MORGAN STANLEY INSTITUTIONAL FUND INC, 497, 1997-09-26

MORGAN STANLEY INSTITUTIONAL FUND INC
497, 1997-09-26

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P R O S P E C T U S
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EUROPEAN REAL ESTATE PORTFOLIO
ASIAN REAL ESTATE PORTFOLIO
U.S. REAL ESTATE PORTFOLIO

PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.

P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786

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

Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the European Real Estate, Asian Real Estate and U.S. Real Estate Portfolios
(each a "Portfolio" and together, the "Portfolios"). The Class A and Class B
shares currently offered by the Portfolios have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge, exchange fee or redemption fee, (except that the International
Small Cap Portfolio may impose a transaction fee).

The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.

This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information" dated September
26, 1997, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.

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 DATE OF THIS PROSPECTUS IS SEPTEMBER 26, 1997.
<PAGE>
FUND EXPENSES

The following table illustrates the expenses and fees that a shareholder of
each Portfolio will incur:

<TABLE>
<CAPTION>
EUROPEAN ASIAN U.S.
REAL REAL REAL
ESTATE ESTATE ESTATE
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................... None None None
Class B................................................... None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................... None None None
Class B................................................... None None None
Deferred Sales Load
Class A................................................... None None None
Class B................................................... None None None
Redemption Fees
Class A................................................... None None None
Class B................................................... None None None
Exchange Fees
Class A................................................... None None None
Class B................................................... None None None
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C>
Management Fee (Net of Fee Waiver)*
Class A................................................... 0.54% 0.46% 0.65%
Class B................................................... 0.54% 0.46% 0.65%
12b-1 Fees
Class A................................................... None None None
Class B................................................... 0.25% 0.25% 0.25%
Other Expenses
Class A................................................... 0.46%+ 0.54%+ 0.35%
Class B................................................... 0.46%+ 0.54%+ 0.35%
--- --- ---
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................... 1.00% 1.00% 1.00%
Class B................................................... 1.25% 1.25% 1.25%
--- --- ---
--- --- ---
</TABLE>

- ------------------------
+Estimated.
*The Adviser has agreed to waive its management fees and/or reimburse the
Portfolios, if necessary, if such fees would cause the total annual operating
expenses of the Portfolios to exceed a specified percentage of its respective
average daily net assets. As a result of these reductions, the Management Fees
stated above are lower than the contractual fees stated under "Management of
the Fund." The Adviser reserves the right to terminate any of its fee waivers
and/or expense reimbursements at any time in its sole discretion. For further
information on Fund expenses, see "Management of the Fund." Set forth below,
for each Portfolio, are the management fees and total operating expenses absent
such fee waivers and/or expense reimbursements as a percent of the average
daily net assets of the Class A shares and Class B shares, respectively.

2
<PAGE>

<TABLE>
<CAPTION>
TOTAL OPERATING
MANAGEMENT EXPENSES
FEE ABSENT FEE WAIVERS
ABSENT FEE -------------------------
PORTFOLIO WAIVERS CLASS A CLASS B
- ---------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>

European Real Estate Portfolio.......... 0.80% 1.26% 1.51%
Asian Real Estate Portfolio............. 0.80% 1.34% 1.59%
U.S. Real Estate Portfolio.............. 0.80% 1.14% 1.37%
</TABLE>

The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees for the European Real Estate and Asian Real Estate
Portfolios are based on estimates assuming that the average daily net assets of
both the Class A and Class B shares of the Portfolios will be $50,000,000.
Expenses and fees for the U.S. Real Estate Portfolio are based on actual figures
for the period ended December 31, 1996. Due to the continuous nature of Rule
12b-1 fees, long term Class B shareholders may pay more than the equivalent of
the maximum front-end sales charges otherwise permitted by the National
Association of Securities Dealers, Inc. ("NASD") Conduct Rules.

The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolios after fee waivers.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
European Real Estate Portfolio
Class A.......................................................... $ 10 $ 32 * *
Class B.......................................................... 13 40 * *
Asian Real Estate Portfolio
Class A.......................................................... 10 32 * *
Class B.......................................................... 13 40 * *
U.S. Real Estate Portfolio
Class A.......................................................... 10 32 55 122
Class B.......................................................... 13 40 69 151
</TABLE>

- ------------------------
*Because the European Real Estate and Asian Real Estate Portfolios are new, the
Fund has not projected expenses for these Portfolios beyond the three year
period shown.

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.

3
<PAGE>
FINANCIAL HIGHLIGHTS

The following table provides financial highlights for the Class A and Class
B shares of the U.S. Real Estate Portfolio for each of the periods presented.
The audited financial highlights for the U.S. Real Estate Portfolio's shares for
each of the periods presented are part of the Fund's financial statements which
appear in the Fund's December 31, 1996 Annual Report to Shareholders and which
are incorporated by reference into the Fund's Statement of Additional
Information. The U.S. Real Estate Portfolio's financial highlights for each of
the periods presented have been audited by Price Waterhouse LLP, whose
unqualified report thereon is also incorporated by reference into the Statement
of Additional Information. Additional performance information is included in the
Annual Report. The Annual Report and the financial statements therein, along
with the Statement of Additional Information, are available at no cost from the
Fund at the address and telephone number noted on the cover page of this
Prospectus. The following information should be read in conjunction with the
financial statements and notes thereto. No financial highlights are included for
the European Real Estate and Asian Real Estate Portfolios as they had not
commenced operations as of December 31, 1996.

4
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U.S. REAL ESTATE PORTFOLIO

<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------- ------------
PERIOD FROM PERIOD FROM
FEBRUARY 24, JANUARY 2,
YEAR ENDED 1995* TO 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 11.42 $ 10.00 $ 11.50
------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.37 0.26 0.35
Net Realized and Unrealized Gain on
Investments............................... 4.02 1.84 3.92
------------ ------------ ------------
Total from Investment Operations......... 4.39 2.10 4.27
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income...................... (0.39) (0.24) (0.37)
Net Realized Gain.......................... (1.01) (0.44) (1.01)
------------ ------------ ------------
Total Distributions...................... (1.40) (0.68) (1.38)
------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD............... $ 14.41 $ 11.42 $ 14.39
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN................................. 39.56% 21.07% 38.23%
------------ ------------ ------------
------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $210,368 $69,509 $8,734
Ratio of Expenses to Average Net
Assets (1)................................ 1.00% 1.00%** 1.25%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 3.08% 4.04%** 2.91%**
Portfolio Turnover Rate.................... 171% 158% 171%
Average Commission Rate#................... $0.0568 N/A $0.0568
</TABLE>

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

<TABLE>
<C> <S> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income............................... $0.02 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets........ 1.14% 1.33%** 1.37%**
Net Investment Income to Average Net
Assets............................... 2.93% 3.71%** 2.79%**
</TABLE>

* Commencement of operations.

** Annualized.

*** The Portfolio began offering Class B Shares on January 2, 1996.

# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commisions were charged, during the period.

5
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PROSPECTUS SUMMARY

THE FUND

The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:

- - The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income
and long-term capital appreciation by investing primarily in equity
securities of companies in the European real estate industry.
- - The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of
companies in the Asian real estate industry.
- - The U.S. REAL ESTATE PORTFOLIO seeks to provide above average
current income and long term capital appreciation by investing
primarily in equity securities of companies in the U.S. real estate
industry, including real estate investment trusts.

The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:

GLOBAL AND INTERNATIONAL EQUITY:
- - The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings
determined by the Adviser in equity securities of non-U.S. issuers
which, in the aggregate, replicate broad country indices.
- - The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- - The CHINA GROWTH PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of issuers
in The People's Republic of China, Hong Kong and Taiwan.
- - The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of emerging country
issuers.
- - The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of European issuers.
- - The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the
world, including U.S. issuers.
- - The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers
engaged in gold-related activities.
- - The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of non-U.S.
issuers.

6
<PAGE>

<TABLE>
<S> <C>
- - The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of non-U.S.
issuers domiciled in EAFE countries.
- - The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of non-U.S.
issuers with equity market capitalizations of less than $1 billion.
- - The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of Japanese issuers.
- - The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers
and, from time to time, debt securities issued or guaranteed by
Latin American governments or governmental entities.

U.S. EQUITY:
- - The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by
investing primarily in corporate equity and equity-linked
securities.
- - The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation
by investing primarily in growth-oriented equity securities of
small- to medium-sized corporations.
- - The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium
and large capitalization companies.
- - The MICROCAP PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small
corporations.
- - The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total
return by investing in undervalued equity securities of small- to
medium-sized companies.
- - The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of companies that, in the
opinion of the Portfolio's investment adviser, are expected to
benefit from their involvement in technology and technology-related
industries.
- - The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of issuers included in
the S&P 500 Index ("S&P 500").
- - The VALUE EQUITY PORTFOLIO seeks high total return by investing in
equity securities which the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase.

EQUITY AND FIXED INCOME:
- - The BALANCED PORTFOLIO seeks high total return while preserving
capital by investing in a combination of undervalued equity
securities and fixed income securities.

FIXED INCOME:
- - The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by
investing primarily in debt securities of government,
government-related and corporate issuers located in emerging
countries.
- - The FIXED INCOME PORTFOLIO seeks to produce a high total return
consistent with the preservation of capital by investing in a
diversified portfolio of fixed income securities.
- - The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive
real rate of return while preserving capital by investing in fixed
income securities of issuers throughout the world, including U.S.
issuers.
</TABLE>

7
<PAGE>

<TABLE>
<S> <C>
- - The HIGH YIELD PORTFOLIO seeks to maximize total return by investing
in a diversified portfolio of high yield fixed income securities
that offer a yield above that generally available on debt securities
in the four highest rating categories of the recognized rating
services.
- - The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a
level of current income as is consistent with the preservation of
capital by investing primarily in a variety of investment-grade
mortgage-backed securities.
- - The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of
current income consistent with preservation of principal through by
investing in municipal obligations, the interest on which is exempt
from federal income tax.

MONEY MARKET:
- - The MONEY MARKET PORTFOLIO seeks to maximize current income and
preserve capital while maintaining high levels of liquidity through
investing in high quality money market instruments with remaining
maturities of one year or less.
- - The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current
tax-exempt income and preserve capital while maintaining high levels
of liquidity through investing in high quality money market
instruments with remaining maturities of one year or less which are
exempt from federal income tax.
</TABLE>

THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.

INVESTMENT MANAGEMENT

Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of August 31, 1997, Morgan Stanley Asset Management
Inc. and its affiliated asset management companies (exclusive of Miller Anderson
& Sherrerd, LLP, Van Kampen American Capital, Inc. and Dean Witter InterCapital
Inc.) managed assets of approximately $80.9 billion. See "Management of the Fund
- -- Investment Adviser" and "Management of the Fund -- Administrator."

HOW TO INVEST

Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. The minimum initial investment, generally, is $500,000 for Class A
shares of each Portfolio and $100,000 for the Class B shares of each Portfolio.
The minimum initial investment amount is reduced for certain categories of
investors. For additional information on how to purchase shares and minimum
initial investments, see "Purchase of Shares."

HOW TO REDEEM

Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions that
cause the value of an account to remain for a continuous 60-day period below the
minimum investment amount for Class A shares

8
<PAGE>
or for Class B shares may result in involuntary redemption or automatic
conversion. For additional information on how to redeem shares and involuntary
redemption or conversion, see "Purchase of Shares -- Minimum Account Sizes and
Involuntary Redemption of Shares" and "Redemption of Shares."

RISK FACTORS

The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. Because the Portfolios
invest primarily in the securities of companies principally engaged in the real
estate industry, their investments may be subject to the risks associated with
the direct ownership of real estate. The Portfolios' share prices and investment
returns fluctuate, and a shareholder's investment when redeemed may be worth
more or less than his original cost. Because it is expected that the U.S. Real
Estate Portfolio will invest a substantial portion of its assets in real estate
investment trusts ("REITs"), the Portfolio may also be subject to certain risks
associated with the direct investments of REITs. The Portfolios may invest in
certain derivatives, including options, futures, options on futures and swaps.
These investments entail certain costs and risks, including imperfect
correlation between the value of securities held by a Portfolio and the value of
the particular derivative instrument, and the risk that a Portfolio could not
close out a derivatives position when it would be most advantageous to do so.
The European Real Estate and Asian Real Estate Portfolios will invest in
securities of foreign issuers, including issuers located in emerging markets,
which are subject to certain risks not typically associated with domestic
securities. Securities of issuers located in emerging markets may pose greater
liquidity risks and other risks not typically associated with investing in more
established markets. Because the Portfolios are non-diversified portfolios, the
Portfolios will invest a greater proportion of their assets in the securities of
a smaller number of issuers and, as a result, will be subject to a greater risk
with respect to their portfolio securities. Each of these investment strategies
involves specific risks which are described under "Investment Objectives and
Policies" herein and under "Investment Objectives and Policies" in the Statement
of Additional Information.

9
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES

The investment objective of each Portfolio is described below, together with
the policies the Portfolios employ in their efforts to achieve these objectives.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. The investment policies described below are non-fundamental policies
and may be changed without shareholder approval.

Each of the Portfolios invests in equity securities of companies in the real
estate industry. Equity securities include common stocks, rights or warrants to
purchase common stocks, securities convertible into common stocks, preferred
stocks, equity-linked securities and shares or units of beneficial interest in
specialized ownership vehicles, such as property unit trusts and real estate
investment trusts ("REITs"). For purposes of each 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. For
example, companies in the real estate industry may include, among others: real
estate development companies, real estate operating companies, companies
principally engaged in the ownership of income-producing real property,
specialized ownership vehicles, and companies with substantial real estate
holdings, such as hotel companies, residential builders and land-rich companies.
In addition to the investments and strategies described below, the Portfolios
may invest in certain securities and obligations as set forth in "Additional
Investment Information" below.

EUROPEAN REAL ESTATE PORTFOLIO

The investment objective of the European Real Estate Portfolio is to provide
current income and long-term capital appreciation by investing primarily in
equity securities of companies in the European real estate industry. The
Portfolio seeks to achieve its objective by investing primarily in securities of
European issuers, including those located in Germany, France, Switzerland,
Belgium, Italy, Spain, Portugal, Finland, Sweden, Denmark, Norway, Ireland and
the United Kingdom. Investments may also be made in equity securities of
companies located in the smaller and emerging markets of Europe.

The Portfolio will invest primarily in securities which are traded on
recognized stock exchanges in Europe and in equity securities of companies
organized under the laws of a European country whose business is conducted
principally in Europe. The Portfolio may also invest in Depositary Receipts of
European issuers and, to the extent that they become available, REITs that
invest in Europe. At least 65% of the total assets of the Portfolio will be
invested in equity securities of companies principally engaged in the European
real estate industry. While the Portfolio is not limited in the portion of its
assets that may be invested in a single country, it currently intends to spread
its investments among several countries to reduce investment risk and currency
risk.

The Portfolio's investments may include securities of companies located in
emerging countries and traded in emerging markets. 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 "Additional Investment Information."

10
<PAGE>
ASIAN REAL ESTATE PORTFOLIO

The investment objective of the Asian Real Estate Portfolio is to provide
long-term capital appreciation by investing primarily in equity securities of
companies in the Asian real estate industry. The Portfolio seeks to achieve its
objective by investing primarily in equity securities which are traded on
recognized stock exchanges in Asia and in equity securities of companies
organized under the laws of an Asian country whose business is conducted
principally in Asia. The Portfolio may also invest in Depositary Receipts of
Asian issuers and, to the event that they become available, REITs that invest in
Asia.

The Portfolio will invest primarily in the more established Asian markets,
including Singapore, Malaysia, Hong Kong and Thailand, but additional
opportunities are also sought in markets such as South Korea and Taiwan and
other emerging markets that are open to foreign investment. In addition, the
Portfolio may invest in Japan, Australia and New Zealand. At least 65% of the
total assets of the Portfolio will be invested in equity securities of companies
principally engaged in the Asian real estate industry. While the Portfolio is
limited in the portion of its assets that may be invested in a single country,
it currently intends to spread its investments among several countries to reduce
investment risk and currency risk. Allocation of investments will depend on the
relative attractiveness of the stocks of companies 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 Portfolio's investments will include securities of companies located in
emerging countries and traded in emerging markets. 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 "Additional Investment Information."

U.S. REAL ESTATE PORTFOLIO

The investment objective of the U.S. Real Estate Portfolio is to provide
above average current income and long-term capital appreciation by investing in
equity securities of companies in the U.S. real estate industry, including
substantial investment in REITs. 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. The Portfolio seeks to invest in equity securities of companies that
provide a dividend yield that exceeds the composite dividend yield of securities
comprising the Standard & Poor's 500 Stock Price Index ("S&P 500").

Any remaining assets not invested as described above may be invested in
certain securities or obligations, including derivative securities, as set forth
in "Additional Investment Information" below.

ADDITIONAL INVESTMENT INFORMATION

CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES. The European
Real Estate and Asian Real Estate Portfolios may invest in securities such as
convertible securities, preferred stock, warrants or other securities
exchangeable under certain circumstances for shares of common stock. 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. The Portfolios may also
invest in equity-linked securities, which are securities that are convertible
into, or the value of which is based upon the value of, equity securities upon
certain terms and conditions. The amount received by an investor at maturity of
such securities is not fixed but is based on the price of the

11
<PAGE>
underlying common stock. It is impossible to predict whether the price of the
underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial, or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market, although the market for such securities is fairly developed and
generally liquid. The market for such securities may be shallow, however, and
high volume trades may be possible only with discounting. In addition to the
foregoing risks, the return on such securities depends on the creditworthiness
of the issuer of the securities, which may be the issuer of the underlying
securities or a third party investment banker or other lender. The
creditworthiness of such third party issuer of equity-linked securities may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities. The advantage of using equity-linked securities over traditional
equity and debt securities is that the former are income producing vehicles that
may provide a higher income than the dividend income on the underlying equity
securities while allowing some participation in the capital appreciation of the
underlying equity securities. Another advantage of using equity-linked
securities is that they may be used for hedging to reduce the risk of investing
in the generally more volatile underlying equity securities.

DEPOSITARY RECEIPTS. The Portfolios may invest in Depositary Receipts,
including American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts
(which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred
to as "Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs include American Depositary Shares and New
York Shares and may be "sponsored" or "unsponsored." Sponsored ADRs are
established jointly by a depositary and the underlying issuer, whereas
unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. The issuers of the stock of unsponsored ADRs are not
obligated to disclose material information in the United States and therefore,
there may not be a correlation between such information and the market value of
the ADR. GDRs, EDRs and other types of Depositary Receipts are typically issued
by foreign depositaries, although they may also be issued by U.S. depositaries,
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. The Portfolios may invest in sponsored and
unsponsored Depositary Receipts. For purposes of the Portfolios' investment
policies, the Portfolios' investments in Depositary Receipts will be deemed to
be investments in the underlying securities.

FIXED INCOME SECURITIES. Under normal circumstances, each Portfolio may
invest up to 35% of its total assets in (i) debt securities issued or guaranteed
by real estate companies or secured by real estate assets which are, at the time
of purchase, rated investment grade by a nationally recognized statistical
rating organization ("NRSRO") or determined by the Adviser to be of comparable
quality; (ii) high quality money market instruments, such as notes, certificates
of deposit or bankers' acceptances issued by domestic or foreign issuers; and
(iii) high-grade debt securities, consisting of corporate debt securities and
U.S. and foreign government securities. Investment grade securities are
securities that are rated in one of the four highest rating categories by an
NRSRO. Securities rated in the lowest category of investment grade securities
have speculative characteristics. Changes in prevailing interest rates may
inversely affect the value of the debt securities in which a Portfolio will

12
<PAGE>
invest. Changes in the value of portfolio securities will not necessarily affect
cash income derived from these securities, but will affect a Portfolio's net
asset value. Although a Portfolio is not required to sell securities whose
quality declines below investment grade, the Adviser will consider such quality
in determining whether to maintain the Portfolio's investment in such
securities.

FOREIGN INVESTMENT. Each Portfolio may invest in securities of foreign
issuers. Investment in securities of foreign issuers involves somewhat different
investment risks than those affecting securities of U.S. domestic 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 and other reporting 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 to the Portfolios by domestic companies, and 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. Additional
risks include future political and economic developments, the possibility that a
foreign jurisdiction might impose or change withholding taxes on income payable
with respect to foreign securities, possible seizure, nationalization or
expropriation of the foreign issuer or foreign deposits and the possible
adoption of foreign governmental restrictions such as exchange controls. Many of
the emerging countries may have less stable political environments than more
developed countries. Also, it may be more difficult to obtain a judgment in a
court outside the United States.

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

The Asian Real Estate Portfolio may invest in securities of issuers located
in Hong Kong. Hong Kong was established as a British colony in the 1840's and,
until recently, was ruled by the British Government through an appointed
Governor. Effective July 1, 1997, Hong Kong reverted to Chinese sovereignty and
is governed as a Special Administrative Region of China. Although China has made
certain commitments to preserve the economic and social freedoms enjoyed in Hong
Kong during British rule, there can be no assurances China's commitments will be
maintained. Action taken by the Chinese government which limits or causes
uncertainty with regard to these economic and social freedoms could have an
adverse affect on the Portfolio's investments in securities of issuers located
in Hong Kong.

