
("Borrowing") from banks and other entities in an amount up to 33 1/3% of its
total assets (including the amount borrowed) less all liabilities and
indebtedness other than the Borrowing, and may use the proceeds of the
Borrowing for investment purposes or to pay dividends. Borrowing for investment
purposes creates leverage which is a speculative characteristic. The Portfolio
will only Borrow when the Adviser believes that Borrowing will benefit the
Portfolio after taking into account considerations such as the costs of
Borrowing and the likely investment returns on securities purchased with
borrowed monies. Borrowing by the Portfolio will create the opportunity for
increased net income but, at the same time, will involve special risk
considerations. Leverage that results from Borrowing will magnify declines as
well as increases in the Portfolio's net asset value per share and net yield.
The Portfolio expects that all of its Borrowing will be made on a secured
basis. The Portfolio's custodian will either segregate the assets securing the
Borrowing for the benefit of the lenders or arrangements will be made with a
suitable sub-custodian. If assets used to secure the Borrowing decrease in
value, the Portfolio may be required to pledge additional collateral to the
lender in the form of cash or securities to avoid liquidation of those assets.

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 nationally
recognized statistical rating organizations (each, an "NRSRO") 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.

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<PAGE>

(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.

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 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.

12
<PAGE>

enter into futures to the extent that each Portfolio's outstanding obligations
to purchase securities under these contracts, in combination with its
outstanding obligations with respect to options, would exceed 50% of its total
assets. The Portfolios' investments in forward foreign currency contracts and
Derivatives used for hedging purposes are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

13
<PAGE>

the change in market value of investments held by a Portfolio and the prices of
derivative products relating to investments purchased or sold by the Portfolio,
and (ii) possible lack of a liquid secondary market for a derivative product
and the resulting inability to close out a position. The risk that a Portfolio
will be unable to close out a position will be minimized by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and related
transactions can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in pricing.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

14
<PAGE>

exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign
currency swaps), the entire notional amount is not exchanged and thus is not at
risk. A collar is a combination product in which the same party, such as the
Portfolio, buys a cap from and sells a floor to the other party. As with put
and call options, the amount at risk is limited for the buyer, but, if the cap
or floor is not hedged or covered, may be unlimited for the seller. Under
current market practice, caps, collars and floors between the same two parties
are generally documented under the same "master agreement." In some cases,
options and forward agreements may also be governed by the same master
agreement. In the event of a default, amounts owed under all transactions
entered into under, or covered by, the same master agreement would be netted
and only a single payment would be made.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

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.

15
<PAGE>

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 Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

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

16
<PAGE>

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.

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.

17
<PAGE>

such repatriation controls will be considered illiquid if it appears reasonably
likely that this process will take more than seven days.

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

HIGH YIELD PORTFOLIO+

<TABLE>
<S> <C>
QUALITY
AAA 23.22%
AA 0.00%
A 0.00%
BBB 4.31%
BB 50.36%
B 19.44%
CCC 0.17%
Not Rated 2.49%
B 2.49%*
TOTAL 100.00%**
</TABLE>
- -------
+ Ratings by S&P
* The Adviser believes that these non-rated securities are equivalent to the
rating indicated.
**The figures provided do not total to exactly 100% due to rounding.

18
<PAGE>

EMERGING MARKETS DEBT PORTFOLIO+

<TABLE>
<S> <C>
QUALITY
AAA-Baa3 0.00%
Ba1 10.91%
Ba2 25.09%
Ba3 12.68%
B1 21.04%
B2 14.15%
B3 4.04%
Cash 5.70%
Not Rated 6.37%
Ba2 1.51%*
Ba3 1.03%*
B1 0.83%*
B2 2.53%*
B3 0.47%*
TOTAL 100.00%**
</TABLE>
- -------
+ Ratings by Moody's
* The Adviser believes that these non-rated securities are equivalent to the
rating indicated.
**The figures provided do not total to exactly 100% due to rounding.

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 a 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.

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.

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<PAGE>

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.

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. In addition, the High
Yield Portfolio may lend its portfolio securities to certain institutional
investors. 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. Pursuant to an order issued by the SEC, the Fund may lend
portfolio securities to affiliated broker-dealers. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

20
<PAGE>

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, Fannie Mae, 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.

21
<PAGE>

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 Emerging
Markets Debt Portfolio may invest up to 25% of its total assets in Rule 144A
Securities that are deemed to be liquid. Other Portfolios may invest an
unlimited amount in Rule 144A Securities that are deemed to be liquid.

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.

22
<PAGE>

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.

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 Equity
Growth, Emerging Markets Debt and Global 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.

23
<PAGE>

FUNDAMENTAL INVESTMENT LIMITS

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 Emerging Markets Debt, Equity
Growth and Global Equity Portfolios. MAS serves as the Adviser for the High
Yield and 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 subsidiary of Morgan Stanley Dean
Witter & Co. ("MSDW"), which is a preeminent global financial services firm
that maintains leading market positions in each of its three primary
businesses--securities, asset management and credit services. 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 well as to employee benefit plans, endowment funds,
foundations and other institutional investors. MAS is a Pennsylvania limited
liability partnership founded in 1969 with principal offices at One Tower
Bridge, West Conshohocken, Pennsylvania 19428. MAS is also a subsidiary of
MSDW. 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, 1998, MSAM and its institutional investment advisory affiliates
(exclusive of

24
<PAGE>

MAS) had approximately $88.1 billion in assets under management or fiduciary
advice and MAS managed assets of approximately $68.4 billion. See "Management
of the Fund" in the SAI.

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

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, a
Principal of Morgan Stanley and the Portfolio Manager for high yield
investments, joined Morgan Stanley in October 1988. Mr. Angevine received an
M.B.A. from Fairleigh Dickinson University and a B.A. in Economics from
Lafayette College. Thomas L. Bennett, a Managing Director of 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. Messrs.
Esser, Bennett and Angevine have shared primary responsibility for managing the
Portfolio's assets since its inception.

25
<PAGE>

International Relations from Pomona College and an M.S. in Foreign Service from
Georgetown University. Mr. Ghaffari has had primary responsibility for managing
the Portfolio's assets since its inception.

OTHER SERVICES

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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

26
<PAGE>

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>
Emerging
High Equity Markets Global
Assets Yield Growth Value Debt Equity
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First $500 0.50% 0.55% 0.55% 0.80% 0.80%
million
- ----------------------------------------------------------------------------------------------
From $500
million to 0.45% 0.50% 0.50% 0.75% 0.75%
$1 billion
- ----------------------------------------------------------------------------------------------
More than 0.40% 0.45% 0.45% 0.70% 0.70%
$1 billion
</TABLE>

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<S> <C>
High Yield............................................. 0.80%
Equity Growth.......................................... 0.85%
Value.................................................. 0.85%
Global Equity.......................................... 1.15%
Emerging Markets Debt.................................. 1.30%
</TABLE>

These fee waivers and reimbursements 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 Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, 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 Advisers may allocate a

27
<PAGE>

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. For the
periods ended December 31, 1997, the Portfolio turnover rates for the Equity
Growth and Emerging Markets Debt Portfolios were 172%, and 173%, respectively.
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.

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

28
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

<TABLE>
<CAPTION>
Corresponding
Corresponding MSIF MAS Funds
Fund Portfolio portfolio portfolio
-------------- --------------------- -------------
<S> <C> <C>
High Yield High Yield
Equity Growth Equity Growth
Value Value
Emerging Markets Debt Emerging Markets Debt
Global Equity Global Equity
</TABLE>

<TABLE>
<CAPTION>
Average Average Average
Annual Annual Annual
Total Return Total Return Total Return Total Return Total Return Total Return Total Return
One Year Three Years Five Years Ten Years Three Years Five Years Ten Years
Inception Ended Ended Ended Ended Ended Ended Ended
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Equity Growth... 4/2/91 31.32% 149.21% 168.69% NA 35.58% 21.86% NA
Emerging Markets
Debt........... 2/1/94 18.29% 126.72% NA NA 31.37% NA NA
Global Equity... 7/15/92 23.75% 80.38% 178.25% NA 21.73% 22.71% NA
MAS FUNDS:
High Yield...... 2/28/89 15.98% 65.72% 91.86% NA 18.34% 13.92% NA
Value........... 11/5/84 23.38% 118.48% 158.50% 464.41% 29.76% 20.92% 18.89%
<CAPTION>
Average
Annual
Total Return
Since
Fund Name Inception
- --------- ------------
<S> <C>
MSIF:
Equity Growth... 19.07%
Emerging Markets
Debt........... 18.77%
Global Equity... 20.03%
MAS FUNDS:
High Yield...... 12.14%
Value........... 18.01%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the Global Equity and High Yield Portfolios. Also, as of that
date, Nationwide Life Insurance owned more than 25% of the Emerging Markets
Debt Portfolio, General American Life Insurance owned more than 25% of the
Equity Growth Portfolio, American General Life Insurance Company owned more
than 25% of the Value and Equity Growth Portfolios and Fidelity Investments
Life Insurance Company owned more than 25% of the Global Equity Portfolio,
pursuant to variable annuity contracts and variable life insurance policies
they have issued to the public.

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

ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES

As stated on the cover of this Prospectus, shares of the Portfolios will be
purchased by life insurance companies for

29
<PAGE>

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 Internal Revenue 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 Equity Growth, Value, Emerging Markets Debt and
Global 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,
Martin Luther King, Jr. 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.

The 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
Portfolio is open for business.

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.

30
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 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 SIXTEEN OTHER PORTFOLIOS MANAGED BY MSAM
OR MAS.

THE PORTFOLIOS:

Fixed Income Emerging Markets Equity

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, 1998
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 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 in seeking to achieve
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
Emerging Markets Equity Portfolio. MSAM conducts a worldwide investment
advisory business. As of February 28, 1998, MSAM and its affiliated
institutional asset management companies (exclusive of MAS) had approximately
$88.1 billion in assets under management or fiduciary advice.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE
----

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

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES 4

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

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 21
- -----------------------------

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 21
- ----------------------

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 26
- ----------------

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

2
<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FIXED INCOME EMERGING MARKETS EQUITY
PORTFOLIO PORTFOLIO
------------------- --------------------------------
PERIOD FROM YEAR ENDED PERIOD FROM
SELECTED PER SHARE DATA JANUARY 2, 1997* TO DECEMBER 31, OCTOBER 1, 1996* TO
AND RATIOS DECEMBER 31, 1997 1997 DECEMBER 31, 1996
- ----------------------- ------------------- ------------ -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD.......... $ 10.00 $ 9.78 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income... 0.46 0.04 0.01
Net Realized and
Unrealized Gain
(Loss)................. 0.53 -- (0.21)
------- ------- -------
Total From Investment
Operations............. 0.99 0.04 (0.20)
------- ------- -------
DISTRIBUTIONS
Net Investment Income... (0.45) (0.07) (0.02)
Net Realized Gain....... (0.13) (0.02) --
In Excess of Net Real-
ized Gain.............. -- (0.28) --
------- ------- -------
Total Distributions..... (0.58) (0.37) (0.02)
------- ------- -------
NET ASSET VALUE, END OF
PERIOD.................. $ 10.41 $ 9.45 $ 9.78
======= ======= =======
TOTAL RETURN............. 9.93% 0.52% (2.03)%
======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(000's)................. $12,760 $34,098 $11,789
Ratio of Expenses to
Average Net Assets...... 0.70%** 1.80% 1.79%**
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense and Foreign Tax
Expense................. -- 1.75% 1.75%**
Ratio of Net Investment
Income to Average Net
Assets.................. 5.66%** 0.47% 0.32%
Portfolio Turnover Rate.. 185% 87% 9%
Average Commission Rate
Per Share............... -- $0.0018 $0.0013
As a Percentage of Trade
Amount................. -- 0.40% 0.45%
- -------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to Net
Investment Income...... $ 0.08 $ 0.17 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets................. 1.71%** 4.12% 6.17%**
Net Investment Income
(Loss) to Average Net
Assets................. 4.65%** (1.84)% (4.06)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

3
<PAGE>

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.

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.

EMERGING MARKETS EQUITY PORTFOLIO

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

INVESTMENT CHARACTERISTICS AND RISKS

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.

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

4
<PAGE>

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.

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, Depositary Receipts 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 intends to invest primarily in some or all of the following
emerging market countries:

5
<PAGE>

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."

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

6
<PAGE>

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.

MORTGAGE INVESTING: At times it is anticipated that greater than 50% of the
Fixed Income Portfolio's assets may be

7
<PAGE>

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"), Fannie Mae, 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 warrant such investments.
Securities issued by private issuers will be rated investment grade by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P")
or be deemed by the Adviser to be of comparable investment quality.

INSTRUMENTS AND INVESTMENTS

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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:

8
<PAGE>

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 nationally
recognized statistical rating organizations (each, an "NRSRO") 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.

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.

9
<PAGE>

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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). The Emerging Markets Equity Portfolio will limit
its use of Derivatives to 33 1/3% of its total assets measured by the aggregate
notional amount of outstanding Derivatives. The Fixed Income Portfolio will not
enter into futures to the extent that the Portfolio's outstanding obligations
to purchase securities under these contracts, in combination with its
outstanding obligations with respect to options, would exceed 50% of its total
assets. The Portfolio's investments in forward foreign currency contracts and
Derivatives used for hedging purposes are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

10
<PAGE>

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

11
<PAGE>

structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other makes payments
equivalent to a specified interest rate index. A Portfolio may engage in simple
or more complex swap transactions involving a wide variety of underlyings. The
currency swaps that 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.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Stock Index. In some cases, the impact of
the movements of these factors may increase or decrease through the use of
multipliers or deflators. The Portfolios may use structured notes to tailor
their investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.

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.

The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in

12
<PAGE>

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 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.

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>

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.

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.

14
<PAGE>

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 risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

15
<PAGE>

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 a 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.

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

16
<PAGE>

MBSSs 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 GNMA, FHLMC, Fannie Mae, 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.

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

17
<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 Emerging
Markets Equity Portfolio may invest up to 25% of its total assets in Rule 144A
Securities that are deemed to be liquid. The Fixed Income Portfolio may invest
an unlimited amount in Rule 144A Securities that are deemed to be liquid.

