MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND INC, N-30B-2, 1999-12-02

MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND INC
N-30B-2, 1999-12-02

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MORGAN STANLEY DEAN WITTER

[GRAPHIC] MORGAN STANLEY
DEAN WITTER
INSTITUTIONAL FUND, INC.

THIRD QUARTER REPORT
SEPTEMBER 30, 1999

<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
President's Letter ....................................................... 1
Performance Summary ...................................................... 2
Letters to Shareholders and Investments by
Portfolio:
Global and International Equity Portfolios:
Active International Allocation ....................................... 4
Asian Equity .......................................................... 15
Asian Real Estate ..................................................... 23
Emerging Markets ...................................................... 27
European Equity ....................................................... 35
European Real Estate .................................................. 40
Global Equity ......................................................... 45
International Equity .................................................. 50
International Magnum .................................................. 54
International Small Cap ............................................... 60
Japanese Equity ....................................................... 64
Latin American ........................................................ 67
U.S. Equity Portfolios:
Equity Growth ......................................................... 72
Focus Equity (formerly Aggressive Equity).............................. 77
Small Company Growth (formerly
Emerging Growth).................................................... 81
Technology ............................................................ 85
U.S. Equity Plus ...................................................... 89
U.S. Real Estate ...................................................... 96
Value Equity .......................................................... 102
Fixed Income Portfolios:
Emerging Markets Debt ................................................. 107
Fixed Income .......................................................... 112
Global Fixed Income ................................................... 116
High Yield ............................................................ 121
Municipal Bond ........................................................ 126
Directors and Officers ................................................... 129
</TABLE>

This report is authorized for distribution only when preceded or accompanied by
prospectuses of the Morgan Stanley Dean Witter Institutional Fund, Inc.
Prospectuses describe in detail each of the Portfolio's investment policies to
the prospective investor. Please read the prospectuses carefully before you
invest or send money.

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MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------

Fellow Shareholders:

We are pleased to present to you the Fund's Third Quarter Report for the
three months ended September 30, 1999. Our Fund currently offers 26 portfolios
providing investors with a full array of global and domestic equity and fixed
income products. Together, the Fund's portfolios allow investors to meet
specific investment needs or to allocate assets among different portfolios to
implement an overall investment strategy.

The third quarter was a period of mixed performance. As global economic
growth continued, investors became increasingly concerned about increasing
inflationary pressures particularly in the U.S.. Inflation indicators released
during the quarter produced conflicting results, heightening the uncertainty in
the markets. The U.S. Federal Reserve raised interest rates in June and again in
August, in response to mounting wage and consumer price index pressures. As U.S.
bond yields peaked in early August, fears of a classic inflation led ending to
the U.S. economic expansion caused a flight to quality within U.S. capital
markets and a flight of international capital to areas of higher potential
growth and lower inflationary risk. European and Japanese markets were the
primary beneficiaries of this trend. Bonds outperformed stocks during the
quarter, as the JPM Traded Global Bond Index rose 3.9% while the MSCI World
Index fell 1.5%.

Despite a strong earnings outlook, U.S. equity markets could not withstand
the pressures of higher interest rates and anticipation of an economic slowdown.
The S&P 500 Index fell 6.2% during the quarter. As investors became more
uncertain regarding the outlook for future earnings, capital flowed to companies
with stronger historical earnings growth and return on equity. This led to
outperformance of large cap growth stocks (-3.7%) over value stocks (-9.6%), and
mid (-8.4%) and small cap stocks (-6.3%).

Non-U.S. equities fared better in the third quarter, due to stronger
economic prospects and stronger currencies relative to the dollar. Leading the
developed equity markets was Japan (+1.9% in local terms and +15.8% in U.S.
dollar terms) which rose on increasing optimism regarding economic recovery and
restructuring. The three-way bank tie up announced in September gave further
steam to the market. As foreign investors rushed to buy Japanese equities, the
currency strengthened dramatically (+14%). Although prospects for better
European economic growth remained clouded by poor economic performance in
Germany, European equities managed to outperform U.S. markets, falling 2.3% in
local terms but gaining 1.2% in U.S. dollar terms, bolstered by a strengthening
Euro. Asia fell 4.9%, pressured by rising interest rates in the United States.
Despite this setback in the third quarter, the region is still up 48.3%
year-to-date.

Although emerging markets suffered from a flight to quality and U.S.
interest rate pressures in Asia and Latin America, the asset category managed to
outperform the U.S., falling 5.0% in the third quarter. Emerging markets were
benefited by strong performance in Europe, as investors became more optimistic
about Euro zone growth prospects. Latin America was hit hard by rising U.S.
interest rates, falling 9.0%, while Asia fell 7.7%.

U.S. bonds had a 0.7% gain amidst a volatile quarter for the asset class.
U.S. interest rates peaked in August, as the 30-year bond yield rose as high as
6.25%. Although inflation data was mixed in the third quarter, the strong pace
of the U.S. economy together with stronger than expected wage pressures caused
the Fed to raise interest rates. As more benign inflation data surfaced in late
August and early September, the U.S. long bond yield fell back to a 6% level. As
interest rates peaked, investors began to fear an interest rate led slowdown in
the U.S. economy in which corporate profits would suffer. This drove a flight to
quality within the U.S. bond market, as corporates (+0.4%) and high yield debt
(-1.6%) underperformed higher quality Treasuries (+0.7%).

Yields in Europe rose throughout the quarter, as economic data releases
indicated a stronger than expected economy. The U.K. endured a surprise rate
hike in September as house prices and wages continued to rise strongly. Despite
these pressures on yields, unhedged European bonds delivered attractive returns
to unhedged U.S. based investors, as the Euro appreciated relative to the dollar
(+1.9% in dollar terms, -1.5% in local terms). Japanese bonds were among the
strongest performers during the quarter, as a stronger yen provided impetus for
capital flows into the bond market. Japanese bonds rose 2.0% in local terms and
15.9% in dollar terms.

In this Report, each of our portfolio managers discuss the performance
results and outlook of their markets and portfolios in greater detail. We hope
you find this Report informative. We very much appreciate your continued support
of the Fund.

Sincerely,

/s/ Michael F. Klein

Michael F. Klein
PRESIDENT

October 1999
1
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MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
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PERFORMANCE SUMMARY (UNAUDITED)
SEPTEMBER 30, 1999
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NET ASSETS NET ASSET VALUE
INCEPTION DATES (000) PER SHARE YTD TOTAL RETURN
------------------ ------------------ ----------------- -----------------------------
COMPARABLE
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B INDICES
------- ------- ------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS:
Active International Allocation 1/17/92 1/02/96 $455,148 $4,543 $12.66 $12.79 7.62% 6.74% 8.53 (1)
Asian Equity 7/01/91 1/02/96 72,857 1,911 10.66 10.58 33.08 32.75 31.11 (2)
Asian Real Estate 10/01/97 10/01/97 3,162 1,251 7.33 7.36 13.00 12.81 12.17 (3)
Emerging Markets 9/25/92 1/02/96 974,100 10,028 12.63 12.62 32.25 32.01 32.66 (5)
32.83 (4)

European Equity 4/02/93 1/02/96 104,568 2,311 15.20 15.16 0.91 0.71 -1.27 (6)
European Real Estate 10/01/97 10/01/97 12,018 1,914 9.84 9.86 4.31 4.06 9.05 (7)
Global Equity 7/15/92 1/02/96 193,727 28,145 20.12 19.98 0.24 0.10 6.90 (8)
International Equity* 8/04/89 1/02/96 4,298,643 34,446 20.06 19.99 10.21 10.01 8.53 (1)
International Magnum 3/15/96 3/15/96 180,610 26,284 12.91 12.85 11.80 11.58 8.53 (1)
International Small Cap 12/15/92 -- 302,677 -- 19.33 -- 27.06 -- 17.58 (9)
Japanese Equity 4/25/94 1/02/96 63,418 2,521 8.85 8.77 43.20 43.07 39.84 (10)
Latin American 1/18/95 1/02/96 14,615 1,289 8.08 8.11 22.25 21.97 19.22 (11)
21.79 (21)
U.S. EQUITY PORTFOLIOS:
Equity Growth 4/02/91 1/02/96 838,614 185,737 21.80 21.67 14.50 14.24 5.36 (12)
Focus Equity** 3/08/95 1/02/96 113,206 18,641 21.51 21.35 22.91 22.70 5.36 (12)
10.40 (13)
Small Company Growth*** 11/01/89 1/02/96 42,904 5,474 10.13 9.93 32.11 31.92 2.37 (14)
Technology 9/16/96 9/16/96 36,089 3,081 27.05 26.94 53.49 53.39 5.36 (12)
U.S. Equity Plus 7/31/97 7/31/97 20,141 1,346 12.98 12.95 5.47 5.31 5.36 (12)
U.S. Real Estate 2/24/95 1/02/96 294,642 14,945 12.21 12.17 -0.74 -0.86 -3.65 (15)
Value Equity 1/31/90 1/02/96 52,616 1,149 11.10 11.07 7.53 7.28 5.36 (12)

FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 1/02/96 47,036 873 2.96 2.98 12.98 12.03 11.90 (16)
Fixed Income 5/15/91 1/02/96 182,283 2,491 10.47 10.49 1.54 -1.61 -0.70 (17)
Global Fixed Income 5/01/91 1/02/96 35,744 330 11.55 11.51 -5.36 -5.53 -3.54 (18)
High Yield 9/28/92 1/02/96 134,213 47,009 10.49 10.47 3.46 3.32 1.17 (19)
Municipal Bond 1/18/95 -- 26,448 -- 9.86 -- -1.67 -- -0.05 (20)
</TABLE>

* For the ten-year period ended September 30, 1999, the average annual total
return of the International Equity Portfolio Class A shares was 13.39%
compared to 5.82% for the MSCI EAFE Index.
** Formerly Aggressive Equity
*** Formerly Emerging Growth

<TABLE>
<CAPTION>
YIELD INFORMATION AS OF SEPTEMBER 30, 1999
------------------------------------------
30 DAY
CURRENT YIELD+
--------------
CLASS A CLASS B
------- -------
<S> <C> <C>
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 14.96% 14.72%
Fixed Income 6.54 6.39
Global Fixed Income 4.51 4.36
High Yield 9.98 9.72
Municipal Bond 4.69 --
</TABLE>

+ The current 30 day yield reflects the net investment income generated by the
Portfolio over a specified 30 day period expressed as an annual percentage.
Expenses accrued for the 30 day period include any fees charged to all
shareholders. Yields will fluctuate as market conditions change and are not
necessarily indicative of future performance.

2
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<TABLE>
<CAPTION>
AVERAGE ANNUAL
FIVE YEAR
ONE YEAR TOTAL RETURN TOTAL RETURN
---------------------------- -------------------
COMPARABLE COMPARABLE
CLASS A CLASS B INDICES CLASS A INDICES
------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS:
Active International Allocation 23.06% 22.81% 30.95% (1) 10.79% 9.12% (1)
Asian Equity 65.53 64.54 84.68 (2) -9.54 -5.43 (2)
Asian Real Estate 70.54 70.05 67.36 (3) -- --
Emerging Markets 51.56 51.12 56.52 (5) -4.20 -5.50 (5)
54.71 (4) -5.59 (4)
European Equity 10.95 10.69 17.21 (6) 11.54 18.48 (6)
European Real Estate 3.86 3.59 5.38 (7) -- --
Global Equity 15.45 15.21 29.47 (8) 14.94 15.91 (8)
International Equity* 26.69 26.41 30.95 (1) 14.78 9.12 (1)
International Magnum 23.33 22.98 30.95 (1) -- --
International Small Cap 38.34 -- 33.58 (9) 8.35 -2.67 (9)
Japanese Equity 64.80 64.23 77.37 (10) 5.87 -1.20 (10)
Latin American 32.40 32.11 27.66 (11) -- --
30.61 (21)
U.S. EQUITY PORTFOLIOS:
Equity Growth 40.46 40.01 27.80 (12) 27.73 25.03 (12)
Focus Equity** 55.08 54.71 27.80 (12) -- --
34.85 (13)
Small Company Growth***
Technology 61.11 60.54 19.07 (14) 21.17 12.39 (14)
U.S. Equity Plus 122.20 121.85 27.80 (12) -- --
U.S. Real Estate 26.92 26.65 27.80 (12) -- --
Value Equity 1.45 1.29 -6.46 (15) -- --
27.37 27.22 27.80 (12) 18.60 25.03 (12)
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 25.49 25.09 23.00 (16) 8.93 11.59 (16)
Fixed Income -1.43 -1.39 -0.37 (17) 7.79 7.84 (17)
Global Fixed Income -3.62 -3.74 -0.66 (18) 6.93 7.13 (18)
High Yield 9.13 8.91 3.95 (19) 11.37 8.61 (19)
Municipal Bond -1.46 -- 0.57 (20) -- --

<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN SINCE INCEPTION
--------------------------------------------------
COMPARABLE COMPARABLE
CLASS A INDICES-CLASS A CLASS B INDICES-CLASS B
------- --------------- ------- ---------------
<S> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS:
Active International Allocation 10.27% 9.80% (1) 11.92% 9.51% (1)
Asian Equity 5.35 7.72 (2) -11.88 -6.73 (2)
Asian Real Estate -10.68 -18.44 (3) -11.00 -18.44 (3)
Emerging Markets 7.31 6.35 (5) 1.96 -2.15 (5)
5.93 (4) -1.62 (4)
European Equity 15.28 17.47 (6) 12.29 18.54 (6)
European Real Estate 2.04 4.24 (7) 1.82 4.24 (7)
Global Equity 17.07 14.64 (8) 15.59 15.92 (8)
International Equity* 12.90 5.89 (1) 16.12 9.51 (1)
International Magnum 9.61 10.18 (1) 9.32 10.18 (1)
International Small Cap 14.01 4.61 (9) -- --
Japanese Equity 5.25 -0.51 (10) 8.92 -1.22 (10)
Latin American 8.63 2.99 (11) 12.22 5.34 (11)
3.28 (21) 5.82 (21)
U.S. EQUITY PORTFOLIOS:
Equity Growth 19.13 18.03 (12) 25.04 23.50 (12)
Focus Equity** 33.72 26.19 (12) 29.37 23.50 (12)
20.17 (13) 17.36 (13)
Small Company Growth***
Technology 15.62 11.70 (14) 19.13 9.79 (14)
U.S. Equity Plus 50.64 24.98 (12) 50.36 24.98 (12)
U.S. Real Estate 14.04 16.32 (12) 13.82 16.32 (12)
Value Equity 14.67 9.01 (15) 11.93 7.11 (15)
13.87 18.05 (12) 16.60 23.50 (12)
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 6.45 8.12 (16) 6.58 11.27 (16)
Fixed Income 7.47 7.66 (17) 5.27 5.61 (17)
Global Fixed Income 6.78 8.07 (18) 3.91 4.46 (18)
High Yield 10.95 8.83 (19) 9.45 6.97 (19)
Municipal Bond 4.96 6.37 (20) -- --
</TABLE>

INDICES:
(1) MSCI EAFE (Europe, Australasia, and Far East)
(2) MSCI All-Country Far East Free ex-Japan
(3) GPR General Real Estate Securities Index -- Far East
(4) IFC Global Total Return Composite
(5) MSCI Emerging Markets Free
(6) MSCI Europe
(7) GPR General Real Estate Securities Index -- Europe
(8) MSCI World
(9) MSCI EAFE Small Cap
(10) MSCI Japan
(11) MSCI Emerging Markets Free Latin America
(12) S&P 500
(13) Lipper Capital Appreciation
(14) Russell 2000
(15) National Association of Real Estate Investment Trusts
(NAREIT) Equity
(16) J.P. Morgan Emerging Markets Bond Plus
(17) Lehman Aggregate Bond
(18) J.P. Morgan Traded Global Bond
(19) CS First Boston High Yield
(20) Lehman 7-Year Municipal Bond
(21) MSCI Emerging Markets Global Latin America

Past performance should not be construed as a guarantee of future performance.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Please read the Portfolios' prospectuses carefully before you invest or send
money.

3
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MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
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ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Australia (1.6%)
Austria (0.3%)
France (5.2%)
Germany (6.1%)
Hong Kong (2.9%)
Italy (1.9%)
Japan (25.2%)
Netherlands (5.5%)
Portugal (0.9%)
Singapore (2.3%)
Spain (3.6%)
Sweden (2.9%)
Switzerland (5.5%)
United Kingdom (14.5%)
Other (21.6%)
</TABLE>

Of the amount shown above as "Other", a significant portion represents cash
equivalents required under regulations to be held as collateral relating to
investments in futures contracts - a listing of open futures contracts is
included in the Investments section.

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- ------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
----- ------ ------ ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A ... 7.62% 23.06% 10.79% 10.27%
PORTFOLIO -- CLASS B ... 6.74 22.81 N/A 11.92
INDEX -- CLASS A ....... 8.53 30.95 9.12 9.80
INDEX -- CLASS B ....... 8.53 30.95 N/A 9.51
</TABLE>

1. The MSCI EAFE Index is an unmanaged index of common stocks in Europe,
Australasia and the Far East (includes dividends net of withholding taxes).

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE
RESULTS PROVIDED ARE AS MEASURED BY THE MSCI EAFE INDEX AND ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.

The Active International Allocation Portfolio invests in international equity
markets, with emphasis placed upon countries, rather than stock selection. This
approach reflects our belief that a diversified selection of securities
representing exposure to countries that we find attractive provides an effective
way to maximize the return potential and minimize the risk associated with
global investing.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 7.62% for the Class A shares and 6.74% for the Class B shares compared to
8.53% for the Morgan Stanley Capital International (MSCI) EAFE Index (the
"Index"). For the one year period ended September 30, 1999, the Portfolio had a
total return of 23.06% for the Class A shares and 22.81% for the Class B shares
compared to 30.95% for the Index. For the five-year period ended September 30,
1999, the average annual total return for Class A shares was 10.79% compared to
9.12% for the Index. For the period since inception on January 17, 1992 through
September 30, 1999, the average annual total return for Class A shares was
10.27% compared to 9.80% for the Index. For the period since inception on
January 2, 1996 through September 30, 1999, the average annual total return for
the Class B shares was 11.92% compared to 9.51% for the Index.

During the third quarter the EAFE markets churned on worries about interest
rates and Central Bank policies. We essentially added no outperformance during
the quarter. Our overweight position in Japan was correct as the market and the
yen contributed to a 15.8% rise in the Index as compared to only 4.4% for EAFE.
Our Japanese high tech tilt also was a positive performance factor. Our
underweight in Europe was also correct but our country selection was not
stellar. Specifically, the eurobubble countries of Italy and Spain
underperformed and Finland roared to a new high on technology gains. Our real
estate tilt has worked well.

The negative factors were our overweight in non-Japan Asia and our cash
position. We were also hurt by a poorly timed hedge out of the euro, which cost
us about 50 basis points versus the Index.

We are cautious about the U.S. equity market, which continues to be the bell cow
of the world. We recognize that the fundamentals verge on perfection but we
doubt the permanence of that sublime state and argue that even if it is
perpetual, big cap American equity prices already discount it.

Nevertheless, the outlook for the rest of the world is much brighter. Japan and
Asia are just emerging from devastating depressions and bear markets, and Europe
is in the early stages of what could be a prolonged period of growth. In

4
<PAGE>

addition, both the Euro and the yen are strengthening versus the dollar. We
expect EAFE to outperform the S&P 500 not for months but for years.

However, the issue is whether in the months to come EAFE will do better than the
S&P 500 in absolute or only in relative terms. Our feeling is that if the U.S.
market stays mired in its present trading range for the rest of the year, EAFE
could gain another ten percentage points or so. However, if the U.S. market
falls further, EAFE and particularly European equities, will also decline but
less sharply than the U.S.

What really troubles us is this; a year ago, the world economic fundamentals
were grim but the central banks around the world were cutting interest rates and
adding liquidity. Stocks soared. Today, growth forecasts are being raised and
everyone is chanting "global healing," but the same central banks now are
beginning to raise rates and reduce liquidity. Stocks around the world may be on
the verge of a decline if liquidity contracts significantly and interest rates
rise.

As we enter the fourth quarter, we are very mindful of the risks of cash, and
basically are gradually deploying what we have into the European equity markets.
We are doing a great deal of work on sector analysis with the research team in
"the engine room." There are some interesting anomalies particularly in
telecommunications and pharmaceuticals which we are studying. The question is
the interaction of value and growth.

As for Japan, which is our single biggest country weight, we continue to believe
that it is essentially a restructuring story. The positive surprise could be
that the economy might be stronger next year than the consensus expects. Our
reasoning is described below:

The Japanese economy is tilted upwards but the arc of the turn is profoundly
gradual. Hundreds of economists constantly monitor its vital signs, but some of
the best clues are intuitive rather than statistical. In other words, we
distrust the conventional analysis, which at this time is for at least another
year of stagnation or even a reversion to recession. We suspect, not believe or
forecast, that real growth in the year 2000 will be around 2%, the only caveat
being that the U.S. economy, the locomotive of the world, can slow, but must not
falter.

Our reasons for this above consensus guess is that we think the strong yen and
the rising stock market are having a subtle but meaningful impact on reviving
consumer spending patterns in Japan. Both are being viewed by the Japanese man
and woman on the street as signs that the world is regaining confidence in
Japan. Actions speak far louder than words, particularly words of politicians
and Ministry of Finance officials who have been wrong for years. The Japanese
public seems to be reasoning that investors don't buy the currency and the
shares of a country that is going down the drain.

The other factor is that restructuring with its snowballing effect on
unemployment now seems to have been accepted into the Japanese psyche. There is
no question that it created insecurity and when combined with deflation caused
consumers to defer purchases. Deflation itself engenders a "don't buy now
because it will cost less later" psychology.

The other factor in our relative optimism is the on-going recovery in the rest
of Asia, which, of course, will aid Japan. However we emphasize that it is not
capital spending, exports, or housing that we are counting on to boost Japanese
GDP next year. It is a revival in consumer spending. Economists always
underestimate the snapback effect from the consumer when the environment
improves.

Just look at the V shaped recoveries in Asia in the last 18 months. Please note
that 2% real growth is hardly a V shaped recovery after years of stagnation and
recession.

In September we lowered our allocation to the U.K. and as of October 8, 1999 we
are now at 14.5% versus 20.6% for the EAFE Index. The Bank of England raised
short-term interest rates in early September by 25 basis points and we believe
that further rate rises will follow. The central bank was very agile in lowering
interest rates to avoid an economic bust and we expect the bank to be aggressive
on the upside as well.

We remain underweight Europe, although we have added to Germany and Italy since
the end of September. We do believe in the positive long-term case for a
transformed Europe. Corporate taxes are being cut; mergers and aquisitions
activity has passed US$ 1 trillion this year (we don't believe it has peaked);
buybacks are being made easier to complete; and corporations are restructuring
their balance sheets and business units. Add all this to a cyclical revival, and
over the next three years we expect European profits should grow at least as
fast as those in the U.S. Additionally, the liquidity of funds moving to equity
investments should remain a powerful source of support. However, European
equities are fully valued and highly correlated to U.S. stocks. We are looking
for an opportunity to increase our allocation to European equities.

We have lowered our Hong Kong allocation since month-end from overweight to
neutral versus the benchmark (2.3%). In Hong Kong bank loan growth is still
negative and

5
<PAGE>

we are now marginally less optimistic on the chances of World Trade Organization
membership. From a technical perspective, there are a large number of stock
offerings, including the disposal of part of the government's equity positions,
which is likely to overhang the market. We continue to favor Singapore, which is
our largest relative allocation at more than twice the benchmark weight (2.2%
vs. 1.0%). We like Singapore based on an improving corporate environment and
robust economic growth.

We continue to closely monitor the emerging markets with our extensive
investment management and research team. At this point in the cycle, we feel it
is unrealistic to be as cautious as we are about the U.S. equity market and to
expect the emerging markets to outperform. Also, although we expect no major
disruption at the end of the year, if there are going to be dislocations they
are most likely to occur in the developing countries.

Ann D. Thivierge
PORTFOLIO MANAGER

Barton M. Biggs
PORTFOLIO MANAGER

October 1999
6
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (78.1%)
AUSTRALIA (1.6%)
24,086 Amcor Ltd. .................................... $ 116
34,699 AMP Ltd. ...................................... 323
13,758 Australian Gas Light Co., Ltd. ................ 81
40,598 Boral Ltd. .................................... 62
8,091 Brambles Industries Ltd. ...................... 234
59,008 Broken Hill Proprietary Co., Ltd. ............. 680
23,006 Coca Cola Amatil Ltd. ......................... 81
40,446 Coles Myer Ltd. ............................... 211
29,503 Colonial Ltd. ................................. 107
3,928 CSL Ltd. ...................................... 44
39,744 CSR Ltd. ...................................... 100
4,539 F.H. Faulding & Co., Ltd. ..................... 30
65,662 Fosters Brewing Group Ltd. .................... 185
49,087 General Property Trust ........................ 83
8,601 Gio Australia Holdings Ltd. ................... 16
43,942 Goodman Fielder Ltd. .......................... 41
10,711 ICI Australia Ltd. ............................ 58
10,113 Leighton Holdings Ltd. ........................ 39
19,563 Lend Lease Corp., Ltd. ........................ 239
13,213 Mayne Nickless Ltd. ........................... 35
51,077 National Australia Bank Ltd. .................. 748
130,744 News Corp., Ltd. .............................. 918
71,595 Normandy Mining Ltd. .......................... 64
25,110 North Ltd. .................................... 53
41,844 Pacific Dunlop Ltd. ........................... 63
34,185 Pioneer International Ltd. .................... 84
14,641 QBE Insurance Group Ltd. ...................... 56
6,725 Rio Tinto Ltd. ................................ 114
22,328 Santos Ltd. ................................... 62
14,524 Schroders Property Fund ....................... 23
7,312 Smith (Howard) Ltd. ........................... 55
23,235 Southcorp Holdings Ltd. ....................... 85
11,637 Stockland Trust Group ......................... 26
11,718 Suncorp-Metway Ltd. ........................... 62
12,061 TABCORP Holdings Ltd. ......................... 82
178,705 Telstra Corp. Ltd. ............................ 926
6,888 Wesfarmers Ltd. ............................... 61
48,104 Westfield Trust ............................... 97
67,204 Westpac Banking Corp. ......................... 415
66,646 WMC Ltd. ...................................... 339
42,007 Woolworths Ltd. ............................... 147
-----------
7,245
-----------
AUSTRIA (0.3%)
1,191 Austian Airlines/Oest Luftv AG ................ 24
159 Austria Mikro Systeme
International AG ............................ 5
1,170 Austria Tabakwerke AG ......................... 55
5,990 Bank Austria AG ............................... 298
250 Bau Holding AG ................................ 8
486 BBag Oest Brau Beteiligungs AG ................ 22
587 Boehler-Uddeholm AG ........................... 26
90 BWT AG ........................................ 17
375 EA-Generali AG ................................ 60
1,127 Flughafen Wein AG ............................. 45
197 Lenzing AG .................................... $ 12
637 Mayr-Melnhof Karton AG ........................ 28
1,621 Oest Elektrizatswirts AG, Class A ............. 239
1,420 OMV AG ........................................ 132
743 Radex-Heraklith Industriebet AG ............... 22
795 VA Technologie AG ............................. 64
3,664 Wienerberger Baustoffindustrie AG ............. 82
-----------
1,139
-----------
FRANCE (5.2%)
1,158 Accor ......................................... 270
6,373 Alcatel Alsthom ............................... 878
10,098 Axa ........................................... 1,277
14,102 Banque Nationale de Paris ..................... 1,125
855 Bouygues ...................................... 271
3,772 Canal Plus .................................... 225
2,295 Cap Gemini Sogeti ............................. 362
7,044 Carrefour ..................................... 1,127
2,339 Casino Guichard-Perrachon ..................... 269
3,045 Cie de Saint Gobain ........................... 567
4,007 Dassault Systemes S.A. ........................ 158
8,515 Elf Aquitaine ................................. 1,551
1,319 Eridania Beghin-Say ........................... 160
411 Essilor International ......................... 131
27,805 France Telecom ................................ 2,438
1,924 Groupe Danone ................................. 468
3,078 Klepierre ..................................... 314
2,805 L'Air Liquide ................................. 445
2,011 L'OREAL ....................................... 1,283
3,412 Lafarge ....................................... 377
4,372 Lagardere S.C.A. .............................. 181
875 Legrand ....................................... 197
2,695 LVMH Moet Hennessy Louis Vuitton .............. 807
4,368 Lyonnaise des Eaux ............................ 707
6,574 Michelin Compagnie Generale des
Establissements, Class B .................... 310
2,742 Pechiney ...................................... 152
2,170 Pernod Ricard ................................. 146
3,612 Pinault-Printemps-Re doute S.A. ............... 684
578 Promodes ...................................... 511
1,605 PSA Peugeot Citroen ........................... 321
11,457 Rhone-Poulenc, Class A ........................ 591
220 Sagem ......................................... 61
13,244 Sanofi ........................................ 564
5,294 Schneider ..................................... 387
2,040 SEITA ......................................... 122
968 Silic ......................................... 160
4,797 Simco (RFD) ................................... 408
1,880 Soceite BIC ................................... 92
1,400 Societe Fonciere Lyonnaise .................... 195
2,948 Societe Generale, Class A ..................... 607
1,052 Sodexho Alliance .............................. 178
5,074 Thomson CSF ................................... 172
7,925 Total, Class B ................................ 995
</TABLE>
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
FRANCE (CONT.)
3,372 Unibail ....................................... $ 478
8,809 Usinor Sacilor ................................ 124
2,735 Valeo ......................................... 198
14,451 Vivendi ....................................... 1,014
-----------
24,058
-----------
GERMANY (5.9%)
1,883 Adidas AG ..................................... 161
1,883 AGIV AG ....................................... 35
9,958 Allianz AG .................................... 2,830
1,350 AMB AG ........................................ 120
23,950 BASF AG ....................................... 1,025
27,800 Bayer AG ...................................... 1,102
15,670 Bayerische Vereinsbank AG ..................... 921
2,567 Bilfinger & Berger Bau AG ..................... 57
1,367 CKAG AG ....................................... 137
4,567 Continential AG ............................... 99
35,834 DaimlerChrysler AG ............................ 2,454
19,550 Deutsche Bank AG .............................. 1,308
107,808 Deutsche Telekom AG ........................... 4,343
18,717 Dresdner Bank AG .............................. 883
5,867 FAG Kugelfischer Georg Schaefer AG ............ 55
1,985 Heidelberger Zement AG ........................ 172
4,133 Hochtief AG ................................... 171
483 Karstadt AG ................................... 213
2,683 Kloeckner-Humboldt-Deutz AG ................... 18
3,330 Linde AG ...................................... 184
14,033 Lufthansa AG .................................. 255
12,967 Mannesmann AG ................................. 2,031
8,417 Merck KGaA .................................... 305
9,143 Metro AG ...................................... 475
5,607 Muechener Rueck AG (Registered) ............... 1,140
6,500 Preussag AG ................................... 326
16,823 RWE AG ........................................ 709
2,197 SAP AG ........................................ 832
3,017 Schering AG ................................... 330
21,583 Siemens AG .................................... 1,757
20,000 Thyssen Krupp AG .............................. 395
19,200 VEBA AG ....................................... 1,073
29,198 Viag AG ....................................... 558
11,580 Volkswagen AG ................................. 643
-----------
27,117
-----------
HONG KONG (2.8%)
77,757 Bank of East Asia Ltd. ........................ 169
245,000 Cathay Pacific Airways Ltd. ................... 442
172,000 Cheung Kong Holdings Ltd. ..................... 1,434
186,000 CLP Holdings Ltd. ............................. 874
127,000 Hang Lung Development Co. ..................... 144
152,700 Hang Seng Bank Ltd. ........................... 1,617
395,700 Hong Kong & China Gas Co., Ltd. ............... 532
58,000 Hong Kong & Shanghai Hotel Ltd. ............... 44
859,108 Hong Kong Telecommunications Ltd. ............. 1,886
135,200 Hopewell Holdings Ltd. ........................ 95
268,000 Hutchison Whampoa Ltd. ........................ 2,493
89,090 Hysan Development Co., Ltd. ................... 111
176,360 New World Development Co., Ltd. ............... $ 387
25,000 Shangri-La Asia Ltd. .......................... 28
196,798 Sino Land Co. ................................. 96
50,000 South China Morning Post
Holdings Ltd. ............................... 33
177,000 Sun Hung Kai Properties Ltd. .................. 1,350
127,500 Swire Pacific Ltd., Class A ................... 604
30,000 Television Broadcasts Ltd. .................... 128
179,000 Wharf Holdings Ltd. ........................... 517
-----------
12,984
-----------
ITALY (1.9%)
30,642 ALITALIA ...................................... 86
24,335 Assicurazioni Generali S.p.A. ................. 808
46,876 Banca Commerciale Italiana .................... 323
63,091 Banco Ambrosiano Veneto S.p.A. ................ 264
8,001 Banco Popolare di Milano ...................... 59
41,147 Benetton Group S.p.A. ......................... 90
2,277 Cartiere Burgo ................................ 18
103,534 Credito Italiano S.p.A ........................ 506
16,430 Edison S.p.A. ................................. 144
192,888 ENI S.p.A. .................................... 1,209
9,991 Fiat S.p.A. ................................... 333
10,497 Impregilo S.p.A. .............................. 8
34,420 Instituto Bancario San Paolo di Torino......... 447
100,999 Istituto Nazionale delle Assicurazioni......... 329
3,645 Italcementi S.p.A. ............................ 50
5,381 Italcementi S.p.A. (RNC) ...................... 26
11,235 Italgas ....................................... 49
11,949 Magneti Marelli S.p.A ......................... 33
29,425 Mediaset S.p.A. ............................... 300
15,577 Mediobanca S.p.A. ............................. 172
34,266 Montedison S.p.A. Di Risp (NCS) ............... 42
104,728 Olivetti S.p.A. ............................... 226
42,060 Parmalat Finanziaria S.p.A. ................... 56
56,201 Pirelli S.p.A. ................................ 137
11,793 R.A.S. S.p.A. ................................. 118
2,855 Reno de Medici S.p.A. ......................... 9
5,201 Rinascente S.p.A. ............................. 39
3,277 SAI ........................................... 37
4,432 Sirti S.p.A. .................................. 23
22,506 Snia BPD S.p.A. ............................... 26
153,823 Telecom Italia Mobile S.p.A. .................. 956
37,394 Telecom Italia Mobile S.p.A. (RNC) ............ 138
88,313 Telecom Italia S.p.A. ......................... 767
21,523 Telecom Italia S.p.A. (RNC) ................... 108
1,782,487 Unione Immobiliare S.p.A. ..................... 947
-----------
8,883
-----------
JAPAN (25.2%)
6,100 Acom Co., Ltd. ................................ 798
2,990 Advantest Corp. ............................... 431
63,400 Ajinomoto Co., Inc. ........................... 739
5,000 Alps Electric Co. ............................. 104
86,900 Asahi Bank Ltd. ............................... 623
38,000 Asahi Breweries Ltd. .......................... 580
114,000 Asahi Chemical Industry Co., Ltd. ............. 633
108,800 Asahi Glass Co., Ltd. ......................... 751
</TABLE>
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (CONT.)
5,800 Bank of Yokohama Ltd. ......................... $ 20
2,000 Benesse Corp. ................................. 397
42,000 Bridgestone Corp. ............................. 1,172
70,600 Canon, Inc. ................................... 2,050
22,800 Casio Computer Co., Ltd. ...................... 173
87 Central Japan Railway Co. ..................... 579
40,600 Chugai Pharmaceuticals Co., Ltd. .............. 489
1,900 CSK Corp. ..................................... 66
42,600 Dai Nippon Printing Co., Ltd. ................. 790
39,600 Daiei, Inc. ................................... 157
37,600 Daikin Industries Ltd. ........................ 454
5,000 Dainippon Screen Manufacturing ................ 30
69,000 Daiwa Bank Ltd. ............................... 229
39,600 Daiwa House Industry Co., Inc. ................ 391
101,000 Daiwa Securities Co., Ltd. .................... 918
16,600 Denso Corp. ................................... 351
222 East Japan Railway Co. ........................ 1,410
25,800 Ebara Corp. ................................... 334
10,100 Fanuc Ltd. .................................... 685
216,000 Fuji Bank ..................................... 2,618
23,000 Fuji Photo Film Ltd. .......................... 786
1,000 Fuji Soft ABC, Inc. ........................... 85
134,200 Fujitsu Ltd. .................................. 4,173
28,800 Furukawa Electric Co., Ltd. ................... 171
29,000 Gunma Bank Ltd. ............................... 197
1,200 Hirose Electric Co., Ltd. ..................... 188
284,000 Hitachi Ltd. .................................. 3,139
46,000 Honda Motor Co., Ltd. ......................... 1,922
3,000 Hoya Corp. .................................... 181
103,000 Industrial Bank of Japan ...................... 1,263
17,000 Ito-Yokado Co., Ltd. .......................... 1,401
121,000 Japan Airlines Co., Ltd. ...................... 465
87 Japan Tobacco, Inc. ........................... 1,076
3,600 Joyo Bank Ltd. ................................ 15
19,800 Jusco Co., Ltd. ............................... 372
74,400 Kajima Corp. .................................. 297
51,700 Kansai Electric Power Co., Ltd. ............... 997
51,000 Kao Corp. ..................................... 1,438
86,200 Kinki Nippon Railway Co., Ltd. ................ 459
77,400 Kirin Brewery Co., Ltd. ....................... 924
69,400 Komatsu Ltd. .................................. 459
2,000 Konami Co., Ltd. .............................. 193
110,000 Kubota Corp. .................................. 387
18,700 Kyocera Corp. ................................. 1,419
34,600 Kyowa Hakko Kogyo Co., Ltd. ................... 263
104,000 Marubeni Corp. ................................ 269
154,000 Matsushita Electric Industrial
Co., Ltd. ................................... 3,267
1,200 Meitec Corp. .................................. 45
117,000 Mitsubishi Chemical Corp. ..................... 446
104,000 Mitsubishi Corp. .............................. 857
197,800 Mitsubishi Electric Corp. ..................... 1,126
33,000 Mitsubishi Estate Co., Ltd. ................... 334
208,000 Mitsubishi Heavy Industries Ltd. .............. 799
72,400 Mitsubishi Materials Corp. .................... 214
51,000 Mitsubishi Trust & Banking Co. ................ 621
103,800 Mitsui & Co., Ltd. ............................ $ 784
24,400 Mitsui Fudosan Co., Ltd. ...................... 195
200 Mitsui Trust & Banking Co., Ltd. .............. --
39,800 Mitsukoshi Ltd. ............................... 238
24,000 Murata Manufacturing Co., Ltd. ................ 2,405
25,800 Mycal Corp. ................................... 161
113,400 NEC Corp. ..................................... 2,278
40,600 NGK Insulators Ltd. ........................... 393
2,900 Nichiei Co. Ltd. (Kyoto) ...................... 221
1,800 Nidec Corp. ................................... 340
11,000 Nikon Corp. ................................... 211
10,000 Nintendo Corp., Ltd. .......................... 1,590
27,800 Nippon Express Co., Ltd. ...................... 186
34,600 Nippon Meat Packers, Inc. ..................... 441
110,800 Nippon Oil Co., Ltd. .......................... 453
289,000 Nippon Steel Co. .............................. 782
580 Nippon Telegraph & Telephone Corp
(NTT) ....................................... 7,116
107,000 Nippon Yusen Kabushiki Kaisha ................. 392
139,600 Nissan Motor Co., Ltd. ........................ 843
225,800 NKK Corp. ..................................... 209
74,000 Nomura Securities Co., Ltd. ................... 1,144
75,400 Oji Paper Co., Ltd. (New) ..................... 528
8,000 Omron Corp. ................................... 158
4,300 Oriental Land Co. Ltd. ........................ 356
1,700 Orix Corp. .................................... 208
154,600 Osaka Gas Co., Ltd. ........................... 514
17,000 Pioneer Electric Corp. ........................ 291
2,900 Promise Co., Ltd. ............................. 233
10,000 Rohm Co., Ltd. ................................ 2,084
145,000 Sakura Bank Ltd. .............................. 1,086
30,800 Sankyo Co., Ltd. .............................. 923
124,000 Sanyo Electric Co., Ltd. ...................... 598
15,600 Secom Co., Ltd. ............................... 1,388
39,600 Sekisui House Co., Ltd. ....................... 446
97,200 Sharp Corp. ................................... 1,553
11,800 Shimano, Inc. ................................. 282
57,600 Shimizu Corp. ................................. 254
14,000 Shin-Etsu Chemical Co., Ltd. .................. 582
17,000 Shiseido Co., Ltd. ............................ 253
20,600 Shizuoka Bank Ltd. ............................ 247
2,900 SMC Corp. ..................................... 407
6,600 Softbank Corp. ................................ 2,503
28,600 Sony Corp. .................................... 4,262
91,000 Sumitomo Bank ................................. 1,364
145,600 Sumitomo Chemical Co., Ltd. ................... 739
74,400 Sumitomo Corp. ................................ 546
52,400 Sumitomo Electric Industries .................. 717
22,800 Sumitomo Forestry Co., Ltd. ................... 165
36,800 Sumitomo Metal & Mining Co. ................... 182
135,800 Sumitomo Metal Industries ..................... 153
79,400 Taisei Corp., Ltd. ............................ 176
25,800 Taisho Pharmaceutical Co., Ltd. ............... 1,083
46,000 Taiyo Yuden Co., Ltd. ......................... 1,517
45,600 Takeda Chemical Industries .................... 2,456
5,800 Takefuji Corp. ................................ 963
75,400 Teijin Ltd. ................................... 362
</TABLE>
9
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (CONT.)
12,000 Terumo Corp. .................................. $ 370
14,000 The 77 Bank, Ltd. ............................. 146
243,000 The Bank of Tokyo- Mitsubushi
Ltd. ........................................ 3,721
51,400 Tobu Railway Co., Ltd. ........................ 166
25,400 Tohoku Electric Power Co., Ltd. ............... 395
71,800 Tokai Bank Ltd. ............................... 517
29,000 Tokio Marine & Fire Insurance
Co., Ltd. ................................... 342
65,800 Tokyo Electric Power Co. ...................... 1,516
11,000 Tokyo Electron Ltd. ........................... 953
144,600 Tokyo Gas Co. ................................. 345
63,400 Tokyu Corp. ................................... 178
48,600 Toppan Printing Co., Ltd. ..................... 610
114,100 Toray Industries, Inc. ........................ 588
221,000 Toshiba Corp. ................................. 1,641
38,600 Toto Ltd. ..................................... 300
1,000 Toyo Information Systems ...................... 47
160,000 Toyota Motor Corp. ............................ 5,080
72,400 Ube Industries Ltd. ........................... 176
600 Yamaichi Securities Co., Ltd. ................. --
47,000 Yokogawa Electric Corp. ....................... 335
-----------
115,607
-----------
NETHERLANDS (5.5%)
83,398 ABN Amro Holding N.V. ......................... 1,873
32,177 Aegon N.V. .................................... 2,767
19,132 Akzo Nobel N.V. ............................... 810
5,264 Buhrmann N.V. ................................. 89
34,516 Elsevier N.V. ................................. 354
3,832 Getronics N.V. ................................ 207
4,812 Hagemeyer N.V. ................................ 115
17,824 Heineken N.V. ................................. 886
53,502 ING Groep N.V. ................................ 2,904
4,854 KLM Royal Dutch Airlines N.V. ................. 126
34,200 Koninklijke Ahold N.V. ........................ 1,125
1,515 Nedlloyd Groep N.V. ........................... 42
5,271 Oce N.V. ...................................... 97
19,135 Phillips Electronics N.V. ..................... 1,925
123,467 Royal Dutch Petroleum Co. ..................... 7,162
26,550 Royal KPN N.V. ................................ 1,163
2,847 Stork N.V. .................................... 59
28,108 TNT Post Group N.V. ........................... 715
33,469 Unilever N.V. ................................. 2,276
4,195 Vedior N.V. ................................... 73
16,784 Wolters Kluwer N.V. ........................... 575
-----------
25,343
-----------
PORTUGAL (0.9%)
20,709 Banco Commercial Portugues
(Registered) ................................ 558
12,702 Banco Espirito Santo e Comercial de
Lisboa (Registered) ......................... 319
11,210 Banco Portugues de Investimento
(New) ....................................... 229
6,261 Brisa-Auto Estradas ........................... 239
2,326 Cia de Seguros Tranquilidade
(Registered) ................................ 68
15,171 Cimpor SGPS ................................... $ 250
400 Cin-Corparacao Industial do Norte ............. 10
63,151 EDP-Electricidade de Portugal ................. 996
537 INAPA-Investimentos Participacoes e
Gestao ...................................... 5
8,498 Jeronimo Martins SGPS ......................... 241
11,271 Portucel Industrial-Empressa .................. 82
19,192 Portugal Telecom (Registered) ................. 798
358 Sociedade de Construcoes Soares da
Costa ....................................... 1
3,032 Somague-Sociedade Gestora de
Participacoes ............................... 12
4,830 Sonae Investmentos ............................ 157
1,789 UNICER-Uniao Cervejeira ....................... 34
-----------
3,999
-----------
SINGAPORE (2.3%)
115,000 City Developments Ltd. ........................ 585
13,250 Creative Technology Ltd. ...................... 145
42,000 Cycle & Carriage Ltd. ......................... 141
116,300 DBS Group Holdings Ltd. ....................... 1,327
225,500 DBS Land Ltd. ................................. 419
43,000 First Capital Corp., Ltd. ..................... 49
46,800 Fraser & Neave Ltd. ........................... 153
126,000 Hotel Properties Ltd. ......................... 102
120,750 Keppel Corp., Ltd. ............................ 352
68,000 NatSteel Ltd. ................................. 120
92,000 Neptune Orient Lines Ltd. (Foreign) ........... 110
152,560 Oversea-Chinese Banking Corp.
(Foreign) ................................... 1,185
64,000 Parkway Holdings Ltd. ......................... 117
264,644 Sembcorp Industries Ltd. ...................... 305
135,000 Singapore Airlines Ltd. (Foreign) ............. 1,318
52,018 Singapore Press Holdings Ltd. ................. 820
419,000 Singapore Technologies Engineering
Ltd. ........................................ 535
892,000 Singapore Telecommunications Ltd. ............. 1,627
232,000 United Industrial Corp., Ltd. ................. 126
101,000 United Overseas Bank Ltd. (Foreign)............ 766
164,000 United Overseas Land Ltd. ..................... 145
34,000 Venture Manufacturing
(Singapore) Ltd. ............................ 296
-----------
10,743
-----------
SPAIN (3.6%)
5,569 Acerinox ...................................... 173
4,526 ACS Actividades ............................... 121
10,557 Aguas de Barcelona ............................ 177
34,173 Argentaria .................................... 751
19,526 Autopistas Concesionaria Espanola ............. 215
2,402 Azucarera Ebro Agricolas ...................... 43
153,813 Banco Bilbao Vizcaya (Registered) ............. 2,027
263,622 Banco Santander ............................... 2,724
7,567 Corporacion Financiera Alba ................... 209
5,430 Corporacion Mapfre ............................ 101
70,435 Endesa ........................................ 1,337
1 Ercros ........................................ --
6,892 Fomento Construction y Cantractas ............. 188
</TABLE>
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
SPAIN (CONT.)
33,009 Gas Natural SDG ............................... $ 706
12,990 Grupo Dragados, S.A. .......................... 149
66,400 Iberdrola ..................................... 984
17,451 Inmobiliaria Metropolitana
Vasco Central ............................... 389
14,840 Prima Immobiliaria S.A. ....................... 135
71,583 Repsol ........................................ 1,401
7,209 SOL Melia S.A. ................................ 87
13,205 Tabacalera .................................... 250
203,847 Telefonica .................................... 3,261
16,707 Telepizza ..................................... 77
21,964 Union Electrica Fenosa ........................ 329
57 Uralita ....................................... 1
64,932 Vallehermoso .................................. 625
115 Viscofan Envolturas Celulosicas ............... 1
3,616 Zardoya Otis .................................. 49
-----------
16,510
-----------
SWEDEN (2.9%)
12,600 AGA AB, Class B ............................... 215
10,050 Atlas Copco AB, Class A ....................... 282
5,300 Atlas Copco AB, Class B ....................... 147
18,520 Castellum AB .................................. 159
31,424 Diligentia AB ................................. 236
16,720 Drott AB, Class B ............................. 155
23,800 Electrolux AB, Series B ....................... 445
113,000 Ericsson LM, Class B .......................... 3,504
10,600 Fastighets AB Tornet .......................... 133
41,100 ForeningsSparbanken AB ........................ 667
63,600 Hennes & Mauritz AB, Class B .................. 1,603
7,233 Netcom Systems AB, Class B .................... 268
5,700 OM Gruppen AB ................................. 64
6,700 S.K.F. AB, Class B ............................ 150
15,300 Sandvik AB, Class A ........................... 416
6,400 Sandvik AB, Class B ........................... 175
30,340 Securitas AB, Class B ......................... 456
40,100 Skandia Forsakrings AB ........................ 837
46,600 Skandinaviska Enskilda Banken,
Class A ..................................... 475
9,800 Skanska AB, Class B ........................... 365
17,200 Svenska Cellulosa AB, Class B ................. 459
50,500 Svenska Handelsbanken, Class A ................ 706
9,400 Svenskt Stal AB (SSAB), Series A .............. 121
11,400 Trelleborg AB, Class B ........................ 109
11,400 Volvo AB, Class A ............................. 321
23,850 Volvo AB, Class B ............................. 674
4,400 WM-Data AB, Class B ........................... 191
-----------
13,333
-----------
SWITZERLAND (5.5%)
27 ABB AG ........................................ 44
12,782 ABB Ltd. ...................................... 1,319
895 Adecco ........................................ 500
295 Alusuisse-Lonza Holdings Ltd.
(Registered) ................................ 339
12,600 CS Holding AG (Registered) .................... 2,306
350 Holderbank Financiere Glarus AG,
Class B (Bearer) ............................ $ 454
1,865 Nestle (Registered) ........................... 3,501
3,020 Novartis AG (Registered) ...................... 4,475
76 Roche Holding AG (Bearer) ..................... 1,407
326 Roche Holding AG (Registered) ................. 3,768
750 SAirgroup ..................................... 162
80 SGS Surveillance .............................. 90
260 SMH AG (Bearer) ............................... 202
210 Sulzer AG (Registered) ........................ 132
695 Swiss Reinsurance (Registered) ................ 1,386
3,260 Swisscom AG (Registered) ...................... 1,016
9,869 UBS (Registered) .............................. 2,779
315 Valora Holding AG ............................. 80
2,260 Zurich Allied AG .............................. 1,259
-----------
25,219
-----------
THAILAND (0.0%)
8,000 CMIC Finance & Securities PCL
(Foreign) .................................. --
18,600 General Finance & Securities PCL
(Foreign) .................................. --
34,700 Siam City Bank PCL (Foreign) ................. --
-----------
--
-----------
UNITED KINGDOM (14.5%)
53,563 Abbey National plc ............................ 951
34,817 Albert Fisher Group plc ....................... 10
1,851 Alldays plc ................................... 2
2,415 Allders plc ................................... 6
58,643 Allied Zurich plc ............................. 688
7,063 AMEC plc ...................................... 29
20,898 Anglian Water plc ............................. 247
34,741 Arjo Wiggins Appleton plc ..................... 113
26,069 Associated British Foods plc .................. 170
21,152 Associated British Ports Holdings plc ......... 103
28,721 AstraZeneca Group plc ......................... 1,197
43,513 BAA plc ....................................... 441
53,303 Barclays plc .................................. 1,565
10,099 Barratt Developments plc ...................... 43
27,053 Bass plc ...................................... 326
1,209 BBA Group plc ................................. 9
25,448 Beazer Group plc .............................. 60
17,594 Berisford plc ................................. 88
154,396 BG plc ........................................ 887
35,417 BICC plc ...................................... 63
66,198 Blue Circle Industries plc .................... 394
21,425 BOC Group plc ................................. 447
37,939 Boots Co. plc ................................. 423
68,361 BPB Industries plc ............................ 421
75,975 British Aerospace plc ......................... 501
45,104 British Airways plc ........................... 253
58,654 British American Tobacco plc .................. 503
137,932 British Land Co. plc .......................... 1,076
290,608 British Petroleum Co. plc ..................... 5,306
59,331 British Sky Broadcasting plc .................. 574
104,121 British Steel plc ............................. 264
</TABLE>
11
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM (CONT.)
194,687 British Telecommunications plc ................ $ 2,947
158,240 BTR plc ....................................... 771
28,406 Burmah Castrol plc ............................ 531
70,701 Cable & Wireless plc .......................... 769
84,716 Cadbury Schweppes plc ......................... 588
32,370 Capital Shopping Centers plc .................. 214
85,194 Caradon plc ................................... 215
10,413 Carillion Plc ................................. 21
11,379 Carpetright plc ............................... 79
159,822 Centrica plc .................................. 439
4,309 Cobham plc .................................... 57
36,806 Commercial Union plc .......................... 568
25,488 Compass Group plc ............................. 250
2,363 Delta plc ..................................... 5
120,057 Diageo plc .................................... 1,226
4,384 Dialog Corp. plc .............................. 5
5,841 EMAP plc ...................................... 80
64,737 EMI Group plc ................................. 473
26,630 Enterprise Oil plc ............................ 182
25,800 FirstGroup Aquisition Ltd. .................... 4
25,800 FirstGroup plc ................................ 135
21,058 FKI plc ....................................... 66
96,509 General Electric plc .......................... 926
54,218 GKN plc ....................................... 865
117,363 Glaxo Wellcome plc ............................ 3,061
64,246 Granada Group Plc ............................. 550
172,580 Grantchester Holdings plc ..................... 403
76,100 Great Portland Estates plc .................... 257
37,062 Great Universal Stores plc .................... 279
90,967 Halifax plc ................................... 1,143
53,250 Hammerson plc ................................. 416
51,045 Hanson plc .................................... 393
13,575 House of Fraser ............................... 18
231,942 HSBC Holdings plc ............................. 2,658
9,035 Hyder plc ..................................... 80
24,877 IMI plc ....................................... 114
29,662 Imperial Chemical Industries plc .............. 329
14,587 Jarvis plc .................................... 67
1,427 JBA Holdings plc .............................. 6
29,407 Johnson Matthey plc ........................... 280
55,767 Kingfisher plc ................................ 598
53,005 Ladbroke Group plc ............................ 184
6,302 Laird Group plc ............................... 32
120,325 Land Securities plc ........................... 1,620
70,346 Lasmo plc ..................................... 164
227,756 Legal & General Group plc ..................... 646
11,777 Lex Service plc ............................... 110
11,340 Limit plc ..................................... 27
191,131 Lloyds TSB Group plc .......................... 2,376
21,361 London Clubs International plc ................ 49
7,019 London Forfaiting Co. plc ..................... 5
28,645 Lonrho plc .................................... 302
1,872 Low & Bonar plc ............................... 6
1,810 Manchester United plc ......................... 7
103,929 Marks and Spencer plc ......................... 540
237 Mayflower Corp. plc ........................... 1
2,171 McKechnie plc ................................. $ 15
5,553 Meggitt plc ................................... 17
96,916 MEPC plc ...................................... 724
21,924 Mirror Group News plc ......................... 96
58,404 MISYS plc ..................................... 573
50,775 National Power plc ............................ 396
42,137 NEC plc ....................................... 148
16,137 NEXT plc ...................................... 163
890 Ocean Group plc ............................... 14
28,443 Parity plc .................................... 119
29,296 Peninsular & Oriental Steam
Navigation .................................. 442
11,317 Pennon Group plc .............................. 194
178,701 Pilkington plc ................................ 300
1,975 Powerscreen International plc ................. 6
78,655 Prudential Corp. plc .......................... 1,208
10,414 Racal Electronic plc .......................... 71
17,911 Railtrack Group plc ........................... 377
62,124 Rank Group plc ................................ 219
47,708 Reed International plc ........................ 287
124,404 Rentokil Initial plc .......................... 440
50,503 Reuters Group plc ............................. 570
26,392 Rexam plc ..................................... 113
39,391 Rio Tinto plc ................................. 683
15,240 RMC Group plc ................................. 235
37,612 Rolls-Royce plc ............................... 130
37,979 Royal & Sun Alliance Insurance
Group plc ................................... 299
12,052 Rugby Group plc ............................... 19
45,756 Safeway plc ................................... 167
72,318 Sainsbury (J) plc ............................. 451
4,107 Schroders plc ................................. 86
5,310 Scotia Holdings plc ........................... 14
187 Scottish & Newcastle plc ...................... 2
47,576 Scottish Hydro-Electric plc ................... 444
53,424 Scottish Power plc ............................ 491
1,614 Skillsgroup plc ............................... 6
110,013 Slough Estates plc ............................ 634
193,141 Smithkline Beecham plc ........................ 2,221
5,565 Smiths Industries plc ......................... 79
45,467 Stagecoach Holdings plc ....................... 142
10,413 Tarmac plc .................................... 75
32,085 Tate & Lyle plc ............................... 198
18,917 Taylor Woodrow plc ............................ 46
81,094 Tesco plc ..................................... 253
20,033 Thames Water plc .............................. 313
6,861 The Berkeley Group plc ........................ 66
19,443 TI Group plc .................................. 142
1,574 Torotrac plc .................................. 5
108,494 Unilever plc .................................. 1,021
27,355 United Utilities plc .......................... 299
2,637 Vickers plc ................................... 11
182,214 Vodafone Group plc ............................ 4,314
1,107 Wickes plc .................................... 7
16,674 William Baird plc ............................. 24
30,156 WPP Group plc ................................. 280
19,291 Yorkshire Water plc ........................... 125
</TABLE>
12
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM (CONT.)
35,432 Zeneca Group plc .............................. $ 1,486
-----------
66,557
-----------
TOTAL COMMON STOCKS (Cost $322,834) ............................... 358,737
-----------
PREFERRED STOCKS (0.3%)
AUSTRIA (0.0%)
3 Bau Holding AG ................................ --
-----------
GERMANY (0.2%)
1,567 SAP AG ........................................ 692
-----------
HONG KONG (0.1%)
68,000 Johnson Electric Holdings Ltd. ................ 330
-----------
ITALY (0.0%)
3,489 Fiat S.p.A. ................................... 57
-----------
NETHERLANDS (0.0%)
37,485 Unilever N.V. ................................. 201
-----------
TOTAL PREFERRED STOCKS (Cost $1,034) .............................. 1,280
-----------
<CAPTION>
NO. OF
RIGHTS
- ---------------
<S> <C> <C>
RIGHTS (0.0%)
AUSTRIA (0.0%)
743 Radx .......................................... --
-----------
ITALY (0.0%)
34,755 Montedison S.p.A. ............................. 68
-----------
SWEDEN (0.0%)
10,050 Atlas Copco AB, Class A ....................... 12
5,300 Atlas Copco AB, Class B ....................... 6
17,200 Svenska Cellulosa AB, Class B ................. 28
-----------
46
-----------
TOTAL RIGHTS (Cost $74) 114
-----------
<CAPTION>
NO. OF
WARRANTS
- ---------------
<S> <C> <C>
WARRANTS (0.0%)
HONG KONG (0.0%)
7,850 Hong Kong and China Gas Co. Ltd. .............. --
-----------
THAILAND (0.0%)
6,349 National Finance & Securities PCL ............. --
-----------
TOTAL WARRANTS (Cost $0) .......................................... --
-----------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<S> <C> <C>
FIXED INCOME SECURITIES (0.0%)
FRANCE (0.0%)
EUR 136 Casino Guichard-Perrachon, Series
XW, 4.50%, 7/12/01 .......................... 146
-----------
PORTUGAL (0.0%)
10 Jeronimo Martins SGPS, Zero
Coupon, 12/30/04 ............................ 6
-----------
TOTAL FIXED INCOME SECURITIES (Cost $37) .......................... 152
-----------
TOTAL FOREIGN SECURITIES (78.4%) (Cost $323,979) .................. 360,283
-----------