13
<PAGE>
INVESTMENT FUNDS. Some emerging countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain emerging countries through investment funds which have been specifically
authorized. The Asian Real Estate and European Real Estate Portfolios may invest
in these investment funds subject to the provisions of the 1940 Act and other
applicable laws. If a Portfolio invests in such investment funds, 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 of the investment funds referred to in the preceding paragraph 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.

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. Each Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.

MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objectives to the extent
practical. Consistent with their investment policies, the Portfolios may make
money market investments pending other investment or settlement for liquidity.
In addition, the Portfolios may invest in money market instruments for temporary
defensive purposes during adverse market conditions. The money market
investments permitted for the Portfolios include obligations of the U.S.
Government and its agencies and instrumentalities, other debt securities,
commercial paper, bank obligations including, certificates of deposit, and
repurchase agreements.

NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. Each Portfolio may invest in securities that are neither listed on
a stock exchange nor traded over-the-counter. 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. Further, 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, each 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. Securities that are not registered under the
Securities Act of 1933, as amended (the "1933 Act"), but that can be offered and
sold to qualified

14
<PAGE>
institutional buyers under Rule 144A under the 1933 Act ("Rule 144A Securities")
will not be included within the foregoing 15% restriction if the securities are
determined to be liquid. The 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.

REITS. A substantial portion of the U.S. Real Estate Portfolio's total
assets will be invested in securities of REITs. The European Real Estate and
Asian Real Estate Portfolios may also, to the extent they become available,
invest in REITs that invest in Europe or Asia, respectively. REITs pool
investors' funds for investment primarily in income producing real estate or
real estate related loans or interests. A REIT is not taxed on income
distributed to its shareholders or unitholders if it complies with regulatory
requirements relating to its organization, ownership, assets and income, and
with a regulatory requirement that it distribute to its shareholders or
unitholders at least 95% of its taxable income for each taxable year. Generally,
REITs can be classified as Equity REITs, Mortgage REITs or Hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
their income primarily from rents and capital gains from appreciation realized
through property sales. Equity REITs are further categorized according to the
types of real estate securities they own, e.g., apartment properties, retail
shopping centers, office and industrial properties, hotels, health-care
facilities, manufactured housing and mixed-property types. Mortgage REITs invest
the majority of their assets in real estate mortgages and derive their income
primarily from interest payments. Hybrid REITs combine the characteristics of
both Equity and Mortgage REITs. The U.S. Real Estate Portfolio will invest
primarily in Equity REITs.

A shareholder in any of the Portfolios should realize that by investing in
REITs indirectly through the Portfolio, he will bear not only his proportionate
share of the expenses of the Portfolio, but also indirectly, the management
expenses of underlying REITs. Because it is expected that the U.S. Real Estate
Portfolio will invest a substantial portion of its assets in REITs, the
Portfolio will also be subject to certain risks associated with the direct
investments of REITs. REITs may be affected by changes in the value of their
underlying properties and by defaults by borrowers or tenants. Mortgage REITs
may be affected by the quality of the credit extended. Furthermore, REITs are
dependent on specialized management skills. Some REITs may have limited
diversification and may be subject to risks inherent in investments in a limited
number of properties, in a narrow geographic area, or in a single property type.
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders or unitholders, and may be subject to defaults by
borrowers and to self-liquidations. In addition, the performance of a REIT may
be affected by its failure to qualify for tax-free pass-through of income under
the Internal Revenue Code of 1986, as amended (the "Code"), or its failure to
maintain exemption from registration under the Investment Company Act of 1940,
as amended (the "1940 Act"). Changes in prevailing interest rates may inversely
affect the value of the debt securities in which a Portfolio may invest. Changes
in the value of portfolio securities will not necessarily affect cash income
derived from these securities but will affect a Portfolio's net asset value.

REAL ESTATE INVESTING. Each of the Portfolios invests primarily in equity
securities of issuers engaged in the real estate industry, which entails certain
risks and considerations of which an investor should be aware. In particular,
securities of such issuers may be subject to the risks associated with the
direct ownership of real estate. These risks include: the cyclical nature of
real estate values, risks related to general and local economic

15
<PAGE>
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, demographic trends and variations in rental income,
changes in zoning laws, casualty or condemnation losses, environmental risks,
regulatory limitations on rents, changes in neighborhood values, changes in the
appeal of properties to tenants, increases in interest rates and other real
estate capital market influences. Generally, increases in interest rates will
increase the costs of obtaining financing, which could directly and indirectly
decrease the value of the Portfolios' investments. In addition, since the Asian
Real Estate and European Real Estate Portfolios invest in securities of issuers
engaged in the Asian and European real estate industries, respectively, the
Portfolios' investments are subject to additional risks associated with foreign
investing discussed under "Foreign Investment."

REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. 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 Portfolio
always receives securities, with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
during the term of the agreement. 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. The Portfolios may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets are invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid.

SPECIALIZED OWNERSHIP VEHICLES. Each Portfolio may invest in specialized
ownership vehicles which pool investors' funds for investment primarily in
income-producing real estate or real estate related loans or interests. Such
specialized ownership vehicles in which the Portfolios may invest include
property unit trusts, REITs and other similar specialized investment vehicles.
Investments in such specialized ownership vehicles may have favorable or
unfavorable legal, regulatory or tax implications for a Portfolio and, to the
extent such vehicles are structured similarly to investment funds, may cause the
Portfolios' shareholders to indirectly bear certain additional operating
expenses.

TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser
determines that market conditions warrant, each Portfolio may invest up to 100%
of its assets in dollar and non-dollar denominated money market instruments and
short- and medium-term debt securities that the Adviser believes to be of high
quality, or hold cash. The short- and medium-term debt securities in which the
Portfolios may invest consist of (i) obligations of the U.S. or foreign country
governments, their respective agencies or instrumentalities; (ii) bank deposits
and bank obligations (including certificates of deposit, time deposits and
bankers' acceptances) of U.S. or foreign country banks denominated in any
currency; (iii) floating rate securities and other instruments denominated in
any currency issued by international development agencies; (iv) finance company
and corporate commercial paper and other short-term corporate debt obligations
of U.S. and foreign country corporations meeting the Portfolio's credit quality
standards; and (v) repurchase agreements with banks and broker-dealers with
respect to such securities.

16
<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolios may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought 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 Portfolios will
maintain with the Custodian a separate account with a segregated portfolio of
cash or liquid securities in an amount at least equal to these commitments. 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. It is a current policy of the
Portfolios not to enter into when-issued commitments exceeding, in the
aggregate, 15% of the market value of the Portfolio's total assets less
liabilities other than the obligations created by these commitments.

DERIVATIVE INSTRUMENTS

The Portfolios are permitted to invest in various derivative instruments for
both hedging and non-hedging purposes. Derivatives instruments include options,
futures and options on futures, structured investments and structured notes,
caps, floors, collars and swaps. Additionally, the Portfolios may invest in
other derivative instruments that are developed over time if their use would be
consistent with the objectives of the Portfolios. Each Portfolio will limit its
use of derivative instruments to 33 1/3% of its total assets measured by the
aggregate notional amount of outstanding derivative instruments. The Portfolios'
investments in forward foreign currency contracts and derivatives used for
hedging purposes are not subject to the limit described above.

The Portfolios may use derivative instruments 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
when 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.

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

Under rules adopted by the Commodity Futures Trading Commission, each
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
non-hedging activities.

17
<PAGE>
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by a Portfolio and the prices of futures and
options relating to investments purchased or sold by the Portfolio and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position. The risk that a Portfolio will
be unable to close out a futures position or options contract will be minimized
by only entering into futures contracts or options transactions for which there
appears to be a liquid exchange or secondary market. The risk of loss in trading
on futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing.

OPTIONS TRANSACTIONS

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

Each Portfolio also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, a Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolios may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will earmark or segregate sufficient liquid assets to
cover its obligations under the option or own (i) the underlying security or
instrument subject to the option, (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option, or (iii) a call option on the same underlying
security with a strike price no higher than the price at which the underlying
instrument was sold pursuant to a short option position.

By writing (or selling) a put option, a Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. The Portfolios may also write options that may be
exercised by the purchaser only on a specific date. A Portfolio that has written
a put option will earmark or segregate sufficient liquid assets to cover its
obligations under the option or will own a put option on the same underlying
security with an equal or higher strike price.

The Portfolios may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such options markets. The primary risks associated with

18
<PAGE>
the use of options are (i) imperfect correlation between the change in market
value of investments held, purchased or sold by a Portfolio and the prices of
options relating to such investments, and (ii) possible lack of a liquid
secondary market for an option.

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 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.

SWAPS -- SWAP CONTRACTS

Swaps and Swap Contracts are derivatives in the form of a contract or other
similar instrument in which two parties agree to exchange the returns generated
by a security, instrument, basket or index thereof for the returns generated by
another security, instrument, basket thereof or index. The payment streams are
calculated by reference to a specific security, index or instrument and an
agreed upon notional amount. The relevant indices include but are not limited
to, currencies, fixed interest rates, prices and total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Portfolio may agree to swap the return generated by a fixed income index for the
return generated by a second fixed income index. The currency swaps in which 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.

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

Interest rate and total rate of return swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of loss
with respect to interest rate and total rate of return swaps is limited to the
net amount of payments that a Portfolio is contractually obligated to make. If
the other party to an interest rate or total rate of return swap defaults, a
Portfolio's risk of loss consists of the net amount of payments that a Portfolio
is contractually entitled to receive. In contrast, currency swaps may 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 may be subject to the risk that the other party to the
swap will default on its contractual delivery obligations. If there is a default
by the counterparty, a Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swaps market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents

19
<PAGE>
utilizing standardized swap documentation. As a result, the swaps market has
become relatively liquid. Swaps that include caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than "traditional" swaps.

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

INVESTMENT LIMITATIONS

As non-diversified investment companies, 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, each Portfolio may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
as a result, will be subject to greater risk with respect to its portfolio
securities. Any economic, political, or regulatory developments affecting the
value of the securities the Portfolio holds could have a greater impact on the
total value of the Portfolio's holdings than would be the case if the
Portfolio's securities were diversified among more issuers. The Portfolios,
however, intend to comply with the diversification requirements imposed by the
Code for qualification as regulated investment companies. In addition, each
Portfolio may concentrate in the real estate industry, but will not invest more
than 25% of its total assets in the securities of companies in any one other
industry (for these purposes the U.S. Government and its agencies and
instrumentalities are not considered an industry). See "Investment Limitations"
in the Statement of Additional Information.

Each Portfolio operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
limitations, see "Investment Limitations" in the Statement of Additional
Information.

MANAGEMENT OF THE FUND

INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser 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 each Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each Portfolio's
investments. Set forth below as an annual percentage of average daily net assets
are the management fees payable to the Adviser quarterly by each Portfolio
pursuant to terms of the

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<PAGE>
Investment Advisory Agreement. The Adviser has agreed to a reduction in the fees
payable to it and to reimburse the Portfolios, if necessary, if such fees would
cause total annual operating expenses of the Portfolios to exceed the maximums
set forth in the table below.

<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES AFTER FEE WAIVERS
--------------------------
PORTFOLIO MANAGEMENT FEE CLASS A CLASS B
- -------------------------------------------------------------------- ------------------- ------------ ------------
<S> <C> <C> <C>
European Real Estate Portfolio...................................... 0.80% 1.00% 1.25%
Asian Real Estate Portfolio......................................... 0.80% 1.00% 1.25%
U.S. Real Estate Portfolio.......................................... 0.80% 1.00% 1.25%
</TABLE>

The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. is the
direct parent of the Adviser and Morgan Stanley. At August 31, 1997, the Adviser
(exclusive of Miller Anderson & Sherrerd, LLP, Van Kampen American Capital, Inc.
and Dean Witter InterCapital Inc.) managed assets of approximately $80.9
billion. See "Management of the Fund" in the Statement of Additional
Information.

PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Portfolios noted below:

EUROPEAN REAL ESTATE PORTFOLIO. -- JAN WILLEM DE GEUS. Jan Willem de Geus
joined the Adviser in 1997. He is responsible for the Adviser's real estate
investment management business in Europe, with a focus on real estate securities
research. Before joining the Adviser, he was employed at the Dutch Metalworkers
Pensionfund (MPMA), where he worked for four years in the international real
estate department. At the MPMA he was involved in the acquisition of direct real
estate, responsible for selecting REIT managers in the United States, and was a
portfolio manager of international real estate securities. He graduated from the
University of Nijmegen in 1991 with a Drs. in City Planning with a
specialization in real estate and received an Msc. in Real Estate Investment
from the Pennsylvania State University in 1993. He is currently in the final
stage of finishing his RBA (the Dutch equivalent of an American CFA).

ASIAN REAL ESTATE PORTFOLIO. -- KIAT SENG SEAH. Kiat Seng Seah joined the
Adviser's Singapore office in 1990 as a portfolio manager/analyst specializing
in the Southeast Asian markets. He is currently a Principal and is responsible
for investments in Taiwan, Korea and Singapore. He has had primary management
responsibility for the Portfolio since it commenced operations. Previously, Kiat
Seng worked at Barclays de Zoete Wedd (BZW), where he was a senior investment
analyst, with particular responsibility for coverage of the real estate sectors
in Singapore and Malaysia, and helped pioneer BZW's research effort in
Singapore. Kiat Seng is a Chartered Financial Analyst and a qualified real
estate valuer who spent a total of four years as a real estate appraiser, first
for the New Zealand Government and then for the Singapore Ministry of Finance.
He was a Colombo Plan Scholar at the University of Auckland, New Zealand and
graduated with a degree in Property Administration.

U.S. REAL ESTATE PORTFOLIO. -- RUSSELL C. PLATT AND THEODORE R. BIGMAN. Mr.
Platt joined Morgan Stanley in 1982 and currently is a Principal of the Firm.
Russell Platt has primary responsibility for managing the real estate securities
investment business for Morgan Stanley Asset Management ("MSAM") and serves as a
member

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of the Investment Committee of The Morgan Stanley Real Estate Fund ("MSREF").
Previously, Mr. Platt served as a Director of MSREF, where he was involved in
capital raising, acquisitions, oversight of investments and investor relations.
MSREF is a privately held limited partnership engaged in the acquisition of real
estate assets, portfolios and real estate operating companies with gross assets
of approximately $3.5 billion as of December 1994. From 1991 to 1993, Mr. Platt
was head of Morgan Stanley's Transaction Development Group, which was
responsible for identifying and structuring real estate investment opportunities
for the Firm and its clients worldwide. As part of these responsibilities, Mr.
Platt directed Morgan Stanley Realty's activities in Latin America and served as
U.S. liaison for Morgan Stanley Realty's Japanese real estate clients. From 1990
to 1991, Mr. Platt was based in Morgan Stanley Realty's London Office, where he
was responsible for European transaction development. Prior to this, he had
extensive transaction responsibilities involving portfolio, retail, office,
hotel and apartment sales and financings. Mr. Platt graduated from Williams
College in 1982 with a B.A. in Economics and received his M.B.A. from Harvard
Business School in 1986. Mr. Platt is a member of the Board of Trustees of The
National Multi Housing Council and The Wharton Real Estate Center, and a member
of The Urban Land Institute (International Council), the National Association of
Real Estate Investment Trusts and the Pension Real Estate Association.

Mr. Bigman joined Morgan Stanley Asset Management in 1995 as a Vice
President. 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. Since 1992,
Mr. Bigman established and managed the REIT effort at CS First Boston, including
primary responsibility for $2.5 billion of initial public offering by real
estate investment trusts. Previously, Mr. Bigman had extensive real estate
experience in a wide variety of transactions involving the financing and sale of
both individual assets and portfolios of real estate assets as well as the
acquisition and sale of several real estate companies. Mr. Bigman graduated from
Brandeis University in 1983 with a B.A. in Economics and received his M.B.A.
from Harvard University in 1987. He is a member of the National Association of
Real Estate Investment Trusts and International Council of Shopping Centers.

ADMINISTRATOR. The Adviser also provides administrative services to the
Fund 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 laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.

Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.

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DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.

DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley 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.

The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.

The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive from each
Portfolio a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the Class B shares' average daily net assets on an annualized basis.
The Distributor expects to reallocate most of its fee to its investment
representatives. The Distributor may, in its discretion, voluntarily waive from
time to time all or any portion of its distribution fee and each of the
Distributor and the Adviser is free to make additional payments out of its own
assets to promote the sale of Fund shares, including payments that compensate
financial institutions for distribution services or shareholder services.

Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.

EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.

PURCHASE OF SHARES

Class A and Class B shares of each Portfolio may be purchased at the net
asset value per share next determined after receipt of the purchase order by the
Portfolio. See "Valuation of Shares."

MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES

For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares of each Portfolio. Certain
advisory or asset allocation accounts, such as Total Funds Management accounts,
managed by Morgan Stanley or its affiliates, including the Adviser ("Managed
Accounts") may purchase Class A shares without being subject to any minimum
initial investment or minimum account size requirements for a Portfolio account.
Employees of the Adviser and certain of its affiliates may purchase Class A
shares subject to conditions, including a lower minimum initial investment,
established by Officers of the Fund.

If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value

23
<PAGE>
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.

Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.

Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.

The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Code and
"rabbi trusts." The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days
notice to shareholders.

The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.

MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES

If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.

Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption. The Fund reserves the right
to modify or terminate the involuntary redemption features of the shares as
stated above at any time upon 60-days notice to shareholders.

CONVERSION FROM CLASS B TO CLASS A SHARES

If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are

24
<PAGE>
subject to the same minimum account size requirements that are applicable to New
Accounts containing Class A shares, as stated above. The Fund reserves the right
to modify or terminate this conversion feature at any time upon 60-days notice
to shareholders.

INITIAL PURCHASES DIRECTLY FROM THE FUND

The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.

1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Portfolio and $100,000 for Class B shares of each
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]", to:

Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798

Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The class(es) of shares of
the Portfolio(s) to be purchased should be designated on the Account
Registration Form. For purchases by check, the Fund is ordinarily credited
with Federal Funds within one business day. Thus, your purchase of shares by
check is ordinarily credited to your account at the net asset value per share
of the relevant Portfolio determined on the next business day after receipt.

2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:

A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)

B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected, and the account number
assigned to you) as follows:

The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)

Please call the Fund at 1-800-548-7786 prior to wiring funds.

C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.

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<PAGE>
The purchase price of the Class A and Class B shares of each Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the regular close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed
at the price computed on the date of receipt; an order received after the
regular close of the NYSE will be executed at the price computed on the next
day the NYSE is open as long as the Transfer Agent receives payment by check
or in Federal Funds prior to the regular close of the NYSE on such day.

Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.

3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.

ADDITIONAL INVESTMENTS

You may add to your account at any time (minimum additional investment
$1,000 for each portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, the portfolio name and the class selected be specified
in the letter or wire to assure proper crediting to your account. In order to
ensure that your wire orders are invested promptly, you are requested to notify
one of the Fund's representatives (toll free: 1-800-548-7786) prior to the wire
date. Additional investments will be applied to purchase additional shares in
the same class held by a shareholder in a Portfolio account.

OTHER PURCHASE INFORMATION

Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.

In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio(s)
will not be issued. All shares purchased are confirmed to you and credited to
your account on the Fund's books maintained by the Adviser or its agents. You
will have the same rights and ownership with respect to such shares as if
certificates had been issued.

To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or

26
<PAGE>
because your check does not clear, you will be responsible for any loss the Fund
or its agents incur. If you are already a shareholder, the Fund may redeem
shares from your account(s) to reimburse the Fund or its agents for any loss. In
addition, you may be prohibited or restricted from making future investments in
the Fund.

Investors may also invest in the Fund by purchasing shares through the
Distributor.

EXCESSIVE TRADING

Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a Portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolios and the Portfolios' performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a Portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging
shares of Portfolio A for shares of Portfolio B, then exchanging shares of
Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C
for shares of Portfolio B within a 120-day period. Two types of transactions are
exempt from these excessive trading restrictions: (1) trades exclusively between
money market portfolios; and (2) trades done in connection with an asset
allocation service, such as TFM Account or accounts managed or advised by the
Adviser and/or any of its affiliates.

INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT

In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.

The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or current income objectives. After using TFM criteria to determine your
long-term investment and/or current income objectives, you can choose one of
several TFM investment strategies. Based on your chosen strategy, your initial
investment will be allocated among a number of the Class A or Class B shares of
the Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."

