MORGAN STANLEY INSTITUTIONAL FUND INC, 497, 1998-05-05

MORGAN STANLEY INSTITUTIONAL FUND INC
497, 1998-05-05

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<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-----------------------------------------------------------------------------

FIXED INCOME PORTFOLIO
MUNICIPAL BOND PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET 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 Fixed Income, Municipal Bond and Mortgage-Backed Securities Portfolios (the
"Non-Money Portfolios") and to the Class A and Class B shares of the Money
Market Portfolio and Class A shares of the Municipal Money Market Portfolio (the
"Money Portfolios") (each, a "Portfolio" and collectively, the "Portfolios").
The Class A and Class B shares currently offered by the Non-Money Portfolios and
the Money Market Portfolio have different minimum investment requirements and
fund expenses. Shares of the Portfolios are offered with no sales charge,
exchange fee or redemption fee. The Mortgage-Backed Securities Portfolio
currently is not being offered.

INVESTMENTS IN THE MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE
THAT THE MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.

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, 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 May 1,
1998, 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 MAY 1, 1998.
<PAGE>
FUND EXPENSES

The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:

<TABLE>
<CAPTION>
MORTGAGE- MUNICIPAL
FIXED MUNICIPAL BACKED MONEY MONEY
INCOME BOND SECURITIES MARKET MARKET
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A........................................................... None None None None None
Class B........................................................... None None None None N/A
Maximum Sales Load Imposed on Reinvested Dividends
Class A........................................................... None None None None None
Class B........................................................... None None None None N/A
Deferred Sales Load
Class A........................................................... None None None None None
Class B........................................................... None None None None N/A
Redemption Fees
Class A........................................................... None None None None None
Class B........................................................... None None None None N/A
Exchange Fees
Class A........................................................... None None None None None
Class B........................................................... None None None None N/A
</TABLE>

<TABLE>
<CAPTION>
MORTGAGE- MUNICIPAL
FIXED MUNICIPAL BACKED MONEY MONEY
ANNUAL FUND OPERATING EXPENSES INCOME BOND SECURITIES MARKET MARKET
(AS A PERCENTAGE OF AVERAGE NET ASSETS) PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO
- -------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A......................................... 0.20% 0.12% 0.20%+ 0.30%** 0.30%**
Class B......................................... 0.20% 0.12% 0.20%+ 0.30% N/A
12b-1 Fees
Class A......................................... None None None+ None None
Class B......................................... 0.15%*** 0.25% 0.25%+ 0.25% N/A
Other Expenses
Class A......................................... 0.25% 0.33% 0.25%+ 0.19% 0.20%
Class B......................................... 0.25% 0.33% 0.25%+ 0.19% N/A
-------- -------- -------- -------- --------
Total Operating Expenses (Net of Fee Waivers)*
Class A......................................... 0.45% 0.45% 0.45%+ 0.49%** 0.50%**
Class B......................................... 0.60% 0.70% 0.70%+ 0.74% N/A
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</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 each 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 as applicable, are the management
fees and total operating expenses absent such fee waivers and/or expense
reimbursements as a percent of average daily net assets of the Class A shares
of the Portfolios and Class B shares of the Non-Money Portfolios and Money
Market Portfolio, respectively.

2
<PAGE>

<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEES ----------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ------------------------------------------------------ ----------------------- ------------- -------------
<S> <C> <C> <C>
Fixed Income.......................................... 0.35% 0.60% 0.74%
Municipal Bond........................................ 0.35% 0.68% 0.93%
Mortgage-Backed Securities............................ 0.35% 0.60% 0.85%
Money Market.......................................... 0.30% 0.49% 0.74%
Municipal Money Market................................ 0.30% 0.50% N/A
</TABLE>

- ------------------------
**No fee waiver or expense reimbursement is in effect for this Portfolio.
***The Distributor has agreed to waive 0.10% of the 0.25% distribution fee it is
entitled to receive from this Portfolio.

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 are based on actual figures for the fiscal year
ended December 31, 1997 except that (i) expenses for the Mortgage-Backed
Securities Portfolio are based on estimates and assume that the average daily
net assets of the Mortgage-Backed Securities Portfolio will be $50,000,000 and
(ii) expenses for Class B shares of the Money Market Portfolio assume that
expenses for Class A and Class B shares will differ only by the distribution
expense charged to Class B shares. 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 (i) a 5% annual rate of return, and (ii) redemption
at the end of each time period. As noted in the table above, the Portfolios
charge no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.

<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fixed Income Portfolio
Class A............................. $ 5 $ 14 $ 25 $ 57
Class B............................. 6 19 33 75
Municipal Bond Portfolio
Class A............................. 5 14 25 57
Class B............................. 7 22 39 87
Mortgage-Backed Securities Portfolio*
Class A............................. 5 14 * *
Class B............................. 7 22 * *
Money Market Portfolio
Class A............................. 5 16 27 62
Class B*............................ 8 24 * *
Municipal Money Market Portfolio
Class A............................. 5 16 28 63
</TABLE>

- ------------------------------
* Because this Class or Portfolio was not operational as of the Fund's fiscal
year end, the Fund has not projected expenses 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 tables provide financial highlights for the Class A and Class
B shares of the Fixed Income and Municipal Bond Portfolios and the Class A
shares of the Money Market and Municipal Money Market Portfolio for each of the
periods presented. The audited financial highlights for each Portfolio's shares
for each of the periods in the five years ended December 31, 1997 are part of
the Fund's financial statements which appear in the Fund's December 31, 1997
Annual Report to Shareholders and which are incorporated by reference into the
Fund's Statement of Additional Information. Each 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. No financial highlights
appear for Class A and Class B shares of the Mortgage-Backed Securities
Portfolio and Class B shares of the Money Market Portfolio because the Fund had
not offered those classes of shares as of December 31, 1997. After October 31,
1992, the Fund changed its fiscal year end to December 31. The following
information should be read in conjunction with the financial statements and
notes thereto.

4
<PAGE>
FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------------------------------------------------- ---------
TWO
MONTHS YEAR MAY 15* YEAR
YEAR ENDED DECEMBER 31, ENDED ENDED TO ENDED
--------------------------------------------------------- DEC. 31, OCT. 31, OCT. 31, DEC. 31,
1997 1996 1995 1994 1993 1992 1992 1991 1997
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92 $ 10.55 $ 10.00 $ 10.58
--------- --------- --------- --------- --------- --------- --------- --------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1)....... 0.65 0.67 0.72 0.59 0.54 0.10 0.69 0.22 0.64
Net Realized and
Unrealized Gain
(Loss) on
Investments...... 0.33 (0.20) 1.06 (0.92) 0.41 0.01 0.39 0.49 0.33
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from
Investment
Operations..... 0.98 0.47 1.78 (0.33) 0.95 0.11 1.08 0.71 0.97
--------- --------- --------- --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment
Income........... (0.68) (0.70) (0.79) (0.53) (0.56) (0.10) (0.69) (0.16) (0.66)
In Excess of Net
Investment
Income........... (0.00)+ (0.00)+ -- -- (0.01) -- -- -- --
Net Realized
Gain............. -- -- -- (0.37) (0.26) -- (0.02) -- --
In Excess of Net
Realized Gain.... -- -- -- (0.00)+ -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
Distributions... (0.68) (0.70) (0.79) (0.90) (0.83) (0.10) (0.71) (0.16) (0.66)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END
OF PERIOD.......... $ 10.88 $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92 $ 10.55 $ 10.89
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN........ 9.54% 4.61% 18.76% (3.10)% 9.07% 1.02% 10.61% 7.12% 9.48%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period
(Thousands)...... $183,192 $130,733 $165,527 $209,331 $240,668 $154,210 $146,546 $72,326 $ 4,834
Ratio of Expenses
to Average Net
Assets (1)....... 0.45% 0.45% 0.45% 0.45% 0.45% 0.45%** 0.45% 0.45%** 0.60%
Ratio of Net
Investment Income
to Average Net
Assets (1)....... 6.11% 6.30% 6.85% 5.73% 4.97% 5.56%** 6.59% 7.29%** 5.93%
Portfolio Turnover
Rate............. 163% 183% 172% 388% 240% 15% 105% 48% 163%
- ----------------------------------
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to net
investment
income........ $0.02 $0.02 $0.01 $0.01 $0.02 $0.01 $0.02 $0.01 $0.02
Ratios before
expense
limitation:
Expenses to
Average Net
Assets........ 0.60% 0.60% 0.59% 0.58% 0.60% 0.75%** 0.59% 0.81%** 0.74%
Net Investment
Income to
Average Net
Assets........ 5.97% 6.15% 6.71% 5.60% 4.82% 5.26%** 6.45% 6.93%** 5.78%

PERIOD
FROM
JAN. 2,
1996***
TO
DEC. 31,
1996
---------
<S> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $ 10.81
---------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1)....... 0.64
Net Realized and
Unrealized Gain
(Loss) on
Investments...... (0.19)
---------
Total from
Investment
Operations..... 0.45
---------
DISTRIBUTIONS
Net Investment
Income........... (0.68)
In Excess of Net
Investment
Income........... --
Net Realized
Gain............. --
In Excess of Net
Realized Gain.... --
---------
Total
Distributions... (0.68)
---------
NET ASSET VALUE, END
OF PERIOD.......... $ 10.58
---------
---------
TOTAL RETURN........ 4.35%
---------
---------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period
(Thousands)...... $ 1,462
Ratio of Expenses
to Average Net
Assets (1)....... 0.60%**
Ratio of Net
Investment Income
to Average Net
Assets (1)....... 6.15%**
Portfolio Turnover
Rate............. 183%
- --------------------
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to net
investment
income........ $0.01
Ratios before
expense
limitation:
Expenses to
Average Net
Assets........ 0.74%**
Net Investment
Income to
Average Net
Assets........ 6.01%**
</TABLE>

- --------------------------------------------------------------------------------
* Commencement of operations

** Annualized

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

+ Amount is less than $0.01 per share.

5
<PAGE>
MUNICIPAL BOND PORTFOLIO

<TABLE>
<CAPTION>
CLASS A
----------------------------------------- CLASS B
--------------------------
PERIOD FROM PERIOD FROM
JANUARY 18, JANUARY 2,
1995* TO PERIOD 1996*** TO
YEAR ENDED DECEMBER 31, DECEMBER ENDED DECEMBER
-------------------------- 31, NOVEMBER 5, 31,
1997++ 1996 1995 1997++ 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.25 $ 10.37 $ 10.00 $ 10.24 $ 10.37
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.47 0.49 0.44 0.08 0.44
Net Realized and Unrealized Gain (Loss) on
Investments............................... 0.25 (0.12) 0.42 0.14 (0.08)
----------- ----------- ----------- ----------- -----------
Total from Investment Operations......... 0.72 0.37 0.86 0.22 0.36
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income...................... (0.46) (0.49) (0.45) (0.08) (0.49)
In Excess of Net Investment Income......... (0.00)+ -- (0.00)+ -- --
Net Realized Gain.......................... (0.00)+ -- (0.04) -- --
In Excess of Net Realized Gain............. (0.00)+ -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Distributions...................... (0.46) (0.49) (0.49) (0.08) (0.49)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD............... $ 10.51 $ 10.25 $ 10.37 $ 10.38 $ 10.24
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
TOTAL RETURN................................. 7.25% 3.67% 8.80% (0.01)% 3.55%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $60,541 $40,227 $45,869 $ 0 $ 69
Ratio of Expenses to Average Net Assets
(1)....................................... 0.45% 0.45% 0.45%** 0.70%** 0.70%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 4.55% 4.77% 4.61%** 4.43%** 4.56%**
Portfolio Turnover Rate.................... 80% 45% 180% N/A 45%
</TABLE>

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

<TABLE>
<C> <S> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income............................... $0.02 $0.03 $0.03 $0.00 + $0.03
Ratios before expense limitation:
Expenses to Average Net Assets........ 0.68 % 0.73 % 0.73 %** 0.93 %** 0.98 %**
Net Investment Income to Average Net
Assets............................... 4.33 % 4.50 % 4.33 %** 4.19 %** 4.28 %**
</TABLE>

- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
*** The Portfolio began offering Class B shares on January 2, 1996.
+ Amount is less than $0.01 per share.
++ Per share amounts for the year ended December 31, 1997 and for the period
ended November 5, 1997 are based on average shares outstanding. As of
November 5, 1997, and for the period from March 19 through October 30, 1997,
there were no outstanding Class B shares for the Municipal Bond Portfolio.

6
<PAGE>
MONEY MARKET PORTFOLIO

<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------------------
TWO
MONTHS NOV. 15,
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED OCTOBER 31, 1988* TO
-------------------------------------------------------- DEC. 31, ---------------------------- OCT. 31,
1997 1996 1995 1994 1993 1992 1992 1991 1990 1989
--------- --------- ---------- ---------- --------- --------- ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD........... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000 $ 1.000 $ 1.000 $ 1.000
--------- --------- ---------- ---------- --------- --------- ------ --------- --------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1)..... 0.051 0.049 0.054 0.040 0.027 0.005 0.039 0.062 0.079 0.085
--------- --------- ---------- ---------- --------- --------- ------ --------- --------- ---------
DISTRIBUTIONS
Net Investment
Income......... (0.051) (0.049) (0.054) (0.040) (0.027) (0.005) (0.039) (0.062) (0.079) (0.085)
In Excess of Net
Investment
Income......... -- -- -- -- 0.000+ -- -- -- -- --
--------- --------- ---------- ---------- --------- --------- ------ --------- --------- ---------
Total
Distributions... (0.051) (0.049) (0.054) (0.040) (0.027) (0.005) (0.039) (0.062) (0.079) (0.085)
--------- --------- ---------- ---------- --------- --------- ------ --------- --------- ---------
NET ASSET VALUE,
END OF PERIOD.... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000 $ 1.000 $ 1.000 $ 1.000
--------- --------- ---------- ---------- --------- --------- ------ --------- --------- ---------
--------- --------- ---------- ---------- --------- --------- ------ --------- --------- ---------
TOTAL RETURN...... 5.20% 5.03% 5.51% 3.84% 2.76% 0.50% 3.77% 6.37% 8.16% 8.8%
--------- --------- ---------- ---------- --------- --------- ------ --------- --------- ---------
--------- --------- ---------- ---------- --------- --------- ------ --------- --------- ---------
RATIOS AND
SUPPLEMENTAL
DATA:
Net Assets, End
of Period
(Thousands).... $1,506,210 $1,284,633 $836,693 $690,503 $657,163 $599,172 $612,968 $607,087 $516,182 $158,582
Ratio of
Expenses to
Average Net
Assets (1)..... 0.49% 0.52% 0.51% 0.49% 0.53% 0.55%** 0.52% 0.53% 0.55% 0.55%**
Ratio of Net
Investment
Income to
Average Net
Assets (1)..... 5.12% 4.92% 5.37% 3.77% 2.71% 3.11%** 3.74% 6.11% 7.87% 8.80%**
- ----------------------------------
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to
net
investment
income...... N/A N/A N/A N/A $0.000+ $0.000+ N/A N/A N/A N/A
Ratios before
expense
limitation:
Expenses to
Average Net
Assets...... N/A N/A N/A N/A 0.54% 0.59%** N/A N/A 0.58% 0.55%**
Net
Investment
Income to
Average Net
Assets...... N/A N/A N/A N/A 2.70% 3.07%** N/A N/A 7.85% N/A
</TABLE>

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

* Commencement of operations

** Annualized

+ Amount if less than $0.001 per share.

7
<PAGE>
MUNICIPAL MONEY MARKET PORTFOLIO

<TABLE>
<CAPTION>
TWO
MONTHS FEB.
YEAR 10* TO
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED OCTOBER 31, OCT.
-------------------------------------------------------------- DEC. 31, ---------------------- 31,
1997 1996 1995 1994 1993 1992 1992 1991 1990 1989
----------- ----------- ----------- ----------- --------- --------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000 $1.000 $1.000 $1.000
----------- ----------- ----------- ----------- --------- --------- ------ ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1)....... 0.031 0.030 0.034 0.020 0.019 0.004 0.026 0.043 0.054 0.046
----------- ----------- ----------- ----------- --------- --------- ------ ------ ------ ------
DISTRIBUTIONS
Net Investment
Income........... (0.031) (0.030) (0.034) (0.020) (0.019) (0.004) (0.026) (0.043) (0.054) (0.046)
In Excess of Net
Investment
Income........... -- -- -- -- (0.000)+ -- -- -- -- --
----------- ----------- ----------- ----------- --------- --------- ------ ------ ------ ------
Total
Distributions... (0.031) (0.030) (0.034) (0.020) (0.019) (0.004) (0.026) (0.043) (0.054) (0.046)
----------- ----------- ----------- ----------- --------- --------- ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD.......... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000 $1.000 $1.000 $1.000
----------- ----------- ----------- ----------- --------- --------- ------ ------ ------ ------
----------- ----------- ----------- ----------- --------- --------- ------ ------ ------ ------
TOTAL RETURN........ 3.17% 3.02% 3.44% 2.44% 1.91% 0.37% 2.74% 4.35% 5.51% 4.3%
----------- ----------- ----------- ----------- --------- --------- ------ ------ ------ ------
----------- ----------- ----------- ----------- --------- --------- ------ ------ ------ ------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period
(Thousands)...... $804,607 $721,410 $451,519 $359,444 $266,524 $208,866 $206,691 $166,953 $102,195 $38,540
Ratio of Expenses
to Average Net
Assets (1)....... 0.50% 0.53% 0.52% 0.51% 0.54% 0.57%** 0.55% 0.56% 0.51% 0.32%**
Ratio of Net
Investment Income
to Average Net
Assets (1)....... 3.14% 2.98% 3.38% 2.42% 1.89% 2.31%** 2.66% 4.18% 5.38% 6.05%**
- ------------------------------
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to net
investment
income........ N/A N/A N/A N/A $0.000+ $0.000+ N/A N/A $0.001 N/A
Ratios before
expense
limitation:
Expenses to
Average Net
Assets........ N/A N/A N/A N/A 0.56% 0.67%** N/A N/A 0.63% 0.32%**
Net Investment
Income to
Average Net
Assets........ N/A N/A N/A N/A 1.87% 2.21%** N/A N/A 5.26% N/A
</TABLE>

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

* Commencement of operations

** Annualized.

+ Amount is less than $0.001 per share.

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PROSPECTUS SUMMARY

THE FUND

The Fund consists of thirty-two portfolios, offering institutional 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 Class B shares, except the International
Small Cap and Municipal Money Market Portfolios which offer only Class A 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 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 MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.

- 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 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.

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

GLOBAL AND INTERNATIONAL EQUITY:

- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.

- 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 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.

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<PAGE>
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.

- 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 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.

- 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 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 equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.

- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to be 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 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
substantial investment in real estate investment trusts.

10
<PAGE>
- 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 equity securities which the Adviser believe
to be undervalued 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 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.

- 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 CHINA GROWTH, GOLD, 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 & Co., acts as investment adviser to the Fund and each of
its portfolios. As of March 31, 1998, Morgan Stanley Asset Management Inc. and
its affiliated institutional asset management companies managed assets of
approximately $166 billion, including assets under fiduciary advice. 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
Non-Money 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. The
Distributor has agreed to waive 0.10% of the 0.25% 12b-1 fee with respect to the
Fixed Income Portfolio. The minimum initial investment, generally, is $500,000
for Class A shares of each Portfolio and $100,000 for Class B shares of each
Non-Money Portfolio. There is no minimum investment for Class B shares of the
Money Market 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 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 or 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" and
"Redemption of Shares."

11
<PAGE>
RISK FACTORS

Investing in each of the Portfolios entails certain risks and considerations
of which an investor should be aware. The Portfolios' share prices and
investment returns fluctuate and, when redeemed, an investment in the Portfolios
may be worth more or less than its original cost. The investment policies of the
Portfolios may entail the following risk factors:

- FIXED INCOME SECURITIES. Each Portfolio will be subject to credit risk and
market risk associated with investment in fixed income securities. Credit
risk is the possibility that an issuer may be unable to meet scheduled
principal and interest payments. Market risk is the possibility that a
change in interest rates or the market's perception of the issuer's
prospects may adversely affect the value of a fixed income security.

- MORTGAGE-BACKED SECURITIES. The Fixed Income, Mortgage-Backed Securities
and Money Market Portfolios may invest in mortgage-backed securities.
Mortgage-backed securities represent an interest in a pool of underlying
mortgage loans. They are sensitive to changes in interest rates, but may
respond to these changes in a manner different from other fixed income
securities due to the possibility of prepayment of the underlying mortgage
loans. As a result, it is not possible to determine in advance the actual
maturity date or average life of a mortgage-backed security. Rising
interest rates tend to discourage refinancings, with the result that the
average life and volatility of the security will increase and its market
price will decrease. When interest rates fall, mortgage-backed securities
may not gain as much in market value because additional mortgage
prepayments must be reinvested at lower interest rates.

- FOREIGN INVESTMENT. The Fixed Income Portfolio may invest in the
securities of foreign issuers. The risks of foreign investment include
fluctuations in foreign currency values, political events affecting the
country of issuance and potentially greater market volatility and lower
liquidity.

- DERIVATIVES. Each Non-Money Portfolio may invest in instruments that
derive their values from those of specified securities, indices,
currencies or other points of reference. These derivatives, including
those used to manage risk, are themselves subject to the risks of the
different markets in which they are traded and, therefore, may or may not
serve their intended purposes.

For additional information about risk factors, see also "Investment Objectives
and Policies" and "Additional Investment Information."

12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES

The investment objective of each Portfolio is described below, together with
the policies each Portfolio will employ in its efforts to achieve its objective.
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. 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" and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval.

THE FIXED INCOME PORTFOLIO

The Fixed Income Portfolio seeks to produce a high total return consistent
with the preservation of capital by investing primarily in a diversified
portfolio of U.S. Government securities, corporate bonds (including
competitively priced Eurodollar bonds), mortgage-backed securities and other
fixed income securities, such as certificates of deposit and short-term money
market instruments. Short- and intermediate-term bonds form the core of the
Portfolio, and long-term bonds (i.e., those with maturities over ten years) are
purchased on a short-term opportunistic basis when the Adviser believes they
will enhance return without significantly increasing risk. The Adviser sets an
annual target rate of return for the Portfolio based on current and projected
market and economic conditions and manages the Portfolio conservatively --
primarily through gradual shifts in maturities in attempting to achieve this
target rate.

