MORGAN STANLEY STRATEGIC ADVISER FUND INC, N-30D, 1998-08-26

MORGAN STANLEY STRATEGIC ADVISER FUND INC
N-30D, 1998-08-26

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<PAGE>
MORGAN STANLEY
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<TABLE>
<S> <C>
DIRECTORS OFFICERS
Barton M. Biggs

CHAIRMAN OF THE BOARD
Director and Managing Director,
Morgan Stanley Asset Management Stefanie V. Chang
Inc. and Morgan Stanley Asset VICE PRESIDENT
Management Limited; Managing
Director, Morgan Stanley & Co.
Incorporated
Michael F. Klein

DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Harold J. Schaaff, Jr.
Management Inc. and Morgan VICE PRESIDENT
Stanley & Co. Incorporated
John D. Barrett II
Chairman and Director, Barrett
Associates, Inc.
Gerard E. Jones
Partner, Richards & O'Neil LLP Joseph P. Stadler
Andrew McNally IV VICE PRESIDENT
River Road Partners
Samuel T. Reeves
Chairman of the Board and Chief
Executive Officer, Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Valerie Y. Lewis
Officer, LumeLite Plastics SECRETARY
Corporation
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin &
Boehm, P.C.

INVESTMENT ADVISER AND Joanna M. Haigney
ADMINISTRATOR TREASURER
Morgan Stanley Asset Management
Inc.
1221 Avenue of the Americas
New York, New York 10020

DISTRIBUTOR
Morgan Stanley & Co., Incorporated Rene J. Feuerman
1221 Avenue of the Americas ASSISTANT TREASURER
New York, New York 10020

CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245

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

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
</TABLE>

FOR CURRENT PERFORMANCE, CURRENT NET ASSET VALUE, OR FOR ASSISTANCE WITH YOUR
ACCOUNT, PLEASE CONTACT THE FUND AT (800) 548-7786.

MORGAN STANLEY
STRATEGIC ADVISER FUND, INC.

SEMI-ANNUAL REPORT
JUNE 30, 1998
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
President's Letter.............................. 1

Managers' Reports and Portfolio of Investments
by Portfolio:

Conservative Portfolio........................ 2

Moderate Portfolio............................ 5

Aggressive Portfolio.......................... 9

Statement of Assets and Liabilities............. 13

Statement of Operations......................... 14

Statement of Changes in Net Assets.............. 15

Financial Highlights............................ 16

Notes to Financial Statements................... 19
</TABLE>

This report is authorized for distribution only when preceded or accompanied by
the prospectus of the Morgan Stanley Strategic Adviser Fund, Inc. The prospectus
describes in detail each of the Portfolio's investment policies to the
prospective investor. Please read the prospectus carefully before you invest or
send money.

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<PAGE>
[LOGO] Morgan Stanley
Strategic Adviser Fund, Inc.
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PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
- --------

We are pleased to bring to you this first semi-annual report for Morgan Stanley
Strategic Adviser Fund for the six-month period ended June 30, 1998. In this
report you will find commentary, performance statistics and other useful
information for the three Portfolios comprising the Fund:

Conservative Portfolio
Moderate Portfolio
Aggressive Portfolio

At Morgan Stanley, we believe that asset allocation -- or diversifying
investments -- plays an important role in achieving long-term investment goals.
However, many individual investors find it difficult to make asset allocation
decisions themselves. Each of the Portfolios of Morgan Stanley Strategic Adviser
Fund is designed to provide investors not only with the ability to diversify
their investments across many different securities, but to allocate their
investments across classes of assets as well, depending on an investor's
financial goals and tolerance for risk. For example, the Conservative
Portfolio's assets are allocated within ranges of 75%-85% fixed income and
15%-25% equities. By contrast, the Moderate Portfolio invests between 45%-55%
each in equities and fixed income, while the Aggressive Portfolio invests
80%-90% in equities and 10%-20% in fixed income. Additionally, the Portfolios
vary their investments among market segments within equity and fixed income
asset classes. Finally, each Portfolio seeks to achieve its investment objective
by investing in underlying portfolios of two highly regarded institutional
mutual funds -- the Morgan Stanley Institutional Fund (managed by Morgan Stanley
Asset Management Inc.) and the MAS Funds (managed by Miller Anderson & Sherrerd
LLP).

We hope that you find the accompanying semi-annual report helpful and we very
much appreciate your investment in Morgan Stanley Strategic Adviser Fund.

Sincerely,

/s/Michael F. Klein

Michael F. Klein
PRESIDENT

August, 1998

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1
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
CONSERVATIVE PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- -----------------------------------------

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
U.S. Fixed Income 64.4%
U.S. Equity 16.8%
Other 18.8%
</TABLE>

PERFORMANCE COMPARED TO THE BENCHMARK(1)
- ---------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------
TOTAL RETURN
YTD SINCE INCEPTION
---------- ------------------
<S> <C> <C>
PORTFOLIO--CLASS A(3)............. 5.10% 5.10%
PORTFOLIO--CLASS B(3)............. 4.90 4.90
INDEX............................. 6.08 6.08
</TABLE>

1. The benchmark for the Conservative Portfolio is a composite comprised of 70%
of the Lehman 1-3 Year Government Bond Index, 20% of the S&P 500 Index and
10% of the Salomon High Yield Market Index.

2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.

3. The Portfolio commenced operations on December 31, 1997.

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

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

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

The Conservative Portfolio seeks the highest level of long-term total return
that is consistent with a relatively conservative level of risk. The Portfolio
invests primarily in certain fixed income portfolios, and, to a lesser degree,
certain equity portfolios of the Morgan Stanley Institutional Fund and the MAS
Funds. The Portfolio's assets are normally allocated within the ranges of
75%-85% fixed income and 15%-25% equities. The allocations are expected to be
relatively static with subtle periodic adjustments in response to market
developments.

The Portfolio uses, as its benchmark for performance purposes, a composite
comprised of 70% of the Lehman 1-3 Year Government Bond Index, 20% of the S&P
500 Index and 10% of the Salomon High Yield Market Index.

For the six month period ended June 30, 1998, the Portfolio had a total return
of 5.10% for the Class A shares and 4.90% for the Class B shares compared to
6.08% for the benchmark.