From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios, since Portfolios that experience
redemptions as

27
<PAGE>
a result of reallocations or rebalancings may have to sell portfolio securities
and Portfolios that receive additional cash will have to invest it in additional
portfolio securities. While it is impossible to predict the overall impact of
these transactions over time, there could be adverse effects on portfolio
management to the extent that Portfolios may be required to sell securities or
invest cash at times when they would not otherwise do so. These transactions
could also have tax consequences if sales of securities resulted in gains and
could also increase transaction costs. The Adviser, representing the interests
of the Portfolios, is committed to minimizing the impact of TFM Account
transactions on the Portfolios. The Adviser, however, will have a conflict in
fulfilling this responsibility in that it also serves as a TFM Adviser. In that
capacity, the Adviser, representing the interests of the TFM Accounts, also is
committed to minimizing the impact of TFM Account transactions on the Portfolios
to the extent consistent with pursuing the investment objectives of the TFM
Accounts. In addition, an affiliate of the TFM Adviser, the Distributor is
compensated on the sale, and may be compensated for distribution or shareholder
services on the sale of shares of the Portfolios. See "Purchase of Shares" and
"Shareholder Services -- Exchange Features." The Adviser will monitor the impact
of TFM Account transactions on the Portfolios.

REDEMPTION OF SHARES

You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of each Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of each
of the Portfolios is determined at the regular close of trading of the NYSE
(currently 4:00 p.m. Eastern Time). Shares of each Portfolio may be redeemed by
mail or telephone. No charge is made for redemption. Any redemption may be more
or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by a Portfolio.

BY MAIL

Each Portfolio will redeem its Class A or Class B shares at the net asset
value determined on the date the request is received, if the request is received
in "good order" before the regular close of the NYSE. Your request should be
addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston,
Massachusetts 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.

"Good order" means that the request to redeem shares must include the
following documentation:

(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;

(b) Any required signature guarantees (see "Further Redemption
Information" below); and

(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.

Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.

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<PAGE>
BY TELEPHONE

Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by regular mail or express mail
and it will be implemented at the net asset value next determined after it is
received. Redemption requests sent to the Fund through express mail must be
mailed to the address of the Dividend Disbursing and Transfer Agent listed under
"General Information." The Fund and the Fund's transfer agent (the "Transfer
Agent") will employ reasonable procedures to confirm that the instructions
communicated by telephone are genuine. These procedures include requiring the
investor to provide certain personal identification information at the time an
account is opened and prior to effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded and
investors may be required to provide additional telecopied written instructions
regarding transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.

To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.

FURTHER REDEMPTION INFORMATION

Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").

If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.

To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information.

SHAREHOLDER SERVICES

EXCHANGE FEATURES

You may exchange shares that you own in any Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares

29
<PAGE>
of a portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege may be modified or terminated by the Fund at any time
upon 60-days notice to shareholders.

BY MAIL

In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, P.O. Box 2798, Boston,
Massachusetts 02208-2798.

BY TELEPHONE

When exchanging shares by telephone, have ready the name, class of shares
and account number of your current Portfolio, the names of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the
class(es) of the portfolios involved in the exchange of shares at the close of
business. Requests received after 4:00 p.m. (Eastern Time) are processed the
next business day based on the net asset value determined at the close of
business on such day. For additional information regarding responsibility for
the authenticity of telephoned instructions, see "Redemption of Shares -- By
Telephone" above.

TRANSFER OF REGISTRATION

You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.

VALUATION OF SHARES

The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolios. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at a
price within a

30
<PAGE>
range not exceeding the current asked price nor less than the current bid price.
The current bid and asked prices are determined based on the average of the bid
and asked prices quoted on such valuation date by reputable brokers.

Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account institutional-size, trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.

The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine the prices in
accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S. dollars at the mean
of the bid and asked price for such currencies against the U.S. dollar last
quoted by any major bank.

Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.

PERFORMANCE INFORMATION

The Fund may from time to time advertise total return for each class of a
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.

Each of the Portfolios may advertise "total return" which shows what an
investment in a class of a Portfolio would have earned over a specified period
of time (such as one, five or ten years), assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or on
redemption. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.

The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.

31
<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
that, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
may elect to receive income dividends and capital gains distributions in cash.

Each Portfolio expects to distribute substantially all of its taxable net
investment income in the form of quarterly dividends. Net realized capital
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually.

Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to income tax.

Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.

TAXES

The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.

No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolios or their shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.

Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.

Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, the excess of net short-term
capital gain over net long-term capital loss) to shareholders. Dividends from a
Portfolio's net investment income are taxable to shareholders as ordinary
income, whether received in cash or in additional shares. Each Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
the corporate dividend received deduction.

Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio will send reports annually to its shareholders of the federal income
tax status of all distributions made during the preceding year.

32
<PAGE>
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss) prior to the end of each calendar year to avoid liability for federal
excise tax.

Dividends and other distributions declared by a Portfolio 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 Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.

The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.

The sale, redemption or exchange of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or is
less than the shareholder's adjusted tax basis in the redeemed, exchanged or
sold shares. Any such taxable gain or loss generally will be treated as
long-term capital gain or loss if the shares have been held for more than one
year and otherwise generally will be treated as short-term capital gain or loss.
If capital gain distributions have been made with respect to shares that are
sold at a loss after being held for six months or less, however, then the loss
is treated as a long-term capital loss to the extent of the capital gain
distributions.

Conversion of shares between classes are not taxable events to the
Shareholder.

Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.

Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although each
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that each Portfolio will be able to do so.

THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.

33
<PAGE>
PORTFOLIO TRANSACTIONS

The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.

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 intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.

Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.

PORTFOLIO TURNOVER

The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with its respective
objective and policies. For the fiscal year ended December 31, 1996, the U.S.
Real Estate Portfolio had a portfolio turnover rate of 171%. The European Real
Estate and Asian Real Estate Portfolios are not expected to have portfolio
turnover rates in excess of 100%. If portfolio turnover exceeds 100%, the
Portfolios may expect to pay correspondingly increased brokerage and trading
costs. In addition to transaction costs, higher portfolio turnover may result in
the realization of capital gains. As discussed under "Taxes," to the extent net
short-term capital gains are realized, any distributions resulting from such
gains are considered ordinary income for federal income tax purposes.

GENERAL INFORMATION

DESCRIPTION OF COMMON STOCK

The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 38 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the International Small Cap Portfolio, Money Market
and Municipal Money Market Portfolios which offer only Class A shares.

34
<PAGE>
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative 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. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as defined in
the 1940 Act) such Portfolio. Under Maryland law, the Fund is not required to
hold an annual meeting of its shareholders unless required to do so under the
1940 Act.

REPORTS TO SHAREHOLDERS

The Fund will send to its shareholders annual, semi-annual and quarterly
reports; the financial statements appearing in annual reports are audited by
independent accountants. Monthly unaudited portfolio data is also available from
the Fund upon request.

In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.

CUSTODIAN

Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission 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 Statement of Additional
Information.

DIVIDEND DISBURSING AND TRANSFER AGENT

Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.

INDEPENDENT ACCOUNTANTS

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

LITIGATION

The Fund is not involved in any litigation.

35
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
EUROPEAN REAL ESTATE, ASIAN REAL ESTATE AND U.S. REAL ESTATE
PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798

ACCOUNT REGISTRATION FORM

<TABLE>
<C> <S> <C>
If you need assistance in filling out this
form for the Morgan Stanley Institutional
ACCOUNT INFORMATION Fund, please contact your Morgan Stanley
Fill in where applicable representative or call us toll free
1-800-548-7786. Please print all items except
signature, and mail to the Fund at the
address above.

A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>

1.
First
Name Initial Last Name

2.
First
Name Initial Last Name

First
Name Initial Last Name

3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional documents that may be required to set
up account and to authorize transactions.
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>

/ / TRUST ________________________ / / OTHER (Specify) ________________________

<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>

/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.

/ / Non-Resident Alien:

Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.

Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.

<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual taxpayers, this is
IDENTIFICATION your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
1. TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
NUMBER ("TIN") ("SSN")
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C>
2. TIN OR SSN
TIN OR SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your correct
TIN(s) or SSN(s). Accounts that have a missing or incorrect TIN(s) or SSN(s) will
be subject to backup withholding at a 31% rate on dividends, distributions and
other payments. If you have not provided us with your correct TIN(s) or SSN(s),
you may be subject to a $50 penalty imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of persons subject
to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding under Section
3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest
or dividends or you were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
</TABLE>

<PAGE>

<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio: / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 for European Real Estate Portfolio / / Class A Shares $ / / Class B Shares $
each Portfolio and Class B shares Asian Real Estate Portfolio / / Class A Shares $ / / Class B Shares $
minimum $100,000 for each Portfolio). U.S. Real Estate Portfolio
Please indicate name of Portfolio, class
and amount.
Total Initial Investment $
</TABLE>

<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio, manner of
payment.
</TABLE>

Payment by:

/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)

<TABLE>
<S> <C>
/ / Exchange $ From - - - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>

<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone
AND EXCHANGE requests to wire redemption proceeds to
OPTION the commercial bank indicated at right
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests
shares by telephone. A are believed to be authentic.
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated
YOUR FUND ACCOUNT. by telephone are genuine. These
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal
NOT BE HONORED UNLESS THE BOX identification information at the time
IS CHECKED. an account is opened and prior to
effecting each transaction requested by
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.

<CAPTION>
G)
Name of COMMERCIAL Bank (Not Savings Bank)
Bank Account No.
Bank ABA No.
Name(s) in which your Bank Account is Established
Bank's Street Address
City State Zip
</TABLE>

<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the
account statement sent to
my/our registered Address
address, I/we hereby
authorize the Fund to City State Zip Code
mail duplicate statements
to the name and address
provided at right.
</TABLE>

<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>

<PAGE>

<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>

<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity to purchase and redeem shares of the Fund and
affirm that I/we have received a current Prospectus of the Morgan Stanley Institutional Fund, Inc. and agree to be bound
by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF PERJURY THAT THE INFORMATION ON THIS APPLICATION IS
COMPLETE AND CORRECT AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE
ARE NOT SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE
HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE SUBJECT TO BACKUP WITHHOLDING AS A
RESULT OF A FAILURE TO REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED ME/US THAT I AM/WE ARE NO
LONGER SUBJECT TO BACKUP WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE
SOCIAL SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER
TO CHASE GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I/WE FAIL
TO FURNISH MY/OUR CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP WITHHOLDING ON
DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S. CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN
PERSONS AS DEFINED BY THE INTERNAL REVENUE SERVICE.

THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS
REQUIRED TO AVOID BACKUP WITHHOLDING.

(X) (X)
Signature Date Signature (if joint account, both must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.

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

TABLE OF CONTENTS

<TABLE>
<S> <C>
PAGE
----
Fund Expenses............................................................. 2
Financial Highlights...................................................... 4
Prospectus Summary........................................................ 6
Investment Objectives and Policies........................................ 10
Additional Investment Information......................................... 11
Investment Limitations.................................................... 20
Management of the Fund.................................................... 20
Purchase of Shares........................................................ 23
Redemption of Shares...................................................... 28
Shareholder Services...................................................... 29
Valuation of Shares....................................................... 30
Performance Information................................................... 31
Dividends and Capital Gains Distributions................................. 32
Taxes..................................................................... 32
Portfolio Transactions.................................................... 34
General Information....................................................... 34
Account Registration Form
</TABLE>

EUROPEAN REAL ESTATE PORTFOLIO
ASIAN REAL ESTATE PORTFOLIO
U.S. REAL ESTATE PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.

Common Stock
($.001 PAR VALUE)

-------------
PROSPECTUS
-------------

Investment Adviser
Morgan Stanley
Asset Management Inc.

Distributor
Morgan Stanley & Co.
Incorporated

MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION

Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company with diversified and non-diversified series
("Portfolios"). The Fund currently consists of thirty-two Portfolios offering a
broad range of investment choices. The Fund is designed to provide clients with
attractive alternatives for meeting their investment needs. Each Portfolio,
except the Money Market, Municipal Money Market, International Small Cap and
China Growth Portfolios, offers two classes of shares, the Class A shares and
the Class B shares (each, a "Multiclass Portfolio"). The Class A shares and the
Class B shares currently offered by each Multiclass Portfolio have different
minimum investment requirements and fund expenses. Shares of each Portfolio are
offered with no sales charge or exchange or redemption fee (except that the
International Small Cap Portfolio may impose a transaction fee). This Statement
of Additional Information ("SAI") addresses information of the Fund applicable
to all of the Fund's Portfolios.

This SAI is not a prospectus but should be read in conjunction with the
several prospectuses of the Fund's Portfolios (the "Prospectuses"). To obtain
any of the Prospectuses, please call the Morgan Stanley Institutional Fund, Inc.
Services Group at 1-800-548-7786.
--------------

TABLE OF CONTENTS

<TABLE>
<S> <C>
PAGE
----
INVESTMENT OBJECTIVES AND POLICIES...... 2
TAXES................................... 17
GENERAL REGULATED INVESTMENT COMPANY
QUALIFICATIONS........................ 17
GENERAL TAX TREATMENT OF QUALIFYING RICS
AND SHAREHOLDERS...................... 18
SPECIAL TAX CONSIDERATIONS RELATING TO
MUNICIPAL BOND AND MUNICIPAL MONEY
MARKET PORTFOLIOS..................... 19
SPECIAL TAX CONSIDERATIONS RELATING TO
FOREIGN INVESTMENTS................... 20
TAXES AND FOREIGN SHAREHOLDERS.......... 20
PURCHASE OF SHARES...................... 21
REDEMPTION OF SHARES.................... 21
SHAREHOLDER SERVICES.................... 22
INVESTMENT LIMITATIONS.................. 22
DETERMINING MATURITIES OF CERTAIN
INSTRUMENTS........................... 24
MANAGEMENT OF THE FUND.................. 24
NET ASSET VALUE FOR MONEY MARKET
PORTFOLIOS............................ 33
PERFORMANCE INFORMATION................. 34
GENERAL INFORMATION..................... 41
DESCRIPTION OF RATINGS.................. 42
FINANCIAL STATEMENTS.................... 43
</TABLE>

STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1997 AS SUPPLEMENTED THROUGH
SEPTEMBER 26, 1997

Prospectus for the European Real Estate Portfolio, Asian Real Estate
Portfolio and U.S. Real Estate Portfolio, dated September 26, 1997

Prospectus for the Asian Equity Portfolio and Japanese Equity Portfolio,
dated May 1, 1997, as supplemented through September 26, 1997

Prospectus for the Emerging Markets Portfolio, Emerging Markets Debt
Portfolio and Latin American Portfolio, dated May 1, 1997, as supplemented
through September 26, 1997

Prospectus for the Global Equity Portfolio, International Equity Portfolio,
International Small Cap Portfolio and European Equity Portfolio, dated May
1, 1997, as supplemented through September 26, 1997

Prospectus for the U.S. Equity Plus Portfolio, dated July 21, 1997

Prospectus for the International Magnum Portfolio, dated May 1, 1997

Prospectus for the Fixed Income Portfolio, Municipal Bond Portfolio,
Mortgage-Backed Securities Portfolio, Money Market Portfolio and Municipal
Money Market Portfolio, dated May 1, 1997

Prospectus for the Equity Growth Portfolio, Emerging Growth Portfolio,
MicroCap Portfolio and Aggressive Equity Portfolio, dated May 1, 1997

Prospectus for the Small Cap Value Equity Portfolio, Value Equity Portfolio,
Balanced Portfolio, Global Fixed Income Portfolio and High Yield Portfolio,
dated May 1, 1997

Prospectus for the Active Country Allocation Portfolio, dated May 1, 1997

Prospectus for the Technology Portfolio, dated May 1, 1997

Prospectus for the Gold Portfolio, dated May 1, 1997

Prospectus for the China Growth Portfolio, dated May 1, 1995

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INVESTMENT OBJECTIVES AND POLICIES

The following policies supplement the investment objectives and policies set
forth in the Fund's Prospectuses:

BRADY BONDS. The Emerging Markets Debt Portfolio may invest in certain debt
obligations 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 recently and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are U.S. dollar-denominated) and they are
actively traded in the over-the-counter secondary market. The Portfolio may
purchase Brady Bonds either in the primary or secondary markets. The price and
yield of Brady Bonds purchased in the secondary market will reflect the market
conditions at the time of purchase, regardless of the stated face amount and the
stated interest rate. With respect to Brady Bonds with no or limited
collateralization, the 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 as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as speculative.

Brady Plan debt restructuring totalling approximately $73 billion have been
implemented to date in Argentina, Bulgaria, Costa Rica, Ecuador, Mexico,
Nigeria, the Philippines, Uruguay and Venezuela, with the largest proportion of
Brady Bonds having been issued to date by Mexico and Venezuela. Brazil and
Poland have announced plans to issue Brady Bonds aggregating approximately $52
billion, based on current estimates. There can be no assurance that the
circumstances regarding the issuance of Brady Bonds by these countries will not
change.

EMERGING COUNTRY EQUITY AND DEBT SECURITIES

GENERAL. Each of the Active Country Allocation, Latin American,
International Magnum, Active Country Allocation, Global Equity, Technology,
International Equity, International Small Cap, Asian Equity, European Equity,
Emerging Markets, Emerging Markets Debt, European Real Estate and Asian Real
Estate Portfolios' definition of emerging country equity or debt securities
includes securities of companies that may have characteristics and business
relationships common to companies in a country or countries other than an
emerging 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 country. The Adviser believes, however, that investment in such
companies will be appropriate because the Portfolio will invest only in those
companies which, in its view, have sufficiently strong exposure to economic and
market forces in an emerging country that their value will tend to reflect
developments in such emerging country to a greater extent than developments in
another country or countries. For example, the Portfolio may invest in companies
organized and located in countries other than an emerging country, including
companies having their entire production facilities outside of an emerging
country, when securities of such companies meet one or more elements of the
Portfolio's definition of an emerging country equity or debt security and so
long as the Adviser believes at the time of investment that the value of the
company's securities principally reflects conditions in such emerging country.

The Emerging Markets Debt Portfolio is subject to no restrictions on the
maturities of the emerging country debt securities it holds; those maturities
may range from overnight to 30 years. The value of debt securities held by the
Portfolio generally will vary inversely to changes in prevailing interest rates.
The Portfolio's investments in fixed-rated debt securities with longer terms to
maturity are subject to greater volatility than the Portfolio's investments in
shorter-term obligations. Debt obligations acquired at a discount are subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which are not subject to such
discount.

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Investments in emerging country government debt securities involve special
risks. Certain emerging countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging country's debt may be
unable or unwilling to repay the principal and/or interest when due in
accordance with the terms of such debt. As a result of the foregoing, a
government obligor may default on its obligations. If such an event occurs, the
Portfolio may have limited legal recourse against the issuer and/or guarantor.
Remedies must, in some cases, be pursued in the courts of the defaulting party
itself, and the ability of the holder of foreign government debt 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.

EQUITY-LINKED SECURITIES

The Aggressive Equity, U.S. Real Estate, Asian Real Estate, European Real
Estate and Technology Portfolios may invest in equity-linked securities,
including, among others, PERCS, ELKS or LYONs, which are securities that are
convertible into or the value of which is based upon the value of, equity
securities upon certain terms and conditions. The amount received by an investor
at maturity of such securities is not fixed but is based on the price of the
underlying common stock. It is impossible to predict whether the price of the
underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial, or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market, although the market for such securities is fairly developed and
generally liquid. The market for such securities may be shallow, however, and
high volume trades may be possible only with discounting. In addition to the
foregoing risks, the return on such securities depends on the creditworthiness
of the issuer of the securities, which may be the issuer of the underlying
securities or a third party investment banker or other lender. The
creditworthiness of such third party issuer of equity-linked securities may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities. The advantage of using equity-linked securities over traditional
equity and debt securities is that the former are income producing vehicles that
may provide a higher income than the dividend income on the underlying equity
securities while allowing some participation in the capital appreciation of the
underlying equity securities. Another advantage of using equity-linked
securities is that they may be used for hedging to reduce the risk of investing
in the generally more volatile underlying equity securities.

The following are three examples of equity-linked securities. The Portfolios
may invest in the securities described below or other similar equity-linked
securities.

PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically
is preferred stock with some characteristics of common stock. PERCS are
mandatorily convertible into common stock after a period of time, usually three
years, during which the investors' capital gains are capped, usually at 30%.
Commonly, PERCS may be redeemed by the issuer at any time or if the issuer's
common stock is trading at a specified price level or better. The redemption
price starts at the beginning of the PERCS duration period at a price that is
above the cap by the amount of the extra dividends the PERCS holder is entitled
to receive relative to the common stock over the duration of the PERCS and
declines to the cap price shortly before maturity of the PERCS. In exchange for
having the cap on capital gains and giving the issuer the option to redeem the
PERCS at any time or at the specified common stock price level, the Portfolio
may be compensated with a substantially higher dividend yield than that on the
underlying common stock. Investors, such as the Portfolios, that seek current
income find PERCS attractive because PERCS provide a higher dividend income than
that paid with respect to a company's common stock.

ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to receive a
principal amount equal to the lesser of a cap amount, commonly in the range of
30% to 55% greater than the current price of the issuer's common stock, or the
average closing price per share of the issuer's common stock, subject to
adjustment as a result of certain dilution events, for the 10 trading days
immediately prior to maturity. Unlike PERCS, ELKS are commonly not subject to
redemption prior to maturity. ELKS usually bear interest during the three-year
term at a substantially higher rate than the dividend yield on the underlying
common stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, a Portfolio may be
compensated with higher yield, contingent on how well the underlying common
stock does. Investors, such as the Portfolios, that seek current income, find
ELKS attractive because ELKS provide a higher dividend income than that paid
with respect to a company's common stock.

LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Portfolios will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par, value.
The yield on LYONs, typically, is lower-than-market rate for debt securities of
the same maturity, due in part to the fact that the LYONs are convertible into
common

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stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better or, at the option of the holder, upon certain fixed dates. The redemption
price typically is the purchase price of the LYONs plus accrued original issue
discount to the date of redemption, which amounts to the lower-than-market
yield. The Portfolios will receive only the lower-than-market yield unless the
underlying common stock increases in value at a substantial rate. LYONs are
attractive to investors like the Portfolios when it appears that they will
increase in value due to the rise in value of the underlying common stock.

FOREIGN CURRENCY FORWARD CONTRACTS

The U.S. dollar value of the assets of the Global Equity, International
Equity, International Small Cap, Asian Equity, European Equity, Japanese Equity,
Latin American, International Magnum, Global Fixed Income, Active Country
Allocation, China Growth, Emerging Markets, Emerging Markets Debt, Gold,
European Real Estate and Asian Real Estate Portfolios and, to the extent they
invest in securities denominated in foreign currencies, the assets of the Equity
Growth, Emerging Growth, MicroCap, Aggressive Equity, Small Cap Value Equity,
Value Equity, Balanced, Fixed Income, High Yield and Technology Portfolios may
be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Portfolios may incur costs in
connection with conversions between various currencies. The Portfolios will
conduct their foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market,
or through entering into forward contracts to purchase or sell foreign
currencies. A foreign currency forward 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. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for such
trades. The Gold Portfolio may also enter into precious metals forward
contracts. See "Precious Metals Forward and Futures Contracts and Options on
Futures Contracts" below.

The Portfolios may enter into foreign currency forward 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, the Portfolio will be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.

Additionally, when any of these Portfolios anticipates that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
such Portfolio's securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. None of the Portfolios intend to enter
into such forward contracts to protect the value of portfolio securities on a
continuous basis. The Portfolios will not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate such Portfolio to deliver an amount of foreign currency
in excess of the value of such Portfolio's securities or other assets
denominated in that currency.

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 the performance
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 cash or liquid securities 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.

The Portfolios generally will not enter into a forward contract with a term
of greater than one year. 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.

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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. For a discussion of the
special risks associated with foreign currency transactions, see "Risks
Associated with Foreign Currency Transactions," below in this SAI.

RISKS ASSOCIATED WITH FOREIGN CURRENCY TRANSACTIONS

Transactions in foreign currency forward contracts, foreign currency futures
contracts and options thereon, 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
the Portfolios permitted to engage in such hedging transactions. In addition,
the value of such positions could be adversely affected by a number of other
complex political and economic factors applicable to the countries issuing the
underlying currencies.

Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which a Portfolio's trading systems will be
based may not be as complete as the comparable data on which such Portfolio
makes investment and trading decisions in connection with securities and other
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.

Settlement of over-the-counter ("OTC") forward contracts or the exercise of
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires parties to such contracts to accept
or make delivery of such currencies in conformity with any United States or
foreign restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.

Unlike currency futures contracts and exchange-traded options, OTC options
on foreign currencies and foreign currency forward contracts are not traded on
contract markets or national securities exchanges regulated by the Commodity
Futures Trading Commission ("CFTC") or the Securities and Exchange Commission
(the "Commission"), respectively. 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 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.

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OTC options on foreign currencies are within the exclusive regulatory
jurisdiction of the CFTC. The CFTC currently permits the trading of such
options, but only subject to a number of conditions regarding the commercial
purpose of the purchaser of such options. The Portfolios are not able to
determine at this time whether or to what extent the CFTC may impose additional
restrictions on the trading of over-the-counter options on foreign currencies at
some point in the future, or the effect that any restrictions may have on the
hedging strategies to be implemented by the Portfolios. 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 Commission, 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 OTC 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.

FOREIGN INVESTMENTS

The Active Country Allocation, International Equity, International Fixed
Income, Global Equity, Global Fixed Income, Asian Equity, European Equity,
Japanese Equity, International Small Cap, Latin American and China Growth
Portfolios will invest, and the Emerging Growth, Emerging Markets, Emerging
Markets Debt, Value Equity, Equity Growth, MicroCap, Balanced, Small Cap Value
Equity, International Magnum, Fixed Income, High Yield, Aggressive Equity, Gold,
European Real Estate, Asian Real Estate and Technology Portfolios may invest in
securities of foreign issuers. Investors should recognize that investing in such
foreign securities involves certain special considerations which are not
typically associated with investing in U.S. issuers. For a description of the
effect on the Portfolios of currency exchange rate fluctuation, see "Foreign
Currency Forward Contracts" above. As foreign issuers are not generally subject
to uniform accounting, auditing and financial reporting standards and may have
policies that are not comparable to those of domestic issuers, there may be less
information available about certain foreign companies than about domestic
issuers. Securities of some foreign issuers are generally less liquid and more
volatile than securities of comparable domestic issuers. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
issuers than in the United States. 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. Foreign securities not listed on a
recognized domestic or foreign exchange are regarded as not readily marketable
and therefore such investments will be limited to 15% of a Portfolio's net asset
value at the time of purchase.

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 International Equity, Global Equity, European Equity, Japanese Equity, Asian
Equity, Global Fixed Income, International Fixed Income, International Magnum,
International Small Cap, Latin American and China Growth 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 and any dividend or interest income should be considered
incidental.

FUTURES CONTRACTS

The Portfolios, except the Global Equity, International Equity,
International Small Cap, European Equity, Money Market and Municipal Money
Market Portfolios, may enter into futures contracts and options on futures
contracts. Futures contracts provide for the future sale by one party and
purchase by another party of a specified amount of a specific security at a
specified

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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 CFTC.

Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.

Futures contracts on securities indices or other indices do not require the
physical delivery of securities, but merely provide for profits and losses
resulting from changes in the market value of a contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures position is simply closed out. Changes in the
market value of a particular futures contract reflect changes in the level of
the index on which the futures contract is based.

Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.

After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. 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.

Portfolios may purchase and write call and put options on futures contracts
which are traded on a U.S. Exchange or on any recognized securities or futures
exchange to the extent permitted by the CFTC and 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
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by which the market
price of the futures contract 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. The Portfolios intend to use futures contracts only for hedging
purposes.

Regulations of the CFTC applicable to the Portfolios require that all
futures transactions constitute bona fide hedging transactions except that a
Portfolio may engage in futures transactions that do not constitute bona fide
hedging to the extent that not more than 5% of the liquidation value of a
Portfolio's total assets are required as margin deposits or premiums for such
transactions. The Portfolios will only sell futures contracts to protect
securities owned against declines in price or purchase contracts to protect
against an increase in the price of securities intended for purchase. As
evidence of this hedging interest, the Portfolios expect that approximately 75%
of their futures contracts will be "completed"; that is, equivalent amounts of
related securities will have been purchased or are being purchased by the
Portfolios upon sale of open futures contracts.

Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolios' exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Portfolios will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.

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RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. None of the Portfolios will
enter into futures contract transactions to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds 5%
of the market value of its total assets. In addition, each Portfolio will limit
its use of derivative instruments, including futures contracts, to 33 1/3% of
its total assets measured by the aggregate notional amount of outstanding
derivative instruments.

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 the Portfolio's ability
to effectively hedge.

The Portfolios will minimize the risk that they will be unable to close out
a futures contract by generally entering into futures which are traded on
recognized international or national futures exchanges and for which there
appears to be a liquid secondary market, however the Portfolios may enter into
over-the-counter futures transactions to the extent permitted by applicable law.

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
engage in futures strategies only for hedging purposes, the Adviser does not
believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. A Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying security or currency and sold it after the decline.

Utilization of futures transactions by the Portfolios does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that a Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by a Portfolio of margin deposits in the event of
bankruptcy of a broker with whom the Portfolio has an open position in a futures
contract or related option.

Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses. For a discussion of the special risks associated
with foreign currency transactions, see "Risks Associated with Foreign Currency
Transactions" in this SAI.

LOAN PARTICIPATIONS AND ASSIGNMENTS

The Emerging Markets and Emerging Markets Debt Portfolio may also invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between an issuer of sovereign debt obligations and one or more financial
institutions ("Lenders"). The 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 a portion of Loans ("Assignments") from third parties.
The Portfolio's investment in Participations typically will result in the
Portfolio having a contractual relationship only with the Lender and not with
the borrower. 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 connection with purchasing Participations, the 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 the Portfolio may not directly benefit from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, the 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, 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, but even under such a structure, in
the event of the Lender's insolvency, the Lender's servicing of the
Participation may be

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delayed and the assignability of the Participation 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.

When the 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 the 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 the Portfolio may acquire an interest in a loan
is through a Participation and not an Assignment. The 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 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.

MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX

The investment objective of the Active Country Allocation Portfolio and the
International Magnum Portfolio is to provide long-term capital appreciation. The
Active Country Allocation Portfolio seeks to achieve its objective by investing
in equity securities of non-U.S. issuers which, in the aggregate, replicate
broad country indices, in accordance with country weightings determined by the
Adviser. The Adviser utilizes a top-down approach in selecting investments for
the Active Country Allocation Portfolio that emphasizes country selection and
weighing rather than individual stock selection. The Active Country Allocation
Portfolio invests, INTER ALIA, in industrialized countries throughout the world
that comprise the Morgan Stanley Capital International EAFE (Europe, Australia
and the Far East) Index (the "EAFE Index"). 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").

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 EAFE Index is based on the share
prices of 1,066 companies listed on the stock exchanges of Europe, Australia,
New Zealand and the Far East. "Europe" includes Austria, Belgium, Denmark,
Finland, France, Germany, Italy, The Netherlands, Norway, Spain, Sweden,
Switzerland and the United Kingdom. "Far East" includes Japan, Hong Kong and
Singapore/Malaysia.

MORTGAGE-BACKED SECURITIES

Mortgage-Backed Securities are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage loans
on real property. Mortgage-backed securities include collateralized mortgage
obligations, 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.

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In a CMO, a series of bonds or certificates are issued in multiple classes.
Each 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 Mortgage Assets. As part of the process of creating
more predictable cash flows on certain tranches of a CMO, one or more tranches
generally must be created that absorb most of the changes in the cash flows on
the underlying Mortgage Assets. The yields on these tranches are generally
higher than prevailing market yields on Mortgage-Backed Securities with similar
average lives. Because of the uncertainty of the cash flows on these tranches,
the market prices of and yields on these tranches are more volatile.

Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of
CMO tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.

MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities in which
the Mortgage-Backed Securities Portfolio may invest include pass-through
securities issued or guaranteed by agencies or instrumentalities of the U.S.
government or by private sector entities. Mortgage pass-through securities
issued or guaranteed by private sector originators of or investors in mortgage
loans and are structured similarly to governmental pass-through securities.
Because private pass-throughs typically lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality, they are generally
structured with one or more types of credit enhancement described below. Federal
National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac") obligations are not backed by
the full faith and credit of the U.S. government as Government National Mortgage
Association ("GNMA" or "Ginnie Mae") certificates are, but FNMA and FHLMC
securities are supported by the instrumentalities' right to borrow from the U.S.
Treasury. Each of GNMA, FNMA and FHLMC guarantees timely distributions of
interest to certificate holders. Each of GNMA and FNMA also guarantees timely
distributions of scheduled principal. FHLMC has in the past guaranteed only the
ultimate collection of principal of the underlying mortgage loan; however, FHLMC
now issues Mortgage-Backed Securities (FHLMC Gold Pcs) which also guarantee
timely payment of monthly principal reductions. REFCORP obligations are backed,
as to principal payments, by zero coupon U.S. Treasury bonds, and as to interest
payment, ultimately by the U.S. Treasury. Obligations issued by such U.S.
governmental agencies and instrumentalities are described more fully below.

GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veterans Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States
government is pledged to the payment of all amounts that may be required to be
paid under any guaranty. In order to meet its obligations under such guaranty,
Ginnie Mae is authorized to borrow from the U.S. 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 U.S. government.

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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 Mortgage-Backed
Securities Portfolio will not pay any additional fees for such credit support,
although the existence of credit support may increase the price the Portfolio
pays for a security.

The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.

Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with defaults on the underlying assets being borne first
by the holders of the most subordinated class), creation of "reserve funds"
(where cash or investments, sometimes funded from a portion of the payments on
the underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each security is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.

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. The Municipal Bond Portfolio and the Municipal Money
Market Portfolio may also invest in tax-exempt industrial development bonds,
short-term municipal obligations, project notes, demand notes and tax-exempt
commercial paper in accordance with the Portfolio's investment objectives and
policies.

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,

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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 may 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 demand notes in which
the Municipal Money Market Portfolio will invest are payable on not more than
one year's notice.

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. It will be the responsibility of the Adviser to appraise
independently the fundamental quality of the bonds held by the Municipal Bond
Portfolio and the Municipal Money Market Portfolio.

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. If any such proposal were
enacted, it might restrict or eliminate the ability of either the Municipal Bond
Portfolio or the Municipal Money Market Portfolio to achieve its investment
objective. In that event, the Fund's Directors and officers would reevaluate its
investment objective and policies and consider recommending to its shareholders
changes in such objective and policies.

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. If any such proposal were enacted, it might restrict or eliminate
the ability of either of the Municipal Bond Portfolio or the Municipal Money
Market Portfolio to achieve its investment objective. In that event, the Fund's
Directors and officers would reevaluate the Portfolio's investment objective and
policies and consider recommending to its shareholders changes in such objective
and policies.

OPTIONS TRANSACTIONS

GENERAL INFORMATION. The Portfolios, except the Global Equity,
International Equity, International Small Cap, European Equity, Money Market and
Municipal Money Market Portfolios, may purchase and sell options on portfolio
securities and securities indices. Additional information with respect to option
transactions is set forth below. Call and put options on equity securities are
listed on various U.S. and foreign securities exchanges ("listed options") and
are written in over-the-counter transactions ("OTC Options").

Listed options are issued or guaranteed by the exchange on which they trade
or by a clearing corporation, such as Options Clearing Corporation ("OCC") in
the United States. Ownership of a listed call option gives the fund the right to
buy from the clearing corporation or exchange, the underlying security covered
by the option at the state 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 the current market price. Ownership of listed put option would
give the Portfolio the right to sell the underlying security or currency to the
clearing corporation or exchange at the state exercise price. Upon notice of
exercise of the put option, the writer of the option would have the obligation
to purchase the underlying security from the clearing corporation or exchange at
the exercise price.

OTC options are purchased from or sold (written) to dealers of financial
institutions which have entered into direct agreements with the Portfolio. With
OTC options, such variables as expiration date, exercise price and premium will
be agreed upon between the Portfolio and the transactions dealer, without the
intermediation 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, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction.

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COVERED CALL WRITING. Each of the Portfolios may write (i.e., sell) covered
call options on portfolio securities. By doing so, the Portfolio would become
obligated during the terms 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, the 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. The 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 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, the Portfolio has, in return for the premium on the
option, given up the opportunity for capital appreciation above the exercise
price should the market price of the underlying security increase, but has
retained the risk of loss should the price of the underlying security decline.
The size of premiums will fluctuate with varying market conditions.

COVERED PUT WRITING. Each of the Portfolios may write covered put options
on portfolio securities. By doing so, the Portfolio incurs an obligation to buy
the security underlying the option from the purchaser of the put at the option's
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 cash or other liquid securities equal to the exercise
price of the option or if the Portfolio holds a put option on the same
underlying security with a similar or higher exercise price.

Each of the Portfolios may write put options to receive the premiums paid by
purchasers; when the Adviser (and also the Sub-Adviser with respect to the Gold
Portfolio) wishes to purchase the security underlying the option at a price
lower than its current market price, in which case it will write the covered put
at an exercise price reflecting the lower purchase price sought; and to close
out long put option positions.

PURCHASE OF PUT AND CALL OPTIONS. When the Portfolio purchases a call
option it acquires the right to purchase a designated security at a designated
price (the "exercise price"), and when the 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 Portfolio may purchase call options to close out a covered call position
or to protect against an increase in the price of a security it anticipates
purchasing. The 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, the Portfolio would incur no additional loss. The Portfolio may
also purchase put options to close out written put positions in a manner similar
to call option closing purchase transactions.

The amount the 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 the 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.

OPTIONS ON SECURITIES INDICES. The Portfolios may purchase and write put
and call options on securities indices and enter into related closing
transactions in order to hedge against the risk of market price fluctuations or
to increase income
to the Portfolio.

Call and put options on indices are similar to options on securities except
that, rather than the right to purchase or sell particular securities at a
specified price, options on an index give the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the underlying
index is greater than (or less than, in the case of puts) the exercise price of
the option. This amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
particular market represented by the index generally (or in a particular
industry or segment of the market) rather than the price movements in individual
securities.

All options written on indices must be covered. When the Portfolio writes an
option on an index, it will establish a segregated account containing cash or
liquid securities with its custodian in an amount at least equal to the market
or value of the option and will maintain the account while the option is open or
will otherwise cover the transaction.

The Portfolio may choose to terminate an option position by entering into a
closing transaction. The ability of the Portfolio to enter into closing
transactions depends upon the existence of a liquid secondary market for such
transactions.

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OPTIONS ON CURRENCIES. The Portfolios may purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter markets) to manage the Portfolio's exposure to changes in
dollar exchange rates. Call options on foreign currency written by the Portfolio
will be "covered," which means that the Portfolio will own an equal amount of
the underlying foreign currency. With respect to put options on foreign currency
written by the Portfolio, the Portfolio will establish a segregated account with
the Fund's Custodian consisting of cash or liquid securities in an amount equal
to the amount the Portfolio would be required to pay upon exercise of the put.

RISK FACTORS IN OPTIONS TRANSACTIONS. The use of options also involves
additional risks. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to a Portfolio
because the maximum amount of risk is the premium paid for the option. The
writing of a call option generates a premium which may partially offset a
decline in the value of a Portfolio's portfolio assets. By writing a call
option, the Portfolio becomes obligated to sell the underlying instrument, which
may have a value higher than the exercise price. Conversely, the writing of a
put option generates a premium, but the Portfolio becomes obligated to purchase
the underlying instrument, which may have a value lower than the exercise price.
Thus, the loss incurred by a Portfolio in writing options may exceed the amount
of the premium received.

The effective use of options strategies is dependent, among other things, on
a Portfolio's ability to terminate options positions at a time when the
portfolio manager deems it desirable to do so. Although a Portfolio will enter
into options positions only if the portfolio manager believes that a liquid
secondary market exists for such options, there is no assurance that the
Portfolio will be able to effect closing transactions at any particular time or
at an acceptable price.

A Portfolio's purchase or sale of put or call options will be based upon
predictions as to anticipated market trends and/or interest rate movements by
the portfolio manager, which could prove to be inaccurate. Even if the
expectations of the portfolio manager are correct, there may be an imperfect
correlation between the change in the value of the options and of the
Portfolio's portfolio securities.

The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.

The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.

Effecting a closing transaction in the case of a written call option will
permit the Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both, in the case
of a written put option, will permit the Portfolio to write another put option
to the extent that the exercise price thereof is secured by depositing liquid
assets. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other Portfolio investments. If the Portfolio desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security.

A Portfolio will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Portfolio will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the
Portfolio.

An options position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might be possible to effect a closing transaction in particular options with
the result that the Portfolio would have to exercise the options in order to
realize any profit. If the Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (1) there may be insufficient trading interest in certain options,
(2) restrictions may be imposed by an exchange on opening transactions or
closing transactions, or both, (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities, (4) unusual or unforeseen circumstances may
interrupt normal operation on an exchange, (5) the facilities of an exchange or
OCC may not at all times be adequate to handle current trading volume, or (6)
one or more exchange could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that

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class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by OCC as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.

The Portfolios may purchase put options to hedge against a decline in the
value of their portfolios. By using put options in this way, the Portfolios will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.

The Portfolios may purchase call options to hedge against an increase in the
price of securities that the Portfolios anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently, the option may
expire worthless.

Options may also be traded OTC ("OTC Options"). In an OTC trading
environment, many of the protections afforded to exchange participants 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. The Portfolios may purchase or write OTC Options deemed
creditworthy by the Adviser. OTC Options are illiquid and it may not be possible
for the Portfolios to dispose of such options they have purchased or terminate
their obligations under an option they have written at a time when the Adviser
and portfolio manager believe it would be advantageous to do so. Accordingly,
OTC Options are subject to the Portfolios' limitation that a maximum of 15% of
its net assets be invested in illiquid securities. In the event of the
bankruptcy of the writer of an OTC Option, the Portfolios could experience a
loss of all or part of the value of the option.