The Portfolio will typically invest between 50% and 75% of its total assets
in U.S. Government and mortgage-backed securities. The Portfolio will purchase
corporate bonds that generally are rated in the two highest rating categories by
Moody's Investors Service, Inc. ("Moody's") (Aaa or Aa) or Standard & Poor's
Ratings Group ("S&P") (AAA or AA). The Portfolio will not invest in a corporate
bond if it is not rated at least investment grade by either rating agency at the
time of investment. The Portfolio may invest up to 15% of its assets in fixed
income instruments denominated in foreign currencies and issued by corporate or
governmental issuers when the Adviser feels that the currency component and
underlying market characteristics of such obligations will add value to the
Portfolio.

THE MUNICIPAL BOND PORTFOLIO

The Municipal Bond Portfolio seeks to produce a high level of current income
consistent with preservation of principal by investing in a portfolio consisting
primarily of intermediate- and long-term investment grade municipal obligations
("Municipal Obligations"), the interest on which is exempt from federal income
tax. Municipal Obligations include notes, bonds and other securities issued by
or on behalf of states, territories and possessions of the United States and the
District of Columbia, and their political subdivisions, agencies and
instrumentalities, on which the interest paid is, in the opinion of counsel for
the issuer or the Portfolio, exempt from federal income tax.

The Portfolio will invest only in Municipal Obligations if they are
investment grade securities. Investment grade securities are (i) bonds rated
within one of the four highest rating categories of Moody's (Aaa, Aa, A or Baa)
or S&P (AAA, AA, A or BBB); (ii) notes rated within one of the two highest
rating categories of Moody's (MIG1 or MIG2) or one of the two highest rating
categories of S&P (SP-1 or SP-2); (iii) commercial paper rated P-1 or P-2 by
Moody's or A-1 or A-2 by S&P; (iv) variable rate securities rated VMIG1 or VMIG2
by Moody's; and

13
<PAGE>
(v) unrated Municipal Obligations that the Adviser believes are of comparable
quality to securities in the foregoing rating categories. Bonds rated Baa by
Moody's or BBB by S&P have speculative characteristics. Under normal
circumstances, the Portfolio will invest at least 80% of its net assets in
Municipal Obligations (or futures contracts or options on futures relating
thereto), that are rated investment grade at the time of investment. This policy
is fundamental and may not be changed without the approval of a majority of the
Portfolio's outstanding voting securities.

Although there are no maturity restrictions on the Municipal Obligations in
which the Portfolio invests, it is currently anticipated that the average
maturity will range between 7 and 20 years. Under normal circumstances, at least
65% of the Portfolio's net assets will be invested in Municipal Obligations
having an initial maturity of more than one year. The Adviser will actively
manage the Portfolio, and adjust its average maturity (including by the use of
futures contracts and options on futures), depending on its assessment of the
relative yields available on securities of different maturities and its
expectations of future changes in interest rates. During periods of rising
interest rates and declining prices, the average maturity of the Portfolio may
be shorter, while during periods of declining interest rates and rising prices,
the Portfolio may have a longer average maturity. The Portfolio will not invest
more than 20% of its net assets in Municipal Obligations the interest on which
is subject to alternative minimum tax.

The Portfolio may also invest up to 20% of its net assets in cash, cash
equivalents, U.S. Government securities and taxable corporate investment grade
securities. U.S. Government securities consist of direct obligations of the U.S.
Treasury and securities issued or guaranteed by agencies or instrumentalities of
the U.S. Government. Securities issued or guaranteed by agencies or
instrumentalities may be backed by the full faith and credit of the United
States (such as securities issued by the Government National Mortgage
Association ("GNMA")), or supported by the issuing agency's right to borrow from
the U.S. Treasury (such as securities issued by the Federal Home Loan Banks), or
backed only by the credit of the issuing instrumentality such as securities
issued by Fannie Mae).

THE MORTGAGE-BACKED SECURITIES PORTFOLIO

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 mortgage-backed securities either (i) issued or guaranteed by the
U.S. Government, or (ii) rated A or higher by Moody's or S&P or, if unrated,
determined by the Adviser to be of comparable quality.

The Portfolio will invest in mortgage-backed securities that are either (i)
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, or (ii) at the time of investment rated within one of the
three highest rating categories of Moody's (Aaa, Aa or A) or S&P (AAA, AA or A),
or if unrated, determined by the Adviser to be of comparable quality. Under
normal circumstances, the Adviser expects that at least 75% of the Portfolio's
net assets will be invested in mortgage-backed securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or rated Aaa by
Moody's or AAA by S&P. Up to 15% of the Portfolio's net assets may be invested
in mortgage-backed securities rated A by Moody's or S&P.

The Adviser expects that short- and intermediate-term mortgage-backed
securities will form the core of the Portfolio, with long-term securities (i.e.,
with maturities over ten years) being purchased when the Adviser believes that
they will enhance return without significantly increasing risk. The Adviser sets
an annual target

14
<PAGE>
rate of return for the Portfolio based on current and projected market and
economic conditions and manages the Portfolio conservatively -- primarily
through gradual shifts in maturities -- in attempting to achieve this target
rate.

THE MONEY MARKET PORTFOLIO

The Money Market Portfolio seeks to maximize current income and preserve
capital while maintaining high levels of liquidity by investing in the following
high quality money market instruments which have remaining maturities of one
year or less. The Portfolio's average maturity (on a dollar-weighted basis) will
not exceed 90 days. The Portfolio expects to maintain a net asset value of $1.00
per share. There can be no assurance, however, that the Portfolio will be
successful in maintaining a net asset value of $1.00 per share.

U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in obligations issued
or guaranteed by the U.S. Government, such as U.S. Treasury securities and those
backed by the full faith and credit of the United States, such as obligations of
GNMA, the Farmers Home Administration and the Export-Import Bank. The Portfolio
may also invest in obligations issued or guaranteed by U.S. Government agencies
or instrumentalities where the Portfolio must look principally to the issuing or
guaranteeing agency for ultimate repayment; some examples of agencies or
instrumentalities issuing these obligations are the Federal Farm Credit System
and the Federal Home Loan Banks.

MORTGAGE-BACKED SECURITIES. The Portfolio may invest in certain high
quality mortgage-backed securities.

BANK OBLIGATIONS. The Portfolio may invest in high quality U.S.
dollar-denominated negotiable certificates of deposit, time deposits, deposit
notes and bankers' acceptances of (i) banks, savings and loan associations and
savings banks which have more than $2 billion in total assets and are organized
under federal or state law; (ii) foreign branches of these banks ("Euros"); and
(iii) U.S. branches of foreign banks of equivalent size ("Yankees"). The
Portfolio may also invest in U.S. dollar-denominated obligations of the
International Bank for Reconstruction and Development ("World Bank"). These
obligations are supported by appropriated but unpaid commitments of the World
Bank's member countries, and there is no assurance these commitments will be
undertaken or met in the future.

COMMERCIAL PAPER; CORPORATE BONDS. The Portfolio may invest in high quality
commercial paper and corporate bonds issued by U.S. corporations. The Portfolio
may also invest in commercial paper issued by foreign corporations if the issuer
is a direct subsidiary of a U.S. corporation, the obligation is U.S. dollar-
denominated and is not subject to foreign withholding tax, and the aggregate of
these foreign investments does not exceed 10% of the Portfolio's net assets.

QUALITY INFORMATION. The Portfolio will limit its portfolio investments to
those instruments that present minimal credit risks and are of "eligible
quality" as determined by the Adviser under the supervision of the Board of
Directors in accordance with regulations of the Securities and Exchange
Commission (the "Commission"), as they may from time to time be amended. For
this purpose, "eligible quality" means a security rated (i) in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations assigning a rating to the security or issuer; or (ii) if
only one rating organization assigned a rating, by that rating

15
<PAGE>
organization; or (iii) if unrated, of comparable quality as determined by the
Board of Directors. The Money Market Portfolio will not purchase any bank or
corporate obligation unless it is rated at least Aa or Prime-1 by Moody's or AA
or A-1 by S&P, or is deemed to be of comparable quality.

These standards must be satisfied at the time an investment is made. In the
event that an investment held by the Portfolio is assigned a lower rating or
ceases to be rated, the Adviser under the supervision of the Board of Directors,
will promptly reassess whether such security presents minimal credit risk and
whether the Portfolio should continue to hold the security. If a portfolio
security no longer presents minimal credit risk or is in default, the Portfolio
will dispose of the security as soon as reasonably practicable unless the Board
of Directors determines that it is not in the best interests of the Portfolio to
do so.

THE MUNICIPAL MONEY MARKET PORTFOLIO

The Municipal Money Market Portfolio seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity by
investing in the following high quality municipal money market instruments
which, in the opinion of bond counsel for the issuer, earn interest exempt from
federal income tax. The Portfolio will purchase only securities having a
remaining maturity of one year or less. Under normal circumstances, the
Portfolio will invest at least 80% of its assets in tax-exempt municipal
securities. Additionally, the Portfolio will not purchase private activity bonds
that pay interest subject to the alternative minimum tax. Interest on tax-exempt
municipal securities may be subject to state and local taxes. The Portfolio's
average maturity (on a dollar-weighted basis) will not exceed 90 days. The
Portfolio expects to maintain a net asset value of $1.00 per share. There can be
no assurance, however, that the Portfolio will be successful in maintaining a
net asset value of $1.00 per share.

MUNICIPAL BONDS. The Portfolio may invest in bonds issued by or on behalf
of states, territories and possessions of the United States and its political
subdivisions, agencies, authorities and instrumentalities. These obligations may
be general obligation bonds secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest, or they may
be revenue bonds payable from specific revenue sources, but not generally backed
by the issuer's taxing power. These obligations include private activity bonds
where payment is the responsibility of the private industrial user of the
facility financed by the bonds. The Portfolio may invest more than 25% of its
total assets in private activity bonds (provided that the interest on such bonds
is not subject to the alternative minimum tax), but may not invest more than 25%
of its total assets in these bonds related to projects of similar type or in the
same state.

MUNICIPAL NOTES. The Portfolio may also invest in municipal notes of
various types, including notes issued in anticipation of receipt of taxes, the
proceeds of the sale of bonds, other revenues or grant proceeds and project
notes, as well as municipal commercial paper and municipal demand obligations.
There may be no secondary market for project notes, and the Portfolio intends to
hold such notes until maturity. There is no specific percentage limitation on
these investments.

QUALITY INFORMATION. The Portfolio will limit its portfolio investments to
those instruments which present minimal credit risk and which are of "eligible
quality" as determined by the Adviser under the supervision of the Board of
Directors in accordance with regulations of the Commission, as they may from
time to time be amended. For this purpose, "eligible quality" means a security
rated (i) in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations assigning a rating to the security
or issuer; or (ii) if only one rating organization assigned a rating, by that
rating organization; or (iii) if unrated, of

16
<PAGE>
comparable quality as determined by the Board of Directors. The Municipal Money
Market Portfolio will not purchase any municipal obligation unless it is rated
at least Aa, MIG-1 (or MIG-2 in the case of New York State municipal notes), or
Prime-1 by Moody's, or AA, SP-1 or A-1 by S&P, or is deemed to be of comparable
quality.

These standards must be satisfied at the time an investment is made. In the
event that an investment held by the Portfolio is assigned a lower rating or
ceases to be rated, the Adviser under the supervision of the Board of Directors
will promptly reassess whether such security presents minimal credit risk and
whether the Portfolio should continue to hold the security. If a portfolio
security no longer presents minimal credit risk or is in default, the Portfolio
will dispose of the security as soon as reasonably practicable unless the Board
of Directors determines that it is not in the best interests of the Portfolio to
do so. The credit quality of municipal obligations is frequently enhanced by
various arrangements with domestic or foreign financial institutions, such as
letters of credit, guarantees and insurance, and these arrangements are
considered when investment quality is evaluated.

PUTS FOR THE MUNICIPAL MONEY MARKET PORTFOLIO. The Portfolio may to the
extent consistent with the Portfolio's investment policies, purchase without
limit municipal bonds or notes together with the right to resell them at an
agreed price or yield within a specified period prior to maturity. This right to
resell is known as a "put." The aggregate price paid for securities with puts
may be higher than the price which otherwise would be paid. The purpose of this
practice is to permit the Portfolio to be fully invested in tax-exempt
securities while maintaining the necessary liquidity to purchase securities on a
when-issued basis, to meet unusually large redemptions, to purchase at a later
date securities other than those subject to the put and to facilitate the
Adviser's ability to manage the Portfolio actively. The principal risk of puts
is that the put writer may default on its obligation to repurchase. The Adviser
will monitor each put writer's ability to meet its obligations. No value is
assigned to any puts. The cost of any such put is carried as an unrealized loss
from the time of purchase until it is exercised or expires.

ADDITIONAL INVESTMENT INFORMATION

FIXED INCOME SECURITIES. Each Portfolio will invest in fixed income (debt)
securities. The market value of the fixed income securities in which a Portfolio
invest will be affected by changes in the creditworthiness of issuers and will
change in response to interest rate changes and other factors. Generally, the
values of fixed income securities vary inversely with changes in interest rates,
so that during periods of falling interest rates, the values of outstanding
fixed income securities generally rise and during periods of rising interest
rates, the values of such securities generally decline. While securities with
longer maturities tend to produce higher yields, the prices of longer maturity
securities are subject to greater market fluctuations as a result of changes in
interest rates.

FOREIGN INVESTMENT. The Fixed Income Portfolio may invest in the securities
of foreign issuers. Investment in securities of foreign issuers involves
investment risks somewhat different from those affecting securities of U.S.
issuers. The Portfolio's investments will be subject to political and economic
events that affect the countries in which it invests. Foreign issuers may be
subject to different accounting, auditing and financial standards and
requirements. There also may 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 trading volume
than U.S. national securities exchanges and, therefore, securities of some

17
<PAGE>
foreign issuers are less liquid and more volatile than securities of comparable
U.S. 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 Portfolio by domestic companies.
Investments in securities of foreign issuers are generally denominated in
foreign currencies and, since the Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency exchange rates and exchange control regulations, and the
Portfolio may incur costs in connection with conversions between various
currencies.

FOREIGN CURRENCY FORWARD CONTRACTS.

Each Non-Money Portfolio may enter into foreign currency forward contracts
("forward contracts") that provide for the purchase or sale of an amount of a
specified currency at a future date. The Portfolio may use such contracts to
protect against a decline in a foreign currency against the U.S. dollar between
the trade date and settlement date when the Portfolio purchases or sells
securities, lock in the U.S. dollar value of dividends and interest on
securities held by the Portfolio, and generally to protect the U.S. dollar value
of securities held by the Portfolio against exchange rate fluctuation. While
forward contracts may limit losses as a result of exchange rate fluctuations,
they will also limit any gains that might otherwise have been realized. The
Portfolio's Custodian may be required to place cash or liquid securities in a
segregated account in an amount equal to the value of the Portfolio's total
assets committed to the consummation of forward 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 at least equal to the amount of the Portfolio's commitments
with respect to such contracts.

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 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 risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets.

MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective 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, obligations of foreign sovereignties, commercial
paper, bank obligations (including certificates of deposit), other debt
securities and repurchase agreements.

MORTGAGE-BACKED SECURITIES. The Fixed Income, Mortgage-Backed Securities
and Money Market Portfolios may invest in mortgage-backed securities.
Mortgage-backed securities, directly or indirectly, represent an interest in a
pool of mortgage loans on real property. The Portfolios generally will invest in
two types of

18
<PAGE>
mortgage-backed securities. Mortgage pass-through securities represent a direct
interest in a group of loans that has been pooled and the loan payments passed
through to security holders. Collateralized mortgage obligations ("CMOs") are
fixed income securities that, rather than representing a direct interest in a
pool of underlying mortgage loans, are collateralized by the underlying loans.
The indirect ownership structure enables issuers to offer CMOs with a number of
different classes, or tranches, having particular risk/return characteristics.

The loans may be pooled by a government agency or instrumentality, such as
the Government National Mortgage Association, which packages the loans and
guarantees repayment of principal and/or interest on the underlying loans. The
agencies or instrumentalities pooling and guaranteeing such loans may or may not
be backed by full faith and credit of the U.S. Government. Mortgage-backed
securities also may be issued by private originators of or investors in mortgage
loans and structured similarly to governmental pass-through securities. Because
privately issued securities typically lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality, they often are
structured with one or more types of credit enhancement.

Investment in mortgage-backed securities entails certain risks. Like other
debt securities, the value of mortgage-backed securities generally varies
inversely with changes in interest rates. However, mortgage-backed securities
may respond to these changes in a manner different from other fixed income
securities because the possibility of prepayment of the underlying mortgage
loans makes it difficult to determine in advance the actual maturity date or
average life of a mortgage-backed security. Rising interest rates tend to
discourage refinancings, with the result that the average life and volatility of
the security will increase and its market price will decrease. When interest
rates fall, however, mortgage-backed securities may not gain as much in value
because increased mortgage prepayments must be reinvested at lower interest
rates.

REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines of the Fund's
Board of Directors. In a repurchase agreement, a 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. A repurchase agreement 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 Portfolio 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.

REVERSE REPURCHASE AGREEMENTS. The Money Market Portfolio may enter into
reverse repurchase agreements with brokers, dealers, domestic and foreign banks
or other financial institutions. In a reverse repurchase agreement, the
Portfolio sells a security and agrees to repurchase it at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. Reverse Repurchase Agreements may also be viewed as the borrowing of
money by the Portfolio and are, therefore, subject to the Portfolio's overall
borrowing limitations. The Portfolio's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. The Portfolio
may enter into a reverse repurchase agreement only if

19
<PAGE>
the interest income from investment of the proceeds is greater than the interest
expense of the transaction and the proceeds are invested for a period no longer
than the term of the agreement. The Portfolio will maintain with the Custodian a
segregated account of securities at least equal to its purchase obligations
under these agreements. If interest rates rise during a reverse repurchase
agreement, it may adversely affect the Portfolio's ability to maintain a stable
net asset value.

TAXABLE INVESTMENTS. The Municipal Bond and Municipal Money Market
Portfolios attempt to invest 80% and 100%, respectively, of their assets in
tax-exempt municipal securities. However, the Portfolios are permitted to invest
up to 20% of the value of their total assets in securities, the interest income
of which is subject to federal income tax. Either Portfolio may make taxable
investments pending investment of proceeds from sales of its shares or portfolio
securities or pending settlement of purchases of portfolio securities in order
to maintain liquidity to meet redemptions or when it is advisable in the
Adviser's opinion because of adverse market conditions. The taxable investments
permitted for either Portfolio include obligations of the U.S. Government and
its agencies and instrumentalities, bank obligations, commercial paper and
repurchase agreements. Fees from loans of tax-exempt securities will also be
taxable income of the Portfolio.

TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio 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. Each Portfolio will
maintain with the Custodian a segregated account 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 a Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if the general level of
interest rates has changed. It is a fundamental policy of the Money Market
Portfolio and a current policy of the Municipal Money Market Portfolio 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 PRODUCTS (DERIVATIVES)

The Non-Money Portfolios are permitted to utilize various exchange-traded
and over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. The Money Portfolios do not utilize derivative
products. Permitted derivative products include, but are not limited to: futures
contracts ("futures"); forward contracts ("forwards"); options; swaps, caps,
collars and floors; structured notes; and other derivative products yet to be
developed, so long as these new products are used in a manner consistent with
the objectives of the Portfolios. These derivative products may be based upon a
wide variety of underlying rates,

20
<PAGE>
indices, instruments, securities and other products, such as interest rates,
foreign currencies, foreign and domestic fixed income and equity securities,
groups or "baskets" of securities and securities indices (for each derivative
product, the "underlying"). Exclusive of forward foreign currency contracts and
any derivative products used for hedging purposes, each Portfolio will limit its
use of derivative products to 33 1/3% of its total assets, measured by the
aggregate notional amount of outstanding derivative products.

The Portfolios may use derivative products under a number of different
circumstances to further their investment objectives. For example, a Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. A Portfolio may also use derivatives when it is restricted from directly
owning the "underlying" or when derivatives provide a pricing advantage or lower
transaction costs. The Portfolios also may purchase combinations of derivatives
in order to gain exposure to an investment in lieu of actually purchasing such
investment. Derivatives may also be used by a Portfolio for hedging or risk
management purposes and in other circumstances when the Adviser believes it
advantageous to do so consistent with the Portfolio's investment objectives and
policies. The Portfolios will not use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by a particular Portfolio's investment policies, and then only in a manner
consistent with such policies.

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

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

FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)

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

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

21
<PAGE>
In some cases, the Portfolios may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolios will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolios may utilize futures contracts, forward contracts and related options
are as follows:

The Portfolios may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolios may also purchase and
sell foreign currency futures to hedge their respective holdings and commitments
against changes in the level of future currency rates or to adjust their
exposure to a particular currency.

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

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

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

Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), each Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.

OPTION TRANSACTIONS

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

22
<PAGE>
Each Portfolio may purchase put and call options. Purchasing a put option
gives a Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives a Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.

Each Portfolio also may write put and call options on investments held in
its portfolio, as well as foreign currency options. A Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, a Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, a Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.

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

There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolios' use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by a
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.

INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS

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

23
<PAGE>
agreement to pay interest streams in one currency based on a specified index in
exchange for receiving interest streams denominated in another currency. Such
swaps may involve initial and final exchanges that correspond to the agreed upon
notional amount.

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

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

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

STRUCTURED NOTES

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<PAGE>
the S&P 500. In some cases, the impact of the movements of these factors may
increase or decrease through the use of multipliers or deflators. The Non-Money
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.

INVESTMENT LIMITATIONS

Each Portfolio is a diversified investment company under the Investment
Company Act of 1940, as amended (the "1940 Act") and is subject to the following
limitations: (i) as to 75% of its total assets, a Portfolio may not invest more
than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government and its agencies and instrumentalities; and
(ii) a Portfolio may not own more than 10% of the outstanding voting securities
of any one issuer.