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

18
<PAGE>

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.

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.

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 Equity 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. Stripped Mortgage-Backed Securities ("SMBSs") are Derivatives in the
form of multi-class

19
<PAGE>

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 ("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.

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
Emerging Markets Equity 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.

20
<PAGE>

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

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

21
<PAGE>

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, 1998, MSAM and its
institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice and
MAS managed assets of approximately $68.4 billion. See "Management of the Fund"
in the SAI.

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

OTHER SERVICES

22
<PAGE>

information or any other Fund documents (such as semi-annual reports) used as
sales materials. Morgan Stanley does not receive compensation for providing
distribution services.

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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.
23
<PAGE>

MANAGEMENT FEE

PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Emerging
Fixed Markets
Assets Income Equity
- ---------------------------------------------
<S> <C> <C>
First $500 million 0.40% 1.25%
- ---------------------------------------------
From $500 million to $1
billion 0.35% 1.20%
- ---------------------------------------------
More than $1 billion 0.30% 1.15%
</TABLE>

These fee waivers and reimbursements 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 Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

24
<PAGE>

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

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.

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

25
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

Past investment performance of the Class A Shares of the MSIF Emerging Markets
Portfolio and the Institutional Class Shares of the Fixed Income Portfolio 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 Emerging Markets
Portfolio and the Institutional Class Shares of the Fixed Income Portfolio of
the MAS Funds is provided merely to indicate the experience of the Advisers in
managing similar portfolios.
<TABLE>
<CAPTION>
Average Average Average
Annual Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Total Return Total Return Annual
One Year Three Years Five Years Ten Years Three Years Five Years Ten Years Total Return
Inception Ended Ended Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Emerging
Markets........ 9/25/92 (1.03)% (3.09)% 62.71% NA (1.04)% 10.23% NA 10.13%
MAS FUNDS:
Fixed Income.... 11/14/84 9.61% 40.07% 50.75% 157.81% 11.89% 8.56% 9.93% 10.92%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, General American Life Insurance and Allmerica Financial
Life Insurance & Annuity Company each owned more than 25% of the outstanding
voting securities of the Fixed Income Portfolio and New York Life Insurance and
Annuity Corporation owned more than 25% of the Emerging Markets Equity
Portfolio, pursuant to variable annuity contracts and variable life insurance
policies they have issued to the public.

For more information, see "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 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

26
<PAGE>

currently scheduled to be closed on New Year's Day, Martin Luther King, Jr.
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.

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
Portfolio is open for business.

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.

27
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 THREE 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.

THE PORTFOLIOS:

High Yield 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, 1998
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
International Magnum and Emerging Markets Equity Portfolios. MSAM conducts a
worldwide investment advisory business. As of February 28, 1998, MSAM and its
affiliated institutional asset management companies (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE

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

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES 4
- -------------------

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

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

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

2
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FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
HIGH YIELD INTERNATIONAL EMERGING MARKETS EQUITY
PORTFOLIO MAGNUM PORTFOLIO PORTFOLIO
------------------- ------------------- -------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
SELECTED PER SHARE DATA JANUARY 2, 1997* TO JANUARY 2, 1997* TO YEAR ENDED OCTOBER 1, 1996* TO
AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996
- ----------------------- ------------------- ------------------- ----------------- -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 10.00 $ 10.00 $ 9.78 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.. 0.63 0.13 0.04 0.01
Net Realized and
Unrealized Gain
(Loss)................ 0.72 0.59 -- (0.21)
------- ------- ------- -------
Total From Investment
Operations............ 1.35 0.72 0.04 (0.20)
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income.. (0.63) (0.32) (0.07) (0.02)
Net Realized Gain...... (0.13) (0.02) (0.02) --
In Excess of Net Real-
ized Gain............. -- -- (0.28) --
------- ------- ------- -------
Total Distributions.... (0.76) (0.34) (0.37) (0.02)
------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 10.59 $ 10.38 $ 9.45 $ 9.78
======= ======= ======= =======
TOTAL RETURN............ 13.53% 7.31% 0.52% (2.03)%
======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000's)......... $12,490 $18,855 $34,098 $11,789
Ratio of Expenses to
Average Net Assets..... 0.81%** 1.16%** 1.80% 1.79%**
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense................ 0.80%** 1.15%** -- --
Ratio of Expenses to
Average Net Assets
Excluding Interest
Expense and
Foreign Tax Expense.... -- -- 1.75% 1.75%**
Ratio of Net Investment
Income to Average Net
Assets................. 7.41%** 1.43%** 0.47% 0.32%**
Portfolio Turnover
Rate................... 78% 41% 87% 9%
Average Commission Rate
Per Share.............. -- $0.0181 $0.0018 $0.0013
As a Percentage of
Trade Amount.......... -- 0.20% 0.40% 0.45%
- -------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment
Income................ $ 0.08 $ 0.15 $ 0.17 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets................ 1.68%** 2.78%** 4.12% 6.17%**
Net Investment Income
(Loss) to Average Net
Assets................ 6.53%** (0.19)%** (1.84)% (4.06)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

3
<PAGE>

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.

HIGH YIELD PORTFOLIO

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).

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 foreign securities exchanges and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

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

INVESTMENT CHARACTERISTICS AND RISKS

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.

HIGH YIELD PORTFOLIO

INTERNATIONAL MAGNUM PORTFOLIO

5
<PAGE>

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, Depositary Receipts 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 intends to invest primarily in some or all of the following
emerging market countries:

Emerging Market Country Securities pose greater liquidity risks and other risks
than securities of companies located in

6
<PAGE>

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."

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

7
<PAGE>

U.S. investments in those countries. Additionally, there may be difficulty in
obtaining and enforcing judgments against foreign issuers.

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.

8
<PAGE>

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.

MORTGAGE INVESTING: At times it is anticipated that greater than 50% of the
High Yield 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"), Fannie Mae, 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
warrant such investments. Securities issued by private issuers will be rated
investment grade by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P") or be deemed by the Adviser to be of comparable
investment quality.

INSTRUMENTS AND INVESTMENTS

ADRs. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

9
<PAGE>

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 nationally
recognized statistical rating organizations (each, an "NRSRO") 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.

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.

10
<PAGE>

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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). Each of the International Magnum and Emerging
Markets Equity Portfolios will limit its use of Derivatives to 33 1/3% of its
total assets measured by the aggregate notional amount of outstanding
Derivatives. The High Yield Portfolio will not enter into futures to the extent
that the Portfolio's outstanding obligations to purchase securities under these
contracts, in combination with its outstanding obligations with respect to
options, would exceed 50% of its total assets. The Portfolios' investments in
forward foreign currency contracts and Derivatives used for hedging purposes
are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

11
<PAGE>

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

12
<PAGE>

the Portfolios may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either
earmark or segregate sufficient liquid assets to cover its obligations under
the option or will continue to own (i) the underlying; (ii) securities or
instruments convertible or exchangeable without the payment of any
consideration into the underlying; or (iii) a call option on the same
underlying with a strike price no higher than the price at which the underlying
was sold pursuant to a short option position. In the case of a put option, the
Portfolio will either earmark or segregate sufficient liquid assets to cover
its obligations under the option or will own another put option on the same
underlying with an equal or higher strike price.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

13
<PAGE>

rates, interest rates (such as the prime lending rate and LIBOR) and stock
indices, such as the S&P 500 Stock Index. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. The Portfolios may use structured notes to tailor
their investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.

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.

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.

14
<PAGE>

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.

There is a risk in adopting a synthetic investment position to the extent that
the value of a security denominated in U.S.

15
<PAGE>

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.

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

16
<PAGE>

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.

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

The following table provides a summary of ratings assigned to all U.S. and
foreign debt holdings of the High Yield Portfolio, the only Portfolio with more
than 5% invested in High Yield Securities as of December 31, 1997 (not
including Money Market Instruments). These figures do not necessarily indicate
a Portfolio's current or future debt holdings.

HIGH YIELD PORTFOLIO+

<TABLE>
<S> <C>
QUALITY
AAA 23.22%
AA 0.00%
A 0.00%
BBB 4.31%
BB 50.36%
B 19.44%
CCC 0.17%
Not Rated 2.49%
B 2.49%*
TOTAL 100.00%**
</TABLE>
- -------
+Ratings by S&P
* The Adviser believes that these non-rated securities are equivalent to the
rating indicated.
**The figures provided do not total to exactly 100% due to rounding.

17
<PAGE>

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 a 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.

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.

18
<PAGE>

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. In addition, the High
Yield Portfolio may lend its portfolio securities to certain institutional
investors. 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. Pursuant to an order issued by the SEC, the Fund may lend
portfolio securities to affiliated broker-dealers. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

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 GNMA, FHLMC, Fannie Mae, 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.

19
<PAGE>

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 "Internal Revenue Code"), for qualification as
regulated investment companies. See "Investment Limitations" and "Taxes" in the
SAI.

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. 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
High Yield Portfolio may invest an unlimited amount in Rule 144A Securities
that are deemed to be liquid.

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

20
<PAGE>

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.

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 Equity 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.

21
<PAGE>

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.

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

The High Yield Portfolio is a diversified investment company and is therefore
subject to the following fundamental limitations: as to 75% of its total
assets, the Portfolio may

22
<PAGE>

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
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 International Magnum and
Emerging Markets Equity Portfolios. MAS serves as the Adviser for the High
Yield 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 subsidiary of Morgan Stanley Dean Witter &
Co. ("MSDW"), which is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses--
securities, asset management and credit services. 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
well as to employee benefit plans, endowment funds, foundations and other
institutional investors. MAS is a Pennsylvania limited liability partnership
founded in 1969 with principal offices at One Tower Bridge, West Conshohocken,
Pennsylvania 19428. MAS is also a subsidiary of MSDW. 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, 1998, MSAM and its
institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice and
MAS managed assets of approximately $68.4 billion. See "Management of the Fund"
in the SAI.

23
<PAGE>

that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other non-
complying computer systems will not impair their services at that time. The
Advisers and Morgan Stanley are contacting their vendors and service providers
to obtain assurances that such vendors and service providers have taken
appropriate measures to address the "Year 2000" problem.

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

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, a
Principal of Morgan Stanley and the Portfolio Manager for high yield
investments, joined Morgan Stanley in October 1988. Mr. Angevine received an
M.B.A. from Fairleigh Dickinson University and a B.A. in Economics from
Lafayette College. Thomas L. Bennett, a Managing Director of 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. Messrs.
Esser, Bennett and Angevine have shared primary responsibility for managing the
Portfolio's assets since its inception.

OTHER SERVICES

24
<PAGE>

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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

PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
Emerging
High International Markets
Assets Yield Magnum Equity
- -----------------------------------------------
<S> <C> <C> <C>
First $500 mil-
lion 0.50% 0.80% 1.25%
- -----------------------------------------------
From $500
million to
$1 billion 0.45% 0.75% 1.20%
- -----------------------------------------------
More than $1
billion 0.40% 0.70% 1.15%
</TABLE>

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<S> <C>
High Yield............................................. 0.80%
International Magnum................................... 1.15%
Emerging Markets Equity................................ 1.75%
</TABLE>

These fee waivers and reimbursements are voluntary and may be terminated by
MSAM or MAS at any time without notice.

OTHER EXPENSES

25
<PAGE>

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 semi-annual 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

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 Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

PORTFOLIO TURNOVER

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.

26
<PAGE>

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.

<TABLE>
<CAPTION>
Corresponding
Corresponding MSIF MAS Funds
Fund Portfolio portfolio portfolio
-------------- -------------------- -------------
<S> <C> <C>
High Yield High Yield
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 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 MSIF or MAS Funds. The
investment performance of the Class A Shares of the MSIF portfolios and the
Institutional Class Shares of the High Yield Portfolio of the MAS Funds is
provided merely to indicate the experience of the Advisers in managing similar
portfolios.
<TABLE>
<CAPTION>
Average Average Average
Annual Annual Annual Average
Total Return Total Return Total Return Total Return Total Return Total Return Total Return Annual
One Year Three Years Five Years Ten Years Three Years Five Years Ten Years Total Return
Inception Ended Ended Ended Ended Ended Ended Ended Since
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 Inception
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MSIF:
International
Magnum......... 3/15/96 6.58% NA NA NA NA NA NA 8.28%
Emerging
Markets........ 9/25/92 (1.03)% (3.09)% 62.71% NA (1.04)% 10.23% NA 10.13%
MAS FUND:
High Yield...... 2/28/89 15.98% 65.72% 91.86% NA 18.34% 13.92% NA 12.14%
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the High Yield Portfolio. Also, as of that date, General American
Life Insurance and American General Life Insurance Company each owned more than
25% of the International Magnum Portfolio and New York Life Insurance and
Annuity Corporation owned more than 25% of the Emerging Markets Equity
Portfolio, pursuant to variable annuity contracts and variable life insurance
policies they have issued to the public.

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

27
<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 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, Martin Luther King,
Jr. 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.

The 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
Portfolio is open for business.

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.

28
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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 SIX 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.