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (20.6%)
REPURCHASE AGREEMENT (20.6%)
$ 94,869 Chase Securities, Inc. 5.05%, dated
9/30/99, due 10/01/99, to be
repurchased at $94,882,
collateralized by U.S. Treasury
Bonds, 5.125%, due 02/13/04,
valued at $97,180 (Cost $94,869) ............ $ 94,869
-----------
<CAPTION>
FOREIGN CURRENCY (0.1%)
<S> <C> <C>
AUD 54 Australian Dollar ............................. 35
GBP 39 British Pound ................................. 64
EUR 132 Euro .......................................... 141
GRD 4,436 Greek Drachma ................................. 14
JPY 1,207 Japanese Yen .................................. 11
NOK 20 Norwegian Krone ............................... 3
SGD 128 Singapore Dollar .............................. 76
CHF 46 Swiss Franc ................................... 31
-----------
TOTAL FOREIGN CURRENCY (Cost $371) ................................ 375
-----------
TOTAL INVESTMENTS (99.1%) (Cost $419,219) ......................... 455,527
-----------
OTHER ASSETS AND LIABILITIES (0.9%)
Other Assets .................................................... 537,647
Liabilities ..................................................... (533,483)
-----------
4,164
-----------
NET ASSETS (100%) ................................................. $ 459,691
-----------
-----------
<CAPTION>
CLASS A:
- --------
<S> <C> <C>
NET ASSETS ........................................................ $ 455,148
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 35,945,526 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 12.66
-----------
-----------
CLASS B:
- --------
NET ASSETS ........................................................ $ 4,543
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 355,303 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 12.79
-----------
-----------
- --------------------------------------------------------------------------------
</TABLE>

NCS -- Non-Convertible Shares
PCL -- Public Company Limited
RFD -- Ranked for Dividend
RNC -- Non-Convertible Savings Shares
Foreign -- Prior governmental approval for foreign investments may be required
under certain circumstances.

13
<PAGE>

FUTURES CONTRACTS:
At September 30, 1999 the following futures contracts were open:

<TABLE>
<CAPTION>
NET
UNREALIZED
NUMBER AGGREGATE APPRECIATION
OF FACE VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
--------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
LONG
IBEX Index (Spain) 31 U.S.$ 3,061 Oct-99 $(139)
Aust All Ord.
(Australia) 17 U.S.$ 792 Dec-99 (12)
CAC 40 Index
(France) 242 U.S.$11,729 Dec-99 (32)
MIB 30 Index (Italy) 35 U.S.$ 6,178 Sept-99 (174)
TOPIX Index
(Japan) 227 U.S.$31,042 Dec-99 53

SHORT
DAX Index
(Germany) 9 U.S.$ 1,208 Dec-99 85
FT-SE Index (United
Kingdom) 47 U.S.$ 4,698 Dec-99 (74)
-----
$(293)
-----
-----
</TABLE>

14
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]

<TABLE>
<S> <C>
China (0.6%)
Hong Kong (28.6%)
India (0.1%)
Indonesia (2.2%)
South Korea (20.7%)
Malaysia (4.4%)
Philippines (1.2%)
Singapore (12.8%)
Taiwan (22.5%)
Thailand (2.4%)
Other (4.5%)
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) ALL-COUNTRY FAR
EAST FREE EX-JAPAN INDEX(1)
- ---------------------------------------------

TOTAL RETURNS(2)
----------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
------ ------ ------- ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A... 33.08% 65.53% -9.54% 5.35%
PORTFOLIO -- CLASS B... 32.75 64.54 N/A -11.88
INDEX -- CLASS A ...... 31.11 84.68 -5.43 7.72
INDEX -- CLASS B ...... 31.11 84.68 N/A -6.73
</TABLE>

1. The MSCI All-Country Far East Free ex-Japan Index is an unmanaged index of
common stocks and includes Indonesia, Hong Kong, Malaysia, the Philippines,
Korea, Singapore, Taiwan and Thailand (includes dividends).

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- -------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE
RESULTS PROVIDED ARE AS MEASURED BY THE MSCI ALL-COUNTRY FAR EAST EX-JAPAN
INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT
PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF
CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.

The investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities which are
traded on recognized exchanges of Hong Kong, Singapore, Malaysia, Thailand,
Indonesia and the Philippines. The Portfolio may also invest in equity
securities traded on markets in Taiwan, South Korea, India, Pakistan, Sri Lanka
and other Asian developing markets which are open for foreign investment. The
Portfolio does not intend to invest in securities which are principally traded
in Japan or in companies organized under the laws of Japan.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 33.08% for the Class A shares and 32.75% for the Class B shares compared to
31.11% for the Morgan Stanley Capital International (MSCI) All-Country Far East
Free ex-Japan Index (the "Index"). For the one year period ended September 30,
1999, the Portfolio had a total return of 65.53% for the Class A shares and
64.54% for the Class B shares compared to 84.68% for the Index. For the
five-year period ended September 30, 1999, the average annual total return for
Class A shares was -9.54% compared to -5.43% for the Index. For the period since
inception on July 1, 1991 through September 30, 1999, the average annual total
return of Class A shares was 5.35% compared to 7.72% for the Index. For the
period since inception on January 2, 1996 through September 30, 1999 the average
annual total return of Class B shares was -11.88% compared to -6.73% for the
Index.

All of the markets in the Index fell in the third quarter, with Indonesia,
Thailand and the Philippines performing the worst. Year-to-date, South Korea has
been the strongest individual market, but it too corrected over the summer.
Following a second quarter in which markets were fairly tightly correlated and
strong, third quarter weakness was marked by more differentiation among the
performances of individual markets and stocks.

Key trends common among most of the East Asian markets were positive economic
data releases, signs that interest rates have bottomed for this cycle, a heavy
calendar of new equity issuance and strong electronics exports. Economic growth
expectations have been upgraded significantly across Asia, with Korea leading
the way, although the rate of change of improvement should slow into 2000 as low
base effects drop out and as most observers now expect growth. Interest rates
moved up in a number of markets for internal reasons (e.g. Korea, Singapore) or
external reasons (e.g. Hong Kong). Further material rate reductions are probably
only possible in Indonesia pending a successful resolution of political issues
and a resumption of IMF funding. We expect to see a large deal calendar across
Asia

15
<PAGE>

throughout the balance of the year and well into 2000 as Asian companies attempt
to recapitalize or raise equity to fund growth. A few significant deals have
already been cancelled and we believe that only the better deals will be
completed. Currencies were fairly well behaved vs. the U.S. dollar, although the
Thai baht, Philippine peso and Korean won all slipped a bit during the quarter.

Key external events during the quarter included two interest rate hikes by the
U.S. Fed, market focus on the growth of the U.S. current account deficit, a
sharp rise in oil prices and continued Japanese market strength. Most Asian
markets have held up well despite the headwinds of rising global interest rates
given this year's limited foreign debt financing needs and healthy domestic
liquidity. The U.S. current account deficit is a significant issue for the
global economy; a best case scenario would be a gradual slowdown in the growth
of U.S. consumption accompanied by accelerated growth in demand in Europe and
throughout Asia. The rise in the price of oil is similar to a tax hike for most
of Asia; Indonesia and Malaysia are the only net beneficiaries of higher prices.
The Japanese market outperformed non-Japan Asia in the third quarter. Japanese
economic recovery is very positive for Asia and Japanese corporate restructuring
opens up new opportunities for outsourcing across a range of manufacturing
industries.

Most countries in the region reported increases in exports of electronics
components during the first three quarters of 1999. This growth has contributed
significantly to GDP growth upgrades in Taiwan, South Korea, Singapore and
Malaysia. Price pressures in the global personal computer industry have forced
PC manufacturers to cut costs, which often means sourcing more from low-cost
Asian producers. The trend towards greater outsourcing, firmly established among
American companies, is being adopted by an increasing number of Japanese
companies. In the past Japanese manufacturers often built factories in other
Asian countries in an effort to cut costs. An increasing number of Japanese
companies are now turning to outsourcing instead as part of their own
restructuring efforts. Outsourcing allows us to invest directly in the resulting
growth, as we can identify companies winning Japanese orders. The Portfolio has
a significant exposure to a number of Asian electronics companies in Taiwan,
Korea, Singapore and Thailand, and these investments performed well in the third
quarter as order books gained momentum.

Taiwan suffered from its worst earthquake in 100 years (7.6 on the Richter
scale) during September. The quake killed over 2,500 people, destroyed numerous
buildings and disrupted power supply and transportation. Damage estimates range
as high as US$10 billion, or approximately 3% of GDP. The stock market was
closed for 5 days and fell when it reopened, although it stabilized after
several days of decline. We believe that the quake will disrupt electronics
shipments for 1 to 2 months. However, most of our portfolio companies reportedly
suffered only limited physical damage. Given the strong demand for electronics
components, we believe that strong growth will resume within several months and
that the market will look through fourth quarter revenue and earnings
shortfalls. Exports are a key driver of the economy but growth should recover
soon. The government will fund most of the rebuilding costs, and public
investment will rise sharply. The Taiwanese government has sufficient financial
strength to fund this effort. GDP growth outlook remains strong for 1999 and
2000. The Taiwanese market was also affected earlier in the quarter by
diplomatic wrangling with China. President Lee of Taiwan attempted to alter the
terms of negotiations between Taiwan and China by redefining relations to be on
a "state-to-state" basis. Most observers believe that Lee was using this issue
for domestic political reasons ahead of the upcoming presidential elections;
resulting threats from China rattled the market. These tensions have simmered
down and paradoxically the earthquake disaster may have contributed to a cooling
of rhetoric. The market should also be supported by foreign portfolio inflows on
the back of MSCI inclusion of Taiwan at 100% weight in the first quarter of
2000.

The South Korean economy experienced the fastest recovery from the Asian
economic downturn of 1998. Korean industrial production is above pre-crisis
levels and consensus expectations for 1999 and 2000 GDP growth have moved to 8%
and 6%, respectively. The Korean economy benefited from a combination of
positive factors including strong government policy implementation, better
demand and pricing for its exports and a strong recovery in domestic confidence.
The government eased fiscal and monetary policies aggressively from the second
half of 1998 onwards. Interest rates fell rapidly from a crisis high of over 30%
to the 6% - 7% range in June. Interest rates at these levels were at a 20-year
low. As of June, the powerful moves seen in the equity market had pushed Korean
equities near historic highs on measures such as price to book value. Korean
corporations have historically traded at low multiples due to their high
leverage, low returns on equity, opaque corporate structures and poor
disclosure. In the last letter we highlighted the need for further restructuring
and growth to sustain these multiples.

The Korean industry is highly concentrated, heavily indebted and dominated by
large groups known as chaebols. Daewoo, one of the largest chaebols, experienced

16
<PAGE>

difficulties in July in rolling over its substantial short-term debt. Daewoo has
aggregate debt, mostly denominated in won, equivalent to over $50 billion. The
group controls a wide range of companies that are typically not the leading
players in their respective industries. Daewoo group companies have
significantly under-performed the market since the crisis began, confirming that
the market was aware that Daewoo was troubled. However, the announcement of
Daewoo's liquidity problems and its follow-on effects halted the Korean equity
rally in mid-July. Daewoo owes money to a wide array of lenders, including
domestic and foreign banks and a variety of bondholders, including life
insurers, other institutions and retail held mutual funds. The Daewoo workout
will be lengthy and losses will have to be split among these stakeholders. Given
the size of the problem, some government bailout will be required. News of the
Daewoo problem led to outflows from domestic mutual funds, disrupting the bond
market and widening credit spreads. The government has responded with a number
of initiatives that treat the symptom of the problem, including support funds to
improve bond market liquidity. However, the problem will not be fully solved
until losses are taken and Daewoo is broken up and the constituent companies'
debts are restructured. This will require political will and time and will be a
restraint on the market in the near term. Several chaebols, notably Samsung and
LG, have aggressively restructured their businesses and recapitalized their
balance sheets, and their group companies have outperformed the market,
consistent with our expectation of differentiated performance at the individual
stock level.

The Hong Kong market pulled back in the third quarter but marginally
outperformed the Index. Hong Kong's adherence to its currency board regime
lengthened its adjustment to the Asian crisis, but the economy bottomed in the
first half of 1999. Without a currency devaluation, Hong Kong companies had to
cut costs by reducing employment and negotiating lower rents, wages and other
costs, leading to deflation. Consumer price indexes are now down almost 6%
year-on-year. The currency board ties Hong Kong's monetary policy to tightening
U.S. policy, so rates are rising from very high levels in real terms. Banks in
Hong Kong have significantly strengthened their balance sheets during the
recession, and are as liquid as they have been in years. So far they have only
grown their mortgage portfolios but are well positioned to increase other loans
when demand improves.

The Hong Kong property market has remained sluggish in the face of high real
interest rates, a large schedule of new residential development launches and low
but stabilizing office rents. Affordability of residential property is now near
the most attractive levels of the past decade, so the residential market should
improve with better consumer confidence when rates stabilize. The Hong Kong
market has traditionally relied on property profits for a significant portion of
market earnings and the market is currently transitioning to new earnings
drivers. The government has created incentives to encourage the development of
technology businesses. Telecom liberalization has led to lower telecom costs and
a profusion of new services, two pre-conditions for the government's plans for
an information age economy. Privatization initiatives are also likely to improve
economic efficiency and create new investment opportunities. Revitalized Chinese
exports are also a strong positive for the economy. The market has drifted down
as the government commences the disposition of the shares purchased in last
year's market support operation. We remain underweight Hong Kong but may use
further weakness to reduce this underweight.

After a very strong second quarter Chinese shares fell in the third quarter and
underperformed the Index. Chinese news flow was mixed during the quarter.
Positives included a rapid acceleration of Chinese export growth, further
government initiatives to reform state-owned enterprises (SOEs) and the banking
sector and some indications that deflation was easing. Chinese export growth
improved due to greater intra-Asian trade and continued strong exports to the
U.S. This export acceleration and U.S. dollar weakness quelled lingering
concerns about currency devaluation. China's exchange rate adjustment will be
part of a move to a managed float and will be initiated by the government and
not the markets. SOE and bank reforms are positive and necessary reforms but
will take a long time to implement. The consumer price index turned from
deflation to modest inflation over the summer, and Shanghai has tended to lead
the national averages. Negative developments included limited progress on World
Trade Organization (WTO) negotiations and the announcement of a potential $30
billion calendar of new Chinese equity placements. WTO negotiations need to be
concluded by November to succeed before 2001. Markets fluctuated on the latest
twists in the 13-year negotiation process; currently, successful negotiations
would be a positive surprise for the markets. We remain hopeful for WTO
membership, as it would lock China onto a more open, reformist path. The deal
calendar threatens to dwarf the value of currently listed Chinese shares and has
created a great deal of pressure on those stocks.

The MSCI Singapore Index fell slightly during the quarter but outperformed the
regional indexes. Strong earnings from the electronics and banking sectors and
firm real estate

17
<PAGE>

conditions contributed to this out-performance. The merger of the foreign and
local tranches of the bank shares should facilitate bank mergers in Singapore,
which will reduce excess bank capacity and allow major cost cutting. Singaporean
firms seem to be taking a regional lead in working to create shareholder value.
For example, Singapore Airlines received permission to repurchase and retire up
to S$1 billion of stock. This balance sheet initiative comes on top of a strong
cost-cutting program and a stronger than expected rebound in passenger traffic
and yields. Government-linked corporations are implementing guidance from the
government to streamline their businesses and boost returns on equity. A series
of small divestitures have marked progress in streamlining. The economy remains
challenged by a relatively high cost base and will continue to lose
manufacturing jobs to neighboring countries, but public policy remains focused
on improving competitiveness and attracting financial, communications and
technology firms to Singapore.

The Indonesian market slumped during the third quarter due to a scandal
surrounding the misappropriation of funds intended for the bailout of Bank Bali,
one of the country's failed banks, and the tragic mishandling of East Timor's
independence referendum. The World Bank and IMF ceased aid to the country due to
these two events. A proper reckoning of bank support funds, cooperation in the
independence of East Timor and a new government will be needed for aid to
resume. The presidential election process has been accelerated into October.
Successful coalition building, further progress on corporate debt restructuring
and bank recapitalization will be needed to restart the equity rally. On a
positive note, higher oil prices generated hard currency and government revenues
and the currency remains very undervalued on a long-term view.

A collection of bad news in the banking sector, heavy capital calls on the
market and relatively slow economic recovery caused a significant correction in
Thailand in the third quarter. Valuations were ahead of fundamentals in Thailand
when the quarter began and we were significantly underweight the market. More
capital for the banking sector, implementation of the new bankruptcy and
foreclosure laws and more corporate restructuring will be needed to enhance the
long-term investment attractiveness of Thailand. Although the cyclical economic
recovery is currently accelerating, we remain underweight pending more forceful
structural reforms and more attractive equity valuations.

The Malaysian economy has responded better than we expected to the capital
control regime. The pegged currency rate chosen proved to be undervalued when
competitive currencies appreciated and the U.S. dollar depreciated. Strong
global electronics demand, a competitive currency and a tax holiday have all
boosted exports, very positive for an economy in which exports significantly
exceed GDP. The Japanese were very supportive of the Malaysians via the Miyazawa
initiative, allowing the country to refinance its short-term debt obligations.
Half of a good bank bailout program has been implemented, as the government has
warehoused a significant portion of the non-performing loans in the system. The
next and more difficult part of the program will be NPL liquidation. The capital
controls were relaxed in August and largely replaced by a capital gains tax
system. MSCI will include Malaysia in the main international indexes again from
February 2000. While all of these developments are positive, Malaysia remains a
very difficult market to invest in due to frequent changes in the rules
governing trading. A government mandated program to forcibly merge all of the
banks and finance companies into six groups also highlighted how arbitrary the
government can be. This proposal may be withdrawn due to poor market reaction
but it is cautionary. The government needs to address a succession vacuum
following the upcoming elections to reduce political risks. Very few listed
stocks are direct beneficiaries of the positive electronics export trends. We
currently hold a significant non-index position in Malaysian equities and will
evaluate our relative weights in 2000 prior to the Index inclusion.

The Asian risk factors we continue to monitor include the large supply of
upcoming equity offerings and the danger that economic recovery are likely to
lessen the will to implement needed economic and corporate level reforms. Y2K
concerns are likely to affect fourth quarter liquidity. External risk factors
include the performance of the Japanese economy, import and economic growth in
Europe and America, U.S. monetary policy and global interest rate trends,
extreme weakness in the Euro and the performance of Western equity markets.
Upside surprises could include better than expected economic recovery and bank
recapitalization in Japan, and stronger than expected import demand from the
U.S. and Europe.

Sentiment and liquidity drove Asian equity returns in the second quarter. The
third quarter represented a reality check. Some companies and markets had moved
ahead of where they should have been, and much of the overshooting was corrected
in the third quarter. We continue to believe that the best way to drive future
performance will be through stock selection, and note that the importance of
stock selection was reasserted in a less buoyant market environment. We continue
to focus our efforts on identifying companies that are restructuring and
refocusing

18
<PAGE>

their businesses around the principle of improving returns on equity. We have
seen a variety of restructuring efforts by Asian companies over the past year
and they continue to perform well in relative and absolute terms. As mentioned
above, restructuring in Japan could also provide enhanced investment
opportunities in non-Japan Asia through outsourcing. We will continue to search
for these opportunities, and build significant positions in companies geared to
the recovery in domestic consumption currently underway in most Asian economies.

Timothy D. Jensen
PORTFOLIO MANAGER

Ashutosh Sinha
PORTFOLIO MANAGER

October 1999

19
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.6%)
CHINA (0.6%)
670,200 Hengan International Group Co. Ltd. ........... $ 171
471,000 Huaneng Power International, Inc., Class H .... 142
404,000 Yanzhou Coal Mining Co., Ltd. ................. 156
-----------
469
-----------
HONG KONG (28.5%)
170,000 Asia Satellite Telecommunications
Holdings Ltd. ............................... 433
327,900 Cheung Kong Holdings Ltd. ..................... 2,733
165,300 China Light & Power Co., Ltd. ................. 777
304,000 China Telecom Ltd. ............................ 937
159,000 Dao Heng Bank Group Ltd. ...................... 727
518,000 Great Wall Technology Co., Class H ............ 333
131,000 Hong Kong Land Holdings Ltd. .................. 172
1,198,500 Hong Kong Telecommunications Ltd. ............. 2,631
506,800 Hutchison Whampoa Ltd. ........................ 4,714
147,000 Jardine International Motor Holdings Ltd....... 71
65,000 Johnson Electric Holdings Ltd. ................ 316
143,000 Kerry Properties Ltd. ......................... 151
261,100 Li & Fung Ltd. ................................ 790
346,000 New World Development Co., Ltd. ............... 759
138,800 Sime Darby Hong Kong Ltd. ..................... 55
467,000 Sino Land Co. ................................. 228
203,000 SmarTone Telecommunications Holdings Ltd. ..... 625
281,600 Sun Hung Kai Properties Ltd. .................. 2,148
308,200 Swire Pacific Ltd., Class A ................... 1,460
207,800 Television Broadcasts Ltd. .................... 888
65,000 Wing Hang Bank Ltd. ........................... 218
56,000 Yue Yuen Industrial Holdings .................. 141
-----------
21,307
-----------
INDIA (0.1%)
790 Hero Honda Motors Ltd. ........................ 23
100 Reckitt & Coleman of India Ltd. ............... 1
1,700 Software Solution Integrated Ltd. ............. 27
50 Tata Engineering & Locomotive Co., Ltd......... --
3,069 Tata Infotech Ltd. ............................ 50
-----------
101
-----------
INDONESIA (2.2%)
772,000 Aneka Tambang ................................. 134
264,500 Gudang Garam .................................. 536
230,500 Indofood Sukses Makmur Tbk .................... 220
190,000 Semen Gresik .................................. 304
69,480 Telekomunikasi Indonesia ADR .................. 482
-----------
1,676
-----------
MALAYSIA (4.4%)
133,000 Carlsberg Brewery Malaysia Bhd ................ 375
239,800 Malayan Banking Bhd ........................... 745
40,000 Nestle (Malaysia) Bhd ......................... 140
356,000 Public Bank Bhd ............................... 290
170,400 Rothmans of Pall Mall (Malaysia) Bhd .......... $ 1,040
50,000 Sime Darby Bhd ................................ 58
99,000 Tanjong plc ................................... 208
126,000 Telekom Malaysia Bhd .......................... 327
18,000 Unisem (M) Bhd ................................ 73
-----------
3,256
-----------
PHILIPPINES (1.1%)
18,480 Philippine Long Distance Telephone Co. ........ 400
173,255 San Miguel Corp., Class B ..................... 262
757,500 SM Prime Holdings, Inc. ....................... 128
-----------
790
-----------
SINGAPORE (11.5%)
61,600 City Developments Ltd. ........................ 313
171,000 DBS Land Ltd. ................................. 318
44,194 Development Bank of Singapore Ltd. (Foreign) .. 504
267,000 Gul Technologies............................... 251
147,000 Natsteel Electronics Ltd. ..................... 549
249,000 Neptune Orient Lines Ltd. (Foreign) ........... 299
168,000 Omni Industries Ltd. .......................... 178
100,000 Oversea-Chinese Banking Corp. (Foreign) ....... 777
82,224 Overseas Union Bank Ltd. ...................... 365
88,000 Parkway Holdings Ltd. ......................... 161
99,200 Sembcorp Logistics Ltd. ....................... 303
136,000 Singapore Airlines Ltd. ....................... 1,328
59,900 Singapore Press Holdings Ltd. ................. 944
347,000 Singapore Technologies Engineering Ltd. ....... 443
78,600 United Overseas Bank Ltd. (Foreign) ........... 597
140,700 Venture Manufacturing (Singapore) Ltd. ........ 1,225
-----------
8,555
-----------
SOUTH KOREA (20.7%)
17,300 Daeduck Electronics Co. ....................... 192
11,892 Daewoo Securities Co. ......................... 175
47,590 Good Morning Securities Co., Ltd. ............. 274
31,300 Hana Bank...................................... 232
8,370 Hankuk Glass Industry Co., Ltd. ............... 160
18,260 Housing & Commercial Bank, Korea .............. 353
61,000 Hyundai Motor Co. ............................. 602
17,170 Kookmin Bank .................................. 215
22,670 Koram Bank .................................... 152
4,070 Korea Chemical Co., Ltd. ...................... 261
123,530 Korea Electric Power Corp. ADR ................ 1,984
48,800 Korea Telecom Corp. ADR ....................... 1,806
19,220 L.G. Chemical Ltd. ............................ 558
16,620 LG Electronics ................................ 557
34,800 Mirae Co. ..................................... 186
53,200 Pohang Iron & Steel Co., Ltd. ADR ............. 1,666
10,199 Samsung Electro-Mechanics Co. ................. 520
30,555 Samsung Electronics Co. ....................... 4,948
4,300 Samsung Securities Co., Ltd. .................. 140
48,970 SK Telecom Co., Ltd. ADR ...................... 505
-----------
15,486
-----------
</TABLE>

20
<PAGE>

VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TAIWAN (22.5%)
13,000 Acer Peripherals GDR .......................... $ 236
50,000 Acer Peripherals, Inc. ........................ 123
158,850 Acer, Inc. .................................... 288
163,696 Advanced Semiconductor Engineering, Inc. ...... 467
7,700 ASE Test Ltd. ................................. 187
161,960 Asia Cement Corp. ............................. 146
141,375 Asustek Computer, Inc. ........................ 1,407
23,117 Bank Sinopac .................................. 12
114,850 Cathay Life Insurance Co., Ltd. ............... 297
96,000 China Development Corp. ....................... 146
1,325,850 China Steel Corp. ............................. 1,077
505 China Steel Corp. GDR ......................... 10
368,760 Chinatrust Commercial Bank .................... 318
149,276 Compal Electronics, Inc. ...................... 472
96,500 Compeq Manufacturing Co., Ltd. ................ 456
141,600 CTCI Corp. .................................... 125
50,000 Delta Electronics, Inc. ....................... 187
338,576 E. Sun Commercial Bank ........................ 133
271,840 Evergreen Marine Corp. ........................ 260
471,433 Far East Textile Ltd. ......................... 670
164,000 First Commercial Bank ......................... 214
9,720 Formosa Chemical & Fibre Corp. ................ 9
135,000 Formosa Plastics Corp. ........................ 261
250,288 Hon Hai Precision Industry .................... 1,640
299,700 International Commercial Bank of China ........ 293
263,080 Nan Ya Plastics Corp. ......................... 418
72,544 President Chain Store Corp. ................... 206
50,953 Quanta Computer, Inc. ......................... 424
343,710 Siliconware Precision Industries Co. .......... 574
563,000 Taishin International Bank .................... 312
761,035 Taiwan Semiconductor Manufacturing Co. ........ 3,200
707,350 United Micro Electronics Corp., Ltd. .......... 1,649
255,160 United World Chinese Commercial Bank .......... 309
93,000 Winbond Electronics Corp. ..................... 163
220,000 Yang Ming Marine Transport .................... 134
-----------
16,823
-----------
THAILAND (2.0%)
30,400 Advanced Information Service PCL (Foreign) .... 347
51,000 BEC World PCL (Foreign) ....................... 276
34,545 Delta Electronics (Thailand) PCL (Foreign) .... 307
360,400 Golden Land Property Development PCL
(Foreign) ................................... 141
74,266 Siam City Cement PCL (Foreign) ................ 229
1,100 Siam Cement PCL (Foreign) ..................... 23
155,200 Thai Farmers Bank PCL (Foreign) ............... 183
-----------
1,506
-----------
TOTAL COMMON STOCKS (Cost $66,251) ................................ 69,969
-----------

<CAPTION>
NO. OF
RIGHTS
- ---------------
<S> <C> <C>

RIGHTS (0.4%)
TAIWAN (0.0%)
50,000 Acer Pheripherals, Inc., expiring 10/15/99 .... $ 4
525,000 Taishin International Bank .................... 20
-----------
24
-----------
THAILAND (0.4%)
547,200 Siam Commercial Bank PCL, expiring 5/10/02 .... 157
155,200 Thai Farmers Bank PCL ......................... 107
-----------
264
-----------
TOTAL RIGHTS (Cost $19) ........................................... 288
-----------

<CAPTION>
NO. OF
WARRANTS
- ---------------
<S> <C> <C>
WARRANTS (0.7%)
HONG KONG (0.1%)
471,000 Credit Lyonn, expiring 10/13/99 ............... 71
-----------
PHILIPPINES (0.1%)
224,190 Jollibee FoodsCorp, expiring 3/24/03 .......... 95
-----------
SINGAPORE (0.5%)
485,000 Deutsche Bank, expiring 3/28/02 ............... 348
-----------
TOTAL WARRANTS (Cost $707) ........................................ 514
-----------

<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<S> <C> <C>
CONVERTIBLE BONDS (0.8%)
SINGAPORE (0.8%)
$ 350 Finlayson Global Corp., 0.00%, 2/19/04
(Cost $394) ................................. 623
-----------
TOTAL FOREIGN SECURITIES (95.5%) (Cost $67,371) ................... 71,394
-----------
SHORT-TERM INVESTMENT (2.3%)
REPURCHASE AGREEMENT (2.3%)
1,669 Chase Securities, Inc., 5.05%, dated 9/30/99,
due 10/01/99, to be repurchased at $1,669,
collateralized by U.S. Treasury Bonds,
7.125%, due 2/15/23, valued at $1,683
(Cost $1,669) ............................... 1,669
-----------
FOREIGN CURRENCY (2.5%)
HKD 6,486 Hong Kong Dollar .............................. 835
MYR 478 Malaysian Ringgit ............................. 126
PHP 1,171 Philippine Peso ............................... 29
SGD 45 Singapore Dollar .............................. 26
KRW 146,769 South Korean Won .............................. 121
TWD 23,438 Taiwan Dollar ................................. 738
THB 1,071 Thai Baht ..................................... 26
-----------
TOTAL FOREIGN CURRENCY (Cost $1,900) .............................. 1,901
-----------
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
VALUE
(000)
- --------------------------------------------------------------------------------
<S> <C>
TOTAL INVESTMENTS (100.3%) (Cost $70,940) ......................... $ 74,964
-----------
OTHER ASSETS AND LIABILITIES (-0.3%)
Other Assets ................................................... 2,408
Liabilities .................................................... (2,604)
-----------
(196)
-----------
NET ASSETS (100%) ................................................. $ 74,768
-----------
-----------

<CAPTION>
CLASS A:
- --------
<S> <C>
NET ASSETS ........................................................ $ 72,857
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,832,236 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................ $ 10.66
-----------
-----------

<CAPTION>
CLASS B:
- --------
<S> <C>
NET ASSETS ........................................................ $ 1,911
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 180,742 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................ $ 10.58
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
PCL -- Public Company Limited
Foreign -- Prior governmental approval for foreign investments may be required
under certain circumstances.