Each Portfolio also 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 such 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
investment 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 the portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. Set forth below as an annual percentage of daily net assets are the
management fees payable to the Adviser quarterly by each Portfolio pursuant to
the terms of the Investment Advisory Agreement. The Adviser has voluntarily
agreed to a reduction in the fees payable to it and to reimburse the Non-Money
Portfolios, if necessary, if such fees would cause the total annual operating
expenses of any Portfolio to exceed the maximum set forth in the table below.

<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING EXPENSES
AFTER FEE WAIVERS
MANAGEMENT FEE ----------------------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- -------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Fixed Income 0.35% 0.45% 0.60%
Municipal Bond 0.35% 0.45% 0.70%
Mortgage-Backed Securities 0.35% 0.45% 0.70%
Money Market 0.30% 0.55% 0.80%
Municipal Money Market 0.30% 0.57% N/A
</TABLE>

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<PAGE>
March 31, 1998, the Adviser, together with its affiliated institutional asset
management companies, managed assets of approximately $166 billion, including
assets under fiduciary advice. 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:

FIXED INCOME PORTFOLIO -- WARREN ACKERMAN, III. Warren Ackerman is a
Principal of the Adviser and Morgan Stanley and a Senior Fixed Income Portfolio
Manager. Mr. Ackerman joined the Advisor in December 1993. Prior to joining the
Advisor, Mr. Ackerman spent over 14 years with Bankers Trust Company as a
Managing Director responsible for institutional active fixed income management.
Prior to Bankers, he spent almost seven years as a Vice President with Irving
Trust Company in the Trust Investment Division. Mr. Ackerman is a graduate of
Monmouth College with a B.S. in Economics. Mr. Ackerman has had primary
responsibility for managing the Portfolio's assets since March 1994.

MUNICIPAL BOND PORTFOLIO -- LORI A. COHANE. Lori A. Cohane joined the
Adviser in 1994 as a Vice President and Municipal Bond Portfolio Manager. Prior
to joining the Adviser, Ms. Cohane spent eight years with Salomon Brothers Asset
Management as a Vice President, Portfolio Manager and Senior Credit Analyst of
municipal bond accounts managing portfolios for high net worth individuals,
open- and closed-end bond funds and institutional accounts. Ms. Cohane is a
magna cum laude graduate of the State University of New York at Albany with a
B.S. degree in Finance and Economics. Ms. Cohane has had primary responsibility
for managing the Portfolio's assets since its inception.

MORTGAGE-BACKED SECURITIES PORTFOLIO -- WARREN ACKERMAN, III. Information
about Mr. Ackerman is included under Fixed Income Portfolio above. Mr. Ackerman
has had primary responsibility for managing the Portfolio's assets since its
inception.

MONEY MARKET PORTFOLIO -- ABIGAIL JONES FEDER AND DANIEL M. NILAND.
Abigail Jones Feder is a Principal of the Adviser and Morgan Stanley and shares
responsibility for managing short-term taxable and tax-exempt portfolios. Ms.
Feder joined Morgan Stanley's Corporate Finance Department in 1985. In 1987 she
joined the Adviser as a Marketing Analyst and was promoted to a Marketing
Director in 1988. She joined the Fixed Income Group as a Portfolio Manager in
1989 and she became a Vice President in 1992. Ms. Feder holds a B.A. from Vassar
College. Ms. Feder has had primary responsibility for managing the portfolio's
assets since its inception. Daniel M. Niland joined the Adviser in July 1997 as
a Vice President and shares responsibility for managing short-term taxable
portfolios. Prior to joining the Adviser, Mr. Niland managed liquidity and short
duration fixed income portfolios for institutional and private accounts at
Citibank Global Asset Management from January 1996 to June 1997. Before joining
Citibank, Mr. Niland worked at J.P. Morgan from April 1991 to January 1996 as a
portfolio manager investing $20 billion in short-term securities for that firm's
securities lending program. Mr. Niland holds a B.A. from Iona College and an
M.B.A. from Fordham University. Mr. Niland has shared primary responsibility for
managing the Portfolio's assets since July 1997.

MUNICIPAL MONEY MARKET PORTFOLIO -- ABIGAIL JONES FEDER. Information about
Ms. Feder is included under the Money Market Portfolio above. Ms. Feder has had
primary responsibility for managing the Portfolio's assets since its inception.

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<PAGE>
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.

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 of the Non-Money Portfolios and the Money Market Portfolio
pursuant to Rule 12b-1 under the 1940 Act (each, a "Plan"). Under each Plan, the
Distributor is entitled to receive from each of the Non-Money Portfolios and the
Money Market 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. Each Plan is designed to compensate the Distributor for its
services in connection with distribution assistance. The Distributor may retain
any portion of the fee that it does not expend in meeting its obligations to the
Fund. The Distributor may compensate financial intermediaries, plan fiduciaries
and administrators for providing distribution-related services, including
account maintenance services, to shareholders (including, where applicable,
underlying beneficial owners) of Class B shares. The Distributor has agreed to
waive 0.10% of the 0.25% distribution fee it is entitled to receive from the
Fixed Income Portfolio.

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) as specified in its agreements with the Adviser and
Morgan Stanley.

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today cannot recognize the year 2000, but revert to 1900 or some other date, due
to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the handling of securities trades, pricing and account
services. The Adviser and Morgan Stanley have been actively working on necessary
changes to their own computer systems to deal with the year 2000 problem and
expect that their systems will be adapted before that date. There can be no
assurance, however, that they will be successful. In addition, other
unaffiliated service providers may be faced with similar problems. The Adviser
and Morgan Stanley are monitoring their remedial efforts, however, there can be
no assurance that they and the services they provide will not be adversely
affected.

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

PURCHASE OF SHARES

Class A shares of each Portfolio and Class B shares of each Portfolio except
the Municipal Money Market Portfolio may be purchased at the net asset value per
share next determined after receipt by the Fund of a purchase order as described
under "Methods of Purchase." CLASS B SHARES OF THE MONEY MARKET PORTFOLIO ARE
AVAILABLE FOR PURCHASE ONLY THROUGH FINANCIAL INTERMEDIARIES (AS DISCUSSED
BELOW) THAT HAVE MADE ARRANGEMENTS WITH THE FUND. The net asset value per share
of each Portfolio is calculated on days that the New York Stock Exchange
("NYSE") and Chase (the "Custodian Bank") are open for business. Net asset value
per share is determined (i) for each Non-Money Portfolio, as of the close of
trading of the NYSE (normally 4:00 p.m. Eastern Time); (ii) for the Money Market
Portfolio, as of 12:00 noon Eastern Time; and (iii) for the Municipal Money
Market Portfolio, as of 11:00 a.m. Eastern Time (for each Portfolio, the
"Pricing Time").

MINIMUM INVESTMENT

The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of each Non-Money Portfolio. The minimum initial investment
is $100,000 for Class A shares of each Money Portfolio. There is no minimum
initial investment for Class B shares of the Money Market Portfolio. These
minimums may be waived at the discretion of the Adviser for certain types of
investors, including trust departments, brokers, dealers, agents, financial
planners, financial services firms, investment advisers or various retirement
and deferred compensation plans ("Financial Intermediaries"); certain accounts
managed by the Adviser and its affiliates ("Managed Accounts"); and certain
employees and customers of Morgan Stanley and its affiliates. 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.

METHODS OF PURCHASE

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<PAGE>
through Financial Intermediaries. Some Financial Intermediaries may charge an
additional service or transaction fee. If a purchase is canceled due to
nonpayment or 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.

FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:

1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.

2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account 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.

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

When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the regular close of the Federal Funds Wire Control
Center ("FFWCC") (normally 6:00 p.m. Eastern Time) the purchase will be executed
at the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the regular close of the FFWCC will be executed at the net asset value
next determined. Certain institutional investors and financial institutions have
entered into an agreement with Morgan Stanley pursuant to which they may place
orders prior to the Pricing Time, but make payment in Federal Funds for those
shares the following business day.

BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and the bank handling the wire, money transferred by bank wire
may or may not be converted into Federal Funds prior to the close of the FFWCC.
Prior to conversion to Federal Funds and receipt by the Fund, an investor's
money will not be invested.

CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:

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

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<PAGE>
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share of each of the
Portfolios determined on the next business day after receipt. An investor's
money will not be invested prior to crediting of Federal Funds.

INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day, and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for each
Portfolio as of the close of the previous business day.

ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 per
Portfolio, except that there is no minimum for Class B shares of the Money
Market Portfolio. The minimum additional investment may be lower for certain
accounts described above under "Minimum Investment." For purchases directly from
the Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.

INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES

Class A and Class B shares of each Non-Money Portfolio may be subject to the
involuntary conversion and redemption features described below. Shares of the
Money Portfolios are not subject to involuntary conversion or redemption. The
conversion and redemption features may be waived at the discretion of the
Adviser for shares held in a Managed Account and shares purchased through a
Financial Intermediary. Accounts that were open prior to January 2, 1996 are not
subject to involuntary conversion or redemption. The Fund reserves the right to
modify or terminate the conversion or redemption features of the shares at any
time upon 60 days notice to shareholders.

CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares of a Non-Money Portfolio 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 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 Class B shares. The Fund will
not convert Class A shares of a Non-Money Portfolio to Class B shares based
solely upon changes in the market that reduce the net asset value of shares.
Under current tax law, conversion between share classes is not a taxable event
to the shareholder.

CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares of a Non-Money Portfolio increases to $500,000 or
more, whether due to shareholder purchases or market activity, the Class B
shares will convert to Class A shares. Class B shares purchased through a
Financial Intermediary that has entered into an arrangement with the Fund for
the purchase of such shares may not be converted. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements as
are applicable to accounts containing Class A shares described above.

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<PAGE>
INVOLUNTARY REDEMPTION OF SHARES. If the value of an 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 will be subject to redemption by the
Fund. The Fund will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares. If redeemed, redemption proceeds will
be promptly paid to the shareholder.

REDEMPTION OF SHARES

Class A shares of each Portfolio and Class B shares of each Portfolio except
the Municipal Money Market Portfolio may be redeemed at any time and without
charge at the net asset value per share next determined after receipt by the
Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds 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.

METHODS OF REDEMPTION

Shares may be redeemed directly from the Fund by mail or by telephone.
HOWEVER, SHARES PURCHASED THROUGH A FINANCIAL INTERMEDIARY MUST BE REDEEMED
THROUGH A FINANCIAL INTERMEDIARY. Certain Financial Intermediaries may charge an
additional service or transaction fee.

BY MAIL. Each Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, 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:

1. 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;

2. Any required signature guarantees; and

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

Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.

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<PAGE>
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.

The Fund and the Transfer Agent will employ reasonable procedures to confirm
that 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
telephone transaction. 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.

REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.

FURTHER REDEMPTION INFORMATION

The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event 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 conditions as determined by 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 in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.

To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund for further information. See
"Redemption of Shares" in the Statement of Additional Information.

ACCOUNT POLICIES AND SERVICES

EXCHANGE FEATURES

You may exchange shares of each Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced and Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.

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<PAGE>
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchases of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the request. Shares of the portfolios may be
exchanged by mail or telephone. The telephone exchange privilege is automatic
and made available without shareholder election. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days notice to
shareholders.

BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.

BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.

TRANSFER OF REGISTRATION

You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with 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 shares and may
result in involuntary conversion or redemption of your shares.

OTHER ACCOUNT INFORMATION

The Fund does not issue share certificates for the Portfolios. 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.

EXCESSIVE TRADING

Frequent trades in your account(s) can disrupt management of a Portfolio and
raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of each Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases 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. For example, the following series of transactions would amount 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 then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day

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<PAGE>
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.

INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS

Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the portfolios used for investment by these accounts may
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the portfolio.

VALUATION OF SHARES

The net asset value per share of a class of shares of each Non-Money
Portfolio is determined by dividing the total market value of the Non-Money
Portfolio's investments and other assets attributable to such class, less all
liabilities attributable to such class, by the number of total outstanding
shares of such a class of the Non-Money Portfolio. Net asset value is calculated
separately for each class of the Portfolio. Net asset value per share of the
Non-Money Portfolios is determined as of the close of the NYSE (normally 4:00
p.m. Eastern Time) 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 and for which market quotations are not readily available are
valued at a price within a 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 two 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 unless collection is in doubt. 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.

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<PAGE>
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 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 converted 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 Class A shares as a result of the distribution expenses charged to
Class B shares.

The net asset value per share of each of the Money Market and Municipal
Money Market Portfolios is determined by subtracting the Portfolio's liabilities
(including accrued expenses and dividends payable) from the total value of the
Portfolio's investments and other assets and dividing the result by the total
number of outstanding shares of the Portfolio. The net asset values per share of
the Municipal Money Market Portfolio and the Money Market Portfolio are
determined as of 11:00 a.m. and 12:00 noon (Eastern Time), respectively, on the
days on which the NYSE is open. For the purpose of calculating each Money
Portfolio's net asset value per share, securities are valued by the "amortized
cost" method of valuation, which does not take into account unrealized gains or
losses. This involves valuing an instrument at its cost and thereafter assuming
a constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which the value, as determined by amortized cost, is higher or lower than
the price the Portfolio would receive if it sold the instrument.

PERFORMANCE INFORMATION

The Fund may from time to time advertise total return for each class of the
Fixed Income, Municipal Bond and Mortgage-Backed Securities Portfolios. In
addition, from time to time the Fund may advertise "yield" for the Municipal
Bond, Money Market and Municipal Money Market Portfolios and "effective yield"
for the Money Market and Municipal Money Market Portfolios. In addition to these
yield figures, the Municipal Bond and Municipal Money Market Portfolio may
advertise a tax equivalent yield. THESE FIGURES ARE BASED ON HISTORICAL
PERFORMANCE AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.

Each of the Non-Money Portfolios may advertise "total return" which shows
what an investment in a class of the 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 upon redemption. The "yield" of the Municipal Bond Portfolio
refers to the income generated by an investment in the Portfolio over a
one-month or 30-day period, while the "yield" of the Money Market and Municipal
Money Market Portfolios refers to the income generated by an investment in the
Portfolio over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that 30- or seven-day period is assumed to be
generated each 30-day period for twelve periods or each week over a 52-week
period, and is

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<PAGE>
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned on an investment in the
Portfolio is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. A "tax equivalent yield" is the "yield" of the Portfolio increased
by an amount based on an assumed rate of tax for a shareholder. For further
information concerning these figures, see "Calculation of Yield and Total
Return" in the Statement of Additional Information. The Fund may also use
comparative performance information in marketing the Portfolios' shares,
including data from Lipper Analytical Services, Inc., Donoghue's Money Fund
Report, 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.

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

FIXED INCOME, MUNICIPAL BOND AND MORTGAGE-BACKED SECURITIES PORTFOLIOS

All income dividends and capital gains distributions for a class of shares
of each Non-Money Portfolio will be automatically reinvested in additional
shares of such class 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 Non-Money Portfolio expects to distribute substantially all of its
taxable net investment income in the form of monthly dividends. Net realized
capital gains of each Non-Money Portfolio, if any, after reduction for any tax
loss carryforwards will also be distributed annually.

Undistributed net investment income is included in each Non-Money
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 each Non-Money Portfolio will differ
at times. Expenses of each Non-Money Portfolio allocated to a particular class
of shares will be borne on a pro rata basis by each outstanding share of that
class.

MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS

Net investment income is computed and dividends declared as of 1:00 p.m.
(Eastern time), on each day. Such dividends are payable to Municipal Money
Market Portfolio shareholders of record as of 11:00 a.m. (Eastern time) on that
day and to Money Market Portfolio shareholders of record as of 12:00 noon
(Eastern time) on that day, if the Fund and Custodian Bank are open for
business. This means that shareholders whose purchase orders become effective as
of 12:00 noon (for the Money Market Portfolio) or 11:00 a.m. (for the Municipal
Money Market Portfolio) receive the dividend for that day. Dividends declared
for Saturdays, Sundays and holidays are payable to shareholders of record as of
4:00 p.m. on the last preceding day the Fund and its Custodian Bank were open
for business.

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<PAGE>
For the purpose of calculating dividends, net income of each Money Portfolio
shall consist of interest earned, including any discount or premium ratably
amortized to the date of maturity, minus estimated expenses of the Money
Portfolio. Each Money Portfolio's daily dividends are accrued throughout the
month and are distributed on the fifteenth calendar day of each month (or next
business day if the fifteenth calendar day falls on a holiday or weekend).
Because of the distribution fee and other expenses that may be attributable to
Class B shares of the Money Market Portfolio, the net income attributable to and
the dividends payable on Class B shares will be lower than for Class A shares.
Dividends of each Money Portfolio are payable in additional shares, 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 any capital gains distributions in cash.

Each shareholder receives a monthly statement summarizing activity in the
account. If at any time a shareholder wishes to withdraw all of the funds in an
account, the proceeds will be sent to the shareholder by wire or check,
according to the shareholder's instructions. If the withdrawal is by wire, a
check in the amount of the income to the shareholder's account through the day
of withdrawal will be mailed to the shareholder on the next business day.
Withdrawals by check will include accrued income through the date of withdrawal.

Net realized short-term capital gains, if any, of each Money Portfolio are
to be distributed whenever the Board of Directors determine that such
distributions would be in the best interest of shareholders, but in any event,
at least once a year. The Money Portfolios do not expect to realize any
long-term capital gains. Should any such gains be realized, they will be
distributed annually.

It is an objective of management to maintain the price per share of each
Money Portfolio as computed for the purpose of sales and redemptions at exactly
$1.00. In the event the Board of Directors determines that a deviation from the
$1.00 per share price may exist which may result in a material dilution or other
unfair results to investors or existing shareholders, they will take corrective
action they regard as necessary and appropriate, including the sale of
instruments from a Money Portfolio prior to maturity to realize capital gains or
losses; shortening average portfolio maturity; withholding dividends; making a
special capital distribution; or redemptions of shares in kind.

TAXES

GENERAL

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 a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors 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 Internal Revenue Code of 1986, as amended
(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.

37
<PAGE>
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income (other than
"exempt-interest dividends," described below) are taxable to shareholders as
ordinary income, whether received in cash or in additional shares. Distributions
of net capital gain are taxable to shareholders as a 20% rate gain distribution
(taxed at a rate of 20%) or a 28% rate gain distribution (taxed at a rate of
28%), depending upon the designation by the Portfolio (such designation being
dependent upon the holding period of the Portfolio in the underlying asset
generating the net capital gain), regardless of how long shareholders have held
their shares. Distributions of net investment income and net capital gain are
not eligible for the corporate dividends-received deduction. Each Portfolio will
send reports annually to its shareholders of the federal income tax status of
all distributions made during the preceding year.

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, including any available capital loss carryforwards) 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 on December 31 of 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 (i) 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 Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) 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, exchange or redemption 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 redemption proceeds exceed or are less than the
shareholder's adjusted basis in the sold, exchanged or redeemed shares. If
capital gains distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, then the loss is treated as a
long-term capital loss to the extent of the capital gains distributions.

Conversions of shares between classes are not taxable events to the
shareholder.

Shareholders are urged to consult with their tax advisors 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.

THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET PORTFOLIOS

The dividends payable by the Municipal Bond and the Municipal Money Market
Portfolios from net tax-exempt interest from municipal bonds and notes will
qualify as "exempt-interest dividends" if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on

38
<PAGE>
which is excludable from gross income. Each of the Municipal Bond and Municipal
Money Market Portfolios intends to invest a sufficient portion of its assets in
municipal bonds and notes to qualify to pay "exempt-interest dividends."

Exempt-interest dividends are excludable from a shareholder's gross income
for regular income tax purposes. However, the receipt of such dividends may have
collateral federal income tax consequences, including alternative minimum tax
consequences. In addition, the receipt of exempt-interest dividends may cause
persons receiving Social Security or Railroad Retirement benefits to be taxable
on a portion of such benefits. See the Statement of Additional Information.
Current federal tax law limits the types of volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Portfolios to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirement for the payment of exempt-interest
dividends.

All or a portion of the interest on indebtedness incurred or continued by an
investor to purchase or carry shares is not deductible for federal income tax
purposes. Furthermore, entities or persons who are "substantial users" (or
persons related to "substantial users") of facilities financed by "private
activity bonds" or "industrial development bonds" should consult their tax
advisors before purchasing shares of the Portfolios. See the Statement of
Additional Information.

The Portfolios will report annually to their shareholders the portion of
dividends that is taxable and the portion that is tax-exempt based on income
received by the Portfolios during the year to which the dividends relate.

The exemption of dividends paid by the Municipal Bond and Municipal Money
Market Portfolio for Federal income tax purposes may not result in similar
exemptions under the laws of a particular state or local taxing authority. Each
of the Municipal Bond and Municipal Money Market Portfolio will report annually
to its shareholders the percentage and source, on a state-by-state basis, of
interest income earned on municipal bonds and municipal notes held by the
Portfolio during the preceding year.

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.

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.

39
<PAGE>
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 their
respective objectives and policies. For the fiscal year ended December 31, 1997,
the Fixed Income Portfolio had a portfolio turnover rate of 163%. Higher
portfolio turnover (e.g., over 100%) necessarily will cause the Portfolios 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 40 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
Class B shares, except for the International Small Cap and Municipal Money
Market Portfolios, which offer only Class A shares.

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 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. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as that
term is defined in the 1940 Act) that 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 and semi-annual reports.
Financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.

40
<PAGE>
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 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 its annual financial statements.

FUND COUNSEL

Morgan, Lewis & Bockius LLP acts as the Fund's legal counsel.

LITIGATION

The Fund is not involved in any litigation.

41
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
FIXED INCOME, MUNICIPAL BOND, MORTGAGE-BACKED SECURITIES,
MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798

ACCOUNT REGISTRATION FORM

<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, Inc., please contact your Morgan Stanley
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

<TABLE>
<C> <S> <C>
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 Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
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).