For a discussion regarding the special risks of foreign currency options,
see "Risks Associated with Foreign Currency Transactions," in this SAI.

PORTFOLIO TURNOVER

The portfolio turnover rate for a year is the lesser of the value of the
purchases or sales for the year divided by the average monthly market value of
the Portfolio for the year, excluding U.S. Government securities and securities
with maturities of one year or less. The portfolio turnover rate for a year is
calculated by dividing the lesser of sales or the average monthly value of the
Portfolio's portfolio purchases of portfolio securities during that year by
securities, excluding money market instruments. 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.

PRECIOUS METALS FORWARD AND FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

The Gold Portfolio may enter into futures contacts on precious metals
("precious metals futures") as a hedge against changes in the prices of precious
metals held or intended to be acquired by the Portfolio, but not for speculation
or for achieving leverage. The Portfolio's hedging activities may include
purchases of futures contracts as an offset against the effect of anticipated
increases in the price of a precious metal which the Portfolio intends to
acquire ("anticipatory hedge") or sales of futures contracts as an offset
against the effect of anticipated declines in the price of precious metal which
the Portfolio owns ("hedge against an existing position").

The Portfolio will enter into precious metals forward contracts which are
similar to precious metals futures contracts, in that they provide for the
purchase or sale of precious metals at an agreed price with delivery to take
place at an agreed future time. However, unlike futures contracts, forward
contracts are negotiated contracts which are primarily used in the dealer
market. Unlike the futures contract market, which is regulated by the CFTC and
by the regulations of the commodity exchanges, the forward contract market is
unregulated. The Portfolio will use forward contracts for the same hedging
purposes as those applicable to futures contracts, as described above. When the
Portfolio enters into a forward contract it will establish with the custodian a
segregated account consisting of cash, liquid assets or bullion equal to the
market value of the forward contract purchased.

Precious metals futures and forward contract prices can be volatile and are
influenced principally by changes in spot market prices, which in turn are
affected by a variety of political and economic factors. In addition,
expectations of changing market conditions may at times influence the prices of
such futures and forward contracts, and changes in the cost of holding physical
precious metals, including storage, insurance and interest expense, will also
affect the relationship between spot and futures or forward prices. While the
correlation between changes in prices of futures and forward contracts and
prices of the precious metals being hedged by such contracts has historically
been very strong, the correlation may at times be imperfect and even a well
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected precious metals price trends. To the extent that interest rates move
in a direction opposite to that anticipated, the Portfolio may realize a loss on
a futures transaction not offset by an increase in the value of portfolio
securities. Moreover there is a possibility of a lack of a liquid secondary
market for closing out a futures position or futures option. The success of any
hedging technique depends upon the Adviser's and Sub-Adviser's accuracy in
predicting the direction of a market. If these predictions are incorrect, the
Portfolio may realize a loss.

The Portfolio may also purchase (buy) and write (sell) covered call or put
options on precious metals futures contracts. Such options would be purchased
solely for hedging purposes similar to those applicable to the purchase and sale
of futures

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contracts. Call options might be purchased to hedge against an increase in the
price of precious metals the Portfolio intends to acquire, and put options may
be purchased to hedge against a decline in the price of precious metals owned by
the Portfolio. As is the case with futures contracts, options on precious metals
futures may facilitate the Portfolio's acquisition of precious metals or permit
the Portfolio to defer disposition of precious metals for tax or other purposes.
The Portfolio may not purchase options on precious metals and precious metals
futures contracts if the premiums paid for all such options, together with
margin deposits on precious metals future contracts, would exceed 5% of the
Portfolio's total assets at the time the option is purchased.

One of the risks which may arise in employing futures contracts to protect
against the price volatility of the Portfolio's assets is that the price of
precious metals subject to futures contracts (and thereby the futures contracts
prices) may correlate imperfectly with the prices of such assets. A correlation
may also be distorted by the fact that the futures market is dominated by
short-term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.

SECURITIES LENDING

Each Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Portfolio attempts to increase its net investment income through
the receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Portfolio. Each Portfolio may lend its investment securities to
qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, structure and the aggregate amount of such
loans are not inconsistent with the 1940 Act, or the Rules and Regulations or
interpretations of the Commission thereunder, which currently require that (a)
the borrower pledge and maintain with the portfolio collateral consisting of
cash, an irrevocable letter of credit issued by a domestic U.S. bank, or
securities issued or guaranteed by the United States Government 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
or Sub-Adviser to be of good standing and when, in the judgment of the Adviser
or Sub-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 Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.

SHORT SALES

The Emerging Markets Debt, Latin American, Aggressive Equity and Technology
Portfolios may from time to time sell securities short without limitation but
consistent with applicable legal requirements. A short sale is a transaction in
which the Portfolio would sell securities it owns or has the right to acquire at
no added cost (i.e., "against the box") or does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. When the
Portfolio makes a short sale of borrowed securities, the proceeds it receives
from the sale will be held on behalf of a broker until the Portfolio replaces
the borrowed securities. To deliver the securities to the buyer, the Portfolio
will need to arrange through a broker to borrow the securities and, in so doing,
the Portfolio will become obligated to replace the securities borrowed at their
market price at the time of replacement, whatever that price may be. The
Portfolio may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.

The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or liquid securities. 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 cash or liquid securities
equal to the difference, if any, between the market value of the securities sold
short and any cash or liquid securities deposited as collateral with the broker
in connection with 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 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.

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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 FNMA, 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 the FNMA.

TAXES

The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectuses. No attempt is made to present 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 Prospectuses is not
intended as a substitute for careful tax planning.

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.

GENERAL REGULATED INVESTMENT COMPANY QUALIFICATIONS

Each Portfolio intends to 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.

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In addition to the requirements described above, in order to qualify as a
RIC, a Portfolio must distribute at least 90% of its 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, for each tax
year, if any, to its 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, and its distributions (including
capital gains distributions) will be taxable as ordinary income dividends to its
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits, and will be eligible for the corporate dividends received deduction
for corporate shareholders.

GENERAL TAX TREATMENT OF QUALIFYING RICS AND SHAREHOLDERS

Each Portfolio will decide whether to distribute or to retain all or part of
any net capital gains (the excess of net long-term capital gains over net
short-term capital losses) in any year for reinvestment. If any such gains are
retained, the Portfolio will pay federal income tax thereon, and, if the
Portfolio makes an election, the shareholders will include such undistributed
gains in their income, will increase their basis in Portfolio shares by 65% of
the amount included in their income and will be able to claim their share of the
tax paid by the Portfolio as a refundable credit.

A gain or loss realized by a shareholder on the sale, exchange or redemption
of shares of a Portfolio held as a capital asset will be capital gain or loss,
and such gain or loss will be long-term if the holding period for the shares
exceeds 18 months, will be mid-term if the holding period exceeds 12 months, but
does not exceed 18 months, and otherwise will be short-term. Any loss realized
on a sale, exchange or redemption of shares of a Portfolio will be disallowed to
the extent the shares disposed of are replaced within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
Any loss realized by a shareholder on the disposition of shares held 6 months or
less is treated as a long-term capital loss to the extent of any distributions
of net long-term capital gains received by the shareholder with respect to such
shares or any inclusion of undistributed capital gain with respect to such
shares.

The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.

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.

Each Portfolio is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not certified on the Account
Registration Form or on a separate form supplied by the Portfolio, that the
Social Security or Taxpayer Identification Number provided is correct and that
the shareholder is exempt from backup withholding or is not currently subject to
backup withholding.

A Section 1256 position held by a Fund will generally be marked-to-market
(i.e. treated as if it were sold for fair market value) on the last business day
of a Fund's fiscal year, and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within a Fund. The acceleration of income on Section 1256 positions may
require a Fund to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, a Fund may be required to dispose of portfolio securities that they
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of Fund shares. In these ways, any or all of these rules may
affect the amount, character and timing of income earned and in turn distributed
to shareholders by a Fund.

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.

SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS. In general, gains
from foreign currencies and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in stock,
securities or foreign currencies are currently considered to be qualifying
income for purposes of determining whether the Fund qualifies as a regulated
investment company. It is currently unclear, however, who will be treated as the
issuer of certain foreign currency instruments or how foreign currency options,
futures, or forward foreign currency contracts will be valued for purposes of
the regulated investment company diversification requirements applicable to the
Fund. The Fund may request a private letter ruling from the Internal Revenue
Service on some or all of these issues.

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Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from forward contracts, from futures
contracts that are not "regulated futures contracts", and from unlisted options
will be treated as ordinary income or loss under Code Section 988. Also, certain
foreign exchange gains or losses derived with respect to foreign fixed-income
securities are also subject to Section 988 treatment. In general, therefore,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Fund's
net capital gain.

If the Fund invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the Fund
level which could not be eliminated by distributions to shareholders. The U.S.
Treasury issued proposed regulation section 1.1291-8 which establishes a
mark-to-market regime which allows investment companies investing in PFIC's to
avoid most, if not all, of the difficulties posed by the PFIC rules. In any
event, it is not anticipated that any taxes on the Fund with respect to
investments in PFIC's would be significant.

A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or losses are subject to many complex and
special tax rules. For example, over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse or closing out
of the option or sale of the underlying stock or security. By contrast, a Fund's
treatment of certain other options, futures and forward contracts entered into
by a Fund is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indexes, options on securities indexes, options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.

When a Fund holds options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position which may reduce or eliminate the operation of these
straddle rules.

SPECIAL TAX CONSIDERATIONS RELATING TO MUNICIPAL BOND AND
MUNICIPAL MONEY MARKET PORTFOLIOS

Each of the Municipal Bond Portfolio and the Municipal Money Market
Portfolio will qualify to pay "exempt interest dividends" to its shareholders
provided that, at the close of each quarter of its taxable year at least 50% of
the value of its total assets consists of obligations the interest on which is
exempt from federal income tax. Current federal tax law limits the types and
volume of bonds qualifying for federal income tax exemption of interest, which
may have an effect on the ability of these Portfolios to purchase sufficient
amounts of tax-exempt securities to satisfy this requirement. Any loss on the
sale or exchange of shares of the Municipal Bond Portfolio or the Municipal
Money Market Portfolio held for six months or less will be disallowed to the
extent of any exempt-interest dividends received by the selling shareholder with
respect to such shares.

As noted in the Prospectus for the Municipal Bond Portfolio and the
Municipal Money Market Portfolio, exempt-interest dividends are excludable from
a shareholder's gross income for regular Federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the alternative minimum
tax (the "Alternative Minimum Tax") imposed by Section 55 of the Code or the
environmental tax (the "Environmental Tax") imposed by Section 59A of the Code.
The Alternative Minimum Tax is imposed at the rate of up to 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The
Environmental Tax is imposed at the rate of 0.12% and applies only to corporate
taxpayers. The Alternative Minimum Tax and the Environmental Tax may be affected
by the receipt of exempt-interest dividends in two circumstances. First,
exempt-interest dividends derived from certain "private activity bonds" issued
after August 7, 1986, will generally be an item of tax preference and therefore
potentially subject to the Alternative Minimum Tax and the Environmental Tax.
The Portfolios intend, when possible, to avoid investing in private activity
bonds. Second, in the case of exempt-interest dividends received by corporate
shareholders, all exempt-interest dividends, regardless of when the bonds from
which they are derived were issued or whether they are derived from private
activity bonds, will be included in the corporation's "adjusted current
earnings," as defined in Section 56(g) of the Code, in calculating the
corporation's alternative minimum taxable income for purposes of determining the
Alternative Minimum Tax and the Environmental Tax.

The percentage of income that constitutes "exempt-interest dividends" will
be determined for each year for the Municipal Bond Portfolio and the Municipal
Money Market Portfolio and will be applied uniformly to all dividends declared
with respect to the Portfolios during that year. This percentage may differ from
the actual percentage for any particular day.

Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Municipal Bond Portfolio or the Municipal Money Market
Portfolio will not be deductible for federal income tax purposes. The deduction

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<PAGE>
otherwise allowable to property and casualty insurance companies for "losses
incurred" will be reduced by an amount equal to a portion of exempt-interest
dividends received or accrued during any taxable year. Foreign corporations
engaged in a trade or business in the United States will be subject to a "branch
profits tax" on their "dividend equivalent amount" for the taxable year, which
will include exempt-interest dividends. Certain Subchapter S corporations may
also be subject to taxes on their "passive investment income," which could
include exempt-interest dividends. Up to 85% of the Social Security benefits or
railroad retirement benefits received by an individual during any taxable year
will be included in the gross income of such individual if the individual's
"modified adjusted gross income" (which includes exempt-interest dividends) plus
one-half of the Social Security benefits or railroad retirement benefits
received by such individual during that taxable year exceeds the base amount
described in Section 86 of the Code.

Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
shares of the Municipal Bond Portfolio or the Municipal Money Market Portfolio.
"Substantial user" is defined generally for these purposes as including a
"non-exempt person" who regularly uses in trade or business a part of a facility
financed from the proceeds of such bonds.

Issuers of bonds purchased by the Municipal Bond Portfolio (or the
beneficiary of such bonds) may have made certain representations or covenants in
connection with the issuance of such bonds to satisfy certain requirements of
the Code that must be satisfied subsequent to the issuance of such bonds.
Investors should be aware that exempt-interest dividends derived from such bonds
may become subject to federal income taxation retroactively to the date thereof
if such representations are determined to have been inaccurate or if the issuer
of such bonds (or the beneficiary of such bonds) fails to comply
with such covenants.

SPECIAL TAX CONSIDERATIONS RELATING TO 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.

It is expected that each Portfolio will 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 Portfolio may elect to treat certain foreign income taxes
imposed on it for U.S. federal income tax purposes as paid directly by its
shareholders. A Portfolio will make such an election 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 in computing their federal income tax liability.

Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to a number of complex limitations regarding the
availability and utilization of the credit. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by a Portfolio.
Shareholders are urged to consult their tax advisors regarding the application
of these rules to their particular circumstances.

TAXES AND FOREIGN SHAREHOLDERS

Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership ("Foreign Shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.

If the income from the Portfolio is not effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, distributions of net
investment income plus the excess of net short-term capital gains over net
long-term capital losses will be subject to U.S. withholding tax at the rate of
30% (or such lower treaty rate as may be applicable) upon the gross amount of
the dividend. Furthermore, Foreign Shareholders will generally be exempt from
U.S. federal income tax on gains realized on the sale of shares of the
Portfolio, distributions of net long-term capital gains, and amounts retained by
the Fund which are designated as undistributed capital gains.

If the income from the Portfolio is effectively connected with a U.S. trade
or business carried on by a Foreign Shareholder, then distributions from the
Portfolio and any gains realized upon the sale of shares of the Portfolio, will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations.

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<PAGE>
The Portfolio may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.

The tax consequences to a Foreign Shareholder entitled to claim the benefits
of an applicable tax treaty may differ from those described here. Furthermore,
Foreign Shareholders are strongly urged to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in a
Portfolio, including the potential application of the provisions of the Foreign
Investment in Real Estate Property Tax Act of 1980, as amended.

PURCHASE OF SHARES

The purchase price of the Class A shares of each Portfolio of the Fund,
except the Money Market and Municipal Money Market Portfolios, and the Class B
shares of each Multiclass Portfolio of the Fund is the net asset value next
determined after Federal Funds are received. The International Small Cap
Portfolio may impose a 1% transaction fee on share purchases. For each Portfolio
of the Fund other then the Money Market or Municipal Money Market Portfolios, an
order received prior to the regular close of the New York Stock Exchange (the
"NYSE") will be executed at the price computed on the date of receipt; and an
order received after the regular close of the NYSE will be executed at the price
computed on the next day the NYSE is open as long as the Fund's transfer agent
receives payment by check or in Federal Funds prior to the regular close of the
NYSE on such day. Shares of the Money Market and Municipal Money Market
Portfolios may be purchased at the net asset value per share at the price next
determined after Federal Funds are available to such Portfolios. 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.

Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of a Portfolio's shares. The
International Equity and the Emerging Markets Portfolios are currently closed to
new investors with the exception of certain Morgan Stanley customers, employees
of Morgan Stanley, certain tax-qualified retirement plans and other investment
companies advised by Morgan Stanley Asset Management Inc. and its affiliates.

REDEMPTION OF SHARES

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 Commission, (ii) during any period when an
emergency exists as defined by the rules of the Commission 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.

No charge is made by any Portfolio for redemptions except for the 1%
transaction fee that may be assessed upon redemption of the International Small
Cap Portfolio. Any redemption may be more or less than the shareholder's cost
depending on the market value of the securities held by the Portfolio.

To protect your account and the Fund from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Fund to verify
the identity of the person who has authorized a redemption from your account.
Signature guarantees are required in connection with: (1) all redemptions,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owner(s) and/or registered address; and (2) share
transfer requests.

An "eligible guarantor institution" guarantor may include a bank, a trust
company, a credit union or savings and loan association, a member firm of a
domestic stock exchange, or a foreign branch of any of the foregoing. Notaries
public are not acceptable guarantors.

The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.

The Fund has made an election with the Commission pursuant to Rule 18f-1
under the 1940 Act to pay in cash all redemptions requested by any shareholder
of record limited in amount during any 90-day period to the lesser of $250,000
or 1% of the net assets of a Portfolio at the beginning of such period. Such
commitment is irrevocable without the prior approval of the Commission.
Redemptions in excess of the above limits may be paid in whole or in part in
investment securities or in cash, as the Board of Directors may deem advisable
as being in the best interests of the Fund. If redemptions are paid in
investment securities, such securities will be valued as set forth in the Fund's
Prospectus under "Valuation of Shares" and a redeeming shareholder would
normally incur brokerage expenses in converting these securities to cash.

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<PAGE>
SHAREHOLDER SERVICES

EXCHANGE FEATURES

Shares of each Portfolio of the Fund may be exchanged for shares of any
other available Portfolio (other than the International Equity and Emerging
Markets Portfolios, which are closed to new investors). In exchanging for shares
of a Portfolio with more than one class, the class of shares a shareholder
receives in exchange will be determined in the same manner as any other purchase
of shares and will not be based on the class of shares surrendered for the
exchange. Consequently, the same minimum initial investment and minimum account
size for determining the class of shares received in the exchange will apply.

Any such exchange will be based on the respective net asset values of the
shares involved. There is no sales commission or sales charge of any kind.
Before making an exchange, a shareholder should consider the investment
objectives of the Portfolio to be purchased.

Exchange requests may be made either by mail or telephone. Exchange requests
by mail should be sent to Morgan Stanley Institutional Fund, Inc., P.O. Box
2798, Boston, Massachusetts 02208-2798. Telephone exchanges will be accepted
only if the certificates for the shares to be exchanged are held by the Fund for
the account of the shareholder and the registration of the two accounts will be
identical. Requests for exchanges received prior to 10:00 a.m. (Eastern Time)
for the Municipal Money Market Portfolio, 11:00 a.m. (Eastern Time) for the
Money Market Portfolio, and 4:00 p.m. (Eastern Time) for the remaining
Portfolios will be processed as of the close of business on the same day.
Requests received after these times will be processed on the next business day.
Exchanges may be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board of Directors to assure that such exchanges
do not disadvantage the Fund and its shareholders.

For federal income tax purposes an exchange between Portfolios is a taxable
event for shareholders subject to tax, and, accordingly, a gain or loss may be
realized. The exchange privilege may be modified or terminated by the Fund at
any time upon 60-days notice to shareholders.

TRANSFER OF SHARES

Shareholders may transfer shares of the Fund's Portfolios to another person
by making a written request to the Fund. The request should clearly identify the
account and number of shares to be transferred, and include the signature of all
registered owners and all stock certificates, if any, which are subject to the
transfer. The signature on the letter of request, the stock certificate or any
stock power must be guaranteed in the same manner as described under "Redemption
of Shares". As in the case of redemptions, the written request must be received
in good order before any transfer can be made. Transferring shares may affect
the eligibility of an account for a given class of the Portfolio's shares and
may result in involuntary conversion or redemption of such shares.

INVESTMENT 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 options or futures contracts or from
investing in securities or other instruments backed by physical commodities),
and except that the Gold Portfolio may invest in gold bullion in accordance with
its investment objectives and policies;

(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 Global Fixed Income, Emerging Markets,
Emerging Markets Debt, China Growth, Latin American, MicroCap, Aggressive
Equity, European Real Estate, Asian Real Estate, Technology 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 and as a
temporary measure for extraordinary or emergency purposes and then, in no event,
in excess of 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings), except that each of the Emerging Markets
Debt, Latin American and Technology Portfolios may borrow from banks and other
entities in amount not in excess of 33 1/3% of its total assets (including the
amount borrowed) less liabilities in accordance with its investment objectives
and policies;

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<PAGE>
(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;

(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,
however, that 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 or the Municipal Money Market Portfolio)
instruments issued by U.S. Banks, except that (i) the Latin American Portfolio
may invest more than 25% of its total assets in companies involved in the
telecommunications industry or financial services industry, (ii) the Gold
Portfolio may invest more than 25% of its total assets in securities of
companies in the group of industries involved in gold-related or
precious-metals-related activities, as described in its prospectus, and may
invest more than 25% of its total assets in one or more of the industries, as
described in its prospectus, (iii) each of the Asian Real Estate, European Real
Estate and U.S. Real Estate Portfolios will invest more than 25% of its total
assets in the Asian, European and U.S. real estate industries, respectively, as
described in their prospectuses, and (iv) the Technology Portfolio may invest
more than 25% of its assets in securities of companies in the technology or
technology-related industries; and

(8) write or acquire options or interests in oil, gas or other mineral
exploration or development programs.