22
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)

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

[CHART]

<TABLE>
<S> <C>
Australia (8.2%)
Hong Kong (44.5%)
Japan (19.3%)
Philippines (2.6%)
Singapore (15.7%)
Thailand (1.4%)
Other (8.3%)
</TABLE>

PERFORMANCE COMPARED TO THE
GPR GENERAL REAL ESTATE SECURITIES INDEX - FAR EAST(1)
- ------------------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------
AVERAGE
ONE ANNUAL
YTD YEAR SINCE INCEPTION
----- ------ ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A .... 13.00% 70.54% -10.68%
PORTFOLIO -- CLASS B .... 12.81 70.05 -11.00
INDEX .................. 12.17 67.36 -18.44
</TABLE>

1. The GPR General Real Estate Securities Index - Far East is a market
capitalization weighted index measuring total return of listed property/real
estate securities in the Far East.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE COUNTRY
SPECIFIC PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE.
PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH
INTERNATIONAL INVESTING.

The investment objective of the Asian Real Estate Portfolio is to provide
long-term capital appreciation by investing primarily in equity securities of
companies in the Asian real estate industry. A company is considerd to be Asian
if its shares trade on a recognized stock exchange in Asia or if it is organized
under the laws of an Asian country and whose business is conducted principally
in Asia.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 13.00% for Class A shares and 12.81% for Class B shares compared to 12.17%
for the GPR General Real Estate Securities Index - Far East (the "Index"). For
the one year period ended September 30, 1999, the Portfolio had a total return
of 70.54% for the Class A shares and 70.05% for the Class B shares compared to
67.36% for the Index. For the period since inception on October 1, 1997 through
September 30, 1999, the Portfolio had an average annual total return of -10.68%
for Class A shares and -11.00% for Class B shares compared to -18.44% for the
Index.

For the three months ended September 30, 1999, the Portfolio had a total return
of -12.85% for Class A shares and -12.96% for Class B shares compared to -10.13%
for the Index. The Portfolio was affected by a sharp correction of real estate
securities prices in the third quarter, in reaction to a reversal of U.S.
interest rates and the shift toward higher interest rates in the future.

An eventful September quarter had resulted in Asian stock markets sustaining
huge volatility. This clearly demonstrates that sentiment remains fragile with
liquidity disappearing at the first sign of uncertainty. In addition to market
fears of higher interest rates in the U.S., Asia has been hit by the political
spat between Taiwan and China, unexpected strength of the yen, problems with
debt restructuring plans by large Korean Chaebols, violence erupting in East
Timor and a severe earthquake in central Taiwan.

On the economic front, Japan has for the most part surprised on the upside with
another positive 0.3% GDP rise for the second quarter of 1999. Japan looks set
to enter into a stable and moderate up-trend with the government pushing forward
supply-side reforms. Key to the sustainability of recovery from here will be an
upturn in corporate confidence and spending patterns.

Economic recovery in non-Japan Asia remains uneven. While the Hong Kong economy
is slowly bottoming, the pace of recovery remains weak given slower growth in
China. One positive sign is that the pace of contraction in retail sales has
begun to ease and retail sales volume should return to positive territory soon.
Singapore's nominal non-

23
<PAGE>

oil domestic exports grew by a lower than expected 8.5% in August as a result
of Western Digital Corp.; the third largest disk-drive manufacturer,
relocating to a cheaper cost-base in Malaysia. However the island's
manufacturing output remains robust, growing at 18.4% year-over-year in
August, as demand for electronics components and chemicals boosted
production. Korea is still showing robust growth with industrial production
growing 33% in July, inventories remain low and exports are booming. In
Taiwan, export growth averaged 11% year-over-year during the first two months
of the third quarter of 1999. The earthquake may have serious implications
for the economy in the short-term but, with Taiwan's robust fundamentals, a
huge current account surplus, Foreign exchange reserves and a well-financed
fiscal deficit, the authorities are well placed to limit the catastrophe.
Meanwhile, Malaysia's export sector is benefiting hugely from the fixed
currency peg and the low interest rates are positive for the real economy.

We expect the Asian recovery to gather momentum going forward. Pro-growth
policies adopted by policy makers are well-supported by the region's strong
balance of payments position, which should provide some insulation from external
shocks. However, the Y2K issue is a near term risk for the less-prepared
countries in Asia. Another concern is that government policies may remain too
easy for too long and the reform momentum may wane as a result.

In Hong Kong, sluggish economic growth and high unemployment rates at around 6%
continue to dampen interest in the real estate market. The number of apartments
changing hands fell 3.4% year-over-year in August, 19% fewer than in July. This
is partly due to fewer new project launches by property developers. However
mass-market residential units, priced in the region of Hong Kong dollar 2
million per unit, continue to attract strong demand by home-purchasers.
Activities picked up in the residential investment market, Singapore's Pidemco
Land recently acquired a block of 40-story luxury apartments at the Hong Kong
Parkview for Hong Kong dollar 900m (or Hong Kong dollar 9,000 per square foot),
at a yield of approximately 5%. The office property supply overhang in Central
Hong Kong is slowly clearing with more than 80% occupancy at One IFC Building
and the Cheung Kong Centre. Grade A office yields have stabilized at around
6.5%. Secondary office locations such as Causeway Bay and Island East are
beginning to register a marginal rise in leasing activities, albeit at very low
monthly rates of Hong Kong dollar 10-15 per square foot. The strata office
investment market continues to register strong interest from international
buyers. Several floors at the Lippo Centre were sold to Lend Lease at Hong Kong
dollar 6,300-6,500 per square foot during the third quarter of 1999.

In Singapore, the government surprised the market by announcing a
larger-than-expected Year 2000 land sale program comprising 6,000 private
leasehold residential units and 3,000 executive condominium units. This is
expected to have a stabilizing effect on prices in the medium term. Meanwhile
property developers are actively accumulating freehold residential land bank
made available by owner's collective sales, driving up prime land values by
5-10% from the previous quarter. Prime office rentals continue to consolidate
but at a slower rate. Average rents for prime Grade A office space eased 2.4%
during the third quarter of 1999. Capital values of prime office space are still
45% below their peaks achieved in '96.

In Japan, housing starts rose 10.7% in August from the previous month as a
result of the government-run Housing Loan Corporation offering a new round of
cheap mortgages at 2.6%. In addition, the government has relaxed conditions for
getting a loan and provided tax breaks to borrowers. Tokyo area property prices
continue to fall in the June-quarter, though the pace of decline has slowed.
Commercial land prices in the Tokyo area fell 2.6% while residential prices
declined 1.5% during this period.

In an attempt to boost domestic consumption, China's central bank extended the
repayment period on home mortgage loans to 30 years from 20 years to encourage
more people to buy their own homes. The maximum mortgage interest rate was cut
to 5.58% from 6.33%. In the office sector, vacancy rates in most major Chinese
cities fell slightly in the second quarter of 1999 because of lower interest
rates and asking rents.

Investors sold down Asian real estate securities in the third quarter of 1999 on
the back of higher interest rates, poorer-quality half-yearly earnings from
both Hong Kong and Singapore property developers and a shift toward investing in
technology, telecommunications and internet-related stocks. With the key Asian
property indices declining by more than 20% in the September quarter,
well-managed and good quality property companies are again offering good value
at attractive discounts to marked- to-market net asset values. Japanese real
estate shares came off 5% in the month of September on concerns that the
property sector could be dragged down further if economy recovery cannot be
sustained on the Yen's recent strength. In Australia, the Listed Property Trusts
(LPTs) slightly underperformed on concerns over rising bond yields and the large
amount of capital raising. We expect sentiment to improve going

24
<PAGE>

forward on news that the LPTs can retain their tax free and tax deferred status.

We have kept Hong Kong at a slight overweight position and reduced our
overweight in Singapore marginally, with a preference for residential
developers. We believe that demand for residential housing will pick up in Hong
Kong as the economy shows signs of sustainable recovery. In Singapore, the
wealth effect created as a result of numerous "en-bloc" residential sales
concluded in recent months will be translated into up-grader demand for
higher-end residential units. Also the new round of mortgage wars among local
banks will make home purchases even more affordable in these two cities. We
continue to hold on to good quality companies, well-positioned to benefit from
the anticipated pick up in demand. Australia remains an under-weight given the
upward trend for bond yields. We have re-established our exposure to the office
sector as lettings of new supply in Sydney and Melbourne are much better than
market forecast in the past month. Also we remain largely invested in the retail
trusts which continue to enjoy strong distribution on the back of robust retail
sales and strong consumer spending. We have also made a deliberate effort to
reduce our exposure in the Philippines and Thailand where Y2K preparedness is a
bigger issue compared to the more developed countries in Asia.

Theodore R. Bigman
PORTFOLIO MANAGER

Timothy D. Jensen
PORTFOLIO MANAGER

October 1999
25

<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.7%)
AUSTRALIA (8.2%)
15,300 BT Office Trust ............................... $ 14
28,300 Centro Properties Group ....................... 50
21,600 Westfield Holdings Ltd. ....................... 123
86,000 Westfield Trust ............................... 174
-----------
361
-----------
HONG KONG (44.5%)
120,000 Amoy Properties Ltd. .......................... 109
51,000 Cheung Kong Holdings Ltd. ..................... 425
135,000 China Resources Beijing Land .................. 21
23,000 Henderson Land Development Co., Ltd. .......... 106
274,100 HKR International Ltd. ........................ 210
85,000 Kerry Properties Ltd. ......................... 90
19,200 New World China Land Ltd. ..................... 11
91,000 New World Development Co., Ltd. ............... 200
33,000 Shui On Construction .......................... 48
228,700 Sino Land Co. ................................. 112
51,000 Sun Hung Kai Properties Ltd. .................. 389
18,000 Swire Pacific Ltd., Class A ................... 85
46,000 Wharf Holdings Ltd. ........................... 133
19,000 Wheelock & Co., Ltd. .......................... 25
-----------
1,964
-----------
JAPAN (19.3%)
8,000 Daibiru Corp. ................................. 62
42,000 Mitsubishi Estate Co., Ltd. ................... 425
38,000 Mitsui Fudosan Co., Ltd. ...................... 304
16,000 Sumitomo Realty & Development Co., Ltd. ....... 59
-----------
850
-----------
PHILIPPINES (2.6%)
180,400 Ayala Land, Inc., Class B ..................... 44
207,000 Filinvest Land, Inc. .......................... 15
325,000 SM Prime Holdings, Inc. ....................... 55
-----------
114
-----------
SINGAPORE (15.7%)
124,000 Allgreen Properties Ltd. ...................... 106
41,000 City Developments Ltd. ........................ 209
105,500 DBS Land Ltd. ................................. 196
41,000 First Capital Corp., Ltd. ..................... 46
28,000 Keppel Land Ltd. .............................. 35
23,000 Marco Polo Developments Ltd. .................. 28
8,000 Overseas Union Enterprise Ltd. ................ 22
58,000 United Industrial Corp., Ltd. ................. 32
26,000 Wing Tai Holdings Ltd. ........................ 21
-----------
695
-----------
THAILAND (1.4%)
68,600 MBK Properties and Development PCL ............ $ 37
5,700 Oriental Hotel (Thailand) PCL ................. 26
-----------
63
-----------
TOTAL COMMON STOCKS (Cost $3,544) ................................. 4,047
-----------

<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<S> <C> <C>
SHORT-TERM INVESTMENT (6.9%)
REPURCHASE AGREEMENT (6.9%)
$ 305 Chase Securities, Inc. 5.05%, dated 9/30/99,
due 10/01/99, to be repurchased at $305,
collateralized by U.S. Treasury Bond, 8.125%,
due 8/15/19, valued at $308 (Cost $305) ..... 305
-----------
FOREIGN CURRENCY (2.8%)
HKD 509 Hong Kong Dollar .............................. 66
JPY 3,469 Japanese Yen .................................. 32
PHP 11 Philippines Peso .............................. --
SGD 17 Singapore Dollar .............................. 10
TWD 29 Taiwan Dollar ................................. 1
THB 600 Thai Baht ..................................... 15
-----------
TOTAL FOREIGN CURRENCY (Cost $124) ................................ 124
-----------
TOTAL INVESTMENTS (101.4%) (Cost $3,973) .......................... 4,476
-----------
OTHER ASSETS AND LIABILITIES (-1.4%)
Other Assets ................................................... 420
Liabilities .................................................... (483)
-----------
(63)
-----------
NET ASSETS (100%) ................................................. $ 4,413
-----------
-----------

<CAPTION>
CLASS A:
- --------
<S> <C>
NET ASSETS ........................................................ $ 3,162
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 431,232 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................ $ 7.33
-----------
-----------

<CAPTION>
CLASS B:
- --------
<S> <C>
NET ASSETS ........................................................ $ 1,251
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 169,898 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................ $ 7.36
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
PCL -- Public Company Limited

26
<PAGE>

<TABLE>
<CAPTION>
COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------
[CHART]
<S> <C>
Argentina (0.7%)
Brazil (8.6%)
Chile (0.5%)
China (0.4%)
Czech Republic (0.7%)
Egypt (0.8%)
Greece (2.1%)
Hong Kong (1.1%)
Hungary (0.9%)
India (11.8%)
Indonesia (3.0%)
Israel (4.4%)
Malaysia (1.5%)
Mexico (11.0%)
Pakistan (0.5%)
Philippines (0.8%)
Poland (1.6%)
Russia (2.6%)
Singapore (0.2%)
South Africa (6.7%)
South Korea (15.1%)
Taiwan (14.6%)
Thailand (2.2%)
Turkey (6.1%)
Other (2.1%)
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
FREE INDEX AND THE IFC GLOBAL TOTAL RETURN
COMPOSITE INDEX(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
----- ------ ------ ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A ......... 32.25% 51.56% -4.20% 7.31%
PORTFOLIO -- CLASS B ......... 32.01 51.12 N/A 1.96
MSCI EMERGING MARKETS
FREE INDEX -- CLASS A ...... 32.66 56.52 -5.50 6.35
IFC GLOBAL TOTAL RETURN
COMPOSITE INDEX --
CLASS A .................... 32.83 54.71 -5.59 5.93
MSCI EMERGING MARKETS
FREE INDEX -- CLASS B ...... 32.66 56.52 N/A -2.15
IFC GLOBAL TOTAL RETURN
COMPOSITE INDEX --
CLASS B .................... 32.83 54.71 N/A -1.62
</TABLE>

1. The MSCI Emerging Markets Free Index is a market capitalization weighted
index comprised of companies that are representative of the market structure
of developing countries in Latin America, Asia, Eastern Europe, the Middle
East and Africa (includes dividends). The IFC Global Total Return Composite
Index is an unmanaged index of common stocks and includes developing
countries in Latin America, East and South Asia, Europe, the Middle East and
Africa (includes dividends).

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

The investment objective of the Emerging Markets Portfolio is to provide
long-term capital appreciation by investing in equity securities of emerging
country issuers.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 32.25% for the Class A shares and 32.01% for the Class B shares compared to
32.66% for the Morgan Stanley Capital International (MSCI) Emerging Markets Free
Index (the "MSCI Index") and 32.83% for the IFC Global Total Return Composite
Index (the "IFC Index"). For the one year period ended September 30, 1999, the
Portfolio had a total return of 51.56% for the Class A shares and 51.12% for the
Class B shares compared to 56.52% for the MSCI Index and 54.71% for the IFC
Index. For the five-year period ended September 30, 1999, the average annual
total return of Class A shares was -4.20% compared to -5.50% for the MSCI Index
and -5.59% for the IFC Index. For the period since inception on September 25,
1992 through September 30, 1999, the average annual total return for Class A
shares was 7.31% compared to 6.35% for the MSCI Index and 5.93% for the IFC
Index. For the period since inception on January 2, 1996 through September 30,
1999, the average annual total return for Class B shares was 1.96% compared to
- -2.15% for the MSCI Index and -1.62% for the IFC Index.

For the third quarter ended September 30, 1999, the Portfolio had a total return
of -5.54% for the Class A shares and -5.61% for the Class B shares compared to-
5.15% for the MSCI Index and -3.95% for the IFC Index. Overall, stock selection
added to performance while country allocation detracted from performance.
Underperformance relative to the Index resulted primarily from our country
selection, particularly our underweight position in Greece (+33.3%) and our
overweight position in Indonesia (-35.1%). Poor stock selection in Greece and
South Africa also detracted from performance. Strong stock selection contributed
positively to performance, particularly in India, South Korea, Taiwan and
Thailand.

The emerging markets evidenced great diversity in their performances during the
third quarter. In general, the positive effects of rallying commodity prices,
improving

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE COUNTRY
SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS MEASURED BY THE
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS COUNTRY OR
REGIONAL INDICES, ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH
INTERNATIONAL INVESTING.

27
<PAGE>

economic fundamentals and strong corporate earnings were eclipsed by investor
concerns regarding the direction of U.S. inflation and interest rates. Emerging
markets faced great adversities during the quarter, including heightened
political tensions (Indonesia), scandals (Indonesia and South Korea) and
earthquakes (Greece, Turkey, Taiwan and Mexico).

The recent widening of risk premia in the emerging markets has been induced by
numerous factors, including a global tightening in risk appetite, the rise in
U.S. interest rates, the partial Ecuadorian Brady bond default and the violent
turmoil in Indonesia. With the reversal of commodity price deflation, many
emerging markets are experiencing improvements in their terms of trade. The
external surpluses of the Asian economies help to isolate the region from the
worst effects of a U.S. monetary tightening. Those countries with current
account surpluses or whose current account deficits can be financed by Foreign
Direct Investment will have greater flexibility and independence in structuring
their economic policies.

The Latin American region declined 9.0% during the quarter. Political noise and
investor skittishness over U.S. inflation and interest rates prevailed over
support from improving commodity prices and economic fundamentals, and some
robust corporate earnings. Ecuador's partial default set the precarious
precedent that defaulting on external debt without an IMF bailout may become the
way of the future. Yet the implications may be subdued as the major Latin
countries are heavily dependent on foreign capital for their survival and have
governments which act more responsibly regarding debt obligations. Within Latin
America, we are modestly overweight Brazil. Brazil declined 8.8% during the
third quarter, weighed down by the absence of political commitment to enact
reforms intended to reduce the fiscal deficit. However, the Brazilian economy
has shown great resilience since the currency devaluation at the beginning of
the year, as evidenced by rather disciplined inflation and unemployment figures.
We believe Brazilian assets are attractively valued and may be poised for a
rebound given a decline in domestic interest rates and a cyclical recovery in
earnings growth. We are focusing on the telecommunications and energy resources
industries in Brazil, where good management and improving operating margins bode
well for earnings growth.

Mexico (-13.7%) remains our favorite Latin American market due to promising
economic fundamentals and corporate earnings growth potential coupled with
attractive valuations. Our relatively neutral stance is based on political
anxieties surrounding upcoming elections coupled with the predominance of
investor concerns regarding U.S. inflation and interest rates over dynamic
corporate earnings. We maintain overweight positions in the building materials
and components and broadcasting and publishing industries, focusing on companies
such as Cemex and Televisa, which we believe represent great earnings growth
stories.

Asian equities declined 7.7% during the third quarter. Indonesia fell 35.1%,
weighed down by political tensions and the emergence of the "Baligate" scandal,
involving graft claims against three government agencies. Erupting violence in
East Timor at the end of August exacerbated weakening market returns. We
maintain our overweight position in Indonesia, as we find asset prices
attractive and believe economic rationality will ultimately prevail in the
tenuous political situation.

Taiwan (-7.7%) initially benefited during the third quarter from diminishing
tensions with China and increased liquidity when MSCI declared on August 12 that
it will increase Taiwan's market capitalization weighting from 50% to 100% in
the MSCI Index next year. Equities were pulled down towards the end of the
quarter when the most powerful earthquake to ever strike Taiwan hit on September
21. We expect the impact on Taiwanese electronic and semiconductor companies
will be limited to the short-term, and we believe that Taiwan is well positioned
to gain from the continuing cyclical upturn and trend in outsourcing various
computer components. During the quarter we added to our overweight position in
Taiwan, increasing exposure to transportation-shipping and the electronic
components and instruments industries.

South Korean equities fell 9.6% during the third quarter, as investor sentiment
was dampened by U.S. interest rate anxieties and continued uncertainty and
ambiguity regarding the restructuring plans for CHAEBOL Daewoo corporation. We
maintain our overweight position in South Korea but trimmed some of our exposure
to the South Korean banking industry, based on concerns regarding how the Daewoo
group's restructuring may affect the solvency and loan portfolios of creditor
banks. We also selectively trimmed significant overweights in stocks such as
Samsung Electronics and Korea Telecom.

India was the star performer of the Asian region during the quarter, gaining
21.2%. Investors were fixated on the upcoming presidential elections in October,
anticipating the likely formation of a stable, majority-led government. Such an
election outcome would help accelerate the reform process and privatizations.
Continued lower inflation and signs of an industrial turnaround indicate the
Indian economy is on the mend. We have added to our overweight

28
<PAGE>

position in India, as we are compelled by evidence of corporate restructuring
and increasing management focus on return on equity. During the quarter we
trimmed some significant overweight positions, such as Infosys and Satyam, to
take advantage of price appreciation and to fund other purchases. We believe
technology, cyclical and cement companies will continue to perform well.

The Emerging Europe and the Middle East region led the emerging markets during
the third quarter, gaining 6.7%. The markets in this region posted mixed
returns. Greece (+33.3%), Turkey (+7.9%) and Czech Republic (+7.4%) performed
well, while the equities markets in Russia (-31.4%) and Poland (-21.2%) lagged
the region. Despite the rally in oil prices, Russia was weighed down by
political instability, including upcoming Duma (Russia's lower house of
parliament) elections, terrorist bombings in Moscow and the war with Chechnya.
Polish equities were pressured by Poland's large current account deficit and the
announcement that further privatization of TPSA, Poland's telephone service
provider, would be delayed until next year. We maintain modest overweight
positions in both Russia and Poland, concentrating on those holdings that are
attractively valued and that we believe are poised for earnings growth over the
longer-term.

Turkey had notably strong performance in light of the devastating earthquake on
August 17 that killed nearly fifteen thousand people and destroyed residential
buildings and commercial and industrial facilities. The Istanbul Stock Exchange
was closed until August 26 as companies attempted to assess damage. Stock prices
stabilized soon after the market reopened, and promises of international aid
including U.S. $330 million from the IMF should help allay the earthquake's
financial ramifications. The passage of two key reform bills (social security
and international arbitration) by the Turkish parliament in mid-August, that
were requisite for receiving new IMF loans, buoyed investor sentiment. We are
encouraged by these recent reforms that should foster a structural decline in
inflation and future interest rate reductions. We maintain an overweight
position in Turkey and took advantage of depressed valuations to add to our
holdings.

Greece was the star performer of the Eastern Europe and Middle East region, as
the Greek equities market was fueled by tremendous liquidity and bank
consolidations. During the quarter, we reduced our positions in Greece, as we
believe Greek equities are expensively valued.

We added to our positions in Israel (-9.6%) during the quarter, and are now
modestly overweight. Positive sentiment in Israel may be reinforced by
perceptions of a strong coalition government and progress on the Wye peace
agreement, privatizations and rationalizations. However, the limited scope for
monetary easing and a widening current account deficit temper enthusiasm for the
market. Our purchases in Israel during the quarter were focused within the
electrical and electronics, electronic components and instruments, and
telecommunications industries. We purchased technology companies including ECI
Telecom and DSP Group, based on attractive valuations coupled with improved
operating outlooks.

South African equities declined 3.0% during the quarter, in sympathy with
emerging markets in general. However, performance across industries was uneven,
as commodity stocks gained more than 20% while financials and industrials fell
over 12%. Interest rates continued to fall during the quarter, with the prime
lending rate dropping from 18% to 15.5%. Stronger commodity prices and foreign
exchange inflows from the listing of South African companies in London helped
the Rand remain relatively strong. We remain underweight South Africa, yet we
increased holdings in some commodity stocks during the quarter, including
Billiton and Amplats, which mine aluminum and platinum, respectively. We reduced
holdings in insurance companies, finding more attractive opportunities
elsewhere, including stocks in South Africa's information technology sector.

Robert L. Meyer
PORTFOLIO MANAGER

Andy B. Skov
PORTFOLIO MANAGER

October 1999

29
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.6%)
ARGENTINA (0.7%)
6 Acindar, Class B .............................. $ --
250,888 Telecom Argentina ADR ......................... 6,695
-----------
6,695
-----------
BRAZIL (8.6%)
295,998,880 Banco Nacional (Preferred) .................... 8
5,229,313 Brahma (Preferred) ............................ 3,132
14,276,976 Celular CRT ................................... 1,562
33,876,493 Celular CRT (Preferred) ....................... 3,705
112,106,166 CEMIG (Preferred) ............................. 1,722
155,540 CEMIG ADR (Preferred) ......................... 2,372
(e)103,238 CEMIG ADR (Preferred) ......................... 1,574
245,678 CIA Vale do Rio Doce,
Class A (Preferred) ........................... 5,182
12,714,900 Coteminas ..................................... 464
(e)98,865 Coteminas ADR ................................. 180
32,379,893 CRT (Preferred) ............................... 7,269
293,889 CVRD ADR (Preferred) .......................... 6,208
72,446,810 Embratel (Preferred) .......................... 830
54,552 Embratel ADR .................................. 624
119,019,000 Lojas Arapua (Preferred) ...................... --
(e)120,830 Lojas Arapua GDR (Preferred) .................. --
39,236,000 Pao de Acucar (Preferred) ..................... 787
26,429 Pao de Acucar ADR ............................. 524
48,752,387 Petrobras (Preferred) ......................... 7,414
42,860 Petrobras ADR (Preferred) ..................... 661
42,912 Tele Celular Sul .............................. 813
418,534,410 Tele Celular Sul (Preferred) .................. 796
42,211 Tele Centro Sul ............................... 2,343
336,151,110 Tele Centro Sul (Preferred) ................... 3,747
8,975 Tele Nordeste Celular ......................... 204
253,287,610 Tele Nordeste Celular (Preferred) ............. 305
185,983 Tele Norte Leste ADR .......................... 2,883
133,610,610 Tele Norte Leste (Preferred) .................. 2,129
87,599 Tele Sudeste Celular .......................... 1,883
397,511,250 Tele Sudeste Celular (Preferred) .............. 1,747
10,662 Telebras ADR (Preferred) ...................... 799
13,140 Telemig Celular ............................... 388
466,131,316 Telemig Celular (Preferred) ................... 682
20,876,000 Telerj Celular, Class B ....................... 397
56,665,610 Telesp (Preferred) ............................ 877
74,155 Telesp ADR .................................... 1,168
147,838 Telesp Celular ................................ 3,862
265,118,410 Telesp Celular (Preferred) .................... 2,693
36,519,601 Telesp Celular, Class B ....................... 1,940
530,323 Unibanco GDR (Preferred) ...................... 9,380
318,900 Usiminas (Preferred) .......................... 1,046
62,535 Usinas Siderurgicas de Minas
Gerais S.A. ................................... 210
-----------
84,510
-----------
CHILE (0.5%)
71,202 CCU ADR ....................................... 1,638
83,300 Endesa ADR .................................... 1,083
112,780 Enersis ADR ................................... 2,354
44,223 Santa Isabel ADR .............................. $ 337
-----------
5,412
-----------
CHINA (0.4%)
21,000 China.com Corp., Class A ...................... 1,365
102,036 Yanzhou Coal Mining Co., Ltd. ADR ............. 1,932
3,795,300 Zhenhai Refining & Chemical Co.,
Ltd., Class H ............................... 889
-----------
4,186
-----------
CZECH REPUBLIC (0.7%)
90,290 SPT Telecom a.s. .............................. 1,365
330,379 SPT Telecom a.s. GDR .......................... 5,026
-----------
6,391
-----------
EGYPT (0.8%)
57,869 Al-Ahram Beverages Co. GDR .................... 1,729
333 Commercial International Bank ................. 3
46,045 Eastern Tobacco ............................... 1,065
22,500 Egypt Gas Co. ................................. 841
148,006 Egyptian Co. for Mobil Services ............... 3,468
450 Egyptian Finance & Industrial ................. 4
25 Helwan Cement ................................. --
37,981 Industrial & Engineering ...................... 334
-----------
7,444
-----------
GREECE (2.1%)
484,203 Hellenic Telecommunication
Organization (OTE) .......................... 11,289
851,288 Hellenic Telecommunication
Organization (OTE) ADR ...................... 9,524
-----------
20,813
-----------
HONG KONG (1.1%)
772,000 China Telecom Ltd. ............................ 2,380
6,796,300 Great Wall Technology Co. Ltd. ................ 4,375
527,000 Guangdong Kelon Electrical
Holdings Co. Ltd. ........................... 529
1,138,000 Legend Holdings Ltd. .......................... 1,084
920,000 Yue Yuen Industrial Holdings .................. 2,310
-----------
10,678
-----------
HUNGARY (0.9%)
181,713 Magyar Tavkozlesi Rt. ......................... 996
194,999 Matav Rt. ADR ................................. 5,314
50,035 OTP Bank Rt. .................................. 2,212
-----------
8,522
-----------
INDIA (11.8%)
5,650 Apollo Tyres Ltd. ............................. 30
4,330 Associated Cement Cos., Ltd. .................. 21
1,239,800 Bharat Heavy Electricals Ltd. ................. 7,767
913,800 Container Corp. of India Ltd. ................. 6,501
46,907 Dabur India Ltd. .............................. 1,247
380 Digital Equipment (India) Ltd. ................ 6
1,900 Federal Bank Ltd. ............................. 2
166,200 Gujarat Ambuja Cements Ltd. ................... 1,880
500 HCL Infosystems Ltd. .......................... 6
374,323 Hero Honda Motors Ltd. ........................ 10,910
129,300 Hindustan Lever Ltd. .......................... 7,599
</TABLE>

30
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INDIA (CONT.)
280,000 Housing Development Finance
Corp., Ltd. ................................... $ 1,844
60,220 Housing Development Finance
Corp., Ltd. ................................... 397
170,800 Infosys Technology Ltd. ....................... 27,983
231,243 ITC Ltd. ...................................... 4,362
367,247 Larsen & Toubro Ltd. .......................... 3,085
5 Madras Cements Ltd. ........................... 1
20,000 Mahanagar Telephone Nigam Ltd. ................ 84
(g)25,663,200 Morgan Stanley India Growth Fund .............. 5,978
34,281 MRF Ltd., Class B ............................. 1,790
87,250 NIIT Ltd. ..................................... 5,657
231,000 Reliance Industries Ltd. ...................... 1,254
700,000 Saurashtra Cement & Chemicals Ltd. ............ 1,490
229,600 Saytam Computer Services Ltd. ................. 5,936
45,000 Sri Venkatesa Mills Ltd. ...................... 12
300 State Bank of India ........................... 1
2,608 Sudarshan Chemical Industries Ltd. ............ 5
376,950 Tata Engineering & Locomotive
Co., Ltd. ..................................... 2,336
355,250 Tata Engineering & Locomotive
Co., Ltd. ..................................... 2,201
165,400 Tata Tea Ltd. ................................. 2,296
70,900 Videsh Sanchar Nigam Ltd. GDR ................. 886
127,000 Zee Telefilms Ltd. ............................ 13,031
-----------
116,598
-----------
INDONESIA (3.0%)
908,045 Asia Pulp & Paper Co. Ltd. ADR ................ 5,335
4,242,641 Gudang Garam .................................. 8,597
4,990,555 Indah Kiat Pulp & Paper Corp.
(Foreign) ..................................... 1,786
2,788,500 Indofood Sukses Makmur Tbk .................... 2,658
2,139,600 Semen Gresik .................................. 3,422
1,115,674 Telekomunikasi Indonesia ADR .................. 7,740
-----------
29,538
-----------
ISRAEL (4.4%)
151,800 Amdocs Ltd. ................................... 3,188
727,500 Bank Hapoalim Ltd. (Registered) ............... 1,789
1,134,000 Bank Leumi Le-Israel .......................... 1,974
51,250 Check Point Software Technologies ............. 4,327
45,525 Converse Technology, Inc. ..................... 4,294
44,440 DSP Communications, Inc. ...................... 844
52,210 DSP Group, Inc. ............................... 2,082
299,724 ECI Telecommunications Ltd. ................... 7,400
75,776 Galileo Technology Ltd. ....................... 1,894
189,117 Gilat Satellite Networks Ltd. ................. 10,141
19,535 NICE-Systems Ltd. ............................. 509
59,666 NICE-Systems Ltd. ADR ......................... 1,536
49,759 Orbotech Ltd. ................................. 3,079
-----------
43,057
-----------
MALAYSIA (1.5%)
555,000 Commerce Asset Holdings Bhd ................... 986
1,004,000 Malayan Banking Bhd ........................... 3,118
531,000 Nestle (Malaysia) Bhd ......................... 1,858
3,373,000 Public Bank Bhd. .............................. $ 2,752
344,000 Rothmans of Pall Mall (Malaysia) Bhd .......... 2,100
808,000 Sime Darby Bhd ................................ 935
1,126,000 Telekom Malaysia Bhd .......................... 2,919
-----------
14,668
-----------
MEXICO (10.0%)
349,359 Alfa, Class A ................................. 1,457
1,638,642 Banacci, Class B .............................. 2,948
966,103 Banacci, Class L .............................. 1,447
(e)277,930 Bancomer, Class B ............................. 1,251
6,470,353 Bancomer, Class C ADR ......................... 1,453
601,409 Carso, Class A1 ............................... 2,509
1,179,729 Cemex CPO ..................................... 5,679
613,667 Cemex CPO ADR ................................. 14,805
989,236 Cifra, Class C ................................ 1,526
37,357 Cifra, Class V ................................ 59
126,562 Cifra, Class V ADR ............................ 1,991
209,088 Fomento Economico Mexicano ADR ................ 6,547
1,113,277 Kimberly-Clark, Class A ....................... 3,930
566,319 Televisa CPO GDR .............................. 22,617
427,697 Telmex, Class L ADR ........................... 30,473
-----------
98,692
-----------
PAKISTAN (0.5%)
31 Crescent Textile Mills Ltd. ................... --
10,000 Fauji Fertilizer Co., Ltd. .................... 9
892,198 Pakistan State Oil Co., Ltd. .................. 2,245
7,277,000 Pakistan Telecommunications Corp.,
Class A ..................................... 2,873
-----------
5,127
-----------
PERU (0.0%)
52 Cementos Lima ................................. --
-----------
PHILIPPINES (0.8%)
783,980 Manila Electric Co., Class B .................. 2,262
2,337,101 San Miguel Corp., Class B ..................... 3,543
12,201,900 SM Prime Holdings, Inc. ....................... 2,058
-----------
7,863
-----------
POLAND (1.6%)
1,800 BIG Bank Gdanski .............................. 4
33,400 Eastbridge N.V. ............................... 2,245
245,871 Elektrim ...................................... 2,279
43,913 Powszechny Bank Kredytowy ..................... 739
7,672 Powszechny Bank Kredytowy, Class C ............ 125
111,002 Prokom Software GDR ........................... 1,063
1,825,630 Telekomunikacja Polska GDR .................... 8,991
143,863 Wielkopolski Bank Kredytowy ................... 758
-----------
16,204
-----------
RUSSIA (2.5%)
592,359 Alliance Cellulose Ltd. ....................... 942
231,561 Lukoil Holding ADR ............................ 6,310
100,000 Lukoil Holding Sponsored ADR .................. 515
66,270,018 Mustcom ....................................... 8,880
317,851 Russian Telecom Development Corp. ............. 757
990 Storyfirst Communications, Inc.,
Class C ....................................... 247
</TABLE>

31
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
RUSSIA (cont.)
2,640 Storyfirst Communications, Inc.,
Class D ..................................... $ 660
3,250 Storyfirst Communications, Inc.,
Class E ..................................... 812
1,331 Storyfirst Communications, Inc.,
Class F ..................................... 665
784,326 Surgutneftgaz ADR ............................. 5,245
-----------
25,033
-----------
SINGAPORE (0.2%)
243,000 Natsteel Electronics Ltd. ..................... 908
115,000 Venture Manufacturing (Singapore) Ltd. ........ 1,001
-----------
1,909
-----------
SOUTH AFRICA (6.7%)
1,108,745 Amalgamated Banks of South Africa ............. 4,341
129,430 Anglo American Corp. .......................... 3,433
31 Anglo American plc ............................ 2
19,150 AngloGold Ltd. ................................ 1,206
1,316,360 Bidvest Group Ltd. ............................ 8,772
541,200 Billiton plc .................................. 2,267
1,000,400 Billiton plc .................................. 4,150
7,141,977 BOE Ltd. ...................................... 4,045
359,970 De Beers Centenary AG ......................... 9,895
48,070 De Beers Consolidated Mines ADR ............... 1,298
263,710 Dimension Data Holdings Ltd. .................. 1,048
521,750 Ellerine Holdings Ltd. ........................ 2,030
4,917,730 FirstRand Ltd. ................................ 4,997
247,687 Nedcor Ltd. ................................... 4,853
3,400,970 New Africa Investments Ltd., Class N .......... 1,360
161,030 Persetel Holdings Ltd. ........................ 1,080
425,250 Rembrandt Group Ltd. .......................... 3,241
168,400 Sasol Ltd. .................................... 1,296
661,750 South African Breweries Ltd. .................. 5,654
1,330,854 The Education Investment Corp., Ltd. .......... 783
-----------
65,751
-----------
SOUTH KOREA (15.1%)
198,029 Daewoo Securities Co. ......................... 2,922
626,620 Good Morning Securities Co., Ltd. ............. 3,606
211,730 Hana Bank ..................................... 1,568
81,180 Hankuk Glass Industry Co., Ltd. ............... 1,555
852,100 Hanvit Bank ................................... 3,187
339,750 Hanvit Bank GDR ............................... 2,463
120,410 Housing & Commercial Bank ..................... 2,326
346,760 Kookmin Bank .................................. 4,347
788,926 Korea Electric Power Corp. ADR ................ 12,672
95,170 Korea Telecom Corp. ........................... 5,875
399,790 Korea Telecom Corp. ADR ....................... 14,792
104,730 L.G. Chemical Ltd. ............................ 3,039
151,160 L.G. Securities ............................... 5,070
59,253 Pohang Iron & Steel Co., Ltd. ................. 6,793
28,200 Pohang Iron & Steel Company Ltd. ADR .......... 883
28,799 Samsung Electro-Mechanics Co. ................. 1,468
390,503 Samsung Electronics Co. ....................... 63,238
2,444 SK Telecom Co., Ltd. .......................... 2,260
228,035 SK Telecom Co., Ltd. ADR ...................... $ 2,352
118,314 Trigem Computer Inc. .......................... 8,121
-----------
148,537
-----------
TAIWAN (14.6%)
110,000 Acer Peripherals GDR .......................... 1,998
632,000 Acer Peripherals, Inc. ........................ 1,553
1,836,050 Acer, Inc. .................................... 3,325
1,660,472 Advanced Semiconductor
Engineering, Inc. ........................... 4,733
36,300 ASE Test Ltd. ................................. 880
1,472,345 Asustek Computer, Inc. ........................ 14,654
143,944 Bank Sinopac .................................. 76
811,900 Cathay Life Insurance Co., Ltd. ............... 2,097
1,347,200 China Development Corp. ....................... 2,045
7,104,900 China Steel Corp. ............................. 5,773
3,120,200 Chinatrust Commercial Bank .................... 2,693
1,287,636 Compal Electronics, Inc. ...................... 4,076
1,133,000 Compeq Manufacturing Co., Ltd. ................ 5,353
346,078 E Sun Commercial Bank ......................... 136
2,066,000 Evergreen Marine .............................. 1,978
5,053,510 Far East Textile Ltd. ......................... 7,178
966,000 First Commercial Bank ......................... 1,263
1,354,130 Formosa Plastics Corp. ........................ 2,623
2,017,000 Hon Hai Precision Industry .................... 13,214
3,056,700 International Commercial Bank
of China .................................... 2,984
1,840,120 Nan Ya Plastics Corp. ......................... 2,927
644,660 President Chain Store Corp. ................... 1,827
232,579 Quanta Computer, Inc. ......................... 1,934
148,000 Ritek Incorporation ........................... 993
1 Shinkong Synthetic Fiber ...................... --
499,000 Silicon Integrated Systems Corp ............... 1,807
3,201,240 Siliconware Precision Industries Co. .......... 5,344
2,830,680 Taishin International Bank .................... 1,569
7,834,220 Taiwan Semiconductor Manufacturing
Co. ADR ..................................... 32,941
6,470,000 United Micro Electronics Corp., Ltd. .......... 15,080
84,840 United World Chinese Commercial
Bank ........................................ 103
561,000 Winbond Electronics Corp. ..................... 981
-----------
144,138
-----------
THAILAND (1.9%)
406,350 Advanced Information Services
PCL (Foreign) ............................... 4,644
501,500 BEC World PCL (Foreign) ....................... 2,718
447,777 Delta Electronics (Thailand)
PCL (Foreign) ............................... 3,980
438,000 Shinawatra Computer Co.
PCL (Foreign) ............................... 1,807
1,185,066 Siam Cement PCL (Foreign) ..................... 3,646
235,700 Siam Commercial Bank PCL ...................... 194
618,300 Siam Commercial Bank PCL
(Preferred) ................................. 555
796,400 Thai Farmers Bank PCL (Foreign) ............... 938
-----------
18,482
-----------
</TABLE>

32
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TURKEY (6.1%)
109,635 Akbank T.A.S .................................. $ 328
289,393,000 Akbank T.A.S. ................................. 4,328
522,416,000 Dogan Sirketler Grubu Holding ................. 7,473
241,527,000 Dogan Yayin Holdings .......................... 969
93,729,300 Ege Biracilik ................................. 3,047
15,522,932 Erciyas Biracilik ............................. 343
173,581,000 Eregli Demir Celik ............................ 3,950
818,001,200 Garanti Bankasi A.S. .......................... 5,939
194,126,000 Haci Omer Sabanci Holding A.S. ................ 5,049
19,621,000 Koc Holding A.S. .............................. 1,892
4,427,000 Migros (Registered) ........................... 1,919
36,340,000 Tupras-Turkiye Petrol Rafinerileri A.S. ....... 2,324
366,420,200 Turkiye Is Bankasi, Class C ................... 6,750
28,092,601 Vestel Elektronik Sanayi Ve Ticaret A.S. ...... 3,410
867,348,063 Yapi Ve Kredi Bankasi A.S. .................... 11,843
-----------
59,564
-----------
OTHER (0.1%)
(g)100,130 MSDW Africa Investment Fund ................... 939
-----------
TOTAL COMMON STOCKS (Cost $962,398) ............................... 950,751
-----------
PREFERRED STOCKS (0.0%)
COLOMBIA (0.0%)
103,207 Bancolombia (Cost $616) ....................... 110
-----------
<CAPTION>
NO. OF
RIGHTS
- ---------------
<S> <C> <C>
RIGHTS (0.1%)
BRAZIL (0.0%)
21,857,937 Tele Centro Oeste ............................. 25
-----------
INDIA (0.0%)
1,082 Associated Cement Cos., Ltd. .................. 1
-----------
TAIWAN (0.0%)
711,000 Acer Peripherals .............................. 54
4,139,000 Taishin International Bank .................... 163
-----------
217
-----------
THAILAND (0.1%)
744,500 Thai Farmers Bank Ltd. ........................ 514
-----------
TOTAL RIGHTS (Cost $945) .......................................... 757
-----------
<CAPTION>
NO. OF
WARRANTS
- ---------------
<S> <C> <C>
WARRANTS (0.2%)
THAILAND (0.2%)
7,007,633 Siam Commercial Bank PCL
(Foreign) (Cost $0) ......................... 1,973
-----------
<CAPTION>
NO. OF
UNITS
- ---------------
<S> <C> <C>
UNITS (1.1%)
MEXICO (1.0%)
3,108,113 Fomento Economico Mexican
S.A. (Femsa) ................................ 9,659
-----------
<CAPTION>
NO. OF VALUE
UNITS (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
RUSSIA (0.1%)
1,637 Storyfirst Communications, Inc., First
Section, Tranche I, 25.00% .................. $ 409
96 Storyfirst Communications, Inc.,
Second Section, Tranche I, 25.00% ........... 24
421 Storyfirst Communications, Inc.,
Tranche II, 26.00% .......................... 105
562 Storyfirst Communications, Inc.,
Tranche IV, 28.00% .......................... 140
654 Storyfirst Communications, Inc.,
Tranche V, 29.00% ........................... 163
550 Storyfirst Communications Inc.,
Tranche VI, 30.00% .......................... 138
-----------
979
-----------
TOTAL UNITS (Cost $10,912) ........................................ 10,638
-----------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<S> <C> <C>
CONVERTIBLE DEBENTURES (0.0%)
INDIA (0.0%)
INR 336 DCM Shriram Industries Ltd.,
7.50%, 2/21/02 (Cost $473) .................. 177
-----------
NON-CONVERTIBLE DEBENTURES (0.0%)
INDIA (0.0%)
341 DCM Shriram Industries Ltd., (Floating
Rate), 9.90%, 2/2/1/02 (Cost $633) .......... 238
-----------
TOTAL FOREIGN SECURITIES (98.0%) (Cost $975,977) .................. 964,644
-----------
SHORT-TERM INVESTMENT (1.6%)
REPURCHASE AGREEMENT (1.6%)
U.S.$ 15,180 Chase Securities, Inc. 5.05%,
dated 9/30/99, due 10/01/99,
to be repurchased at $15,182,
collateralized by U.S. Treasury
Bonds, 6.625%, due 2/15/27,
valued at $15,306 (Cost $15,180) ............ 15,180
-----------
<CAPTION>
FOREIGN CURRENCY (1.3%)
<S> <C> <C>
BRL 626 Brazilian Real ................................ 326
COP 5 Colombian Peso ................................ --
EGP 1,002 Egyptian Pound ................................ 294
GRD 354,140 Greek Drachma ................................. 1,147
HKD 1,236 Hong Kong Dollar .............................. 159
HGF 82,012 Hungarian Forint .............................. 339
INR 238,181 Indian Rupee .................................. 5,466
IDR 1,686,053 Indonesian Rupiah ............................. 203
MXP 9,087 Mexican Peso .................................. 972
PKR 11,920 Pakistani Rupee ............................... 223
PLZ 1 Poland Zloty .................................. --
ZAR 12,788 South African Rand ............................ 2,130
KRW 676 South Korean Won .............................. 1
LKR 2 Sri Lankan Rupee .............................. --
TWD 45,515 Taiwan Dollar ................................. 1,433
THB 16,011 Thai Baht ..................................... 391
-----------
TOTAL FOREIGN CURRENCY (Cost $13,074) ............................. 13,084
-----------
</TABLE>

33
<PAGE>

<TABLE>
<CAPTION>
VALUE
(000)
- --------------------------------------------------------------------------------
<S> <C>
TOTAL INVESTMENTS (100.9%) (Cost $1,004,231) ...................... $992,908
-----------
OTHER ASSETS AND LIABILITIES (-0.9%)
Other Assets ................................................... 42,667
Liabilities .................................................... (51,447)
-----------
(8,780)
-----------
NET ASSETS (100%) ................................................. $984,128
-----------
-----------
<CAPTION>
CLASS A:
- --------
<S> <C>
NET ASSETS ........................................................ $ 974,100
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 77,126,584 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 12.63
-----------
-----------
CLASS B:
- --------
NET ASSETS ........................................................ $ 10,028
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 794,588 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 12.62
-----------
-----------
- --------------------------------------------------------------------------------
</TABLE>

(e) -- 144A Security - certain conditions for public resale may exist.
(g) -- The fund is advised by an affiliate.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
PCL -- Public Company Limited
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect on
September 30, 1999.
Foreign -- Prior governmental approval for foreign investments may be required
under certain circumstances.