<CAPTION>
B)

/ / 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>
<S> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
<PAGE>
<TABLE>
<S> <S> <C> <C>
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
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 A Shares $ / / Class B Shares $
CLASS SELECTION Portfolio(s): / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 Fixed Income Portfolio / / Class A Shares $ / / Class B Shares $
and Class B shares minimum $100,000 Municipal Bond Portfolio / / Class A Shares $
for each of the Fixed Income, Mortgage-Backed Securities / / Class A Shares $
Municipal Bond and Mortgage-Backed Portfolio
Securities Portfolios. Minimum Money Market Portfolio
$50,000 for Class A shares of each Municipal Money Market
of the Money Market and Municipal Portfolio
Money Market Portfolios). Please
indicate Portfolio, class and
amount.
Total Initial Investment $
</TABLE>

<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and 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> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
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 Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
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.
</TABLE>

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

/ / 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 (if joint account, both
Signature Date 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................................ 9
Investment Objectives and Policies................ 13
Additional Investment Information................. 17
Investment Limitations............................ 25
Management of the Fund............................ 25
Purchase of Shares................................ 28
Redemption of Shares.............................. 31
Account Policies and Services..................... 32
Valuation of Shares............................... 34
Performance Information........................... 35
Dividends and Capital Gains Distributions......... 36
Taxes............................................. 37
Portfolio Transactions............................ 39
General Information............................... 40
Account Registration Form
</TABLE>

FIXED INCOME PORTFOLIO
MUNICIPAL BOND PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET 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>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
HIGH YIELD 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 Small Cap Value Equity, Value Equity, Balanced, Global Fixed Income and High
Yield Portfolios (each, a "Portfolio," and collectively, 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. The Small Cap
Value Equity and Balanced Portfolios are currently closed to new investors with
the exception of certain tax-qualified retirement plans, other investment
companies advised by Morgan Stanley Asset Management Inc. and its affiliates and
certain employees of the Adviser and its affiliates.
THE HIGH YIELD PORTFOLIO INVESTS PREDOMINANTLY IN LOWER RATED BONDS,
COMMONLY REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS PORTFOLIO. SEE "RISK FACTORS RELATING TO INVESTING IN HIGH YIELD
SECURITIES."
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, 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 May 1,
1998, 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 MAY 1, 1998.
<PAGE>
FUND EXPENSES

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

<TABLE>
<CAPTION>
GLOBAL
SMALL CAP VALUE FIXED HIGH
EQUITY VALUE EQUITY BALANCED INCOME YIELD
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------- --------------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases
Class A.......................... None None None None None
Class B.......................... None None None None None
Maximum Sales Load Imposed on
Reinvested Dividends
Class A.......................... None None None None None
Class B.......................... None None None None None
Deferred Sales Load
Class A.......................... None None None None None
Class B.......................... None None None None None
Redemption Fees
Class A.......................... None None None None None
Class B.......................... None None None None None
Exchange Fees
Class A.......................... None None None None None
Class B.......................... None None None None None
</TABLE>

<TABLE>
<CAPTION>
GLOBAL
ANNUAL FUND OPERATING EXPENSES SMALL CAP VALUE FIXED HIGH
(AS A PERCENTAGE OF AVERAGE NET EQUITY VALUE EQUITY BALANCED INCOME YIELD
ASSETS) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------- --------------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Management Fee (Net of Fee
Waivers)*
Class A.......................... 0.53% 0.40% 0.00% 0.19% 0.375%
Class B.......................... 0.53% 0.40% 0.00% 0.19% 0.375%
12b-1 Fees
Class A.......................... None None None None None
Class B.......................... 0.25% 0.25% 0.25% 0.15%** 0.25%
Other Expenses
Class A.......................... 0.47% 0.30% 0.70% 0.31% 0.32%
Class B.......................... 0.47% 0.30% 0.70% 0.31% 0.30%
------- ------ -------- --------- ---------
Total Operating Expenses (Net of
Fee Waivers)*
Class A.......................... 1.00% 0.70% 0.70% 0.50% 0.695%
Class B.......................... 1.25% 0.95% 0.95% 0.65% 0.925%
------- ------ -------- --------- ---------
------- ------ -------- --------- ---------
</TABLE>

- --------------------------
*The Adviser has agreed to waive its management fee and/or reimburse the
Portfolios, if necessary, if such fees would cause the total annual operating
expenses of each 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
percentage of the average daily net assets of the Class A shares and Class B
shares, respectively.

2
<PAGE>

<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEE -------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- --------------------------------------------------------------- ------------------- ----------- ------------
<S> <C> <C> <C>
Small Cap Value Equity......................................... 0.85% 1.32% 1.56%
Value Equity................................................... 0.50% 0.80% 1.04%
Balanced....................................................... 0.50% 1.83% 2.05%
Global Fixed Income............................................ 0.40% 0.71% 0.86%
High Yield..................................................... 0.375% 0.69% 0.93%
</TABLE>

**The Distributor has agreed to waive 0.10% of the 0.25% distribution fee it is
entitled to receive from this Portfolio.

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 each Portfolio are based on actual figures for
the fiscal year ended December 31, 1997. 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.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Small Cap Value Equity Portfolio
Class A.......................................................... $ 10 $ 32 $ 55 $ 122
Class B.......................................................... 13 40 69 151
Value Equity Portfolio
Class A.......................................................... 7 22 39 87
Class B.......................................................... 10 30 53 117
Balanced Portfolio
Class A.......................................................... 7 22 39 87
Class B.......................................................... 10 30 53 117
Global Fixed Income
Class A.......................................................... 5 16 28 63
Class B.......................................................... 7 21 36 81
High Yield Portfolio
Class A.......................................................... 7 22 38 86
Class B.......................................................... 10 30 52 115
</TABLE>

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 tables provide financial highlights for the Class A and Class
B shares for each of the Portfolios for the periods presented. The audited
financial highlights for each of the Portfolio's shares for each of the periods
in the five years ended December 31, 1997 are part of the Fund's financial
statements which appear in the Fund's December 31, 1997 Annual Report to
Shareholders and which are incorporated by reference into the Fund's Statement
of Additional Information. Each 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. After October 31, 1992, the Fund changed its fiscal year end to
December 31. The following information should be read in conjunction with the
financial statements and notes thereto.

4
<PAGE>
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------

YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.89 $ 11.91 $ 10.80 $ 11.10
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............. 0.07 0.32 0.30 0.28
Net Realized and Unrealized Gain
(Loss) on Investments................ 3.72 2.36 1.82 (0.01)
------------ ------------ ------------ ------------
Total from Investment Operations.... 3.79 2.68 2.12 0.27
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income................. (0.08) (0.32) (0.38) (0.27)
In Excess of Net Investment Income.... (0.00)+ -- -- --
Net Realized Gain..................... (3.36) (3.38) (0.63) (0.30)
------------ ------------ ------------ ------------
Total Distributions................. (3.44) (3.70) (1.01) (0.57)
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD.......... $ 11.24 $ 10.89 $ 11.91 $ 10.80
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TOTAL RETURN............................ 36.80% 22.99% 20.63% 2.53%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).......................... $35,612 $23,970 $51,919 $40,033
Ratio of Expenses to Average Net
Assets (1)........................... 1.01% 1.00% 1.00% 1.00%
Ratio of Expenses to Average Net
Assets Excluding Interest Expense.... 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1)............... 0.55% 2.20% 2.60% 2.67%
Portfolio Turnover Rate............... 178% 32% 36% 22%
Average Commission Rate Per Share#.... $0.0500 $0.0402 N/A N/A
- -------------------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net investment
income............................ $ 0.04 $ 0.04 $ 0.02 $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets..... 1.32% 1.32% 1.21% 1.26%
Net Investment Income to Average
Net Assets........................ 0.24% 1.89% 2.39% 2.41%

<CAPTION>
CLASS B
---------------------------
PERIOD FROM PERIOD FROM
DECEMBER 17, JANUARY 2,
1992* TO YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.14 $ 10.00 $ 10.88 $ 11.95
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............. 0.24 0.01 0.10 0.23
Net Realized and Unrealized Gain
(Loss) on Investments................ 0.90 0.13 3.65 2.38
------------ ------------ ------------ ------------
Total from Investment Operations.... 1.14 0.14 3.75 2.61
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income................. (0.18) -- (0.06) (0.30)
In Excess of Net Investment Income.... -- -- (0.00)+ --
Net Realized Gain..................... -- -- (3.36) (3.38)
------------ ------------ ------------ ------------
Total Distributions................. (0.18) -- (3.42) (3.68)
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD.......... $ 11.10 $ 10.14 $ 11.21 $ 10.88
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TOTAL RETURN............................ 11.33% 1.40% 36.51% 22.33%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).......................... $26,775 $ 5,974 $ 7,523 $ 1,689
Ratio of Expenses to Average Net
Assets (1)........................... 1.00% 1.00%** 1.26% 1.24%**
Ratio of Expenses to Average Net
Assets Excluding Interest Expense.... 1.00% 1.00%** 1.25% 1.24%**
Ratio of Net Investment Income to
Average Net Assets (1)............... 2.56% 1.64%** (0.06)% 1.93%**
Portfolio Turnover Rate............... 29% 0% 178% 32%
Average Commission Rate Per Share#.... N/A N/A $0.0500 $0.0402
- -------------------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net investment
income............................ $ 0.06 $ 0.13 $ 0.02 $ 0.05
Ratios before expense limitation:
Expenses to Average Net Assets..... 1.68% 23.14%** 1.56% 1.69%**
Net Investment Income to Average
Net Assets........................ 1.88% (20.50)%** (0.36)% 1.50%**
</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
commissions were charged, during the period.

+ Amount is less than $0.01 per share.

5
<PAGE>
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------

YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD.................. $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31
----------- ----------- ----------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)... 0.35 0.41 0.38 0.40 0.37
Net Realized and Unrealized
Gain (Loss) on
Investments................ 3.51 2.27 3.30 (0.55) 1.31
----------- ----------- ----------- ---------- ----------
Total from Investment
Operations............. 3.86 2.68 3.68 (0.15) 1.68
----------- ----------- ----------- ---------- ----------
DISTRIBUTIONS
Net Investment Income..... (0.35) (0.41) (0.47) (0.40) (0.36)
Net Realized Gain......... (3.78) (2.32) (0.77) (0.58) --
----------- ----------- ----------- ---------- ----------
Total Distributions..... (4.13) (2.73) (1.24) (0.98) (0.36)
----------- ----------- ----------- ---------- ----------
NET ASSET VALUE, END OF
PERIOD..................... $ 13.62 $ 13.89 $ 13.94 $ 11.50 $ 12.63
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
TOTAL RETURN................ 29.20% 19.73% 33.69% (1.29)% 15.14%
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands).............. $ 86,054 $ 106,128 $ 147,365 $ 73,406 $ 54,598
Ratio of Expenses to
Average Net Assets (1)... 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)............... 2.15% 2.62% 3.01% 3.37% 3.23%
Portfolio Turnover Rate... 36% 42% 43% 33% 51%
Average Commission Rate
Per Share#............... $0.0411 $0.0434 N/A N/A N/A
- -------------------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income................ $0.02 $0.01 $0.01 $0.01 $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets................ 0.80% 0.78% 0.77% 0.80% 0.95%
Net Investment Income
to
Average Net Assets.... 2.06% 2.55% 2.94% 3.27% 2.98%

<CAPTION>
CLASS B
------------------------
PERIOD
FROM
TWO MONTHS YEAR ENDED OCTOBER 31, JAN. 31* JAN. 2,
ENDED TO YEAR ENDED 1996*** TO
DEC. 31, ----------------------- DEC. 31, DEC. 31, DEC. 31,
1992 1992 1991 1990 1997 1996
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD.................. $ 10.71 $ 10.24 $ 8.59 $ 10.00 $ 13.89 $ 14.06
---------- ---------- ---------- ---------- ----------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)... 0.08 0.38 0.46 0.37 0.28 0.29
Net Realized and Unrealized
Gain (Loss) on
Investments................ 0.52 0.48 1.67 (1.45) 3.51 2.25
---------- ---------- ---------- ---------- ----------- ----------
Total from Investment
Operations............. 0.60 0.86 2.13 (1.08) 3.79 2.54
---------- ---------- ---------- ---------- ----------- ----------
DISTRIBUTIONS
Net Investment Income..... -- (0.39) (0.48) (0.33) (0.31) (0.39)
Net Realized Gain......... -- -- -- -- (3.78) (2.32)
---------- ---------- ---------- ---------- ----------- ----------
Total Distributions..... -- (0.39) (0.48) (0.33) (4.09) (2.71)
---------- ---------- ---------- ---------- ----------- ----------
NET ASSET VALUE, END OF
PERIOD..................... $ 11.31 $ 10.71 $ 10.24 $ 8.59 $ 13.59 $ 13.89
---------- ---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ---------- ----------- ----------
TOTAL RETURN................ 5.60% 8.51% 25.34% (11.05)% 28.70% 18.57%
---------- ---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ---------- ----------- ----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands).............. $ 27,541 $ 25,013 $ 16,304 $18,178 $ 2,246 $ 2,555
Ratio of Expenses to
Average Net Assets (1)... 0.70%** 0.70% 0.70% 0.70%** 0.95% 0.95%**
Ratio of Net Investment
Income to Average Net
Assets (1)............... 4.41%** 3.72% 4.57% 5.46%** 1.86% 2.33%**
Portfolio Turnover Rate... 9% 56% 90% 70% 36% 42%
Average Commission Rate
Per Share#............... N/A N/A N/A N/A $0.0411 $0.0434
- -------------------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income................ $0.01 $0.01 $0.02 $0.01 $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets................ 1.20%** 0.84% 0.87% 0.88%** 1.04% 1.03%**
Net Investment Income
to
Average Net Assets.... 3.91%** 3.58% 4.40% 5.28%** 1.77% 2.26%**
</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
commissions were paid, during the period.

6
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)... 0.36 0.52 0.39 0.42 0.44
Net Realized and Unrealized
Gain (Loss) on
Investments................ 0.99 0.54 1.62 (0.64) 0.79
---------- ---------- ---------- ---------- ----------
Total from Investment
Operations............... 1.35 1.06 2.01 (0.22) 1.23
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income....... (0.36) (0.48) (0.50) (0.49) (0.41)
In Excess of Net Investment
Income..................... (0.00)+ 0.00+ -- -- (0.08)
Net Realized Gain........... (1.63) (2.37) (0.49) (1.46) (0.06)
In Excess of Net Realized
Gain....................... -- -- -- -- (0.86)
---------- ---------- ---------- ---------- ----------
Total Distributions....... (1.99) (2.85) (0.99) (1.95) (1.41)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF
PERIOD....................... $ 7.55 $ 8.19 $ 9.98 $ 8.96 $ 11.13
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN.................. 17.30% 10.93% 23.63% (2.32)% 12.09%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $ 4,606 $ 5,992 $22,642 $18,492 $29,684
Ratio of Expenses to Average
Net Assets (1)............. 0.71% 0.70% 0.70% 0.70% 0.70%
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense........... 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)................. 3.82% 3.93% 4.10% 4.13% 3.88%
Portfolio Turnover Rate..... 25% 22% 26% 44% 136%
Average Commission Rate Per
Share#..................... $0.0426 $0.0397 N/A N/A N/A
- ----------------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income....... $0.11 $0.08 $0.03 $0.03 $0.04
Ratios before expense
limitation:
Expenses to Average Net
Assets.................. 1.83% 1.32% 1.02% 0.95% 1.02%
Net Investment Income to
Average Net Assets...... 2.71% 3.31% 3.78% 3.88% 3.56%

<CAPTION>
CLASS B
-----------------------
PERIOD
FROM
TWO JAN. 2,
MONTHS YEAR ENDED OCTOBER 31, FEB. 20* YEAR 1996***
ENDED TO ENDED TO
DEC. 31, ----------------------- OCT. 31, DEC. 31, DEC. 31,
1992 1992 1991 1990 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 11.00 $ 10.61 $ 9.62 $ 10.00 $ 8.18 $ 10.02
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)... 0.10 0.58 0.59 0.40 0.08 0.34
Net Realized and Unrealized
Gain (Loss) on
Investments................ 0.21 0.42 1.03 (0.46) 1.24 0.65
--------- --------- --------- --------- --------- ---------
Total from Investment
Operations............... 0.31 1.00 1.62 (0.06) 1.32 0.99
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income....... -- (0.58) (0.63) (0.32) (0.34) (0.46)
In Excess of Net Investment
Income..................... -- -- -- -- -- --
Net Realized Gain........... -- (0.03) -- -- (1.63) (2.37)
In Excess of Net Realized
Gain....................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total Distributions....... -- (0.61) (0.63) (0.32) (1.97) (2.83)
--------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF
PERIOD....................... $ 11.31 $ 11.00 $ 10.61 $ 9.62 $ 7.53 $ 8.18
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
TOTAL RETURN.................. 2.82% 9.57% 17.31% (0.63)% 16.94% 10.24%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $39,984 $ 40,332 $ 51,334 $37,444 $ 621 $ 2,197
Ratio of Expenses to Average
Net Assets (1)............. 0.70%** 0.70% 0.70% 0.70%** 0.96% 0.95%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense........... 0.70% 0.70% 0.70% 0.70%** 0.95% 0.95%**
Ratio of Net Investment
Income to Average Net
Assets (1)................. 5.29%** 5.21% 5.99% 6.81%** 3.60% 3.73%**
Portfolio Turnover Rate..... 4% 40% 67% 19% 25% 22%
Average Commission Rate Per
Share#..................... N/A N/A N/A N/A $0.0426 $0.0397
- ----------------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income....... $0.01 $0.01 $0.01 $0.01 $0.14 $0.07
Ratios before expense
limitation:
Expenses to Average Net
Assets.................. 1.00%** 0.79% 0.78% 0.90%** 2.05% 1.68%**
Net Investment Income to
Average Net Assets...... 4.99%** 5.12% 5.91% 6.61%** 2.50% 3.00%**
</TABLE>

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

* Commencement of operations

** Annualized

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

+ Amount is less than $0.01 per share.

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

7
<PAGE>
GLOBAL FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------

YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997++ 1996 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 11.30 $ 11.22 $ 10.29 $ 11.68
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............... 0.56 0.61 0.76 0.70
Net Realized and Unrealized Gain (Loss)
on Investments......................... (0.40) 0.08 1.15 (1.38)
---------- ---------- ---------- ----------
Total from Investment Operations.... 0.16 0.69 1.91 (0.68)
---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income................. (0.31) (0.61) (0.98) (0.40)
In Excess of Net Investment Income.... -- -- -- --
Net Realized Gain..................... -- -- -- (0.31)
---------- ---------- ---------- ----------
Total Distributions................. (0.31) (0.61) (0.98) (0.71)
---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD.......... $ 11.15 $ 11.30 $ 11.22 $ 10.29
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
TOTAL RETURN............................ 1.50% 6.44% 19.32% (6.08)%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).......................... $ 84,635 $ 112,888 $ 102,852 $ 130,675
Ratio of Expenses to Average Net
Assets (1)........................... 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets (1)............... 5.05% 5.50% 6.79% 6.34%
Portfolio Turnover Rate............... 116% 258% 207% 171%
- ----------------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net investment
income............................ $0.02 $0.02 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets..... 0.71% 0.72% 0.71% 0.66%
Net Investment Income to Average
Net Assets........................ 4.84% 5.29% 6.58% 6.18%

<CAPTION>
CLASS B
-------------------------
PERIOD FROM
TWO MONTHS JAN. 2,
ENDED YEAR ENDED MAY 1* TO YEAR ENDED 1996*** TO
DEC. 31, OCT. 31, OCT. 31, DEC. 31, DEC. 31,
1993 1992 1992 1991 1997++ 1996
---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 11.26 $ 11.41 $ 10.61 $ 10.00 $ 11.29 $11.23
---------- ---------- ---------- ---------- ---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............... 0.69 0.14 0.53 0.16 0.54 0.48
Net Realized and Unrealized Gain (Loss)
on Investments......................... 0.90 (0.29) 0.55 0.45 (0.40) 0.18
---------- ---------- ---------- ---------- ---------- ------
Total from Investment Operations.... 1.59 (0.15) 1.08 0.61 0.14 0.66
---------- ---------- ---------- ---------- ---------- ------
DISTRIBUTIONS
Net Investment Income................. (0.79) -- (0.27) -- (0.30) (0.60)
In Excess of Net Investment Income.... (0.22) -- -- -- -- --
Net Realized Gain..................... (0.16) -- (0.01) -- -- --
---------- ---------- ---------- ---------- ---------- ------
Total Distributions................. (1.17) -- (0.28) -- (0.30) (0.60)
---------- ---------- ---------- ---------- ---------- ------
NET ASSET VALUE, END OF PERIOD.......... $ 11.68 $ 11.26 $ 11.41 $ 10.61 $ 11.13 $11.29
---------- ---------- ---------- ---------- ---------- ------
---------- ---------- ---------- ---------- ---------- ------
TOTAL RETURN............................ 15.34% (1.31)% 10.29% 6.1% 1.29% 6.12%
---------- ---------- ---------- ---------- ---------- ------
---------- ---------- ---------- ---------- ---------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).......................... $ 172,468 $ 92,897 $ 94,847 $ 28,236 $ 366 $1,559
Ratio of Expenses to Average Net
Assets (1)........................... 0.50% 0.50%** 0.50% 0.50%** 0.65% 0.65%**
Ratio of Net Investment Income to
Average Net Assets (1)............... 5.99% 6.99%** 6.92% 7.24%** 4.88% 5.28%**
Portfolio Turnover Rate............... 108% 9% 144% 20% 116% 258%
- ----------------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net investment
income............................ $0.02 $0.01 $0.03 $0.02 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets..... 0.70% 0.90%** 0.86% 1.62%** 0.86% 0.86%**
Net Investment Income to Average
Net Assets........................ 5.79% 6.59%** 6.56% 6.12%** 4.68% 5.08%**
</TABLE>

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

* Commencement of operations

** Annualized

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

++ Per share amounts for the period ended December 31, 1997 are based on
average shares outstanding.