THE PORTFOLIOS:

Fixed Income Value
High Yield Global Equity
Equity Growth Emerging Markets Equity

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, 1998
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 six separate investment portfolios (each, a "Portfolio") has a distinct
investment objective. The following pages describe the types of securities and
investment techniques each Portfolio uses in seeking to achieve 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:

Equity Growth Emerging Markets Equity
Global Equity

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

Fixed Income Value
High Yield

MAS's institutional investment advisory business was established in 1969. As of
February 28, 1998, MAS managed assets of approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE
----

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

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES 4
- -------------------

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

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND 24
- ----------------------

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 29
- ----------------

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

2
<PAGE>

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

<TABLE>
<CAPTION>
EQUITY GLOBAL
FIXED INCOME HIGH YIELD GROWTH VALUE EQUITY EMERGING MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO
------------ ------------ ------------ ------------ ------------ -------------------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 2, JANUARY 2 JANUARY 2, JANUARY 2, JANUARY 2, OCTOBER 1,
1997* TO 1997* TO 1997* TO 1997* TO 1997* TO YEAR ENDED 1996* TO
SELECTED PER SHARE DATA DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
AND RATIOS 1997 1997 1997 1997 1997 1997 1996
- ----------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 9.78 $ 10.00
------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.. 0.46 0.63 0.02 0.10 0.08 0.04 0.01
Net Realized and
Unrealized Gain
(Loss)................ 0.53 0.72 3.27 1.99 1.92 -- (0.21)
------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 0.99 1.35 3.29 2.09 2.00 0.04 (0.20)
------- ------- ------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income.. (0.45) (0.63) (0.02) (0.10) (0.08) (0.07) (0.02)
In Excess of Net In-
vestment Income....... -- -- -- 0.00 + -- -- --
Net Realized Gain...... (0.13) (0.13) (0.53) (0.21) (0.18) (0.02) --
In Excess of Net Real-
ized Gain............. -- -- -- 0.00 + -- (0.28) --
------- ------- ------- ------- ------- ------- -------
Total Distributions.... (0.58) (0.76) (0.55) (0.31) (0.26) (0.37) (0.02)
------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 10.41 $ 10.59 $ 12.74 $ 11.78 $ 11.74 $ 9.45 $ 9.78
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN............ 9.93% 13.53% 33.05% 20.98% 20.04% 0.52% (2.03)%
======= ======= ======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000's)......... $12,760 $12,490 $12,419 $14,664 $14,707 $34,098 $11,789
Ratio of Expenses to
Average Net Assets..... 0.70%** 0.81%** 0.85%** 0.85%** 1.15%** 1.80% 1.79%**
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense................ -- 0.80%** -- -- -- -- --
Ratio of Expenses to
Average Net Asset,
Excluding Interest
Expense and Foreign Tax
Expense................ -- -- -- -- -- 1.75% 1.75%**
Ratio of Net Investment
Income to Average Net
Assets................. 5.66%** 7.41%** 0.41%** 1.70%** 1.24%** 0.47% 0.32%**
Portfolio Turnover
Rate................... 185% 78% 172% 34% 20% 87% 9%
Average Commission Rate
Per Share.............. -- -- $0.0542 $0.0585 $0.0350 $0.0018 $0.0013
As a Percentage of
Trade Amount.......... -- -- -- -- 0.25% 0.40% 0.45%
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment
Income................ $ 0.08 $ 0.08 $ 0.07 $ 0.06 $ 0.09 $ 0.17 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets................ 1.71%** 1.68%** 2.05%** 1.87%** 2.43%** 4.12% 6.17%**
Net Investment Income
(Loss) to Average Net
Assets................ 4.65%** 6.53%** (0.80)%** 0.68%** (0.04)%** (1.84)% (4.06)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized
+Amount is less than $0.01 per share.

3
<PAGE>

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.

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

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.

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 foreign securities exchanges, and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

4
<PAGE>

EMERGING MARKETS EQUITY PORTFOLIO

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

INVESTMENT CHARACTERISTICS AND RISKS

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.

FIXED INCOME PORTFOLIO

5
<PAGE>

Investing" and "Foreign Investing" in "Securities and Investment Techniques"
below.

HIGH YIELD PORTFOLIO

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.

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

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<PAGE>

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, and may engage in
Loans of Portfolio Securities. For additional information about investments,
see "Securities and Investment Techniques" below.

GLOBAL EQUITY PORTFOLIO

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, Depositary Receipts 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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<PAGE>

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:

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

8
<PAGE>

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

9
<PAGE>

MORTGAGE INVESTING: At times it is anticipated that greater than 50% of a
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"), Fannie Mae, 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
warrant such investments. Securities issued by private issuers will be rated
investment grade by Moody's Investors Service, Inc. ("Moody's") or S&P or be
deemed by the Adviser to be of comparable investment quality.

VALUE STOCK INVESTING: Emphasizes Common Stocks that are deemed by the Adviser
to be undervalued relative to

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<PAGE>

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

ADRS. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

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 nationally
recognized statistical rating organizations (each, an "NRSRO") 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.

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<PAGE>

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 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. The Portfolios are permitted to invest in various Derivatives for
both hedging and non-hedging purposes. Derivatives include caps, floors and
collars, futures contracts and forward contracts, options, structured notes and
swaps. Additionally, the Portfolios may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Portfolios. These Derivatives may be based upon a wide variety of underlying
rates, indicies, instruments, securities and other products, such as interest
rates, foreign currencies, foreign and domestic fixed income and equity
securities, group or "baskets" of Securities and Securities indicies (for each
Derivative, the "underlying"). Each of the Equity Growth, Global Equity and
Emerging Markets Equity Portfolios will limit its use of Derivatives to 33 1/3%
of its total assets measured by the aggregate notional amount of outstanding
Derivatives. The Fixed Income, High Yield and Value Portfolios will not enter
into futures to the extent that each Portfolio's outstanding obligations to
purchase securities under these contracts, in combination with its outstanding

12
<PAGE>

obligations with respect to options, would exceed 50% of its total assets. The
Portfolios' investments in forward foreign currency contracts and Derivatives
used for hedging purposes are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

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<PAGE>

liquid secondary market for a derivative product and the resulting inability to
close out a position. The risk that a Portfolio will be unable to close out a
position will be minimized by only entering into transactions for which there
appears to be a liquid exchange or secondary market. In some strategies, the
risk of loss in trading on futures and related transactions can be substantial,
due both to the low margin deposits required and the extremely high degree of
leverage involved in pricing.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

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<PAGE>

of a floor) a pre-determined strike level. As in the case of swaps, obligations
under caps and floors are calculated based upon an agreed notional amount, and
like most swaps (other than foreign currency swaps), the entire notional amount
is not exchanged and thus is not at risk. A collar is a combination product in
which the same party, such as the Portfolio, buys a cap from and sells a floor
to the other party. As with put and call options, the amount at risk is limited
for the buyer, but, if the cap or floor is not hedged or covered, may be
unlimited for the seller. Under current market practice, caps, collars and
floors between the same two parties are generally documented under the same
"master agreement." In some cases, options and forward agreements may also be
governed by the same master agreement. In the event of a default, amounts owed
under all transactions entered into under, or covered by, the same master
agreement would be netted and only a single payment would be made.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

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.

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.

15
<PAGE>

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.

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.

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<PAGE>

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.

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.

17
<PAGE>

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

HIGH YIELD PORTFOLIO+

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<PAGE>

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 a 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.

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.

19
<PAGE>

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 Net Asset Value ("NAV").

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. In addition, the High
Yield Portfolio may lend its portfolio securities to certain institutional
investors. 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. Pursuant to an order issued by the SEC, the Fund may lend
portfolio securities to affiliated broker-dealers. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

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 GNMA, FHLMC, Fannie Mae, 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.

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

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NON-DIVERSIFIED STATUS. The Emerging Markets Equity
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 "Internal Revenue Code"), for qualification as a regulated
investment company. See "Investment Limitations" and "Taxes" in the SAI.

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 Emerging
Markets Equity Portfolio may invest up to 25% of its total assets in Rule 144A
Securities that are deemed to be liquid. Other Portfolios may invest an
unlimited amount in Rule 144A Securities that are deemed to be liquid.

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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<PAGE>

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.

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.

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 Equity 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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<PAGE>

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 ("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.

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 Equity
Growth, Global Equity 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.

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<PAGE>

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

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

24
<PAGE>

West Conshohocken, Pennsylvania 19428. MAS is also a subsidiary of MSDW. 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, 1998, MSAM and its institutional investment advisory affiliates
(exclusive of MAS) had approximately $88.1 billion in assets under management
or fiduciary advice and MAS managed assets of approximately $68.4 billion. See
"Management of the Fund" in the SAI.

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

EQUITY GROWTH PORTFOLIO -- Kurt Feuerman and Margaret K. Johnson. Kurt Feuerman
is a Managing Director of Morgan Stanley and 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 Morgan Stanley and MSAM
and a Portfolio Manager in MSAM's Institutional Equity Group. She joined MSAM
in 1984. She holds a B.A. degree from Yale College and is a Chartered Financial
Analyst. Mr. Feuerman and Ms. Johnson have shared primary responsibility for
managing the Portfolio's assets since its inception.

25
<PAGE>

OTHER SERVICES

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

26
<PAGE>

purchase shares of the Portfolios. An Adviser may make payments to these
insurance companies to defray the costs of providing those services.

Chase Global calculates the NAV and dividends and maintains the general
accounting records 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

PORTFOLIO ADVISORY FEES

<TABLE>
<CAPTION>
================================================================================
Emerging
Fixed High Equity Global Markets
Assets Income Yield Growth Value Equity Equity
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $500 million 0.40% 0.50% 0.55% 0.55% 0.80% 1.25%
- --------------------------------------------------------------------------------
From $500 million to
$1 billion 0.35% 0.45% 0.50% 0.50% 0.75% 1.20%
- --------------------------------------------------------------------------------
More than $1 billion 0.30% 0.40% 0.45% 0.45% 0.70% 1.15%
================================================================================
</TABLE>

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<S> <C>
Fixed Income........................................... 0.70%
High Yield............................................. 0.80%
Equity Growth.......................................... 0.85%
Value.................................................. 0.85%
Global Equity.......................................... 1.15%
Emerging Markets Equity................................ 1.75%
</TABLE>

These fee waivers and reimbursements are voluntary and may be terminated by
MSAM or MAS at any time without notice.

OTHER EXPENSES

PORTFOLIO TRANSACTIONS

27
<PAGE>

execution, provided the Advisers believe 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 Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

PORTFOLIO TURNOVER

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.

28
<PAGE>

PERFORMANCE OF INVESTMENT ADVISERS

<TABLE>
<CAPTION>
Corresponding
Corresponding MAS Funds
Fund Portfolio MSIF portfolio portfolio
-------------- ---------------- -------------
<S> <C> <C>
Fixed Income Fixed Income
High Yield High Yield
Equity Growth Equity Growth
Value Value
Global Equity Global Equity
Emerging Markets Equity Emerging Markets
</TABLE>

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the Global Equity and High Yield Portfolios. Also, as of that
date, General American Life Insurance owned more than 25% of the Equity Growth
and Fixed Income Portfolios, American General Life Insurance Company owned more
than 25% of the Value and Equity Growth Portfolios, New York Life Insurance and
Annuity Corporation owned more than 25% of the Emerging Markets Equity
Portfolio, Fidelity Investments Life Insurance Company owned more than 25% of
the Global Equity Portfolio and Allmerica Financial Life Insurance & Annuity
Company owned more than 25% of the Fixed Income Portfolio, pursuant to variable
annuity contracts and variable life insurance policies they have issued to the
public.

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

ACCOUNT POLICIES
- ----------------

DISTRIBUTIONS AND TAXES

29
<PAGE>

of the Internal Revenue 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 Equity Growth, Value, Global Equity 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,
Martin Luther King, Jr. 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'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.

30
<PAGE>

MORGAN STANLEY UNIVERSAL FUNDS, INC.

MORGAN STANLEY ASSET MANAGEMENT INC. MILLER 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. THE FUND OFFERS 18
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'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 Fixed Income Emerging Markets Equity
Emerging Markets Debt Asian Equity
Global Equity Latin American
International Magnum

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.

Prospectus dated May 1, 1998
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 18 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 in seeking to achieve
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 International Magnum
Equity Growth Emerging Markets Equity
U.S. Real Estate Asian Equity
Emerging Markets Debt Latin American
Global 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, 1998, MAS managed assets of approximately $68.4 billion.

OFFERING OF SHARES

PROSPECTUS OUTLINE PAGE

FINANCIAL HIGHLIGHTS____________________3

Financial highlights tables as of December 31, 1997.

PORTFOLIO SUMMARIES_____________________5

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

THE PORTFOLIOS' INVESTMENTS_____________9

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

SECURITIES AND INVESTMENT TECHNIQUES___19

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__________35

Certain policies that may be changed only by shareholders.

MANAGEMENT OF THE FUND_________________36

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_______________________46

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

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following tables provide audited financial highlights for the Fixed Income,
High Yield, Equity Growth, Value, Mid Cap Value, U.S. Real Estate, Emerging
Markets Debt, Global Equity, International Magnum, Emerging Markets Equity, and
Asian Equity Portfolios for the periods presented. The audited financial
highlights for the periods presented have been audited by Price Waterhouse LLP,
whose unqualified report thereon appears in the Fund's Annual Report to
Shareholders and is incorporated by reference in the Statement of Additional
Information. The Fund's other Portfolios were not active in the fiscal year
ended December 31, 1997 and, therefore, financial highlights are not presented
for these Portfolios. The Annual Report and the financial statements therein,
as well as 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>
FIXED INCOME HIGH YIELD EQUITY GROWTH VALUE MID CAP VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------- ------------------- ------------------- ------------------- -------------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
SELECTED PER SHARE DATA JANUARY 2, 1997* TO JANUARY 2, 1997* TO JANUARY 2, 1997* TO JANUARY 2, 1997* TO JANUARY 2, 1997* TO
AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
- ----------------------- ------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD........ $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment In-
come................. 0.46 0.63 0.02 0.10 0.02
Net Realized and
Unrealized Gain...... 0.53 0.72 3.27 1.99 4.05
------- ------- ------- ------- -------
Total From Investment
Operations........... 0.99 1.35 3.29 2.09 4.07
------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment In-
come................. (0.45) (0.63) (0.02) (0.10) (0.02)
In Excess of Net In-
vestment Income...... -- -- -- 0.00 + --
Net Realized Gain..... (0.13) (0.13) (0.53) (0.21) (0.73)
In Excess of Net Real-
ized Gain............ -- -- -- 0.00 + --
------- ------- ------- ------- -------
Total Distributions... (0.58) (0.76) (0.55) (0.31) (0.75)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................ $ 10.41 $ 10.59 $ 12.74 $ 11.78 $ 13.32
======= ======= ======= ======= =======
TOTAL RETURN........... 9.93% 13.53% 33.05% 20.98% 40.93%
======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000's)........ $12,760 $12,490 $12,419 $14,664 $11,461
Ratio of Expenses to
Average Net Assets.... 0.70%** 0.81%** 0.85%** 0.85%** 1.05%**
Ratio of Expenses to
Average Net Assets,
Excluding Interest
Expense............... -- 0.80%** -- -- --
Ratio of Net Investment
Income to Average Net
Assets................ 5.66%** 7.41%** 0.41%** 1.70%** 0.19%**
Portfolio Turnover
Rate.................. 185% 78% 172% 34% 141%
Average Commission Rate
Per Share............. -- -- $0.0542 $0.0585 $0.0490
As a Percentage of
Trade Amount......... -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment
Income............... $ 0.08 $ 0.08 $ 0.07 $ 0.06 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average
Net Assets........... 1.71%** 1.68%** 2.05%** 1.87%** 2.13%**
Net Investment Income
(Loss) to Average Net
Assets............... 4.65%** 6.53%** (0.80)%** 0.68%** (0.89)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized
+Amount is less than $0.01 per share.