34
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Belgium (0.5%)
Denmark (0.8%)
Finland (2.9%)
France (15.9%)
Germany (10.7%)
Ireland (1.4%)
Italy (5.3%)
Netherlands (6.6%)
Portugal (2.3%)
Spain (5.1%)
Sweden (5.5%)
Switzerland (12.3%)
United Kingdom (29.7%)
Other (1.0%)
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
- ------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEAR INCEPTION
------ ------ ------- ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A ... 0.91% 10.95% 11.54% 15.28%
PORTFOLIO -- CLASS B ... 0.71 10.69 N/A 12.29
INDEX -- CLASS A ....... -1.27 17.21 18.48 17.47
INDEX -- CLASS B ...... -1.27 17.21 N/A 18.54
</TABLE>

1. The MSCI Europe Index is an unmanaged market value weighted index of common
stocks listed on the stock exchanges of countries in Europe (includes
dividends).

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE
RESULTS PROVIDED ARE MEASURED BY THE MSCI EUROPE INDEX AND ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL.

The investment objective of the European Equity Portfolio is to seek long-term
capital appreciation through investment in equity securities of European
issuers. Equity securities for this purpose include stocks and stock equivalents
such as securities convertible into common and preferred stocks and securities
having equity characteristics, such as rights and warrants to purchase common
stock.

The approach taken in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of European databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Once stocks have
been selected from this screening process, they are put through detailed
fundamental analysis. Important areas covered during this in-depth study include
the companies' balance sheets and cash flow, franchise, products, management and
the strategic value of the assets.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 0.91% for the Class A shares and 0.71% for the Class B shares compared
to -1.27% for the Morgan Stanley Capital International (MSCI) Europe Index (the
"Index"). For the one year period ended September 30, 1999, the Portfolio had a
total return of 10.95% for the Class A shares and 10.69% for the Class B shares
compared to 17.21% for the Index. For the five-year period ended September 30,
1999, the average annual total return of Class A shares was 11.54% compared to
18.48% for the Index. For the period since inception on April 2, 1993 through
September 30, 1999, the average annual total return for Class A shares was
15.28% compared to 17.47% for the Index. For the period since inception on
January 2, 1996 through September 30, 1999, the average annual total return for
Class B shares was 12.29% compared to 18.54% for the Index.

For the three months ended September 30, 1999, the Portfolio had a total return
of 2.14% for the Class A shares and 2.08% for the Class B shares compared to
1.17% for the Index. Improving European economic growth coupled with rising
merger and acquisition activity helped continue the trend this year in
performance favoring small and mid cap companies. In the year-to-date, European
mega cap companies (those over $20 billion market cap) have declined 2.7% versus
a rise of 6% for the small and mid cap segment (those companies below $2 billion
in market cap).

Our overweight to small and mid caps (23% weight versus 10% in the Index) was a
key contributor to our strong relative performance in the third quarter and
year-to-date.

35
<PAGE>

Performance benefited from strong stock selection in consumer goods and capital
equipment. Schneider (France, +30%), one the world's largest makers of
industrial control equipment, saw first half profits exceed forecasts as efforts
to cut costs paid off. Autoliv (Sweden, +24%), worldwide leader in automotive
safety systems, witnessed growth in sales of their side-impact airbags. Michelin
(France, +15%) rose following announcement of a radical restructuring program.

Selected consumer defensives added performance as Reckitt & Colman, (U.K., +19%)
with Benckiser (Netherlands, +17%) to create one of the largest players in the
household cleaning market. Benckiser brings strong management to the combination
as Reckitt had been without a CEO for the last year. The deal makes good
strategic sense, as the two companies' products are complementary. Richemont
(Switzerland, +5%) and Nestle (Switzerland, +4.3%), both large holdings, showed
their defensive qualities by rising in a difficult market.

Elf Aquitaine (France, +19%) was bid for in the quarter by Franco- Belgian oil
company Total Fina. Swedish bank Svenska Handelsbanken (+16%) rose in line with
an improving economic outlook in Sweden.

On the negative side our underweight and poor stock selection in
telecommunications was an important detractor in the third quarter. Telecom
Italia (-15%) weakened following news that shares in its mobile subsidiary
would be transferred to Olivetti's acquisition vehicle, Tecnost to decrease
leverage. Although legal, this maneuver has been criticized for its poor
treatment of minority shareholders. Swisscom (-17%) and British Telecom (-8%)
were also weak with the latter impacted by fears of rising U.K. interest rates.
Retailer Great Universal Stores (U.K., -30%) fell on deteriorating fundamentals
in its catalogue business which accounts for only 20% of profit. We see value in
the shares and believe management can transform the business.

In the third quarter, European equities outperformed the world by 3% and the
U.S. equity market by 9%, thanks in part to a firmer Euro against the dollar.
The European economic recovery began to gather steam in the quarter. Business
surveys are upbeat, the OECD leading economic indicator for Europe has turned
positive, domestic demand remains robust and, above all, monetary policy in the
Euro-zone remains highly stimulative with the yield curve the most positively
sloped in three years.

This economic revival, however, has not been enjoyed evenly across Europe.
Germany still lags the strong economy in France and remains the most susceptible
to a rising Euro and/or deterioration in demand from the U.S. and Asia given the
significant export reliance of its listed sector. Although France and Germany
have an equal 14% weight in the MSCI Europe Index, our bottom-up approach has
led to a 15.9% weight in France and a 10.7% weight in Germany at the end of the
quarter. Overall the Portfolio is underweight the Euro-bloc slightly at 50%
versus an Index weight of 53.8%. The overweight outside the Euro-bloc is
focussed on Sweden and Switzerland, primarily for stock specific reasons.

We have been increasing our focus on the U.K. (29.7% of the Portfolio, 29.9% in
the Index) this year. A number of U.K. value ideas were added in the third
quarter. In pharma, a sector we have been underweight until this summer,
AstraZeneca was added. In banking, Barclays and NatWest were added on valuation
grounds relative to Continental peers and on the expectation of consolidation in
the sector. At the end of the quarter, Bank of Scotland launched a hostile bid
for NatWest following the latter's unpopular bid for U.K. life insurer Legal &
General. In retailing, Boots (pharmacies) and BAA (U.K. airport operator/
airport retail), neither historically associated with a value portfolio, were
added on the grounds of relative valuation, management strength and franchise
resilience.

Across Europe, we remain underweight telecommunications and technology (ie.
zero in Vodafone Airtouch and Nokia), despite adding Dutch telecom provider KPN,
and Telecel, a cheap pure cellular play in Portugal. In the consumer area, with
our weighting to health care now neutral (by adding to Novartis and initiating
AstraZeneca) our disagreement with the market is reflected in our ongoing
overweight to consumer defensive staples (ie. Richemont, Nestle & Reckitt-
Benkiser). Our cyclical exposure continues to be reduced on strength with Morgan
Crucible (+20%) sold, following strong performance, on concerns of a raw
material price squeeze.

36
<PAGE>

The Portfolio is attractively valued at 11 times cash flow versus 12.5 times for
the MSCI Europe Index. Merger and acquisition activity remains a catalyst for
value with the Portfolio benefiting from three deals in the quarter: Total
Fina's bid for Elf Aquitaine, Reckitt & Colman's merger with Benkiser and Bank
of Scotland's hostile bid for NatWest. Our concentration remains in the small,
mid and large cap segments of the market where the Portfolio is overweight
compared to the Index. We maintain an underweight to mega caps in Europe (39%
versus 60% in the Index) due to the excessive valuation premium generally
accorded these companies.

Margaret Naylor
PORTFOLIO MANAGER

Alastair Anderson
PORTFOLIO MANAGER

October 1999

37
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.3%)
BELGIUM (0.5%)
9,700 Fortis (B) .................................... $ 316
55 G.I.B. Group-VVPR ............................. 3
5,200 G.I.B Group S.A. .............................. 225
-----------
544
-----------
DENMARK (0.8%)
7,170 Novo-Nordisk A/S, Class B ..................... 852
-----------
FINLAND (2.9%)
9,250 KCI Konecranes International .................. 251
4,975 Kone Oyj, Class B ............................. 655
196,900 Merita Ltd., plc, Class A ..................... 1,106
34,165 Sampo Insurance Co., plc, Class A ............. 1,135
-----------
3,147
-----------
FRANCE (15.9%)
4,530 Alcatel Alsthom ............................... 624
7,190 Axa ........................................... 909
8,220 Banque Nationale de Paris ..................... 656
3,470 Cie de Saint Gobain ........................... 646
22,620 Cie Generale des Establissements
Michelin, Class B (Registered) .............. 1,067
61,420 CNP Assurances ................................ 1,808
7,100 Elf Aquitaine ................................. 1,293
10,450 France Telecom ................................ 916
4,135 Groupe Danone ................................. 1,006
3,570 Lyonnaise des Eaux ............................ 577
20,830 Pernod Ricard ................................. 1,399
26,600 Rhone-Poulenc, Class A ........................ 1,373
33,710 Schneider ..................................... 2,465
18,120 Total, Class B ................................ 2,276
-----------
17,015
-----------
GERMANY (8.0%)
7,765 Adidas AG ..................................... 663
24,730 BASF AG ....................................... 1,058
14,650 Bayerische Vereinsbank AG ..................... 861
12,356 Bewag Aktiengesellschaf ....................... 183
25,310 Deutsche Telekom AG ........................... 1,020
32,633 Hoechst AG .................................... 1,377
3,720 Mannesmann AG (Registered) .................... 583
13,540 Schering AG ................................... 1,481
23,060 Volkswagen AG ................................. 1,281
-----------
8,507
-----------
IRELAND (1.4%)
186,746 Bank of Ireland ............................... 1,520
-----------
ITALY (5.3%)
67,235 Banca Popolare Di Bergamo S.p.A. .............. 1,488
74,200 Marzotto (Gaetano) & Figli S.p.A. ............. 572
153,100 Mediaset S.p.A. ............................... 1,563
34,800 Telecom Italia S.p.A. ......................... 216
203,400 Telecom Italia S.p.A. (RNC) ................... 1,767
-----------
5,606
-----------
NETHERLANDS (6.6%)
15,450 ABN Amro Holding N.V. ......................... 347
45,590 Akzo Nobel N.V. ............................... 1,931
41,856 ING Groep N.V. ................................ $ 2,272
12,875 Koninklijke (Royal) Philips
Electronics N.V. ............................ 1,295
33,160 Laurus N.V. ................................... 762
10,200 Royal KPN N.V. ................................ 447
-----------
7,054
-----------
PORTUGAL (2.3%)
26,800 Banco Commercial Portugues
(Registered) ................................ 722
71,730 Electricidade de Portugal ..................... 1,131
5,150 Telecel Commincacaoes Pessoais S.A. ........... 635
-----------
2,488
-----------
SPAIN (5.1%)
9,310 Banco Popular Espanol S.A. .................... 643
61,600 Banco Santander S.A. .......................... 637
57,250 Endesa ........................................ 1,087
80,900 Iberdrola ..................................... 1,198
116,304 Telefonica S.A. ............................... 1,860
-----------
5,425
-----------
SWEDEN (5.5%)
39,790 Autoliv, Inc. ................................. 1,501
39,400 ForeningsSparbanken AB ........................ 640
78,100 Nordbanken Holding AB ......................... 438
61,500 Svedala Intrustri AB .......................... 1,209
145,500 Svenska Handelsbanken, Class A ................ 2,033
-----------
5,821
-----------
SWITZERLAND (12.3%)
1,615 Cie Financiere Richemont AG, Class A .......... 3,266
1,405 Holderbank Financiere Glarus AG,
Class B (Bearer) ............................ 1,823
1,685 Nestle (Registered) ........................... 3,163
1,295 Novartis AG (Registered) ...................... 1,919
435 Schindler Holding AG (Registered) ............. 709
3,350 Swisscom AG ................................... 1,043
4,510 UBS AG (Registered) ........................... 1,270
-----------
13,193
-----------
UNITED KINGDOM (29.7%)
343,250 Aegis Group plc ............................... 706
161,100 Allied Domecq Plc ............................. 919
134,000 Allied Zurich plc ............................. 1,573
20,250 AstraZeneca Group plc ......................... 849
33,900 BAA plc ....................................... 343
114,300 Bank of Scotland .............................. 1,363
31,800 Barclays plc .................................. 934
181,318 BG plc ........................................ 1,042
66,900 BOC Group plc ................................. 1,394
37,800 Boots Co. plc ................................. 421
136,300 British Telecommunications plc ................ 2,063
43,205 Burmah Castrol plc ............................ 807
92,700 Capital Radio plc ............................. 1,346
329,000 Centrica plc .................................. 903
101,600 Diageo plc .................................... 1,038
20,600 Glaxo Wellcome plc ............................ 537
165,480 Great Universal Stores plc .................... 1,248
</TABLE>

38
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM (CONT.)
412,900 Halma plc ..................................... $ 782
118,900 Imperial Tobacco Group plc .................... 1,419
77,600 Lloyds TSB Group plc .......................... 965
29,500 National Westminster Bank plc ................. 688
97,600 Prudential Corp. plc ......................... 1,499
161,100 Punch Taverns Finance plc ..................... --
308,248 Reckitt & Colman plc .......................... 3,826
74,600 Royal & Sun Alliance Insurance
Group plc ................................... 588
18,300 Sainsbury (J) plc ............................. 114
123,600 Scottish and Southern Energy plc .............. 1,153
58,000 Seton Scholl Healthcare plc ................... 683
128,300 Shell Transport & Trading Co. plc ............. 959
12,200 Smith & Nephew plc ............................ 39
45,950 Tesco plc ..................................... 144
150,300 WPP Group plc ................................. 1,398
-----------
31,743
-----------
TOTAL COMMON STOCKS (Cost $94,253) ................................ 102,915
-----------
PREFERRED STOCKS (2.7%)
GERMANY (2.7%)
10,710 Fresenius AG .................................. 1,852
16,520 Henkel KGaA-Vorzug ............................ 1,053
-----------
TOTAL PREFERRED STOCKS (Cost $3,074) .............................. 2,905
-----------
TOTAL FOREIGN SECURITIES (99.0%) (Cost $97,327) ................... 105,820
-----------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<S> <C> <C>
FOREIGN CURRENCY (0.5%)
EUR 3 Euro .......................................... 3
CHF 724 Swiss Franc ................................... 482
-----------
TOTAL FOREIGN CURRENCY (Cost $476) ................................ 485
-----------
TOTAL INVESTMENTS (99.5%) (Cost $97,803) .......................... 106,305
-----------
OTHER ASSETS AND LIABILITIES (0.5%)
Other Assets ................................................... 3,937
Liabilities .................................................... (3,363)
-----------
574
-----------
NET ASSETS (100%) ................................................. $ 106,879
-----------
-----------
<CAPTION>
CLASS A:
- --------
<S> <C>
NET ASSETS ........................................................ $ 104,568
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,878,725 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 15.20
-----------
-----------
CLASS B:
- --------
NET ASSETS ........................................................ $ 2,311
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 152,505 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 15.16
-----------
-----------
- --------------------------------------------------------------------------------
</TABLE>

RNC -- Non-Convertible Savings Shares

39
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Denmark (0.9%)
Finland (1.8%)
France (25.1%)
Ireland (2.9%)
Italy (3.1%)
Netherlands (3.1%)
Norway (1.7%)
Portugal (1.0%)
Spain (5.7%)
Sweden (10.4%)
United Kingdom (41.0%)
Other (3.3%)
</TABLE>

PERFORMANCE COMPARED TO THE GPR GENERAL REAL
ESTATE SECURITIES INDEX - EUROPE(1)
- ---------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------
AVERAGE
ONE ANNUAL
YTD YEAR SINCE INCEPTION
----- ----- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A... 4.31% 3.86% 2.04%
PORTFOLIO -- CLASS B... 4.06 3.59 1.82
INDEX ................. 9.05 5.38 4.24
</TABLE>

1. The GPR General Real Estate Securities Index-Europe is a European market
capitalization weighted index of listed property/real estate securities
measuring total return.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE COUNTRY
SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL
PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S
FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.

The investment objective of the European Real Estate Portfolio is to provide
current income and long-term capital appreciation by investing primarily in
equity securities of companies in the European real estate industry.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 4.31% for the Class A shares and 4.06% for the Class B shares compared to
9.05% for the GPR General Real Estate Securities Index-Europe (the "Index"). For
the one year period ended September 30, 1999, the Portfolio had a total return
of 3.86% for the Class A shares and 3.59% for the Class B shares compared to
5.38% for the Index. For the period since inception on October 1, 1997 through
September 30, 1999, the Portfolio had an average annual total return of 2.04%
for Class A shares and 1.82% for Class B shares compared to 4.24% for the Index.

Most of the European listed property markets took their usual summer holiday
during the third quarter this year. The result was a sharp decline in trading
volumes across the region, as well as a slowdown in price appreciation. For
example, the trading volume in Land Securities, the largest market cap security
in the European listed real estate universe, declined by approximately 20% from
the average volume over the first 6 months of the year. The exceptions were
France, Italy, Spain and Portugal, which were dominated by merger and
acquisition activity. The result was each of the active markets outperformed the
Index. The Index returned -1.1% in Euros, significantly below the better than
9.0% return offered in each of the first two quarters, but continued to
outperform the broader equity market. The broadbased MSCI European Equity Index
declined over the past three months by -2.0% in Euros, resulting in a total
outperformance by property shares of 9.9% year-to-date.

In contrast to our second quarter review, when we argued for "a strong
millennium finish" based on the anticipated growth in the European economy, we
are now foreseeing an almost silent fourth quarter of trading due to investor
concerns over Y2K. While the strong economic evidence we expected in terms of
production growth, consumer confidence, and forward looking surveys is
materializing across Europe, we believe investors will take to the sidelines in
a manner similar to the Euro launch in 1998. During November and December 1998,
the share activity in Land Securities declined by 20% and 30%, respectively,
from the 12-month trading average. A similar decline in trading activity looks
likely during the run-up to the year 2000. As a result, we are curious to see
how the two expected October IPOs, Alexsia in Finland and Colonial in Spain,
will perform in this dry market. However, we believe

40
<PAGE>

once the Y2K bug is exterminated, investor confidence will be renewed and the
strong macroeconomic picture will inspire an early millennium rally. In other
words, we expect Y2K is postponing, but not denying property shares from
realizing the benefits created by the recovering European economies.

The U.K. economy is a fine example of the rebound in European growth we are
looking for over the next 12 to 18 months. Threatened with recession only a few
months ago, the economy is thriving today. Morgan Stanley Dean Witter
strategists are estimating 3.2% GDP growth during 2000, as opposed to their 1.5%
year 2000 estimate only 9 months ago. These prospects pressured the Bank of
England to raise interest rates by 25 basis points in September, reversing a
June 25 basis point reduction. The impact of this change in economic
expectations on the property securities was a top performing 29.8% return in
Euros year-to-date, even though the third quarter -2.1% return slowed the
appreciation. The third quarter figures were particularly hit by a failed
L190 million private placement of Canary Wharf Group shares, the second
largest U.K. listed property company at the time. Canary Wharf fell -11.9%
during the quarter. Overall, the U.K. has outperformed the Index by 10.8%
year-to-date but underperformed by 1.0% for the third quarter. Looking forward,
we expect the property market to benefit significantly from the economic rebound
taking place in the U.K. West End offices, out-of-town retail, and Southeast
industrial continue to be our favored sectors, in particular the larger
capitalized names. While we remain a nonbeliever in the Canary Wharf valuation,
further price declines could provide an attractive buying opportunity. We intend
to remain underweight the country as a whole, but slightly overweight the larger
cap "majors" and the smaller companies with what we believe to be aggressive
managements and opportunistically positioned portfolios.

The French recovery continued through the third quarter with real estate
securities again outperforming the Index. The outperformance was driven by three
factors expanding M&A activity, mid-year earnings figures confirming rental
growth, and economic data demonstrating a strong economy. The result was a 4.0%
Euro return for the quarter, which outperformed the Index by 5.1%. First,
continuing with the theme set last quarter, M&A transactions drove share prices
and kept trading volumes respectable. Gecina continued their breathtaking
acquisition pace by announcing their fourth deal in three years. Before the ink
dried on the Sefimeg transaction, Gecina reached an agreement to acquire French
rival Immobiliere Batibail SA in a stock deal worth EUR 260 million, an 8%
discount to Batibail's restated net asset value. On the rumor front, speculation
concerning Paribas' stake in Klepierre, following the bank's merger with BNP,
sparked investor interest. BNP has since denied the portfolio is up for sale.
The British company Hammerson also increased their exposure to France this
quarter through a EUR 230 million redevelopment joint venture with AXA, and a
EUR 100 million acquisition of the La Seita headquarters in the 7th
arrondissement. Second, 6-month earnings releases confirmed the strength of the
rental market. During the first half of 1999, like-for-like rentals on the
Unibail shopping center and office portfolios rose by 6.3% and 5.5%
respectively, causing a 10% jump in restated net asset value. And third, the
French economy is entering the sweet spot of the cycle. Real GDP growth for 2000
is expected to hit 3.0%, CPI is forecast at only 0.8%, and unemployment should
drop below 11% for the first time since December 1992. This positive growth
environment will continue to put pressure on rental levels, which remain 27%
below the 1991 peak in the Golden Triangle of Paris. Although, while we expect
the rental growth to push capital values further, we do not expect to see a
continued decline in property yields due to the recent rise in 10-year Oats
above 5.0%. Recognizing each of these positives, we intend to maintain our
significant overweight in both the country and the commercial sectors.

The Swedish public real estate market continues to battle against its
fundamentals. Even though the economic landscape for both businesses and
consumers brightened during the third quarter, Swedish real estate stocks lost
- -2.5% of their Euro value. The shares also continued to miserably underperform
the European real estate Index, losing 1.4% this quarter, 5.3% year-to-date, and
trailing the broader Swedish OMX Index Euro return by -3.2% and -15.4% for the
quarter and year-to-date, respectively. We believe one cause for the imbalance
in Swedish pricing is the focus of many foreign investors on the Eurozone
stocks. The loss of this marginal investor base has caused rebalancing in the
market. However, we continue to believe Swedish real estate securities present
an investment story that cannot be ignored for much longer. The Swedish shares
are trading at one of the largest discounts to net asset value in Europe, while
capital value growth is strong, approximately 5.9% year-to-date, and continuing
to expand through rent appreciation. At the same time, real estate securities
are trading at an increasing discount to their underlying net asset value.
Furthermore, income tax cuts of SEK 12 billion implemented into the 2000 budget
suggest consumer spending will hit the 4.0% level, pushing GDP growth at a 3.8%
pace. Both of these figures provide assurances that demand for office, retail
and residential space should continue into the millennium. This increasing
demand, with limited although growing new supply,

41
<PAGE>

suggests a bright future for rents. While we do expect the Riksbank to
tighten monetary policy from the current stimulative stance toward a neutral
level, this adjustment should only limit the potential for a further decline
in direct property yields, not increase cap rates. Going forward, we remain
overweight the country, but expect a listless performance through the end of
the year. We do not believe foreign investors will reallocate toward the
Swedish story, providing the necessary capital for the market to realize
current underlying valuations, until after the millennium obstacle subsides.

The smaller Nordic markets have fared even worse than Sweden. Finland, Norway
and Denmark each lost -12.1%, -13.9% and -2.6%, respectively, during the
quarter, significantly underperforming the Index. These markets are each
dominated by one or two small cap, specialized companies. As a result, we do not
expect to see any excitement in this area until the new year. Y2K nervous
investors are taking a conservative stance, and focusing on cash and larger
companies. In other words, technical factors outside of the real estate realm
should dictate performance in the short-term. We are reducing our overweight
position in Denmark and Norway, but maintaining our Finnish position.

Each one of the Dutch property shares had a negative return of at least -2.0%
for the third quarter. European City Estates led this miserable performance
falling 14.4%. The combined result was a -7.3% country return, underperforming
the Index by -6.2%. The reasons for the decline include two primary factors.
First, the failed Rodamco split left a bad taste for institutional and retail
investors toward the entire sector. Second, long-term interest rates rose 50
basis points to 5.2%, while December 1999 estimates rose from 3.9% to 4.8%.
Although the abrupt change in the interest rate outlook took place across
Europe, the Dutch stocks were hit particularly hard due to their already steep
premiums to net asset value. On the other hand, the underlying fundamentals of
the market look favorable for the next 12-18 months as the economy continues to
move forward and substantial new space does not yet hit the market. Thus, based
on the retreat back toward reasonable valuation levels, we are increasing our
Dutch exposure through a position in Rodamco Continental Europe, 12% below the
split-up pricing.

Along with the Dutch securities, each Belgian property company in our universe
returned a negative performance this quarter. The overall market offered its
third negative quarter in a row at -3.5%, and trails the Index by 23.4%
year-to-date. The reason for this fallback is a continuing IPO environment
offering an excess supply of overvalued securities. This became evident at the
undersubscribed Leasinvest Real Estate offering in June, priced at an 8.8%
premium over net asset value. The stock has since fallen by over 6%. We will
remain underweight until we believe valuations fall to a reasonable level for
the underlying direct property environment.

Spanish shares finally reversed their downward slide and offered a positive
return this quarter. The Spanish property stock's 2.2% third quarter return
outperformed the Index for the first time in 1999, offering a 3.3% relative
play. Although we would like to believe that the reason for this reversal of
fortune was our second quarter review, a more plausible explanation was the
positive rental growth confirmed in interim results and the merger activity
concerning Bami SA Inmobiliaria, Inmobiliaria Zabalburu and Prima Inmobiliaria.
The current rental environment in Spain is in excellent shape. Prime Madrid
office rents are up over 27% since the second quarter of 1998, without a
slowdown of demand in sight. Take-up in 1999 is slightly behind the 1998 pace,
but due to a lack of quality supply rather than a slowdown in demand. However,
we do believe further hardening of prime yields will be limited. Within this
environment, two companies seem interested to increase their portfolio through
the acquisition of or merger with Zabalburu. First, after rejecting merger
rumors with German RSE and Swiss Maag, Prima Inmobiliaria announced the
possibility of merging with Zabalburu. Then, notwithstanding the merger
possibility, Bami offered to acquire 49.98% of Zabalburu's common shares,
including the 23.7% stake owned by Spanish tobacco group Tabacalera. Tabacalera
rejected Bami, and favored the Prima merger, but in the end, everything fell
apart and the three remain independent for now. Within this environment of
activity, we will maintain our overweight stance, but could shift our positions
if the expected October IPO of Colonial offers a favorable valuation.

Both of the remaining Southern European property markets, Italy and Portugal,
outperformed significantly this quarter due to M&A activity. The Italian market
offered a 11.9% return, but Portugal's 17.7% performance was the strongest
across Europe. In Italy, the price appreciation was driven by speculation Unione
Immobiliare (Unim) would bid for energy giant Eni's entire real estate
portfolio, including publicly listed Immobiliare Metanopoli. Metanopoli was
projected to sell for approximately net asset value. But then, in late
September, the Pirelli Group made a friendly bid to acquire Unim. Some believe
the Unim bid was to increase the likelihood of Pirelli acquiring the Eni
portfolio. Now the public real estate market faces extinction in Italy. If
Pirelli succeeds in acquiring both portfolios, it will be wound into

42
<PAGE>

the current conglomerate structure. Thus, we either learn about tires, or
focus on the rest of Europe. The Portuguese scenario also had its drama. The
story began in August when Alves Ribeiro Investimentos Industriais SGPS bid
EUR10.00/share to acquire the remaining 55% of Mundicenter it did not already
own. The company was trading as low as EUR 7.00/share in early August, with
an estimated 1999 net asset value of EUR 10.44/ share. The stock then rose to
EUR 12.49 in September when Banco Privado Portugues was rumored to make a
rival bid. Since this time, the shares fell back to the EUR 11.60/share range
with a wait and see attitude. Our overweight position in Italy was reversed
into an underweight holding due to an Index change in July, but we intend to
hold our current positions until the dust clears and we see what is left to
invest in. As for Portugal, we remain slightly overweight in Sonae
Imobiliaria, expecting a confirmation of shopping center values from the
Mundicenter offer.

The closed end property companies in Germany, Switzerland and Austria were mixed
against the European Index this quarter. Switzerland outperformed with a 5.9%
return, but Germany and Austria both lost relative ground, falling 7.4% and
3.1%, respectively. We continue to hold a zero weighting in these markets due to
both the company structures and the underlying real estate fundamentals. The
dominant open-ended funds enforce unjustified pricing pressure on properties;
while the real estate supply and demand fundamentals continue to trail the rest
of Europe in their recovery. Munich, Frankfurt, and Hamburg are the cities the
furthest along toward a recovery, but there is not an attractive vehicle to gain
exposure to these markets. Looking into next year, we believe an opportunity
could arise in either Germany or Switzerland, and intend to closely monitor
these markets.

Theodore R. Bigman
PORTFOLIO MANAGER

Daniel A. Policy
PORTFOLIO MANAGER

Jan Willem de Geus
PORTFOLIO MANAGER

October 1999

43
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.7%)
DENMARK (0.9%)
3,350 EjendomsSelskabet Norden A/S................... $ 128
-----------
FINLAND (1.8%)
54,040 Sponda Oyj..................................... 250
-----------
FRANCE (25.1%)
852 Gecina......................................... 103
7,728 Klepierre...................................... 790
1,810 Silic.......................................... 299
4,300 Simco (RFD).................................... 366
5,160 Societe Fonciere Lyonnaise..................... 719
7,616 Sophia......................................... 331
6,292 Unibail........................................ 891
-----------
3,499
-----------
IRELAND (2.9%)
1,025,750 Dunloe Ewart plc............................... 398
-----------
ITALY (3.1%)
275,050 Immobiliaria Urbis............................. 393
76,180 Unione Immobiliare S.p.A. ..................... 41
-----------
434
-----------
NETHERLANDS (3.1%)
3,595 Rodamco Continental Europe N.V. ............... 141
22,100 Uni-Invest N.V. ............................... 286
-----------
427
-----------
NORWAY (1.7%)
35,020 Avantor ASA.................................... 231
-----------
PORTUGAL (1.0%)
10,280 Sonae Imobiliaria S.A. ........................ 145
-----------
SPAIN (5.7%)
16,900 Inmobiliaria Metropolitana Vasco Central....... 376
43,630 Vallehermoso................................... 420
-----------
796
-----------
SWEDEN (10.4%)
48,300 Castellum AB................................... 415
37,800 Diligentia AB.................................. 284
25,300 Drott AB, Class B.............................. 235
13,460 Fastighets AB Tornet........................... 169
55,410 Piren AB....................................... 352
-----------
1,455
-----------
UNITED KINGDOM (41.0%)
145,600 British Land Co. plc........................... 1,136
124,800 Buford Holdings plc............................ 236
49,000 Capital & Regional Properties plc.............. 219
96,360 Capital Shopping Centers plc................... 638
6,800 Chelsfield plc................................. 41
21,885 Freeport Leisure plc........................... 205
59,600 Grantchester Holdings plc...................... 139
103,830 Great Portland Estates plc..................... 351
29,300 Hammerson plc.................................. 229
94,055 Land Securities plc............................ 1,267
56,750 MEPC plc....................................... $ 424
48,129 NHP plc........................................ 149
18,700 Pillar Property plc............................ 100
72,650 Slough Estates plc............................. 419
104,750 Wates City Of London Properties plc............ 152
-----------
5,705
-----------
TOTAL COMMON STOCKS (Cost $13,547)................................. 13,468
-----------
<CAPTION>
NO. OF
WARRANTS
--------------
<S> <C> <C>
WARRANTS (0.0%)
FRANCE (0.0%)
6,800 Societe Fonciere Lyonnaise,
expiring 7/30/02 (Cost $0)................... 3
-----------
TOTAL FOREIGN SECURITIES (96.7%) (Cost $13,547).................... 13,471
-----------
<CAPTION>
FACE
AMOUNT
(000)
--------------
<S> <C> <C>
SHORT-TERM INVESTMENT (2.2%)
REPURCHASE AGREEMENT (2.2%)
$ 309 Chase Securities, Inc. 5.05%, dated
9/30/99, due 10/01/99, to be
repurchased at $309,
collateralized by U.S. Treasury
Bonds, 8.125% due 08/15/19,
valued at $312 (Cost $309)................... 309
-----------
FOREIGN CURRENCY (0.7%)
GBP 14 British Pound.................................. 23
EUR 70 Euro........................................... 75
-----------
TOTAL FOREIGN CURRENCY (Cost $97).................................. 98
-----------
TOTAL INVESTMENTS (99.6%) (Cost $13,953)........................... 13,878
-----------
OTHER ASSETS AND LIABILITIES (0.4%)
Other Assets..................................................... 922
Liabilities...................................................... (868)
-----------
54
-----------
NET ASSETS (100%).................................................. $ 13,932
-----------
-----------
<CAPTION>
CLASS A:
- --------
<S> <C> <C>
NET ASSETS........................................................ $ 12,018
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,221,865 outstanding $0.001 par
value shares (authorized 500,000,000 shares).................... $ 9.84
-----------
-----------
CLASS B:
- --------
NET ASSETS......................................................... $ 1,914
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 194,144 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 9.86
-----------
-----------

- --------------------------------------------------------------------------------
</TABLE>

RFD -- Ranked for Dividend

44
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Denmark (0.5%)
France (8.8%)
Germany (5.0%)
Hong Kong (0.5%)
Ireland (2.8%)
Italy (3.0%)
Japan (9.3%)
Netherlands (3.5%)
Portugal (0.8%)
Spain (3.7%)
Sweden (1.0%)
Switzerland (8.3%)
United Kingdom (12.2%)
United States (30.2%)
Other (5.5%)
Australia (1.7%)
Belgium (1.0%)
Canada (2.4%)
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
- -------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
----- ------ ------ ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A ... 0.24% 15.45% 14.94% 17.07%
PORTFOLIO -- CLASS B ... 0.10 15.21 N/A 15.59
INDEX -- CLASS A ....... 6.90 29.47 15.91 14.64
INDEX -- CLASS B ....... 6.90 29.47 N/A 15.92
</TABLE>

1. The MSCI World Index is an unmanaged index of common stocks and includes
securities representative of the market structure of 22 developed market
countries in North America, Europe, and the Asia/Pacific region (includes
dividends).

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE COUNTRY
SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL
PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S
FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.

The Global Equity Portfolio is managed with the objective of obtaining long-term
capital appreciation by investing in equity securities of issuers throughout the
world, including U.S. issuers. Investments may also be made with discretion in
emerging markets.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 0.24% for the Class A shares and 0.10% for the Class B shares compared to
6.90% for the Morgan Stanley Capital International (MSCI) World Index (the
"Index"). For the one year period ended September 30, 1999, the Portfolio had a
total return of 15.45% for the Class A shares and 15.21% for the Class B shares
compared to 29.47% for the Index. For the five-year period ended September 30,
1999, the average annual total return of Class A shares was 14.94% compared to
15.91% for the Index. For the period since inception on July 15, 1992 through
September 30, 1999, the average annual total return of Class A shares was 17.07%
compared to 14.64% for the Index. For the period since inception on January 2,
1996 through September 30, 1999, the average annual total return of Class B
shares was 15.59% compared to 15.92% for the Index.

Globally, growth continued to be stronger than expected, drawing the quarter to
a nervous close with the possibility of rate increases by the Fed and European
Central Bank. The yen rose 13.7% against the dollar in the quarter following
improved economic momentum in Japan. The Portfolio underperformed during the
third quarter versus the Index. This was discouraging following our strong
second quarter that coincided with a turnaround in "value". The third quarter
saw a return in the U.S. to the narrow, technology-dominated performance
reminiscent of the devastating first quarter of this year. Our lack of exposure
to the largest U.S. Index stocks, dominated by technology, negatively impacted
our returns. Mega caps (companies with capitalization exceeding $100 billion)
continued to explain the majority of the Index returns with Microsoft, Cisco,
GE, IBM and Intel accounting for 50% of the U.S. stock market return this year.
Just 11 stocks (7 of which are technology) explained 100% of the S & P 500's
rise in 1999, through the third quarter. In fact, the stocks in the top quintile
of price momentum sourced 73% of S&P returns vs. 51% last year and an average of
31% since 1959. The valuation of these momentum stocks is 47 times earnings,
more than twice that of the market.

In addition to the narrowing technology leadership, the Portfolio struggled
against stock specific weakness in U.S. consumer defensives (Philip Morris and
Albertson's) and specialty financials (MBIA and Finova Group). Our underweights
to the strong yen, coupled with a lack of

45
<PAGE>

exposure to the rallying Japanese banking sector, were additional detractors.

Philip Morris (-14%) was negatively impacted by the recent Federal litigation
against the tobacco industry. However, with the federal lawsuit now filed (it
was long anticipated) and the Engle class action in Florida ongoing, investors'
legal and regulatory concern likely has peaked. There is a good chance the Engle
suit will be dismissed as a class action and that the federal claim will be
dismissed, or protracted for so long that it will simply fade away. These two
events should trigger a fundamental reassessment of the company's legal risk
profile. In the meantime operating performance is strong and management have
targeted $40 billion out of the $50 billion of cash flow the company will
generate over the next five years to go towards increased dividends and share
repurchase. The yield is helpful at 5.5%.

Positive stock selection in Japan was counterbalanced by our underweighting to
the country relative to the Index driven by our bottom-up stock selection. We
have not been in the sectors which have most benefited from the Nikkei's rally
since June, namely the banks, especially following the announced three way
merger between Fuji Bank, DKB and IBJ (note that non-performing loans are 30% of
GDP in Japan).

Stock selection in pharmaceuticals, one of the worst performing and largest
sector weightings in the Index, was a positive during the third quarter.
Rhone-Poulenc (+13%), the life science and specialty chemical company, showed
continued strong earnings following the performance of new strategic products.

Overweights in selected consumer defensive staples (food & household products,
tobacco) were a strong positive. Reckitt & Colman (+19%) and Benckiser (+17%)
merged during the quarter, creating one of the largest players in the household
cleaning market. The merger makes great strategic sense and Benckiser brings
excellent management to the combined entity. Imperial Tobacco (+9%) and
Richemont (+5%), somewhat immune to the litigious U.S. market, displayed their
resilience by rising in a down market. While our value discipline has kept us
out of large cap technology our small cap technology added value in the quarter
as Data General (+44%), manufacturer of computer systems and mass storage
devices, was acquired by market leader, EMC Corp.

The Portfolio maintains attractive valuation characteristics versus the Index.
The Portfolio trades at 10 times cash flow versus 16 times for the Index. The
valuation of the Index is biased upward by its thirty largest stocks,
predominately U.S. growth stocks currently trading on 28 times cash flow. We
have found more attractively valued companies down the capitalization scale. The
weighted-average market cap of our companies is $24 billion versus $82 billion
in the Index.

From a geographic perspective, we remain overweight Europe, both the Euro-bloc
and non-Euro areas. The increasing globalization of the economy and the threat
from powerful new entrants to Europe like Walmart have prompted an acceleration
in the consolidation within European sectors such as banking, energy and
consumer goods in order to build scale in a world characterized by slow growth
and overcapacity. The value of M&A activity in Europe is rising - from $160
billion in'97 to an annualized $400 billion so far in '99. The Portfolio was
positively impacted by three recent European deals. In energy, Elf Aquitaine was
acquired by Total Fina - a hostile acquisition that turned friendly. In
household products, UK's Reckitt & Colman merged with Dutch company Benckiser
(see earlier comment). Finally, Bank of Scotland made a hostile bid for NatWest
bank in the UK. All of these acquisitions reflect changing management attitudes
toward shareholder value (and self-preservation). This is an important
development for value investors as management, through their willingness to
change, often provides the catalyst for value creation.

In the U.S., we remain underweight the market but importantly our underweight is
primarily to the largest U.S. companies mentioned above. Despite the value
premium currently accorded to the biggest U.S. stocks, we have been able to
allocate 33% of the Portfolio to U.S. ideas that offer value. Over 50% of U.S.
stocks are down this year with the average return in the U.S. Index a negative
4.5%. Recent value ideas in the U.S. include retailer Sears and telecom operator
GTE, which is a cheaper way to get exposure to Bell Atlantic (the two are
merging) and the cellular joint venture proposed between Bell Atlantic and
Vodafone-Airtouch. Fort James, restructuring tissue manufacturer, is simply too
cheap relative to its intrinsic value.