8
<PAGE>
HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------

YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 10.91 $ 10.46 $ 9.55 $ 11.16
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)..... 1.00 1.03 1.14 0.97
Net Realized and Unrealized
Gain (Loss) on
Investments................ 0.67 0.47 0.97 (1.40)
---------- ---------- ---------- ----------
Total from Investment
Operations............... 1.67 1.50 2.11 (0.43)
---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income....... (1.00) (1.05) (1.20) (0.97)
In Excess of Net Investment
Income..................... -- (0.00)+ -- --
Net Realized Gain........... -- -- -- (0.21)
---------- ---------- ---------- ----------
Total Distributions....... (1.00) (1.05) (1.20) (1.18)
---------- ---------- ---------- ----------
NET ASSET VALUE, END OF
PERIOD....................... $ 11.58 $ 10.91 $ 10.46 $ 9.55
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
TOTAL RETURN.................. 15.87% 15.01% 23.35% (4.18)%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $ 113,006 $ 95,663 $ 62,245 $ 97,223
Ratio of Expenses to Average
Net Assets (1)............. 0.69% 0.75% 0.75% 0.75%
Ratio of Net Investment
Income to Average Net
Assets (1)................. 8.70% 9.78% 11.09% 9.42%
Portfolio Turnover Rate..... 111% 117% 90% 74%
- ----------------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income....... N/A $0.01 $0.01 $0.001
Ratios before expense
limitation:
Expenses to Average Net
Assets.................. N/A 0.82% 0.83% 0.76%
Net Investment Income to
Average Net Assets...... N/A 9.71% 11.01% 9.41%

<CAPTION>
CLASS B
-----------------------
PERIOD PERIOD
FROM FROM
TWO MONTHS SEPT. 28, JAN. 2,
ENDED 1992* TO YEAR ENDED 1996*** TO
DEC. 31, OCT. 31, DEC. 31, DEC. 31,
1993 1992 1992 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 9.95 $ 9.77 $ 10.00 $ 10.90 $ 10.49
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)..... 0.90 0.14 0.08 0.97 0.98
Net Realized and Unrealized
Gain (Loss) on
Investments................ 1.21 0.19 (0.31) 0.65 0.45
---------- ---------- ---------- ---------- ----------
Total from Investment
Operations............... 2.11 0.33 (0.23) 1.62 1.43
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income....... (0.90) (0.15) -- (0.96) (1.02)
In Excess of Net Investment
Income..................... -- -- -- -- --
Net Realized Gain........... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions....... (0.90) (0.15) -- (0.96) (1.02)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF
PERIOD....................... $ 11.16 $ 9.95 $ 9.77 $ 11.56 $ 10.90
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN.................. 22.11% 3.41% (2.30)% 15.48% 14.37%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $ 74,500 $ 20,194 $ 16,950 $ 7,213 $ 5,665
Ratio of Expenses to Average
Net Assets (1)............. 0.75% 0.75%** 0.75%** 0.93% 1.00%**
Ratio of Net Investment
Income to Average Net
Assets (1)................. 8.70% 8.96%** 9.89%** 8.48% 9.49%**
Portfolio Turnover Rate..... 104% 24% 9% 111% 117%
- ----------------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income....... $0.02 $0.01 $0.01 N/A $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets.................. 0.96% 1.62%** 1.23%** N/A 1.05%**
Net Investment Income to
Average Net Assets...... 8.49% 8.09%** 9.41%** N/A 9.44%**
</TABLE>

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

* Commencement of operations

** Annualized

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

+ Amount is less than $0.01 per share.

9
<PAGE>
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 Class B shares, except for
the International Small Cap and Municipal Money Market Portfolios which offer
only Class A 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 SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.

- 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.

- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.

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 ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.

- 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 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.

10
<PAGE>
- The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
in the European real estate industry.

- 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.

- 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 JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.

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 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 TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
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
Standard & Poor's 500 Index ("S&P 500").

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.

11
<PAGE>
- 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.

MONEY MARKET:

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

INVESTMENT MANAGEMENT

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. The Distributor
has agreed to waive 0.10% of the 0.25% 12b-1 fee with respect to the Global
Fixed Income Portfolio. The minimum initial investment, generally, is $500,000
for Class A shares of each Portfolio and $100,000 for 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 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 or

12
<PAGE>
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" and "Redemption of Shares."

RISK FACTORS

- EQUITY SECURITIES. The Small Cap Value Equity, Value Equity and Balanced
Portfolios invest primarily in equity securities. Prices of equity
securities fluctuate in response to many factors, including the financial
health of the issuer and changes in economic and market conditions.

- FIXED INCOME SECURITIES. The Balanced, Global Fixed Income and High Yield
Portfolios will be subject to credit risk and market risk associated with
investment in fixed income securities. Credit risk is the possibility that
an issuer may be unable to meet scheduled principal and interest payments.
Market risk is the possibility that a change in interest rates or the
market's perception of the issuer's prospects may adversely affect the
value of a fixed income security.

- HIGH YIELD SECURITIES. The High Yield Portfolio may invest in lower rated
and unrated fixed income securities (i.e., high yield or high risk
securities), which are often issued by smaller or less creditworthy
companies. High yield securities generally are subject to greater market
risk and credit risk than other fixed income securities.

- MORTGAGE-BACKED SECURITIES. The Balanced and High Yield Portfolios may
invest in mortgage-backed securities. Mortgage-backed securities represent
an interest in a pool of underlying mortgage loans. They are sensitive to
changes in interest rates, but may respond to these changes in a manner
different from other fixed income securities due to the possiblity of
prepayment of the underlying mortgage loans. As a result, it is not
possible to determine in advance the actual maturity date or average life
of a mortgage-backed security. Rising interest rates tend to discourage
refinancings, with the result that the average life and volatility of the
security will increase and its market price will decrease. When interest
rates fall, mortgage-backed securities may not gain as much in market
value because additional mortgage prepayments must be reinvested at lower
interest rates.

- FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.

- EMERGING MARKET COUNTRY SECURITIES. The High Yield Portfolio may invest in
emerging market country securities which entail risks typically associated
with investment in more established foreign markets. However, these risks
may be intensified due to higher volatility and less liquidity of emerging
markets, possible political risks associated with the country of issuance
and generally weaker financial condition of issuers in these markets.

13
<PAGE>
- DERIVATIVES. Each Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in
which they are traded and, therefore, may or may not serve their intended
purposes.

For additional information about risk factors, see also "Investment
Objectives and Policies" and "Additional Investment Information."

14
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES

The investment objective of each Portfolio is described below, together with
the policies each Portfolio employs in its efforts to achieve its objective.
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 a Portfolio will attain its objective. 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" and as described under "Investment Objectives and
Policies" in the Statement of Additional Information. The investment policies
described below are not fundamental policies unless otherwise noted and may be
changed without shareholder approval.

THE SMALL CAP VALUE EQUITY PORTFOLIO

The investment objective of the Small Cap Value Equity Portfolio is to
provide high long-term total return by investing in equity securities of small-
to medium-sized corporations that the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase. The Portfolio
invests primarily in corporations domiciled in the United States with equity
market capitalizations in the range of the companies represented in the Russell
2500 Small Company Index, and may also invest in similar sized foreign
companies. Such range is approximately $70 million to $1.3 billion, but the
range fluctuates over time with the equity market. Under normal circumstances,
the Fund will invest at least 65% of the value of its total assets in equity
securities of issuers whose market capitalizations are within the range
represented in the Index. With respect to the Portfolio, equity securities
include common and preferred stocks, convertible securities, rights and warrants
to purchase common stocks, and similar equity interests, such as trusts or
partnership interests. These investments may or may not carry voting rights. The
Portfolio may invest in equity securities of foreign issuers that trade on a
U.S. exchange, over-the-counter or in the form of Depositary Receipts.

Companies considered attractive will have the following characteristics; (i)
the market prices of the stocks will be undervalued relative to the normal
earning power of the companies; (ii) stock prices will be low relative to the
intrinsic value of the companies' assets; (iii) stocks will most often have
yields distinctly above the average of companies with similar capitalizations;
and (iv) stocks will be of high quality, in the Adviser's judgment, as evaluated
by the companies' balance sheets, income statements, franchises and product
competitiveness. The thrust of this approach is to seek investments in stocks
for which investor enthusiasm is currently low, as reflected in their valuation,
but which have the financial and fundamental features, which, in the Adviser's
opinion, will allow the stocks to achieve a higher valuation. Value is achieved
and the Portfolio reduces its holdings in a security when the investment
community's perception of the issuer improves and the price approaches what the
Adviser believes is a fair valuation.

THE VALUE EQUITY PORTFOLIO

The investment objective of the Value Equity Portfolio is to achieve high
total return (i.e., long-term growth of capital and high current income) by
investing in equity securities that the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase. The Portfolio
invests primarily in equity securities of large capitalization companies, mainly
those domiciled in the United States. With respect to the Portfolio, equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to

15
<PAGE>
purchase common stocks. Under normal circumstances, the Portfolio will invest at
least 65% of the value of its total assets in equity securities. The Portfolio
may invest up to 25% of its total assets in the equity securities of foreign
issuers, and in Depositary Receipts for such securities.

The Adviser invests with the philosophy that a diversified portfolio of
undervalued equity securities will outperform the market over the long term, as
well as preserve principal in difficult market environments. Companies
considered attractive will have the following characteristics: (i) stocks most
often will have distinctly above-average dividend yields; (ii) the market prices
of the stocks will be undervalued relative to the normal earning power of the
company; (iii) many stocks will sell at close to or below the replacement value
of their assets; and (iv) most stocks' market prices will have underperformed
the general market due to a lower level of investor expectations regarding the
company outlook. The thrust of this approach is to seek investments where
current investor enthusiasm is low, as reflected in their valuations. Value is
achieved and the Portfolio reduces its holdings in a security when the
investment community's perception of the issuer improves and the price
approaches what the Adviser believes is a fair valuation.

THE BALANCED PORTFOLIO

The investment objective of the Balanced Portfolio is to achieve high total
return while preserving capital by investing in a combination of undervalued
equity securities and fixed income securities. The Portfolio seeks strong total
return in all market conditions, with a special emphasis on minimizing interim
declines during falling equity markets. It primarily invests in large
capitalization equity securities, intermediate-maturity bonds and cash
equivalents.

The Adviser uses a value-driven balanced portfolio philosophy which combines
separate equity, fixed income and asset allocation strategies. The equity
investment approach is the same as that used for the Value Equity Portfolio.
This produces a portfolio of stocks with low price-to-earnings and price-to-book
ratios and high dividend yields. The fixed income strategy values bonds using
historical yield differentials. Fixed income securities in which the Portfolio
may invest include U.S. Governmental securities, mortgage-backed securities,
corporate bonds, bank obligations and short-term money market instruments. The
asset allocation strategy shifts the stock/fixed income/cash equivalent mix
relative to calculated risk and return levels. All three strategies use
historical capital market behavior to reach conclusions.

The Portfolio will typically maintain between 35% and 65% of its total
assets invested in equity securities, depending upon the Adviser's assessment of
market conditions. In overvalued equity markets, the common stock exposure will
be at the low end of this range. It is expected that equity exposure will
average approximately 55% over time. With respect to the Portfolio, equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks. The average maturity of the fixed
income securities held by the Portfolio will, under normal circumstances, be
approximately five years, although this will vary with changing market
conditions. Up to 25% of the Portfolio's total assets may be invested in the
securities of foreign issuers.

THE GLOBAL FIXED INCOME PORTFOLIO

The Global Fixed Income Portfolio seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities of
U.S. and foreign issuers denominated in U.S. dollars and in other currencies.
The Portfolio seeks to achieve its objective by investing in U.S. Government
securities, foreign government securities, securities of supranational entities,
Eurobonds, and corporate bonds with varying

16
<PAGE>
maturities. In selecting portfolio securities, the Adviser evaluates the
currency, market, and individual features of the securities being considered for
investment. Under normal circumstances, at least 65% of the total assets of the
Portfolio will be invested in fixed income securities.

The Adviser seeks to minimize investment risk by investing only in debt
securities that meet the Portfolio's quality requirements. U.S. Government
securities that the Portfolio may invest in include obligations issued by the
U.S. Government, such as U.S. Treasury securities, as well as those guaranteed
or backed by the full faith and credit of the United States, such as obligations
of the Government National Mortgage Association and The Export-Import Bank. The
Portfolio may also invest in obligations issued or guaranteed by U.S. Government
agencies or instrumentalities where the Portfolio must look principally to the
issuing or guaranteeing agency for ultimate repayment. The Portfolio may invest
in obligations issued or guaranteed by foreign governments and their political
subdivisions, authorities, agencies or instrumentalities, and by supranational
entities (such as the World Bank, The European Economic Community, The Asian
Development Bank and the European Coal and Steel Community). The Portfolio may
invest in foreign government securities of developed nations which the Adviser
believes pose limited credit risk. The Portfolio may also invest in government
securities of other countries and corporate and supranational obligations rated
A or better by Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") or IBCA Ltd. or, if unrated, those that are of comparable
quality in the determination of the Adviser.

The Adviser's approach to multicurrency fixed income management is strategic
and value-based and designed to produce an attractive real rate of return. The
Adviser's assessment of bond markets and currencies is based on an analysis of
real interest rates. Current nominal yields of securities are adjusted for
inflation prevailing in each currency sector using an analysis of past and
projected inflation rates. The Portfolio's aim is to invest in bond markets
which offer the most attractive real returns.

The Portfolio will have a neutral investment position in medium-term
securities (I.E., those with a remaining maturity of between three and seven
years) and will respond to changing interest rate levels by shortening or
lengthening portfolio maturity through investment in longer- or shorter-term
instruments. For example, the Portfolio will respond to high levels of real
interest rates through a lengthening in portfolio maturity. Current and
historical yield spreads among the three main market segments -- the Government,
Foreign and Euro markets -- guide the Adviser's selection of markets and
particular securities within those markets. The analysis of currencies is made
independent of the analysis of markets. Value in foreign exchange is determined
by relative purchasing power parity of a given currency. The Portfolio seeks to
invest in currencies currently undervalued based on purchasing power parity. The
Adviser analyzes current account and capital account performance and real
interest rates to adjust for shorter-term currency flows.

THE HIGH YIELD PORTFOLIO

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 Portfolio normally invests
between 80% and 100% of its total assets in these higher yielding securities,
which generally entails increased credit and market risk. To mitigate these
risks the Portfolio will diversify its holdings by issuer, industry and credit
quality, but investors should carefully review the section below entitled "Risk
Factors Relating to Investing in High Yield Securities."

17
<PAGE>
Appendix A to this Prospectus sets forth a description of the corporate bond
rating categories of Moody's and S&P. Corporate bonds rated below Baa by Moody's
or BBB by S&P are considered speculative. Securities in the lowest rating
categories may have predominantly speculative characteristics or may be in
default. Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, although the Adviser will
consider ratings, it will perform its own analysis of credit risk and market
risk and will not rely principally on ratings. In its selection of securities
for the Portfolio, the Adviser will consider, among other things, the price of
the security and the issuer's financial history and condition as well as the
prospects and the management of the issuer. The Portfolio may buy unrated high
yield securities consistent with the Portfolio's objective and policies. The
Adviser may vary the average maturity of the securities in the Portfolio without
limit and there is no restriction on the maturity of any individual security.

The Portfolio may acquire fixed income securities of both U.S. and foreign
issuers, including debt obligations (e.g., bonds, debentures, notes, equipment
lease certificates, equipment trust certificates, conditional sales contracts,
commercial paper and obligations issued or guaranteed by the U.S. Government,
any foreign government with which the United States maintains relations or any
of their respective political subdivisions, agencies or instrumentalities) and
preferred stock. The Portfolio's fixed income securities may have equity
features such as conversion rights or warrants, and the Portfolio may invest in
equity securities other than preferred stock (e.g., common stocks, warrants and
rights and limited partnership interests). The Portfolio may not invest more
than 5% of its total assets at time of acquisition in limited partnership
interests. The Portfolio may invest in fixed income securities that are
investment grade (i.e., rated in one of the top four categories or comparable)
and have maturities of one year or less. The Portfolio may invest in or own
securities of companies in various stages of financial restructuring, bankruptcy
or reorganization which are not currently paying interest or dividends; the
total value, at time of purchase, of the sum of all such securities will not
exceed 10% of the value of the Portfolio's total assets.

The table below provides a summary of ratings assigned by S&P to debt
obligations in the High Yield Portfolio. These figures are dollar-weighted
averages of month-end portfolio holdings during the fiscal year ended December
31, 1997, presented as a percentage of total investments. These percentages are
historical and are not necessarily indicative of the quality of current or
future portfolio holdings, which may vary.

<TABLE>
<CAPTION>
S&P
- ----------------
AVERAGE
PERCENT
OF
PORTFOLIO
RATING HOLDINGS
- ------- -------
<S> <C>
AAA 9.82%
AA 0.00%
A 0.00%
BBB 1.18%
BB 39.32%
B 37.94%
CCC 6.15%
CC 0.00%
Unrated 5.59%
</TABLE>

18
<PAGE>
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Lower rated or
unrated (i.e., high yield) securities are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
primarily react inversely to movements in the general level of interest rates.
Yields and market values of high yield securities, however, reflect not only
changing interest rates, but the market's perception of credit quality and the
outlook for economic growth. When economic conditions appear to be
deteriorating, medium to lower rated securities may decline in value due to
heightened concern over credit quality, regardless of prevailing interest rates.
Investors should carefully consider the relative risks of investing in high
yield securities and understand that such securities are not generally meant for
short-term investing.

The high yield market is still relatively new and its recent growth
parallels a long period of economic expansion and an increase in merger,
acquisition and leveraged buyout activity. Adverse economic developments may
disrupt the market for high yield securities, and severely affect the ability of
issuers, especially highly leveraged issuers, to service their debt obligations
or to repay their obligations upon maturity. In addition, the secondary market
for high yield securities, which is concentrated in relatively few market
makers, may not be as liquid as the secondary market for more highly rated
securities. As a result, the Adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Under these circumstances, prices realized
upon the sale of lower rated or unrated securities may be less than the prices
used in calculating the Portfolio's net asset value. Prices for high yield
securities may be affected by legislative and regulatory developments. These
developments could adversely affect the Portfolio's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities.

Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Portfolio
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of high yield
securities.

ADDITIONAL INVESTMENT INFORMATION

DEPOSITARY RECEIPTS. Each Portfolio, except the Global Fixed Income and
High Yield Portfolios, is permitted to 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 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

19
<PAGE>
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. Each Portfolio, except the Small Cap Value Equity
and Value Equity Portfolios, will invest in fixed income (debt) securities. The
market value of the fixed income securities in which a Portfolio invests will be
affected by changes in the creditworthiness of issuers and will change in
response to interest rate changes and other factors. Generally, the values of
fixed income securities vary inversely with changes in interest rates, so that
during periods of falling interest rates, the values of outstanding fixed income
securities generally rise and during periods of rising interest rates, the
values of such securities generally decline. While securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are subject to greater market fluctuations as a result of changes in
interest rates.

FOREIGN CURRENCY FORWARD CONTRACTS. Each Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. Forward contracts may also be used as a protective
measure against the effects of fluctuating rates of currency exchange and
exchange control regulations. While forward contracts may limit losses as a
result of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
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 at least equal to the amount of
the Portfolio's commitments with respect to such contracts.

FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may 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 trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. 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. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since a
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the value of a Portfolio's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations, and a Portfolio may incur costs in connection with
conversions between various currencies.

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<PAGE>
The High Yield Portfolio may also invest in emerging market country
securities. Investing in emerging markets entails the risks associated with
foreign investment described above, however, these risks may be intensified in
emerging markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe. Certain emerging market countries have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
trade difficulties and unemployment. Further, the economies of developing
countries generally are heavily dependent upon international trade and,
accordingly, have been, and may continue to be, adversely affected by trade
barriers, exchange controls and other protectionist measures imposed or
negotiated by the countries in which they trade. There also are risks associated
with the possibility of nationalization, expropriation or confiscatory taxation,
political changes, government regulation, social instability or diplomatic
developments (including war) that could adversely affect the economies of such
countries or the value of a Portfolio's investments in those countries.

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 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 the Portfolio's
total assets. Securities lending entails certain risks of delay in recovery or
loss of rights in collateral in the event of the insolvency of the borrower.

MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objective 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, commercial paper, bank
obligations (including certificates of deposit), other debt securities and
repurchase agreements.

MORTGAGE-BACKED SECURITIES. The Balanced and High Yield Portfolios may
invest in mortgage-backed securities. Mortgage-backed securities, directly or
indirectly, represent an interest in a pool of mortgage loans on real property.
The Portfolios generally will invest in two types of mortgage-backed securities.
Mortgage pass-through securities represent a direct interest in a group of loans
that has been pooled and the loan payments passed through to security holders.
Collateralized mortgage obligations ("CMOs") are fixed income securities that,
rather than representing a direct interest in a pool of underlying mortgage
loans, are collateralized by the underlying loans. The indirect ownership
structure enables issuers to offer CMOs with a number of different classes, or
tranches, having particular risk/return characteristics.

The loans may be pooled by a government agency or instrumentality, such as
the Government National Mortgage Association, which packages the loans and
guarantees repayment of principal and/or interest on the underlying loans. The
agencies or instrumentalities pooling and guaranteeing such loans may or may not
be backed by the full faith and credit of the U.S. Government. Mortgage-backed
securities also may be issued by private originators of or investors in mortgage
loans and structured similarly to governmental pass-through

21
<PAGE>
securities. Because privately issued securities typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
they often are structured with one or more types of credit enhancement.

NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolios may invest in securities that are neither listed on
a stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolio or less than what may be
considered the fair value of such securities. 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, a Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Also, as a general matter, the Portfolio may
not invest more than 10% of its total assets in securities that are restricted
from sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, the Portfolio may
invest without limit in liquid Restricted Securities that can be offered and
sold to qualified institutional buyers under Rule 144A under the 1933 Act ("Rule
144A Securities"). 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.

REPURCHASE AGREEMENTS. Each Portfolio 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. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. Each 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

22
<PAGE>
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.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio 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. Each Portfolio will
maintain with the Custodian a segregated account 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 a Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if the general level of
interest rates has changed. It is a current policy of each Portfolio not to
enter into when-issued commitments and delayed delivery 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.

ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. The High Yield
Portfolio may invest in zero coupon, pay-in-kind or deferred payment securities.
Zero coupon securities are securities that are sold at a discount to par value
and securities on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received "phantom income" annually. Because
the Portfolio will distribute its "phantom income" to shareholders, to the
extent that shareholders elect to receive dividends in cash rather than
reinvesting such dividends in additional shares of the Portfolio, it will have
fewer assets with which to purchase income producing securities. The Portfolio
accrues income with respect to these securities prior to the receipt of cash
payments. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.