3
<PAGE>

FINANCIAL HIGHLIGHTS (CONCLUDED)

<TABLE>
<CAPTION>
U.S. REAL EMERGING GLOBAL INTERNATIONAL ASIAN
ESTATE MARKETS DEBT EQUITY MAGNUM EMERGING MARKETS EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------ ------------- ------------------------- ------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
MARCH 3, JUNE 16, JANUARY 2, JANUARY 2, OCTOBER 1, MARCH 3,
1997* TO 1997* TO 1997* TO 1997* TO YEAR ENDED 1996* TO 1997* TO
SELECTED PER SHARE DATA AND DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
RATIOS 1997 1997 1997 1997 1997 1996 1997
- --------------------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 9.78 $ 10.00 $ 10.00
------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.... 0.17 0.28 0.08 0.13 0.04 0.01 0.01
Net Realized and
Unrealized Gain (Loss).. 1.61 (0.22) 1.92 0.59 -- (0.21) (4.36)
------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 1.78 0.06 2.00 0.72 0.04 (0.20) (4.35)
------- ------- ------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income.... (0.17) (0.27) (0.08) (0.32) (0.07) (0.02) (0.01)
Net Realized Gain........ (0.20) (0.02) (0.18) (0.02) (0.02) -- --
In Excess of Net Realized
Gain.................... -- (0.10) -- -- (0.28) -- --
------- ------- ------- ------- ------- ------- -------
Total Distributions.... (0.37) (0.39) (0.26) (0.34) (0.37) (0.02) (0.01)
------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD.................... $ 11.41 $ 9.67 $ 11.74 $ 10.38 $ 9.45 $ 9.78 $ 5.64
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN............... 17.99% 0.76% 20.04% 7.31% 0.52% (2.03)% (43.52)%
======= ======= ======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(000's)................... $13,055 $26,378 $14,707 $18,855 $34,098 $11,789 $12,571
Ratio of Expenses to
Average Net Assets........ 1.10%** 1.35%** 1.15%** 1.16%** 1.80% 1.79%** 1.35%**
Ratio of Expenses to
Average Net Assets
Excluding Interest
Expense................... -- 1.30%** -- 1.15%** -- -- --
Ratio of Expenses to
Average Net Assets
Excluding Interest Expense
and Foreign Tax Expense... -- -- -- -- 1.75% 1.75%** 1.20%**
Ratio of Net Investment
Income to Average Net
Assets.................... 3.14%** 8.10%** 1.24%** 1.43%** 0.47% 0.32%** 0.32%**
Portfolio Turnover Rate.... 114% 173% 20% 41% 87% 9% 130%
Average Commission Rate
Per Share................ $0.0542 -- $0.0350 $0.0181 $0.0018 $0.0013 $0.0134
As a Percentage of Trade
Amount.................. -- -- 0.25% 0.20% 0.40% 0.45% 0.50%
- --------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the
Period:
Per Share Benefit to Net
Investment Income....... $ 0.07 $ 0.02 $ 0.09 $ 0.15 $ 0.17 $ 0.08 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets.................. 2.32%** 2.06%** 2.43%** 2.78%** 4.12% 6.17%** 3.10%**
Net Investment Income
(Loss) to Average Net
Assets.................. 1.92%** 7.39%** (0.04)%** (0.19)%** (1.84)% (4.06)%** (1.43)%**
</TABLE>
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized

4
<PAGE>

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

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

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

OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in

5
<PAGE>

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.

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 generally $500
million to $6 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 generally $500 million to $6 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.

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 foreign securities
exchanges, and the overall political, economic and regulatory environment in
the countries in which the Portfolio invests.

EMERGING MARKETS DEBT PORTFOLIO

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

6
<PAGE>

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, Foreign Investment involves different or
increased risks. The performance of the Portfolio will be affected by foreign
currency values, the greater volatility of foreign 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 foreign 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).

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 foreign securities exchanges and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.

EMERGING MARKETS EQUITY PORTFOLIO

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.

7
<PAGE>

LATIN AMERICAN PORTFOLIO

OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of Latin American issuers.

INVESTOR PROFILE: The Portfolio may be appropriate for investors who wish to
pursue their investment goals by investing in the markets of Latin America and
who wish to include Emerging Market Country Securities in their portfolio. By
including Latin American securities in their portfolio, investors can achieve
additional diversification and participate in growth opportunities in the
emerging market countries of Latin America.

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, Foreign Investment involves different or increased
risk. The performance of the Portfolio will be affected by foreign currency
values, the greater volatility of foreign securities exchanges, and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests. In addition, because the Portfolio presently intends to
concentrate in Latin American issuers engaged in the telecommunications
industry, its performance is exposed to increased risk of loss if this industry
underperforms expectations. Investment in Emerging Market Country Securities
often involves greater risk than other Foreign Investments. Because the
Portfolio invests in a small group of geographically and economically related
countries, its performance is expected to be more volatile than more
geographically diversified investment portfolios.

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
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

8
<PAGE>

will be affected by foreign currency values, the greater volatility of foreign
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 Fixed Income Securities
also fluctuate and generally move in the opposite direction from interest
rates.

Because the International Fixed Income, International Magnum, U.S. Real Estate,
Emerging Markets Equity, Emerging Markets Debt and Latin American 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 investment in Derivatives, but there is no guarantee
that these strategies will work as intended.

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 (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 When-Issued or Delayed Delivery
Securities, and may engage in Loans of Portfolio Securities. For additional
investment information, see "Securities and Investment Techniques" below.

FIXED INCOME PORTFOLIO

9
<PAGE>

HIGH YIELD PORTFOLIO

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

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, When-Issued and Delayed Delivery Securities, and
Derivatives and may engage in Loans of Portfolio Securities. For additional
information about investments, see "Securities and Investment Practices" below.

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

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<PAGE>

engage in Loans of Portfolio Securities. For additional information about
investments, see "Securities and Investment Techniques" below.

VALUE PORTFOLIO

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 the S&P MidCap 400
Index. Such range is generally $500 million to $6 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, 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.

11
<PAGE>

MID CAP VALUE PORTFOLIO

U.S. REAL ESTATE PORTFOLIO

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
12
<PAGE>

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, 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

13
<PAGE>

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.

GLOBAL EQUITY PORTFOLIO

INTERNATIONAL MAGNUM PORTFOLIO

14
<PAGE>

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, Depositary Receipts 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.

15
<PAGE>

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

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.

16
<PAGE>

LATIN AMERICAN PORTFOLIO

The Portfolio seeks long-term capital appreciation. The Portfolio invests
primarily in Common and Preferred Stocks, Convertible Securities, Rights,
Warrants, Depositary Receipts and other Equity Securities (i) issued by
companies organized in or for which the principal securities trading market is
in Latin America, (ii) denominated in a Latin American currency and issued by
companies to finance operations in Latin America, or (iii) issued by companies
that alone or on a consolidated basis derive 50% or more of their annual
revenues from either goods produced, sales made or services performed in Latin
America (collectively, "Latin American issuers"). The Portfolio also may
invest, from time to time, in Fixed Income Securities issued or guaranteed by a
Latin American government or government entity. Under normal circumstances,
substantially all, but not less than 80% of the Portfolio's total assets are
invested in Equity Securities of Latin American issuers and in Fixed Income
Securities issued or guaranteed by a Latin American government or government
entity. For purposes of this Prospectus, unless otherwise indicated, Latin
America consists of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica,
Cuba, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras,
Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela.

The Portfolio's investments generally involve special considerations and risks
associated with Emerging Market Country Securities. These securities pose
greater liquidity 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 investments in Emerging Market
Country Securities and Foreign Investment, see "Securities and Investment
Techniques" below.

The Portfolio focuses its investments in listed Equity Securities in Argentina,
Brazil, Chile and Mexico, the most developed capital markets in Latin America.
The Portfolio expects, under normal circumstances, to have at least 55% of its
total assets invested in listed Equity Securities of issuers in these four
countries. The Portfolio is not limited in the extent to which it may invest in
any Latin American country and intends to invest opportunistically as markets
develop. The portion of the Portfolio's holdings in any Latin American country
will vary from time to time although the portion of the Portfolio's assets
invested in Chile may tend to vary less than the portions invested in other
Latin American markets because, with limited exceptions, capital invested in
Chile currently cannot be repatriated for one year.

To the extent that the Portfolio's assets are not invested in Equity Securities
of Latin American issuers or in government issued or guaranteed Fixed Income
Securities, the remainder of its assets may be invested in (i) Fixed Income
Securities of other Latin American issuers, (ii) Equity or Fixed Income
Securities of corporate or governmental issuers located in countries outside
Latin America, and (iii) Temporary Investments. The Portfolio's assets may be
invested in Fixed Income Securities when the Portfolio believes that, based
upon factors such as relative interest rate levels and foreign exchange rates,
Fixed Income Securities offer opportunities for long-term capital appreciation.
It is likely that many of the Fixed Income Securities in which the Portfolio
will invest will be unrated. The Portfolio may invest up to 20% of its total
assets in lower-quality Fixed Income Securities involving risks similar to High
Yield Securities. The Portfolio may also invest in Brady Bonds, Privatizations,
Debt Conversions, Investment Funds, Non-Publicly Traded Securities, Private
Placements and Restricted Securities, Foreign Currency Transactions, Money
Market Instruments, Repurchase Agreements, Reverse Repurchase Agreements, When-
Issued and Delayed Delivery Securities, Derivatives, and may engage in Loans of
Portfolio Securities and Borrowing. For a discussion of certain considerations
and risks associated with Borrowing, see "Securities and Investment Techniques"
below.

The Portfolio will not invest more than 25% of its total assets in one industry
except, and to the extent, and only for such period of time, as the Board of
Directors determines that it is appropriate and in the best interests of the
Portfolio and its shareholders to invest more than 25% of the Portfolio's
total assets in companies involved in either the telecommunications or
financial services industry. Concentration in these two industries may be
beneficial to the Portfolio because the securities markets of Latin American
countries are emerging markets characterized by a relatively small number of
issuers and it is possible that one or more markets may be dominated by issues
of companies in these industries. Also, it is possible that Privatizations in
certain Latin American countries, which currently represent a primary source of
new issues in many Latin American markets and are often attractive investment
opportunities, will occur in these two industries.

The Board of Directors has determined that, in light of the increased presence
of telecommunications companies in the Latin American markets, the Portfolio's
ability to achieve its investment objective would be materially adversely
affected if it were not permitted to invest more than 25% of its assets in
securities of companies in the telecommunications industries of the Latin
American countries in which the Portfolio invests. In accordance with the
Portfolio's investment restrictions and as a result of the Board's action, the
Portfolio is required to invest at least 25% of its total assets in securities
of Latin American issuers engaged in the

17
<PAGE>

telecommunications industry. The Portfolio will remain so invested until the
Board determines that the Portfolio should invest less than 25% of its assets
in that industry. Because the Portfolio will have a more concentrated position
in the securities of a single sector within the Latin American securities
markets, the Portfolio will be subject to certain risks with respect to these
portfolio securities. Market price movements affecting telecommunications
companies and their securities will have a greater impact on the Portfolio's
performance because of the more concentrated position in such securities.
Telecommunications may be subject to greater government regulation than many
other industries. Changes in government policies and the need to obtain
regulatory approvals may have a material effect on products and services
offered by telecommunications companies. Technological and structural
developments may adversely affect the profitability of telecommunications
companies. To better control the Portfolio's exposure to such risks, the Board
has limited investments in telecommunications securities to not more than 40%
of the Portfolio's assets.

The Board of Directors has not currently authorized the Portfolio to invest
more than 25% of its total assets in the financial services industry. The
Portfolio will notify shareholders of any decision by the Board of Directors to
permit investments of more than 25% in the financial services industry
including, if applicable, a discussion of any increased investment risks
particular to this industry to which the Portfolio may be exposed.

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. 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, Emerging Market Countries Securities, Foreign Currency
Transactions, CMOs, Brady Bonds, Zero Coupons, Cash Equivalents, ADRs, When-
Issued and Delayed-Delivery Securities, Derivatives 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 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.

18
<PAGE>

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 MAS's twenty-nine 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.

19
<PAGE>

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.

GROWTH STOCK INVESTING: This strategy emphasizes 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.

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

20
<PAGE>

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.

MORTGAGE INVESTING: At times it is anticipated that greater than 50% of a
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"), Fannie Mae, 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
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

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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.

ADRs. For information concerning American Depositary Receipts ("ADRs"), see
"Depositary Receipts" below.

BORROWING: Each Portfolio that engages in borrowing ("Borrowing") is authorized
to borrow money from banks and other entities in an amount up to 33 1/3% of its
total assets (including the amount borrowed) less all liabilities and
indebtedness other than the Borrowing, and may use the proceeds of the
Borrowing for investment purposes or to pay dividends. Borrowing for investment
purposes creates leverage which is a speculative characteristic. Portfolios
authorized to borrow will do so only when the Adviser believes that Borrowing
will benefit the Portfolio after taking into account considerations such as the
costs of Borrowing and the likely investment returns on securities purchased
with borrowed monies. Borrowing by a Portfolio will create the opportunity for
increased net income but, at the same time, will involve special risk
considerations. Leverage that results from Borrowing will magnify declines as
well as increases in a Portfolio's net asset value per share and net yield.
Each Portfolio that engages in Borrowing expects that all of its Borrowing will
be made on a secured basis. The Portfolios' custodian will either segregate the
assets securing the Borrowing for the benefit of the lenders or arrangements
will be made with a suitable sub-custodian. If assets used to secure the
Borrowing decrease in value, a Portfolio may be required to pledge additional
collateral to the lender in the form of cash or securities to avoid liquidation
of those assets.