In Japan our stock selection has not been as strong as in the first six months
of the year. This is due to the strong re-rating of financials and low-quality
cyclicals that has taken place in anticipation of improved operating
fundamentals. We remain wary of the sustainability of the current economic
recovery that has relied heavily on fiscal stimulus. We doubt the Japanese would
allow the Government deficit to move much above 10% of GDP where it currently
sits. We have been drawn to relatively defensive business franchises such as NTT
and Toppan Printing or technology companies like Hitachi and Pioneer,

46
<PAGE>

which are more attractively valued than their U.S. counterparts.

The first nine months of 1999 have been challenging for value investors. The
recovery by value (and collapse of technology stocks) in the second quarter was
effectively reversed in the third quarter as investors began to believe that
interest rates rises were (at least temporarily) on hold. This apparently meant
that expensive growth stocks could go up again and the valuation extremes
witnessed at the end of the first quarter have been revisited. We are not
certain what might deflate the current bubble in U.S. mega cap technology
stocks. We remain committed to what we know works over the long run - that is,
adherence to the discipline of purchasing good businesses at a discount to their
intrinsic value.

Frances Campion
PORTFOLIO MANAGER

Richard Boon
PORTFOLIO MANAGER

Paul Boyne
PORTFOLIO MANAGER

October 1999

47
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.0%)
AUSTRALIA (1.7%)
545,000 CSR Ltd. ...................................... $ 1,377
377,250 Westpac Banking Corp. ......................... 2,328
-----------
3,705
-----------

BELGIUM (1.0%)
28,300 Delhaize-Le Lion .............................. 2,259
-----------

CANADA (2.4%)
89,840 BCT.Telus Communications Inc. ................ 1,873
48,346 BCT.Telus Communications Inc. (A Shares) ..... 995
45,550 Potash Corp. of Saskatchewan, Inc. ........... 2,363
-----------
5,231
-----------
DENMARK (0.5%)
27,550 Danisco A/S .................................. 1,152
-----------
FRANCE (8.8%)
24,250 Cie Generale des Establissements
Michelin, Class B (Registered) ............. 1,144
27,566 Elf Aquitaine ................................ 5,020
17,910 Groupe Danone ................................ 4,355
32,710 Pernod Ricard ................................ 2,197
77,100 Rhone-Poulenc, Class A ....................... 3,980
59,450 Scor ......................................... 2,879
-----------
19,575
-----------
GERMANY (4.5%)
81,590 BASF AG ...................................... 3,491
42,120 Bayer AG ..................................... 1,670
10,900 Schering AG .................................. 1,192
58,700 VEBA AG ...................................... 3,280
5,420 Volkswagen AG ................................ 301
-----------
9,934
-----------
HONG KONG (0.5%)
349,000 Hong Kong Electric Holdings Ltd. ............. 1,083
-----------
IRELAND (2.6%)
516,600 Bank of Ireland .............................. 4,207
285,481 Green Property plc ........................... 1,656
-----------
5,863
-----------
ITALY (3.0%)
305,000 Mediaset S.p.A. .............................. 3,113
700,913 Telecom Italia S.p.A. (RNC) .................. 3,521
-----------
6,634
-----------
JAPAN (9.3%)
157,000 Daiichi Pharmaceutical Co., Ltd. ............. 2,379
94,000 Fuji Photo Film Ltd. ......................... 3,213
124,000 Hitachi Ltd. ................................. 1,370
132,000 Kao Corp. .................................... 3,721
115,000 Nichido Fire & Marine Insurance Co., Ltd. .... 566
526 Nippon Telegraph & Telephone Corp (NTT) ...... 6,454
58,000 Pioneer Electric Corp. ....................... 994
127,000 Sumitomo Marine & Fire Insurance Co., Ltd. ... 809
91,000 Toppan Printing Co., Ltd. .................... 1,142
-----------
20,648
-----------
NETHERLANDS (3.5%)
73,412 ABN Amro Holding N.V. ........................ $ 1,649
69,072 ING Groep N.V. ............................... 3,749
22,344 Philips Electronics N.V. ..................... 2,247
-----------
7,645
-----------
PORTUGAL (0.8%)
111,152 Cimpor SGPS .................................. 1,834
-----------
SPAIN (3.7%)
243,900 Iberdrola .................................... 3,613
289,038 Telefonica ................................... 4,624
-----------
8,237
-----------
SWEDEN (1.0%)
403,200 Nordbanken Holding AB ........................ 2,264
-----------
SWITZERLAND (8.3%)
3,181 Cie Financiere Richemont AG, Class A ......... 6,433
2,500 Forbo Holding AG (Registered) ................ 1,090
2,512 Holderbank Financiere Glarus AG,
Class B (Bearer)............................ 3,259
3,480 Nestle (Registered) .......................... 6,532
3,210 Swisscom AG (Registered) ..................... 1,000
-----------
18,314
-----------
UNITED KINGDOM (12.2%)
524,580 Allied Domecq plc ............................ 2,992
2,210 AstraZeneca .................................. 93
251,204 Blue Circle Industries plc ................... 1,496
93,591 Burmah Castrol plc ........................... 1,749
179,600 Great Universal Stores plc ................... 1,354
226,600 Imperial Tobacco Group plc ................... 2,705
67,721 INVENSYS ..................................... 330
241,400 Matthews (Bernard) plc ....................... 449
58,550 National Westminster Bank plc ................ 1,365
653,333 Pentos plc ................................... --
524,580 Punch Taverns Finance plc .................... --
551,866 Reckitt & Colman plc ......................... 6,850
350,497 Royal & Sun Alliance Insurance Group plc ..... 2,764
347,210 Sainsbury (J) plc ............................ 2,166
147,000 Wolseley plc ................................. 1,020
195,400 WPP Group plc ................................ 1,818
-----------
27,151
-----------
UNITED STATES (30.2%)
140,692 Albertson's, Inc. ............................ 5,566
18,400 Alcoa, Inc. .................................. 1,142
90,750 BJ's Wholesale Club, Inc. .................... 2,683
41,800 Boise Cascade Corp. .......................... 1,523
41,650 Borg-Warner Automotive, Inc. ................. 1,791
92,200 Cadiz, Inc. .................................. 882
22,000 Cadiz, Inc. (Restricted Shares) .............. 210
32,450 Chase Manhattan Bank ......................... 2,446
73,491 COMSAT Corp. ................................. 2,177
118,400 Enhance Financial Services Group, Inc. ....... 2,094
66,050 Finova Group, Inc. ........................... 2,411
50,100 Fort James Corp. ............................. 1,337
19,000 General Dynamics Corp. ....................... 1,186
124,500 GenRad, Inc. ................................. 2,381
</TABLE>

48
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT.)
23,600 Georgia Pacific Group ........................ $ 956
61,000 Goodrich (BF) Co. ............................ 1,769
24,100 GTE Corp. .................................... 1,853
101,700 Houghton Mifflin Co. ......................... 4,132
3,205 IBP, Inc. .................................... 79
83,000 InteliData Technologies Corp. ................ 169
87,330 MBIA, Inc. ................................... 4,072
117,000 Mellon Bank Corp. ............................ 3,949
26,400 NCR Corp. .................................... 873
55,100 Noble Drilling Corp. ......................... 1,205
10,160 Pharmacia & Upjohn, Inc. ..................... 504
210,950 Philip Morris Cos., Inc. ..................... 7,212
55,200 Rite Aid Corp. ............................... 762
58,500 Sears Roebuck & Co. .......................... 1,835
7,800 Tenneco, Inc. ................................ 133
50,700 Terra Nova (Bermuda) Holdings Ltd., Class A .. 1,619
88,900 Tupperware Corp. ............................. 1,800
58,150 U.S. Bancorp ................................. 1,755
121,200 Unicom Corp. ................................. 4,477
-----------
66,983
-----------
TOTAL COMMON STOCKS (Cost $194,867) .............................. 208,512
-----------
PREFERRED STOCKS (0.5%)
GERMANY (0.5%)
38,660 Volkswagen AG (Cost $1,125) .................. 1,222
-----------
TOTAL FOREIGN & U.S. SECURITIES (94.5%) (Cost $195,992) .......... 209,734
-----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (2.8%)
REPURCHASE AGREEMENT (2.8%)
$ 6,258 Chase Securities, Inc., 5.05%,
dated 9/30/99, due 10/01/99, to
be repurchased at $6,259,
collateralized by U.S. Treasury
Bonds, 7.125%, due 2/15/23,
valued at $6,311 (Cost $6,258) ............. $ 6,258
-----------
FOREIGN CURRENCY (0.5%)
GBP 56 British Pound ................................ 93
DKK 124 Danish Krone ................................. 18
EUR 838 Euro ......................................... 892
-----------
TOTAL FOREIGN CURRENCY (Cost $998) ............................... 1,003
-----------
TOTAL INVESTMENTS (97.8%) (Cost $203,248) ........................ 216,995
-----------
OTHER ASSETS AND LIABILITIES (2.2%)
Other Assets ................................................... 41,371
Liabilities .................................................... (36,494)
-----------
4,877
-----------
NET ASSETS (100%) ................................................ $ 221,872
-----------
-----------
<CAPTION>
CLASS A:
- --------
<S> <C> <C>
NET ASSETS ....................................................... $ 193,727
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,627,846 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 20.12
-----------
-----------
CLASS B:
- --------
NET ASSETS ....................................................... $ 28,145
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,408,705 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 19.98
-----------
-----------
- --------------------------------------------------------------------------------
</TABLE>

RNC -- Non-Convertible Savings Shares

49
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Australia (3.3%)
Belgium (0.3%)
Canada (2.6%)
Denmark (2.0%)
Finland (0.5%)
France (12.9%)
Germany (6.6%)
Hong Kong (1.5%)
Italy (2.9%)
Japan (17.7%)
Netherlands (4.6%)
New Zealand (0.4%)
Portugal (0.5%)
Singapore (1.7%)
Spain (3.1%)
Sweden (2.6%)
Switzerland (8.6%)
United Kingdom (22.0%)
Other (6.2%)
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- ------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------------------
AVERAGE AVERAGE AVERAGE
ANNUAL ANNUAL ANNUAL
ONE FIVE TEN SINCE
YTD YEAR YEARS YEARS INCEPTION
----- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
PORTFOLIO -- CLASS A ... 10.21% 26.69% 14.78% 13.39% 12.90%
PORTFOLIO -- CLASS B ... 10.01 26.41 N/A N/A 16.12
INDEX -- CLASS A ....... 8.53 30.95 9.12 5.82 5.89
INDEX -- CLASS B ....... 8.53 30.95 N/A N/A 9.51
</TABLE>

1. The MSCI EAFE Index is an unmanaged index of common stocks in Europe,
Australasia and the Far East (includes dividends net of withholding taxes).

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE COUNTRY
SPECIFIC PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE.
PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH
INTERNATIONAL INVESTING.

The investment objective of the International Equity Portfolio is long-term
capital appreciation through investment primarily in equity securities of
non-U.S. issuers. Equity securities for this purpose include common stocks and
equivalents, such as securities convertible into common stocks, and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 10.21% for the Class A shares and 10.01% for the Class B shares compared to
8.53% for the Morgan Stanley Capital International (MSCI) EAFE Index (the
"Index"). For the one year period ended September 30, 1999, the Portfolio had a
total return of 26.69% for the Class A shares and 26.41% for the Class B shares
compared to 30.95% for the Index. For the five-year period ended September 30,
1999, the average annual total return of Class A shares was 14.78% compared to
9.12% for the Index. For the ten-year period ended September 30, 1999, the
average annual total return of Class A shares was 13.39% compared to 5.82% for
the Index. For the period since inception on August 4, 1989 through September
30, 1999, the average annual total return of Class A shares was 12.90% compared
to 5.89% for the Index. For the period since inception on January 2, 1996
through September 30, 1999, the average annual total return of Class B shares
was 16.12% compared to 9.51% for the Index.

Our over-riding concern continues to be the structural imbalances in the U.S.
economy, which we believe will eventually spell an end to the easy monetary
conditions that have fueled the economic boom. If the major locomotive of world
growth falters, we see little chance of a resynchronization of global growth.

With this in mind, the Portfolio remains its defensive bias with a heavy
overweight position in the food and household and beverage sectors (12.7%
weighting vs. 4.7% Index weighting) where earnings and free cash flow should
prove to be more resilient in the event of an economic slow down. This
overweight position was increased further by the addition of Cadbury Schweppes
during the quarter.

The Portfolio also has an overweight position in utilities (7.2% weighting vs.
4.2% Index weighting) but a combination of rising bond yields and deregulation
in the European electricity market has, however, overshadowed the traditionally
defensive characteristics of the sector. However, given the substantial relative
underperformance of this sector, we see little downside from current levels.

Over the course of the last quarter we started to take profits in the industrial
cyclicals (exiting Billiton and Lonmin) and

50
<PAGE>

reducing exposure to Blue Circle, RMC, Wolseley, Invensys and Schneider as
prices reached our sell targets. However, an abrupt halt to the recovery in
cyclical stocks in the final weeks of the quarter has seen prices for this
group gap down well below our sell limits.

Our weighting in the pharmaceuticals has increased with the addition of
AstraZeneca and the reclassification of Rhone Poulenc out of the chemicals
sector as its transformation to a pure life sciences group (to be renamed
Aventis) reaches its final stages. This stock is currently rated at half the
multiples of its European peer group providing the scope for a significant
re-rating and very little downside.

We continue to be underweight capital goods, autos and financials.

Dominic Caldecott
PORTFOLIO MANAGER

Peter Wright
PORTFOLIO MANAGER

William Lock
PORTFOLIO MANAGERR

Kate Cornish-Bowden
PORTFOLIO MANAGER

Walter Riddell
PORTFOLIO MANAGER

October 1999

51
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.9%)
AUSTRALIA (3.3%)
1,584,150 Brambles Industries Ltd. ..................... $ 45,881
7,505,400 Fosters Brewing Group Ltd. ................... 21,164
10,016,200 Westpac Banking Corp. ........................ 61,804
4,067,250 Woolworths Ltd. .............................. 14,204
-----------
143,053
-----------
BELGIUM (0.3%)
296,046 G.I.B. Holdings Ltd. ......................... 12,824
-----------
CANADA (2.6%)
1,253,279 BCT.Telus Communications, Inc. ............... 26,133
548,259 BCT.Telus Communications, Inc. (A Shares) .... 11,283
635,980 Potash Corp. of Saskatchewan, Inc. ........... 32,991
2,973,600 Renaissance Energy Ltd. ...................... 42,483
-----------
112,890
-----------
DENMARK (2.0%)
520,692 Danisco A/S .................................. 21,767
214,200 Den Danske Bank .............................. 24,380
179,000 Novo-Nordisk A/S, Class B .................... 21,270
307,008 Unidanmark A/S, plc, Class A (Registered) .... 20,790
-----------
88,207
-----------
FINLAND (0.5%)
370,200 Huhtamaki Oyj, Series 1 ...................... 11,702
1,318,967 Merita Ltd., plc, Class A .................... 7,412
-----------
19,114
-----------
FRANCE (12.9%)
303,010 Alcatel Alsthom .............................. 41,731
861,070 Assurances Generales de France (Bearer) ...... 47,105
531,000 Banque Nationale de Paris .................... 42,358
238,932 Cie de Saint Gobain .......................... 44,502
530,900 Elf Aquitaine ................................ 92,666
601,315 France Telecom ............................... 52,735
327,411 Groupe Danone ................................ 79,624
1,767,470 Rhone-Poulenc, Class A ....................... 91,235
289,604 Schneider .................................... 21,175
373,850 Total, Class B ............................... 46,951
-----------
560,082
-----------
GERMANY (5.7%)
925,600 BASF AG ...................................... 39,602
1,009,950 Bayer AG ..................................... 40,040
1,649,168 RWE AG ....................................... 69,506
503,350 Schering AG .................................. 55,072
2,324,400 Viag AG ...................................... 44,406
-----------
248,626
-----------
HONG KONG (1.5%)
9,401,300 Hong Kong Electric Holdings Ltd. ............. 29,168
14,865,155 Hong Kong Land Holdings Ltd. ................. 19,473
2,770,600 Swire Pacific Ltd., Class A .................. 13,125
6,002,500 Swire Pacific Ltd., Class B .................. 4,405
-----------
66,171
-----------
ITALY (2.9%)
4,837,800 Mediaset S.p.A. .............................. $ 49,378
14,709,387 Telecom Italia S.p.A. (RNC) .................. 73,893
-----------
123,271
-----------
JAPAN (17.7%)
3,669,000 Aisin Seiki Co., Ltd. ........................ 57,215
13,700 Aoyama Trading Co., Ltd. ..................... 462
806,000 Canon, Inc. .................................. 23,402
325,000 Chudenko Corp. ............................... 5,750
1,844,000 Daibiru Corp. ................................ 14,248
1,356,000 Daiichi Pharmaceutical Co., Ltd. ............. 20,549
866,000 Eisai Co., Ltd. .............................. 21,899
1,656,000 Fuji Photo Film Ltd. ......................... 56,611
1,422,000 Fujitsu Ltd. ................................. 44,217
3,500,000 Hitachi Ltd. ................................. 38,681
3,343 Japan Tobacco, Inc. .......................... 41,330
1,302,000 Kao Corp. .................................... 36,705
3,823,000 Nichido Fire & Marine Insurance Co., Ltd. .... 18,798
8,972 Nippon Telegraph & Telephone Corp (NTT) ...... 110,081
543,000 Ono Pharmaceutical Co., Ltd. ................. 20,089
1,178,000 Pioneer Electric Corp. ....................... 20,191
126,000 Sankyo Co., Ltd. ............................. 3,776
4,202,000 Shionogi & Co., Ltd. ......................... 34,397
5,957,000 Sumitomo Marine & Fire Insurance Co., Ltd. ... 37,939
392,500 Takefuji Corp. ............................... 65,178
5,442,000 Toppan Printing Co., Ltd. .................... 68,299
599,000 Yamanouchi Pharmaceutical Co. ................ 27,995
-----------
767,812
-----------
NETHERLANDS (4.6%)
1,074,100 Akzo Nobel N.V. .............................. 45,498
329,358 Buhrmann N.V. ................................ 5,539
406,300 CSM N.V. ..................................... 19,524
826,060 Hollandsche Beton Groep N.V. ................. 8,440
859,000 ING Groep N.V. ............................... 46,626
533,128 Philips Electronics N.V. ..................... 53,620
486,000 Royal KPN N.V. ............................... 21,285
-----------
200,532
-----------
NEW ZEALAND (0.4%)
7,869,900 Lion Nathan Ltd. ............................. 16,486
-----------
PORTUGAL (0.5%)
1,203,416 Cimpor SGPS .................................. 19,852
-----------
SINGAPORE (1.7%)
17,707,337 Jardine Strategic Holdings, Inc. ............. 36,123
4,988,000 United Overseas Bank Ltd. (Foreign) .......... 37,850
-----------
73,973
-----------
SPAIN (3.1%)
6,024,300 Iberdrola .................................... 89,251
2,789,249 Telefonica ................................... 44,618
-----------
133,869
-----------
SWEDEN (2.6%)
2,583,550 ForeningsSparbanken AB ....................... 41,945
</TABLE>

52
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
SWEDEN (cont.)
5,728,100 Nordbanken Holding AB ........................ $ 32,165
1,471,600 Svenska Cellulosa AB, Class B ................ 39,251
-----------
113,361
-----------
SWITZERLAND (8.6%)
47,177 Cie Financiere Richemont AG, Class A ......... 95,403
25,820 Forbo Holding AG (Registered) ................ 11,258
36,901 Holderbank Financiere Glarus AG,
Class B (Bearer) ........................... 47,873
48,145 Nestle (Registered) .......................... 90,374
13,744 Schindler Holding AG (Participating
Certificates) .............................. 21,179
22,355 Sulzer AG (Registered) ....................... 14,107
112,470 Swisscom AG (Registered) ..................... 35,037
194,955 UBS AG (Registered) .......................... 54,893
-----------
370,124
-----------
UNITED KINGDOM (22.0%)
4,894,800 Allied Domecq plc ............................ 27,922
3,635,600 Allied Zurich plc ............................ 42,675
831,910 AstraZeneca Group plc ........................ 34,883
3,193,500 BAA plc ...................................... 32,333
7,380,600 BG plc ....................................... 42,406
6,265,829 Blue Circle Industries plc ................... 37,316
3,454,600 British Telecommunications plc ............... 52,295
4,572,377 BTR plc ...................................... 22,282
8,018,100 Bunzl plc .................................... 38,149
1,852,975 Burmah Castrol plc ........................... 34,624
1,839,050 Cadbury Schweppes plc ........................ 12,769
2,976,200 CGU plc ...................................... 45,935
4,237,100 Great Universal Stores plc ................... 31,948
4,096,371 Imperial Tobacco Group plc ................... 48,893
5,026,451 John Mowlem & Co. plc ........................ 9,930
3,969,300 National Westminster Bank plc ................ 92,531
4,859,600 Premier Farnell plc .......................... 22,641
6,052,576 Reckitt & Colman plc ......................... 75,132
2,462,300 RMC Group plc ................................ 38,024
5,093,563 Royal & Sun Alliance Insurance Group plc ..... 40,167
6,354,200 Sainsbury (J) plc ............................ 39,647
4,524,300 Scottish Hydro-Electric plc .................. 42,195
2,889,960 Tate & Lyle plc .............................. 17,842
3,268,400 Wolseley plc ................................. 22,680
5,210,676 WPP Group plc ................................ 48,468
-----------
953,687
-----------
TOTAL COMMON STOCKS (Cost $3,281,788) ............................ 4,023,934
-----------
PREFERRED STOCKS (0.9%)
GERMANY (0.9%)
1,223,100 Volkswagen AG (Cost $29,217).................. 38,662
-----------
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
SWEDEN (0.0%)
1,471,600 Svenska Cellulosa, Series B (Cost $0) ........ $ 2,350
-----------
TOTAL FOREIGN SECURITIES (93.8%) (Cost $3,311,005) ............... 4,064,946
-----------
<CAPTION>
FACE
AMOUNT
(000)
- -------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (5.2%)
REPURCHASE AGREEMENT (2.5%)
$ 109,586 Chase Securities, Inc., 5.05%,
dated 9/30/99, due 10/01/99, to
be repurchased at $109,601,
collateralized by Federal
National Mortgage Association,
5.125%, due 2/13/04, valued at $112,235 109,586
-----------
TIME DEPOSITS (2.7%)
EUR 104,598 Euro Time Deposit, 12/31/99 .................. 110,508
GBP 3,026 UK Time Deposit, 12/31/99 .................... 4,888
-----------
115,396
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $224,982) ..................... 224,982
-----------

FOREIGN CURRENCY (0.9%)
CAD 179 Canadian Dollar .............................. 122
DKK 2,583 Danish Krone ................................. 370
HKD 9,988 Hong Kong Dollar ............................. 1,286
JPY 3,214,834 Japanese Yen ................................. 30,110
SGD 4,767 Singapore Dollar ............................. 2,804
SEK 45,953 Swedish Krona ................................ 5,609
-----------
TOTAL FOREIGN CURRENCY (Cost $39,687) ............................ 40,301
-----------
TOTAL INVESTMENTS (99.9%) (Cost $3,575,674) ...................... 4,330,229
-----------
OTHER ASSETS AND LIABILITIES (0.1%)
Other Assets ................................................... 880,298
Liabilities .................................................... (877,438)
-----------
2,860
-----------
NET ASSETS (100%) ................................................ $4,333,089
-----------
-----------
<CAPTION>
CLASS A:
- --------
<S> <C> <C>
NET ASSETS ....................................................... $4,298,643
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 214,255,125 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 20.06
-----------
-----------
CLASS B:
- --------
NET ASSETS ....................................................... $ 34,446
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,722,766 outstanding $0.001 par
value shares (authorized 500,000,000 shares) ................... $ 19.99
-----------
-----------

- --------------------------------------------------------------------------------
</TABLE>

EUR -- Euro
GBP -- British Pound
RNC -- Non-Convertible Savings Shares
Foreign -- Prior governmental approval for foreign investments may be required
under certain circumstances.

53
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- -------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------
[CHART]
<TABLE>
<S> <C>
Australia (2.6%)
Belgium (0.3%)
Denmark (0.5%)
Finland (1.7%)
France (9.4%)
Germany (6.8%)
Hong Kong (1.4%)
Ireland (0.8%)
Italy (3.3%)
Japan (30.0%)
Netherlands (3.7%)
New Zealand (0.1%)
Portugal (1.5%)
Singapore (1.9%)
Spain (2.7%)
Sweden (3.7%)
Switzerland (7.4%)
United Kingdom (19.3%)
Other (2.9%)
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- ------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE
ANNUAL
ONE SINCE
YTD YEAR INCEPTION
----- ------ ---------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A... 11.80% 23.33% 9.61%
PORTFOLIO -- CLASS B... 11.58 22.98 9.32
INDEX ................. 8.53 30.95 10.18
</TABLE>

1. The MSCI EAFE Index is an unmanaged index of common stocks in Europe,
Australasia and the Far East (includes dividends net of withholding taxes).

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

The International Magnum Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance with
the EAFE country weightings determined by the Adviser. The EAFE countries in
which the Portfolio will invest are those comprising the Morgan Stanley Capital
International (MSCI) EAFE Index, which includes Australia, Japan, New Zealand,
most nations located in Western Europe, and certain developed countries in Asia.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 11.80% for the Class A shares and 11.58% for the Class B shares compared to
8.53% for the Morgan Stanley Capital International (MSCI) EAFE Index (the
"Index"). For the one year period ended September 30, 1999, the Portfolio had a
total return of 23.33% for the Class A shares and 22.98% for the Class B shares
compared to 30.95% for the Index. For the period since inception on March 15,
1996 through September 30, 1999, the average annual total return of Class A
shares was 9.61% and 9.32% for Class B shares compared to 10.18% for the Index.

The Portfolio outperformed the Index during the third quarter as the Portfolio
had a total return of 5.43% for the Class A shares and 5.37% for the Class B
shares compared to 4.39% for the Index. Portfolio outperformance is attributable
primarily to strong stock selection within Europe and Japan, with additional
contribution from regional allocation. Global economic healing continued into
the third quarter as jitters about a deflationary environment were replaced with
concern about possible inflation. Central banks started to take back the easings
seen last year, with the U.S. Fed leading the charge with two interest rate
increases in as many months in an effort to squelch possible inflationary trends
in the persistently robust U.S. economy. Asian markets, which had led the
developed market universe during the first half of 1999 succumbed to pressure
from tightening interest rates and saw the poorest performance within the Index.
The Pacific Free ex-Japan Index fell 5.5% in U.S. dollar terms (-4.8% in local
currency). Despite increasing signs of economic revitalization and strengthening
currencies, much of Europe languished during the third quarter, falling 2.4% in
local currency, but rising 1.2% in U.S. dollars due to the Euro's 3%
appreciation versus the dollar. Japan was the single stand-out market during the
third quarter, appreciating 15.8% in U.S. dollars (+1.9% local currency) on
signs of tangible corporate restructuring efforts and positive economic growth
during the first half of 1999, as well as the strength of the yen.

- -------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE PERFORMANCE
RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH
INTERNATIONAL INVESTING.

54
<PAGE>

The Portfolio began the third quarter underweight to Europe (64% vs. 69%),
overweight to Japan (27% vs. 24%,) and slightly overweight to Asia ex-Japan
(7.1% vs. 6.6%) versus the Index. During the course of the third quarter we
decreased our allocation to Asia ex-Japan, positioning the Portfolio in a
neutral stance to the market. We maintained our underweight to Europe while
decreasing the magnitude of our overweight position in Japan. In general, this
regional allocation stance benefited Portfolio returns as Japan outperformed all
EAFE regions, while Europe and Asia ex-Japan were relative underperformers.

European performance benefited from strong stock selection in consumer goods and
capital equipment industries which surged on signs of economic revitalization.
Schneider (France, +30%), the world's largest maker of industrial control
equipment, saw first half profits exceed forecasts as efforts to cut costs paid
off. Autoliv (Sweden, +24%), worldwide leader in automotive safety systems,
witnessed growth in sales of their side-impact airbags and Michelin (France,
+15%) rose on improving prospects for global demand. Selected consumer
defensives also added to performance as the merger of Reckitt & Colman (+19%)
with Benckiser (+17%) pushed both stocks up. This union was looked upon
favorably due to Benckiser's strong management and complementary products which
will make it one of the largest players in the household products market.
Richemont (Switzerland, +5%) and Nestle (Switzerland, +4.3%), both large
Portfolio holdings, showed their defensive qualities by rising in a difficult
market.

Detractors from performance in Europe included our underweight in the
telecommunications industry which, for the most part, has overextended
valuations. However, the telecom companies we do hold suffered poor performance
as Telecom Italia (-15%) weakened following news that shares in its mobile
subsidiary would be transferred to Olivetti's acquisition vehicle, Tecnost, to
decrease leverage. Although legal, this maneuver has been criticized for its
treatment of minority shareholders. Swisscom (-17%) and British Telecom (-8%)
were also weak with the latter impacted by fears of rising interest rates. UK
catalogue retailer Great Universal Stores (-30%) fell on deteriorating
fundamentals. However, we believe management can transform the business and see
tremendous value in this stock.

Japanese stock selection was a major contributor to Portfolio outperformance as
companies such as Fujitsu (+55%), Ricoh (+27%), TDK (+27%), Rohm (+36%) and Sony
(+39%) rallied to record highs over the course of the third quarter.
Restructuring efforts and earnings momentum rewarded many technology related
companies and we believe that the leadership in the market from these Japanese
"Generals" was very significant and supports our view that investors still need
to be highly selective in their investments for Japanese equities. Detractors
from performance included our avoidance of the banking sector which we feel is
appreciating on a buying frenzy following August's announced merger by
Industrial Bank of Japan, Dai- Ichi Kangyo Bank and Fuji Bank, and not based on
fundamental improvements. The yen's steep 12% appreciation against the dollar
last quarter impacted export- oriented companies which also detracted from
overall results.

During the third quarter we added to our position in Singapore while reducing
exposure to Hong Kong. This strategy served the Portfolio well as Singapore was
the relative outperformer of the region falling 3.6% in U.S. dollars (-3.7%
local currency). Strong earnings in the electronics and banking sectors as well
as a firming of the real estate market helped to keep the market from falling as
far as some of its peers in response to U.S. interest rate increases.

In the third quarter, European equities outperformed the world by 3% and the
U.S. equity market by 9%, thanks in part to a firmer Euro against the dollar.
The European economic recovery began to gather steam in earnest during the third
quarter, but continued to be uneven as core Germany trailed many of its
counterparts. However, recent data releases suggest that the tide may be
turning. Germany's August survey of business confidence (the Ifo Survey)
recovered sharply as industrial production, manufacturing orders, plant and
machinery orders and exports were all stronger than expected. Additionally,
macroeconomic reforms are starting to impact the economy with the corporate tax
rate set to fall from 56% to 36% in 2002. This, combined with potential
restructuring, particularly in the banking sector, should help the German
market. Although we expect the ECB to raise rates in the near- term, monetary
policy in the Euro-zone remains highly stimulative with the yield curve the most
positively sloped in three years.

The Portfolio is well positioned to reap the potential benefits of the
developing European economic recovery. We maintain an underweight to mega caps
in Europe due to the excessive valuation premiums generally accorded these
companies. In the year-to-date, the mega cap component of the MSCI Europe Index
(companies over $20 billion in market cap) has declined 2.7% versus a rise of 6%
for the small and mid cap segments (companies below $2 billion in market cap).
The improving European economic growth coupled with rising merger and
acquisition activity should

55
<PAGE>

continue the trend seen thus far this year in performance favoring small and
mid cap companies. The Portfolio is poised to take advantage of this trend as
our concentration remains in the small, mid and large cap segments of the
market and in cyclical industries which have historically flourished during
times of economic expansion. As Europe's recovery begins to fully materialize
in 2000 we would consider increasing our exposure to that region accordingly.

Although employing a hands-off monetary policy during recent yen strength, we
believe the Japanese government is prepared to provide additional fiscal
stimulus in light of upcoming elections and the Okinawa G7 Summit next year.
This should help sustain the growth seen in the first quarter's surprise 8%
annualized GDP followed by a 0.2% increase for the second quarter of 1999, both
significantly higher than market expectations. If we are correct in these
assumptions, Japan is likely to see further equity commitments in the near
future as evidence of a sustainable recovery continues to mount. We believe the
next leg of the market recovery will witness a polarization within individual
stocks and within sectors as winners and losers emerge from recent measures to
fully deregulate domestic industries. Given this scenario, we would consider
adding select domestic related sectors such as housing, retailing and
manufacturing to the Portfolio. On an individual company level, we believe
restructuring efforts, in particular for the leading companies or "Generals",
will produce upward revisions in earnings, particularly during the next
six-month period. However, with volatile foreign exchange markets and Y2K fears
during the fourth quarter of 1999, returns for Japanese equities are expected to
be modest.

As global economic growth continues, Asian economies should experience continued
recovery. Positives include bank recapitalization and restructuring in Japan
which could provide enhanced investment opportunities in non-Japan Asia through
outsourcing, and stronger than expected import demand from the U.S. and Europe.
We continue to monitor Asian risk factors such as the large supply of upcoming
equity offerings and the danger that economic recovery will lessen the will to
implement needed economic and corporate level reforms. Several local level
reforms also look promising for the strength of the equity markets. In
Singapore, the fusion of foreign and local bank shares should facilitate bank
mergers, which will reduce excess capacity and allow major cost cutting.
Shareholder value is beginning to surface as vital for corporations; government
linked corporations are implementing guidance from the authorities to streamline
their businesses and boost returns on equity. Banks in Hong Kong have
significantly strengthened their balance sheets during the recession, and are as
liquid as they have been in years. The most affordable residential property
market of the past decade and better consumer and business confidence should be
an additional boon for the market.

As we begin the last quarter of the century, we believe the Portfolio is well
positioned to benefit from the economic recovery evidenced in the developed
international world. We open the fourth quarter with an underweight to Europe
(62.9% versus 65.8%), but given a sustained level of economic growth, would
consider moving to a more neutral stance versus the Index. In Japan we are
closely monitoring signs of corporate restructuring and economic revitalization
and are optimistic about the long-term. We remain 2% overweight relative to the
Index (30.0% vs. 28.3%). The Portfolio is neutral-weighted in Asia ex- Japan
(5.9% vs. 6.0%), and we look to these markets to reap the potential benefits of
a sustained global economic recovery during the year 2000.

Francine J. Bovich
PORTFOLIO MANAGER

October 1999
56
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------------------------
INVESTMENT (UNAUDITED)
SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.3%)
AUSTRALIA (2.6%)
14,700 AMP Ltd. ...................................... $ 137
7,250 Brambles Industries Ltd. ...................... 210
39,500 Broken Hill Proprietary Co., Ltd. ............. 455
49,800 Coca-Cola Amatil Ltd. ......................... 175
31,100 Commonwealth Bank Of Australia ................ 490
142,100 Fosters Brewing Group Ltd. .................... 401
17,910 Lend Lease Corp., Ltd. ........................ 219
97,600 Macquarie Corporate Telecommunications
Holdings Ltd. ............................... 105
43,030 National Australia Bank Ltd. .................. 630
65,650 News Corp., Ltd. .............................. 461
324,200 Normandy Mining Ltd. .......................... 288
75,500 Qantas Airways Ltd. ........................... 237
29,900 Rio Tinto Ltd. ................................ 507
121,400 Telstra Corp., Ltd. ........................... 629
60,500 Westpac Banking Corp. ......................... 373
----------
5,317
----------
BELGIUM (0.3%)
11,280 Fortis (B) .................................... 367
5,675 G.I.B. Group S.A. ............................. 246
----------
613
----------
BERMUDA (0.0%)
21,800 Dao Heng Bank Group Ltd. ...................... 100
----------
DENMARK (0.5%)
8,900 Novo-Nordisk A/S, Class B ..................... 1,057
----------
FINLAND (1.7%)
11,023 KCI Konecranes International .................. 299
5,880 Kone Oyj, Class B ............................. 774
250,280 Merita Ltd., Class A .......................... 1,406
30,400 Sampo Insurance Co., plc, Class A ............. 1,010
----------
3,489
----------
FRANCE (9.4%)
4,950 Alcatel Alsthom ............................... 682
8,520 Axa ........................................... 1,077
9,750 Banque Nationale de Paris ..................... 778
4,101 Cie de Saint Gobain ........................... 764
29,672 Cie Generale des Establissements
Michelin, Class B. .......................... 1,400
73,500 CNP Assurances ................................ 2,164
8,360 Elf Aquitaine ................................. 1,522
15,450 France Telecom ................................ 1,355
5,250 Groupe Danone ................................. 1,277
21,510 Pernod Ricard ................................. 1,444
31,590 Rhone-Poulenc, Class A ........................ 1,631
28,250 Schneider ..................................... 2,065
3,780 Suez Lyonnaise des Eaux ....................... 611
21,640 Total Fina, Class B ........................... 2,718
----------
19,488
----------
GERMANY (5.0%)
12,940 Adidas-Salomon AG ............................. 1,104
28,170 BASF AG ....................................... 1,205
21,100 Bayerische Hypo Uno Vereinsbank AG ............ 1,240
22,815 Bewag Aktiengesellschaft AG ................... $ 339
29,250 Deutsche Telekom AG ........................... 1,178
36,415 Hoechst AG .................................... 1,537
4,520 Mannesmann AG ................................. 708
13,900 Schering AG ................................... 1,521
25,790 Volkswagen AG ................................. 1,433
----------
10,265
----------
HONG KONG (1.4%)
50,700 Asia Satellite Telecommunications Holdings Ltd. 129
123,200 Cable & Wireless HKT Ltd. ..................... 270
110,000 Cathay Pacific Airways Ltd. ................... 198
43,400 Cheung Kong Holdings Ltd. ..................... 362
101,200 China Telecom Ltd. ............................ 312
12,300 HSBC Holdings Plc ............................. 141
65,100 Hutchison Whampoa Ltd. ........................ 606
48,300 Li & Fung Ltd. ................................ 146
48,800 New World Development Co., Ltd. ............... 107
28,600 Smartone Telecommunications ................... 88
32,000 Sun Hung Kai Properties Ltd. .................. 244
20,200 Swire Pacific Ltd., Class A ................... 96
30,000 Television Broadcasts Ltd. .................... 128
----------
2,827
----------
IRELAND (0.8%)
200,080 Bank of Ireland ............................... 1,629
----------
ITALY (3.3%)
84,235 Banca Popolare Di Bergamo S.p.A. .............. 1,865
103,700 Marzotto (Gaetano) & Figli S.p.A. ............. 799
173,290 Mediaset S.p.A. ............................... 1,769
43,700 Telecom Italia Mobile S.p.A. .................. 271
240,410 Telecom Italia S.p.A. (RNC) ................... 2,088
----------
6,792
----------
JAPAN (30.0%)
25,500 Aiwa Co., Ltd. ................................ 748
89,000 Amada Co., Ltd. ............................... 619
58,000 Canon, Inc. ................................... 1,684
86,000 Casio Computer Co., Ltd. ...................... 652
57,000 Dai Nippon Printing Co., Ltd. ................. 1,057
161,000 Daicel Chemical Industries Ltd. ............... 588
84,000 Daifuku Co., Ltd. ............................. 535
83,000 Daikin Industries Ltd. ........................ 1,003
18,000 FamilyMart Co., Ltd. .......................... 947
35,000 Fuji Machine Manufacturing Co. ................ 1,672
49,000 Fuji Photo Film Ltd. .......................... 1,675
73,000 Fujitec Co., Ltd. ............................. 978
82,000 Fujitsu Ltd. .................................. 2,550
106,000 Furukawa Electric Co. ......................... 630
50,000 Hitachi Credit Corp. .......................... 1,033
182,000 Hitachi Ltd. .................................. 2,011
122,000 Kaneka Corp. .................................. 1,565
43,000 Kurita Water Industries Ltd. .................. 870
20,600 Kyocera Corp. ................................. 1,563
33,000 Kyudenko Corp., Ltd. .......................... 155
58,000 Lintec Corp. .................................. 698
91,000 Matsushita Electric Industrial Co., Ltd. ...... 1,930
</TABLE>

57
<PAGE>

SPAIN (2.7%)
10,650 Banco Popular Espanol S.A. .................... 735
77,400 Banco Santander Central HispanoS.A. ........... 800
66,410 Endesa ........................................ 1,261
91,500 Iberdrola ..................................... 1,355
96,190 Telefonica .................................... 1,539
----------
5,690
----------
SWEDEN (3.7%)
42,090 Autoliv, Inc. SDR ............................. 1,588
102,450 ForeningsSparbanken AB ........................ 1,663
185,890 Nordbanken Holding AB ......................... 1,044
63,480 Svedala Intrustri AB .......................... 1,247
154,950 Svenska Handelsbanken, Class A ................ 2,166
----------
7,708
----------
SWITZERLAND (7.4%)
1,930 Cie Financiere Richemont AG, Class A .......... 3,903
1,575 Holderbank Financiere Glarus AG,
Class B (Bearer) ............................ 2,043
2,010 Nestle (Registered) ........................... 3,773
1,645 Novartis AG (Registered) ...................... 2,438
460 Schindler Holding AG (Registered) ............. 750
3,590 Swisscom AG ................................... 1,118
4,730 UBS AG (Registered) ........................... 1,332
----------
15,357
----------
UNITED KINGDOM (19.3%)
400,680 Aegis Group plc ............................... 825
241,150 Allied Domecq plc ............................. 1,376
159,250 Allied Zurich plc ............................. 1,869
41,340 AstraZeneca Group plc ......................... 1,733
77,900 BAA plc ....................................... 789
133,120 Bank of Scotland .............................. 1,588
36,940 Barclays plc .................................. 1,084
215,405 BG plc ........................................ 1,238
75,340 BOC Group plc ................................. 1,570
47,400 Boots Co. plc ................................. 528
165,050 British Telecommunications plc ................ 2,498
50,980 Burmah Castrol plc ............................ 953
104,590 Capital Radio plc ............................. 1,519
391,700 Centrica plc .................................. 1,075
129,010 Diageo plc .................................... 1,318
24,060 Glaxo Wellcome plc ............................ 627
211,970 Great Universal Stores plc .................... 1,598
372,210 Halma plc ..................................... 705
167,960 Imperial Tobacco Group plc .................... 2,005
89,900 Lloyds TSB Group plc .......................... 1,117
</TABLE>

58
<PAGE>

FACE
AMOUNT
(000)
--------------
SHORT-TERM INVESTMENT (1.8%)
REPURCHASE AGREEMENT (1.8%)
$ 3,659 Chase Securities, Inc. 5.05%, dated
9/30/99, at $3,660, due 10/01/99,
to be repurchased collateralized by
U.S. Treasury Bonds, 6.375%,
due 8/15/27, valued at $3,689
(Cost $3,659) .............................. 3,659
----------
FOREIGN CURRENCY (0.2%)
GBP 81 British Pound ................................. $ 134
DKK 195 Danish Krone .................................. 28
EUR 72 Euro .......................................... 77
HKD 785 Hong Kong Dollar .............................. 101
SGD 68 Singapore Dollar .............................. 40
----------
TOTAL FOREIGN CURRENCY (Cost $378) ................................ 380
----------
TOTAL INVESTMENTS (99.1%) (Cost $181,915) ......................... 205,121
----------
OTHER ASSETS AND LIABILITIES (0.9%)
Other Assets .................................................... 62,157
Liabilities ..................................................... (60,384)
----------
1,773
----------
NET ASSETS (100%) ................................................. $ 206,894
----------
----------
CLASS A:
- ---------
NET ASSETS ........................................................ $ 180,610
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,994,706 outstanding $0.001
par value shares (authorized 500,000,000 shares) ............... $ 12.91
----------
----------
CLASS B:
- --------
NET ASSETS ........................................................ $ 26,284
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,046,167 outstanding $0.001
par value shares (authorized 500,000,000 shares) ............... $ 12.85
----------
----------
- -------------------------------------------------------------------------------
</TABLE>
RNC -- Non-Convertible Savings Shares
SDR -- Swedish Depositary Receipt
Foreign -- Prior governmental approval for foreign investments may be
required under certain circumstances.