DERIVATIVE PRODUCTS (DERIVATIVES)

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<PAGE>
collars and floors; structured notes; and other derivative products yet to be
developed, so long as these new products are used in a manner consistent with
the objectives of the Portfolios. These derivative products may be based upon a
wide variety of underlying rates, indices, instruments, securities and other
products, such as interest rates, foreign currencies, foreign and domestic fixed
income and equity securities, groups or "baskets" of securities and securities
indices (for each derivative product, the "underlying"). Exclusive of forward
foreign currency contracts and any derivative products used for hedging
purposes, each Portfolio will limit its use of derivative products to 33 1/3% of
its total assets, measured by the aggregate notional amount of outstanding
derivative products.

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

FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)

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

24
<PAGE>
In some cases, the Portfolios may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolios will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolios may utilize futures contracts, forward contracts and related options
are as follows:

OPTION TRANSACTIONS

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

25
<PAGE>
Each Portfolio may purchase put and call options. Purchasing a put option
gives a Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives a Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.

INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS

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

26
<PAGE>
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.

STRUCTURED NOTES

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

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<PAGE>
INVESTMENT LIMITATIONS

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

The Global Fixed Income Portfolio is a non-diversified investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), which
means the Global Fixed Income Portfolio is not limited by the 1940 Act in the
proportion of its total assets that may be invested in the obligations of a
single issuer. Thus, the Global Fixed Income Portfolio may invest a greater
proportion of its total 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. Nevertheless, the Global Fixed Income Portfolio intends to comply
with the more limited diversification requirements imposed by the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.

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 the terms of the Investment Advisory Agreement. The Adviser has
voluntarily 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
MANAGEMENT ----------------------------
PORTFOLIO FEE CLASS A CLASS B
- ------------------------------------ ------------ ------------- -------------
<S> <C> <C> <C>
Small Cap Value Equity Portfolio 0.85% 1.00% 1.25%
Value Equity Portfolio 0.50% 0.70% 0.95%
Balanced Portfolio 0.50% 0.70% 0.95%
Global Fixed Income 0.40% 0.50% 0.65%
High Yield 0.375% 0.75% 1.00%
</TABLE>

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<PAGE>
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 & Co. ("MSDW") is the
direct parent of the Adviser and Morgan Stanley. MSDW is a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses -- securities, asset management and credit services. At
March 31, 1998, the Adviser, together with its affiliated institutional asset
management companies managed assets of approximately $166 billion, including
assets under fiduciary advice. 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:

SMALL CAP VALUE EQUITY PORTFOLIO -- WILLIAM B. GERLACH AND GARY G.
SCHLARBAUM. William B. Gerlach joined the Adviser in July 1996 and has worked
with the Adviser's affiliate, Miller Anderson & Sherrerd, LLP ("MAS") since
1991. Previously, he was with Alphametrics Corporation and Wharton Econometric
Forecasting Associates. Mr. Gerlach received a B.A. in Economics from Haverford
College. Gary G. Schlarbaum, a Managing Director of Morgan Stanley, joined MAS
in 1987. He assumed responsibility for the MAS Funds Equity and Small Cap Value
Portfolios in 1987, the MAS Funds Balanced Portfolio in 1992 and the MAS Funds
Multi-Asset-Class and Mid Cap Value Portfolios in 1994. Mr. Schlarbaum also is a
Director of MAS Fund Distribution, Inc. Previously, he was with First Chicago
Investment Advisers and was a Professor at the Krannert Graduate School at
Purdue University. Mr. Schlarbaum holds a B.A. in Economics from Coe College and
a Ph.D. in Applied Economics from University of Pennsylvania. Mr. Gerlach and
Mr. Schlarbaum have had primary responsibility for managing the Small Cap Value
Equity Portfolio since June 1997.

VALUE EQUITY AND BALANCED PORTFOLIOS -- STEPHEN C. SEXAUER AND PHILIP W.
FRIEDMAN. Stephen C. Sexauer is a Principal of Morgan Stanley and the Adviser
and is a member of the investment management team of the Adviser. In addition to
portfolio management, his equity research responsibilities include financials,
energy, utilities and technology. Mr. Sexauer joined the firm in July 1989 after
three years as a Vice President at Salomon Brothers. Previously, he was with
Merrill Lynch Economics and Wharton Econometrics. Mr. Sexauer received a B.S. in
Economics from the University of Illinois and an M.B.A. in Economics and
Statistics from the University of Chicago. Philip W. Friedman is a Managing
Director of Morgan Stanley and the Adviser and is a member of the investment
management team of the Adviser. In addition to portfolio management, his equity
research responsibilities include business equipment and services, capital
goods, consumer durables, multi-industry and transportation. Prior to joining
the Adviser in 1997, he was the North American Director of Equity Research at
Morgan Stanley. From 1990 to 1995, he was a member of Morgan Stanley's Equity
Research team. Mr. Friedman graduated from Rutgers University with a B.A. (PHI
BETA KAPPA AND SUMMA CUM LAUDE) in Economics. He also holds an M.B.A. from J.L.
Kellogg School of Management at Northwestern University. Mr. Sexauer and Mr.
Friedman have had primary responsibility for managing the Value Equity Portfolio
since January 1992 and July 1997, respectively. Mr. Sexauer and Mr. Friedman
have had primary responsibility for managing the Balanced Portfolio since
February 1990 and July 1997, respectively.

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<PAGE>
GLOBAL FIXED INCOME PORTFOLIO -- J. DAVID GERMANY, MICHAEL B. KUSHMA, PAUL
F. O'BRIEN, ROBERT M. SMITH AND RICHARD B. WORLEY. J. David Germany joined the
Adviser in 1996 and has been a portfolio manager with MAS since 1991. He was
Vice President & Senior Economist for Morgan Stanley from 1989 to 1991. He
assumed responsibility for the Global Fixed Income and International Fixed
Income Portfolios of the MAS-advised MAS Funds in 1993 and the MAS Funds
Multi-Asset-Class Portfolio in 1994. Mr. Germany was Senior Staff Economist
(International Finance and Macroeconomics) to the Council of Economic Advisers
- -- Executive Office of the President from 1986 through 1987 and an Economist
with the Board of Governors of the Federal Reserve System -- Division of
International Finance from 1983 through 1987. He holds an A.B. degree
(Valedictorian) from Princeton University and a Ph.D. in Economics from the
Massachusetts Institute of Technology. Michael B. Kushma, a Principal at Morgan
Stanley, joined the firm in 1987. He was a member of Morgan Stanley's global
fixed income strategy group in the fixed income division from 1987 to 1995,
where he became the division's senior government bond strategist. He joined the
Adviser in 1995, where he took responsibility for global fixed income bond
strategy. Mr. Kushma received an A.B. in economics from Princeton University in
1979, and an M.Sc. in economics from Columbia University in 1983. Paul F.
O'Brien joined the Adviser and MAS in 1996. He was head of European Economics
from 1993 through 1995 for JP Morgan and a Principal Administrator from 1991
through 1992 for the Organization for Economic Cooperation and Development. He
assumed responsibility for the MAS-advised MAS Funds Global Fixed Income and
International Fixed Income Portfolios in 1996. Mr. O'Brien holds a B.S. degree
from the Massachusetts Institute of Technology and a Ph.D. in Economics from the
University of Minnesota. Robert M. Smith, a Principal of Morgan Stanley, joined
the Adviser in June 1994. Prior to joining the Adviser, he spent eight years as
Senior Portfolio Manager -- Fixed Income at the State of Florida Pension Fund.
Mr. Smith's responsibilities included active total rate of return management of
long-term portfolios and supervision of other fixed income managers. A graduate
of Florida State University with a B.S. in Business, Mr. Smith also received an
M.B.A. -- Finance from Florida State and holds a Chartered Financial Analyst
(CFA) designation. Richard B. Worley, a Managing Director of Morgan Stanley,
joined MAS in 1978. He assumed responsibility for the MAS Funds Fixed Income
Portfolio in 1984, the MAS Funds Domestic Fixed Income Portfolio in 1987, the
MAS Funds Fixed Income Portfolio II in 1990, the MAS Funds Balanced and Special
Purpose Fixed Income Portfolios in 1992, the MAS Funds Global Fixed Income and
International Fixed Income Portfolios in 1993 and the MAS Funds
Multi-Asset-Class Portfolio in 1994. Mr. Worley received a B.A. in Economics
from University of Tennessee and attended the Graduate School of Economics at
University of Texas. J. David Germany, Michael B. Kushma, Paul F. O'Brien,
Robert M. Smith and Richard B. Worley have had primary responsibility for
managing the Global Fixed Income Portfolio since September 1997.

HIGH YIELD PORTFOLIO -- ROBERT ANGEVINE, THOMAS L. BENNETT AND STEPHEN F.
ESSER. Robert Angevine is a Principal of the Adviser and the Portfolio Manager
for high yield investments. Prior to joining the Adviser in October 1988, he
spent over eight years at Prudential Insurance where he was responsible for one
of the largest open-end high yield mutual fund in the country. Mr. Angevine also
manages high yield assets for one of the largest corporate pension funds in the
country. His other experience includes international treasury operations at a
major pharmaceutical company and commercial banking. Mr. Angevine received an
M.B.A from Fairleigh Dickinson University and a B.A. in Economics from Lafayette
College. He served two years as a Lieutenant in the U.S. Army. Mr. Angevine has
had primary responsibility for managing the Portfolio's assets since its
inception. Thomas L. Bennett joined the Adviser in 1996 and has been a portfolio
manager with MAS since 1984. Mr. Bennett assumed responsibility for the
MAS-advised MAS Funds' Fixed Income Portfolio in 1984, the

30
<PAGE>
Domestic Fixed Income Portfolio in 1987, the High Yield Portfolio in 1985, the
Fixed Income Portfolio II in 1990, the Special Purpose Fixed Income and Balanced
Portfolios in 1992 and the Multi-Asset-Class Portfolio in 1994. Mr. Bennett also
is the Chairman of the MAS Funds and has a B.S degree (Chemistry) and an M.B.A.
from the University of Cincinnati. Stephen F. Esser joined the Adviser in 1996
and has been a portfolio manager with MAS since 1988. He assumed responsibility
for the MAS-advised MAS Funds' High Yield Portfolio in 1989. Mr. Esser is a
member of the New York Society of Security Analysts and has a B.S. degree (SUMMA
CUM LAUDE; PHI BETA KAPPA) from the University of Delaware. Mr. Bennett and Mr.
Esser have had primary responsibility for managing the Portfolio's assets since
April 1996.

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.

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 compensation
from each Portfolio, which is accrued daily and paid quarterly, equal to 0.25%
of the Class B shares' average daily net assets on an annualized basis. Each
Plan is designed to compensate the Distributor for its services in connection
with distribution assistance. The Distributor may retain any portion of the fee
that it does not expend in meeting its obligations to the Fund. The Distributor
may compensate financial intermediaries, plan fiduciaries and adminsitrators for
providing distribution-related services, including account

31
<PAGE>
maintenance services, to shareholders (including, where applicable, underlying
beneficial owners) of Class B shares. The Distributor has agreed to waive 0.10%
of the 0.25% distribution fee it is entitled to receive from the Global Fixed
Income Portfolio.

YEAR 2000. The management and distribution services provided to the Fund by
the Adviser and Morgan Stanley depend on the smooth functioning of their
computer systems. Many computer software systems in use today cannot recognize
the year 2000, but revert to 1900 or some other date, due to the manner in which
dates were encoded and calculated. That failure could have a negative impact on
the handling of securities trades, pricing and account services. The Adviser and
Morgan Stanley have been actively working on necessary changes to their own
computer systems to deal with the year 2000 problem and expect that their
systems will be adapted before that date. There can be no assurance, however,
that they will be successful. In addition, other unaffiliated service providers
may be faced with similar problems. The Adviser and Morgan Stanley are
monitoring their remedial efforts, however, there can be no assurance that they
and the services they provide will not be adversely affected.

PURCHASE OF SHARES

Class A shares of each Portfolio and Class B shares of each Portfolio may be
purchased at the net asset value per share next determined after receipt by the
Fund of a purchase order as described under "Methods of Purchase." The net asset
value per share of each Portfolio is calculated on days that the New York Stock
Exchange ("NYSE") and Chase (the "Custodian") are open for business as of the
close of trading of the NYSE, normally 4:00 p.m. Eastern Time (the "Pricing
Time").

MINIMUM INVESTMENT

The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of each Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. 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.

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<PAGE>
METHODS OF PURCHASE

Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolios by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or 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.

FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian are open for business. Your
bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:

1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.

2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:

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

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

When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at the net asset value next
determined. Certain institutional investors and financial institutions have
entered into an arrangement with Morgan Stanley, pursuant to which they may
place orders prior to the Pricing Time, but make payment in Federal Funds for
those shares on the following business day.

BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the wire, money transferred by bank
wire may or may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the Fund, an
investor's money will not be invested.

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<PAGE>
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:

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

The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share of each of the
Portfolios determined on the next business day after receipt. An investor's
money will not be invested prior to crediting of Federal Funds.

INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. After the Pricing Time, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for each
Portfolio as of the close of the previous business day.

ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 per
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.

INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES

Class A and Class B shares of each Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the right to modify
or terminate the conversion or redemption features of the shares at any time
upon 60 days notice to shareholders.

CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an 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 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 Class B shares. The Fund 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, conversion between
share classes is not a taxable event to the shareholder.

CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, 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 B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund

34
<PAGE>
for the purchase of such shares may not be converted. Class A shares converted
from Class B shares are subject to the same minimum account size requirements as
are applicable to New Accounts containing Class A shares described above.

REDEMPTION OF SHARES

Class A and Class B shares of each Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds 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.

METHODS OF REDEMPTION

Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.

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

1. 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;

2. Any required signature guarantees; and

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

35
<PAGE>
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.

The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at the time an account
is opened and prior to effecting each telephone transaction. 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.

FURTHER REDEMPTION INFORMATION

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

ACCOUNT POLICIES AND SERVICES

EXCHANGE FEATURES

You may exchange shares of each Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.

36
<PAGE>
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the request. Shares of the portfolios may be
exchanged by mail or telephone. The telephone exchange privilege is automatic
and made available without shareholder election. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days notice to
shareholders.

TRANSFER OF REGISTRATION

OTHER ACCOUNT INFORMATION

EXCESSIVE TRADING

37
<PAGE>
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios; and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.

INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS

Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the Portfolios used for investment by these accounts may
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the Portfolios.

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 a class, less any liabilities attributable
to such a 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 close of the NYSE
(normally 4:00 p.m. Eastern Time) 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 and for which market quotations are
not readily available are valued at a price within a 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.

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<PAGE>
The value of other assets and securities for which quotations are not
readily available (including restricted securities 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 of such currencies against the U.S.
dollar last quoted by a 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
the Small Cap Value Equity, Value Equity and Balanced Portfolios. In addition,
from time to time the Fund may advertise "yield" for the Global Fixed Income and
High Yield Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE
NOT INTENDED TO INDICATE FUTURE PERFORMANCE.

Each Portfolio 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 "yield" of the Global Fixed Income and High Yield Portfolios
refers to the income generated by an investment in the Portfolio over a month or
30-day period. This income is then annualized. That is, the amount of income
generated by the investment during that 30-day period is assumed income
generated each 30-day period for twelve periods, and is shown as a percentage of
the investment. 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 service and market indices. For further information concerning these
figures, see "Calculation of Yield and Total Return"in the Statement of
Additional Information.

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.

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
when, 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
elects 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.

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<PAGE>
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 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.

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, net short-term capital gain) 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. Such dividends paid by a Portfolio, except the High Yield and Global
Equity Portfolios, will generally qualify for the dividends-received deduction
for corporate shareholders to the extent of the aggregate qualifying dividend
income received by the Portfolio from U.S. corporations. Dividends paid by the
High Yield and Global Equity Portfolios will generally not qualify for the
dividends-received deduction for corporate shareholders.

Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long
shareholders have held their shares. Each Portfolio will send reports annually
to shareholders of the federal income tax status of all distributions made
during the preceding year.

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 gains over short-term and long-term capital
loss, including any available capital loss carry-forwards), prior to the end of
each calendar year to avoid liability for federal excise tax.

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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 sale, exchange or redemption 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 are
less than the shareholder's adjusted tax basis in the sold, exchanged or
redeemed shares. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, then the
loss is treated as a long-term capital loss to the extent of the capital gains
distributions.

Conversions of shares between classes are not taxable events to the
shareholder.

PORTFOLIO TRANSACTIONS

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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 their
respective objectives and policies. For the fiscal year ended December 31, 1997,
the Small Cap Value Equity, Global Fixed Income and High Yield Portfolios had
portfolio turnover rates of 178%, 116% and 111%, respectively. Higher portfolio
turnover (e.g., over 100%) necessarily will cause the Portfolios 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 40 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.

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 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. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as that
term is 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 and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data are 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.

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CUSTODIAN

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 its annual financial statements.

FUND COUNSEL

Morgan, Lewis & Bockius LLP acts as the Fund's legal counsel.

LITIGATION

The Fund is not involved in any litigation.

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APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS

MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:

Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." 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 Aaa securities.

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 some time 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.

Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. 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.

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.

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STANDARD & POOR'S RATINGS GROUP CORPORATE 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 they normally exhibit 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 and C -- Debt rated BB, B, CCC, CC and C 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 C 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 may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.

D -- Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.

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MORGAN STANLEY INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY, VALUE EQUITY, BALANCED, GLOBAL FIXED INCOME AND
HIGH YIELD PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798

ACCOUNT REGISTRATION FORM

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

<TABLE>
<C> <S> <C>
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 Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
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).

<CAPTION>
B)

/ / 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.
<PAGE>

<PAGE>

<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SELECTION Portfolio(s): / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 Small Cap Value Equity / / Class A Shares $ / / Class B Shares $
for each Portfolio and Class B Portfolio / / Class A Shares $ / / Class B Shares $
shares minimum $100,000 for each Value Equity Portfolio / / Class A Shares $ / / Class B Shares $
Portfolio. Please indicate Balanced Portfolio
Portfolio, class and amount. Global Fixed Income Portfolio
High Yield Portfolio
Total Initial Investment $
</TABLE>

<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and 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>
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>

/ / U.S. CITIZEN(S)/TAXPAYER(S):

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 (if joint account, both
Signature Date 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................................ 10
Investment Objectives and Policies................ 15
Additional Investment Information................. 19
Investment Limitations............................ 28
Management of the Fund............................ 28
Purchase of Shares................................ 32
Redemption of Shares.............................. 35
Account Policies and Services..................... 36
Valuation of Shares............................... 38
Performance Information........................... 39
Dividends and Capital Gains Distributions......... 39
Taxes............................................. 40
Portfolio Transactions............................ 41
General Information............................... 42
Appendix A -- Description of Corporate Bond
Ratings.......................................... 44
Account Registration Form
</TABLE>

SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
HIGH YIELD 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>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------

ACTIVE COUNTRY ALLOCATION PORTFOLIO

A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.

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

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

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, 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 May 1,
1998, 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 MAY 1, 1998.
<PAGE>
FUND EXPENSES

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

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

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
- ------------------------------------------------------------------------------------------
<S> <C>
Management Fee (Net of Fee Waiver)*
Class A................................................................................. 0.35%
Class B................................................................................. 0.35%
12b-1 Fees
Class A................................................................................. None
Class B................................................................................. 0.25%
Other Expenses
Class A................................................................................. 0.45%
Class B................................................................................. 0.45%
-----------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................. 0.80%
Class B................................................................................. 1.05%
-----------
-----------
</TABLE>

- ------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its average daily
net assets. Absent the fee waiver, the management fee would be 0.65%. Absent
the fee waiver and/or expense reimbursement, the Portfolio's total operating
expenses would be 1.10% of the average daily net assets of the Class A shares
and 1.32% of the average daily net assets of the Class B shares. As a result of
this reduction, the Management Fee stated above is lower than the contractual
fee 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."

2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1997. 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 (i) a 5% annual rate of return, and (ii) redemption
at the end of each time period. As noted in the table above, the Fund charges no
redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Active Country Allocation Portfolio
Class A.......................................................... $ 8 $ 26 $ 44 $ 99
Class B.......................................................... 11 33 58 128
</TABLE>

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 Active Country Allocation Portfolio. The audited financial
highlights for the Portfolio's shares for each of the periods in the five years
ended December 31, 1997 are part of the Fund's financial statements which appear
in the Fund's December 31, 1997 Annual Report to Shareholders and which are
incorporated by reference into the Fund's Statement of Additional Information.
The 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. After October
31, 1992 (the Fund's prior fiscal year end), the Fund changed its fiscal year
end to December 31. The following information should be read in conjunction with
the financial statements and notes thereto.