The first half of 1998 witnessed a period of mixed performance in the aftermath
of the Asian currency crisis which shook global capital markets in the fourth
quarter of 1997. U.S. bonds briefly rallied as Asian markets continued to fall
in January, as these assets are considered a safe haven in times of global
market uncertainty. However, as Asian equity markets stabilized and began to
rise, U.S. bond yields edged back up to the levels at which they started the
year. The Lehman 1-3 Year Government Bond Index returned 1.4% for the first
quarter, a respectable showing for the asset class. In equity markets, investors
quickly shrugged off the bad news in Asia amidst news of better than expected
earnings growth and low inflation in the U.S. and Europe. The S&P 500 Index rose
14.0% in the first three months of 1998. The combination of strong equity
markets and steady bond yields provided a favorable backdrop for high yield debt
instruments. The Salomon High Yield Market Index returned 4.1% in the first
quarter.

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Conservative Portfolio

2
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
CONSERVATIVE PORTFOLIO (CONT.)

After a strong first quarter, market gains were more moderate in the second
quarter. Most of the weakness and uncertainty in markets stemmed from Asia as
the currency crisis countries experienced another leg down of economic
contraction. Japan's economic troubles intensified, and the yen began to
depreciate rapidly, threatening a broader round of competitive devaluations. The
volatility in foreign markets was again positive for U.S. bonds, as another
flight to quality ensued. The long bond yield reached a historic low of 5.6% in
June. For the second quarter of 1998, the Lehman 1-3 Year Government Index
returned 1.5%. U.S. equity markets experienced up and down months in the second
quarter, as news from Asia turned for the worse, and uncertainty mounted
regarding the prospects for future growth and the direction of U.S. interest
rates. The S&P 500 Index gained 3.3% in the second quarter. The equity
volatility and the flight to quality provided a less favorable environment for
high yield bonds during the second quarter, as this asset class underperformed
investment grade bonds. The Salomon High Yield Market Index returned 1.0%.

The Portfolio underperformed its benchmark for the first half of 1998, with most
of the underperformance coming in the second quarter. Our asset allocation
remains at the middle of the ranges and similar to the benchmark, with 20.6% of
the Portfolio's investments in U.S. equity portfolios, and 79.4% invested in
fixed income portfolios. The composition of the Portfolio remained relatively
unchanged during the first half of 1998.

The underperformance of the Portfolio was due primarily to security selection
within the mutual funds. The MSIF Equity Growth Portfolio was the largest
contributor to underperformance, returning 15.7% year-to-date, well below the
17.7% return for the S&P 500. The poor relative performance in the MSIF Equity
Growth Portfolio was due in large part to a substantial holding of Cendant, a
stock which has been much in the news since the company's announcement in
mid-April of "accounting irregularities" in the company's CUC division. (Cendant
resulted from the merger of CUC and HFS last December.) The stock dropped
precipitously (about 46%), falling as low as $17. Another contributor to
underperformance was the MAS High Yield Portfolio, which ended the second
quarter flat, compared to a rise in the Salomon High Yield Market Index of 1.0%.
The MAS High Yield Portfolio's overexposure to Asian markets was the primary
cause of underperformance, as Indonesian debt and Japanese debt prices suffered
from further deterioration in economic fundamentals and currency movements.

Going forward, we see significant risk in equity markets, as the economy appears
to be slowing, valuations remain at all time highs, and pricing power remains
weak. We believe that, in this environment, growth oriented companies should
outperform, and we continue to gear the Portfolio towards a growth strategy
within the U.S. equity segment. The combination of slowing growth, low
inflation, and the Asian/Russian financial crises should help keep the Federal
Reserve on the sidelines with respect to interest rates. The Portfolio maintains
a defensive stance, with investments in primarily high quality, U.S.
instruments. We do not anticipate significant changes to the Portfolio at this
time.

Francine J. Bovich
PORTFOLIO MANAGER

July 1998

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Conservative Portfolio

3
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------

CONSERVATIVE PORTFOLIO
- --------------------------------------------------------------------------------

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

INVESTMENTS (81.2%)
U.S. FIXED INCOME FUNDS (64.4%)
33,154 MAS High Yield Portfolio, Institutional Class..... $ 325
214,922 MAS Limited Duration Portfolio, Institutional
Class........................................... 2,250
----------
2,575
----------
U.S. EQUITY FUNDS (16.8%)
12,297 MSIF Equity Growth Portfolio, Class A............. 241
36,144 MSIF U.S. Equity Plus Portfolio, Class A.......... 428
----------
669
----------
TOTAL INVESTMENTS (81.2%) (Cost $3,193)....................... 3,244
----------
OTHER ASSETS AND LIABILITIES -- NET (18.8%)................... 752
----------
NET ASSETS (100%)............................................. $ 3,996
----------
----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
Conservative Portfolio

4
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
MODERATE PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- -----------------------------------------

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
U.S. Equity 34.6%
International Equity 14.7%
U.S. Fixed Income 47.9%
Other 2.8%
</TABLE>

PERFORMANCE COMPARED TO THE BENCHMARK(1)
- ---------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------
TOTAL RETURN
YTD SINCE INCEPTION
---------- ------------------
<S> <C> <C>
PORTFOLIO--CLASS A(3)............. 8.60% 8.60%
PORTFOLIO--CLASS B(3)............. 8.40 8.40
INDEX............................. 10.40 10.40
</TABLE>

1. The benchmark for the Moderate Portfolio is a composite comprised of 40% of
the Lehman Intermediate Government/Corporate Bond Index, 35% of the S&P 500
Index, 15% of the Morgan Stanley Capital International (MSCI) Europe,
Australasia and Far East (EAFE) Index and 10% of the Salomon High Yield
Market Index.

2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.

3. The Portfolio commenced operations on December 31, 1997.

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

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

The Moderate Portfolio seeks the highest level of long-term total return that is
consistent with a relatively moderate level of risk primarily through investment
in a mix of fixed income and equity portfolios of the Morgan Stanley
Institutional Fund and the MAS Funds. The Portfolio's assets are normally
allocated within the range of 45%-55% equities and 45%-55% fixed income. The
allocations are expected to be relatively static with subtle periodic
adjustments in response to market developments.