In addition, each current Portfolio of the Fund has adopted non-fundamental
investment limitations as stated below and in their respective Prospectuses.
Such limitations may be changed without shareholder approval. Each current
Portfolio of the Fund will not:

(1) purchase on margin or sell short, except (i) that the Emerging Markets
Debt, Latin American, Aggressive Equity and Technology Portfolios may from time
to time sell securities short without limitation but consistent with applicable
legal requirements as stated in its Prospectus, (ii) that each Portfolio, except
the Money Market and Municipal Money Market Portfolios may enter into option
transactions and futures contracts as described in its Prospectus, and (iii) as
specified above in fundamental investment limitation number (1) above;

(2) purchase or retain securities of an issuer if those Officers and
Directors of the Fund or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities;

(3) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fair
market value;

(4) invest for the purpose of exercising control over management of any
company;

(5) invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder;

(6) except for the U.S. Real Estate, European Real Estate and Asian Real
Estate Portfolios, invest in real estate limited partnership interests, and the
U.S. Real Estate, European Real Estate and Asian Real Estate Portfolios may not
invest in such interests that are not publicly traded;

(7) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective Prospectuses) that are publicly distributed, and
(ii) by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the 1940
Act or the Rules and Regulations or interpretations of the Commission
thereunder;

(8) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing, or purchase securities
while borrowings exceed 5% of its total assets, except that the Latin American,
Emerging Markets Debt and Technology Portfolios may borrow in accordance with
Fundamental Restriction No. (5) above; and

(9) invest in fixed time deposits with a duration of over seven calendar
days or invest in fixed time deposits with a duration of from two business days
to seven calendar days if more than 10% of the Portfolio's total assets would be
invested in these deposits.

The Balanced, Fixed Income and Value Equity Portfolios will only issue
shares for securities or assets other than cash in a bona fide reorganization,
statutory merger, or in other acquisitions of portfolio securities (except for
municipal debt securities issued by state political subdivisions or their
agencies or instrumentalities) which (i) meet their respective investment
objectives; and (ii) are acquired for investment and not for resale.

Each of the Global Fixed Income, Emerging Markets, Emerging Markets Debt,
China Growth, Latin American, Aggressive Equity, European Real Estate, Asian
Real Estate 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).

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<PAGE>
With respect to fundamental investment limitation number (7), the Fund will
determine industry concentration in accordance with the classifications of
industries based on the Industry Numbers from the Standard Industrial
Classification Manual as prepared by the Office of Management and Budget, except
that, with respect to the Money Market and Municipal Money Market Portfolios,
(i) 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 (ii) asset-backed
securities will be classified according to the underlying assets securing such
securities.

In accordance with fundamental investment limitation number (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 and, accordingly,
the Latin American Portfolio will invest between 25% and 40% of its assets in
securities of issuers engaged in the telecommunications industry.

The percentage limitations contained in these restrictions apply at the time
of purchase of securities. Future Portfolios of the Fund may adopt different
limitations.

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: (1) 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.

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. Two Directors and all of the officers of the Fund
are directors, officers or employees of the Fund's adviser, distributor or
administrative services provider. 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.
("MSAM" or the "Adviser") or its affiliates. The other Directors have no
affiliation with the Fund's adviser, distributor or administrative services
provider. 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 Morgan
1221 Avenue of the Americas Stanley Asset Management Inc. and Morgan Stanley
New York, NY 10020 Asset Management Limited; Managing Director of
11/26/32 Morgan Stanley & Co. Incorporated; Director of
VK/ AC Holdings, Inc.; 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 Asset Management Inc;
1221 Avenue of the Americas President and Director of various investment
New York, NY 10020 companies managed by Morgan Stanley Asset
12/12/58 Management Inc.; Previously practiced law with
the New York firm of Rogers & Wells.
John D. Barrett, II Director Chairman and Director of Barrett Associates, Inc.
521 Fifth Avenue (investment counseling); Director of the
New York, NY 10135 Ashforth Company (real estate); Director of the
8/21/35 Morgan Stanley Universal Funds, Inc.
</TABLE>

24
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND DATE OF BIRTH POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------------------- ---------------------- --------------------------------------------------
<S> <C> <C>
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm);
43 Arch Street Director of the Morgan Stanley Universal Funds,
Greenwich, CT 06830 Inc.
1/23/37
Andrew McNally IV Director Chairman and Chief Executive Officer of Rand
8255 North Central Park Avenue McNally (publication); Director of Allendale
Skokie, IL 60076 Insurance Co., Mercury Finance (consumer
11/11/39 finance); Zenith Electronics, Hubbell, Inc.
(industrial electronics); Director of the Morgan
Stanley Universal Funds, Inc.
Samuel T. Reeves Director Chairman of the Board and CEO, Pinacle L.L.C.
8211 North Fresno Street (investment firm); Director, Pacific Gas and
Fresno, CA 93720 Electric and PG&E Enterprises (utilities);
7/28/34 Director of the Morgan Stanley Universal Funds,
Inc.
Fergus Reid Director Chairman and Chief Executive Officer of LumeLite
85 Charles Colman Blvd Corporation (injection molding firm); Trustee
Pawling, NY 12564 and Director of Vista Mutual Fund Group;
8/12/32 Director of the Morgan Stanley Universal Funds,
Inc.
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin Boehm, P.C.;
2800 North Central Avenue Formerly of Counsel, Bryan, Cave LLP; (law
Phoenix, AZ 85004 firms); Director of the Morgan Stanley Universal
1/24/34 Funds, Inc.
James W. Grisham* Vice President Principal of Morgan Stanley & Co. Incorporated and
1221 Avenue of the Americas of Morgan Stanley Asset Management Inc.; Vice
New York, NY 10020 President of various U.S. registered investment
10/24/41 companies managed by Morgan Stanley Asset
Management Inc.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co. Incorporated and
1221 Avenue of the Americas of Morgan Stanley Asset Management Inc.; General
New York, NY 10020 Counsel and 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 Vice President of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated and Morgan Stanley Asset Management
New York, NY 10020 Inc.; Previously with Price Waterhouse LLP
6/7/54 (accounting); Vice President of various U.S.
registered investment companies managed by
Morgan Stanley Asset Management Inc.
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated and Morgan Stanley Asset Management
New York, NY 10020 Inc.; Previously with Citicorp (banking);
3/26/56 Secretary of various U.S. registered investment
companies managed by Morgan Stanley Asset
Management Inc.
Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and General
73 Tremont Street Counsel of Chase Global Funds Services Company;
Boston, MA 02108-3913 Previously, Leland, O'Brien, Rubinstein
3/7/55 Associates, Inc. (investments).
Joanna Haigney Treasurer Assistant Vice President, Senior Manager of Fund
73 Tremont Street Administration and Compliance Services, Chase
Boston, MA 02108-3913 Global Funds Services Company; Officer of
10/10/66 various investment companies managed by Morgan
Stanley Asset Management Inc. Previously with
Coopers & Lybrand LLP.
Rene J. Feuerman Assistant Treasurer Manager of Fund Administration and Compliance
73 Tremont Street Services, Chase Global Funds Services Company.
Boston, MA 02108-3913 Previously Fund Administrator and Senior Fund
1/25/67 Accountant, Chase Global Funds Services Company.
</TABLE>

- --------------
* "Interested Person" within the meaning of the 1940 Act.

25
<PAGE>
REMUNERATION OF DIRECTORS AND OFFICERS

Effective June 28, 1995, the Fund and other funds managed by MSAM (the "Fund
Complex") will pay each of the Directors who is not an "interested person" an
annual aggregate fee of $55,000, plus out-of-pocket expenses. The Fund Complex
will pay each of the members of the Fund's Audit Committee, which consists of
the Fund's Directors who are not "interested persons," an additional annual
aggregate fee of $10,000 for serving on such committee. The allocation of such
fees will be among the funds in the Fund Complex in proportion to their
respective average net assets. For the fiscal year ended December 31, 1996, the
Fund paid approximately $389,000 in Directors' fees and expenses. Directors who
are also officers or affiliated persons receive no remuneration for their
services as Directors. The Fund's officers and employees are paid by the Adviser
or its agents. As of September 8, 1997, to Fund management's knowledge, the
Directors and officers of the Fund, as a group, owned more than 1% of the
outstanding common stock of the following Portfolio of the Fund: 2.35% Latin
American Portfolio - Class A shares. The following table shows aggregate
compensation paid to each of the Fund's Directors by the Fund and the Fund
Complex, respectively, in the fiscal year ended December 31, 1996.

COMPENSATION TABLE

<TABLE>
<CAPTION>
(4)
(2) (3) ESTIMATED (5)
AGGREGATE PENSION OR RETIREMENT ANNUAL TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED BENEFITS FROM REGISTRANT
(1) FROM AS PART OF FUND UPON AND FUND COMPLEX
NAME OF PERSON, POSITION REGISTRANT EXPENSES RETIREMENT PAID TO DIRECTORS
- -------------------------------------------------- ------------- --------------------- ------------- -------------------
<S> <C> <C> <C> <C>
Barton M. Biggs,
Director and Chairman of the Board............... None N/A N/A None
Warren J. Olsen,*
Director and President........................... None N/A N/A None
Michael F. Klein,**
Director and President........................... None N/A N/A None
John D. Barrett, II
Director......................................... 59,485 N/A N/A 68,777
Gerard E. Jones,
Director......................................... 59,485 N/A N/A 75,877
Andrew McNally, IV
Director......................................... 55,023 N/A N/A 63,195
Samuel T. Reeves,
Director......................................... 53,287 N/A N/A 61,331
Fergus Reid,
Director......................................... 67,434 N/A N/A 77,220
Frederick O. Robertshaw,
Director......................................... 50,834 N/A N/A 58,777
Frederick B. Whittemore,***
Director......................................... None N/A N/A None
</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.
*** As of March 14, 1997, Mr. Whittemore resigned from the Board of Directors.

INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS

MSAM is a wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover &
Co. The principal offices of Morgan Stanley, Dean Witter, Discover & Co. 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, NY 10020. As compensation
for advisory services for the fiscal years ended December 31, 1994, December 31,
1995 and December 31, 1996, the Adviser earned fees of approximately
$34,338,000, $40,534,000 and $55,465,000, respectively, and from such fees
voluntarily waived fees of $2,640,000, $3,526,000 and $4,340,000, respectively.
For the fiscal years ended December 31, 1994, December 31, 1995 and December 31,
1996, the Fund paid brokerage commissions of approximately $7,287,293,
$10,317,515 and $17,014,335, respectively. For the fiscal years ended December
31, 1994, December 31, 1995 and December 31, 1996, the Fund paid in the
aggregate $796,000, $377,000 and $826,686, respectively, as brokerage
commissions to Morgan Stanley & Co. Incorporated ("Morgan Stanley" or the
"Distributor"), an affiliated broker-dealer, which represented 11%, 4%, and 5%
of the total amount of brokerage commissions paid in each respective period. For
the fiscal years ended December 31, 1994, December 31, 1995 and December 31,
1996, the Fund paid administrative fees to MSAM of approximately $4,458,000,
$5,238,000 and $7,298,531, respectively.

Sun Valley Gold Company (the "Sub-Adviser"), with principal offices at 620
Sun Valley Road, Sun Valley, Idaho, serves as the investment sub-adviser of the
Gold Portfolio, pursuant to a sub-advisory agreement among the Fund, the Adviser
and the Sub-Adviser (the "Sub-Advisory Agreement"). The Adviser and the
Sub-Adviser have entered into an indemnification

26
<PAGE>
agreement under which, generally, the Sub-Adviser has agreed to indemnify the
Adviser and the Fund for claims or losses in connection with any failure by the
Sub-Adviser to comply with its obligations under the Sub-Advisory Agreement or
related agreements or any act or omission that amounts to negligence,
misfeasance or bad faith, and the Adviser has agreed to indemnify the
Sub-Adviser for claims or losses in connection with any failure by the Adviser
to comply with its obligations under the Sub-Advisory Agreement or related
agreements. As compensation for sub-advisory services for the fiscal years ended
December 31, 1994, December 31, 1995 and December 31, 1996, the Sub-Adviser
earned fees of approximately $76,000, $73,000 and $110,000, respectively, and
from such fees voluntarily waived fees of $36,000, $37,000 and $52,000,
respectively. For the fiscal years ended December 31, 1994, December 31, 1995
and December 31, 1996, the Fund paid $8,000, $450 and $0, respectively, as
brokerage commissions to Sun Valley Gold Trading, Inc., a broker-dealer
affiliated with the Sub-Adviser.

Pursuant to the MSAM Administration Agreement between the Adviser and the
Fund, the Adviser provides Administrative Services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15 of 1% of the average daily net assets of each
Portfolio.

Under the Agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase Global Funds Services Company ("CGFSC," a corporate affiliate
of Chase) provides certain administrative services to the Fund. CGFSC provides
operational and administrative services to investment companies with
approximately $69 billion in assets and having approximately 215,930 shareholder
accounts as of December 31, 1996. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913.

DISTRIBUTION OF FUND SHARES

The Distributor is a wholly-owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co., serves as the Distributor of the Fund's shares pursuant to a
Distribution Agreement for the Fund and a Plan of Distribution for the Class B
shares of the Portfolios (except the Money Market, Municipal Money Market and
International Small Cap Portfolios which do not have Class B shares) pursuant to
Rule 12b-1 under the 1940 Act (each, a "Plan" and collectively, the "Plans").
Under each Plan the Distributor is entitled to receive from these Portfolios a
distribution and shareholder servicing fee, which is accrued daily and paid
quarterly, at an annual rate of up to 0.25% of the average daily net assets of
the Class B shares of these Portfolios. The Distributor expects to allocate most
of its fee to its investment representatives and investment dealers, banks or
financial service firms that provide distribution and shareholder services (each
a "Participating Dealer"). The actual amount of such compensation is agreed upon
by the Fund's Board of Directors and by the Distributor. The Distributor may, in
its discretion, voluntarily waive from time to time all or any portion of its
distribution and shareholder servicing fee and the Distributor is free to make
additional payments out of its own assets to promote the sale of Fund shares.

The Plans obligate the Portfolios to accrue and pay to the Distributor the
fee agreed to under its Distribution Agreement. The Plans do not obligate the
Portfolios to reimburse the Distributor for the actual expenses the Distributor
may incur in fulfilling its obligations under the Plans. Thus, under each Plan,
even if the Distributor's actual expenses exceed the fee payable to it
thereunder at any given time, the Portfolios will not be obligated to pay more
than that fee. If the Distributor's actual expenses are less than the fee it
receives, the Distributor will retain the full amount of the fee. The Plans for
the Class B shares were most recently approved by the Fund's Board of Directors,
including those directors who are not "interested persons" of the Fund as that
term is defined in the 1940 Act and who have no direct or indirect financial
interest in the operation of a Plan or in any agreements related thereto, on
February 13, 1997.

The Class B shares commenced operations on January 2, 1996. Therefore, no
Rule 12b-1 fees were paid to the Distributor for the fiscal year ended December
31, 1995. For the fiscal year ended December 31, 1996, the Fund paid to the
Distributor fees of approximately $178,205 pursuant to the Distribution Plan in
accordance with Rule 12b-1 under the 1940 Act. The U.S. Equity Plus,
Mortgage-Backed Securities, China Growth, MicroCap, European Real Estate and
Asian Real Estate Portfolios were not in operation in the fiscal year ended
December 31, 1996.

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 the Adviser
(together, the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Adviser and, as described below, impose
additional, more onerous, restrictions on the Fund's investment personnel.

The Codes require that all employees of the 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 the 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.

27
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Fund as of September 11, 1997 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Fund management's knowledge, as follows:

ACTIVE COUNTRY ALLOCATION PORTFOLIO: The Trustees of Columbia University in
the City of New York, 475 Riverside Drive, Suite 401, New York, NY 10115, owned
22% of such Portfolio's total outstanding Class A shares.

Oglebay Norton Company, 1100 Superior Avenue, Cleveland, OH 44114-2598,
owned 16% of such Portfolio's total outstanding Class A shares.

Boatmen's Trust Co. Pension Plan, P.O. Box 14737, St. Louis, MO 63178-4737
owned 10% of such Portfolio's total outstanding Class A shares.

Sahara Enterprises, Inc., 3 First National Plaza, Suite 2000, Chicago, IL
60602-4260, owned 10% of such Portfolio's total outstanding Class A shares.

The Flinn Foundation, Northern Trust Co., Master Trust Dept., 7th Floor,
P.O. Box 92984, Chicago, IL 60675, owned 8% of such Portfolio's total
outstanding Class A shares.

Wallace Global Fund, 1990 M Street, Suite 250, Washington, D.C. 20036, owned
5% of such Portfolio's total outstanding Class A shares.

David M. & Sharon M. Platter, 9 Palmer Lane, Riverside, CT 06878, owned 97%
of such Portfolio's total outstanding Class B shares.

AGGRESSIVE EQUITY PORTFOLIO: Ministers and Missionaries Benefit Board of
the American Baptist Churches, Attn: Morgan Stanley Asset Management Inc., 1221
Avenue of the Americas, New York, NY 10020, owned 11% of such Portfolio's total
outstanding Class A shares.

Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675-2956, owned 10% of such Portfolio's total
outstanding Class A shares.

Bank Morgan Stanley AG, Bahnogstrasse 92, Zurich CH-8023, Switzerland owned
6% of such Portfolio's total outstanding Class A shares.

Kinghugh S.A., c/o Morgan Stanley Asset Management Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 6% of such Portfolio's total outstanding
Class A shares.

ASIAN EQUITY PORTFOLIO: Association De Biefsaissance Et De Retraite Des
Pollciers De La Communaute Urbaine De Montreal, 480 Gilford Street, Montreal,
Quebec H2J1N3, owned 13% of such Portfolio's total outstanding Class A shares.

Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675-2956, owned 8% of such Portfolio's total
outstanding Class A shares.

Thomas J. Holce, 109 N. Lotus Beach Drive, Portland, OR 97217-8021, owned 6%
of such Portfolio's total outstanding Class B shares.

Steve & Julie Gerhardt, 6030 Quail Hill Drive, Cincinnati, OH 45233, owned
6% of such Portfolio's total outstanding Class B shares.

BALANCED PORTFOLIO: Kinney Printing Co., P.O. Box 64010, St. Paul, MN
55154-0010, owned 23% of such Portfolio's total outstanding Class A shares.

H. Conrad & Sarah Meyer, One Woodland Avenue, Bronxville, NY 10708, owned
17% of such Portfolio's total outstanding Class A shares.

Guarantee & Trust Company, FBO H Conrad Meyer III, IRA Rollover, One
Woodland Avenue, Bronxville, NY 10708, owned 11% of such Portfolio's total
outstanding Class A shares.

Jeffery R. Holzschuh, 21 Kenilworth Terrace, Greenwich, CT 06830, owned 7%
of such Portfolio's total outstanding Class A shares.

William Guthrie, IRA Rollover, MSTC Custodian, 435 Sheridan Road, Winnetka,
IL 60093-2626, owned 57% of such Portfolio's total outstanding Class B shares.

Ramakrishna Kothalanka M.D., Profit Sharing Plan, MSTC Custodian, 126
Bentley Avenue, Jersey City, NJ 07304-1702, owned 31% of such Portfolio's total
outstanding Class B shares.

Maree R. Malway, Trustee, Patricia P. Franics Living Trust, Plante & Moran
LLP, 505 N. Woodward Avenue, Suite 2000, Bloomfield Hills, MI 48304-2979, owned
6% of such Portfolio's total outstanding Class B shares.

28
<PAGE>
Eric J. Hall, 604 Hardscrabble Road, Chappaqua, NY 10514, owned 6% of such
Portfolio's total outstanding Class B shares.

EMERGING GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan
Stanley Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 48%
of such Portfolio's total outstanding Class A shares.

Allendale Mutual Insurance Co., P.O. Box 7500, Johnston, RI 02919-0750,
owned 19% of such Portfolio's total outstanding Class A shares.

NOAM/A/EC, c/o Philip Winters, Morgan Stanley Asset Management Inc., 1221
Avenue of the Americas Avenue, New York, NY 10020, owned 9% of such Portfolio's
total outstanding Class A shares.

South Trust Estate & Trust Company of Georgia, Trustee U/A Southern
Engineering Company Retirement Plans, P.O. Box 1001, Atlanta, GA 30301, owned 8%
of such Portfolio's total outstanding Class A shares.