4
<PAGE>
ACTIVE COUNTRY ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS JANUARY 17,
YEAR ENDED DECEMBER 31 ENDED 1992* TO
------------------------------------------------------------------------ DECEMBER 31, OCTOBER 31,
1997++ 1996 1995 1994 1993 1992 1992
------------ ------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING
OF
PERIOD... $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------ -----------
INCOME
FROM
INVESTMENT
OPERATIONS
Net
Investment
Income (1)... 0.18 0.24 0.17 0.19 0.13 0.02 0.11
Net
Realized
and
Unrealized
Gain
(Loss)
on
Investments... 0.80 0.88 1.00 (0.25) 2.75 0.20 (0.74)
------------ ------------ ------------ ------------ ------------ ------------ -----------
Total
from
Investment
Operations... 0.98 1.12 1.17 (0.06) 2.88 0.22 (0.63)
------------ ------------ ------------ ------------ ------------ ------------ -----------
DISTRIBUTIONS
Net
Investment
Income... (0.83) (0.81) (0.25) (0.14) (0.09) -- --
In
Excess
of Net
Investment
Income.. (0.02) (0.02) (0.10) -- (0.08) -- --
Net
Realized
Gain... (1.18) (0.48) (0.84) (0.36) -- -- --
In
Excess
of Net
Realized
Gain... -- -- -- -- (0.09) -- --
------------ ------------ ------------ ------------ ------------ ------------ -----------
Total
Distributions... (2.03) (1.31) (1.19) (0.50) (0.26) -- --
------------ ------------ ------------ ------------ ------------ ------------ -----------
NET ASSET
VALUE,
END OF
PERIOD... $ 10.39 $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37
------------ ------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------ ------------ -----------
TOTAL
RETURN... 8.61% 9.71% 10.57% (0.52)% 30.72% 2.35% (6.30)%
------------ ------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------ ------------ -----------
RATIOS AND
SUPPLEMENTAL
DATA:
Net
Assets,
End of
Period
(Thousands).. $138,667 $183,193 $170,663 $182,977 $150,854 $50,234 $47,534
Ratio of
Expenses
to
Average
Net
Assets
(1).... 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%** 0.88%**
Ratio of
Net
Investment
Income
to
Average
Net
Assets (1)... 1.47% 1.22% 1.26% 1.43% 1.29% 1.22%** 2.32%**
Portfolio
Turnover
Rate... 49% 65% 72% 51% 53% 2% 62%
Average
Commission
Rate
Per
Share #.. $0.0019 $ 0.0028 N/A N/A N/A N/A N/A
- ----------------------------------
Average
Commission
Rate as
a
Percentage
of
Trade
Amount #... 0.11% 0.11% N/A N/A N/A N/A N/A

(1) Effect
of
voluntary
expense
limitation
during
the
period:
Per
share
benefit
to
net
investment
income... $0.03 $0.03 $0.05 $0.03 $0.05 $0.01 $0.03
Ratios
before
expense
limitation:
Expenses
to
Average
Net
Assets... 1.10% 1.09% 1.18% 1.00% 1.33% 1.70%** 1.58%**
Net
Investment
Income
to
Average
Net
Assets... 1.18% 0.94% 0.88% 1.23% 0.76% 0.32%** 1.62%**

<CAPTION>
CLASS B
---------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997++ 1996
------------ ------------
<S> <C> <C>
NET ASSET
VALUE,
BEGINNING
OF
PERIOD... $ 11.44 $ 11.66
------------ ------------
INCOME
FROM
INVESTMENT
OPERATIONS
Net
Investment
Income (1) 0.08 0.06
Net
Realized
and
Unrealized
Gain
(Loss)
on
Investm 0.87 1.00
------------ ------------
Total
from
Investment
Operations 0.95 1.06
------------ ------------
DISTRIBUTI
Net
Investment
Income... (0.71) (0.78)
In
Excess
of Net
Investment
Income.. (0.02) (0.02)
Net
Realized
Gain... (1.18) (0.48)
In
Excess
of Net
Realized
Gain... -- --
------------ ------------
Total
Distri (1.91) (1.28)
------------ ------------
NET ASSET
VALUE,
END OF
PERIOD... $ 10.48 $ 11.44
------------ ------------
------------ ------------
TOTAL
RETURN... 8.35% 9.22%
------------ ------------
------------ ------------
RATIOS AND
SUPPLEMENT
DATA:
Net
Assets,
End of
Period
(Thousa $14 $633
Ratio of
Expenses
to
Average
Net
Assets
(1).... 1.05% 1.05%**
Ratio of
Net
Investment
Income
to
Average
Net
Assets 0.71% 1.09%**

Portfolio
Turnover
Rate... 49% 65%
Average
Commission
Rate
Per
Share #.. $0.0019 $0.0028
- ----------
Average
Commission
Rate as
a
Percentage
of
Trade
Amount 0.11% 0.11%
(1) Effect
of
voluntary
expense
limitation
during
the
period:
Per
share
benefit
to
net
investment
income... $0.03 $0.02
Ratios
before
expense
limitat

Expenses
to
Average
Net
Assets... 1.32% 1.33%**
Net
Investment
Income
to
Average
Net
Assets... 0.45% 0.82%**
</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
commissions were charged, during the period.
++ Per share amounts for the year ended December 31, 1997 are based on average
shares outstanding.

5
<PAGE>
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 Class B shares, except the
International Small Cap and Municipal Money Market Portfolios, which offer only
Class A shares. Each portfolio has its own investment objective and policies
designed to meet its specific goals. The investment objective of the Portfolio
described in this Prospectus is as follows:

GLOBAL AND INTERNATIONAL EQUITY:

-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.

-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 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 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 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.

-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 the equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.

6
<PAGE>
-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 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 equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.

-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
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
Standard & Poor's 500 Index ("S&P 500").

-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
substantial investment in real estate investment trusts.

-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 equity securities which the Adviser believes
to be undervalued 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.

-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.

7
<PAGE>
-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 by investing in municipal
obligations, the interest on which is exempt from federal income tax.

MONEY MARKET:

-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.

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

INVESTMENT MANAGEMENT

HOW TO INVEST

Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
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. The minimum
initial investment, generally, is $500,000 for Class A shares of the Portfolio
and $100,000 for Class B shares of the 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 the Portfolio may be redeemed at any
time, without cost, at the net asset value per share 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 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" and "Redemption of Shares."

8
<PAGE>
RISK FACTORS

Investing in the Portfolio entails certain risks and considerations of which
an investor should be aware. The Portfolio's share price and investment returns
fluctuate and, when redeemed, an investment in the Portfolio may be worth more
or less than its original cost. The investment policies of the Portfolio may
entail the following risk factors:

-EQUITY SECURITIES. The Portfolio will invest in equity securities. Prices
of equity securities fluctuate in response to many factors, including the
financial health of the issuers and changes in economic and market
conditions.

-FOREIGN INVESTMENT. The Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.

-EMERGING MARKET COUNTRY SECURITIES. The Portfolio may invest in emerging
market country securities which entail risks typically associated with
investment in more established foreign markets. However, these risks may be
intensified due to higher volatility and less liquidity of emerging
markets, possible political risks associated with the country of issuance
and generally weaker financial condition of issuers in these markets.

-DERIVATIVES. The Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in which
they are traded and, therefore, may or may not serve their intended
purposes.

For additional information about risk factors, see also "Investment Objectives
and Policies" and "Additional Investment Information."

9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Portfolio is to provide 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 Adviser utilizes a top-down approach in
selecting investments for the Portfolio that emphasizes country selection and
weighting rather than individual stock selection. This approach reflects the
Adviser's philosophy that a diversified selection of securities representing
exposure to world markets, based upon the economic outlook and current valuation
levels for each country, is an effective way to maximize the return and minimize
the risk associated with international investment. The 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 Portfolio will attain its objective. The investment policies
described below are not fundamental policies unless otherwise noted and may be
changed without shareholder approval.

The Adviser determines country allocations for the Portfolio on an ongoing
basis within policy ranges dictated by each country's market capitalization and
liquidity. The Portfolio will invest in the industrialized countries throughout
the world that comprise the Morgan Stanley Capital International EAFE (Europe,
Australia and the Far East) Index. The Portfolio will not invest in the stocks
of U.S. issuers. The Portfolio will also invest in securities of issuers located
in emerging countries. With respect to the Portfolio, the term "emerging
country" applies to any country which, in the opinion of the Adviser, is
generally considered to be an emerging country by the international financial
community, including the International Bank for Reconstruction and Development
(more commonly known as the World Bank) and the International Finance
Corporation. There are currently over 150 countries which, in the opinion of the
Adviser, are generally considered to be emerging countries by the international
financial community. These countries generally include every nation in the world
except the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe. The Portfolio will focus its investments on those
emerging market countries in which it believes the economies are developing
strongly and in which the markets are becoming more sophisticated. With respect
to the portion of the Portfolio that is invested in emerging country equity
securities, the Portfolio currently intends to invest primarily in some or all
of the following countries:

<TABLE>
<S> <C>
Argentina Philippines
Brazil South Africa
India South Korea
Indonesia Thailand
Malaysia Turkey
Mexico
</TABLE>

As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging countries in which it invests. The Portfolio does
not intend to invest in any security in a country where the currency is not
freely convertible to U.S. dollars, unless the Portfolio has obtained the
necessary governmental licensing to convert such currency or other appropriately
licensed or sanctioned contractual guarantee to protect such investment against
loss of that currency's external value, or the Portfolio has a reasonable

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<PAGE>
expectation at the time the investment is made that such governmental licensing
or other appropriately licensed or sanctioned guarantee would be obtained or
that the currency in which the security is quoted would be freely convertible at
the time of any proposed sale of the security by the Portfolio.

By analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on interest rates, currencies, corporate
profits and economic growth for each country. These country projections are used
then to determine what the Adviser believes to be a fair value for the stock
market of each country. Discrepancies between actual value and fair value as
determined by the Adviser provide an expected return for each stock market. The
expected return is adjusted by currency return expectations derived from the
Adviser's purchasing-power parity exchange rate model to arrive at an expected
total return in U.S. dollars. The final country allocation decision is then
arrived at by considering the expected total return in light of various country
specific considerations such as market size, volatility, liquidity and country
risk.

Within a particular country, investments are made through the purchase of
equity securities which, in aggregate, replicate a broad market index, which in
most cases will be the Morgan Stanley Capital International index for the given
country. The Portfolio invests primarily in equity securities, which include
common and preferred stock, convertible securities and rights and warrants to
purchase common stocks. The Adviser may overweight or underweight an industry
segment of a particular index if it concludes this would be advantageous to the
Portfolio. An issuer may be considered to be from a particular country if, in
the opinion of the Adviser, it has one or more of the following characteristics:
(i) its principal securities trading market is in that country; (ii) alone or on
a consolidated basis it derives 50% or more of its annual revenue from either
goods produced, sales made or services performed in that country; or (iii) it is
organized under the laws of, and has a principal office in, that country. The
Adviser will base determinations as to eligibility on publicly available
information and inquiries made to the companies. Indexation of the Portfolio's
stock selection reduces stock-specific risk through diversification and
minimizes transaction costs, which can be substantial in foreign markets. In
addition to the investments and strategies described below, the Portfolio may
invest in certain securities and obligations as set forth in "Additional
Investment Information" below.

ADDITIONAL INVESTMENT INFORMATION

FIXED INCOME SECURITIES. The Portfolio will invest in fixed income (debt)
securities. The market value of the fixed income securities in which the
Portfolio invests will be affected by changes in the creditworthiness of issuers
and will change in response to interest rate changes and other factors.
Generally, the values of fixed income securities vary inversely with changes in
interest rates, so that during periods of falling interest rates, the values of
outstanding fixed income securities generally rise and during periods of rising
interest rates, the values of such securities generally decline. While
securities with longer maturities tend to produce higher yields, the prices of
longer maturity securities are subject to greater market fluctuations as a
result of changes in interest rates.

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<PAGE>
dollar value of dividends and interest on securities held by the Portfolio, and
generally to protect the U.S. dollar value of securities held by the Portfolio
against exchange rate fluctuation. While forward contracts may limit losses as a
result of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
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 at least equal to the amount of
the Portfolio's commitments with respect to such contracts.

FOREIGN INVESTMENT. The Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may 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 trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. 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 Portfolio by domestic companies. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since
the Portfolio may temporarily hold uninvested reserves in bank deposits in
foreign currencies, the value of the Portfolio's assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency exchange
rates and exchange control regulations, and the Portfolio may incur costs in
connection with conversions between various currencies.

The Portfolio may also invest in emerging market country securities.
Investing in emerging markets entails the risks associated with foreign
investment described above, however, these risks may be intensified in emerging
markets. Emerging markets can include every nation in the world except the
United States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe. Certain emerging market countries have historically experienced,
and may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, trade difficulties
and unemployment. Further, the economies of developing countries generally are
heavily dependent upon international trade and, accordingly, have been, and may
continue to be, adversely affected by trade barriers, exchange controls and
other protectionist measures imposed or negotiated by the countries in which
they trade. There also are risks associated with the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies of such countries or the value of
the Portfolio's investments in those countries.

12
<PAGE>
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. The Portfolio will not enter into securities loan
transactions exceeding in the aggregate 33 1/3% of the market value of the
Portfolio's total assets.

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

REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines adopted 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. A repurchase agreement 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 Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 10% of the market value of the Portfolio's net assets would be
invested in such repurchase agreements and other investments for which market
quotations are not readily available or which are otherwise illiquid.

TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, the Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which the Portfolio may invest consist of
(i) obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio 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 Portfolio will
maintain with the Custodian a segregated account 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

13
<PAGE>
level of interest rates has changed. It is a current policy of the Portfolio 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 PRODUCTS (DERIVATIVES)

The Portfolio is permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objective of the Portfolio. These derivative products may be
based upon a wide variety of underlying rates, indices, instruments, securities
and other products, such as interest rates, foreign currencies, foreign and
domestic fixed income and equity securities, groups or "baskets" of securities
and securities indices (for each derivative product, the "underlying").
Exclusive of forward foreign currency contracts and any derivative products used
for hedging purposes, the Portfolio will limit its use of derivative products to
33 1/3% of its total assets, measured by the aggregate notional amount of
outstanding derivative products.

The Portfolio may use derivative products under a number of different
circumstances to further its investment objective. For example, the Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. The Portfolio may also use derivatives when it is restricted from
directly owning the "underlying" or when derivatives provide a pricing advantage
or lower transaction costs. The Portfolio also may purchase combinations of
derivatives in order to gain exposure to an investment in lieu of actually
purchasing such investment. Derivatives may also be used by the Portfolio for
hedging or risk management purposes and in other circumstances when the Adviser
believes it advantageous to do so consistent with the Portfolio's investment
objective and policies. The Portfolio will not use derivatives in a manner that
creates leverage, except to the extent that the use of leverage is expressly
permitted by the Portfolio's investment policies, and then only in a manner
consistent with such policies.

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

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

FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)

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

14
<PAGE>
The Portfolio may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolio may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.

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

The Portfolio may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolio may also purchase and
sell foreign currency futures to hedge its respective holdings and commitments
against changes in the level of future currency rates or to adjust its exposure
to a particular currency.

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

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

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

15
<PAGE>
thereon for both hedging and non-hedging purposes, provided that not more than
5% of the Portfolio's total assets at the time of entering the transaction are
required as margin and option premiums to secure obligations under such
contracts relating to non-bona fide hedging activities.

OPTION TRANSACTIONS

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

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

The Portfolio also may write put and call options on investments held in its
portfolio, as well as foreign currency options. The Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, the Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, the Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.

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

There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolio's use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by the
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.

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<PAGE>
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS

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

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

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

17
<PAGE>
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, the Portfolio's risk of loss will consist of the payments
that the Portfolio is contractually entitled to receive from the other party.
This may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.

STRUCTURED NOTES

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

INVESTMENT LIMITATIONS

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

The Portfolio also 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
investment limitations, see "Investment Limitations" in Statement of Additional
Information.

MANAGEMENT OF THE FUND

INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and the 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 of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. The Adviser is entitled to receive from the Active Country
Allocation Portfolio an annual management fee, payable quarterly, equal to 0.65%
of the average daily net assets of the Portfolio.

The fees of the Portfolio are higher than those of most investment
companies' because the Portfolio invests internationally. The Adviser believes
that the fees are comparable to those of other investment companies that invest
internationally. The Adviser has voluntarily agreed to a reduction in the fees
payable to it and to reimburse

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<PAGE>
the Portfolio, if necessary, if such fees would cause total annual operating
expenses of the Portfolio to exceed 0.80% of the average daily net assets of the
Class A shares of the Portfolio and 1.05% of the average daily net assets of the
Class B shares of the Portfolio.

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 & Co. ("MSDW") is the
direct parent of the Adviser and Morgan Stanley. MSDW is a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses -- securities, asset management and credit services. At
March 31, 1998, the Adviser, together with its affiliated institutional asset
management companies, managed assets of approximately $166 billion, including
assets under fiduciary advice. See "Management of the Fund" in the Statement of
Additional Information.

PORTFOLIO MANAGERS. ANN D. THIVIERGE AND BARTON M. BIGGS. Ann D. Thivierge
is a Principal of the Adviser. She is a member of the Adviser's asset allocation
committee, primarily representing the Total Fund Management team since its
inception in 1991. Prior to joining the Adviser in 1986, she spent two years at
Edgewood Management Company, a privately held investment management firm. Ms.
Thivierge holds a B.A. in International Relations from James Madison College,
Michigan State University, and an M.B.A. in Finance from New York University.
Barton M. Biggs has been Chairman and a director of the Adviser since 1980 and a
Managing Director of Morgan Stanley since 1975. He is also a director and
chairman of various registered investment companies to which the Adviser and
certain of its affiliates provide investment advisory services. Mr. Biggs holds
a B.A. from Yale University and an M.B.A. from New York University. Ms.
Thivierge and Mr. Biggs have shared primary responsibility for managing the
Portfolio since June, 1995.

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 the Portfolio.

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<PAGE>
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 the Fund upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio.

The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio 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 pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") (the "Plan"). Under the Plan, the Distributor is
entitled to receive from the 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. Each Plan is designed to compensate the
Distributor for its services in connection with distribution assistance. The
Distributor may retain any portion of the fee that it does not expend in meeting
its obligations to the Fund. The Distributor may compensate financial
intermediaries, plan fiduciaries and administrators for providing
distribution-related services, including account maintenance services, to
shareholders (including, where applicable, underlying beneficial owners) of
Class B shares.

EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.

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

20
<PAGE>
PURCHASE OF SHARES

Class A shares and Class B shares of the Portfolio may be purchased at the
net asset value per share next determined after receipt by the Fund of a
purchase order as described under "Methods of Purchase." The net asset value per
share of the Portfolio is calculated on days that the New York Stock Exchange
("NYSE") and Chase (the "Custodian Bank") are open for business as of the close
of trading of the NYSE, normally 4:00 p.m. Eastern Time (the "Pricing Time").

MINIMUM INVESTMENT

The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of the Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. 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.

METHODS OF PURCHASE

Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolio by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or 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.

1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.

2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:

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

21
<PAGE>
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.

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

The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share determined on the next
business day after receipt. An investor's money will not be invested prior to
crediting of Federal Funds.

INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for the Portfolio
as of the close of the previous business day.

ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 for the
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.

INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES

22
<PAGE>
that were open prior to January 2, 1996 are not subject to involuntary
conversion or redemption. The Fund reserves the right to modify or terminate the
conversion or redemption features of the shares at any time upon 60 days notice
to shareholders.

CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.

REDEMPTION OF SHARES

Class A and Class B shares of the Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds 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 the Portfolio.

METHODS OF REDEMPTION

BY MAIL. The Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.

23
<PAGE>
"Good order" means that the request to redeem shares must include the
following:

2. Any required signature guarantees; and

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

BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request 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. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.

FURTHER REDEMPTION INFORMATION

24
<PAGE>
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.

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

ACCOUNT POLICIES AND SERVICES

EXCHANGE FEATURES

You may exchange shares of the Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.

Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the request. Shares of the portfolios may be
exchanged by mail or telephone. The telephone exchange privilege is automatic
and made available without shareholder election. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days notice to
shareholders.

TRANSFER OF REGISTRATION

25
<PAGE>
not be possible to transfer the registration of certain shares purchased through
a Financial Intermediary. As with 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 shares and may result in involuntary conversion or redemption of your
shares.

OTHER ACCOUNT INFORMATION

The Fund does not issue share certificates for the Portfolio. 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.

EXCESSIVE TRADING

Frequent trades in your account(s) can disrupt management of the Portfolio
and raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of the Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases 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. For example, the following series of transactions would amount 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 then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.

INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS

VALUATION OF SHARES

26
<PAGE>
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 and for which market quotations are
not readily available are valued at a price that is considered to best represent
fair value within a range not exceeding the current asked price nor less than
the current bid price. The current average bid and asked prices are determined
based on 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 prices in accordance
with the above-stated procedure 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 of such currencies against the U.S. dollar last quoted by a 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 the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.

The Portfolio may advertise "total return" which shows what an investment in
a class of the 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 Portfolio's shares, including data from Lipper Analytical
Services, Inc., other industry publications, business periodicals, rating
services and market indices.

27
<PAGE>
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.

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except when, 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 elects to receive income dividends and capital gains
distributions in cash.

The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual 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 the 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 Portfolio will differ at times.
Expenses of the Portfolio 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 Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.

The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(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.

The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from the Portfolio's net investment income are taxable
to shareholders as ordinary income, whether received in cash or reinvested in
additional shares. Such dividends paid by the Portfolio will generally not
qualify for the dividends-received deduction for corporate shareholders. The
Portfolio will report annually to its shareholders the amount of dividend income
qualifying for such treatment.

28
<PAGE>
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long the
shareholder has held the Portfolio's shares. The Portfolio will send reports
annually to shareholders of the federal income tax status of all distributions
made during the preceding year.

The 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, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.

Dividends and other distributions declared by the 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 taxable dividends, capital gains distributions and redemption proceeds paid
to any individual or certain other non-corporate shareholder (i) 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 Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) 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, exchange or redemption 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 are
less than the shareholder's tax adjusted basis in the sold, exchanged or
redeemed shares. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, then the
loss is treated as a long-term capital loss to the extent of the capital gains
distributions.

Conversions 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 the Portfolio,
which may differ from the federal income tax consequences described above.

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

29
<PAGE>
PORTFOLIO TRANSACTIONS

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 Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the 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 Portfolio will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with their respective
objective and policies. Higher portfolio turnover (e.g., over 100%) necessarily
will cause the Portfolio 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 40 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 the
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares.

30
<PAGE>
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 a
portfolio may be presumed to "control" (as that term is defined in the 1940 Act)
that 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

CUSTODIAN

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 its annual financial statements.

FUND COUNSEL

Morgan, Lewis & Bockius LLP acts as the Fund's legal counsel.

LITIGATION

The Fund is not involved in any litigation.

31
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
ACTIVE COUNTRY ALLOCATION PORTFOLIO
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
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, Inc., please contact your
Fill in where applicable Morgan Stanley 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

<TABLE>
<C> <S> <C>
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 Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
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
IDENTIFICATION taxpayers, this is 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.
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY NUMBER
NUMBER ("TIN") ("SSN")
OR
2. TIN SSN
OR
TIN 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 Active Country Allocation
$500,000 for the Portfolio
Portfolio and Class B
shares minimum $100,000
for the Portfolio).
Please indicate class and
amount.
Total Initial Investment $
</TABLE>

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

Payment by:

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

<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.