- -------------------------------------------------------------------------------
FUTURES CONTRACTS:
At September 30, 1999 the following futures contracts were open:

<TABLE>
<CAPTION>
NET
UNREALIZED
NUMBER AGGREGATE APPRECIATION
OF FACE VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
--------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
LONG
CAC 40 Index
(France) 9 U.S.$ 427 Dec-99 (9)
DAX Index
(Germany) 3 U.S.$ 403 Dec-99 (16)
FT-SE Index (United
Kingdom) 9 U.S.$ 931 Dec-99 35
MIB 30 Index (Italy) 1 U.S.$ 177 Dec-99 (2)
----
$ 8
----
----
</TABLE>

59
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Australia (10.2%)
Denmark (1.0%)
Finland (6.1%)
France (7.2%)
Germany (6.9%)
Hong Kong (2.7%)
Ireland (2.5%)
Italy (4.0%)
Japan (20.7%)
Netherlands (6.5%)
New Zealand (2.4%)
Norway (1.9%)
Singapore (0.7%)
Spain (1.4%)
Sweden (2.7%)
Switzerland (5.9%)
United Kingdom (13.2%)
Other (4.0%)
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL
INTERNATIONAL (MSCI) EAFE SMALL CAP INDEX(1)
- ------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
----- ------ ------- ---------
<S> <C> <C> <C> <C>
PORTFOLIO .... 27.06% 38.34% 8.35% 14.01%
INDEX ........ 17.58 33.58 -2.67 4.61
</TABLE>

1. The MSCI EAFE Small Cap Index is an unmanaged arithmetic market valued
weighted average of the performance of over 900 securities of companies
listed on the stock exchanges of countries in Europe, Australasia and the Far
East. (this index is a price only index and does not include dividends).

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

The International Small Cap Portfolio seeks long-term capital appreciation by
investing primarily in the equity securities of non-U.S. issuers. The Portfolio
applies a disciplined bottom-up value approach to identify and invest in small
capitalization companies which are both attractive businesses and available at
cheap prices. A market capitalization cut-off of U.S. $1 billion is used as our
definition of "small."

For the nine months ended September 30, 1999, the Portfolio had a total return
of 27.06% compared to 17.58% for the Morgan Stanley Capital International (MSCI)
EAFE Small Cap Index (the "Index"). For the one year period ended September 30,
1999, the Portfolio had a total return of 38.34% compared to 33.58% for the
Index. For the five-year period ended September 30, 1999, the average annual
total return for the Portfolio was 8.35% compared to -2.67% for the Index. For
the period since inception on December 15, 1992 through September 30, 1999, the
average annual total return for the Portfolio was 14.01% compared to 4.61% for
the Index.

For the three months ended September 30, 1999, the Portfolio had a total return
of 10.53% compared to 4.92% for the Index, outperforming by 5.61%. International
small caps (+17.6%) have significantly outperformed international large caps
(+8.5%) so far this year as the economies of Europe and Japan have strengthened.
In addition, Japanese small caps have risen 45% this year which has favorably
impacted the Index since its weight to Japan is 34% versus 26% in the large cap
Index.

Stock selection was strongly positive in both Europe and the Pacific Basin in
the third quarter. In Europe, key contributions came from Switzerland, France,
Finland and Spain. In the Pacific Basin, Australia was again a standout while
our underweight to Singapore (0.89% versus 4.95% in the Index) was strongly
positive in light of Singapore's 18% decline in the quarter.

From a sector standpoint, the Portfolio's long standing overweights to three key
industries continued to dominate our investment results: broadcasting &
publishing, business and public services, and electrical & electronics. In
media, Edipresse (+38%), Informa Group (14%) and Capital Radio (+10%) all
outperformed. Asia Securities Printing rose 75% for the quarter, benefiting from
increased demand for IPO documentation in Japan. Asatsu Inc. (+24%, advertising
agency) and Italy's Buffetti (+27%, office supplies) were two other strong
performing service companies.

Positive stock selection in Australia (+40% versus 5% for the Index) was led by
Erg (+121%, automated fare collection and telecom equipment) following new
contracts

- -------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE COUNTRY
SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI EAFE SMALL
CAP INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED
AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN
IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.

60
<PAGE>

it announced with U.K. and Australian companies and Solution 6 (+54%,
accounting software). Our underweight to Japan (19% versus 34% in Index) was a
negative given strong Japanese small cap performance and the 13.7% rise in the
yen. However, our strong stock selection (+20% versus 13% for the Index) acted
to offset our yen underweight. Aiful (+39% consumer finance) rose on the back of
rising confidence regarding the Japanese banking sector. New holding Pacific
Metals (ferra-nickel producer, +189%), rose following a rise in the nickel price
coupled with a radical restructuring.

The Portfolio's underweight to consumer cyclicals was also a negative, as well
as stock selection within basic industry. Norway's Kverneland Asa (-17%,
producer of round bale wrappers for grass products) is expected to strengthen
its position in the market and to increase development of new product lines,
following the pending takeover of Finland's NHK.

Efforts to raise our weighting to Japan recently have been frustrated by an MSCI
Index composition change which has had the effect of raising further the weight
of Japan in the MSCI EAFE Small Cap Index. At quarter end Japan represented
43.7% of the Index versus 21.3% of our Portfolio. Despite our long held concerns
about Japan's structural problems, our conviction is building for investment
opportunities resulting from the evolving restructuring story in Japan.

Following recent company visits to Japan, we increased, this quarter, our
exposure to selected restructuring areas of the Japanese economy. Pacific Metals
is a recent purchase that typifies the opportunity restructuring plays present
for the Portfolio. The company is a ferra-nickel producer (the last remaining
pure play in the world). The company was priced for the bottom of the cycle with
no value ascribed to a potential restructuring which we anticipated having
visited management. Following our purchase, the company recently announced a
massive restructuring: eliminating 75% of the workforce, reducing costs by 30%
and closing 40% of its businesses. This is nothing short of a revolution and has
sent us a strong message regarding the potential for further corporate
restructuring, the value of which remains high, even in a slow growth
environment. We believe investors have been slow to come to grips with the
changes going on in the cyclical sectors of Japan despite the recent strength of
these sectors in the market. We will continue to search for opportunities to add
exposure to Japan while keeping in mind our requirement for identifiable
catalysts.

In Europe, corporate activity continues to dominate performance with two
holdings in the Portfolio recently acquired - Dauphin (outdoor advertiser) by
Clear Channel Communications of the U.S. and Tag Huer (watches) by luxury goods
company LVMH. We maintain an overweight to the Euro-zone countries on the basis
of attractive relative value and company quality. Outside the Euro, we are
neutral weight in the U.K. and overweight Switzerland and Sweden as a result of
our bottom-up stock selection process.

The Portfolio remains defensively oriented, notwithstanding a reduction, in the
quarter, of our underweight to materials (building materials, chemicals, paper &
metals) from 65% of benchmark to 85% driven mostly from an increase in our
Japanese cyclical exposure. We have no energy exposure although the sector is
not featured in the Index at only a 1.2% weight. Our underweight to capital
equipment (20.7% versus 24.3% in the Index) widened in the third quarter
following partial sales of ERG and Disco, some of our recent best performers.
Consumer goods remain overweighted with the emphasis in the Portfolio on food &
household products (eg. Benckiser, Holland). Services are likewise overweighted.
Broadcasting and publishing and business and public services combined are 20% of
the Portfolio compared with 9% in the Index.

Despite the strong performance of international small caps relative to
international large caps this year, the key drivers of small cap performance
look to be still very much in place. They are:

- - Small caps on widest valuation discount to large caps in last ten years

- - Merger & acquisition activity unlocking small cap value

- - Corporate restructuring and "tough decisions" provide a catalyst

- - Japanese small cap strength has been narrowly focussed, plenty of value and
restructuring still on offer.

Margaret Naylor
PORTFOLIO MANAGER

Willem Vinke
PORTFOLIO MANAGER

Nathalie Degans
PORTFOLIO MANAGER

October 1999

61
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------------------------
INVESTMENT (UNAUDITED)
SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.1%)
AUSTRALIA (10.2%)
1,805,900 Ausdoc Group Ltd. ............................. $ 2,888
1,229,402 Australian Hospital Care Ltd. ................. 473
365,530 BRL Hardy Ltd. ................................ 1,623
3,599,735 E.R.G. Ltd. ................................... 14,803
1,691,770 Henry Walker Group Ltd. ....................... 1,944
842,500 Neverfail Springwater Ltd. .................... 1,430
464,600 Pacific Dunlop Ltd. ........................... 698
7,490,464 Parbury Ltd. .................................. 1,393
1,116,100 Ramsay Health Care Ltd. ....................... 605
1,521,111 Skilled Engineering Ltd. ...................... 3,038
518,200 Solution 6 Holdings Ltd. ...................... 1,852
----------
30,747
----------
DENMARK (1.0%)
69,695 Sydbank A/S 3,143
----------
FINLAND (6.1%)
87,308 KCI Konecranes International .................. 2,369
44,273 Kone Oyj, Class B ............................. 5,829
291,630 Metsa Tissue Oyj .............................. 3,724
51,092 Metso Oyj ..................................... 577
80,000 Perlos Oyj .................................... 1,077
503,208 Rapala Normark Corp. .......................... 3,428
163,770 Teleste Oyj ................................... 1,569
----------
18,573
----------
FRANCE (7.2%)
34,569 Algeco ........................................ 2,870
24,500 Chargeurs ..................................... 1,499
24,583 De Dietrich et Compagnie ...................... 1,588
113,093 Europeene d'Extincteurs ....................... 6,054
90,490 Legris Industries ............................. 3,660
131,650 Neopost S.A. .................................. 3,909
30,370 SPIR Communication ............................ 2,247
----------
21,827
----------
GERMANY (4.0%)
66,798 Beru AG ....................................... 1,294
12,354 GfK AG ........................................ 311
27,027 Kamps AG ...................................... 1,645
106,238 Marseille-Kliniken AG ......................... 1,333
17,034 Philip Holzman AG ............................. 2,865
137,619 Winkler & Duennebier AG ....................... 3,347
34,670 Zapf Creation AG .............................. 1,221
----------
12,016
----------
HONG KONG (2.7%)
606,000 Asia Satellite Telecommunications
Holdings Ltd. ............................... 1,545
1,006,000 Li & Fung Ltd. ................................ 3,043
410,000 SmarTone Telecommunications Holdings Ltd. ..... 1,262
7,657,000 Vitasoy International Holdings Ltd. ........... 2,341
----------
8,191
----------
IRELAND (2.5%)
1,777,527 Anglo Irish Bank Corp. plc (British
Pound Shares) ............................... 4,370
539,556 Green Property plc ............................ $ 3,130
----------
7,500
----------
ITALY (4.0%)
141,700 Banca Popolare Di Bergamo S.p.A. .............. 3,137
943,300 Buffetti S.p.A ................................ 7,590
459,000 Sogefi S.p.A. ................................. 1,126
45,550 Vincenzo Zucchi S.p.A. (NCS) .................. 201
----------
12,054
----------
JAPAN (20.7%)
53,000 Aiful Corp. ................................... 9,010
272,300 Asatsu-DK, Inc. ............................... 8,875
342,000 Asia Securities Printing Co., Ltd. ............ 5,285
11,500 Disco Corp. ................................... 1,422
231,000 Foster Electric Co., Ltd. ..................... 1,685
29,400 Fujimi, Inc. .................................. 1,514
42,500 H.I.S. Co., Ltd. .............................. 2,030
844,000 Hankyu Realty Co., Ltd. ....................... 3,533
318,000 Hanshin Department Stores Ltd. ................ 1,281
727,000 Japan Oil Transportation Co., Ltd. ............ 1,369
80,000 Kirin Beverage Corp. .......................... 1,379
174,600 Maezawa Kasei Industries ...................... 2,813
130,200 Nichiha Corp. ................................. 1,500
75,000 Nifco, Inc. ................................... 1,009
31,000 Nippon Broadcasting System, Inc. .............. 2,323
915,000 Nissan Fire & Marine Insurance Co. ............ 2,657
188,000 Nissei Industries ............................. 1,673
50,100 Osaka Steel Co., Ltd. ......................... 271
2,144,000 Pacific Metals Co., Ltd. ...................... 4,819
32,300 Rock Field Co., Ltd. .......................... 1,603
136,000 Sotoh Co., Ltd. ............................... 790
150,000 Tasaki Shinju Co., Ltd. ....................... 812
650,000 Toc Co. ....................................... 4,980
----------
62,633
----------
NETHERLANDS (6.5%)
106,706 Ahrend Groep N.V. ............................. 1,459
113,245 Apothekers Cooperatie OPG ..................... 2,483
32,503 Atag Holding N.V. ............................. 502
103,820 Benckiser N.V., Class B ....................... 6,447
65,150 GTI Holding N.V. .............................. 1,394
118,299 Hollandsche Beton Groep N.V. .................. 1,209
58,510 International Muller N.V. ..................... 1,305
83,356 Nutreco Holding N.V. .......................... 2,883
134,130 Samas Groep N.V. .............................. 1,970
----------
19,652
----------
NEW ZEALAND (2.4%)
1,111,100 Auckland International Airport Ltd. ........... 1,598
991,968 Fisher & Paykel Industries Ltd. ............... 3,130
2,159,100 Fletcher Challenge Building ................... 2,658
----------
7,386
----------
NORWAY (1.9%)
111,100 Kverneland ASA, Class B ....................... 2,553
228,020 Oceanor ....................................... --
140,118 Sparebanken ................................... 3,066
----------
5,619
----------
</TABLE>

62
<PAGE>

1,395,000 GP Batteries International Ltd. ............... $ 2,207
----------
SPAIN (1.4%)
151,104 Miquel y Costas & Miquel ...................... 4,326
----------
SWEDEN (2.7%)
111,950 Haldex AB ..................................... 1,408
261,090 Nobel Biocare AB .............................. 3,856
280,690 Scandic Hotels AB ............................. 2,810
----------
8,074
----------
SWITZERLAND (5.9%)
1,192 Bobst AG (Bearer) ............................. 1,472
10,567 Edipresse (Bearer) ............................ 4,713
3,730 PubliGroupe ................................... 2,589
4,846 SIG-Schweizensche Industrie-
Gesellschaft Holding AG (Registered) ........ 2,774
12,274 Valora Holding AG ............................. 3,113
5,880 Zehnder Holding AG, Class B ................... 3,221
----------
17,882
----------
UNITED KINGDOM (13.2%)
981,300 Aegis Group plc ............................... 2,019
300,170 Capitol Radio plc ............................. 4,359
2,540,850 Donelon Tyson plc ............................. --
669,498 GEI International plc ......................... 143
627,623 Informa Group plc ............................. 4,174
1,024,665 John Mowlem & Co. plc ......................... 2,024
33,795,100 Kendell plc ................................... --
214,635 Le Riches Stores plc .......................... 1,714
676,800 Litho Supplies plc ............................ 1,326
2,719,200 Matthews (Bernard) plc ........................ 5,059
577,200 Money Controls plc ............................ 1,242
673,960 NHP plc ....................................... 2,086
34,762 Oriflame International S.A. ................... 145
2,659,393 Pentos plc .................................... --
373,700 SGB Group plc ................................. 1,692
1,149,800 SIG plc ....................................... 4,297
516,820 SSL International plc ......................... 6,084
1,509,500 The 600 Group plc ............................. 1,715
1,086,300 Time Products plc ............................. 1,806
----------
39,885
----------
TOTAL COMMON STOCKS (Cost $247,802) ............................... 281,715
----------
PREFERRED STOCKS (2.9%)
GERMANY (2.9%)
95,850 Dyckerhoff AG ................................. 2,938
107,612 Moebel Walther AG ............................. 1,317
14,543 Sartorius AG-Vorzug ........................... 2,539
145,084 Wuerttembergische Metallwarenfabrik AG ........ 1,961
----------
TOTAL PREFERRED STOCKS (Cost $12,344) ............................. 8,755
----------
TOTAL FOREIGN SECURITIES (96.0%)(Cost $260,146) ................... 290,470
----------
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT (0.2%)
$ 642 Chase Securities, Inc., 5.05%,
dated 9/30/99, due 10/01/99, to
be repurchased at $642,
collateralized by U.S. Treasury
Bond, 6.625%, due 2/15/27,
valued at $647 (Cost $642) .................. $ 642
----------
FOREIGN CURRENCY (4.3%)
AUD 8,178 Australian Dollar ............................. 5,338
GBP 712 British Pound ................................. 1,173
EUR 937 Euro .......................................... 997
HKD 134 Hong Kong Dollar .............................. 17
JPY 271 ,335 Japanese Yen .................................. 2,541
CHF 4,302 Swiss Franc ................................... 2,864
----------
TOTAL FOREIGN CURRENCY (Cost $12,831) ............................. 12,930
----------
TOTAL INVESTMENTS (100.5%) (Cost $273,619) ........................ 304,042
----------
OTHER ASSETS AND LIABILITIES ( 0.5%)
Other Assets .................................................. 2,122
Liabilities ................................................... (3,487)
----------
(1,365)
----------
NET ASSETS (100%) $ 302,677
----------
----------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 15,660,071 outstanding $0.001
par value shares (authorized 1,000,000,000 shares) ............ $ 19.33
----------
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NCS -- Non-Convertible Shares

63
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)

- -------------------------------------------------
[CHART]
<TABLE>
<S> <C>
Appliances & Household Durables (7.4%)
Automobiles (6.7%)
Broadcasting & Publishing (0.6%)
Building Materials & Components (4.3%)
Business & Public Services (1.8%)
Chemicals (5.7%)
Construction & Housing (1.6%)
Data Processing & Reproduction (10.1%)
Electrical & Electronics (16.3%)
Electric Components Instruments (7.8%)
Energy Equipment & Services (1.2%)
Financial Services (1.8%)
Food & Household Products (2.9%)
Health & Personal Care (7.9%)
Industrial Components (1.0%)
Machinery & Engineering (8.5%)
Merchandising (1.5%)
Multi-Industry (1.1%)
Real Estate (1.2%)
Recreation, Other Consumer goods (8.3%)
Telecommunications (3.2%)
Other (-0.9%)
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) JAPAN INDEX(1)
- -------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
----- ------ ------ ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A ... 43.20% 64.80% 5.87% 5.25%
PORTFOLIO -- CLASS B ... 43.07 64.23 N/A 8.92
INDEX -- CLASS A ....... 39.84 77.37 -1.20 -0.51
INDEX -- CLASS B ....... 39.84 77.37 N/A -1.22
</TABLE>

1. The MSCI Japan Index is an unmanaged index of common stocks (includes
dividends).

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- -------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE PERFORMANCE
RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH
INTERNATIONAL INVESTING.

The investment objective of the Japanese Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Japanese
issuers. Equity securities are defined as common and preferred stocks,
convertible securities and rights and warrants to purchase common stocks.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 43.20% for the Class A shares and 43.07% for the Class B shares compared to
39.84% for the Morgan Stanley Capital International (MSCI) Japan Index (the
"Index"). For the one year period ended September 30, 1999, the Portfolio had a
total return of 64.80% for the Class A shares and 64.23% for the Class B shares
compared to 77.37% for the Index. For the five-year period ended September 30,
1999, the average annual total return of Class A shares was 5.87% compared to
- -1.20% for the Index. For the period since inception on April 25, 1994 through
September 30, 1999, the average annual total return of Class A shares was 5.25%
compared to -0.51% for the Index. For the period since inception on January 2,
1996 through September 30, 1999, the average annual total return of Class B
shares was 8.92% compared to -1.22% for the Index.

The Japanese equity market reflected the second wave of the growing optimism for
economic recovery during the third quarter of 1999, rising from foreign and
domestic retail buying. In our view, the first wave and platform for this rise
was set late last year with the Government's use of public funds to address non-
performing loans, a highly accommodative monetary policy and unprecedented
restructuring announcements by leading companies in Japan.

The heart of the second wave was the release of two consecutive quarterly GDP
growth numbers; 8% annualized announced in June and 9% in September, both
significantly higher than market expectations. Not only was this viewed by
enthusiastic and record foreign buying but it also caused the yen to sharply
appreciate. The Bank of Japan and Ministry of Finance attempted to slow the rise
by large currency interventions, estimated to be $30 billion or more, but failed
because of the accelerating demand for yen assets. Moreover, the U.S. Treasury
criticized Japan's interventions and strongly encouraged the Japanese government
to revive the economy through domestic led growth. As it became accepted by
market participants that the U.S. would not coordinate joint intervention,
currency dealers, hedge funds and speculators rode the momentum of a surging
yen. Since many investors believed a strong yen would hamper the fledgling
economic recovery, profit-taking capped the equity market since its peak in
July.

64
<PAGE>

On a micro basis, restructuring efforts and earnings momentum rewarded many
technology related companies. In particular, Fujitsu, Ricoh, TDK, Mitsumi, Rohm
and SONY rallied to record highs. We believe that the leadership in the market
from these Japanese "Generals" was very significant and supports our view that
investors still need to be highly selective in their investments for Japanese
equities.

In addition, the announced merger by IBJ, DKB and Fuji Bank to create the
world's largest bank in assets (and non-performing loans) by 2002 initiated a
buying frenzy and short covering for bank shares. We are skeptical on this
merger as well as the investment merit for Japanese banks. While such headlines
cause a panic re-evaluation of the sector, we do not see valuations or growth
prospects as compelling, particularly as banks are facing full competition for
the first time.

The Washington G7 meeting in September had a decidedly different tone regarding
dollar/ yen. While formally acknowledging that a strong yen was "not in the best
interest for G7," Japan appeared to have pledged they will re-new their efforts
for a domestic led recovery including additional supplementary budgets for
infrastructure spending. In particular, we believe that with Japan hosting the
Summit Meeting in Okinawa in 2000 and domestic elections both in the U.S. and
Japan next year, the Japanese Government will likely use these dates as
milestones for achieving respectable and sustainable growth in the economy. If
we are correct in these assumptions, it should lead to a "third wave" of equity
commitments to Japan in the near future as continuing evidence begins to mount
for a sustainable recovery. While global money flows have primarily been to the
U.S. and Europe over the last several years, the recent rally in gold, oil,
Japanese and Asia markets suggests that such flows may now be dispersed away
from Anglo Saxon dominated asset classes for the next several years.

On an individual company level, we believe restructuring efforts, in particular
for the leading companies or "Generals" will produce upward revisions in
earnings, particularly during the next six month period. However, with volatile
foreign exchange markets and Y2K fears during the fourth quarter of 1999,
returns for Japanese equities are expected to be modest. Stock picking will
remain critical. During the last several years most good active managers have
added value by avoiding certain sectors such as banking, construction and
brokerage because of their challenging fundamentals. We believe the next wave
will witness a polarization within individual stocks within sectors as winners
and losers emerge from recent measures to fully deregulate domestic industries.

We have begun to consider reducing certain securities such as Nintendo, Fujitsu,
Rohm and SONY because of market appreciation and the subsequent relative high
weightings within our overall portfolio. We are beginning to consider adding
select domestic economic recovery related sectors such as housing, retailing and
manufacturing. Although we are slightly cautious for the fourth quarter of 1999,
it may provide an opportunity for investors to add to their Japanese positions
as it is our view the fourth quarter of 1999 is the "waiting room" for the third
leg of the market rise which we anticipate to begin in the near future.

John R. Alkire
PORTFOLIO MANAGER

Kunihiko Sugio
PORTFOLIO MANAGER

October 1999

65
<PAGE>

84,000 Yamaha Corp. .................................. $ 783
----------
1,937
----------
HEALTH & PERSONAL CARE (7.9%)
37,000 Ono Pharmaceutical Co., Ltd. .................. 1,369
63,000 Sankyo Co., Ltd. .............................. 1,888
42,000 Yamanouchi Pharmaceutical Co., Ltd. ........... 1,963
----------
5,220
----------
INDUSTRIAL COMPONENTS (1.0%)
114,000 Furukawa Electric Co., Ltd. ................... 678
----------
MACHINERY & ENGINEERING (8.5%)
88,000 Amada Co., Ltd. ............................... 612
86,000 Daifuku Co., Ltd. ............................. 548
103,000 Daikin Industries Ltd. ........................ 1,244
39,000 Fuji Machine Manufacturing Co., Ltd. .......... 1,863
188,000 Mitsubishi Heavy Industries Ltd. .............. 722
128,000 Tsubakimoto Chain Co. ......................... 616
----------
5,605
----------
MERCHANDISING (1.5%)
19,000 FamilyMart Co., Ltd. .......................... 1,000
----------
MULTI-INDUSTRY (1.1%)
57,000 Lintec Corp. .................................. 686
----------
REAL ESTATE (1.2%)
77,000 Mitsubishi Estate Co., Ltd. ................... 780
----------
RECREATION, OTHER CONSUMER GOODS (8.3%)
85,000 Casio Computer Co., Ltd. ...................... 644
53,000 Fuji Photo Film Ltd. .......................... 1,812
19,000 Nintendo Corp., Ltd. .......................... 3,021
----------
5,477
----------
TELECOMMUNICATIONS (3.2%)
174 Nippon Telegraph & Telephone Corp. ............ 2,135
----------
TOTAL COMMON STOCKS (Cost $47,838) ................................ 66,507
----------

<CAPTION>
FACE
AMOUNT
(000)
--------------
<S> <C> <C>
FOREIGN CURRENCY (0.0%)
JPY 433 Japanese Yen (Cost $4) ........................ 4
----------
TOTAL INVESTMENTS (100.9%) (Cost $47,842) ......................... 66,511
----------
OTHER ASSETS AND LIABILITIES ( 0.9%)
Other Assets ................................................... 36,618
Liabilities .................................................... (37,190)
----------
(572)
----------
NET ASSETS (100%) ................................................. $ 65,939
----------
----------
CLASS A:
- --------
NET ASSETS ........................................................ $ 63,418
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 7,167,102 outstanding $0.001
par value shares (authorized 500,000,000 shares) ............... $ 8.85
----------
----------
CLASS B:
- --------
NET ASSETS ........................................................ $ 2,521
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 287,515 outstanding $0.001 par
value shares (authorized 500,000,000 shares) .................. $ 8.77
----------
----------
</TABLE>

66
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)

[CHART]
<TABLE>
<S> <C>
Argentina (6.1%)
Brazil (34.9%)
Chile (8.6%)
Colombia (0.5%)
Mexico (42.4%)
Peru (1.2%)
Venezuela (2.4%)
Other (3.9%)
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
GLOBAL LATIN AMERICA INDEX AND THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS FREE
LATIN AMERICA INDEX(1)

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------
AVERAGE
ONE ANNUAL
YTD YEAR SINCE INCEPTION
----- ------ ---------------
<S> <C> <C> <C>
Portfolio -- Class A ... 22.25% 32.40% 8.63%
Portfolio -- Class B ... 21.97 32.11 12.22
MSCI Emerging Markets
Global Latin America
Index-Class A ........ 21.79 30.61 3.28
MSCI Emerging Markets Free
Latin America Index-
Class A............... 19.22 27.66 2.99
MSCI Emerging Markets
Global Latin America
Index-Class B ........ 21.79 30.61 5.82
MSCI Emerging Markets Free
Latin America Index-
Class B............... 19.22 27.66 5.34
</TABLE>

1. The MSCI Emerging Markets Free Latin America Index is a broad based market
cap weighted composite index covering at least 60% of markets in Argentina,
Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. The Index takes into
account local market restrictions for specific securities or classes of
shares that may be excluded from or limited for foreign investor ownership.
The MSCI Emerging Markets Global Latin America Index is the same as the MSCI
Emerging Markets Free Latin America Index, but does not take into account
local market restrictions on share ownership by foreigners.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE COUNTRY
SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI EMERGING
MARKETS COUNTRY OR REGIONAL INDICES, ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE.
PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH
INTERNATIONAL INVESTING.

The investment objective of the Latin American Portfolio is long-term capital
appreciation through investment primarily in equity securities of Latin American
issuers. The Portfolio may also invest in debt securities issued or guaranteed
by a Latin American government or governmental entity.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 22.25% for the Class A shares and 21.97% for the Class B shares compared to
21.79% for the Morgan Stanley Capital International (MSCI) Emerging Markets
Global Latin America Index and 19.22% for the Morgan Stanley Capital
International (MSCI) Emerging Markets Free Latin America Index. For the one year
period ended September 30, 1999, the Portfolio had a total return of 32.40% for
the Class A shares and 32.11% for the Class B shares compared to 30.61% for the
MSCI Emerging Markets Global Latin America Index and 27.66% for the MSCI
Emerging Markets Free Latin America Index. For the period since inception on
January 18, 1995 through September 30, 1999, the average annual total return of
Class A shares was 8.63% compared to 3.28% for the MSCI Emerging Markets Global
Latin America Index and 2.99% for the MSCI Emerging Markets Free Latin America
Index. For the period since inception on January 2, 1996 through September 30,
1999, the average annual total return of Class B shares was 12.22% compared to
5.82% for the MSCI Emerging Markets Global Latin America Index and 5.34% for the
MSCI Emerging Markets Free Latin America Index.

For the third quarter ended September 30, 1999, the Portfolio had a total return
of -12.06% for the Class A shares and -12.02% for the Class B shares, compared
to -8.62% for the MSCI Emerging Markets Global Latin America Index and -9.01%
for the MSCI Emerging Markets Free Latin America Index. Underperformance
relative to the Indices was largely attributable to poor stock selection,
particularly in Argentina, Brazil and Chile. Our underweight position in
Argentina (+2.5%) and our overweight stance in Mexico (-13.7%) detracted from
performance. Our overweight allocation in Brazil (-8.8%) throughout the quarter
contributed favorably to performance.

The equity market declines throughout the region stymied positive themes,
including appreciating commodity prices and better than expected economic
figures. Stronger commodity prices continued to lend support to some markets in
the region, such as Chile and Peru (copper) and Mexico, Colombia and Venezuela
(oil), given their positive effects on the external accounts. Brazil and Mexico
have had better than expected economic figures and assets are attractively
valued. Contributing to the region's malaise, Latin American markets have
witnessed a great deal of

67
<PAGE>

political noise surrounding upcoming elections (Argentina, Mexico), fractious
politics and contentious reform debates (Brazil) and the effective
dismantling of congress (Venezuela).

However, politics, economic fundamentals and great valuations have been
secondary influences on market performances in light of Latin American
countries' heavy reliance on foreign investment to fund current account
deficits. Consequently, anxieties surrounding trends in U.S. inflation and
interest rates have proven quite menacing, dampening investor sentiment for
Latin American assets. However, the blow out in high-yield credit spreads
reached levels beyond that of the Russian crisis. In addition to global
tightening concerns, the bond market has been flooded with corporate supply, as
issuers fear a market shutdown entering the Y2K-sensitive period. Also during
the quarter, Ecuador became the first Brady country to default on its Brady
Bonds. Ecuador's partial default set the precarious precedent that defaulting on
external debt without an IMF bailout may become the way of the future. Although
the market believed this will have significant implications for future Latin
American sovereign borrowing, this is unlikely; the major Latin countries depend
too much on foreign capital for their survival and have governments which act
more responsibly regarding debt obligations.

In Brazil, contained inflation numbers, the easing of interest rates and
progress regarding privatizations were overshadowed by a lack of political
commitment to enact reforms to help reduce the fiscal deficit. A negative
surprise came at quarter end when the Supreme Court ruled against the
government's bill regarding social security contributions from retirees; the
Brazilian authorities must now resort to compensatory (probably tax increases)
fiscal measures in lieu of increased contributions. Despite the currency
devaluation at the beginning of the year, the Brazilian economy has shown great
resilience and inflation and unemployment figures have been tame. Although
interest rate reductions in Brazil have been slowed by decreased global risk
appetite and fractious domestic politics, the Brazilian monetary council (COPOM)
lowered benchmark interest rates to 19.0% at the end of the quarter, from 20.5%
at the end of the second quarter. We are concerned that President Cardoso, at
the nadir of his popularity, lacks the political power to expedite the adoption
of the fiscal reforms requisite for further rate reductions and the
stabilization of the growth of public debt. We believe Brazilian assets are
attractively valued and may be poised for a rebound given a decline in domestic
interest rates and a cyclical recovery in earnings growth. We are overweight
Brazil, focusing on the telecommunications and energy sources industries.

Mexican equities fell 13.7% during the third quarter, as promising economic
fundamentals and corporate earnings were eclipsed by anxieties over the
direction of U.S. inflation and interest rates. Moreover, the equity market
underwent a period of consolidation after a very strong performance during the
first half of 1999. Concerns over decreased global liquidity and increased risk
spreads, coupled with political clamor concerning Mexico's first PRI party
primaries, have exacerbated short-term nervousness regarding Mexican equities.
However, we are impressed by earnings surprises and increased exports and
consumer spending. We maintain overweight positions in the building materials
and components and broadcasting and publishing industries, focusing on companies
such as Cemex and Televisa, which we believe represent strong earnings growth
potential. The peso's seemingly sustainable strength enhances the U.S. dollar
earnings of Mexican companies, and we may add to our holdings in Mexico should
assets become even more attractively valued. One longer-term theme we continue
to watch is Mexico's potential to earn investment grade status, which would
allow for access to a large, new pool of foreign capital and a reduction in the
sovereign risk premium. This would have very positive implications for equity
prices as well, but we do not expect an announcement until after the
presidential election in July 2000.

Argentina fared better than most Latin markets during the quarter and the first
month-over-month improvements emerged towards the end of the quarter, a sign
that the economy has bottomed. Recovering commodity prices, lower costs of
funding and an economic pick-up after the recession should help increase the
earnings growth of Argentine equities in the longer term. We maintain our
underweight position in Argentina, as we are concerned about the country's
ability to service its large debt requirements, and expect limited growth in the
near term, restricting the upside from a contraction in the sovereign risk
premium.

Chile's market declined 6.0%, weighed down by poor economic fundamentals,
including high unemployment figures. Increased global commodity prices,
particularly copper, Chile's main export, should lend support to Chile's
external accounts and its already weak currency. This has not yet been reflected
in increased domestic consumption. During the course of the third quarter, Chile
lifted the trading band on its currency, and we are waiting to see if capital
controls on its foreign exchange will also be lifted. We expect this would help
lower the country's risk

<PAGE>

premium, and help make next year economically interesting for Chile. We
remain underweight Chile, due to a lack of exciting investment opportunities
in the near term.

Venezuela was the best performing regional market during the third quarter,
gaining 3.5%. The rally in oil prices raised expectations for a swift
improvement in Venezuelan fundamentals. Despite the dismantling of the Congress
by the Constitutional Assembly (i.e. congressional oversight of the country's
financial operations have effectively been removed), President Chavez's rhetoric
and measures toward political tyranny appear less dire than anticipated. Chavez
wields a great deal of popular support and has assured investors that Venezuela
will continue servicing its debt. However, we continue to be wary of Venezuela
due to its doubtful ability to service its debt, should oil prices fall, as well
as management issues and an uncertain tariff environment for both the telecom
(CANTV) and electric utility (Electricidad de Caracas) stocks. Therefore, we
maintain our underweight position in Venezuela.

Turning to other markets, we remain underweight Colombia and Peru. Colombian
equities lost 13.5% during the quarter. The Colombian economy continued to
suffer from its recession, with GDP dropping 7.6% in the second quarter of 1999,
its worst performance on record. In a widely anticipated move, Colombia decided
to let the peso float freely at the end of September. Peruvian equities (+0.4%)
were relatively flat during the third quarter, with improved commodity prices
helping terms of trade and exports. Yet growth continues to be skewed, as trends
in consumer manufacturing lack the catalysts for growth as evidenced in areas
such as agriculture, mining investment and fishing production.

While in the near term diminished risk appetites from global investors may
suppress a further rally in the Latin markets, we expect a return to these
attractive markets by early 2000. In part, we believe Y2K related concerns will
abate, fostering more normal capital market operations with supply and demand
equating at higher market levels. Latin America is a great beneficiary from
these conditions as well as from the improved outlook for the global commodity
cycle, allowing for higher rates of growth.

Andy B. Skov
PORTFOLIO MANAGER

Michael L. Perl
PORTFOLIO MANAGER

Robert L. Meyer
PORTFOLIO MANAGER

October 1999

69
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.1%)
ARGENTINA (6.1%)
7,201 Banco Rio de La Plata ADR ..................... $ 78
21,995 Quilmes Industrial ADR ........................ 210
17,946 Telecom Argentina ADR ......................... 479
7,618 Telefonica de Argentina ADR ................... 201
-----------
968
-----------
BRAZIL (34.9%)
3,840 Aracruz Celulose .............................. 80
6,080,000 Banco Bradesco (Preferred) .................... 29
3,069,150 Banco Itau (Preferred) ........................ 165
11,847,000 Banco Nacional (Preferred) .................... --
198,000 Celular CRT ................................... 22
1,837,077 Celular CRT (Preferred) ....................... 201
5,702,386 CEMIG (Preferred) ............................. 88
11,294 CEMIG ADR (Preferred) ......................... 172
(e)1,275 CEMIG ADR (Preferred) ......................... 19
564,636,600 Cia Electric Est Rio Janeiro .................. 106
5,508,900 Cia Siderurgica Nacional ...................... 139
28,315 Copel ADR (Preferred) ......................... 186
29,116,980 Copel, Class B ADR (Preferred) ................ 193
603,830 Coteminas ..................................... 22
(e)9,105 Coteminas ADR ................................. 17
1,445,377 CRT (Preferred) ............................... 324
5,000 CVRD .......................................... 79
34,986 CVRD (Bonus Shares) ........................... --
7,365 CVRD ADR (Preferred) .......................... 156
15,663 CVRD, Class A (Preferred) ..................... 330
228,161 Electrobras, Class B (Preferred) .............. 4
5,269,000 Eletrobras .................................... 88
370 Eletrobras ADR ................................ 3
10,180 Eletrobras, Class B ADR (Preferred) ........... 86
20,891,000 Embratel ...................................... 239
11,399 Embratel ADR .................................. 130
8,647,932 Gerdau (Preferred) ............................ 140
5,000 Globex Utilidades (Preferred) ................. 23
10,009,300 Lojas Arapua (Preferred) ...................... --
(e)13,460 Lojas Arapua ADR (Preferred) .................. --
4,172,800 Petrobras (Preferred) ......................... 635
5,840 Petrobras ADR (Preferred) ..................... 90
(e)49,299 Rossi GDR ..................................... 46
101,175 Rossi GDS ..................................... 95
10,494,925 Tele Centro Sul (Preferred) ................... 117
83,249,000 Tele Leste Celular (Preferred) ................ 53
550 Tele Leste Celular ADR ........................ 17
96,125,000 Tele Norte Celular (Preferred) ................ 55
19,545,700 Tele Norte Leste (Preferred) .................. 312
316 Tele Norte Leste ADR .......................... 5
1,680 Tele Sudeste Celular .......................... 36
9,211,275 Tele Sudeste Celular (Preferred) .............. 40
4,151 Telebras ADR (Preferred) ...................... 311
1,340,000 Telesp (Preferred) ............................ 94
6,760 Telesp ADR .................................... 106
5,945 Telesp Celular ................................ 155
8,531,675 Telesp Celular (Preferred) .................... 87
11,738 Unibanco GDR (Preferred) ...................... $ 208
15,850 Usiminas (Preferred) .......................... 52
-----------
5,555
-----------
CHILE (8.6%)
6,945 Banco Edwards ADR ............................. 111
2,120 Banco Santander ADR ........................... 36
4,103 Banco Santiago ADR ............................ 82
7,969 CCU ADR ....................................... 183
13,889 Chilectra ADR ................................. 264
18,359 Cia. de Telecomunicaciones de Chile ADR ....... 332
5,106 D&S ADR ....................................... 86
4,435 Endesa ADR .................................... 58
4,811 Enersis ADR ................................... 100
7,484 Quinenco ADR .................................. 76
6,002 Santa Isabel ADR .............................. 46
-----------
1,374
-----------
COLOMBIA (0.5%)
18,321 Bavaria ....................................... 56
39,040 Valores Bavaria ............................... 28
-----------
84
-----------
MEXICO (42.4%)
90,554 Alfa, Class A ................................. 378
78,246 Banacci, Class L .............................. 117
4,066 Banacci, Class O .............................. 7
513,361 Bancomer, Class O ............................. 115
85,443 Banorte, Class O .............................. 89
43,754 Carso Global Telecom .......................... 243
52,939 Carso, Class A1 ............................... 221
29,925 Cemex CPO ..................................... 144
33,432 Cemex CPO ADR ................................. 807
128,545 Cifra, Class C ................................ 198
12,513 Cifra, Class V ................................ 20
9,097 Empresas ICA ADR .............................. 27
48,051 Empresas ICA S.A. ............................. 23
21,045 Femsa ADR ..................................... 659
26,569 Grupo Industrial Bimbo, Class A ............... 56
13,205 Grupo Iusacell ................................ 152
55,814 Grupo Modelo, Class C ......................... 142
1,855 Grupo Televisa ................................ 74
169,142 Kimberly-Clark, Class A ....................... 597
68,634 Organizacion Soriana SA ....................... 275
12,275 Seminis, Inc., Class A ........................ 106
6,304 Tamsa ADR ..................................... 77
11,980 Televisa CPO GDR .............................. 478
214 Telmex ADR .................................... 15
23,254 Telmex, Class L ADR ........................... 1,657
15,053 Vitro ADR ..................................... 62
-----------
6,739
-----------
PERU (1.2%)
13,980 Tel Peru, Class B ADR ......................... 188
-----------
VENEZUELA (2.4%)
14,433 CANTV ADR ..................................... 387
-----------
TOTAL COMMON STOCKS (Cost $18,155) ................................ 15,295
-----------
</TABLE>

70
<PAGE>

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN CURRENCY (0.5%)
BRL 38 Brazilian Real ................................ $ 20
COP 6 Colombian Peso ................................ --
MXP 523 Mexican Peso .................................. 56
-----------
TOTAL FOREIGN CURRENCY (Cost $76) ................................. 76
-----------
TOTAL INVESTMENTS (96.6%) (Cost $18,231) .......................... 15,371
-----------
OTHER ASSETS AND LIABILITIES (3.4%)
Other Assets .................................................... 1,567
Liabilities ..................................................... (1,034)
-----------
533
-----------
NET ASSETS (100%) ................................................. $ 15,904
-----------
-----------

<CAPTION>
CLASS A:
- --------
NET ASSETS ........................................................ $ 14,615
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,807,674 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................. $ 8.08
-----------
-----------

CLASS B:
- --------
NET ASSETS ........................................................ $ 1,289
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 158,866 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................. $ 8.11
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
ADR--American Depositary Receipt
CPO--Certificate of Participation
GDR--Global Depositary Receipt
GDS--Global Depositary Shares

71
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)

[CHART]
<TABLE>
<S> <C>
Capital Goods (21.5%)
Communication Services (5.0%)
Consumer Cyclicals (10.7%)
Consumer Staples (15.8%)
Financial (4.4%)
Health Care (12.9%)
Technology (26.1%)
Utilities (0.3%)
Other (3.3%)
</TABLE>

PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
----- ------ ------ ---------
<S> <C> <C> <C> <C>
Portfolio -- Class A ... 14.50% 40.46% 27.73% 19.13%
Portfolio -- Class B ... 14.24 40.01 N/A 25.04
Index-- Class A ........ 5.36 27.80 25.03 18.03
Index-- Class B ........ 5.36 27.80 N/A 23.50
</TABLE>

1. The S&P 500 Index is comprised of the stocks of 500 large-cap U.S. companies
with market capitalization of $1 billion or more. These 500 companies
represent approximately 100 industries chosen mainly for market size,
liquidity and industry group representation.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE PERFORMANCE
RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.

The Equity Growth Portfolio employs a growth-oriented investment strategy
seeking long-term capital appreciation. The Portfolio seeks to accomplish its
objective by investing primarily in equities of medium and large capitalization
companies exhibiting strong earnings growth.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 14.50% for the Class A shares and 14.24% for the Class B shares compared to
5.36% for the S&P 500 Index (the "Index"). For the one year period ended
September 30, 1999, the Portfolio had a total return of 40.46% for the Class A
shares and 40.01% for the Class B shares compared to 27.80% for the Index. For
the five-year period ended September 30, 1999, the average annual total return
for Class A shares was 27.73% compared to 25.03% for the Index. For the period
since inception on April 2, 1991 through September 30, 1999, the average annual
total return for Class A shares was 19.13% compared to 18.03% for the Index. For
the period since inception on January 2, 1996 through September 30, 1999, the
average annual total return of Class B shares was 25.04% compared to 23.50% for
the Index.

We have been fortunate in the first nine months of the year. Our larger
positions, such as Clear Channel and Cisco, have done well and we have largely
managed to avoid problematic areas, like health care earlier in the year, and
some of the consumer goods companies more recently.

Earlier this year we began gradually increasing the median market capitalization
of the Portfolio, which now stands at over $75.8 billion versus $65.4 billion
for the S&P 500. This increase in capitalization is both a function of our
bottom-up research conviction on specific issues as well as the desire, at the
margin, to remain slightly more exposed to the largest capitalization, most
liquid names as we enter the Y2K period. The Portfolio continues to be broadly
diversified by issue, holding 86 securities at September 30, 1999. The Portfolio
remains a mix of "classic" growth stocks such as Microsoft, General Electric,
Cisco, Home Depot and Pfizer as well as less well-known growth names such as
Tyco International, United Technologies and Clear Channel Communications. At
quarter end, our largest position was Tyco, which represented approximately 7%
of the Portfolio's net assets, and the ten largest holdings accounted for about
41% of net assets.