The Portfolio uses, as its benchmark for performance purposes, a composite
comprised of 40% of the Lehman Intermediate Government/Corporate Bond Index, 35%
of the S&P 500 Index, 15% of the Morgan Stanley Capital International (MSCI)
Europe, Australasia, and Far East (EAFE) Index and 10% of the Salomon High Yield
Market Index.

For the six month period ended June 30, 1998, the Portfolio had a total return
of 8.60% for the Class A shares and 8.40% for the Class B shares compared to
10.40% for the benchmark.

The first half of 1998 witnessed a period of mixed performance in the aftermath
of the Asian currency crisis which shook global capital markets in the fourth
quarter of 1997. U.S. bonds briefly rallied as Asian markets continued to fall
in January, as these assets are considered a safe haven in times of global
market uncertainty. However, as Asian equity markets stabilized and began to
rise, U.S. bond yields edged back up to the levels at which they started the
year. The Lehman Intermediate Government/Corporate Bond Index returned 1.6% for
the first quarter, a respectable showing for the asset class. In equity markets,
investors quickly shrugged off the bad news in Asia amidst news of better than
expected earnings growth and low inflation in the U.S. and Europe. The S&P 500
Index rose 14.0% in the first three months of 1998. In Europe, investors chose
to focus on the positive impact European Monetary Union (EMU) was expected to
have on Europe. The majority of European markets set record highs in the first
quarter. Japan experienced a

- --------------------------------------------------------------------------------
Moderate Portfolio

5
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
MODERATE PORTFOLIO (CONT.)
volatile first quarter, producing a strong return in January, only to lose much
of the gains in March, and end the quarter slightly positive. The MSCI EAFE
Index returned 14.7% during the first quarter, outpacing U.S. equity markets.
The combination of strong equity markets and steady bond yields provided a
favorable backdrop for high yield debt instruments. The Salomon High Yield
Market Index returned 4.1% in the first quarter.

After a strong first quarter, market gains were more moderate in the second
quarter. Most of the weakness and uncertainty in markets stemmed from Asia as
the currency crisis countries experienced another leg down of economic
contraction. Japan's economic troubles intensified, and the yen began to
depreciate rapidly, threatening a broader round of competitive devaluations. The
volatility in foreign markets was again positive for U.S. bonds, as another
flight to quality ensued. The long bond yield reached a historic low of 5.6% in
June. For the second quarter of 1998, the Lehman Intermediate Government/
Corporate Bond Index returned a strong 1.9%. U.S. equity markets experienced up
and down months in the second quarter, as news from Asia turned for the worse,
and uncertainty mounted regarding the prospects for future growth and the
direction of U.S. interest rates. The S&P 500 Index gained 3.3% in the second
quarter. International equity markets fared worse than the U.S., as the MSCI
EAFE Index rose only 1.1% for the quarter. Most of the weakness in international
equities stemmed from Japan and Asia ex-Japan, which fell 4.5% and 22.6%
respectively during the quarter. European equities, the largest component of the
MSCI EAFE Index, continued to outperform, returning 5.1% in the second quarter.
The equity volatility and the flight to quality provided a less favorable
environment for high yield bonds during this period, as this asset class
underperformed investment grade bonds. The Salomon High Yield Market Index
returned 1.0% for the second quarter.

The Portfolio underperformed its benchmark for the first half of 1998, with most
of the underperformance coming in the second quarter. Our asset allocation
remains at the middle of the ranges and similar to the benchmark, with 35.6% of
the Portfolio's investments in U.S. equity portfolios, 15.1% invested in
international equity portfolios, and 49.3% invested in fixed income portfolios.

The underperformance of the Portfolio was due primarily to security selection
within the mutual funds. The most significant contributor to underperformance
was the MAS Value Portfolio, which underperformed the S&P 500 significantly
during both the first and second quarters, to return 5.5% in the first half of
the year, relative to an S&P 500 return of 17.7% for the same period. The
underperformance has been due primarily to an underweight in the mega-cap
stocks, which have substantially outperformed smaller stocks. Mega-cap stocks
have been the primary beneficiaries of the strong U.S. bull market since 1995,
and thus, valuations of these stocks are at all-time highs. In searching for
attractively valued stocks, the MAS Value Portfolio has avoided many of the
expensive mega cap names, leading to underperformance. The MSIF Equity Growth
Portfolio was also a contributor to underperformance, returning 15.7%
year-to-date, below the 17.7% return for the S&P 500. The poor performance in
the MSIF Equity Growth Portfolio was due in large part to a substantial holding
of Cendant, a stock which has been much in the news since the company's
announcement in mid-April of "accounting irregularities" in the company's CUC
division. (Cendant resulted from the merger of CUC and HFS last December.) The
stock dropped precipitously (about 46%), falling as low as $17. Another
contributor to underperformance was the MAS High Yield Portfolio, which ended
the second quarter flat, compared to a rise in the Salomon High Yield Market
Index of 1.0%. The MAS High Yield Portfolio's overexposure to Asian markets was
the primary cause of underperformance, as Indonesian debt and Japanese debt
prices suffered from further deterioration in economic fundamentals and currency
movements.

- --------------------------------------------------------------------------------
Moderate Portfolio

6
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
MODERATE PORTFOLIO (CONT.)

A part of these underperforming factors were offset by the strong performance of
the MSIF International Magnum Portfolio (+18.0% year-to-date) versus EAFE
(+15.9% year-to-date). The International Magnum Portfolio's outperformance was
largely due to overweights in Europe, underweights to Japan and Asia, and a
hedge against the Japanese yen.

Going forward, we see significant risk in equity markets, as the U.S. economy,
which had been the primary force behind global growth, appears to be slowing,
global equity valuations remain at all-time highs, and pricing power remains
weak. We believe that in this environment, growth oriented companies should
outperform. We continue to gear the Portfolio towards a growth strategy within
the U.S. equity segment. Within the international equity segment, we continue to
emphasize Europe, where growth prospects remain reasonably strong, and
underweight the Asian countries. The combination of slowing growth, low
inflation, and the Asian/Russian financial crises should help keep the Federal
Reserve on the sidelines with respect to interest rates. We do not anticipate
significant changes to the Portfolio at this time.