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")).

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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.

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.

DEBT CONVERSIONS: Debt to equity conversion programs ("Debt Conversions") are
programs adopted by several Latin American countries, pursuant to which
investors may use government issued or guaranteed Fixed Income Securities,
directly or indirectly, to make investments in local companies. The terms of
the various programs vary from country to country although each program
includes significant restrictions on the application of the proceeds received
in the conversion and on the remittance of profits on the investment and of the
invested capital. The Adviser will evaluate opportunities to enter into Debt
Conversions as they arise.

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
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<PAGE>

deemed to be investments in the underlying securities except as noted.

DERIVATIVES. The Portfolios (except for the Money Market Portfolio), are
permitted to invest in various Derivatives for both hedging and non-hedging
purposes. Derivatives include caps, floors and collars, futures contracts and
forward contracts, options, structured notes and swaps. Additionally, the
Portfolios may invest in other Derivatives that are developed over time if
their use would be consistent with the objectives of the Portfolios. These
Derivatives may be based upon a wide variety of underlying rates, indicies,
instruments, securities and other products, such as interest rates, foreign
currencies, foreign and domestic fixed income and equity securities, group or
"baskets" of Securities and Securities indicies (for each Derivative, the
"underlying"). Each of the Equity Growth, U.S. Real Estate, Emerging Markets
Debt, Global Equity, International Magnum, Emerging Markets Equity, Asian
Equity and Latin American Portfolios will limit its use of Derivatives to 33
1/3% of its total assets measured by the aggregate notional amount of
outstanding Derivatives. The Fixed Income, High Yield, Core Equity, Value, Mid
Cap Growth, Mid Cap Value, International Fixed Income, Balanced and Multi-
Asset-Class Portfolios will not enter into futures to the extent that each
Portfolio's outstanding obligations to purchase securities under these
contracts, in combination with its outstanding obligations with respect to
options, would exceed 50% of its total assets. The Portfolios' investments in
forward foreign currency contracts and Derivatives used for hedging purposes
are not subject to the foregoing limits.

The use of Derivatives 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 forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolios will be less favorable than it would have been if
these investment techniques had not been used.

Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.

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<PAGE>

against changes in the level of future currency rates or to adjust their
exposure to a particular currency.

Gains and losses on futures contracts, forward contracts and related options
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 these instruments include (i) imperfect correlation
between the change in market value of investments held by a Portfolio and the
prices of derivative products relating to investments purchased or sold by the
Portfolio, and (ii) possible lack of a liquid secondary market for a derivative
product and the resulting inability to close out a position. The risk that a
Portfolio will be unable to close out a position will be minimized by only
entering into transactions for which there appears to be a liquid exchange or
secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in
pricing.

There currently are limited options markets in many countries, particularly
emerging market 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 these options markets. The primary risks associated with the
Portfolios' use of options as described include (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.

securities index or a combination thereof. A great deal of flexibility is
possible in the way the products may be structured, with the effect being that
the parties may have exchanged amounts equal to the return on one rate, index
or group of securities for another. For example, in a simple fixed-to-floating
interest rate swap, one party makes payments equivalent to a fixed interest
rate, and the other makes payments equivalent to a specified interest rate
index. A Portfolio may engage in simple or more complex swap transactions
involving a wide variety of underlyings. The currency swaps that 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.

Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, a Portfolio's risk of loss will consist of the
payments that a Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction.

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 Portfolios may use structured notes to tailor their investments
to the specific risks and returns the Adviser wishes to accept while avoiding
or reducing certain other risks.

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.

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<PAGE>

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 Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.

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<PAGE>

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. 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.

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

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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.

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<PAGE>

The risks posed by High Yield Securities are substantial. If a security held by
a Portfolio is down-graded, the Portfolio may retain the security.

The following tables provide a summary of ratings assigned to all U.S. and
foreign debt holdings of those Portfolios with more than 5% invested in High
Yield Securities as of December 31, 1997 (not including Money Market
Instruments). These figures do not necessarily indicate a Portfolio's current
or future debt holdings.

HIGH YIELD PORTFOLIO+

EMERGING MARKETS DEBT PORTFOLIO+

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 a 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>

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.

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. In addition, the High
Yield Portfolio may lend its portfolio securities to certain institutional
investors. 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. Pursuant to an order issued by the SEC, the Fund may lend
portfolio securities to affiliated broker-dealers. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.

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<PAGE>

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.

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 GNMA, FHLMC, Fannie Mae, 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.

NON-DIVERSIFIED STATUS. The International Fixed Income, International Magnum,
U.S. Real Estate, Emerging Markets Equity, Emerging Markets Debt and Latin
American

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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 "Internal Revenue 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 Portfolios, other than the Money Market 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, 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 Emerging
Markets Debt, International Magnum, Emerging Markets Equity, Asian Equity and
Latin American Portfolios may each invest up to 25% of their total assets in
Rule 144A Securities that are deemed to be liquid. Other Portfolios may invest
an unlimited amount in Rule 144A Securities that are deemed to be liquid.

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

PRIVATIZATIONS. The governments of some emerging market countries have been
engaged in programs of selling part or all of their stakes in government owned
or controlled enterprises ("Privatizations"). The Adviser believes that
Privatizations may offer investors opportunities for significant capital
appreciation and intends to invest assets of the Portfolio in Privatizations in
appropriate circumstances. In certain countries, the ability of foreign
entities, such as the Portfolio, to participate in Privatizations may be
limited by local law, or the terms on which the Portfolio may be permitted to
participate may be less advantageous than those
for local investors. There can be no assurance that governments will continue
to sell companies currently owned or controlled by them or that any
Privatization programs in which a Portfolio participates will be successful.

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<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.

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 Equity 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

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<PAGE>

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.

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, Asian Equity and Latin American
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, Emerging Markets Debt and Latin
American 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

35
<PAGE>

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
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 Money Market, Emerging Markets
Debt, Equity Growth, U.S. Real Estate, Global Equity, International Magnum,
Emerging Markets Equity, Asian Equity and Latin American 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 subsidiary of Morgan Stanley Dean Witter &
Co. ("MSDW"), which is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses--
securities, asset management and credit services. 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
well as to employee benefit plans, endowment funds, foundations and other
institutional investors. MAS is a Pennsylvania limited liability partnership
founded in 1969 with principal offices at One Tower Bridge, West Conshohocken,
Pennsylvania 19428. MAS is also a subsidiary of MSDW. 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, 1998, MSAM and its
institutional investment advisory affiliates (exclusive of MAS) had
approximately $88.1 billion in assets under management or fiduciary advice and
MAS managed assets of approximately $68.4 billion. See "Management of the Fund"
in the SAI.

been actively working on necessary changes to their own computer systems to
prepare for the year 2000 and expect that their systems will be adapted before
that date, but there can be no assurance that they will be successful, or that
interaction with other non-complying computer systems will not impair their
services at that time. The Advisers and Morgan Stanley are contacting their
vendors and service providers to obtain assurances that such vendors and
service providers have taken appropriate measures to address the "Year 2000"
problem.

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

MONEY MARKET PORTFOLIO -- Abigail Jones Feder and Daniel M. Niland. Abigail
Jones Feder is a Principal of Morgan Stanley and MSAM and shares responsibility
for managing short-term taxable and tax-exempt portfolios. Ms. Feder joined
Morgan Stanley's Corporate Finance Department in 1985. In 1987 she joined MSAM
as a Marketing Analyst and was promoted to a Marketing Director in 1988. She
joined the Fixed Income Group as a Portfolio Manager in 1989 and she became a
Vice President in 1992. Ms. Feder holds a B.A. from Vassar College. Daniel M.
Niland, a Vice President of Morgan Stanley, joined MSAM in July 1997 as a Vice
President and shares responsibility for managing short-term taxable portfolios.
Prior to joining MSAM, Mr. Niland managed liquidity and short duration fixed
income portfolios for institutional and private accounts at Citibank Global
Asset Management from January 1996 to June 1997. Before joining Citibank, Mr.
Niland worked at J.P. Morgan from April 1991 to January 1996 as a portfolio
manager investing $20 billion in short-term securities for that firm's
securities lending program. Mr. Niland holds a B.A. from Iona College and an
M.B.A. from Fordham University. Ms. Feder and Mr. Niland have shared primary
responsibility for managing the Portfolio's assets since its inception.

FIXED INCOME PORTFOLIO -- Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley. Thomas L. Bennett, a Managing Director of 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 its inception.

CORE EQUITY PORTFOLIO -- Arden C. Armstrong, Kurt Feuerman, James J. Jolinger,
Nicholas J. Kovich, Robert J. Marcin, Gary G. Schlarbaum and Brian Kramp. 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

37
<PAGE>

Feuerman is a Managing Director of Morgan Stanley and 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. Brian Kramp,
a Vice President of Morgan Stanley, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management and its successor,
Corestates Investment Advisors from 1985-1997. Ms. Armstrong and Messrs.
Feuerman, Jolinger, Kovich, Marcin, Schlarbaum and Kramp have shared primary
responsibility for managing the Portfolio's assets since its 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 the 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 primary responsibility for
managing the Portfolio's assets since its 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 its inception.

MID CAP VALUE PORTFOLIO -- William B. Gerlach, Gary G. Schlarbaum, Bradley S.
Daniels and Chris Leavy. 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. Chris Leavy joined MAS in 1997. He served as a Portfolio Manager for
Capitoline Investment Services from 1995-1997; a Portfolio Manager for Premier
Trust Company from 1994 to 1995; and as a Research Analyst for Leavy Investment
Management from 1993-1994. Messrs. Gerlach, Schlarbaum, Daniels and Leavy have
had primary responsibility for managing the Portfolio's assets since its
inception.

38
<PAGE>

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 its 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, a Principal of Morgan Stanley, 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 its inception.

LATIN AMERICAN PORTFOLIO -- Robert L. Meyer and Andy Skov. Information about
Robert L. Meyer is included under Emerging Markets Equity Portfolio above. Andy
Skov joined MSAM in 1994 as a Portfolio Manager. Currently, he is a Principal
of MSAM and Morgan Stanley with responsibilities for investment in Latin
America. Prior to joining MSAM, he worked in the Latin America group at Bankers
Trust in corporate finance, research and sales; two of these years he spent in
Argentina. He graduated from the University of California at Berkeley with a
B.A. (Phi Beta Kappa) in Political Science and Economics Development. Mr. Meyer

39
<PAGE>

and Mr. Skov have shared primary responsibility for managing the Portfolio's
assets since its inception.

BALANCED PORTFOLIO -- Thomas L. Bennett, 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
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, Schlarbaum, Valeiras and Worley have shared
primary responsibility for managing the Portfolio's assets since its inception.

MULTI-ASSET-CLASS PORTFOLIO -- Thomas L. Bennett, 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 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 Managing
Director 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, Germany, Schlarbaum, Valeiras and Worley
have shared primary responsibility for managing the Portfolio's assets since
its inception.

OTHER SERVICES

Chase Global calculates the NAV and dividends and maintains the general
accounting records for each Portfolio.

LOCAL ADMINISTRATORS FOR THE LATIN AMERICAN PORTFOLIO. The Latin American
Portfolio has, as required by local law, entered into administration agreements
with local administrators in Brazil, Chile and Colombia. A local administrator
provides certain services for the Latin American Portfolio with respect to the
Portfolio's investments in that country, including services relating to foreign
exchange, local taxes, remittance of income and capital gains, and repatriation
of investments. The Latin American Portfolio's local administrators may be paid
a fee by Morgan Stanley Trust Company ("MSTC") out of its custody fee.

CUSTODIANS. Chase serves as the Custodian of domestic securities and cash of
the Portfolios. Chase is not an affiliate of

40
<PAGE>

either of the Advisers or the Distributor. MSTC, Brooklyn, New York, 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 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

41
<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 Emerging
Fixed Markets Global International Markets Asian Latin
Assets Income Debt Equity Magnum Equity Equity American
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First $500 million 0.50% 0.80% 0.80% 0.80% 1.25% 0.80% 1.10%
- ----------------------------------------------------------------------------------------------------------------
From $500 million to $1
billion 0.45% 0.75% 0.75% 0.75% 1.20% 0.75% 1.05%
- ----------------------------------------------------------------------------------------------------------------
More than $1 billion 0.40% 0.70% 0.70% 0.70% 1.15% 0.70% 1.00%
</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>

42
<PAGE>

<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Fee Waivers and
Portfolio Reimbursements
- --------- ------------------------
<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%
Latin American......................................... 1.75%
</TABLE>

These fee waivers and reimbursements 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 Advisers. 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 Advisers 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 Advisers.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Advisers, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.

43
<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. For the
periods ended December 31, 1997, the Portfolio turnover rates for the Fixed
Income, Equity Growth, Mid Cap Value, U.S. Real Estate, Emerging Markets Debt
and Asian Equity Portfolios were 185%, 172%, 141%, 114%, 173% and 130%,
respectively. The Latin American Portfolio's turnover rate is expected to be as
high as 200%. The Mid Cap Growth, International Fixed Income and Multi-Asset-
Class Portfolios' rates are expected to be as high as 150%. The fixed income
portion of the Balanced Portfolio will ordinarily exceed an annual portfolio
turnover rate 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.