We consider ourselves to be risk averse investors and were therefore very
excited about the Portfolio's strong relative performance in the difficult
environment of the third quarter. For the three months ended September 30, 1999,
the Portfolio had a total return of 0.65% for the Class A shares and 0.60% for
the Class B shares compared to -6.25% for

72
<PAGE>

the Index. Delivering outperformance in both up and down quarters is very
important to us. During the period, stock selection was the primary driver of
outperformance with modest positive contribution from sector allocation. Top
performers in the quarter included Intel, Clear Channel Communications, Tyco
International, Amgen and Internet Capital Group. Detractors to performance
included United Technologies and MCI/Worldcom. It is important to highlight
that neither of these companies actually had a disappointment in earnings
(notwithstanding the slight near term dilution Worldcom will take for the
Sprint acquisition) so we do not believe the stocks' long-term ability to
deliver performance has been impaired. We tend to view these situations as
providing "pent up" performance potential for the fourth quarter and the year
2000.

We also continue to owe much of our strong performance as much to what we don't
own as to what we do. We were generally underweight much of the consumer space
and held no Coca-Cola, Pepsi, Gillette, Clorox or Avon. We also held no Abbott
Laboratories and had fortunately sold our modest American Home Products position
before its decline. Avoiding these blow-ups was very helpful in generating
performance in the quarter. While our slight overweighting in health care did
cause us to lose about 10 basis points, strong stock picking added 100 basis
points in that sector. We were similarly aided by strong stock picking in
consumer cyclicals and consumer staples. Technology provided only a modest plus
for the quarter, adding about 40 basis points of performance. In general we were
pleased with the broad-based nature of our performance.

Growth has continued to outperform value after a powerful value rebound in
April. For the first nine months of the year the Russell 1000 Growth Index has
risen 6.4% while the Russell 1000 Value Index is up only 1.8%. Notwithstanding
modest interest rate increases, precipitated by the strength of the yen versus
the dollar, we continue to see little inflation pressure due to 1) continued
lack of pricing pressure in all but a few sectors; 2) productivity increases
driven by technology (and the internet specifically) and ongoing corporate
restructuring; and 3) increasing domestic budget surpluses. The benign inflation
outlook combined with the gradual "u-shaped" recoveries we expect in many
foreign markets, lead us to believe the outperformance of large cap growth
should continue.

Tyco remains the largest holding in the Portfolio, accounting for approximately
7% of net assets at quarter end. The stock rose some 37 percent in the first
nine months this year before pulling back in early October. The company recently
reported quarterly earnings ahead of consensus estimates and we believe that the
stock can continue to appreciate given our 20% earnings growth estimate. Clear
Channel, a top ten holding for some time given its burgeoning cash flow has
merged with AM/FM, Inc. to become the largest radio company with over 100
million weekly listeners. This unparalleled distribution platform will enable
the company to further leverage its strong advertiser and consumer ties through
new initiatives like radio networks and the internet. We also own and remain
enthusiastic about Worldcom in the wake of its merger with Sprint. The new
company will be the fastest growing large company in one of the fastest growing
industries in the world and still sell at a discount to the S&P 500 on cash
earnings.

We continue to be big believers in the internet's impact on both the consumer as
well as business-to-business interaction. We believe the development of the
internet is a transformational event and we have been concentrating on those
companies assembling the assets that enable them to win in the future and
provide real cash flow now. In following this investment strategy, we seek to
deliver high returns with low risk. Consequently, we are limiting our pure play
internet exposure, which now stands at only about 1.5%. One of our smaller
internet-oriented investments which has worked out quite well is Internet
Capital Group. This is a holding company of about 36 business-to-business
companies, only three of which are now publicly traded. We are very enthusiastic
about the "B2B" concept as well as this particular management team. Most of the
Portfolio's internet exposure, however, is what we term "imbedded" and is spread
among the categories of content, advertising/media, telecom/satellite
infrastructure and hardware plays in stocks such as Cisco, Clear Channel, AM/FM,
Inc., MCI/Worldcom, Liberty and MediaOne.

Technology now accounts for about 26% of the Portfolio based on net assets. Our
largest technology holdings include Microsoft, Cisco, Intel and Motorola. We are
huge believers in the Motorola/General Instrument merger and are big fans of
the wireless/broadband play that this now offers.

We reduced our health care exposure slightly during the quarter due to continued
relative earnings weakness. The Portfolio currently has about 13% health care
exposure versus 11% for the S&P 500 and about 17% for the Russell 1000 Growth
Index. We will look to increase our weightings in this stable growth area when
we gain confidence that S&P 500 earnings growth rates are peaking and as further
clarification of the Medicare drug benefit debate becomes available. We sharply
reduced our position in Merck due to our belief that its relative earnings
growth will become increasingly less attractive as we near the 2001-2002 patent
expirations for several of its lead drugs.

73
<PAGE>

On the buy side, we initiated a position in leading medical device
manufacturer Medtronic, and added to Bristol-Myers Squibb (now a top 10
holding), Warner Lambert, and Johnson and Johnson, each of which, we believe,
offer an attractive combination of potential near-term earnings
outperformance and accelerating and/or superior long-term growth rate.

Philip W. Friedman
PORTFOLIO MANAGER

Margaret K. Johnson
PORTFOLIO MANAGER

William S. Auslander
PORTFOLIO MANAGER

October 1999

74
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.7%)
CAPITAL GOODS (21.5%)
AEROSPACE/DEFENSE (1.8%)
297,300 General Dynamics Corp. ........................ $ 18,563
-----------
ELECTRICAL EQUIPMENT (5.0%)
400,000 General Electric Co. .......................... 47,425
54,600 Solectron Corp. ............................... 3,921
-----------
51,346
-----------
MANUFACTURING (DIVERSIFIED) (12.1%)
150,000 Textron, Inc. ................................. 11,607
729,300 Tyco International Ltd. ....................... 75,300
616,400 United Technologies Corp. ..................... 36,560
-----------
123,467
-----------
OFFICE EQUIPMENT & SUPPLIES (2.6%)
437,600 Pitney Bowes, Inc. ............................ 26,666
-----------
TOTAL CAPITAL GOODS .............................................. 220,042
-----------
COMMUNICATION SERVICES (5.0%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS)(0.5%)
10,600 Airgate Pcs, Inc. ............................. 264
279,300 Crown Castle International Corp. .............. 5,228
-----------
5,492
-----------
TELEPHONE (4.5%)
240,900 Bell Atlantic Corp. ........................... 16,216
364,900 MCI WorldCom, Inc. ............................ 26,227
57,400 Pinnacle Holdings, Inc. ....................... 1,499
37,600 SBC Communications, Inc. ...................... 1,920
-----------
45,862
-----------
TOTAL COMMUNICATION SERVICES ..................................... 51,354
-----------
CONSUMER CYCLICALS (10.7%)
BUILDING MATERIALS (0.1%)
36,000 Masco Corp. ................................... 1,116
-----------
RETAIL (BUILDING SUPPLIES) (2.9%)
429,200 Home Depot, Inc. .............................. 29,454
-----------
RETAIL (GENERAL MERCHANDISE) (3.7%)
284,400 Costco Wholesale Corp. ........................ 20,477
371,100 Wal-Mart Stores, Inc. ......................... 17,650
-----------
38,127
-----------
RETAIL (SPECIALTY) (2.0%)
278,400 Abercrombie & Fitch Co., Class A .............. 9,483
116,650 Gap, Inc. ..................................... 3,733
190,710 Intimate Brands, Inc. ......................... 7,426
-----------
20,642
-----------
RETAIL (SPECIALTY/APPAREL) (0.4%)
60,000 Tiffany & Co. ................................. 3,596
-----------
SERVICES (ADVERTISING/MARKETING) (1.1%)
147,300 Omnicom Group, Inc. ........................... 11,664
-----------
SERVICES (COMMERCIAL & CONSUMER) (0.5%)
142,232 Nielsen Media Research, Inc. .................. 5,289
-----------
TOTAL CONSUMER CYCLICALS 109,888
-----------
CONSUMER STAPLES (15.8%)
BEVERAGES (ALCOHOLIC) (0.5%)
78,600 Anheuser Busch Cos., Inc. ..................... 5,507
-----------
BROADCASTING (TV, RADIO, CABLE) (10.4%)
210,300 AMFM, Inc. .................................... $ 12,802
445,500 AT&T Corp., Liberty Media Group,
Class A-Common .............................. 16,539
137,400 CBS Corp. ..................................... 6,355
487,500 Clear Channel Communications, Inc. ............ 38,939
67,600 Comcast Corp., Class A-Common ................. 2,438
385,200 Comcast Corp., Class A-Special ................ 15,360
204,300 MediaOne Group, Inc. .......................... 13,956
900 Tivo, Inc. .................................... 27
-----------
106,416
-----------
ENTERTAINMENT (1.6%)
273,100 Time Warner, Inc. ............................. 16,591
-----------
FOODS (0.5%)
163,800 Keebler Foods Co. ............................. 4,893
-----------
HOUSEHOLD PRODUCTS (NON-DURABLES) (1.3%)
140,200 Procter & Gamble Co. .......................... 13,144
-----------
RESTAURANTS (0.3%)
106,700 Brinker International, Inc. ................... 2,894
-----------
RETAIL (FOOD CHAINS) (0.3%)
92,300 Safeway, Inc. ................................. 3,513
-----------
TOBACCO (0.9%)
264,400 Philip Morris Cos., Inc. ...................... 9,039
-----------
TOTAL CONSUMER STAPLES ........................................... 161,997
-----------
FINANCIAL (4.4%)
BANKS (MAJOR REGIONAL) (1.1%)
332,100 Bank of New York Co., Inc. .................... 11,105
-----------
FINANCIAL (DIVERSIFIED) (3.3%)
131,300 American Express Co. .......................... 17,676
361,975 Citigroup, Inc. ............................... 15,927
-----------
33,603
-----------
TOTAL FINANCIAL .................................................. 44,708
-----------
HEALTH CARE (12.9%)
HEALTH CARE (DIVERSIFIED) (7.5%)
482,700 Bristol-Myers Squibb Co. ...................... 32,582
166,100 Johnson & Johnson ............................. 15,261
435,300 Warner Lambert Co. ............................ 28,893
-----------
76,736
-----------
HEALTH CARE (DRUGS - GENERIC & OTHERS)(0.9%)
108,100 Amgen, Inc. ................................... 8,810
-----------
HEALTH CARE (DRUGS - MAJOR PHARMS) (4.1%)
72,200 Eli Lilly & Co. ............................... 4,621
200,400 Merck & Co., Inc. ............................. 12,989
504,300 Pfizer, Inc. .................................. 18,123
154,500 Schering-Plough Corp. ......................... 6,740
-----------
42,473
-----------
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES)(0.4%)
128,600 Medtronic, Inc. ............................... 4,565
-----------
TOTAL HEALTH CARE ................................................ 132,584
-----------
TECHNOLOGY (26.1%)
COMMUNICATION EQUIPMENT (5.7%)
305,500 American Tower Corp., Class A ................. 5,976
157,600 CIENA Corp. ................................... 5,752
168,300 IXnet, Inc. ................................... 2,546
</TABLE>

75
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONT.)
COMMUNICATION EQUIPMENT (CONT.)
94,200 JDS Uniphase Corp. ............................ $ 10,721
47,100 L-3 Communications Corp. ...................... 1,778
145,400 Lucent Technologies, Inc. ..................... 9,433
238,500 Motorola, Inc. ................................ 20,988
31,600 Nortel Networks Corp. ......................... 1,612
-----------
58,806
-----------
COMPUTERS (HARDWARE) (1.5%)
57,400 Hewlett Packard Co. ........................... 5,281
112,500 Sun Microsystems, Inc. ........................ 10,462
-----------
15,743
-----------
COMPUTERS (NETWORKING) (4.8%)
637,150 Cisco Systems, Inc. ........................... 43,684
6,400 Foundry Networks, Inc. ........................ 806
21,500 Inktomi Corp. ................................. 2,581
11,300 Juniper Networks, Inc. ........................ 2,068
-----------
49,139
-----------
COMPUTERS (SOFTWARE & SERVICES) (7.2%)
8,500 Alteon Websystems, Inc. ....................... 799
101,900 America Online, Inc. .......................... 10,598
12,500 Bluestone Software, Inc. ...................... 289
12,500 Egain Communications Corp. .................... 231
3,300 Freeshop.com, Inc. ............................ 38
16,200 Internet Capital Group, Inc. .................. 1,424
12,500 Kana Communications, Inc. ..................... 623
548,100 Microsoft Corp. ............................... 49,637
10,800 Netzero, Inc. ................................. 281
279,600 Novell, Inc. .................................. 5,784
74,450 Oracle Corp. .................................. 3,388
100 RADWARE Ltd. .................................. 3
8,600 Vitria Technology, Inc. ....................... 316
700 Yesmail.com, Inc. ............................. 7
-----------
73,418
-----------
ELECTRONICS (DEFENSE) (1.8%)
131,200 General Motors Corp., Class H ................. 7,511
63,500 Litton Industries, Inc. ....................... 3,477
440,200 Loral Space & Communications Ltd. ............. 7,566
-----------
18,554
-----------
ELECTRONICS (SEMICONDUCTORS) (4.3%)
474,700 Intel Corp. ................................... 35,276
14,800 Maxim Integrated Products, Inc. ............... 934
94,200 Texas Instruments, Inc. ....................... 7,748
-----------
43,958
-----------
EQUIPMENT (SEMICONDUCTORS) (0.8%)
103,100 Applied Materials, Inc. ....................... 8,029
-----------
TOTAL TECHNOLOGY 267,647
-----------
UTILITIES (0.3%)
ELECTRIC COMPANIES (0.3%)
84,800 Montana Power Co. ............................. 2,581
-----------
TOTAL COMMON STOCKS (COST $763,938) ............................... 990,801
-----------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (2.9%)
REPURCHASE AGREEMENT (2.9%)
$ 29,411 Chase Securities, Inc. 5.05%, dated 9/30/99,
due 10/01/99, to be repurchased at $29,415,
collateralized by U.S. Treasury Bonds,
6.125%, due 2/15/26, valued at $29,650
(Cost $29,411) .............................. $ 29,411
-----------
TOTAL INVESTMENTS (99.6%) (Cost $793,349) ......................... 1,020,212
-----------
OTHER ASSETS AND LIABILITIES (0.4%)
Other Assets ................................................... 37,307
Liabilities .................................................... (33,168)
-----------
4,139
-----------
NET ASSETS (100%) ................................................. $1,024,351
-----------
-----------

<CAPTION>
CLASS A:
- --------
NET ASSETS ........................................................ $ 838,614
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 38,463,775 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................ $ 21.80
-----------
-----------

<CAPTION>
CLASS B:
- --------
NET ASSETS ........................................................ $ 185,737
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 8,569,194 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................ $ 21.67
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------

76
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)

[CHART]
<TABLE>
<S> <C>
Capital Goods (24.8%)
Communication Services (10.4%)
Consumer Cyclicals (10.7%)
Consumer Staples (9.4%)
Financial (2.9%)
Health Care (11.0%)
Technology (25.0%)
Utilities (2.3%)
Other (3.5%)
</TABLE>

PERFORMANCE COMPARED TO THE S&P 500 INDEX
AND THE LIPPER CAPITAL APPRECIATION INDEX(1)

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------
AVERAGE
ONE ANNUAL
YTD YEAR SINCE INCEPTION
----- ------ ---------------
<S> <C> <C> <C>
Portfolio -- Class A ..... 22.91% 55.08% 33.72%
Portfolio -- Class B ..... 22.70 54.71 29.37
S&P 500 Index -- Class A . 5.36 27.80 26.19
Lipper Capital
Appreciation Index --
Class A ................ 10.40 34.85 20.17
S&P 500 Index -- Class B . 5.36 27.80 23.50
Lipper Capital
Appreciation Index --
Class B ................ 10.40 34.85 17.36
</TABLE>

1. The S&P 500 Index is an unmanaged stock index comprised of 500 large-cap U.S.
companies with market capitalization of $1 billion or more. The Lipper
Capital Appreciation Index is a composite of mutual funds managed for maximum
capital gains.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE PORTFOLIO'S
CONCENTRATION OF ITS ASSETS IN A SMALL NUMBER OF ISSUERS AND ITS USE OF
EQUITY-LINKED SECURITIES WILL SUBJECT IT TO GREATER RISKS. THE PERFORMANCE
RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.

The Focus Equity Portfolio (formerly the Aggressive Equity Portfolio) seeks
capital appreciation through a concentrated, non-diversified portfolio of
corporate equity securities. Short sales and options can be used to enhance
performance.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 22.91% for the Class A shares and 22.70% for the Class B shares compared to
5.36% for the S&P 500 Index and 10.40% for the Lipper Capital Appreciation
Index. For the one year period ended September 30, 1999, the Portfolio had a
total return of 55.08% for the Class A shares and 54.71% for the Class B shares
compared to 27.80% for the S&P 500 Index and 34.85% for the Lipper Capital
Appreciation Index. For the period since inception on March 8, 1995 through
September 30, 1999, the average annual total return of Class A shares was 33.72%
compared to 26.19% for the S&P 500 Index and 20.17% for the Lipper Capital
Appreciation Index. For the period since inception on January 2, 1996 through
September 30, 1999, the average annual total return of Class B shares was 29.37%
compared to 23.50% for the S&P 500 Index and 17.36% for the Lipper Capital
Appreciation Index.

The Portfolio has performed very well in the first nine months of the year. Our
larger positions, such as Clear Channel and Cisco, have done well and we have
largely managed to avoid problematic areas, like health care, earlier in the
year, and some of the consumer goods companies, more recently.

The Portfolio held 48 securities at September 30, 1999 comprised of a mix of
"classic" growth stocks such as Microsoft, General Electric, Cisco, Home Depot
and Warner Lambert as well as less well-known growth names such as Tyco
International, United Technologies and Clear Channel Communications. At
September 30th, our largest position was Tyco, which represented approximately
8% of net assets, and the ten largest holdings accounted for about 50% of net
assets.

We were very pleased with the Portfolio's strong relative performance in the
difficult environment of the third quarter. For the third quarter ended
September 30, 1999, the Portfolio had a total return of -0.88% for the Class A
shares and -0.97% for the Class B shares compared to -6.25% for the S&P 500
Index and -3.97% for the Lipper Capital Appreciation Index. Delivering
outperformance in both up and down quarters is very important to us. During the
period, stock selection was the primary driver of outperformance, but sector
allocation also contributed

77
<PAGE>

positively to the return. Top performers in the quarter included Intel, Clear
Channel Communications, Tyco International, Amgen and Nielsen Media.
Detractors to performance included United Technologies and MCI/Worldcom. It
is important to highlight that neither of these companies actually had a
disappointment in earnings (notwithstanding the slight near term dilution
Worldcom will take for the Sprint acquisition) so we do not believe the
stocks' long-term ability to deliver performance has been impaired. We tend
to view these situations as providing "pent up" performance potential for the
fourth quarter and the year 2000.

We also continue to owe much of our strong performance as much to what we don't
own as to what we do. We were generally underweight much of the consumer space
and held no Coca-Cola, Pepsi, Gillette, Clorox or Avon. We also held no Abbott
Laboratories or American Home Products. Avoiding these blow-ups was very helpful
in generating performance in the quarter. While our slight overweighting in
health care did cause us to lose about 10 basis points, strong stock picking
added 100 basis points in that sector. We were also aided by strong stock
picking in consumer staples and by our underweighting in financials. Technology
provided a modest plus for the quarter, adding about 60 basis points of
performance. In general we were pleased with the broad-based nature of our
performance.

Growth has continued to outperform value after a powerful value rebound in
April. For the first nine months of the year the Russell 1000 Growth Index has
risen 6.4% while the Russell 1000 Value Index is up only 1.8%. Notwithstanding
modest interest rate increases, precipitated by the strength of the yen versus
the dollar, we continue to see little inflation pressure due to 1) continued
lack of pricing pressure in all but a few sectors; 2) productivity increases
driven by technology (and the internet specifically) and ongoing corporate
restructuring: and 3) increasing domestic budget surpluses. The benign inflation
outlook combined with the gradual "u-shaped" recoveries we expect in many
foreign markets lead us to believe the outperformance of large cap growth should
continue.

Tyco remains the largest holding in the Portfolio, accounting for approximately
8% of net assets. The stock rose some 37 percent in the first nine months of the
year before pulling back in early October. The company recently reported
quarterly earnings ahead of consensus estimates and we believe that the stock
can continue to appreciate given our 20% earnings growth estimates.

Clear Channel with its burgeoning free cash flow, has been a favorite of ours
for years. The company, now the largest out-of-home media company in the world,
has agreed to acquire the unique "beachfront" major-market radio station assets
of AM/FM Incorporated. This accretive transaction positions Clear Channel as the
number one radio station company in the U.S. with over 100 million weekly
listeners. This unparalleled distribution platform will better enable the very
stockholder oriented management of Clear Channel to leverage their strong
advertiser and consumer ties through new initiatives like radio networks and the
internet. Clear Channel's superior market presence will easily attract on-line
users to their internet sites. We already know this because of the dramatic
success many of the "dot coms" have had using radio and billboard to drive
"eye-balls to the web." In fact, Clear Channel's efforts to develop their
proprietary local presence/national footprint approach to the web is already
cash flow positive. To paraphrase Warren Buffet's dictum, we continue to expect
great things from this great management team.

We are also enthusiastic about the new MCI WorldCom, which after completing the
largest transaction in U.S. history, is likely to be the fastest growing large
cap company in one of the fastest growing industries in the world, yet sells at
a discount to the S&P 500 on cash earnings. The visionary management of the
WorldCom/Sprint combination will have an industry leading position, barriers to
entry and tremendous assets in four specific high growth sectors within the
telecom industry: data, internet provider, international and wireless. While we
are in the earliest stages of mobile data services, the benefits of
mobile/wireless service are clear. Mobile/wireless internet based information
service will provide real time data ubiquitously and ignite growth for the few
carriers that are uniquely positioned to offer this feature. Worldcom is the
first carrier to have the assets to position themselves as such a provider.

Philip W. Friedman
PORTFOLIO MANAGER

William S. Auslander
PORTFOLIO MANAGER

October 1999

78
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.5%)
CAPITAL GOODS (24.8%)
AEROSPACE & DEFENSE (0.6%)
11,400 General Dynamics Corp. ........................ $ 712
-----------
ELECTRICAL EQUIPMENT (6.3%)
69,900 General Electric Co. .......................... 8,287
-----------
MANUFACTURING (DIVERSIFIED) (13.6%)
27,700 Textron, Inc. ................................. 2,143
99,900 Tyco International Ltd. ....................... 10,315
93,100 United Technologies Corp. ..................... 5,522
-----------
17,980
-----------
OFFICE EQUIPMENT & SUPPLIES (4.3%)
93,900 Pitney Bowes, Inc. ............................ 5,722
-----------
TOTAL CAPITAL GOODS .............................................. 32,701
-----------
COMMUNICATION SERVICES (10.4%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS)(4.0%)
12,500 Associated Group, Inc., Class A ............... 756
75,300 Associated Group, Inc., Class B ............... 4,561
-----------
5,317
-----------
TELECOMMUNICATIONS (LONG DISTANCE) (3.4%)
2 AT&T Corp. .................................... --
63,400 MCI Worldcom, Inc. ............................ 4,557
-----------
4,557
-----------
TELEPHONE (3.0%)
58,100 Bell Atlantic Corp. ........................... 3,911
-----------
TOTAL COMMUNICATION SERVICES ..................................... 13,785
-----------
CONSUMER CYCLICALS (10.7%)
RETAIL (BUILDING SUPPLIES) (2.9%)
55,700 Home Depot, Inc. .............................. 3,823
-----------
RETAIL (GENERAL MERCHANDISE) (3.0%)
54,000 Costco Wholesale Corp. ........................ 3,888
-----------
RETAIL (SPECIALTY) (2.2%)
86,000 Abercrombie & Fitch Co., Class A .............. 2,929
-----------
SERVICES (COMMERCIAL & CONSUMER) (2.6%)
92,100 Nielsen Media Research, Inc. .................. 3,425
-----------
TOTAL CONSUMER CYCLICALS 14,065
-----------
CONSUMER STAPLES (9.4%)
Broadcasting (TV, Radio, Cable) (6.6%)
26,100 AMFM, Inc. .................................... 1,589
15,700 AT&T - Liberty Media Corp., Class A ........... 583
72,300 Clear Channel Communications, Inc. ............ 5,775
11,600 MediaOne Group, Inc. .......................... 792
-----------
8,739
-----------
FOODS (1.3%)
56,100 Keebler Foods Co. ............................. 1,676
-----------
HOUSEHOLD PRODUCTS (NON-DURABLES) (1.5%)
20,800 Procter & Gamble Co. .......................... 1,950
-----------
TOTAL CONSUMER STAPLES ........................................... 12,365
-----------
FINANCIAL (2.9%)
BANKS (MAJOR REGIONAL) (1.5%)
60,400 Bank of New York Co., Inc. .................... 2,020
-----------
FINANCIAL (DIVERSIFIED) (1.4%)
13,100 American Express Co. .......................... $ 1,763
-----------
TOTAL FINANCIAL .................................................. 3,783
-----------
HEALTH CARE (11.0%)
HEALTH CARE (DIVERSIFIED) (9.4%)
75,900 Bristol-Myers Squibb Co. ...................... 5,124
21,400 Johnson & Johnson ............................. 1,966
79,700 Warner Lambert Co. ............................ 5,290
-----------
12,380
-----------
HEALTH CARE (DRUGS - GENERIC & OTHERS)(1.6%)
25,600 Amgen, Inc. ................................... 2,086
-----------
TOTAL HEALTH CARE ................................................ 14,466
-----------
TECHNOLOGY (25.0%)
COMMUNICATION EQUIPMENT (7.3%)
1,300 AirGate PCS, Inc. ............................. 32
128,800 American Tower Corp., Class A ................. 2,520
11,400 JDS Uniphase Corp. ............................ 1,297
19,700 Lucent Technologies, Inc. ..................... 1,278
36,000 Motorola, Inc. ................................ 3,168
27,200 Nortel Networks Corp. ......................... 1,387
-----------
9,682
-----------
COMPUTERS (HARDWARE) (2.4%)
11,900 Hewlett Packard Co. ........................... 1,095
22,500 Sun Microsystems, Inc. ........................ 2,092
-----------
3,187
-----------
COMPUTERS (NETWORKING) (6.1%)
116,400 Cisco Systems, Inc. ........................... 7,981
800 Foundry Networks, Inc. ........................ 101
-----------
8,082
-----------
COMPUTERS (SOFTWARE & SERVICES) (6.1%)
1,100 Alteon Websystems, Inc. ....................... 103
1,600 Bluestone Software, Inc. ...................... 37
1,700 Egain Communications Corp. .................... 32
400 FreeShop.com, Inc. ............................ 5
1,700 Kana Communications, Inc. ..................... 85
84,800 Microsoft Corp. ............................... 7,680
1,400 Netzero, Inc. ................................. 36
1,100 Vitria Technology, Inc. ....................... 40
100 Yesmail.com, Inc. ............................. 1
-----------
8,019
-----------
ELECTRONICS (SEMICONDUCTORS) (3.1%)
55,000 Intel Corp. ................................... 4,087
-----------
TOTAL TECHNOLOGY ................................................. 33,057
-----------
UTILITIES (2.3%)
ELECTRIC COMPANIES (2.3%)
97,600 Montana Power Co. ............................. 2,971
-----------
TOTAL COMMON STOCKS (COST $112,060) ............................... 127,193
-----------
</TABLE>

79
<PAGE>

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (4.3%)
REPURCHASE AGREEMENT (4.3%)
$ 5,711 Chase Securities, Inc., 5.05%, dated 9/30/99,
due 10/01/99, to be repurchased at
$5,712, collateralized by U.S. Treasury Bonds,
6.625%, due 2/15/27, valued at $5,758
(Cost $5,711) ............................... $ 5,711
-----------
TOTAL INVESTMENTS (100.8%) (Cost $117,771) ...................... 132,904
-----------
OTHER ASSETS AND LIABILITIES (0.8%)
Other Assets .................................................. 11,025
Liabilities ................................................... (12,082)
-----------
(1,057)
-----------
NET ASSETS (100%) ................................................. $ 131,847
-----------
-----------

<CAPTION>
CLASS A:
- --------
NET ASSETS ........................................................ $ 113,206
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 5,263,628 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................ $ 21.51
-----------
-----------

<CAPTION>
CLASS B:
- --------
NET ASSETS ........................................................ $ 18,641
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 872,975 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................ $ 21.35
-----------
-----------
</TABLE>

80
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Auto & Transportation (3.0%)
Consumer Discretionary (33.2%)
Financial Services (4.3%)
Health Care (2.7%)
Producer Durables (4.8%)
Technology (41.5%)
Utilities (5.7%)
Other (4.8%)
</TABLE>

PERFORMANCE COMPARED TO THE RUSSELL 2000 INDEX(1)
- -------------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
------ ------ ------ ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A ... 32.11% 61.11% 21.17% 15.62%
PORTFOLIO -- CLASS B ... 31.92 60.54 N/A 19.13
INDEX -- CLASS A ....... 2.37 19.07 12.39 11.70
INDEX -- CLASS B ....... 2.37 19.07 N/A 9.79
</TABLE>

(1) The Russell 2000 Index is comprised of the 2,000 smallest companies in the
Russell 3000 Index. The companies have an average market capitalization of
approximately $600 million.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED. THE PERFORMANCE RESULTS PROVIDED ARE
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF
THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.

The Small Company Growth Portfolio (formerly the Emerging Growth Portfolio)
invests primarily in growth-oriented equity securities of small- to
medium-sized domestic corporations and, to a limited extent, foreign
corporations. Such companies generally have market capitalizations ranging
from $200 million to $2 billion.

For the nine months ended September 30, 1999, the Portfolio had a total
return of 32.11% for the Class A shares and 31.92% for the Class B shares
compared to 2.37% for the Russell 2000 Index (the "Index"). For the one year
period ended September 30, 1999, the Portfolio had a total return of 61.11%
for the Class A shares and 60.54% for the Class B shares compared to 19.07%
for the Index. For the five-year period ended September 30, 1999, the average
annual total return of Class A shares was 21.17% compared to 12.39% for the
Index. For the period since inception on November 1, 1989 through September
30, 1999, the average annual total return of Class A shares was 15.62%
compared to 11.70% for the Index. For the period since inception on January
2, 1996 through September 30, 1999, the average annual total return of Class
B shares was 19.13% compared to 9.79% for the Index.

The third quarter return for the Portfolio was strong on an absolute and
relative basis. For the three months ended September 30, 1999, the Portfolio
had a total return of 2.41% for the Class A shares and 2.36% for the Class B
shares compared to -6.32% for the Index.

Our best performers for the third quarter included three positions in our
top 10--Nielsen Media Research, The Corporate Executive Board and Metro
Networks--as well as several exciting technology companies, including
Harmonic Lightwaves and SanDisk.

Both Nielsen Media and Metro Networks were acquired by larger companies
during the period, confirming our belief in the strength of their business
models and growth prospects. Furthermore, Harmonic Lightwaves and Sandisk
reported results that were well ahead of Wall Street expectations leading to
upward estimate revisions and higher stock prices.

We continue to view the internet as an exciting new medium with the potential
to fundamentally change the way businesses operate; however, our exposure to
"pure play" internet stocks remains minimal due to the extremely dynamic and
unpredictable nature of these business models. We believe that most of the
companies in our Portfolio are well positioned to benefit from the continuing
proliferation of the internet, through accelerating revenue growth and/or via
lower operating costs.

81
<PAGE>

Pinnacle Holdings is a recent addition to our top ten holdings. The company
is a leading domestic consolidator of cellular towers, which represent the
backbone of any wireless communications network. Communication towers are
monopolistic assets because local zoning authorities limit the number of
sites that can be built in a particular geographic region. As a result,
independent companies can lease their excess tower space to competing service
providers at attractive terms. Pinnacle has the longest track record of any
company in this emerging industry and we believe that the company will
generate significant free cash flow growth over the next five years as
wireless voice, data and internet communication explodes.

Our largest position at quarter end was The Corporate Executive Board. The
company provides best practices research and analysis focusing on strategy,
operations and general management issues. Because of its subscription based
business model and conservative revenue recognition policies, The Corporate
Executive Board's earnings significantly understate its free cash flow
generation capability. Over the next five years, the company should be able
to grow its revenues and earnings significantly by selling more subscriptions
to existing clients as well as expanding its current customer base.

Looking forward, we continue to see many opportunities for capital
appreciation in small to mid-sized companies. At September 30, 1999 there
were 97 names in the Portfolio, with the top 10 representing approximately
32% of net assets.

Alexander L. Umansky
PORTFOLIO MANAGER

Dennis P. Lynch
PORTFOLIO MANAGER

October 1999

82
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.2%)
AUTO & TRANSPORTATION (3.0%)
TRANSPORTATION MISCELLANEOUS (3.0%)
43,700 C.H. Robinson Worldwide, Inc. .................. $ 1,472
-----------
CONSUMER DISCRETIONARY (33.2%)
ADVERTISING AGENCIES (2.8%)
72,662 R.H. Donnelly Corp. ............................ 1,353
-----------
COMMERCIAL INFORMATION SERVICES (0.2%)
1,400 QRS Corp. ...................................... 90
-----------
EDUCATION SERVICES (0.4%)
9,300 ITT Educational Services, Inc. ................. 181
-----------
ENTERTAINMENT (3.9%)
52,364 Cedar Fair L.P. ................................ 1,087
18,300 Championship Auto Racing Teams, Inc. ........... 476
11,158 SFX Entertainment, Inc. ........................ 340
-----------
1,903
-----------
HOTEL/MOTEL (0.8%)
9,800 Four Seasons Hotels, Inc. ...................... 358
-----------
LEISURE TIME (1.4%)
13,500 American Classic Voyages Co. ................... 310
11,500 Ducati Motor Holdings, Inc. .................... 362
-----------
672
-----------
RADIO & TV BROADCASTERS (5.1%)
3,000 Paxson Communications Corp. .................... 37
25,900 Pegasus Communications Corp. ................... 1,165
1,600 Tivo, Inc. ..................................... 48
24,288 Westwood One, Inc. ............................. 1,096
2,400 Young Broadcasting, Inc., Class A .............. 126
-----------
2,472
-----------
RESTAURANTS (4.4%)
17,800 Papa John's International, Inc. ................ 734
45,646 Sonic Corp. .................................... 1,390
-----------
2,124
-----------
RETAIL (4.6%)
6,900 1-800-Flowers.com, Inc. ........................ 100
15,300 Bebe Stores, Inc. .............................. 369
59,400 David's Bridal, Inc. ........................... 442
11,500 InterTAN, Inc. ................................. 226
22,300 P.F. Chang's China Bistro, Inc. ................ 482
20,100 Tuesday Morning Corp. .......................... 507
4,100 ValueVision International, Inc. ................ 107
-----------
2,233
-----------
SERVICE ORGANIZATIONS (1.6%)
31,300 Steiner Leisure Ltd. ........................... 782
-----------
SERVICES: COMMERCIAL (8.0%)
19,511 Nielsen Media Research, Inc. ................... 725
62,600 The Corporate Executive Board Co. .............. 2,551
17,800 UNSWeb Corp. ................................... 611
-----------
3,887
-----------
TOTAL CONSUMER DISCRETIONARY ................................... 16,055
-----------
FINANCIAL SERVICES (4.3%)
DIVERSIFIED FINANCIAL SERVICES (0.0%)
1 Mutual Risk Management Ltd. .................... --
-----------

<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL MISCELLANEOUS (1.2%)
67,868 Indigo Aviation AB ADR ......................... $ 611
-----------
INSURANCE: MULTI-LINE (0.7%)
13,176 Reinsurance Group of America, Inc. ............. 338
(Non-Voting)
-----------
INVESTMENT MANAGEMENT COMPANIES (2.0%)
30,192 PIMCO Advisors Holdings L.P. ................... 951
-----------
RENTAL & LEASING SERVICES: COMMERCIAL (0.4%)
18,600 First Sierra Financial, Inc. ................... 199
-----------
TOTAL FINANCIAL SERVICES ....................................... 2,099
-----------
HEALTH CARE (2.7%)
HEALTH CARE SERVICES (0.1%)
4,500 Laser Vision Centers, Inc. ..................... 63
-----------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (2.6%)
66,800 General Surgical Innovations, Inc. ............. 459
4,700 Novoste Corp. .................................. 84
3,600 Techne Corp. ................................... 113
10,500 Xomed Surgical Products, Inc. .................. 599
-----------
1,255
-----------
TOTAL HEALTH CARE .............................................. 1,318
-----------
PRODUCER DURABLES (4.8%)
AEROSPACE (0.5%)
7,600 Cordant Technologies, Inc. ..................... 231
-----------
ELECTRICAL EQUIPMENT & COMPONENTS (1.8%)
11,100 AFC Cable Systems, Inc. ........................ 472
12,500 Commscope, Inc. ................................ 406
-----------
878
-----------
OFFICE FURNITURE & BUSINESS EQUIPMENT (0.3%)
4,700 Knoll, Inc. .................................... 126
-----------
PRODUCTION TECHNOLOGY EQUIPMENT (1.5%)
17,268 Dionex Corp. ................................... 738
-----------
TELECOMMUNICATIONS EQUIPMENT (0.7%)
9,100 L-3 Communications Corp. ....................... 344
-----------
TOTAL PRODUCER DURABLES ........................................ 2,317
-----------
TECHNOLOGY (41.5%)
COMMUNICATIONS TECHNOLOGY (22.2%)
20,300 Advanced Fibre Communications, Inc. ............ 452
2,200 Airgate Pcs, Inc. .............................. 55
92,540 American Tower Corp., Class A .................. 1,810
12,600 AudioCodes Ltd. ................................ 474
11,100 CIENA Corp. .................................... 405
9,200 CoreComm Ltd. .................................. 303
12,900 Crown Castle International Corp. ............... 242
5,100 Harmonic Lightwaves, Inc. ...................... 667
17,500 IPC Communications, Inc. ....................... 1,068
14,600 IXnet, Inc. .................................... 221
6,900 Leap Wireless International, Inc. .............. 160
21,100 Periphonics Corp. .............................. 662
57,200 Pinnacle Holdings, Inc. ........................ 1,494
4,900 Proxim, Inc. ................................... 225
27,700 RF Micro Devices, Inc. ......................... 1,267
81,600 SBA Communications Corp. ....................... 887
7,200 Terayon Communication Systems, Inc. ............ 352
-----------
10,744
-----------
</TABLE>

83
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONT.)
COMPUTER SERVICES SOFTWARE & SYSTEMS (11.4%)
5,500 Allaire Corp. .................................. $ 308
400 Alteon Websystems, Inc. ........................ 38
600 Bluestone Software, Inc. ....................... 14
10,100 Citrix Systems, Inc. ........................... 626
600 Egain Communications Corp. ..................... 11
19,900 Forte Software, Inc. ........................... 545
300 Foundry Networks, Inc. ......................... 38
200 Freeshop International, Inc. ................... 2
8,600 Informatica Corp. .............................. 436
1,900 Interliant, Inc. ............................... 23
1,000 Kana Communications, Inc. ...................... 50
2,500 Liberate Technologies, Inc. .................... 105
9,100 Micromuse, Inc. ................................ 585
15,000 National Computer Systems, Inc. ................ 575
1,600 NetIQ Corp. .................................... 47
500 Netzero, Inc. .................................. 13
4,000 QLogic Corp. ................................... 279
200 RADWARE Ltd. ................................... 5
80,300 SAGA Systems, Inc. ............................. 1,159
2,200 TIBCO Software, Inc. ........................... 66
12,200 Visio Corp. .................................... 478
400 Vitria Technology, Inc. ........................ 15
3,700 WorldGate Communications, Inc. ................. 85
-----------
5,503
-----------
COMPUTER TECHNOLOGY (3.7%)
4,100 PSInet, Inc. ................................... 147
9,000 SanDisk Corp. .................................. 587
14,250 Transwitch Corp. ............................... 812
7,500 Verio, Inc. .................................... 233
-----------
1,779
-----------
ELECTRONICS: SEMI- CONDUCTORS/COMPONENTS (4.2%)
18,700 Applied Science and Technology, Inc. ........... 386
17,900 Cirrus Logic, Inc. ............................. 196
2,100 Conexant Systems, Inc. ......................... 152
8,800 Maker Communications, Inc. ..................... 205
8,200 Micrel, Inc. ................................... 356
7,500 Powerwave Technologies, Inc. ................... 362
5,000 SDL, Inc. ...................................... 381
-----------
2,038
-----------
TOTAL TECHNOLOGY ............................................... 20,064
-----------
UTILITIES (5.7%)
UTILITIES: ELECTRICAL (1.8%)
28,036 Montana Power Co. .............................. 853
-----------
UTILITIES: TELECOMMUNICATIONS (3.9%)
31,332 Associated Group, Inc., Class B ................ 1,898
-----------
TOTAL UTILITIES ................................................ 2,751
-----------
TOTAL COMMON STOCKS (COST $37,695) ................................ 46,076
-----------
-----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (6.4%)
REPURCHASE AGREEMENT (6.4%)
$ 3,090 Chase Securities, Inc. 5.05%, dated
9/30/99, due 10/01/99, to be
repurchased at $3,090, collateralized by
U.S. Treasury Bonds, 7.125%, due
2/15/23, valued at $3,116
(Cost $3,090)...................................... $ 3,090
-----------
TOTAL INVESTMENTS (101.6%) (Cost $40,785).......................... 49,166
-----------
OTHER ASSETS AND LIABILITIES (-1.6%)
Other Assets..................................................... 3,318
Liabilities...................................................... (4,106)
-----------
(788)
-----------
NET ASSETS (100%).................................................. $ 48,378
-----------
-----------
CLASS A:
- --------
NET ASSETS......................................................... $ 42,904
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,236,624 outstanding $0.001 par
value shares (authorized 500,000,000 shares).................... $ 10.13
-----------
-----------
CLASS B:
- --------
NET ASSETS......................................................... $ 5,474
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 551,114 outstanding $0.001 par value
shares (authorized 500,000,000 shares).......................... $ 9.93
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
ADR -- American Depositary Receipts

84
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Data Communications (35.1%)
Data Storage & Processing (1.4%)
Electronic Equipment (5.9%)
Information Processing (2.3%)
Medical Technology (0.2%)
Micro Computer Mfg. (2.2%)
Office Automation (0.4%)
Semiconductor Capital
Equipment Mfg. (1.9%)
Semiconductor Mfg. (16.1%)
Software Products (24.6%)
Test, Analysis &
Instrumentation Equipment (1.2%)
Other (8.7%)
</TABLE>

PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE
LIPPER SCIENCE AND TECHNOLOGY FUNDS INDEX(1)
- -------------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE
ANNUAL
ONE SINCE
YTD YEAR INCEPTION
------ ------ ---------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A..... 53.49% 122.20% 50.64%
PORTFOLIO -- CLASS B..... 53.39 121.85 50.36
S&P 500 INDEX............ 5.36 27.80 24.98
LIPPER SCIENCE &
TECHNOLOGY FUNDS INDEX. 36.30 89.30 32.86

</TABLE>

(1) The S&P 500 Index is comprised of the stocks of 500 large-cap U.S. companies
with market capitalization of $1 billion or more. These 500 companies
represent approximately 100 industries chosen mainly for market size,
liquidity, and industry group representation. The Lipper Science and
Technology Funds Index is a composite index of mutual funds that invest at
least 65% of their assets in science and technology stocks.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED. THE PERFORMANCE RESULTS PROVIDED ARE
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF
THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.

The investment objective of the Technology Portfolio is to achieve long-term
capital appreciation by investing primarily in equity securities of companies
expected to benefit from their involvement in technology and technology-related
industries. The focus of the Portfolio is to identify significant long-term
technology trends and to invest in those premier companies we believe are
positioned to materially gain from these trends. Stocks selected for the
Portfolio are also expected to meet comprehensive selection criteria. The
Portfolio may invest up to 35% of its total investments in securities of foreign
companies to participate sufficiently in the global technology market.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 53.49% for the Class A shares and 53.39% for the Class B shares compared to
5.36% for the S&P 500 Index and 36.30% for the Lipper Science and Technology
Funds Index. For the one year ended September 30, 1999, the Portfolio had a
total return of 122.20% for the Class A shares and 121.85% for the Class B
shares compared to 27.80% for the S&P 500 Index and 89.30% for the Lipper
Science and Technology Funds Index. For the period since inception on September
16, 1996 through September 30, 1999, the average annual total return of Class A
shares was 50.64% and 50.36% for Class B shares compared to 24.98% for the S&P
500 Index and 32.86% for the Lipper Science and Technology Funds Index.