Francine J. Bovich
PORTFOLIO MANAGER

July 1998

- --------------------------------------------------------------------------------
Moderate Portfolio

7
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------

MODERATE PORTFOLIO
- --------------------------------------------------------------------------------

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

INVESTMENTS (97.2%)
U.S. EQUITY FUNDS (34.6%)
11,735 MAS Value Portfolio, Institutional Class.......... $ 221
26,819 MSIF Equity Growth Portfolio, Class A............. 525
66,686 MSIF U.S. Equity Plus Portfolio, Class A.......... 789
17,140 MSIF Value Equity Portfolio, Class A.............. 258
---------
1,793
---------
U.S. FIXED INCOME FUNDS (47.9%)
50,942 MAS High Yield Portfolio, Institutional Class..... 499
188,818 MAS Intermediate Duration Portfolio, Institutional
Class........................................... 1,981
---------
2,480
---------
INTERNATIONAL EQUITY FUND (14.7%)
59,261 MSIF International Magnum Portfolio, Class A...... 760
---------
TOTAL INVESTMENTS (97.2%) (Cost $4,964)....................... 5,033
---------
OTHER ASSETS AND LIABILITIES -- NET (2.8%).................... 147
---------
NET ASSETS (100%)............................................. $ 5,180
---------
---------
</TABLE>

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
Moderate Portfolio

8
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- -----------------------------------------

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
U.S. Equity 49.9%
International Equity 33.8%
U.S. Fixed Income 14.5%
International Fixed Income 0.1%
Other 1.7%
</TABLE>

PERFORMANCE COMPARED TO THE BENCHMARK(1)
- ---------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------
TOTAL RETURN
YTD SINCE INCEPTION
---------- ------------------
<S> <C> <C>
PORTFOLIO--CLASS A(3)............. 10.10% 10.10%
PORTFOLIO--CLASS B(3)............. 10.10 10.10
INDEX............................. 10.35 10.35
</TABLE>

1. The benchmark for the Aggressive Portfolio is a composite comprised of 50% of
the Russell 3000 Index, 25% of the Morgan Stanley Capital International
(MSCI) Europe, Australasia and Far East (EAFE) Index, 15% of the Lehman
Aggregate Bond Index and 10% of the IFC Investable Emerging Market Index.

2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.

3. The Portfolio commenced operations on December 31, 1997.

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

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

The Aggressive Portfolio seeks the highest level of long-term capital
appreciation that is consistent with a relatively high level of risk primarily
through investment in certain equity portfolios, and, to a lesser degree certain
fixed income portfolios of the Morgan Stanley Institutional Fund and the MAS
Funds. The Portfolio's assets are normally allocated within the range of 80%-90%
equities and 10%-20% fixed income. The allocations are expected to be relatively
static with subtle periodic adjustments in response to market developments.

The Portfolio uses, as its benchmark for performance purposes, a composite
comprised of 50% of the Russell 3000 Index, 25% of the Morgan Stanley Capital
International (MSCI) Europe, Australasia, and Far East (EAFE) Index, 15% of the
Lehman Aggregate Bond Index and 10% of the IFC Investable Emerging Markets
Index.

For the six month period ended June 30, 1998, the Portfolio had a total return
of 10.10% for the Class A shares and 10.10% for the Class B shares compared to
10.35% for the benchmark.

The first half of 1998 witnessed a period of mixed performance in the aftermath
of the Asian currency crisis which shook global capital markets in the fourth
quarter of 1997. U.S. bonds briefly rallied as Asian markets continued to fall
in January, as these assets are considered a safe haven in times of global
market uncertainty. However, as Asian equity markets stabilized and began to
rise, U.S. bond yields edged back up to the levels at which they started the
year. The Lehman Aggregate Bond Index returned 1.6% for the first quarter. In
equity markets, investors quickly shrugged off the bad news in Asia amidst news
of better than expected earnings growth and low inflation in the U.S. and
Europe. The Russell 3000 Index, which is comprised of large, mid, and small cap
U.S. stocks, rose 13.1% in the first three months of 1998. In Europe, investors
chose to focus on the positive impact European Monetary Union (EMU) was expected
to have on Europe. The majority of European markets set record highs in the
first quarter. Japan experienced a volatile first

- --------------------------------------------------------------------------------
Aggressive Portfolio

9
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE PORTFOLIO (CONT.)
quarter, producing a strong return in January, only to lose much of the gains in
March, and end the quarter slightly positive. The MSCI EAFE Index returned 14.7%
during the first quarter, outpacing U.S. equity markets. After significant
losses in the fourth quarter of 1997, emerging market equities recovered, and
the IFC Investible Index returned 7.0% in the first quarter.

Despite first quarter strength, second quarter returns were more moderate. Most
of the weakness and uncertainty in markets stemmed from Asia as the currency
crisis countries experienced another leg down of economic contraction. Japan's
economic troubles intensified, and the yen began to depreciate rapidly,
threatening a broader round of competitive devaluations. Late in the quarter,
Russia imploded in its own financial crisis, caused by corporate non-payments,
inadequate tax collection, and a ballooning federal deficit. In this second
round crisis, the worst performing asset class was emerging market equities. The
IFC Investible Index lost all its gains of the first quarter, precipitously
falling 21.2% in the second quarter, to return -15.7% year-to-date.

The volatility in foreign markets was again positive for U.S. bonds, as another
flight to quality ensued. The long bond yield reached a historic low of 5.6% in
June. For the second quarter of 1998, the Lehman Aggregate Bond Index returned a
strong 2.3%. U.S. equity markets experienced up and down months in the second
quarter, as news from Asia turned for the worse, and uncertainty mounted
regarding the prospects for future growth and the direction of U.S. interest
rates. The Russell 3000 Index gained 1.8% in the second quarter. International
equity markets fared worse than the U.S., as the MSCI EAFE Index rose only 1.1%
for the quarter. Most of the weakness in international equities stemmed from
Japan and Asia ex-Japan, which fell 4.5% and 22.6%, respectively, during the
quarter. European equities, the largest component of the MSCI EAFE Index,
continued to outperform, returning 5.1% in the second quarter.