44
<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
Latin American Latin American
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 Average
Annual Annual Annual
Total Return Total Return Total Return Total Return Total Return Total Return Total Return
One Year Three Years Five Years Ten Years Three Years Five Years Ten Years
Inception Ended Ended Ended Ended Ended Ended Ended
Fund Name Date 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
- --------- --------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MSIF:
Equity Growth... 4/2/91 31.32% 149.21% 168.69% NA 35.58% 21.86% NA
U.S. Real
Estate......... 2/24/95 27.62% NA NA NA NA NA NA
Emerging Markets
Debt........... 2/1/94 18.29% 126.72% NA NA 31.37% NA NA
Global Equity... 7/15/92 23.75% 80.38% 178.25% NA 21.73% 22.71% NA
International
Magnum......... 3/15/96 6.58% NA NA NA NA NA NA
Emerging
Markets........ 9/25/92 (1.03)% (3.09)% 62.71% NA (1.04)% 10.23% NA
Asian Equity.... 7/1/91 (48.29)% (42.81)% (0.96)% NA (16.99)% (0.19)% NA
Latin American.. 1/18/95 41.28% NA NA NA NA NA NA
MAS FUNDS:
Fixed Income.... 11/14/84 9.61% 40.07% 50.75% 157.81% 11.89% 8.56% 9.93%
High Yield...... 2/28/89 15.98% 65.72% 91.86% NA 18.34% 13.92% NA
Equity.......... 11/14/84 25.84% 101.87% 116.38% 373.08% 26.38% 16.69% 16.81%
Value........... 11/5/84 23.38% 118.48% 158.50% 464.41% 29.76% 20.92% 18.89%
Mid Cap Growth.. 3/30/90 33.13% 115.49% 141.04% NA 29.16% 19.24% NA
Mid Cap Value... 12/30/94 39.59% 160.77% NA NA 37.64% NA NA
International
Fixed Income... 4/29/94 (3.97)% 22.01% NA NA 6.86% NA NA
Balanced........ 12/31/92 19.61% 69.72% 90.20% NA 20.67% 13.72% NA
Multi-Asset-
Class.......... 7/29/94 17.48% 75.71% NA NA 19.28% NA NA
<CAPTION>
Average
Annual
Total Return
Since
Fund Name Inception
- --------- ------------
<S> <C>
MSIF:
Equity Growth... 19.07%
U.S. Real
Estate......... 30.92%
Emerging Markets
Debt........... 18.77%
Global Equity... 20.03%
International
Magnum......... 8.28%
Emerging
Markets........ 10.13%
Asian Equity.... 4.16%
Latin American.. 24.70%
MAS FUNDS:
Fixed Income.... 10.92%
High Yield...... 12.14%
Equity.......... 17.08%
Value........... 18.01%
Mid Cap Growth.. 20.83%
Mid Cap Value... 37.60%
International
Fixed Income... 5.92%
Balanced........ 13.72%
Multi-Asset-
Class.......... 16.22%
</TABLE>

45
<PAGE>

PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, MSDW owned more than 25% of the outstanding voting
securities of the U.S. Real Estate, Mid Cap Value, Global Equity, High Yield
and Asian Equity Portfolios. Also, as of that date, Nationwide Life Insurance
owned more than 25% of the Emerging Markets Debt Portfolio, General American
Life Insurance owned more than 25% of the International Magnum, Equity Growth
and Fixed Income Portfolios, American General Life Insurance Company owned more
than 25% of the International Magnum, Mid Cap Value, Value and Equity Growth
Portfolios, New York Life Insurance and Annuity Corporation owned more than 25%
of the Emerging Markets Equity Portfolio, Fidelity Investments Life Insurance
Company owned more than 25% of the Global Equity Portfolio, Allmerica Financial
Life Insurance & Annuity Company owned more than 25% of the Fixed Income
Portfolio, and Integrity Life Insurance Company owned more than 25% of the
Asian Equity Portfolio pursuant to variable annuity contracts and variable life
insurance policies they have issued to the public.

For more information, see "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, Asian Equity and Latin American
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, Martin Luther King,
Jr. 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 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.

46
<PAGE>

Portfolios may be affected significantly by such trading on days when
shareholders can not purchase or redeem shares of the Portfolio.

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.

47
<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 18 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 18 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 "1933 ACT").

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>
<S> <C>
TABLE OF CONTENTS PAGE
</TABLE>

<TABLE>
<S> <C>
SECURITIES AND INVESTMENT TECHNIQUES 2
TAXES 17
PURCHASE OF SHARES 18
REDEMPTION OF SHARES 18
INVESTMENT LIMITATIONS 19
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS 20
MANAGEMENT OF THE FUND 21
NET ASSET VALUE FOR THE MONEY MARKET PORTFOLIO 28
PORTFOLIO TRANSACTIONS 28
PERFORMANCE INFORMATION 29
GENERAL INFORMATION 33
DESCRIPTION OF RATINGS 34
FINANCIAL STATEMENTS 36
</TABLE>

Statement of Additional Information dated May 1, 1998, relating to the Fund's
Prospectuses dated May 1, 1998.
<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, Asian Equity and Latin American
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:

BRADY BONDS

Certain 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. A 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 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 that results in
acceleration of the payment obligations of the issuer, 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.

EMERGING MARKET COUNTRY SECURITIES

Each of the Global Equity, Emerging Markets Equity, International Magnum,
Emerging Markets Debt, Asian Equity and Latin American Portfolios' 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 intends
to 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

2
<PAGE>

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, currency 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, emerging market country obligors may be more
likely to default on their obligations. If such an event occurs, a 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.

EURODOLLAR AND YANKEE DOLLAR OBLIGATIONS

Certain Portfolios may invest in Eurodollar and Yankee Dollar 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.

FOREIGN INVESTMENTS

Certain Portfolios may invest in securities of foreign issuers as described in
the Fund's Prospectus. Investors should recognize that investing in such
foreign securities involves special considerations that 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 "Securities and
Investment Techniques" below. 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 and foreign markets 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 case of
the Asian Equity, International Magnum, Emerging Markets Equity, Multi-Asset-
Class, International Fixed Income, Emerging Markets Debt, Global Equity and
Latin American 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.

On January 1, 1999, the European Monetary Union (EMU) plans to implement a new
currency unit, the Euro, which is expected to reshape financial markets,
banking systems and monetary policies in Europe and other parts of the world.
The countries initially expected to convert or tie their currencies to the Euro
include Austria, Belgium, France, Germany, Luxembourg, the Netherlands,
Ireland, Finland, Italy, Portugal and Spain. Implementation of this plan will
mean that financial transactions and market information, including share
quotations and company accounts, in participating countries will be denominated
in Euros. Approximately 46% of the stock exchange capitalization of the total
European market maybe reflected in Euros, and participating governments will
issue their bonds in Euros. Monetary policy for participating countries will be
uniformly managed by a new central bank, the European Central Bank (ECB).
3
<PAGE>

Although it is not possible to predict the impact of the Euro implementation
plan on the Fund's Portfolios, the transition to the Euro may change the
economic environment and behavior of investors, particularly in European
markets. For example, investors may begin to view those countries participating
in the EMU as a single entity, and the Advisers may need to adapt their
investment strategy accordingly. The process of implementing the Euro also may
adversely affect financial markets world-wide and may result in changes in the
relative strength and value of the U.S. dollar or other major currencies, as
well as possible adverse tax consequences. The transition to the Euro is likely
to have a significant impact on fiscal and monetary policy in the participating
countries and may produce unpredictable effects on trade and commerce
generally. These resulting uncertainties could create increased volatility in
financial markets world-wide.

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, but may also
enter 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 the Portfolios anticipate 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
Portfolios may enter into forward contracts to sell, for a fixed amount of U.S.
dollars or other currencies, an amount of foreign currency other than the
currency in which the securities to be hedged are denominated approximating the
value of some or all of the portfolio securities to be hedged. A Portfolio may
select this "proxy" or "cross-hedging" when it is determined that the foreign
currencies in which the Portfolio's securities are denominated have
insufficient liquidity or are trading at a discount compared with other foreign
currencies with which they tend to move in tandem. 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.

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 Investment Company Act of 1940, as amended (the "1940
Act") or the rules adopted thereunder, 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.

4
<PAGE>

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 (except for the Money Market Portfolio) may invest in futures
contracts and options on futures contracts for both hedging and non-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 or asset
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 the underlying securities or assets, 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. 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

5
<PAGE>

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.

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. 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. Each of the Equity Growth, U.S. Real Estate, Emerging Markets Debt,
Global Equity, International Magnum, Emerging Markets Equity, Asian Equity and
Latin American Portfolios will limit its use of futures contracts and other
derivative instruments to 33 1/3% of their total assets measured by the
aggregate notional amount of outstanding derivative instruments. Each of the
Fixed Income, High Yield, Core Equity, Value, Mid Cap Growth, Mid Cap Value,
International Fixed Income, Balanced and Multi-Asset-Class Portfolios may enter
into futures contracts to the extent that the notional value of 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 50% of its
total assets. All 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.

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

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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.

HIGH YIELD SECURITIES

The market for lower rated and unrated debt securities, also known as "high
yield securities" or "junk bonds," is relatively new and its recent growth
paralleled a long period of economic expansion and an increase in merger,
acquisition and leveraged buyout activity. Adverse economic developments may
disrupt the market for U.S. corporate, lower rated and unrated debt securities
and for emerging country debt securities. Such disruptions may severely affect
the ability of issuers, especially highly leveraged issuers, to service their
debt obligations or to repay their obligations upon maturity. In addition, the
secondary market for lower rated and unrated debt securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. As a result, the Adviser
could find it more difficult to sell these securities or may be able to sell
the securities only at prices lower than if such securities were widely traded.
In addition there may be limited trading markets for debt securities of issuers
located in emerging countries. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating a Portfolio's net asset value.

Prices for lower rated and unrated debt securities may be affected by
legislative and regulatory developments. These laws could adversely affect a
Portfolio's net asset value and investment practices, the secondary market for
lower rated and unrated debt securities, the financial condition of issuers of
such securities and the value of outstanding lower rated and unrated debt
securities. For example, U.S. federal legislation requiring the divestiture by
federally insured savings and loan associations of their investments in lower
rated and unrated debt securities and limiting the deductibility of interest by
certain corporate issuers of lower rated and unrated debt securities has
adversely affected the market in recent years.

Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, a Portfolio
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Portfolio experiences unexpected net
redemption, it may be forced to sell its higher rated securities resulting in a
decline in the overall credit quality of a Portfolio's investment portfolio and
increasing the exposure of the Portfolio to the risks of lower rated and
unrated debt securities.

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.

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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. 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 domiciled in EAFE countries
(defined below). After establishing regional allocation strategies, the Adviser
then selects Equity Securities among issuers of a region. The International
Magnum Portfolio invests primarily in countries comprising the EAFE Index
(each, an "EAFE country") although the Portfolio may invest up to 5% of its
assets in countries other than EAFE countries.

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 over 1,000 companies listed on the stock
exchanges of Europe, Australia, New Zealand and the Far East. "Europe" includes
Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, The
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom. "Far East" includes Japan, Hong Kong and Singapore/Malaysia.

MORTGAGE 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 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

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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-BACKED SECURITIES. With mortgage-backed securities ("MBSs"), many
mortgagees' monthly payments to their lending institutions are pooled together
and passed through to investors such as a Portfolio. The pools are assembled by
various governmental, government-related and private organizations. A Portfolio
may invest in securities issued or guaranteed by Government National Mortgage
Association ("GNMA" or "Ginnie Mae"), Federal Home Loan Mortgage Corporation
("FHLMC" or "Freddie Mac"), Fannie Mae, private issuers and other government
agencies. There can be no assurance that the private issuers 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 nationally recognized statistical rating organizations ("NRSRO") or, if
unrated, are deemed by the Adviser to be of comparable quality.

MBSs are 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. Fannie Mae and FHLMC obligations are not backed by the full
faith and credit of the U.S. Government as GNMA certificates are, but Fannie
Mae and FHLMC securities are supported by the instrumentalities' right to
borrow from the U.S. Treasury. Each of GNMA, Fannie Mae and FHLMC guarantees
timely distributions of interest to certificate holders. Each of GNMA and
Fannie Mae 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 MBSs (FHLMC Gold PCS)
which also guarantee timely payment of monthly principal reductions. Resolution
Funding Corporation ("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.

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. As average life
extends, price volatility generally increases. 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. 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.

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

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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; (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

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could adversely affect the return on an investment in such a security.

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. 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.

OPTIONS

GENERAL INFORMATION. Certain Portfolios may purchase and sell options on
portfolio securities. Additional information with respect to option
transactions is set forth below. Call and put options on portfolio 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

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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. OTC
options are generally considered illiquid due to the absence of an actively
traded market for such negotiated instruments. 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. 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. 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 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 liquid assets
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.

The Portfolios may write put options (i) to receive the premiums paid by
purchasers; and (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.

PURCHASE OF PUT AND CALL OPTIONS. 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.

The Portfolios 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 FOREIGN CURRENCY FORWARD CONTRACTS, OPTIONS ON
FOREIGN CURRENCIES, FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS THEREON

Transactions in foreign currency 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

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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 OTC 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 related 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 OTC 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.

In addition, OTC 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 OTC contracts, and, therefore, 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, OTC 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 OTC transactions only with parties whose creditworthiness has
been reviewed and found satisfactory by the Adviser.

OTC options on foreign currencies, unlike exchange-traded commodity futures
contracts and commodity option contracts, are within the exclusive regulatory
jurisdiction of the CFTC. In addition, 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.

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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.

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 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

A 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.

Pursuant to an order issued by the SEC, the Fund may lend portfolio securities
to affiliated broker-dealers. Under such order, Morgan Stanley Trust Company
("MSTC"), the Fund's custodian and an affiliate of the Advisers, may act as
lending agent for the Fund in securities loans to broker-dealers, including
broker-dealers affiliated with MSTC and the Fund. In order to protect the Fund
against potential favoritism of affiliated brokers by MSTC, the Fund's
securities lending program will be subject to several conditions and monitoring
requirements as set forth in the SEC's order. Under the order each Portfolio
will make at least 50% of its portfolio security loans to unaffiliated
borrowers.

SHORT SALES

Certain 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

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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 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.

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.

STRUCTURED SECURITIES

Certain 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

15
<PAGE>

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
Portfolios may enter into OTC Derivatives transactions 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 performance
of the Portfolios would be less favorable than it would have been if this
investment technique were not used.

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 GNMA, 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 Fannie Mae, 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 FHLMC, 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 Fannie Mae.

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 and may have to generate cash from other sources in order to make such
distribution. The Portfolio may need to sell other investments at an
inopportune time to raise cash.

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<PAGE>

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; and (b) 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 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.

17
<PAGE>

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 have the effect of converting capital gains recognized by
the Portfolio from long-term to mid-term or short-term as well as converting
capital losses recognized by the Portfolio from short-term to mid-term or 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.

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 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 close of the New York Stock Exchange (the "NYSE")
(normally 4:00 pm Eastern Time) will be executed at the price computed on the
date of receipt; and an order received after the 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 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, Martin Luther King, Jr. 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.