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

TABLE OF CONTENTS

<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 11
Investment Limitations............................ 18
Management of the Fund............................ 18
Purchase of Shares................................ 21
Redemption of Shares.............................. 23
Account Policies and Services..................... 25
Valuation of Shares............................... 26
Performance Information........................... 27
Dividends and Capital Gains Distributions......... 28
Taxes............................................. 28
Portfolio Transactions............................ 30
General Information............................... 30
Account Registration Form
</TABLE>

ACTIVE COUNTRY ALLOCATION PORTFOLIO

A PORTFOLIO 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>
- --------------------------------------------------------------------------------
P R O S P E C T U S
- --------------------------------------------------------------------------------

GLOBAL EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL SMALL CAP PORTFOLIO
EUROPEAN EQUITY 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 Global Equity, International Equity, and European Equity Portfolios (each a
"Multiclass Portfolio" and collectively, the "Multiclass Portfolios") and to the
Class A Shares of the International Small Cap Portfolio (each, a "Portfolio" and
collectively, the "Portfolios"). The Class A shares currently offered by the
Portfolios and Class B shares currently offered by the Multiclass 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 International Equity Portfolio is currently closed to new investors
with the exception of certain Morgan Stanley & Co. Incorporated ("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.

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 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, 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 May 1,
1998, 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 MAY 1, 1998.
<PAGE>
FUND EXPENSES

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

<TABLE>
<CAPTION>
GLOBAL EQUITY INTERNATIONAL EQUITY INTERNATIONAL SMALL EUROPEAN EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO
- ---------------------------------- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases
Class A......................... None None None* None
Class B......................... None None N/A None
Maximum Sales Load Imposed on
Reinvested Dividends
Class A......................... None None None None
Class B......................... None None N/A None
Deferred Sales Load
Class A......................... None None None None
Class B......................... None None N/A None
Redemption Fees
Class A......................... None None 1.00%* None
Class B......................... None None N/A None
Exchange Fees
Class A......................... None None None None
Class B......................... None None N/A None
</TABLE>

- --------------------------
* Shareholders of the International Small Cap Portfolio may be charged a 1.00%
transaction fee, which is payable directly to the International Small Cap
Portfolio, in connection with each purchase and redemption of shares of the
Portfolio. The transaction fee is intended to allocate transaction costs
associated with purchases and redemptions of shares of the Portfolio to
investors actually making such purchases and redemptions rather than to the
Portfolio's other shareholders. The 1.00% fee represents the Adviser's
estimate of such transaction costs, which include the costs of acquiring and
disposing of Portfolio securities. The transaction fee is not a sales charge
or load, and is retained by the Portfolio. The fee does not apply to
portfolios of the Fund other than the International Small Cap Portfolio and is
not charged in connection with the reinvestment of dividends or capital gain
distributions. The fee will not be charged with respect to purchases and
redemptions that do not result in actual transaction costs to the Portfolio.
Examples of such transactions include offsetting purchases and redemptions by
different shareholders occurring at the same time and in-kind purchases and
redemptions.

2
<PAGE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES INTERNATIONAL
(AS A PERCENTAGE OF AVERAGE NET GLOBAL EQUITY EQUITY INTERNATIONAL SMALL EUROPEAN EQUITY
ASSETS) PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO
- ------------------------------------------------ ------------------- ------------------- ------------------- ------------------
Management Fee (Net of Fee Waivers)**
<S> <C> <C> <C> <C>
Class A....................................... 0.69% 0.78% 0.88% 0.71%
Class B....................................... 0.69% 0.78% N/A 0.71%
12b-1 Fees
Class A....................................... None None None None
Class B....................................... 0.25% 0.25% N/A 0.25%
Other Expenses
Class A....................................... 0.31% 0.22% 0.27% 0.29%
Class B....................................... 0.31% 0.22% N/A 0.29%
------- ------- ------- ----------
Total Operating Expenses (Net of Fee Waivers)**
Class A....................................... 1.00% 1.00% 1.15% 1.00%
Class B....................................... 1.25% 1.25% N/A 1.25%
------- ------- ------- ----------
------- ------- ------- ----------
</TABLE>

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

** 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 each 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 as applicable,
are the management fees and total operating expenses absent such fee waivers
and/or expense reimbursements as a percentage of average daily net assets of
the Class A shares of the Portfolios and Class B Shares of the Multiclass
Portfolios, respectively.

<TABLE>
<CAPTION>
TOTAL
OPERATING EXPENSES
MANAGEMENT ABSENT
FEES FEE WAIVERS
ABSENT FEE ------------------
PORTFOLIO WAIVERS CLASS A CLASS B
- ---------------------------------------- ---------- ------- --------
<S> <C> <C> <C>
Global Equity........................... 0.80% 1.11% 1.36%
International Equity.................... 0.80% 1.02% 1.27%
International Small Cap................. 0.95% 1.22% N/A
European Equity......................... 0.80% 1.09% 1.34%
</TABLE>

The purpose of the table is to assist the investor in understanding the
various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1997. 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.

3
<PAGE>
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return, and (ii) redemption
at the end of each time period. As noted in the table above, the only fee
charged by the Fund upon purchase or redemption of Fund shares is the 1%
transaction fee that may be assessed on purchases and redemptions of shares of
the International Small Cap Portfolio, which charges are reflected in this
example. The following 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>
Global Equity Portfolio
Class A.......................... $ 10 $ 32 $ 55 $ 122
Class B.......................... 13 40 69 151
International Equity Portfolio
Class A.......................... 10 32 55 122
Class B.......................... 13 40 69 151
International Small Cap Portfolio
Class A.......................... 32 58 85 163
European Equity Portfolio
Class A.......................... 10 32 55 122
Class B.......................... 13 40 69 151
</TABLE>

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.

4
<PAGE>
FINANCIAL HIGHLIGHTS

The following tables provide financial highlights for the Class A and Class
B shares of the Multiclass Portfolios and the Class A shares of the
International Small Cap Portfolio for each of the periods in the five years
ended December 31, 1997. The audited financial highlights for each 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, 1997 Annual Report to
Shareholders and which are incorporated by reference into the Fund's Statement
of Additional Information. Each 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. After October 31, 1992, the Fund changed its fiscal year end to
December 31. The following information should be read in conjunction with
financial statements and notes thereto.

5
<PAGE>
GLOBAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 16.24 $ 14.31 $ 13.40 $ 13.87
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............. 0.21 0.23 0.18 0.08
Net Realized and Unrealized Gain on
Investments.......................... 3.61 3.02 2.26 0.79
------------ ------------ ------------ ------------
Total from Investment Operations.... 3.82 3.25 2.44 0.87
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income................. (0.40) (0.23) (0.22) (0.12)
In Excess of Net Investment Income.... -- -- -- --
Net Realized Gain..................... (1.14) (1.09) (1.31) (1.22)
------------ ------------ ------------ ------------
Total Distributions................. (1.54) (1.32) (1.53) (1.34)
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD.......... $ 18.52 $ 16.24 $ 14.31 $ 13.40
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TOTAL RETURN............................ 23.75% 22.83% 18.66% 6.95%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).......................... $108,074 $80,297 $91,675 $78,935
Ratio of Expenses to Average Net
Assets (1)........................... 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1)............... 1.07% 1.38% 1.17% 0.87%
Portfolio Turnover Rate............... 30% 26% 28% 12%
Average Commission Rate Per Share#.... $0.0312 $0.0299 N/A N/A
- ----------------------------------
Average Commission Rate as a
Percentage of Trade Amount#.......... 0.26% 0.25% N/A N/A
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net investment
income............................ $0.02 $0.03 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets..... 1.11% 1.15% 1.13% 1.24%
Net Investment Income to Average
Net Assets........................ 0.96% 1.23% 1.04% 0.63%

<CAPTION>
CLASS A
------------------------------------------
CLASS B
----------------------------
PERIOD FROM PERIOD FROM
TWO MONTHS JULY 15, JANUARY 2,
ENDED 1992* TO YEAR ENDED 1996*** TO
DECEMBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1992 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 9.75 $ 9.35 $ 10.00 $16.21 $14.36
------------ ------------ ------------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............. 0.08 0.01 0.02 0.16 0.13
Net Realized and Unrealized Gain on
Investments.......................... 4.18 0.39 (0.67) 3.60 3.02
------------ ------------ ------------ ------ ------
Total from Investment Operations.... 4.26 0.40 (0.65) 3.76 3.15
------------ ------------ ------------ ------ ------
DISTRIBUTIONS
Net Investment Income................. (0.02) -- -- (0.37) (0.21)
In Excess of Net Investment Income.... (0.03) -- -- -- --
Net Realized Gain..................... (0.09) -- -- (1.14) (1.09)
------------ ------------ ------------ ------ ------
Total Distributions................. (0.14) -- -- (1.51) (1.30)
------------ ------------ ------------ ------ ------
NET ASSET VALUE, END OF PERIOD.......... $ 13.87 $ 9.75 $ 9.35 $18.46 $16.21
------------ ------------ ------------ ------ ------
------------ ------------ ------------ ------ ------
TOTAL RETURN............................ 44.24% 4.28% (6.50)% 23.37% 22.04%
------------ ------------ ------------ ------ ------
------------ ------------ ------------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).......................... $19,918 $11,739 $11,257 $5,910 $3,928
Ratio of Expenses to Average Net
Assets (1)........................... 1.00% 1.00%** 1.00%** 1.25% 1.25%**
Ratio of Net Investment Income to
Average Net Assets (1)............... 0.84% 0.69%** 1.00%** 0.80% 1.29%**
Portfolio Turnover Rate............... 42% 5% 10% 30% 26%
Average Commission Rate Per Share#.... N/A N/A N/A $0.0312 $0.0299
- ----------------------------------
Average Commission Rate as a
Percentage of Trade Amount#.......... N/A N/A N/A 0.26% 0.25%
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net investment
income............................ $0.01 $0.02 $0.08 $0.02 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets..... 1.66% 2.49%** 5.22%** 1.36% 1.39%**
Net Investment Income to Average
Net Assets........................ 0.18% (0.80)%** (3.22)%** 0.69% 1.15%**
</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
commissions were charged, during the period.

6
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------
TWO
MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------------- DEC. 31,
1997 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83
----------- ----------- ----------- ----------- ------------ -------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)... 0.30 0.25 0.16 0.16 0.15 0.01
Net Realized and Unrealized
Gain on Investments........ 2.01 2.71 1.55 1.54 4.36 0.14
----------- ----------- ----------- ----------- ------------ -------------
Total from Investment
Operations............... 2.31 2.96 1.71 1.70 4.51 0.15
----------- ----------- ----------- ----------- ------------ -------------
DISTRIBUTIONS
Net Investment Income....... (0.48) (0.36) (0.06) (0.18) (0.01) --
In Excess of Net Investment
Income..................... -- -- -- -- (0.13) --
Net Realized Gain........... (1.62) (0.80) (1.84) (0.27) (0.26) --
----------- ----------- ----------- ----------- ------------ -------------
Total Distributions....... (2.10) (1.16) (1.90) (0.45) (0.40) --
----------- ----------- ----------- ----------- ------------ -------------
NET ASSET VALUE, END OF
PERIOD....................... $ 17.16 $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98
----------- ----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ----------- ------------ -------------
TOTAL RETURN.................. 13.91% 19.64% 11.77% 12.39% 46.50% 1.53%
----------- ----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ----------- ------------ -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $2,822,900 $2,264,424 $1,598,530 $1,304,770 $947,045 $510,727
Ratio of Expenses to Average
Net Assets (1)............. 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment
Income to Average Net
Assets (1)................. 1.49% 1.64% 1.38% 1.12% 1.25% 0.68%**
Portfolio Turnover Rate..... 33% 18% 27% 16% 23% 5%
Average Commission Rate Per
Share#..................... $0.0201 $0.0238 N/A N/A N/A N/A
- ----------------------------------------
Average Commission Rate as a
Percentage of Trade
Amount#.................... 0.21% 0.26% N/A N/A N/A N/A
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income....... $0.00+ $0.00 $0.003 $0.004 $0.01 $0.00
Ratios before expense
limitation:
Expenses to Average Net
Assets.................. 1.02% 1.02% 1.03% 1.03% 1.06% 1.14%**
Net Investment Income to
Average Net Assets...... 1.47% 1.61% 1.35% 1.09% 1.19% 0.54%**

<CAPTION>
CLASS A CLASS B
------------------------------------------------------ -----------------------
PERIOD
FROM
JAN. 2,
AUG. 4* YEAR 1996***
YEAR ENDED OCTOBER 31, TO ENDED TO
---------------------------------------- OCT. 31 DEC. 31, DEC. 31,
1992 1991 1990 1989 1997 1996
----------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 10.52 $ 10.05 $ 9.72 $ 10.00 $ 16.93 $ 15.24
----------- ----------- ----------- ----------- --------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)... 0.12 0.12 0.19 0.05 0.23 0.23
Net Realized and Unrealized
Gain on Investments........ (0.59) 0.58 0.20 (0.33) 2.02 2.59
----------- ----------- ----------- ----------- --------- -----------
Total from Investment
Operations............... (0.47) 0.70 0.39 (0.28) 2.25 2.82
----------- ----------- ----------- ----------- --------- -----------
DISTRIBUTIONS
Net Investment Income....... (0.17) (0.15) (0.06) -- (0.43) (0.33)
In Excess of Net Investment
Income..................... -- -- -- -- -- --
Net Realized Gain........... (0.05) (0.08) -- -- (1.62) (0.80)
----------- ----------- ----------- ----------- --------- -----------
Total Distributions....... (0.22) (0.23) (0.06) -- (2.05) (1.13)
----------- ----------- ----------- ----------- --------- -----------
NET ASSET VALUE, END OF
PERIOD....................... $ 9.83 $ 10.52 $ 10.05 $ 9.72 $ 17.13 $ 16.93
----------- ----------- ----------- ----------- --------- -----------
----------- ----------- ----------- ----------- --------- -----------
TOTAL RETURN.................. (4.56)% 7.17% 3.99% (2.8)% 13.57% 18.58%
----------- ----------- ----------- ----------- --------- -----------
----------- ----------- ----------- ----------- --------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $486,836 $ 283,776 $ 110,716 $ 7,811 $ 3,074 $ 5,393
Ratio of Expenses to Average
Net Assets (1)............. 1.00% 1.00% 1.03% 1.35%** 1.25% 1.25%**
Ratio of Net Investment
Income to Average Net
Assets (1)................. 1.46% 2.27% 3.51% 2.34%** 1.21% 1.68%**
Portfolio Turnover Rate..... 12% 22% 38% 0% 33% 18%
Average Commission Rate Per
Share#..................... N/A N/A N/A N/A $0.0201 $0.0238
- ------------------------------
Average Commission Rate as a
Percentage of Trade
Amount#.................... N/A N/A N/A N/A 0.21% 0.26%
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income....... $0.00 $0.01 N/A $0.01 $0.00+ $0.00
Ratios before expense
limitation:
Expenses to Average Net
Assets.................. 1.02% 1.09% 1.24% 0.01%** 1.27% 1.27%**
Net Investment Income to
Average Net Assets...... 1.44% 2.18% 3.30% %** 1.19% 1.66%**
</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
commissions were charged, during the period.

+ Amount is less than $0.01 per share.

7
<PAGE>
INTERNATIONAL SMALL CAP PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 16.83 $ 14.94 $ 15.15
------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)................................. 0.25 0.21 0.24
Net Realized and Unrealized Gain (Loss) on Investments.... (0.42) 2.29*** 0.15***
------------- ------------- -------------
Total from Investment Operations........................ (0.17) 2.50 0.39
------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income..................................... (0.31) (0.22) (0.23)
In Excess of Net Investment Income........................ (0.05) -- --
Net Realized Gain......................................... (0.77) (0.39) (0.37)
------------- ------------- -------------
Total Distributions..................................... (1.13) (0.61) (0.60)
------------- ------------- -------------
TRANSACTION FEES............................................ 0.08 -- --
NET ASSET VALUE, END OF PERIOD $ 15.61 $ 16.83 $ 14.94
------------- ------------- -------------
------------- ------------- -------------
TOTAL RETURN................................................ (0.55)% 16.82% 2.60%
------------- ------------- -------------
------------- ------------- -------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)..................... $ 230,095 $ 234,743 $ 198,669
Ratio of Expenses to Average Net Assets (1)............... 1.15% 1.15% 1.15%
Ratio of Net Investment Income to
Average Net Assets (1)................................... 1.37% 1.29% 1.72%
Portfolio Turnover Rate................................... 39% 35% 24%
Average Commission Rate Per Share#........................ $0.0134 $0.0159 N/A
- ------------------------------
Average Commission Rate as a Percentage of Trade
Amount#.................................................. 0.31% 0.30% N/A
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income............. $0.01 $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets......................... 1.22% 1.23% 1.24%
Net Investment Income(Loss) to Average Net Assets...... 1.30% 1.20% 1.63%

PERIOD FROM
DECEMBER 15,
1992* TO
DECEMBER 31,
1994 1993++ 1992
------------- ------------- -------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 14.64 $ 10.09 $ 10.00
------------- ------------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)................................. 0.14 0.09 0.01
Net Realized and Unrealized Gain (Loss) on Investments.... 0.62*** 4.48*** 0.08***
------------- ------------- ------
Total from Investment Operations........................ 0.76 4.57 0.09
------------- ------------- ------
DISTRIBUTIONS
Net Investment Income..................................... (0.03) 0.00 --
In Excess of Net Investment Income........................ -- (0.02) --
Net Realized Gain......................................... (0.22) -- --
------------- ------------- ------
Total Distributions..................................... (0.25) (0.02) --
------------- ------------- ------
TRANSACTION FEES............................................ -- -- --
NET ASSET VALUE, END OF PERIOD $ 15.15 $ 14.64 $ 10.09
------------- ------------- ------
------------- ------------- ------
TOTAL RETURN................................................ 5.25% 45.34% 0.90%
------------- ------------- ------
------------- ------------- ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)..................... $ 160,101 $ 52,834 $ 3,824
Ratio of Expenses to Average Net Assets (1)............... 1.15% 1.15% 1.15%**
Ratio of Net Investment Income to
Average Net Assets (1)................................... 1.18% 0.66% 1.37%**
Portfolio Turnover Rate................................... 8% 14% 0%
Average Commission Rate Per Share#........................ N/A N/A N/A
- ------------------------------
Average Commission Rate as a Percentage of Trade
Amount#.................................................. N/A N/A N/A
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income............. $0.02 $0.10 $0.16
Ratios before expense limitation:
Expenses to Average Net Assets......................... 1.29% 1.86% 21.67%**
Net Investment Income(Loss) to Average Net Assets...... 1.04% (0.05)% (19.15)%**
</TABLE>

- --------------------------------------------------------------------------------
* Commencement of operations

** Annualized

*** Reflects a 1% transaction fee on purchases and redemptions of capital
shares.

++ Per share amounts for the year ended December 31, 1993 are based on average
outstanding shares.

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

8
<PAGE>
EUROPEAN EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
PERIOD FROM
APRIL 2,
YEAR ENDED DECEMBER 31, 1993* TO
------------------------------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 16.70 $ 13.92 $ 13.94 $ 12.91 $ 10.00
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.39 0.24 0.14 0.08 0.08
Net Realized and Unrealized Gain on
Investments............................... 2.58 2.85 1.37 1.29 2.83
------------- ------------- ------------- ------------- -------------
Total from Investment Operations......... 2.97 3.09 1.51 1.37 2.91
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income...................... (0.37) (0.25) (0.15) (0.09) --
In Excess of Net Investment Income......... -- (0.02) -- -- --
Net Realized Gain.......................... (1.34) (0.04) (1.38) (0.25) --
------------- ------------- ------------- ------------- -------------
Total Distributions...................... (1.71) (0.31) (1.53) (0.34) --
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD............... $ 17.96 $ 16.70 $ 13.92 $ 13.94 $ 12.91
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
TOTAL RETURN................................. 17.88% 22.29% 11.85% 10.88% 29.10%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ 242,868 $ 178,356 $ 69,583 $ 27,634 $ 12,681
Ratio of Expenses to Average Net Assets
(1)....................................... 1.00% 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 1.96% 1.83% 1.37% 0.87% 1.23%**
Portfolio Turnover Rate.................... 43% 24% 13% 79% 15%
Average Commission Rate Per Share#......... $0.0207 $0.0212 N/A N/A N/A
- ----------------------------------
Average Commission Rate as a Percentage of
Trade Amount#............................. 0.20% 0.23% N/A N/A N/A
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income................................. $0.02 $0.02 $0.03 $0.06 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets.......... 1.09% 1.16% 1.25% 1.62% 2.43%**
Net Investment Income (Loss) to Average
Net Assets............................. 1.87% 1.67% 1.12% 0.25% (0.21)%**

CLASS B
-----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 16.67 $ 14.05
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.28 0.18
Net Realized and Unrealized Gain on
Investments............................... 2.66 2.73
------ ------
Total from Investment Operations......... 2.94 2.91
------ ------
DISTRIBUTIONS
Net Investment Income...................... (0.33) (0.23)
In Excess of Net Investment Income......... -- (0.02)
Net Realized Gain.......................... (1.34) (0.04)
------ ------
Total Distributions...................... (1.67) (0.29)
------ ------
NET ASSET VALUE, END OF PERIOD............... $ 17.94 $ 16.67
------ ------
------ ------
TOTAL RETURN................................. 17.73% 20.76%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ 4,654 $2,654
Ratio of Expenses to Average Net Assets
(1)....................................... 1.25% 1.25%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 1.55% 1.67%**
Portfolio Turnover Rate.................... 43% 24%
Average Commission Rate Per Share#......... $0.0207 $0.0212
- ----------------------------------
Average Commission Rate as a Percentage of
Trade Amount#............................. 0.20% 0.23%
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income................................. $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets.......... 1.34% 1.40%**
Net Investment Income (Loss) to Average
Net Assets............................. 1.46% 1.52%**
</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
commissions were charged, during the period.

9
<PAGE>
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 Class B shares except the
International Small Cap and Municipal Money Market Portfolios which offer only
Class A 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 GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.

- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.

- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.

GLOBAL AND INTERNATIONAL EQUITY:

- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.

- 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 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 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 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 MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.

10
<PAGE>
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.