The Portfolio performed in line relative to its benchmark for the first half of
1998. Our asset allocation remains at the middle of the ranges and similar to
the benchmark, with 50.8% of the Portfolio assets invested in U.S. equity
portfolios, 25.2% invested in developed market international equity portfolios,
9.2% invested in emerging markets portfolios, and 14.8% invested in fixed income
portfolios.

Security selection value added within the funds varied by fund, netting out to
zero at the total Portfolio level. The most significant contributor to security
selection underperformance was the MAS Value Portfolio, which underperformed the
Russell 3000 Index significantly during both the first and second quarters, to
return 5.5% in the first half of the year, relative to a Russell 3000 Index
return of 15.1% for the same period. The underperformance has been due primarily
to an underweight in the mega-cap stocks, which have substantially outperformed
smaller stocks. Mega-cap stocks have been the primary beneficiaries of the
strong U.S. bull market since 1995, and thus, valuations of these stocks are at
all-time highs. In searching for attractively valued stocks, the MAS Value
Portfolio has avoided many of the expensive mega cap names, leading to
underperformance. The MSIF Equity Growth Portfolio was also a contributor to
underperformance in the second quarter, returning -0.96% for the second quarter,
well below the 1.8% return for the S&P 500. The poor performance in the MSIF
Equity Growth Portfolio was due in large part to a large holding of Cendant, a
stock which has been much in the news since the company's announcement in
mid-April of "accounting irregularities" in the company's CUC division. (Cendant
resulted from the merger of CUC and HFS last December.) The stock dropped
precipitously (about 46%), falling as low as $17.

These underperforming factors were offset by the strong performance of the MSIF
International Magnum Portfolio (+18.0% year-to-date) versus EAFE (+15.9%
year-to-date), and the strong performance of the MAS Mid Cap Growth

- --------------------------------------------------------------------------------
Aggressive Portfolio

10
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE PORTFOLIO (CONT.)
Portfolio (+25.0% year-to-date) versus the Russell 3000 Index (+15.1%
year-to-date). The MSIF International Magnum Portfolio's outperformance was
largely due to overweights in Europe, underweights to Japan and Asia, and a
hedge against the Japanese yen. The strong performance in the MAS Mid Cap Growth
Portfolio can be attributed to overweights in interest sensitive sectors with
domestic revenue streams such as technology, health care, and telecommunications
which have been very strong in the first half of 1998.

In mid-June, we initiated an investment in the MSIF Value Equity Portfolio by
swapping a portion of our holdings out of the MAS Value Portfolio. We believe
that value stocks should lend a defensive stance to the Aggressive Portfolio in
periods of volatility. The MSIF Value Equity Portfolio has shown strong
performance, and should serve as a risk moderating complement to the MAS Value
Portfolio in the future. We also initiated an investment in the MSIF Emerging
Markets Debt Portfolio. We will continue to increase our exposure to emerging
market debt with inflows, in lieu of increasing investments in the MSIF Emerging
Market Portfolio. During this period of uncertainty in emerging markets, we
expect debt to experience less volatility than emerging market equities, and we
anticipate that the MSIF Emerging Market Debt Portfolio should help moderate the
volatility of our emerging markets investments.

Going forward, we see significant risk in equity markets, as the U.S. economy,
which had been the primary force behind global growth, appears to be slowing,
global equity valuations remain at all-time highs, and pricing power remains
weak. We believe that in this environment, growth oriented companies should
outperform. We continue to gear the Portfolio towards a growth strategy within
the U.S. equity segment. Within the international equity segment, we continue to
emphasize Europe, where growth prospects remain reasonably strong, and
underweight the Asian countries. The combination of slowing growth, low
inflation, and Asian/Russian financial crises should help keep the Federal
Reserve on the sidelines with respect to interest rates. We do not anticipate
significant changes to the Portfolio at this time.

Francine J. Bovich
PORTFOLIO MANAGER

July 1998

- --------------------------------------------------------------------------------
Aggressive Portfolio

11
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------

AGGRESSIVE PORTFOLIO
- --------------------------------------------------------------------------------

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

INVESTMENTS (98.3%)
U.S. EQUITY FUNDS (49.9%)
18,873 MAS Mid Cap Growth Portfolio, Institutional
Class........................................... $ 435
11,869 MAS Value Portfolio, Institutional Class.......... 223
31,314 MSIF Equity Growth Portfolio, Class A............. 613
34,419 MSIF U.S. Equity Plus Portfolio, Class A.......... 408
21,308 MSIF Value Equity Portfolio, Class A.............. 320
---------
1,999
---------
INTERNATIONAL EQUITY FUNDS (33.8%)
32,234 MSIF Emerging Markets Portfolio, Class A.......... 358
77,399 MSIF International Magnum Portfolio, Class A...... 993
---------
1,351
---------
U.S. FIXED INCOME FUND (14.5%)
47,868 MAS Fixed Income Portfolio, Institutional Class... 581
---------
INTERNATIONAL FIXED INCOME FUND (0.1%)
786 MSIF Emerging Markets Debt Portfolio, Class A..... 4
---------
TOTAL INVESTMENTS (98.3%) (Cost $3,853)....................... 3,935
---------
OTHER ASSETS AND LIABILITIES -- NET (1.7%).................... 68
---------
NET ASSETS (100%)............................................. $ 4,003
---------
---------
</TABLE>

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
Aggressive Portfolio

12
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CONSERVATIVE MODERATE AGGRESSIVE
PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------