18
<PAGE>

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, Latin American 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 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 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 and the Latin American Portfolio may invest more than 25% of its
assets in companies in the telecommunications industry or financial services
industry.

In accordance with Fundamental Restriction No. (7), the Latin American
Portfolio will only invest more than 25% of its total assets in companies
involved in the telecommunications industry or financial services industry if
the Board of Directors determines that the Latin American markets are dominated
by securities of issuers in such industries and that, in light of the
anticipated return, investment quality, availability and liquidity of the
issuers in such industries, the Portfolio's ability to achieve its investment
objective would, in light of the investment policies and limitations, be
materially adversely affected if the Portfolio was not able to invest greater
than 25% of its total assets in such industries. As stated in the Prospectus,
the Board of Directors has made the foregoing determination with respect to the
telecommunications industry and, accordingly, the Latin American Portfolio will
invest between 25% and 40% of its assets in securities of issuers engaged in
the telecommunications 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;

19
<PAGE>

(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 and, in the case of the High Yield Portfolio, institutional
investors, 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 and Latin American
Portfolios, 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, Latin American 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 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.

20
<PAGE>

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, Director and Managing Director of
1221 Avenue of the Morgan Stanley Asset Management Inc. and
Americas Morgan Stanley Asset Management Limited;
New York, NY 10020 Managing Director of Morgan Stanley & Co.
11/26/32 Incorporated; Director of Rand McNally
Company; Member of the Yale Development
Board; Chairman and Director of various
U.S. registered investment companies
managed by Morgan Stanley Asset Management
Inc.
Michael F. Klein* Director and President Principal of Morgan Stanley & Co.
1221 Avenue of the Incorporated and Morgan Stanley Asset
Americas Management Inc.; President and Officer of
New York, NY 10020 various U.S. registered investment
12/12/58 companies managed by Morgan Stanley Asset
Management Inc. Previously practiced law
with the New York law firm of Rogers &
Wells.
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 Morgan Stanley
Institutional Fund, Inc. and Morgan Stanley
Strategic Adviser Fund, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law
43 Arch Street firm); Director of Morgan Stanley
Greenwich, CT 06830 Institutional Fund, Inc. and Morgan Stanley
1/23/37 Strategic Adviser Fund, Inc.
Andrew McNally IV Director Director of Allendale Insurance Co.,
8255 North Central Mercury Finance (consumer finance); Zenith
Park Avenue Electronics (consumer finance); Zenith
Skokie, IL 60076 Electronics, Hubbell, Inc. (industrial
11/11/39 electronics); Director of Morgan Stanley
Institutional Fund, Inc. and Morgan Stanley
Strategic Adviser Fund, Inc.; Formerly,
Chairman and Chief Executive Officer of
Rand McNally & Company (publishing).
Samuel T. Reeves Director Chairman of the Board and CEO, Pinacle
8211 North Fresno Street Trading L.L.C. (investments); Director,
Fresno, CA 93720 Pacific Gas and Electric and PG&E
7/28/34 Enterprises (utilities); Director of Morgan
Stanley Institutional Fund, Inc. and Morgan
Stanley Strategic Adviser Fund, Inc.
Fergus Reid Director Chairman and Chief Executive Officer of
85 Charles Colman Blvd LumeLite Plastics Corporation (injection
Pawling, NY 12564 molding); Trustee and Director of Vista
8/12/32 Mutual Fund Group; Director of Morgan
Stanley Institutional Fund, Inc. and Morgan
Stanley Strategic Adviser Fund, Inc.
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ---------------------------- -------------------------------------------
<S> <C> <C>
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin & Boehm,
2800 North Central P.C.; Formerly, Of Counsel, Bryan, Cave LLP
Avenue (law firms); Director of Morgan Stanley
Phoenix, AZ 85004 Institutional Fund, Inc. and Morgan Stanley
1/24/34 Strategic Adviser Fund, Inc.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co.
1221 Avenue of the Amer- Incorporated and Morgan Stanley Asset
icas Management Inc.; General Counsel and
New York, NY 10020 Secretary of Morgan Stanley Asset
6/10/60 Management Inc.; Vice President of various
U.S. registered investment companies
managed by Morgan Stanley Asset Management
Inc.
Joseph P. Stadler* Vice President Principal of Morgan Stanley & Co.
1221 Avenue of the Amer- Incorporated and Morgan Stanley Asset
icas Management Inc.; Previously with Price
New York, NY 10020 Waterhouse LLP (accounting); Vice President
6/7/54 of various U.S. registered investment
companies managed by 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.
Stefanie V. Chang* Vice President Vice President of Morgan Stanley & Co.
1221 Avenue of the Incorporated and Morgan Stanley Asset
Americas Management Inc.; Vice President of various
New York, NY 10020 U.S. registered investment companies
11/30/66 managed by Morgan Stanley Asset Management
Inc. Previously practiced law with the New
York law firm of Rogers & Wells.
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley & Co.
1221 Avenue of the Amer- Incorporated and Morgan Stanley Asset
icas Management Inc.; Previously with Citicorp
New York, NY 10020 (banking); Secretary of various U.S.
3/26/56 registered investment companies managed by
Morgan Stanley Asset 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).
Joanna Haigney Treasurer Assistant Vice President, Senior Manager of
73 Tremont Street Fund Administration and Compliance
Boston, MA 02108-3913 Services, Chase Global Funds Services
10/10/66 Company; Treasurer of various U.S.
registered investment companies managed by
Morgan Stanley Asset Management Inc.
Previously with Coopers & Lybrand LLP.
Rene J. Feuerman Assistant Treasurer Manager of Fund Administration and
73 Tremont Street Compliance Services, Chase Global Funds
Boston, MA 02108-3913 Services Company; Previously Fund
1/25/67 Administrator and Senior Fund Accountant,
Chase Global Funds Services Company.
</TABLE>
- -------
* "Interested Person" within the meaning of the 1940 Act.

22
<PAGE>

REMUNERATION OF DIRECTORS AND OFFICERS

Members of the Board of Directors who are not "interested persons" within the
meaning of the 1940 Act ("Non-interested 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. For the fiscal year ended December 31, 1997, the Fund paid
approximately $2,979 in Directors fees and expenses. 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
fiscal year ended December 31, 1997. 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, 1997. Compensation amounts do not
include reimbursements of out-of-pocket expenses. Directors who are officers or
otherwise "interested persons" receive no remuneration for their services as
Directors. Directors and Officers of the Fund do not own shares of the Fund.

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
-------- ------------ ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Barton M. Biggs $ 0 $0 $0 $0
Warren J. Olsen* 0 0 0 0
Michael F. Klein** 0 0 0 0
Thomas L. Bennett*** 0 0 0 0
John D. Barrett, II 472 0 0 68,900(c)
Gerard E. Jones 472 0 0 86,000(c)(d)
Andrew McNally, IV(b) 521 0 0 80,846(c)
Samuel T. Reeves(b) 521 0 0 76,789(c)
Fergus Reid 472 0 0 108,295(c)(d)
Frederick O.
Robertshaw(b) 521 0 0 71,100(c)
Frederick B.
Whittemore*** 0 0 0 0
</TABLE>
- -------
* As of May 31, 1997, Mr. Olsen resigned from the Board of Directors.
** Mr. Klein was appointed to the Board of Directors effective May 31, 1997.
*** Resigned as of March 14, 1997.
(a) Of the amounts payable to Messrs. Barrett, Jones, McNally, Reeves, Reid and
Robertshaw, nothing was deferred pursuant to the Fund's deferred
compensation plan in the fiscal year ended December 31, 1997.
(b) Member of Audit Committee of the Board of Directors of the Fund.
(c) Number of other investment companies in Fund Complex from whom Director
received compensation: Mr. Barrett--4; Mr. Jones--5; Mr. McNally--4; Mr.
Reeves--5; Mr. Reid--5; Mr. Robertshaw--4.
(d) 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.

The Fund maintains an unfunded Deferred Compensation Plan ("Plan") which allows
each independent Director to defer payment of all, or a portion, of the fees he
or she receives for attending meetings of the Board of Directors throughout the
year. Each eligible Director may elect to have the deferred amounts credited
with a return equal to either of the following: (i) a rate equal to the
prevailing rate for 90-day U.S. Treasury Bills; or (ii) a rate equal to the
total return on any portfolios of the Fund selected by the Director.
Distributions to an eligible Director generally are in the form of equal annual
installments over a period of five (5) years beginning on the first day of the
year following the year in which the Director's service terminates, except that
the Board of Directors, in its sole discretion, may accelerate or extend such
distribution. The Fund intends that the Plan shall be maintained at all times
on an unfunded basis for federal income tax purposes under the Internal Revenue
Code of 1986. The rights of an eligible Director and the beneficiaries to the
amounts held under the Plan are unsecured and such amounts are subject to the
claims of the creditors of the Fund.

23
<PAGE>

INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS

MSAM is a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW").
The principal offices of MSDW are located at 1585 Broadway, New York, NY 10036
and the principal offices of MSAM are located at 1221 Avenue of the Americas,
New York, New York 10020. As compensation for the Portfolios it manages (the
"MSAM Advised Portfolios"), for the fiscal years ended December 31, 1997 and
for the period from October 1, 1996 (commencement of operations) through
December 31, 1996, MSAM earned fees of $675,000 and $32,000, and from such
amounts voluntarily waived fees of $667,000 and $32,000, respectively. As
compensation for the Portfolios it manages (the "MAS Advised Portfolios"), for
the fiscal year ended December 31, 1997 MAS earned fees of $172,000 and from
such amount voluntarily waived fees of $172,000. As no MAS Advised Portfolio
was in operation in the period from October 1, 1996 (commencement of
operations) through December 31, 1996, MAS did not receive any compensation
from the Fund for this period.

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 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, 1997 and the period from
October 1, 1996 (commencement of operations) through December 31, 1996, the
Fund paid administration fees of $209,000 and $9,000, respectively, to MSAM.
For the fiscal year ended December 31, 1997 the Fund paid administration fees
of $81,000 to MAS. As no MAS Advised Portfolio was in operation in the period
from October 1, 1996 (commencement of operations) through December 31, 1996,
the Fund did not pay any administration fees to MAS during this period.

Under a Sub-Administration Agreement between each Adviser and Chase Global
Funds Services Company ("Chase Global"), a corporate affiliate of The Chase
Manhattan Bank, Chase Global 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 subsidiary of MSDW, 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.

24
<PAGE>

PRINCIPAL HOLDERS OF SECURITIES

As of March 16, 1998, the following persons were 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 General American 50%
Life Insurance Company*/1/
700 Market Street
St. Louis, MO 63101
Allmerica Financial Life 42%
Insurance & Annuity Company*/2/
440 Lincoln St., S-134
Worcester, MA 01653
American General Life 6%
Insurance Company*
P.O. Box 1591
Houston, TX 77251
High Yield Portfolio Morgan Stanley Dean Witter & Co./3/ 57%
1585 Broadway
New York, NY 10036
American General Life 25%
Insurance Company*
P.O. Box 1591
Houston, TX 77251
Integrity Life Insurance Company* 12%
515 West Market Street
Louisville, KY 40202
Equity Growth Portfolio American General Life 47%
Insurance Company*/4/
P.O. Box 1591
Houston, TX 77251
General American 33%
Life Insurance Company*/1/
700 Market Street
St. Louis, MO 63101
Morgan Stanley Dean Witter & Co. 19%
1585 Broadway
New York, NY 10036
Value Portfolio American General Life 63%
Insurance Company*/4/
P.O. Box 1591
Houston, TX 77251
Morgan Stanley Dean Witter & Co. 21%
1585 Broadway
New York, NY 10036
General American 14%
Life Insurance Company*
700 Market Street
St. Louis, MO 63101
Mid Cap Value Portfolio American General Life 63%
Insurance Company*/4/
P.O. Box 1591
Houston, TX 77251
Morgan Stanley Dean Witter & Co./3/ 30%
1585 Broadway
New York, NY 10036
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
PERCENT OF
OUTSTANDING
PORTFOLIO NAME OF BENEFICIAL OWNER SHARES
- --------- ------------------------ -----------
<S> <C> <C>
U.S. Real Estate Portfolio Morgan Stanley Dean Witter & Co./3/ 42%
1585 Broadway
New York, NY 10036
Ameritas Variable Life 19%
Insurance Company*
Separate Account VA-2
P.O. Box 82550
Lincoln, NE 68501
Connecticut General 10%
Life Insurance Company*
900 Cottage Grove Road
Hartford, CT 06152
General American 9%
Life Insurance Company*
700 Market Street
St. Louis, MO 63101
Integrity Life Insurance Company* 9%
515 West Market Street
Louisville, KY 40202
Ameritas Variable Life 5%
Insurance Company*
Separate Account V
P.O. Box 82550
Lincoln, NE 68501
Global Equity Portfolio Morgan Stanley Dean Witter & Co./3/ 28%
1585 Broadway
New York, NY 10036
Fidelity Investments 26%
Life Insurance Company*/5/
82 Devonshire Street, R258
Boston, MA 02109
Ameritas Variable 21%
Life Insurance Company*
Separate Account VA-2
P.O. Box 82550
Lincoln, NE 68501
American General Life 15%
Insurance Company*
P.O. Box 1591
Houston, TX 77251
Ameritas Variable 5%
Life Insurance Company*
Separate Account V
P.O. Box 82550
Lincoln, NE 68501
International Magnum General American 33%
Portfolio Life Insurance Company*/1/
700 Market Street
St. Louis, MO 63101
American General Life 26%
Insurance Company*/4/
P.O. Box 1591
Houston, TX 77251
Ameritas Variable Life 16%
Insurance Company*
P.O. Box 82550
Lincoln, NE 68501
Fidelity Investments 14%
Life Insurance Company*
82 Devonshire Street, R258
Boston, MA 02109
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
PERCENT OF
OUTSTANDING
PORTFOLIO NAME OF BENEFICIAL OWNER SHARES
- --------- ------------------------ -----------
<S> <C> <C>
Morgan Stanley Dean Witter & Co. 7%
1585 Broadway
New York, NY 10036
Emerging Markets Equity New York Life Insurance 49%
Portfolio and Annuity Corporation*/6/
300 Interpace Parkway
Parsippany, NJ 07054
Penn Mutual Life 15%
Insurance Company*
Independence Square
Philadelphia, PA 19172
Ameritas Variable Life 10%
Insurance Company*
P.O. Box 82550
Lincoln, NE 68501
Fidelity Investments 10%
Life Insurance Company*
82 Devonshire Street, R258
Boston, MA 02109
Asian Equity Portfolio Morgan Stanley Dean Witter & Co./3/ 42%
1585 Broadway
New York, NY 10036
Integrity Life Insurance Company*/7/ 30%
515 West Market Street
Louisville, KY 40202
Ameritas Variable Life 12%
Insurance Company*
P.O. Box 82550
Lincoln, NE 68501
National Integrity Life 11%
Insurance Company*
515 West Market Street
Louisville, KY 40202
Emerging Markets Debt Nationwide Life Insurance Company*/8/ 35%
P.O. Box 182029
Columbus, OH 43218
Morgan Stanley Dean Witter & Co. 23%
1585 Broadway
New York, NY 10036
Integrity Life Insurance Company* 22%
515 West Market Street
Louisville, KY 40202
Fidelity Investments Life 8%
Insurance Company*
82 Devonshire Street, R258
Boston, MA 02109
</TABLE>
- -------
*Shares of the Portfolio are sold to insurance companies for their variable
annuity contracts and variable life insurance policies.
/1/ General American Life Insurance Company's parent company is GenAmerica
Corporation and its state of incorporation is Missouri.
/2/ Allmerica Financial Life Insurance & Annuity Company's state of
incorporation is Massachusetts.
/3/ Morgan Stanley Dean Witter & Co.'s state of incorporation is Delaware.
/4/ American General Life Insurance Company's parent company is American
General Corporation and its state of incorporation is Texas.
/5/ Fidelity Investments Life Insurance Company's parent company is FMR
Corporation and its state of incorporation is Utah.
/6/ New York Life Insurance and Annuity Corporation's parent company is New
York Life Insurance Company and its state of incorporation is Delaware.
/7/ Integrity Life Insurance Company's direct parent is Integrity Holdings,
Inc., whose direct parent is ARM Financial Group, Inc. The state of
incorporation of Integrity Life Insurance Company is Ohio.
/8/ Nationwide Life Insurance Company's parent company is Nationwide Financial
Services, Inc. and its state of incorporation is Ohio.