HVA Limited Partnership, c/o H L Van Arnem, 1301 W. Newport Center Drive,
Deerfield Beach, FL 33442-7734, owned 12% of such Portfolio's total outstanding
Class B shares.

Anne W. Rohrbach, c/o Gleacher Avenue, 660 Madison Avenue, 19th Floor, New
York, NY 10021, owned 12% of such Portfolio's total outstanding Class B shares.

Lawrence M. Howell, Howell Capital, One Maritime Plaza, Suite 1700, San
Francisco, CA 94101, owned 8% of such Portfolio's total outstanding Class B
shares.

Julian Eisner, 871 Oak Lane, North Woodmere, NY 11581, owned 7% of such
Portfolio's total outstanding Class B shares.

H. Conrad & Sarah Meyer, One Woodland Avenue, Bronxville, NY 10708, owned 7%
of such Portfolio's total outstanding Class B shares.

Bruce S. Ives, 163 Gallows Hill Road, West Redding, CT 06896, owned 6% of
such Portfolio's total outstanding Class B shares.

William B. O'Connor, 18 Montfort Road, Port Washington, NY 11050, owned 6%
of such Portfolio's total outstanding Class B shares.

James F. & Marlene Connors, 7701 Woodmont Avenue, Apt #801, Bethesda, MD
20814, owned 5% of such Portfolio's total outstanding Class B shares.

EMERGING MARKETS PORTFOLIO: Ministers & Missionaries Benefit Board of the
American Baptist Churches, 475 Riverside Drive, New York, NY 10115, owned 6% of
such Portfolio's total outstanding Class A shares.

Ewing Marion Kauffman Foundation, 4900 Oak Street, Kansas City, MO 64112,
owned 6% of such Portfolio's total outstanding Class A shares.

EMERGING MARKETS DEBT PORTFOLIO: Northwestern University, 633 Clark Street,
Evanston, IL 60208-1122, owned 21% of such Portfolio's total outstanding Class A
shares.

Swarthmore College, 500 College Avenue, Swarthmore, PA 19081-1110, owned 7%
of such Portfolio's total outstanding Class A shares.

Morgan Stanley & Co. Pension Fund, c/o Northern Trust Co., 770 Broadway, New
York, NY 10003, owned 7% of such Portfolio's total outstanding Class A shares.

Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675-2956, owned 7% of such Portfolio's total
outstanding Class A shares.

Alice H. & Paul D. Bartlett, 4800 Main Street, Kansas City, MO 64112, owned
9% of such Portfolio's total outstanding Class B shares.

Daniel E. Winters, 1319 Mirror Terrace, NW, Winter Haven, FL 33881, owned 7%
of such Portfolio's total outstanding Class B shares.

Dr. Russell Warren, IRA MSTC Custodian, 215 John Street, Greenwich, CT
06831-2516, owned 6% of such Portfolio's total outstanding Class B shares.

Rodriguez Living Trust, Javier & Gloria Rodriguez Trustees, 210 Saint
Katherine Drive, La Canada, CA 91011, owned 6% of such Portfolio's total
outstanding Class B shares.

Bruce A. Drummond, 1847 Onaway SE, Grand Rapids, MI 49506, owned 5% of such
Portfolio's total outstanding Class B shares.

29
<PAGE>
EQUITY GROWTH PORTFOLIO: Fidelity Management Trust Company as Trustee for
GTE Master Savings Trust, 82 Devonshire Street, Boston, MA 02109, owned 22% of
such Portfolio's total outstanding Class A shares.

Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675, owned 17% of such Portfolio's total outstanding
Class A shares.

Fidelity Investments Institutional Operations Company As Agent for Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 9% of such
Portfolio's total outstanding Class A shares.

St. Raymonds Cemetery Reserve Fund, P.O. Box 92800, Rochester, NY 14692,
owned 5% of such Portfolio's total outstanding Class A shares.

EUROPEAN EQUITY PORTFOLIO: HVA Limited Partnership, 1301 W. Newport Center
Drive, Deerfield Beach, FL 33442-7734 owned 5% of such Portfolio's total
outstanding Class B shares.

FIXED INCOME PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 30% of such
Portfolio's total outstanding Class A shares.

Brooks School, c/o Mr. Frank Marino, North Andover, MA 01845, owned 6% of
such Portfolio's total outstanding Class A shares.

Burton P. Cohen, 3912 Zenith Avenue South, Minneapolis, MN 55410-1169, owned
9% of such Portfolio's total outstanding Class B shares.

Michael S. Virgil, Trustee, Mary Ann Young Brownsey Trust, 333 N. Wabash
Avenue, 22nd Floor, Chicago, IL 60611, owned 9% of such Portfolio's total
outstanding Class B shares.

Joan M. Hunt Trust, 8627 Madison Drive, Niles, IL 60648, owned 8% of such
portfolio's total outstanding Class B shares.

Catholic Medical Center of Brooklyn & Queens, Inc., Deferred Compensation
Plan, 88-25 153rd Street, Apt. 1-H, Jamaica, NY 11432-3748, owned 6% of such
Portfolio's total outstanding Class B shares.

Tom M. & Connie P. Dicarrado, 123 Angola Road, Cornwall, NV 12518-1109 owned
6% of such Portfolio's total outstanding Class B shares.

GLOBAL EQUITY PORTFOLIO: Robert College of Istanbul Turkey c/o Morgan
Stanley Asset Management Inc., 25 Cabot Square, London, England E144QA, owned
46% of such Portfolio's total outstanding Class A shares.

JM Kaplan Fund, Inc., 880 Third Avenue, 3rd Floor, New York, NY 10022, owned
13% of such Portfolio's total outstanding Class A shares.

Kaplan, Choate Value Partners, L.P., 880 Third Avenue, New York, NY
10022-4730, owned 8% of such Portfolio's total outstanding Class A shares.

Divtex and Company FBO, Pritchard Hubble and Herr C/O Texas Commerce Bank,
P.O. Box 2558, Houston, TX 77252, owned 7% of such Portfolio's total outstanding
Class A shares.

Gooss & Company, c/o Chase Manhattan Bank, 1211 6th Avenue, New York, NY
10036, owned 6% of such Portfolio's total outstanding Class A shares.

Fidelity Investments Institutional Operations as Agent for Certain Employee
Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 25% of such
Portfolio's total outstanding Class B shares.

Edward J. Prostic, 2225 Stratford Road, Mission Hills, KS 66208, owned 8% of
such Portfolio's total outstanding Class B shares.

Eduardo Abad Trustee, Abad Charitable Remainder Trust 1, 277 North
Deepspring, Orange, CA 92669-6505, owned 8% of such Portfolio's total
outstanding Class B shares.

V. Marc Droppert IRA, MSTC Custodian, 13106 184th NE, Redmond, WA 98052,
owned 7% of such Portfolio's total outstanding Class B shares.

GLOBAL FIXED INCOME PORTFOLIO: American Industries Trust Company Trustee
for First Farm Credit Bank Retirement Plan, 5700 NW Central Drive, 4th Floor,
Houston, TX 77092, owned 20% of such Portfolio's total outstanding Class A
shares.

Northern Trust Company as Custodian, FBO The Lund Foundation, P.O. Box
92956, Chicago, IL 60675, owned 16% of such Portfolio's total outstanding Class
A shares.

Northern Trust Company as Custodian, FBO The LBD Foundation, P.O. Box 92956,
Chicago, IL 60675, owned 6% of such Portfolio's total outstanding Class A
shares.

30
<PAGE>
The Northern Trust Co. FBO Christel Dehaan Trust, P.O. Box 92956, Chicago,
IL 60675-2956, owned 6% of such Portfolio's total outstanding Class A shares.

Lakeview Holdings Ltd., Coutts & Co. (Bahamas) Ltd., P.O. Box N7788, West
Bay St., Nassau Bahamas owned 6% of such Portfolio's total outstanding Class A
shares.

National Bank of Commerce Trustee, FBO National Bank of Commerce Pension
Plan, c/o NBC Trust Dept., One Commerce Square, Memphis, TN 38150, owned 5% of
such Portfolio's total outstanding Class A shares.

Radiology Associates PA Employee Benefit Plan, 500 South University, Suite
604, Little Rock, AR 72205, owned 5% of such Portfolio's total outstanding Class
A shares.

David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ, England, UK, owned
52% of such Portfolio's total outstanding Class B shares.

George N. & Susan P. Fugelsang, 17 Calhoun Drive, Greenwich, CT 06831, owned
15% of such Portfolio's total outstanding Class B shares.

George & Claudine Boutros, 11007 Branbrook, Houston, TX 77042, owned 11% of
such Portfolio's total outstanding Class B shares.

Paul E. & H. Anthony Hellmers, 4 Colonial Lane, Larchmont, NY 10538, owned
10% of such Portfolio's total outstanding Class B shares.

Anthony F. & Colette H. Rowland, C/O Cambrian Management, 1114 Avenue of the
Americas, New York, NY 10036, owned 9% of such Portfolio's total outstanding
Class B shares.

GOLD PORTFOLIO: Merrill Lynch Trust Co., Trustee FBO Qualified Retirement
Plans, 285 Davidson Avenue, 4th floor, Somerset, NJ 08873, owned 28% of such
Portfolio's total outstanding Class B shares.

Marshall & Ilsley Trust Company, C/F John Morey, 1000 N. Water Street,
Milwaukee, WI 53202, owned 15% of such Portfolio's total outstanding Class B
shares.

Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64112, owned 12% of such Portfolio's total outstanding Class B shares.

Chicago Methodist Episcopal Church Aid Society, c/o Gordon Worley, 1407
Clinton Place, River Forest, IL 60305-1205, owned 10% of such Portfolio's total
outstanding Class B shares.

Steven C. Olson, 505 Knollwood Road, Ridgewood, NJ 07450, owned 9% of such
Portfolio's total outstanding Class B shares.

Priscilla & John Privat, Community Property, 8852 N.E. 24th Street,
Bellevue, WA 98004, owned 8% of such Portfolio's total outstanding Class B
shares.

Donald E. Axinn, 131 Jericho Turnpike, Jericho, NY 11753-1017 owned 7% of
such Portfolio's total outstanding Class B shares.

HIGH YIELD PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 20% of such
Portfolio's total outstanding Class A shares.

Adeliade L. Hinckley, c/o Jim Bell, Morgan Stanley/IIS Department, 1251
Avenue of the Americas, New York, NY 10020, owned 6% of such Portfolio's total
outstanding Class B shares.

INTERNATIONAL EQUITY PORTFOLIO: Vanguard Fiduciary Trust Company FBO Ball
Corp. Plan 91324, The Vanguard Group, P.O. Box 2600 VM421, Valley Forge, PA
19462, owned 16% of such Portfolio's total outstanding Class B shares.

Fleet Bank, Trustee for Third Presbyterian Church, P.O. Box 92800,
Rochester, NY 14692, owned 14% of such Portfolio's total outstanding Class B
shares.

INTERNATIONAL MAGNUM PORTFOLIO: Bankers Trust Trustee, Harris Corporation
Retirement Plan & Harris Corporation Union Retirement Plan, 1025 W. Nasa
Boulevard, Melbourne, FL 32919, owned 40% of such Portfolio's total outstanding
Class A shares.

Southwest Guaranty Trust Co., 2121 Sage Road, Suite 150, Houston, TX 77056,
owned 7% of such Portfolio's total outstanding Class A shares.

Fidelity Investments Institutional Operations Company, Agent for Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 81% of such
Portfolio's total outstanding Class B shares.

INTERNATIONAL SMALL CAP PORTFOLIO: The Short Brothers Pension Fund, P.O.
Box 241, Airport Road, Belfast, N. Ireland, owned 9% of such Portfolio's total
outstanding Class A shares.

31
<PAGE>
The Skillman Foundation, Attn: Jean E. Gregory, 600 Renaissance Center,
Suite 1700, Detroit, MI 48243, owned 8% of such Portfolio's total outstanding
Class A shares.

Trustees of Boston College Attn: Paul Haran Associate Treasurer, St. Thomas
More Hall 310, Chestnut Hill, MA 02167, owned 6% of such Portfolio's total
outstanding Class A shares.

General Mills, Inc. Master Trust: Pooled International Fund, One General
Mills Blvd., Minneapolis, MN 55426, owned 6% of such Portfolio's total
outstanding Class A shares.

JAPANESE EQUITY PORTFOLIO: Barlett and Company, Profit Sharing Plan and
Trust, 4800 Main Street, Kansas City, MO 64112, owned 12% of such Portfolio's
total outstanding Class B shares.

Adase Partners, 106 Laurel Way, Beverly Hills, CA 90210, owned 8% of such
Portfolio's total outstanding Class B shares.

Paul M. & Shirley F. Mathews, 25 W. 706 Jerome Avenue, Wheaton, IL 60187,
owned 6% of such Portfolio's total outstanding Class B shares.

William & Brenda Castonguay, 9101 Hometown Drive, Raleigh, NC 27615, owned
6% of such Portfolio's total outstanding Class B shares.

Wayne Gretzky Trustee of the Gretzky Trust of 1989, 9100 Wilshire Boulevard,
Beverly Hills, CA 90210, owned 5% of such Portfolio's total outstanding Class B
shares.

LATIN AMERICAN PORTFOLIO: Marc Andreessen, Trustee FBO Marc Andreessen 1996
Living Trust, 16615 Lark Avenue, Apt. 101, Los Gatos, CA 95030, owned 10% of
such Portfolio's total outstanding Class B shares.

Pinnacle Trading, LLC, P.O. Box 28918, Fresno, CA 93729-8918, owned 8% of
such Portfolio's total outstanding Class B shares.

Robert M. & Anne D. Buxton, 888 Park Avenue, Apt. 8C, New York, NY 10021,
owned 8% of such Portfolio's total outstanding Class B shares.

Joseph M. Haggar, Jr., 16800 Dallas Parkway, Suite 120, Dallas, TX 75248,
owned 5% of such Portfolio's total outstanding Class B shares.

Horizon Cons Ltd. Profit Sharing Plan, Horizon Cons Ltd. Money Purchase
Plan, 615 Colonial Park Drive, #201, Roswell, GA 30075, owned 5% of such
Portfolio's total outstanding Class B shares.

Chicago Methodist Episcopal Church Aid Society, c/o Gordon Worley, 1407
Clinton Place, River Forest, IL 60305-1205, owned 5% of such Portfolio's total
outstanding Class B shares.

MUNICIPAL BOND PORTFOLIO: Daniel F. and Maria J. McDonald, 8550 Old
Dominion Drive, McLean, VA 22102, owned 10% of such Portfolio's total
outstanding Class A shares.

Frank R. Mori, 935 Park Avenue, New York, NY 10028, owned 8% of such
Portfolio's total outstanding Class A shares.

Arnold E. and Jill I. Bellowe Trustees, 915 Park Lane, Montecito, CA
93108-1421, owned 7% of such Portfolio's total outstanding Class A shares.

Cushman Trust, c/o Cambrian Services, 1114 Avenue of the Americas, Suite
2702, New York, NY 10036, owned 7% of such Portfolio's total outstanding Class A
shares.

Sevenson Environmental Services, P.O. Box 396, 2749 Lockport Road, Niagra
Falls, NY 14305, owned 7% of such Portfolio's total outstanding Class A shares.

Donna Karan, c/o Stephan Weiss, The Donna Karan Company, 550 Seventh Avenue,
New York, NY 10018, owned 6% of such Portfolio's total outstanding Class A
shares.

SMALL CAP VALUE EQUITY PORTFOLIO: Barlett and Company, Profit Sharing Plan
and Trust, 4800 Main Street, Kansas City, MO 64112, owned 7% of such Portfolio's
total outstanding Class B shares.

James E. Himoff, IRA Rollover, 7201 State Route 8, Grant Lake, NY 12815-2236
owned 5% of such Portfolio's total outstanding Class B shares.

TECHNOLOGY PORTFOLIO: Valassis Enterprises-Equity, c/o Franklin
Enterprises, 520 Lake Cook Road, Suite 380, Deerfield, IL 60015, owned 19% of
such Portfolio's total outstanding Class A shares.

Goolock Associates, c/o Oppenheimer & Co. Inc., 200 Liberty Street, New
York, NY 10281, owned 14% of such Portfolio's total outstanding Class A shares.

32
<PAGE>
Bruce W. Bastian and McKay S. Matthews, Trustees FBO Bruce W. Bastian
Charitable Trust, 51 West Center #755, Orem, UT 84057-4605 owned 14% of such
Portfolio's total outstanding Class A shares.

Martha Tredgett, 312 Bleeker Street, New York, NY 10014-3425, owned 12% of
such Portfolio's total outstanding Class B shares.

Donald L. Gustafson, IRA Rollover, MSTC Custodian, 3420 Norman Drive, Reno,
NV 85909-5089 owned 7% of such Portfolio's total outstanding Class B shares.

Dr. Murray J. Klauber, 1620 Gulf of Mexico Drive, Longboat Key, FL
34228-3403 owned 7% of such Portfolio's total outstanding Class B shares.

Paul Krieger, 23 Fairview Avenue, Great Neck, NY 11023, owned 5% of such
Portfolio's total outstanding Class B shares.

U.S. EQUITY PLUS PORTFOLIO: Morgan Stanley, Dean Witter, Discover & Co.,
1221 Avenue of the Americas, New York, NY 10020, owned 56% of such Portfolio's
total outstanding Class A shares.

The Flinn Foundation, Northern Trust Co., Master Trust Department, 7th
Floor, P.O. Box 92984, Chicago, IL 60675, owned 44% of such Portfolio's total
outstanding Class A shares.

Morgan Stanley Asset Management Inc., 1221 Avenue of the Americas, New York,
NY 10020, owned 100% of such Porfolio's total outstanding Class B shares.

U.S. REAL ESTATE PORTFOLIO: Northern Trust Company Trustee, FBO Anderson
Worldwide Profit Sharing 401k Retirement Trust, P.O. Box 92956DV, Chicago, IL
60675, owned 13% of such Portfolios total outstanding Class A Shares.

Northwestern University, Attn: Investment Department, 633 Clark Street,
Suite 1-209, Evanston, IL 60208, owned 8% of such Portfolio's total outstanding
Class A shares.

Morgan Stanley & Co. Pension Fund, c/o Northern Trust Company Cust, 770
Broadway, New York, NY 10003, owned 7% of such Portfolio's total outstanding
Class A shares.

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104,
owned 6% of such Portfolio's total outstanding Class A Shares.

European Patent Organization Pension Reserve Fund, Erhardt Strasse 27,
Munich, 80331 Germany, owned 5% of such Portfolio's total outstanding Class A
shares.

Merrill Lynch Trust Co., Trustee of FBO Qualified Retirement Plans, 265
Davidson Avenue, 4th Floor, Somerset, NJ 08873, owned 45% of such Portfolio's
total outstanding Class B shares.

VALUE EQUITY PORTFOLIO: Alice H. Bartlett Trust, Paul D. Bartlett, Jr.,
Trustee, 4800 Main Street, Kansas City, MO 64112, owned 19% of such Portfolio's
total outstanding Class B shares.

Paul D. Bartlett, Jr., 4800 Main Street, Suite 600, Kansas City, MO 64112,
owned 13% of such Portfolio's total outstanding Class B shares.

R. Douglas Spedding, Trustee of R. Douglas Spedding 1996 Trust, c/o 4380 E.
Alameda, Glendale, CO 80222, owned 11% of such Portfolio's total outstanding
Class B shares.

David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ England, UK, owned
8% of such Portfolio's total outstanding Class B shares.

First United Methodist Church of Chicago - Endowment Fund, 77 West
Washington, Chicago, IL 60602, owned 6% of such Portfolio's total outstanding
Class B shares.

George N. & Susan P. Fugelsang, 17 Calhoun Drive, Greenwich, CT 06831, owned
6% of such Portfolio's total outstanding Class B shares.

Laverne M. Brownsey Trust, 333 N. Wabash Avenue, 22nd Floor, Chicago, IL
60611 owned 6% of such Portfolio's total outstanding Class B shares.

Joan M. Hunt Trust, 8627 Madison Drive, Niles, IL 60648-2321, owned 5% of
such Portfolio's total outstanding Class B shares.

NET ASSET VALUE FOR MONEY MARKET PORTFOLIOS

The Money Market Portfolio and the Municipal Money Market Portfolio seek to
maintain a stable net asset value per share of $1.00. These Portfolios use the
amortized cost method of valuing their securities, which does not take into
account unrealized gains or losses. The use of amortized cost and the
maintenance of each 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, each of the Money Market
Portfolios must maintain a dollar-weighted average portfolio maturity of

33
<PAGE>
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 Commission.

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 each
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 a 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.

There are various methods of valuing the assets and of paying dividends and
distributions from a money market fund. Each of the Money Market and Municipal
Money Market Portfolios 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 each Portfolio will ordinarily remain at $1.00, but
each Portfolio's daily dividends will vary in amount. Net realized gains, if
any, will normally be declared and paid monthly.

PERFORMANCE INFORMATION

The Fund may from time to time quote various performance figures to
illustrate the Portfolios' past performance.