ASSETS
Investments, at Cost....................... $3,193 $4,964 $3,853
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Investments, at Value...................... $3,244 $5,033 $3,935
Cash....................................... -- 15 13
Receivable for Portfolio Shares Sold....... 684 79 --
Receivable for Investments Sold............ 234 -- --
Deferred Organization Costs................ 89 89 89
Receivable from Investment Adviser......... 6 6 6
- -----------------------------------------------------------------------------------------
TOTAL ASSETS................................. 4,257 5,222 4,043
- -----------------------------------------------------------------------------------------
LIABILITIES
Bank Overdraft............................. (233) -- --
Payable for Investments Purchased.......... -- (14) (12)
Administrative Fees Payable................ (1) (1) (1)
Shareholder Reporting Fees Payable......... (15) (15) (15)
Professional Fees Payable.................. (11) (12) (12)
Other Liabilities.......................... (1) -- --
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES............................ (261) (42) (40)
- -----------------------------------------------------------------------------------------
NET ASSETS................................... $3,996 $5,180 $4,003
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital............................ $3,926 $5,060 $3,863
Undistributed Net Investment Income........ 9 5 1
Accumulated Net Realized Gain.............. 10 46 57
Unrealized Appreciation on Investments..... 51 69 82
- -----------------------------------------------------------------------------------------
NET ASSETS................................... $3,996 $5,180 $4,003
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
CLASS A:
- ---------------------------------------------
NET ASSETS................................... $3,454 $4,620 $3,434
SHARES ISSUED AND OUTSTANDING ($0.001 PAR
VALUE)
(Authorized 1,500,000 shares).............. 329 426 312
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE............................ $10.51 $10.86 $11.01
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
CLASS B:
- ---------------------------------------------
NET ASSETS................................... $ 542 $ 560 $ 569
SHARES ISSUED AND OUTSTANDING ($0.001 PAR
VALUE)
(Authorized 1,500,000 shares).............. 52 52 52
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE............................ $10.49 $10.84 $11.01
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

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

13
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividends.................................. $ 12 $ 9 $ 3
Interest................................... -- -- 1
- -----------------------------------------------------------------------------------------
Total Income............................. 12 9 4
- -----------------------------------------------------------------------------------------
EXPENSES:
Administrative Fees........................ 1 2 1
Professional Fees.......................... 15 15 15
Shareholder Reports........................ 14 14 14
Distribution Fees on Class B Shares........ 1 1 1
Amortization of Organizational Costs....... 10 10 10
Other Expenses............................. 1 1 1
Expenses Reimbursed by Adviser............. (39) (39) (39)
- -----------------------------------------------------------------------------------------
Total Expenses........................... 3 4 3
- -----------------------------------------------------------------------------------------
NET INVESTMENT INCOME........................ 9 5 1
- -----------------------------------------------------------------------------------------
NET REALIZED GAIN:
Investments Sold........................... 10 46 57
- -----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION:
Investments................................ 51 69 82
- -----------------------------------------------------------------------------------------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION.................... 61 115 139
- -----------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations............................. $ 70 $ 120 $ 140
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

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

14
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE
PORTFOLIO PORTFOLIO
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
SIX MONTHS ONE DAY SIX MONTHS ONE DAY
ENDED ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997* (UNAUDITED) 1997*
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------

INCREASE IN NET ASSETS
OPERATIONS:
Net Investment Income................. $ 9 $ -- $ 5 $ --
Net Realized Gain..................... 10 -- 46 --
Change in Unrealized Appreciation..... 51 -- 69 --
- -----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations..................... 70 -- 120 --
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed............................ 3,127 517 4,720 517
Redeemed.............................. (234) -- (693) --
CLASS B:
Subscribed............................ -- 516 -- 516
- -----------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions........................ 2,893 1,033 4,027 1,033
- -----------------------------------------------------------------------------------------------------
Total Increase in Net Assets.......... 2,963 1,033 4,147 1,033
NET ASSETS:
Beginning of Period................... 1,033 -- 1,033 --
- -----------------------------------------------------------------------------------------------------
End of Period......................... $3,996 $1,033 $5,180 $1,033
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Undistributed net investment income
included in end of period net
assets.............................. $ 9 $ -- $ 5 $ --
- -----------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed.................... 299 52 438 52
Shares Redeemed...................... (22) -- (64) --
- -----------------------------------------------------------------------------------------------------
Net Increase in Class A Shares
Outstanding........................ 277 52 374 52
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed.................... -- 52 -- 52
- -----------------------------------------------------------------------------------------------------
Net Increase in Class B Shares
Outstanding........................ -- 52 -- 52

<CAPTION>
AGGRESSIVE
PORTFOLIO
----------------------------
<S> <C> <C>
SIX MONTHS ONE DAY
ENDED ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997*
(000) (000)
- ----------------------------------------
INCREASE IN NET ASSETS
OPERATIONS:
Net Investment Income................. $ 1 $ --
Net Realized Gain..................... 57 --
Change in Unrealized Appreciation..... 82 --
- ----------------------------------------
Net Increase in Net Assets Resulting
from Operations..................... 140 --
- ----------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed............................ 3,496 517
Redeemed.............................. (666) --
CLASS B:
Subscribed............................ -- 516
- ----------------------------------------
Net Increase in Capital Share
Transactions........................ 2,830 1,033
- ----------------------------------------
Total Increase in Net Assets.......... 2,970 1,033
NET ASSETS:
Beginning of Period................... 1,033 --
- ----------------------------------------
End of Period......................... $4,003 $1,033
- ----------------------------------------
- ----------------------------------------
Undistributed net investment income
included in end of period net
assets.............................. $ 1 $ --
- ----------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed.................... 321 52
Shares Redeemed...................... (61) --
- ----------------------------------------
Net Increase in Class A Shares
Outstanding........................ 260 52
- ----------------------------------------
- ----------------------------------------
CLASS B:
Shares Subscribed.................... -- 52
- ----------------------------------------
Net Increase in Class B Shares
Outstanding........................ -- 52
</TABLE>

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

* Commencement of operations

The accompanying notes are an integral part of the financial statements.