As currently required under law, the insurance companies vote their shares of
the Portfolios in accordance with instructions received from their variable
annuity contract and variable life insurance policy owners. MSDW will vote the
shares of each Portfolio that it owns in the same proportions as shares of the
Portfolio are voted by the insurance companies. Accordingly, neither MSDW nor
the insurance companies are deemed to be in control of the Portfolios.

27
<PAGE>

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

The policy of the Fund regarding purchase and sales of securities for its
Portfolios is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid
in all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Advisers from obtaining a high quality of brokerage
and research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Advisers rely upon their experience
and knowledge regarding commissions generally charged by various brokers and on
their judgment in evaluating the brokerage and research services received from
the broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.

In seeking to implement the Fund's policies, the Advisers effect transactions
with those brokers and dealers who the Advisers believe provide the most
favorable prices and are capable of providing efficient executions. If the
Advisers believe such prices and executions are obtainable from more than one
broker or dealer. They may give consideration to placing portfolio transactions
with those brokers and dealers who also furnish research and other services to
the Fund or Advisers. Such services may include, but are not limited to, any
one or more of the following: reports on industries and companies, economic
analyses and review of business conditions, portfolio strategy, analytic
computer software, account performance services, computer terminal and various
trading and/or quotation equipment. They also include advice from broker-
dealers as to the value of securities, availability of securities, availability
of buyers, and availability of sellers. In addition, they include
recommendations as to purchase and sale of individual securities and timing of
such transactions. During the fiscal year ended December 31, 1997, the Fund
directed the payment of $34,090 in brokerage commissions to brokers because of
research services provided.

The information and services received by the Advisers from brokers and dealers
may be of benefit to them in the management of accounts of some of their other
clients and may not in all cases benefit the Fund directly. While the receipt
of such information and services is useful in varying degrees and would
generally reduce the amount of research or services otherwise performed by the
Advisers and thereby reduce their expenses, it is of indeterminable value and
the

28
<PAGE>

advisory fees paid to Adviser is not reduced by any amount that may be
attributable to the value of such services.

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 MSDW or any of its affiliates under procedures adopted by the
Board of Directors. For the fiscal year ended December 31, 1997 and for the
period from October 1, 1996 (commencement of operations) through December 31,
1996, the Fund paid aggregate brokerage commissions of $536,791 and $42,941,
respectively. For the fiscal year ended December 31, 1997, the Fund paid
brokerage commissions of $11,803 to Morgan Stanley and its affiliated broker-
dealers. For the period from October 1, 1996 (commencement of operations)
through December 31, 1996, the Fund paid commissions of $26 to Morgan Stanley,
an affiliated broker-dealer. For the fiscal year ended December 31, 1997 and
for the period from October 1, 1996 (commencement of operations) through
December 31, 1996, brokerage commissions paid to affiliated broker-dealers
represented 2.20% and 0.06% of the total amount of brokerage commissions paid
in each respective period and were paid on transactions that represented 1.47%
and 0.11% of the aggregate dollar amount of transactions that incurred
commissions paid by the Fund in each respective period.

Portfolio securities will not be purchased from, or through, or sold to or
through, the Adviser or MSDW or any of its affiliates when such entities are
acting as principals, except to the extent permitted by law.

PERFORMANCE INFORMATION
- -----------------------

Performance figures for the Portfolios may be quoted from time to time to
illustrate their 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 quoted
but must be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual compounded
total return quotations 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

Total return on an investment in the Portfolios may be advertised from time to
time. 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 one-year period ended December 31,
1997 is 0.52%. The average annual total return for the Emerging Markets Equity
Portfolio for the period since inception to December 31, 1997 is (1.22)%.

The year-to-date total return for the Global Equity, International Magnum, Mid
Cap Value, Equity Growth, Value, Fixed Income, High Yield, U.S. Real Estate,
Emerging Markets Debt, and Asian Equity Portfolios for the period since
inception to December 31, 1997 is 20.04%, 7.31%, 40.93%, 33.05%, 20.98%,
9.93%, 13.53%, 17.99%, 0.76% and (43.52)%, respectively.

CALCULATION OF YIELD FOR NON-MONEY MARKET FIXED INCOME PORTFOLIOS

Portfolio yield may be advertised from time to time.

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.

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.

29
<PAGE>

The current yield for the Fixed Income, High Yield and Emerging Markets Debt
Portfolios for the thirty day period ended December 31, 1997 is 5.88%, 8.19%
and 10.01%, respectively.

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 CS 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)CS 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.

(d)CS First Boston Upper/Middle Tier High Yield Index--an unmanaged index of
bonds rated B to BBB.

(e)Donoghue's Money Fund Average--an average of all major money market fund
yields, published weekly for 7 and 30-day yields.

30
<PAGE>

(f) 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.

(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 0.5% cash, 37.9% bonds and 61.6% equity based on $52.5 billion in
assets among 431 portfolios for the year ended December 31, 1997 (assumes
dividends reinvested).

(j) Indata Equity-Median Stock Index--an unmanaged index which includes an
average asset allocation of 8.3% cash and 91.7% equity based on $491.5 billion
in assets among 979 portfolios for the year ended December 31, 1997.

(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) J.P. Morgan Emerging Markets Bond Plus Index--The Emerging Markets Bond Plus
Index (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 U.S. 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 1,000 securities on the stock
exchanges of countries in Europe, Australia and the Far East.

(t) Morgan Stanley Capital International EAFE Small Cap Index--an arithmetic,
unmanaged, market value-weighted average of the performance of all companies in
Europe, Australia and the Far East with a market cap range of US $200-800
million.

(u) Morgan Stanley Capital International Emerging Markets Free Index--a market
capitalization weighted equity index composed of companies that are
representative of the market structure of the following countries: Argentina,
Brazil, Chile, China Free, Colombia, Czech Republic, Greece, Hungary, India,
Indonesia, Israel, Jordan, Korea (at 50%), Malaysia, Mexico Free, Pakistan,
Peru, Philippines Free, Poland, Portugal, Russia, South Africa, Sri Lanka,
Taiwan (at 50%), Thailand, Turkey, Venezuela Free. The base date for the index
is December 31, 1987. "Free" MSCI indices excludes those shares which are not
purchasable by foreign investors. The average size of the emerging market
companies within this index is US $800 million.

(v) Morgan Stanley Capital International Emerging Markets Global Latin America
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).

(w) Morgan Stanley Capital International Europe Index-- an unmanaged index of
common stocks and includes 14 countries throughout Europe.

(x) Morgan Stanley Capital International Japan Index--an unmanaged index of
common stocks (assumes dividends reinvested).

(y) 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).

(z) Morgan Stanley Capital International World Index--an arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on
the stock

31
<PAGE>

exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.

(aa) NASDAQ Composite Index--an unmanaged index of common stocks.

(bb) 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.

(cc) 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.

(dd) 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.

(ee) Russell 1000 Growth Index--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.

(ff) 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.

(gg) Salomon Smith Barney GNMA Index--includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.

(hh) Salomon Smith Barney 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.

(ii) Salomon Smith Barney High Yield Market Index--includes public, non-
convertible corporate bond issues with at least one year remaining to maturity
and $50 million in par amount outstanding which carry a below investment grade
quality rating from either Standard & Poor's or Moody's rating services.

(jj) Salomon Smith Barney Broad Investment Grade Bond Index--a fixed income
market capitalization-weighted index including U.S. Treasury, agency, mortgage
and investment grade (BBB or better) corporate securities with maturities of
one year or longer and with amounts outstanding of at least $25 million.

(kk) 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.

(ll) Standard & Poor's MidCap 400 Index--a market-value weighted index. The
companies chosen for the Index generally have market values between $500
million and $6 billion, depending upon current equity market valuations and
represent a broad range of industry segments within the U.S. economy.

(mm) 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.

(nn) 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 PERFORMANCE INFORMATION

Each Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates,
portfolio expenses and other factors. Performance is one basis investors may
use to analyze a Portfolio as compared to other funds and other investment
vehicles. However, performance of other funds and other investment vehicles may
not be comparable because of the foregoing variables, and differences in the
methods used in valuing their portfolio instruments, computing net asset value
and determining performance.

32
<PAGE>

From time to time, the investment performance of a Portfolio may be compared to
other mutual funds tracked by financial or business publications and
periodicals. For example, Morningstar, Inc. may be quoted in advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance. Rankings that compare the
performance of funds to one another in appropriate categories over specific
periods of time may also be quoted in advertising.

Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the returns of
different indices. Performance of these capital markets may be used in order to
demonstrate general risk-versus-reward investment scenarios. Performance
comparisons may also include the value of a hypothetical investment in any of
these capital markets. The risks associated with the security types in any
capital market may or may not correspond directly to those of the Portfolios.
Performance of Portfolios may also be compared to that of other compilations or
indices that may be developed and made available in the future.

Charts, graphs or drawings may be included in advertisements which illustrate
the potential risks and rewards of investment in various investment vehicles,
including but not limited to, foreign securities, stocks, bonds, treasury bills
and shares of a Portfolio. In addition, advertisements may include a discussion
of certain attributes or benefits to be derived by an investment in a Portfolio
and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and various investment alternatives.

Advertisements may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification,
risk tolerance, goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of a Portfolio (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer, automatic
account rebalancing, the advantages and disadvantages of investing in tax-
deferred and taxable investments). In addition, advertisements and sales
materials relating to a Portfolio may include information regarding the
background and experience of its portfolio managers; the resources, expertise
and support made available to the portfolio managers by MSAM and MAS; and the
portfolio managers' goals, strategies and investment techniques.

Advertisements may discuss economic and political conditions of the United
States and foreign countries, the relationship between sectors of the U.S., a
foreign, or the global economy and the U.S., a foreign, or the global economy
as a whole and the effects of inflation. Discussions and illustrations of the
growth potential of various global markets including, but not limited to,
Africa, Asia, Europe, Latin America, North America, South America, Emerging
Markets and individual countries, may be included in advertisements. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market
performance; and the underlying data which supports such forecasts. From time
to time, advertisements, sales literature, communications to shareholders or
other materials may summarize the substance of information contained in the
Portfolios' shareholder reports (including the investment composition of a
Portfolio), as well as the views of MSAM and MAS as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Portfolio.

Various measures of volatility and benchmark correlation may be quoted in
advertising and the measures may be compared to those of other funds. Measures
of volatility seek to compare the historical share price fluctuations or total
returns to those of a benchmark. Measures of benchmark correlation indicate how
valid a comparative benchmark may be. Measures of volatility and correlation
may be calculated using averages of historical data. Current interest rate
sensitivity, duration, weighted average maturity or similar maturity
characteristics may also be advertised.

Examples of the effects of periodic investment plans, including the principal
of dollar cost averaging may be advertised. In such a program, an investor
invests a fixed dollar amount in a Portfolio at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.

GENERAL INFORMATION

DESCRIPTION OF SHARES AND VOTING RIGHTS

The Fund's Articles of Incorporation permit the Directors to issue 9.5 billion
shares of common stock, par value $.001 per

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share, from an unlimited number of classes ("Portfolios") of shares. Currently
the Fund consists of shares of 18 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 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

Chase is the Fund's custodian for domestic and certain foreign assets. Chase is
not affiliated with Morgan Stanley. MSTC, 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. MSTC is an affiliate of
Morgan Stanley & Co. Incorporated. For the fiscal year ended December 31, 1997,
the Fund paid custody fees of $83,000 to MSTC.

In the selection of foreign sub-custodians, the Directors or their delegates
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.

LEGAL MATTERS

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

DESCRIPTION OF RATINGS

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: SP-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.

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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.

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.

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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 Fund's financial statements for the fiscal year ended December 31, 1997,
including the notes thereto and the report of Price Waterhouse LLP, are herein
incorporated by reference from the Fund's Annual Report to Shareholders. A copy
of the Fund's Annual Report must accompany the delivery of this Statement of
Additional Information.