Performance quotations by investment companies are subject to rules adopted
by the Commission, which require the use of standardized performance quotations.
In the case of total return, non-standardized performance quotations may be
furnished by the Fund but must be accompanied by certain standardized
performance information computed as required by the Commission. Current yield
and average annual compounded total return quotations used by the Fund are based
on the standardized methods of computing performance mandated by the Commission.
An explanation of those and other methods used by the Fund to compute or express
performance follows.

TOTAL RETURN

From time to time each Portfolio, except the Money Market and Municipal
Money Market Portfolios, may advertise total return for each class of shares of
the Portfolio. Total return figures are based on historical earnings and are not
intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-, 5-,
and 10-year periods (or over the life of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1-, 5-, and 10-year period (or over the life of the Portfolio) and the
deduction of all applicable Fund expenses on an annual basis.

The average annual compounded rates of return (unless otherwise noted) for
the Fund's Portfolios for the one year and five year periods ended December 31,
1996 and for the period from inception through December 31, 1996 are as follows:

<TABLE>
<CAPTION>
AVERAGE ANNUAL
INCEPTION ONE AVERAGE ANNUAL SINCE
NAME OF PORTFOLIO+ DATE YEAR FIVE YEAR INCEPTION
- -------------------------------------------------- --------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Active Country Allocation
Class A......................................... 1/17/92 9.71% N/A 8.71%
Class B......................................... 1/02/96 9.22% N/A N/A
Aggressive Equity
Class A......................................... 3/08/95 40.90% N/A 45.98%
Class B......................................... 1/02/96 39.72% N/A N/A
Asian Equity
Class A......................................... 7/01/91 3.49% 19.35% 18.28%
Class B......................................... 1/02/96 2.92% N/A N/A
Balanced
Class A......................................... 2/20/90 10.93% 10.15% 10.39%
Class B......................................... 1/02/96 10.24% N/A N/A
</TABLE>

34
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
INCEPTION ONE AVERAGE ANNUAL SINCE
NAME OF PORTFOLIO+ DATE YEAR FIVE YEAR INCEPTION
- -------------------------------------------------- --------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Emerging Growth
Class A......................................... 11/01/89 3.72% 4.10% 11.96%
Class B......................................... 1/02/96 3.58% N/A N/A
Emerging Markets
Class A......................................... 9/25/92 12.19% N/A 12.93%
Class B......................................... 1/02/96 11.04% N/A N/A
Emerging Markets Debt
Class A......................................... 2/01/94 50.52% N/A 18.94%
Class B......................................... 1/02/96 48.52% N/A N/A
Equity Growth
Class A......................................... 4/02/91 30.97% 16.99% 17.06%
Class B......................................... 1/02/96 29.92% N/A N/A
European Equity
Class A......................................... 4/02/93 22.29% N/A 19.62%
Class B......................................... 1/02/96 20.76% N/A N/A
Fixed Income
Class A......................................... 5/15/91 4.61% 7.00% 8.35%
Class B......................................... 1/02/96 4.35% N/A N/A
Global Equity
Class A......................................... 7/15/92 22.83% N/A 19.22%
Class B......................................... 1/02/96 22.04% N/A N/A
Global Fixed Income
Class A......................................... 5/01/91 6.44% 7.17% 8.50%
Class B......................................... 1/02/96 6.12% N/A N/A
Gold
Class A......................................... 2/01/94 16.94% N/A 6.80%
Class B......................................... 1/02/96 13.21% N/A N/A
High Yield
Class A......................................... 9/28/92 15.01% N/A 12.91%
Class B......................................... 1/02/96 14.37% N/A N/A
International Equity
Class A......................................... 8/04/89 19.64% 16.41% 11.96%
Class B......................................... 1/02/96 18.58% N/A N/A
International Magnum
Class A......................................... 3/15/96 8.25%* N/A N/A
Class B......................................... 3/15/96 7.90%* N/A N/A
International Small Cap
Class A......................................... 12/15/92 16.82% N/A 16.42%
Japanese Equity
Class A......................................... 4/25/94 -1.40% N/A -2.51%
Class B......................................... 1/02/96 -1.67% N/A N/A
Latin American
Class A......................................... 1/18/95 48.77% N/A 16.98%
Class B......................................... 1/02/96 42.44% N/A N/A
Municipal Bond
Class A......................................... 1/18/95 3.67% N/A 6.36%
Class B......................................... 1/02/96 3.55% N/A N/A
Small Cap Value Equity
Class A......................................... 12/17/92 22.99% N/A 14.32%
Class B......................................... 1/02/96 22.33% N/A N/A
U.S. Real Estate
Class A......................................... 2/24/95 39.56% N/A 32.73%
Class B......................................... 1/02/96 38.23% N/A N/A
Value Equity
Class A......................................... 1/31/90 19.73% 14.92% 12.95%
Class B......................................... 1/02/96 18.57% N/A N/A
</TABLE>

- ------------------
+ The China Growth, Mortgage-Backed Securities, MicroCap, U.S. Equity Plus,
Asian Real Estate and European Real Estate Portfolios had not commenced
operations as of December 31, 1996.
* Cumulative (unannualized) total return since inception of the Portfolio.

35
<PAGE>
These figures were calculated according to the following formula:

<TABLE>
<C> <C> <S>
P(1+T)to the power of n = ERV
</TABLE>

where:

<TABLE>
<C> <C> <S>
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).
</TABLE>

CALCULATION OF YIELD FOR NON-MONEY MARKET PORTFOLIOS

From time to time certain of the Fund's Portfolios may advertise yield.

Current yield reflects the income per share earned by a Portfolio's
investments.

Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.

The respective current yields for certain of the Fund's Portfolios for the
30-day period ended December 31, 1996 were as follows:

<TABLE>
<CAPTION>
CLASS A
PORTFOLIO NAME SHARES CLASS B SHARES
- -------------------------------------------------- --------- --------------
<S> <C> <C>
Emerging Markets Debt............................. 10.46% 10.16%
Fixed Income...................................... 6.39% 6.27%
Global Fixed Income............................... 4.91% 4.76%
High Yield........................................ 9.31% 9.05%
Municipal Bond.................................... 4.35% 4.11%
</TABLE>

These figures were obtained using the following formula:

<TABLE>
<S> <C> <C>
Yield = 2[(a - b + 1)to the power of 6 - 1]
-------------------
cd
</TABLE>

where:

<TABLE>
<S> <C> <C>
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.
</TABLE>

CALCULATION OF YIELD FOR MONEY MARKET PORTFOLIOS

The current yield of the Money Market and Municipal Money Market Portfolios
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. The yields of the Money Market and Municipal
Money Market Portfolios for the 7-day period ended December 31, 1996 were 4.99%
and 3.38%, respectively. 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 each 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 effective yields of the Money
Market and Municipal Money Market Portfolios for the 7-day period ended December
31, 1996 were 5.11% and 3.43%, respectively.

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

36
<PAGE>
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.

TAXABLE EQUIVALENT YIELD FOR THE MUNICIPAL BOND
AND MUNICIPAL MONEY MARKET PORTFOLIO

It is easy to calculate your own taxable equivalent yield if you know your
tax bracket. The formula is:

<TABLE>
<C> <C> <S>
Tax Free Yield
- ------------------- = Your Taxable Equivalent
1 - Your Tax Bracket Yield
</TABLE>

For example, if you are in the 28% tax bracket and can earn a tax-free yield
of 7.5%, the taxable equivalent yield would be 10.42%.

The table below indicates the advantages of investments in Municipal Bonds
for certain investors. Tax-exempt rates of interest payable on a Municipal Bond
(shown at the top of each column) are equivalent to the taxable yields set forth
opposite the respective income tax levels, based on income tax rates effective
for the tax year 1996 under the Internal Revenue Code. There can, of course, be
no guarantee that the Municipal Bond Portfolio or Municipal Money Market
Portfolio will achieve a specific yield. Also, it is possible that some portion
of the Portfolio's dividends may be subject to Federal income taxes. A
substantial portion, if not all, of such dividends may be subject to state and
local taxes.

TAXABLE EQUIVALENT YIELD TABLE

<TABLE>
<CAPTION>
SAMPLE LEVEL OF FEDERAL
TAXABLE INCOME INCOME TAXABLE EQUIVALENT RATES BASED ON TAX-EXEMPT YIELD OF:
- ------------------------------------- TAX -----------------------------------------------------------------
JOINT RETURN SINGLE RETURN BRACKETS 3% 4% 5% 6% 7% 8% 9% 10% 11%
- ----------------- ------------------ ----- ---- ---- ---- ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-39,000 $0-23,350 15.0% 3.5% 4.7% 5.9% 7.1% 8.2% 9.4% 10.6% 11.8% 12.9%
39,000-94,250 23,350-56,550 28.0 4.2 5.6 6.9 8.3 9.7 11.1 12.5 13.9 15.3
94,250-143,600 56,550-117,950 31.0 4.3 5.8 7.2 8.7 10.1 11.6 13.0 14.5 15.9
143,600-256,500 117,950-256,500 36.0 4.7 6.3 7.8 9.4 10.9 12.5 14.1 15.6 17.2
over 256,500 over 256,500 39.6 5.0 6.6 8.3 9.9 11.6 13.2 14.9 16.6 18.2
</TABLE>

- ------------------
* Net amount subject to 1996 Federal Income Tax after deductions and exemptions,
not indexed for 1996 income tax rates.

The taxable equivalent yields for the Municipal Money Market and Municipal
Bond Portfolios for the seven days ended December 31, 1996 assuming a Federal
income tax rate of 39.6% (maximum rate), were 5.60% and 6.44%, respectively. The
taxable equivalent effective yields for the Municipal Money Market and Municipal
Bond Portfolios for the seven days ended December 31, 1996, assuming the same
tax rate, were 5.68% and 6.57%, respectively.

COMPARISONS

To help investors better evaluate how an investment in a Portfolio of Morgan
Stanley Institutional Fund, Inc. might satisfy their investment objective,
advertisements regarding the Fund may discuss various measures of Fund
performance as reported by various financial publications. Advertisements may
also compare performance (as calculated above) to performance as reported by
other investments, indices and averages. The following publications may be used:

(a) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
- -- analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.

(b) Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global
Investor, Investor's Daily, Lipper Analytical Services, Inc., Morningstar, Inc.,
New York Times, Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund performance over
specified time periods.

(c) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Lehman Brothers and Bloomberg L.P.

(d) Lipper -- 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:

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(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.

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(b) Consumer Price Index (or cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of change, over time, in the
price of goods and services in major expenditure groups.

(c) Donoghue's Money Fund Average -- an average of all major money market
fund yields, published weekly for 7 and 30-day yields.

(d) Dow Jones Composite Average or its component averages -- an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.

(e) 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.

(f) CS First Boston Upper/Middle Tier High Yield Index -- an unmanaged index
of bonds rated B to BBB.

(g) Goldman Sachs 100 Convertible Bond Index -- currently includes 67 bonds
and 33 preferred. 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 2.5% cash, 38.2% bonds and 59.3% equity based on $52.6 billion in
assets among 579 portfolios for the year ended December 31, 1996 (assumes
dividends reinvested).

(j) Indata Equity-Median Stock Index -- an unmanaged index which includes an
average asset allocation of 7.4% cash and 92.6% equity based on $464.9 billion
in assets among 1,277 portfolios for the year ended December 31, 1996.

(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 Index Plus -- expanding on the J.P.
Morgan Emerging Markets Bond Index, which only trades Brady Bonds, this index
reflects total returns for external debt instruments which have been traded in
emerging markets. Brady Bonds are included amoung 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 Phillipines, Poland, Russia, South Africa and
Venezuela. A more comprehensive benchmark than the EMBI, the EMBI+ covers 49
instruments from these countries. At $96 billion, its market cap is nearly 50%
higher than the EMBI's. The EMBI+ is not, however, intended to replace the EMBI
but rather to complement it. The EMBI continues to represent the most liquid,
most easily traded segment of the market, including more of the assets that
investors typically hold in their portfolios. Both of these indices are
published daily.

(m) J.P. Morgan Traded Global Bond Index -- an unmanaged index of securities
and 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 larger.

(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 China Free
Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and
Thailand. Korea is included in the MSCI Combined Far East Free ex-Japan Index at
20% of its market capitalization.

(s) Morgan Stanley Capital International EAFE Index -- an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.

(t) Morgan Stanley Capital International Emerging Markets Global Latin
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).

(u) Morgan Stanley Capital International Europe Index -- an unmanaged index
of common stocks and includes 14 countries throughout Europe.

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(v) Morgan Stanley Capital International Japan Index -- an unmanaged index
of common stocks.

(w) Morgan Stanley Capital International Latin America Index -- a
broad-based market capitalization-weighted composite index covering at least 60%
of markets in Mexico, Argentina, Brazil, Chile, Colombia, Peru and Venezuela
(assumes dividends reinvested).

(x) Morgan Stanley Capital International World Index -- an arithmetic,
market value-weighted average of the performance of over 1,470 securities listed
on the stock exchanges of countries in Europe, Australia, the Far East, Canada
and the United States.

(y) NASDAQ Composite Index -- an unmanaged index of common stocks.

(z) NASDAQ Industrial Index -- a capitalization-weighted index composed of
more than 3,000 domestic stocks taken from the following industry sectors:
agriculture, mining, construction, manufacturing, electronic components,
services and public administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.

(aa) National Association of Real Estate Investment Trusts ("NAREIT") Index
- -- an unmanaged market weighted index of tax qualified REITs (excluding
healthcare REITs) listed on the New York Stock Exchange, American Stock Exchange
and the NASDAQ National Market System including dividends.

(bb) The New York Stock Exchange composite or component indices -- unmanaged
indices of all industrial, utilities, transportation and finance company stocks
listed on the New York Stock Exchange.

(cc) Philadelphia Gold and Silver Index -- an unmanaged index comprised of
seven leading companies involved in the mining of gold and silver.

(dd) Russell 2000 Growth Index -- comprised of those Russell 2000 Securities
with an above-average growth orientation. Here, securities tend to exhibit
higher price-to-book and price-earnings ratios, lower divided yeilds and higher
forecasted growth than the Value universe.

(ee) 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.

(ff) Salomon Brothers GNMA Index -- includes pools of mortgages originated
by private lenders and guaranteed by the mortgage pools of the Government
National Association.

(gg) Salomon Brothers High Grade Corporate Bond Index -- consists of
publicly issued, non-convertible corporate bonds rated AA or AAA. It a is
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.

(hh) Salomon Brothers Broad Investment Grade Bond -- a market-weighted index
that contains approximately 4700 individually priced investment grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.

(ii) 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.

(jj) Standard & Poor's Small Cap 600 Index -- a capitalization-weighted
index of 600 domestic stocks having market capitalizations which reside within
the 50th and the 83rd percentiles of the market capitalization of the entire
stock market, chosen for certain liquidity characteristics and for industry
representation.

(kk) Wilshire 5000 Equity Index or its component indices -- represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.

(ll) Lipper Science and Technology Fund Index -- a composite index of the
mutual funds which invest at least 65% of their assets in science and technology
stocks.

(mm) Hambrecht and Quist Technology Index -- an index of computer and chip
makers, biotechnology concerns and other high-tech companies.

(nn) Sound View Technology Index -- an unweighted index consisting of more
than 100 technology companies.

(oo) Morgan Stanley High Tech 35 Index -- an index comprised of thirty-five
technology stocks chosen by Morgan Stanley.

(pp) Pacific Stock Exchange Index -- an index consisting of approximately
100 technololgy and healthcare technology concerns.

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

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<PAGE>
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.

From time to time, a Portfolio's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, a Portfolio may quote Morningstar, Inc. in its 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 the
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. The Portfolios may use the performance of these capital
markets 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. The Portfolios may also compare their performance to that of other
compilations or indices that may be developed and made available in the future.

The Portfolios may include in advertisements, charts, graphs or drawings
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 lists of representative Morgan Stanley clients. The Portfolios may also
from time to time include discussions or illustrations of the effects of
compounding in advertisements. "Compounding" refers to the fact that, if
dividends or other distributions on a Portfolio investment are reinvested by
being paid in additional Portfolio shares, any future income or capital
appreciation of a Portfolio would increase the value, not only of the original
investment in the Portfolio, but also of the additional Portfolio shares
received through reinvestment.

The Portfolios may include in its advertisements, 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). 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 Morgan Stanley; and the
portfolio manager's goals, strategies and investment techniques.

The Portfolios' 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. The Portfolios may
include 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. 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 Morgan Stanley 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.

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The Portfolios may quote various measures of volatility and benchmark
correlation in advertising. The Portfolios may compare these measures 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. A Portfolio may also advertise its current interest rate
sensitivity, duration, weighted average maturity or similar maturity
characteristics.

The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. 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, as amended and restated, permit the
Directors to issue 38 billion shares of common stock, par value $.001 per share,
from an unlimited number of classes ("Portfolios") of shares. Currently the Fund
consists of shares of thirty-two Portfolios (the China Growth, Mortgage-Backed
Securities and MicroCap Portfolios are not currently offering shares).

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.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to income taxes for shareholders subject to tax as set
forth herein and in the applicable Prospectus.

As set forth in the Prospectuses, 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 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 & Co. Incorporated. Morgan Stanley Trust
Company, Brooklyn, NY, acts as the Fund's custodian for foreign assets held
outside the United States and employs subcustodians who were approved by the
Directors of the Fund in accordance with Rule 17f-5 adopted by the Commission
under the 1940 Act. Morgan Stanley Trust Company is an affiliate of Morgan
Stanley & Co. Incorporated. In the selection of foreign subcustodians, the
Directors consider a number of factors, including, but not limited to, the
reliability and financial stability of the institution, the ability of the
institution to provide efficiently the custodial services required for the Fund,
and the reputation of the institution in the particular country or region.

ADVISER'S USE OF COMPANIES COMPRISING THE S&P 500 INDEX

The Adviser uses the 500 companies included in the S&P 500 Index as the
universe of potential investments for the U.S. Equity Plus Portfolio. The U.S.
Equity Plus Portfolio is not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to investors in the U.S. Equity
Plus Portfolio or any member of the public regarding the advisability of
investing in the U.S. Equity Plus Portfolio or the ability of the S&P 500 Index
to track general stock market performance. S&P's only relationship to the
Adviser is the licensing of certain trademarks and trade names of S&P and of the
S&P 500 Index which is determined,

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<PAGE>
composed and calculated by S&P without regard to the Adviser or the U.S. Equity
Plus Portfolio. S&P has no obligation to take the needs of the Adviser or the
investors in the U.S. Equity Plus Portfolio into consideration in determining,
composing or calculating the S&P 500 Index. S&P is not responsible for, does not
participate in and has no obligation or liability in connection with the
management, administration or marketing of the U.S. Equity Plus Portfolio.

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO THE PERFORMANCE OF THE ADVISER OR THE U.S. EQUITY PLUS PORTFOLIO, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS) ARISING OUT OF ANY USE OF THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

DESCRIPTION OF RATINGS

DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS

EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIPTION OF
BOND RATINGS: Aaa -- Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Aa --
Bonds which are 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 in 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. Moody's
applies numerical modifiers 1, 2 and 3 in the Aa and A rating categories. The
modifier 1 indicates that the security ranks at a higher end of the rating
category, modifier 2 indicates a mid-range rating and the modifier 3 indicates
that the issue ranks at the lower end of the rating category. A -- Bonds which
are 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
which are 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 which are 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 which are
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 which are 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 which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. C -- Bonds which are rated C
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.

EXCERPTS FROM S&P'S DESCRIPTION OF BOND RATINGS: AAA -- Bonds rated AAA
have the highest rating assigned by Standard & Poor's to a debt obligation and
indicate an extremely strong capacity to pay principal and interest. AA -- Bonds
rated AA have a very strong capacity to pay interest and repay principal and
differ from the highest rated issues only to a small degree. A -- Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in higher rated categories. 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 for
debt in higher rated categories. BB, B, CCC, CC -- Debt rated BB, B, CCC and CC
is regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. C -- The rating C is reserved for income
bonds on which no interest is being paid. D -- Debt rated D is in default, and
payment of interest and/or repayment of principal is in arrears.

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

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<PAGE>
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2 -- high quality with margins of protection ample
although not so large as in the preceding group; MIG-3 - favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.

DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1") --
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.

EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: S-1+ -- very strong
capacity to pay principal and interest; SP-2 -- strong capacity to pay principal
and interest.

DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ -- this
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 -- this designation indicates the degree of safety regarding
timely payment is very strong.

FINANCIAL STATEMENTS

The Fund's financial statements for the fiscal year ended December 31, 1996,
including notes thereto and the report of Price Waterhouse LLP are herein
incorporated by reference from the Fund's Annual report. A copy of the Fund's
Annual Report to Shareholders must accompany the delivery of this Statement of
Additional Information. The China Growth, Mortgage-Backed Securities, MicroCap,
U.S. Equity Plus, European Real Estate and Asian Real Estate Portfolios had not
commenced operations at December 31, 1996.