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

15
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
CONSERVATIVE PORTFOLIO

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

<TABLE>
<CAPTION>
CLASS A
------------------------------
SIX MONTHS
ENDED ONE DAY ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997*
<S> <C> <C>
- -----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD... $ 10.00 $ 10.00
- -----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................ 0.01 --
Net Realized and Unrealized Gain..... 0.50 --
- -----------------------------------------------------------------------
Total From Investment Operations... 0.51 --
- -----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......... $ 10.51 $ 10.00
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
TOTAL RETURN........................... 5.10% 0.00%
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).......................... $ 3,454 $ 517
Ratio of Expenses to Average Net Assets
(1).................................. 0.32%(a) 0.00%(a)
Ratio of Net Investment Income to
Average Net Assets (1)............... 1.10%(a) 0.00%(a)
Portfolio Turnover..................... 22% 0%
- ------------------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net investment
income........................... $ 0.07 $ 0.00
Ratios before expense limitation:....
Expenses to Average Net Assets..... 5.89%(a) 0.00%(a)
Net Investment Income (Loss) to
Average Net Assets............... (4.16)%(a) 0.00%(a)
- -----------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
CLASS B
------------------------------
SIX MONTHS
ENDED ONE DAY ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997*
<S> <C> <C>
- -----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD... $ 10.00 $ 10.00
- -----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................ 0.08 --
Net Realized and Unrealized Gain..... 0.41 --
- -----------------------------------------------------------------------
Total From Investment Operations... 0.49 --
- -----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......... $ 10.49 $ 10.00
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
TOTAL RETURN........................... 4.90% 0.00%
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).......................... $ 542 $ 516
Ratio of Expenses to Average Net Assets
(2).................................. 0.57%(a) 0.00%(a)
Ratio of Net Investment Income to
Average Net Assets (2)............... 1.66%(a) 0.00%(a)
Portfolio Turnover..................... 22% 0%
- ------------------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net investment
income........................... $ 0.33 $ 0.00
Ratios before expense limitation:....
Expenses to Average Net Assets..... 6.14%(a) 0.00%(a)
Net Investment Income (Loss) to
Average Net Assets............... (4.41)%(a) 0.00%(a)
</TABLE>

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

* Commencement of operations
(a) Annualized

The accompanying notes are an integral part of the financial statements.

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

16
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
MODERATE PORTFOLIO

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

<TABLE>
<CAPTION>
CLASS A
-----------------------------------
SIX MONTHS
ENDED ONE DAY ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997*
<S> <C> <C>
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.............. $10.00 $10.00
- ---------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........................... 0.01 --
Net Realized and Unrealized Gain................ 0.85 --
- ---------------------------------------------------------------------------------------
Total From Investment Operations.............. 0.86 --
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................... $10.86 $10.00
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
TOTAL RETURN...................................... 8.60% 0.00%
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)............. $4,620 $ 517
Ratio of Expenses to Average Net Assets (1)....... 0.27%(a) 0.00%(a)
Ratio of Net Investment Income to Average Net
Assets (1)...................................... 0.42%(a) 0.00%(a)
Portfolio Turnover................................ 64% 0%
- ------------------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income.... $ 0.05 $ 0.00
Ratios before expense limitation:...............
Expenses to Average Net Assets................ 4.75%(a) 0.00%(a)
Net Investment Income (Loss) to Average Net
Assets...................................... (3.81)%(a) 0.00%(a)
- ---------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
CLASS B
------------------------------------
SIX MONTHS
ENDED ONE DAY ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997*
<S> <C> <C>
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.............. $10.00 $10.00
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........................... 0.05 --
Net Realized and Unrealized Gain................ 0.79 --
- ----------------------------------------------------------------------------------------
Total From Investment Operations.............. 0.84 --
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................... $10.84 $10.00
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
TOTAL RETURN...................................... 8.40% 0.00%
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)............. $ 560 $ 516
Ratio of Expenses to Average Net Assets (2)....... 0.52%(a) 0.00%(a)
Ratio of Net Investment Income to Average Net
Assets (2)...................................... 0.98%(a) 0.00%(a)
Portfolio Turnover................................ 64% 0%
- ------------------------
(2) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income.... $ 0.33 $ 0.00
Ratios before expense limitation:
Expenses to Average Net Assets................ 5.00%(a) 0.00%(a)
Net Investment Income (Loss) to Average Net
Assets...................................... (4.06)%(a) 0.00%(a)
</TABLE>

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

* Commencement of operations
(a) Annualized

The accompanying notes are an integral part of the financial statements.

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

17
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
AGGRESSIVE PORTFOLIO

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

<TABLE>
<CAPTION>
CLASS A
-----------------------------------------
SIX MONTHS ENDED ONE DAY ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997*
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00 $10.00
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Realized and Unrealized Gain.......................... 1.01 --
- -------------------------------------------------------------------------------------------------------
Total From Investment Operations........................ 1.01 --
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $11.01 $10.00
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 10.10% 0.00%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)....................... $3,434 $ 517
Ratio of Expenses to Average Net Assets (1)................. 0.28%(a) 0.00%(a)
Ratio of Net Investment Income to Average Net Assets (1).... 0.09%(a) 0.00%(a)
Portfolio Turnover.......................................... 71% 0%
- ------------------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income.............. $ 0.08 $ 0.00
Ratios before expense limitation:
Expenses to Average Net Assets.......................... 5.57%(a) 0.00%(a)
Net Investment Income (Loss) to Average Net Assets...... (5.12)%(a) 0.00%(a)
- -------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
CLASS B
-----------------------------------------
SIX MONTHS ENDED ONE DAY ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997*
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00 $10.00
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Realized and Unrealized Gain.......................... 1.01 --
- -------------------------------------------------------------------------------------------------------
Total From Investment Operations........................ 1.01 --
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $11.01 $10.00
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 10.10% 0.00%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)....................... $ 569 $ 516
Ratio of Expenses to Average Net Assets (2)................. 0.53%(a) 0.00%(a)
Ratio of Net Investment Income to Average Net Assets (2).... 0.04%(a) 0.00%(a)
Portfolio Turnover.......................................... 71% 0%
- ------------------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income.............. $ 0.34 $ 0.00
Ratios before expense limitation:
Expenses to Average Net Assets.......................... 5.82%(a) 0.00%(a)
Net Investment Income (Loss) to Average Net Assets...... (5.37)%(a) 0.00%(a)
</TABLE>

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

* Commencement of operations
(a) Annualized

The accompanying notes are an integral part of the financial statements.

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

18
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------

Morgan Stanley Strategic Adviser Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Fund is a type of mutual fund often described as a "fund of funds."
The Fund consists of three separate investment portfolios: Conservative
Portfolio, Moderate Portfolio and Aggressive Portfolio, (each a "Portfolio" and
collectively, the "Portfolios") that invest primarily in Class A shares of
certain investment portfolios of Morgan Stanley Institutional Fund, Inc.
("MSIF") and Institutional Class shares of certain investment portfolios of MAS
Funds (each an "Underlying Fund" and collectively, the "Underlying Funds"). The
MAS Funds are managed by an affiliate of the Adviser. The Fund currently offers
two classes of shares, Class A and Class B shares. Both classes have identical
voting rights (except shareholders of a Class have exclusive voting rights
regarding any matter relating solely to that Class of shares), dividend,
liquidation and other rights. The investment objective of the Conservative,
Moderate and Aggressive Portfolios is to seek the highest level of long-term
total return that is consistent with a relatively conservative level, moderate
level or high level of risk, respectively.

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

1. SECURITY VALUATION: Investments in the Underlying Funds are valued at the net
asset value per share of the Underlying Fund at the close of each valuation day.
Short-term securities with a maturity date of less than 60 days are valued at
amortized cost which approximates market value.

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

3. ORGANIZATIONAL COSTS: The Fund incurred organizational costs of approximately
$297,000 which have been capitalized and allocated equally to each Portfolio.
Such costs are being amortized on a straight line basis over a period of five
years beginning on December 31, 1997, the date the Fund commenced operations.
Morgan Stanley Asset Management Inc. has agreed that in the event any of its
initial shares which comprised the Fund at inception are redeemed, the proceeds
on redemption will be reduced by the pro-rata portion of any unamortized
organizational costs in the same proportion as the number of shares redeemed
bears to the initial shares held at time of redemption.

4. OTHER: Realized gains and losses from the sale of the Underlying Funds are
determined on the specific identified cost basis. Dividend income from the
Underlying Funds is recorded on the ex-dividend date. Most expenses of the Fund
can be directly attributed to a particular Portfolio. Expenses which cannot be
directly attributed are apportioned among the Portfolios based upon relative net
assets. Income, expenses (other than class specific expenses) and realized and
unrealized gains or losses are allocated to each class of shares of a Portfolio
based upon their relative net assets. Distributions from the Portfolios are
recorded on the ex-distribution date.

The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for the character and timing
of the recognition of gains or losses on securities.

Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications

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

19
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
among undistributed net investment income (loss), accumulated net realized gain
(loss) and paid in capital. Permanent book and tax differences, if any, are not
included in ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the Financial Highlights.

B. INVESTMENT ADVISER AND ADMINISTRATOR: Morgan Stanley Asset Management Inc.
("MSAM"), a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., as
Adviser allocates the Portfolios' investments in the Underlying Funds within the
applicable ranges for each Portfolio, at no charge, under the terms of an
Investment Advisory and Management Agreement (the "Agreement"). MSAM also
provides the Fund with administrative services pursuant to an administrative
agreement for a monthly fee which on an annual basis equals 0.15% of the average
daily net assets of each Portfolio, plus reimbursement of out-of-pocket
expenses. Under an agreement between MSAM and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"). For such
services, MSAM pays CGFSC a portion of the fee MSAM receives from the Fund.
Certain employees of CGFSC are officers of the Fund.

MSAM has agreed to reduce fees payable to it and to reimburse the Portfolios, if
necessary, if the annual operating expenses of the Portfolios plus the expenses
of the Underlying Funds attributable to the shares owned by the Portfolio,
expressed as a percentage of average daily net assets, exceed the maximum ratios
indicated as follows:

<TABLE>
<CAPTION>
MAXIMUM EXPENSE RATIO
--------------------------
PORTFOLIO CLASS A CLASS B
- --------------------------------------- ------------ ------------
<S> <C> <C>
Conservative Portfolio................. 0.80% 1.05%
Moderate Portfolio..................... 0.90% 1.15%
Aggressive Portfolio................... 1.10% 1.35%
</TABLE>

C. DISTRIBUTOR: Morgan Stanley & Co., Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., and an affiliate of
MSAM, serves as the distributor of the Fund and provides Class B shareholders of
each applicable Portfolio with distribution services pursuant to a Distribution
Plan (the "Plan") in accordance with Rule 12b-1 under the Investment Company Act
of 1940, as amended. Under the Plan, the Distributor is entitled to receive from
each Portfolio, a distribution fee, which is accrued daily and paid quarterly,
at an annual rate of 0.25% of the Class B shares' average daily net assets. The
Distributor may voluntarily waive, from time to time, all or a portion of its
distribution fee.

D. CUSTODIAN: Chase serves as the custodian of the securities and cash of the
Portfolios.

E. PURCHASES AND SALES: During the six months ended June 30, 1998, purchases and
sales of investment funds were approximately as follows:

<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- --------------------------------------- ----------- -----
<S> <C> <C>
Conservative Portfolio................. $ 2,474 $ 291
Moderate Portfolio..................... 4,900 981
Aggressive Portfolio................... 3,744 948
</TABLE>

For the six months ended June 30, 1998, the Fund had no purchases and sales of
long-term U.S. Government securities.

F. OTHER: At June 30, 1998, cost, unrealized appreciation, unrealized
depreciation, and net unrealized appreciation (depreciation) for U.S. Federal
income tax purposes of the investments of each Portfolio were:

<TABLE>
<CAPTION>
NET
UNREALIZED
UNREALIZED UNREALIZED APPREC.
COST APPREC. DEPREC. (DEPREC.)
PORTFOLIO (000) (000) (000) (000)
- ------------------- --------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Conservative
Portfolio......... $ 3,193 $ 51 $ -- $ 51
Moderate
Portfolio......... 4,964 74 (5) 69
Aggressive
Portfolio......... 3,853 104 (22) 82
</TABLE>

Certain Portfolios invest in underlying funds which invest in high-yield and/or
foreign securities.

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20
<PAGE>
Morgan Stanley
Strategic Adviser Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
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Investments in high-yield securities are accompanied by a greater degree of
credit risk and the risk tends to be more sensitive to economic conditions than
higher-rated securities. In addition, these investments tend to have thinner
trading markets which may result in less availability of price quotations and a
risk that amounts realized upon disposition of a security will differ from such
quotations.

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

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

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