For the three months ended September 30, 1999, the Portfolio had a total return
of 6.68% for the Class A shares and 6.67% for the Class B shares compared to -
6.25% for the S&P 500 Index and 6.90% for the Lipper Science and Technology
Funds Index.

The third quarter return for the Portfolio was good on a relative basis
and strong on an absolute basis. The absolute return for the quarter and
certainly for the year-to-date was very substantial. We continue to be
pleased with the Portfolio's substantial outperformance of the S&P 500
Index and Lipper Science and Technology Index for the first nine months of
the year. Our best performers for the quarter were Internet Capital Group
up 260%, Harmonic Lightwaves up 128%, Doubleclick up 76% and US Web up
55%. The Portfolio also benefited from being overweight the telecom
equipment (especially optical components), semiconductor and semi-cap
equipment sectors, as well as transitioning back into selective internet
holdings. We remain underweight the PC hardware and IT services sectors.

We believe fundamentals for technology continue to be favorable, especially
in broadband technology and Internet Protocol communications. The
telecommunications

85
<PAGE>

industry continues to see 25%-to-35% growth in the demand for data services;
internet access (business and consumer) is growing exponentially and the
cable and long distance companies are in the middle of a multi- billion
dollar, multi-year broadband build out.

Even though there are some valid concerns over a potential slowdown in IT
spending due to Y2K related problems, we believe that companies will continue
to spend on these technologies in order to stay competitive, in both product
and service features and to decrease costs.

There are over 2,000 public technology companies and we strive to invest in the
best 100. Our goal remains the same; identify the premier sectors and companies,
which present compelling investment opportunities and avoid the sectors and
companies with deteriorating fundamentals.

Alexander L. Umansky
PORTFOLIO MANAGER

Stephen C. Sexauer
PORTFOLIO MANAGER

October 1999

86
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.0%)
TECHNOLOGY (99.0%)
DATA COMMUNICATIONS (35.1%)
5,250 Adaptec, Inc.................................... $ 208
4,450 ADC Telecommunications, Inc..................... 187
34,300 Advanced Fibre Communications, Inc.............. 763
400 AirGate PCS, Inc................................ 10
7,950 Alcatel Alsthom ADR............................. 221
14,100 American Tower Corp., Class A................... 276
700 AudioCodes Ltd.................................. 26
27,100 CIENA Corp...................................... 989
17,900 Cisco Systems, Inc.............................. 1,227
12,750 Commscope, Inc.................................. 414
100 Freeshop International Inc...................... 1
24,400 General Instrument Corp......................... 1,174
3,700 Harmonic Lightwaves, Inc........................ 484
5,000 IPC Communications, Inc......................... 305
8,300 JDS Uniphase Corp............................... 945
5,940 Lucent Technologies, Inc........................ 385
8,400 Metromedia Fiber Network, Inc.,
Class A....................................... 206
60,300 Newbridge Networks Corp......................... 1,572
5,200 Nortel Networks Corp............................ 265
17,900 Periphonics Corp................................ 562
8,500 Powerwave Technologies, Inc..................... 410
5,800 Proxim, Inc..................................... 267
2,000 QUALCOMM, Inc................................... 378
4,000 Qwest Communications International,
Inc........................................... 118
15,200 RF Micro Devices, Inc........................... 695
4,750 Scientific-Atlanta, Inc......................... 236
1,550 Sprint PCS...................................... 116
1,500 Tellabs, Inc.................................... 85
10,700 Terayon Communication Systems, Inc.............. 523
9,400 Transwitch Corp................................. 536
750 Vodafone AirTouch plc ADR....................... 178
-----------
13,762
-----------
DATA PROCESSING & REPRODUCTION (0.0%)
100 RADWARE Ltd..................................... 3
-----------
DATA STORAGE & PROCESSING (1.4%)
200 Gadzoox Networks, Inc........................... 11
6,200 Quantum Corp.................................... 46
3,250 SanDisk Corp.................................... 212
3,600 VERITAS Software Corp........................... 273
-----------
542
-----------
ELECTRONIC EQUIPMENT (5.9%)
4,800 Exodus Communications, Inc...................... 346
200 Foundry Networks, Inc........................... 25
2,800 Gemstar Internal Group Ltd...................... 219
300 Juniper Networks, Inc........................... 55
7,200 LSI Logic Corp.................................. 371
8,000 Maker Communications, Inc....................... 188
9,400 Micrel, Inc..................................... 408
4,400 Microchip Technology, Inc....................... 226
1,900 Optical Coating Laboratory, Inc................. 175

<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
400 Sanmina Corp.................................... $ 31
3,700 SDL, Inc........................................ 282
-----------
2,326
-----------
INFORMATION PROCESSING (2.3%)
3,300 America Online, Inc............................. 343
11,100 Electronics For Imaging, Inc.................... 571
-----------
914
-----------
MEDICAL TECHNOLOGY (0.2%)
3,300 Novoste Corp.................................... 59
-----------
MICRO COMPUTER MFG (2.2%)
9,800 Dell Computer Corp.............................. 410
4,900 Sun Microsystems, Inc........................... 455
-----------
865
-----------
OFFICE AUTOMATION (0.4%)
2,800 Pitney Bowes, Inc............................... 171
-----------
SEMICONDUCTOR CAPITAL EQUIPMENT MFG (1.9%)
5,450 Applied Materials, Inc.......................... 424
5,100 KLA Tencor Corp................................. 332
-----------
756
-----------
SEMICONDUCTOR MFG (16.1%)
4,950 Analog Devices, Inc............................. 254
4,400 ASM Lithography Holding N.V..................... 295
3,000 Atmel Corp...................................... 101
400 Broadcom Corp., Class A......................... 44
20,400 Cirrus Logic, Inc............................... 224
9,400 Conexant Systems, Inc........................... 683
4,400 Cypress Semiconductor Corp...................... 95
15,948 Intel Corp...................................... 1,185
5,000 Lam Research Corp............................... 305
4,400 Linear Technology Corp.......................... 259
12,100 Maxim Integrated Products, Inc.................. 763
7,850 Motorola, Inc................................... 691
2,200 PMC-Sierra, Inc................................. 203
5,000 Texas Instruments, Inc.......................... 411
12,050 Xilinx, Inc..................................... 790
-----------
6,303
-----------
SOFTWARE PRODUCTS (24.6%)
2,800 Allaire Corp.................................... 157
300 Alteon Websystems, Inc.......................... 28
500 Bluestone Software, Inc......................... 12
5,600 Citrix Systems, Inc............................. 347
3,400 CMGI, Inc....................................... 348
4,600 DoubleClick, Inc................................ 548
3,300 eBay, Inc....................................... 465
400 Egain Communications Corp....................... 7
2,500 Electronic Data Systems Corp.................... 132
15,600 Forte Software, Inc............................. 429
4,300 Informatica Corp................................ 218
7,500 Infoseek Corp................................... 232
2,100 Inktomi Corp.................................... 252
1,400 Interliant, Inc................................. 17
2,200 Internet Capital Group, Inc..................... 193
11,800 IXnet, Inc...................................... 178
500 Kana Communications, Inc........................ 25

</TABLE>

87
<PAGE>

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

TECHNOLOGY (cont.)
SOFTWARE PRODUCTS (CONT.)
1,700 Liberate Technologies, Inc...................... $ 72
7,900 Lycos, Inc...................................... 396
1,600 Micromuse, Inc.................................. 103
20,900 Microsoft Corp.................................. 1,893
1,200 NetIQ Corp...................................... 36
4,400 Network Solutions, Inc., Class A................ 404
400 Netzero, Inc.................................... 10
29,650 Novell, Inc..................................... 613
3,600 Portal Software, Inc............................ 140
2,900 PSInet, Inc..................................... 104
3,000 Rational Software Corp.......................... 88
1,800 RealNetworks, Inc............................... 188
1,000 Red Hat, Inc.................................... 96
400 Rhythyms NetConnections, Inc.................... 14
55,100 SAGA Systems, Inc............................... 795
4,800 Security First Technologies Corp................ 187
1,100 TIBCO Software, Inc............................. 33
5,000 Verio, Inc...................................... 155
1,200 Vignette Corp................................... 109
300 Vitria Technology, Inc.......................... 11
2,700 WorldGate Communications, Inc................... 62
2,900 YAHOO!, Inc..................................... 521
-----------
9,618
-----------
TEST, ANALYSIS & INSTRUMENTATION EQUIPMENT (1.2%)
12,800 Teradyne, Inc................................... 451
-----------
OTHER (7.7%)
5,100 1-800-Flowers.com, Inc.......................... 74
1,400 Amazon.com, Inc................................. 112
13,200 Applied Science and Technology, Inc............. 272
2,400 Bell Atlantic Corp.............................. 162
2,300 Extreme Networks................................ 146
13,000 First Sierra Financial, Inc..................... 139
4,200 Intimate Brands, Inc............................ 163
4,300 MCI Worldcom, Inc............................... 309
2,800 MediaOne Group, Inc............................. 191
4,400 Montana Power Co................................ 134
2,700 Priceline.com Inc............................... 174
5,950 Sprint Corp. (Fon Group)........................ 323
700 Tivo, Inc....................................... 21
20,000 USWeb Corp...................................... 686
3,000 Williams Cos., Inc.............................. 112
-----------
3,018
-----------
TOTAL TECHNOLOGY................................................... 38,788
-----------
TOTAL COMMON STOCKS (Cost $29,736)................................. 38,788
-----------

FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
<S> <C> <C>

SHORT-TERM INVESTMENT (0.5%)
REPURCHASE AGREEMENT (0.5%)
$ 184 Chase Securities, Inc. 5.05%, dated
9/30/99, due 10/01/99, to be
repurchased at $184,
collateralized by U.S. Treasury
Bonds, 6.375%, due 8/15/27,
valued at $186 (Cost $184)...................... $ 184
-----------
TOTAL INVESTMENTS (99.5%) (Cost $29,920)......................... 38,972
-----------
OTHER ASSETS AND LIABILITIES (0.5%)
Other Assets................................................... 1,085
Liabilities.................................................... (887)
-----------
198
-----------
NET ASSETS (100%).................................................. $ 39,170
-----------
-----------

CLASS A:
- --------
NET ASSETS......................................................... $ 36,089
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,334,085 outstanding $0.001 par value
shares (authorized 500,000,000 shares)........................... $ 27.05
-----------
-----------

CLASS B:
- --------
NET ASSETS......................................................... $ 3,081
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 114,392 outstanding $0.001 par
value shares (authorized 500,000,000 shares)................... $ 26.94
-----------
-----------
</TABLE>
- -------------------------------------------------------------------------------
ADR -- American Depositary Receipt

88
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------
[CHART]
<TABLE>
<S> <C>
Basic Materials (3.0%)
Capital Goods (9.3%)
Communication Services (8.6%)
Consumer Cyclicals (13.5%)
Consumer Staples (8.9%)
Energy (5.5%)
Financial (13.4%)
Health Care (9.8%)
Technology (23.2%)
Transportation (0.8%)
Utilities (3.7%)
Other (0.3%)
100%
</TABLE>

PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- --------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------
AVERAGE
ANNUAL
ONE SINCE
YTD YEAR INCEPTION
------ ------ ---------
<S> <C> <C> <C>
PORTFOLIO-- CLASS A...... 5.47% 26.92% 14.04%
PORTFOLIO-- CLASS B...... 5.31 26.65 13.82
INDEX ................... 5.36 27.80 16.32

</TABLE>

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED. THE PERFORMANCE RESULTS PROVIDED ARE
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF
THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.

The U.S. Equity Plus Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of issuers in the S&P 500 Index.
Equity securities include common and preferred stocks, convertible
securities, and rights and warrants to purchase common stocks.

The Portfolio investment process utilizes systematic quantitative and
qualitative inputs. The quantitative inputs include several proprietary
valuation and momentum models, as well as a market conditions model. The
qualitative inputs include stock ratings from Morgan Stanley Dean Witter's
Equity Research analysts. These inputs are combined in a systematic way to
produce an attractiveness measure for every stock in the Portfolio investment
universe. The Portfolio is designed to have consistently higher returns than the
S&P 500 with a volatility of portfolio return that is approximately equal to
that of the S&P 500. This is sought by using a multi-factor risk model for
building the Portfolio and by maintaining sector neutrality with respect to the
S&P 500 Index. The active exposure to any single company is also kept to a
modest level.

For the nine months ended September 30, 1999, the Portfolio had a total
return of 5.47% for the Class A shares and 5.31% for the Class B shares
compared to 5.36% for the S&P 500 Index (the "Index"). For the one year
period ended September 30, 1999, the Portfolio had a total return of 26.92%
for the Class A shares and 26.65% for the Class B shares compared to 27.80%
for the Index. For the period since inception on July 31, 1997 through
September 30, 1999, the Portfolio had an average annual total return of
14.04% for Class A shares and 13.82% for Class B shares compared to 16.32%
for the Index.

The Portfolio's strategy is sector neutral to the S&P 500, so sector weights
had no impact on incremental performance. The performance of a sector in the
Portfolio is completely driven by stock selection (and relative weights)
within the sector. Based on stock selection, our best performing sectors were
beverages and home products, telephones, financial services, multi- industry,
and drugs and biotechnology. Our worst performing sectors were capital goods,
consumer durables, forest products, public utilities, and semiconductors.

Virtually all of the differential performance between the Portfolio and the
Index came from active stock selection. The five largest contributions to our
performance relative to the S&P 500 came from the following stocks: 1) Coca Cola
(underweight), a global soft drink company, tumbled 22% during the quarter. The
company issued an earnings warning for the sixth consecutive quarter citing the
recall in Europe

89
<PAGE>

MORGAN STANLEY DEAN WITTER
INSITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)

and sluggish international sales. 2) AT&T (underweight), a communications
service company, also dropped 22%, as fears of long distance price wars and a
slowing of AT&T's voice long distance business put pressure on the stock
throughout the quarter. 3) Bell Atlantic (overweight), a local telephone
company, continued its impressive performance this year as investors remained
optimistic about its potential entry into the long distance market, growing
data traffic and wireless revenues and potential benefits from the GTE and
Vodafone Airtouch alliances. 4) Anheuser Busch (overweight), a beer producer
and distributor, rose 15% in July and August as the market anticipated
successful price increases for its key products and increasing volumes and
brand presence internationally. 5) Texas Instruments (overweight), a
worldwide producers of semiconductor products, climbed 14% on the back of
strong demand for digital signal processors and the successful introduction
of a host of analog product offerings.

On the other side, the five most negative contributions to our performance
relative to the S&P 500 came from the following stocks: 1) Owens Corning
(overweight), a manufacturer of building materials and glass fiber products,
tumbled 36%, as market participants seemed to be more focused on its asbestos
liability problems than its current financial performance. 2) Intel
(underweight), a manufacturer of computer components and related products,
rose 24% buoyed by strong demand for microprocessors. 3) Conseco
(overweight), a health and life insurance provider, fell 37%, as investors
continued to pound the stock since the company agreed to acquire Green Tree
Financial in April. 4) Gap (overweight), an international specialty
retailer, dropped 36% on disappointing sales trends at Gap brand stores.
These stores account for over 40% of the company's revenues. 5) Countrywide
Credit Industries (overweight), a mortgage banking company, sank 24% as
investors raised questions about the company ability to produce strong
earnings in a rising interest rate environment with declining demand for
mortgage refinancings.

During the third quarter of 1999 the U.S. economic expansion continued with
surprising vigor. Growth in GDP may exceed 4% and S&P earnings growth may exceed
15%. The interest rate backdrop, however, was not as friendly. While the yield
on the benchmark 30-year Treasury only increased by roughly 10 basis points to
6.05%, there was constant consternation about the next move by the Federal
Reserve Board. These concerns contributed to the S&P 500's stumble during the
third quarter. It lost 6.25%, leaving it with a 5.36% return year-to-date.
Reversing the gains in the second quarter, large capitalization value stocks
underperformed their large capitalization growth counterparts by nearly 6% (as
measured by the S&P 500 Barra Value and Growth indexes). The performance of
small capitalization stocks was no better than large capitalization stocks -
they also fell by 6.32% (as measured by the Russell 2000 index). What will the
future hold for U.S. stocks? We remain cautious about the prospects for U.S.
stocks. The failed advance in stocks at the beginning of the quarter was narrow
and weak. The current investment environment is characterized by a high trade
deficit, a dollar that is under pressure and interest rate uncertainties. None
of these are good for a fully-priced stock market.

Eugene Flood, Jr.
PORTFOLIO MANAGER

Narayan Ramachandran
PORTFOLIO MANAGER

October 1999

90
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK (99.7%)
BASIC MATERIALS (3.0%)
ALUMINUM (0.2%)
400 Alcan Aluminum Ltd. ........................... $ 13
700 Alcoa, Inc. ................................... 43
-----------
56
-----------
CHEMICALS (1.2%)
1,100 Dow Chemical Co. .............................. 125
1,700 E.I. du Pont de Nemours & Co. ................. 104
700 Rohm & Haas Co. ............................... 25
-----------
254
-----------
CHEMICALS (DIVERSIFIED) (0.1%)
500 Monsanto Co. .................................. 18
-----------
CHEMICALS (SPECIALTY) (0.2%)
1,300 Hercules, Inc. ................................ 37
-----------
GOLD & PRECIOUS METALS MINING (0.3%)
3,100 Barrick Gold Corp. ............................ 68
400 Newmont Mining Corp. .......................... 10
-----------
78
-----------
IRON & STEEL (0.0%)
200 Worthington Industries, Inc. .................. 3
-----------
METALS MINING (0.1%)
300 Phelps Dodge Corp. ............................ 16
-----------
PAPER & FOREST (0.9%)
2,300 Georgia-Pacific Group ......................... 93
3,800 Louisiana-Pacific Corp. ....................... 59
1,500 Westvaco Corp. ................................ 39
-----------
191
-----------
TOTAL BASIC MATERIALS ............................................ 653
-----------
CAPITAL GOODS (9.3%)
AEROSPACE & DEFENSE (0.8%)
400 B.F. Goodrich Co. (The) ....................... 12
1,500 Boeing Co. .................................... 64
400 General Dynamics Corp. ........................ 25
1,200 Northrop Grumman Corp. ........................ 76
-----------
177
-----------
ELECTRICAL EQUIPMENT (4.8%)
1,300 Bank One Corp. ................................ 45
1,200 Emerson Electric Co. .......................... 76
6,600 General Electric Co. .......................... 783
600 Solectron Corp. ............................... 43
200 Thomas & Betts Corp. .......................... 10
1,800 Wells Fargo Co. ............................... 71
-----------
1,028
-----------
ENGINEERING & CONSTRUCTION (0.2%)
1,600 McDermot International, Inc. .................. 32
-----------
MANUFACTURING (DIVERSIFIED) (2.9%)
2,800 Allied Signal, Inc. ........................... 168
400 Corning, Inc. ................................. 27
1,000 Illinois Tool Works, Inc. ..................... 75
2,200 Tyco International Ltd. ....................... 227
2,100 United Technologies Corp. ..................... 124
-----------
621
-----------
MANUFACTURING (SPECIALIZED) (0.3%)
500 Avery Dennison Corp. .......................... $ 26
100 Briggs & Stratton Corp. ....................... 6
1,700 Pall Corp. .................................... 40
-----------
72
-----------
TRUCKS & PARTS (0.3%)
100 Cummins Engine Co., Inc. ...................... 5
400 Navistar International Corp. .................. 18
700 PACCAR, Inc. .................................. 36
-----------
59
-----------
WASTE MANAGEMENT (0.0%)
500 Waste Management, Inc. ........................ 10
-----------
TOTAL CAPITAL GOODS .............................................. 1,999
-----------
COMMUNICATION SERVICES (8.6%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (0.5%)
700 Nextel Communications, Inc., Class A .......... 48
700 Sprint Corp. (PCS Group) ...................... 52
-----------
100
-----------
TELECOMMUNICATIONS (LONG DISTANCE) (1.9%)
1,799 AT&T Corp. .................................... 78
4,200 MCI Worldcom, Inc. ............................ 302
500 Sprint Corp. .................................. 27
-----------
407
-----------
TELEPHONE (6.2%)
3,200 Alltel Corp. .................................. 225
600 Amertech Corp. ................................ 40
7,400 Bell Atlantic Corp. ........................... 498
1,000 Bellsouth Corp. ............................... 45
3,400 GTE Corp. ..................................... 261
5,100 SBC Communications, Inc. ...................... 261
-----------
1,330
-----------
TOTAL COMMUNICATION SERVICES ..................................... 1,837
-----------
CONSUMER CYCLICALS (13.5%)
AUTO PARTS & EQUIPMENT (0.1%)
1,600 Delphi Automotive Systems Corp. ............... 26
-----------
AUTOMOBILES (0.0%)
100 Ford Motor Co. ................................ 5
-----------
BUILDING MATERIALS (0.5%)
500 Armstrong World Industries, Inc. .............. 23
3,800 Owens Corning ................................. 82
-----------
105
-----------
CONSUMER (JEWELRY, NOVELTIES & GIFTS) (0.1%)
1,200 American Greetings Corp., Class A ............. 31
-----------
FOOTWEAR (0.8%)
2,800 Nike, Inc., Class B ........................... 159
-----------
GAMING, LOTTERY & PARIMUTUEL COMPANIES (0.1%)
1,100 Harrah's Entertainment, Inc. .................. 31
-----------
HARDWARE & TOOLS (0.1%)
400 Black & Decker Corp. .......................... 18
-----------
HOMEBUILDING (1.2%)
2,900 Centex Corp. .................................. 86
3,000 Kaufman & Broad Home Corp. .................... 62
4,700 Pulte Corp. ................................... 102
-----------
250
-----------
</TABLE>

91
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
HOUSEHOLD FURNISHINGS & APPLIANCES (0.5%)
200 Maytag Corp. .................................. $ 7
1,500 Whirlpool Corp. ............................... 98
-----------
105
-----------
LEISURE TIME PRODUCTS (0.5%)
2,600 Hasbro, Inc. .................................. 56
3,100 Mattel, Inc. .................................. 59
-----------
115
-----------
LODGING - HOTELS (0.1%)
700 Carnival Corp., Class A ....................... 30
-----------
PHOTOGRAPHY/IMAGING (0.3%)
800 Eastman Kodak Co. ............................. 60
-----------
PUBLISHING (NEWSPAPERS) (1.4%)
1,500 Gannett Co., Inc. ............................. 104
1,600 Knight-Ridder, Inc., Co. ...................... 88
1,500 Times Mirror Co. .............................. 98
-----------
290
-----------
RETAIL (BUILDING SUPPLIES) (1.5%)
4,200 Home Depot, Inc. .............................. 288
500 Lowe's Cos., Inc. ............................. 25
400 Sherwin-Williams Co. .......................... 8
-----------
321
-----------
RETAIL (COMPUTERS & ELECTRONICS) (0.9%)
100 Best Buy Co., Inc. ............................ 6
4,400 Circuit City Stores-Circuit City Group ........ 186
-----------
192
-----------
RETAIL (DEPARTMENT STORES) (0.8%)
1,900 Dillards, Inc., Class A ....................... 39
300 Federated Department Stores, Inc. ............. 13
800 J.C. Penney Co., Inc. ......................... 27
400 Kohl's Corp. .................................. 26
1,800 May Department Stores, Co. .................... 66
-----------
171
-----------
RETAIL (DISCOUNTERS) (0.1%)
500 Dollar General Corp. .......................... 15
-----------
RETAIL (GENERAL MERCHANDISE) (3.7%)
200 Costco Wholesale Corp. ........................ 14
2,500 Dayton Hudson Corp. ........................... 150
3,300 Kmart Corp. ................................... 39
600 Sears Roebuck & Co. ........................... 19
12,100 Wal-Mart Stores, Inc. ......................... 575
-----------
797
-----------
RETAIL (SPECIALTY) (0.5%)
3,100 Gap, Inc. ..................................... 99
200 Staples, Inc. ................................. 5
-----------
104
-----------
SERVICES (COMMERCIAL & CONSUMER) (0.0%)
31 Gartner Group, Inc. ........................... 1
100 H&R Block, Inc. ............................... 4
-----------
5
-----------
TEXTILES (APPAREL) (0.3%)
2,100 Liz Claiborne, Inc. ........................... 65
-----------
TOTAL CONSUMER CYCLICALS ......................................... 2,895
-----------
CONSUMER STAPLES (8.9%)
BEVERAGES (ALCOHOLIC) (1.7%)
4,800 Anheuser Busch Cos., Inc. ..................... $ 336
700 Coors (Adolph), Inc., Class B ................. 38
-----------
374
-----------
BEVERAGES (NON-ALCOHOLIC) (0.1%)
400 PepsiCo, Inc. ................................. 12
-----------
BROADCASTING (TV, RADIO, CABLE) (0.4%)
700 CBS Corp. ..................................... 32
200 Clear Channel Communications, Inc. ............ 16
500 Comcast Corp., Class A ........................ 20
300 MediaOne Group, Inc. .......................... 21
-----------
89
-----------
DISTRIBUTORS (FOOD & HEALTH) (0.3%)
2,400 SUPERVALU, Inc. ............................... 52
-----------
ENTERTAINMENT (0.6%)
1,800 King World Productions, Inc. .................. 68
900 Seagram Ltd. .................................. 41
400 Time Warner, Inc. ............................. 24
-----------
133
-----------
FOODS (0.7%)
400 Bestfoods ..................................... 19
1,000 Quaker Oats Co. ............................... 62
300 Sara Lee Corp. ................................ 7
800 Unilever NV (NY Shares) ....................... 55
-----------
143
-----------
HOUSEHOLD PRODUCTS (NON-DURABLES) (2.2%)
200 Clorox Co. .................................... 7
2,700 Kimberly-Clark Corp. .......................... 142
3,400 Procter & Gamble Co. .......................... 319
-----------
468
-----------
HOUSEWARES (0.1%)
400 Fortune Brands, Inc. .......................... 13
700 Tupperware Corp. .............................. 14
-----------
27
-----------
PERSONAL CARE (0.2%)
1,000 Alberto-Culver Co., Class B ................... 23
700 Avon Products, Inc. ........................... 17
-----------
40
-----------
RESTAURANTS (0.3%)
1,300 McDonald's Corp. .............................. 56
300 Wendy's International, Inc. ................... 8
-----------
64
-----------
RETAIL (DRUG STORES) (0.3%)
700 CVS Corp. ..................................... 29
1,500 Walgreen Co. .................................. 38
-----------
67
-----------
RETAIL (FOOD CHAINS) (0.7%)
400 Albertson's, Inc. ............................. 16
2,300 Kroger Co. .................................... 51
2,100 Safeway, Inc. ................................. 80
-----------
147
-----------
SPECIALTY PRINTING (0.2%)
1,500 Deluxe Corp. .................................. 51
-----------
</TABLE>

92
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TOBACCO (1.1%)
7,000 Philip Morris Cos., Inc. ...................... $ 239
-----------
TOTAL CONSUMER STAPLES ........................................... 1,906
-----------
ENERGY (5.5%)
OIL & GAS (DRILLING) (0.2%)
200 Halliburton Co. ............................... 8
600 Schlumberger, Ltd. ............................ 37
-----------
45
-----------
OIL & GAS (EXPLORATION & DRILLING) (0.4%)
1,400 Apache Corp. .................................. 61
700 Burlington Resources, Inc. .................... 26
400 Union Pacific Resources Group, Inc. ........... 6
-----------
93
-----------
OIL (DOMESTIC INTEGRATED) (0.6%)
500 Conoco, Inc. .................................. 14
4,000 USX-Marathon Group ............................ 117
-----------
131
-----------
OIL (INTERNATIONAL INTEGRATED) (4.3%)
5,000 Exxon Corp. ................................... 380
4,700 Mobil Corp. ................................... 473
1,000 Royal Dutch Petroleum Co. ..................... 59
-----------
912
-----------
TOTAL ENERGY ..................................................... 1,181
-----------
FINANCIAL (13.4%)
BANKS (MAJOR REGIONAL) (1.9%)
7,100 AmSouth Bancorp. .............................. 166
1,400 Comerica, Inc. ................................ 71
500 Fifth Third Bancorp ........................... 31
1,700 Fleet Financial Group, Inc. ................... 62
1,400 KeyCorp ....................................... 36
200 Mellon Bank Corp. ............................. 7
500 SunTrust Banks, Inc. .......................... 33
-----------
406
-----------
BANKS (MONEY CENTER) (2.3%)
3,700 BankAmerica Corp. ............................. 206
2,700 Chase Manhattan Corp. ......................... 203
2,500 First Union Corp. ............................. 89
-----------
498
-----------
BANKS (REGIONAL) (0.1%)
200 Firstar Corp. ................................. 5
700 Southtrust Corp. .............................. 25
-----------
30
-----------
CONSUMER FINANCE (0.6%)
1,000 Countrywide Credit Industries, Inc. ........... 32
2,200 Household International, Inc. ................. 89
-----------
121
-----------
FINANCIAL (DIVERSIFIED) (4.1%)
1,100 American Express Co. .......................... 148
400 Associates First Capital Corp., Class A ....... 14
9,799 Citigroup, Inc. ............................... 431
2,300 Federal Home Loan Mortgage Corp. .............. 120
2,800 Federal National Mortgage Association ......... 176
-----------
889
-----------
INSURANCE (BROKERS) (0.5%)
1,400 Marsh & McLennan Cos. ......................... $ 96
-----------
INSURANCE (LIFE & HEALTH) (0.3%)
2,700 Conseco, Inc. ................................. 52
30 UnumProvident Corp. ........................... 1
-----------
53
-----------
INSURANCE (MULTI-LINE) (2.0%)
3,000 American International Group, Inc. ............ 261
1,500 Hartford Financial Service Group, Inc. ........ 61
1,500 Loews Corp. ................................... 105
-----------
427
-----------
INSURANCE (PROPERTY - CASUALTY) (0.6%)
3,000 Allstate Corp. ................................ 75
1,200 Chubb Corp. ................................... 60
-----------
135
-----------
INVESTMENT BANKING & BROKERAGE (0.9%)
2,200 Bear Stearns Cos., Inc. ....................... 84
800 Charles Schwab Corp. .......................... 27
1,400 Lehman Brothers Holdings, Inc. ................ 82
-----------
193
-----------
SAVINGS & LOANS (0.1%)
1,000 Washington Mutual, Inc. ....................... 29
-----------
TOTAL FINANCIAL .................................................. 2,877
-----------
HEALTH CARE (9.8%)
HEALTH CARE (DIVERSIFIED) (6.2%)
5,000 Abbott Laboratories ........................... 184
2,300 American Home Products Corp. .................. 95
7,600 Bristol-Myers Squibb Co. ...................... 513
3,900 Johnson & Johnson ............................. 358
2,900 Warner Lambert Co. ............................ 193
-----------
1,343
-----------
HEALTH CARE (DRUGS - GENERIC & OTHERS) (0.2%)
400 Amgen, Inc. ................................... 33
-----------
HEALTH CARE (DRUGS - MAJOR PHARMS) (2.3%)
6,200 Merck & Co., Inc. ............................. 402
400 Pfizer, Inc. .................................. 14
300 Pharmacia & Upjohn, Inc. ...................... 15
1,300 Schering-Plough Corp. ......................... 57
-----------
488
-----------
HEALTH CARE (HOSPITAL MANAGEMENT) (0.1%)
1,700 Tenet Healthcare Corporation .................. 30
-----------
HEALTH CARE (LONG-TERM CARE) (0.1%)
4,200 HEALTHSOUTH Corp. ............................. 25
-----------
HEALTH CARE (MANAGED CARE) (0.2%)
500 United Healthcare Corp. ....................... 24
400 Wellpoint Health Networks, Inc. ............... 23
-----------
47
-----------
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES)(0.7%)
400 Bard (C.R.), Inc. ............................. 19
300 Bausch & Lomb, Inc. ........................... 20
500 Baxter International, Inc. .................... 30
900 Guidant Corp. ................................. 48
</TABLE>

93
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES)(CONT.)
800 Medtronic, Inc. ............................... $ 28
-----------
145
-----------
TOTAL HEALTH CARE ................................................ 2,111
-----------
TECHNOLOGY (23.2%)
COMMUNICATION EQUIPMENT (3.3%)
300 ADC Telecommunications, Inc. .................. 12
5,700 Lucent Technologies, Inc. ..................... 370
1,300 Motorola, Inc. ................................ 114
2,000 Nortel Networks Corp. ......................... 102
200 Qualcomm, Inc. ................................ 38
400 Scientific-Atlanta, Inc. ...................... 20
1,000 Tellabs, Inc. ................................. 57
-----------
713
-----------
COMPUTERS (HARDWARE) (5.3%)
800 Compaq Computer Corp. ......................... 18
6,100 Dell Computer Corp. ........................... 255
2,400 Hewlett Packard Co. ........................... 221
3,900 International Business Machines Corp. ......... 473
1,900 Sun Microsystems, Inc. ........................ 177
-----------
1,144
-----------
COMPUTERS (NETWORKING) (2.3%)
7,200 Cisco Systems, Inc. ........................... 494
-----------
COMPUTERS (PERIPHERALS) (0.9%)
2,800 EMC Corp. ..................................... 200
-----------
COMPUTERS (SOFTWARE & SERVICES) (7.7%)
1,100 Adobe Systems, Inc. ........................... 125
2,300 America Online, Inc. .......................... 239
100 BMC Software, Inc. ............................ 7
1,000 Computer Associates International, Inc. ....... 61
1,400 Compuware Corp. ............................... 37
1,400 IMS Health, Inc. .............................. 32
10,700 Microsoft Corp. ............................... 969
2,600 Oracle Corp. .................................. 118
1,300 Unisys Corp. .................................. 59
-----------
1,647
-----------
ELECTRONICS (SEMICONDUCTORS) (3.0%)
6,600 Intel Corp. ................................... 491
1,900 Texas Instruments, Inc. ....................... 156
-----------
647
-----------
EQUIPMENT (SEMICONDUCTORS) (0.5%)
1,200 Applied Materials, Inc. ....................... 93
200 KLA-Tencor Corp. .............................. 13
-----------
106
-----------
SERVICES (COMPUTER SYSTEMS (0.1%)
500 Electronic Data Systems Corp. ................. 27
-----------
SERVICES (DATA PROCESSING) (0.1%)
200 First Data Corp. .............................. 9
-----------
TOTAL TECHNOLOGY ................................................. 4,987
-----------
TRANSPORTATION (0.8%)
AIR FREIGHT (0.1%)
500 FDX Corp. ..................................... 19
-----------
AIRLINES (0.6%)
300 AMR Corp. ..................................... $ 17
1,800 Delta Air Lines, Inc. ......................... 87
1,500 Southwest Airlines Co. ........................ 23
200 US Airways Group, Inc. ........................ 5
-----------
132
-----------
RAILROADS (0.1%)
400 Kansas City Southern Industries, Inc. ......... 19
-----------
TOTAL TRANSPORTATION ............................................. 170
-----------
UTILITIES (3.7%)
ELECTRIC COMPANIES (2.5%)
1,600 Cinergy Corp. ................................. 45
1,500 CMS Energy Corp. .............................. 51
4,400 Edison International .......................... 107
1,800 GPU, Inc. ..................................... 59
1,500 PG&E Corp. .................................... 39
500 Public Service Enterprise Group, Inc. ......... 19
2,600 Texas Utilities Co. ........................... 97
3,100 Unicom Corp. .................................. 115
-----------
532
-----------
NATURAL GAS (0.7%)
900 Coastal Corp. ................................. 37
600 Columbia Gas System, Inc. ..................... 33
2,200 Enron Corp. ................................... 91
-----------
161
-----------
POWER PRODUCERS (INDEPENDENT) (0.5%)
1,900 AES Corp. ..................................... 112
-----------
TOTAL UTILITIES ................................................... 805
-----------
TOTAL COMMON STOCKS (COST $21,428) ................................ 21,421
-----------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<S> <C> <C>
SHORT TERM INVESTMENT (0.5%)
REPURCHASE AGREEMENT (0.5%)
$ 119 Chase Securities, Inc., 5.05%, dated 9/30/99,
due 10/01/99, to be repurchased at $119,
collateralized by U.S. Treasury Bonds, 8.125%
due 8/15/19, valued at $120 (Cost $119) .... 119
-----------
TOTAL INVESTMENTS (100.2%) (Cost $21,547) 21,540
-----------
OTHER ASSETS AND LIABILITIES ( 0.2%)
Other Assets ................................................... 214
Liabilities .................................................... (267)
-----------
(53)
-----------
NET ASSETS (100%) ................................................. $ 21,487
-----------
-----------
</TABLE>

94
<PAGE>

<TABLE>
<CAPTION>
AMOUNT
(000)
- --------------------------------------------------------------------------------
<S> <C> <C>
CLASS A:
- --------
NET ASSETS $ 20,141
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,551,406 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................ $ 12.98
-----------
-----------
CLASS B:
- --------
NET ASSETS $ 1,346
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 103,943 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ................................ $ 12.95
-----------
-----------
</TABLE>

95
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Other (2.5%)
Diversified (7.8%)
Self Storage (3.8%)
Health Care (1.0%)
Retail (18.2%)
Lodging/Resorts (6.2%)
Residential (24.6%)
Office/Industrial (35.9%)
</TABLE>

PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF
REAL ESTATE INVESTMENT TRUSTS (NAREIT) EQUITY INDEX(1)
- ------------------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE
ANNUAL
ONE SINCE
YTD YEAR INCEPTION
----- ------ ---------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A ........... -0.74% 1.45% 14.67%
PORTFOLIO -- CLASS B ........... -0.86 1.29 11.93
S&P 500 INDEX -- CLASS A ....... -3.65 -6.46 9.01
S&P 500 INDEX -- CLASS B ....... -3.65 -6.46 7.11
</TABLE>

1. The NAREIT Equity Index is an unmanaged market weighted index of tax
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System, including dividends.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE
PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.

The U.S. Real Estate Portfolio seeks to provide above average current income
and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts ("REITs") and real estate operating companies.

For the nine months ended September 30, 1999, the Portfolio had a total
return of -0.74% for the Class A shares and -0.86% for the Class B shares
compared to -3.65% for the National Association of Real Estate Investment
Trusts (NAREIT) Equity Index (the "Index"). For the one year period ended
September 30, 1999, the Portfolio had a total return of 1.45% for the Class A
shares and 1.29% for the Class B shares compared to -6.46% for the Index. For
the period since inception on February 24, 1995 through September 30, 1999,
the average annual total return of the Class A shares was 14.67% compared to
9.01% for the Index. For the period since inception on January 2, 1996
through September 30, 1999, the average annual total return of the Class B
shares was 11.93% compared to 7.11% for the Index.

Performance of the REIT market in the third quarter of 1999 resembled the
first quarter of this year as REIT prices declined and non-dedicated
investors retreated from the sector. The Morgan Stanley REIT Index fell by
more than 8% in the third quarter and has provided a year-to-date loss of
approximately 4%. REITs are now trading at more than a 10% discount to the
underlying Net Asset Value ("NAV") of their assets. The resulting disparity
in pricing between the public and private real estate markets causes us to
raise the same issues we battled with in the first quarter. We had a modest
temptation to reprint our first quarter commentary as, once again, the key
question is whether the pricing in the public markets is signaling an
expected decline in NAV or are REITs simply oversold. Perhaps the only
comfort for REIT investors is that this quarter's performance was quite
similar to that experienced in most parts of the U.S. equity market as
investors continued to struggle with interest rate fears and a further
narrowing of market leadership. For the quarter, both the S&P 500 and the
Russell 2000 posted losses in excess of 6%. However, on a year-to-date basis,
the S&P has gained more than 5% and the Russell more than 2%.

As stated in earlier quarterly reports, our investment perspective is that
over the medium and long-term the largest determinant of the value of real
estate stocks will be underlying real estate fundamentals. We measure the
sector based on the Price to Net Asset Value per share ratio ("P/NAV"). Given
the large and active private real estate market, we believe that there are
limits as to the level of premium or discount at which the sector can trade
relative

96
<PAGE>

to its NAV. These limits can be viewed as the point at which the arbitrage
opportunity between owning real estate in the private versus public markets
becomes compelling. This analytical framework gave us the conviction to call
the real estate securities market mispriced at the end of the first quarter
and provided a rationale to support the rally in the second quarter. We
argued that the second quarter rally may have been necessary to demonstrate
to investors that a floor valuation level exists for the sector. After the
decline in the third quarter, the sector is trading slightly below the first
quarter's low level. Thus, the current pricing causes us to return to the
same fundamental question: is the public market valuation accurately
predicting a decline in real estate values or is the public market simply
oversold?

Our bias is to support the opinion that the market is oversold. However, we
retain a healthy respect for the power of the public markets and have
witnessed a full retreat of the REIT sector following our short-lived
"recovery" last quarter. Let us examine the case for a deterioration in real
estate values. This will require a reduction in cashflow at the property
level or a worsening of the cashflow multiples at which properties are
traded. Throughout 1999 we have not seen compelling evidence for either case;
although the bears may indicate that the trends show some weakening. Public
companies continue to report strong cashflow growth, primarily based on
improvements in rental rates, but the rate of growth of rental rates is
slowing. Occupancies, which are generally at cyclical high levels, have not
improved, but clearly have more downside than upside risk. There is evidence
of modest overbuilding, which would put pressure on occupancies. The case for
a decline in cashflow requires the impact from a potential decline in
occupancies to offset the rental growth. Although we can gauge new supply,
demand is highly dependent on the overall growth of the economy. Clearly, a
dramatic decline in economic growth would cause us to be far more concerned
with regard to increasing vacancies. It is interesting to note that on a
year-to-date basis REITs have performed no worse than other capital intensive
and cyclical sectors, including autos, homebuilders, chemicals and paper and
forest products. Companies in these sectors have also demonstrated underlying
growth while the stocks are declining. This leads to the conclusion that the
market is cautious about the economic cycle and REITs, which have already
returned to peak occupancy levels, fit well within that investment theme. In
addition, attracting the market to a stock that is not involved with
technology (particularly the "dot.com" segment) has become increasingly
difficult.

The other piece of the NAV equation is cashflow multiples. The tremendous
supply of capital available in the private real estate markets has resulted
in fairly stable cashflow multiples for individual properties in most asset
classes. Clearly the loss of REITs as prospective buyers (in some cases they
have become net sellers) has eliminated one source of buyers, but, in most
asset classes, they appear to have been adequately replaced by pension funds,
opportunity funds and foreign investors. The extent to which REITs dominated
an asset class in terms of buying properties, the greater the need for
alternative capital sources to avoid the potential effect on pricing. This
explains the greater pressure on multiples in the regional mall and hotel
sectors. We have witnessed a reversal in the pricing of portfolios of
properties. As REITs bulked up, sellers were able to achieve premiums for
larger portfolios; currently, portfolio discounts are being extracted by the
more limited group of investors with capital available to buy in bulk.
Another concern is that an increase in interest rates will impair cashflow
multiples. Whereas this will have a direct impact on the financing rates for
leveraged buyers, it is interesting to note that cash flow multiples remained
fairly sticky on the downside even as interest rates fell considerably over
the last few years. We believe this is a result of buyers and sellers also
incorporating the replacement cost of assets into their buying criteria.
Given the strong interest by many sources of capital it appears that the
supply-demand balance for the purchase and sale of properties will allow
future property cashflow multiples to stay at current multiple levels. As a
result of this outlook, we do not foresee the potential for a significant
decline in the NAVs of REITs and favor the case for a modest and slowing pace
of NAV growth. This opinion would be changed if the economy showed
significant signs of slowing.

The other interesting area to explore is determining the size of the
arbitrage (or discount to NAV) required to attract investors to take public
companies private. One prominent analyst proposed the theory that the sector
may be cheap, but not cheap enough to allow for widespread buyouts. The
answer varies to some degree based on the level of institutional interest for
the asset class, from both equity and debt investors, as well as the absolute
size of the company. Generally, given an average leverage ratio approaching
50% of total capital, a company trading at an NAV discount of 10% to 20%
allows an investor to buy the assets at an attractive price and provides
existing shareholders a handsome return. We have seen evidence in each of the
asset classes; although the velocity of this activity varies by sector. The
multifamily sector has had the greatest degree of success, primarily based on
this asset class being able to

97
<PAGE>

support the highest level of debt allowing for a smaller need for equity. We
have previously discussed the buyouts of Irvine Apartment Communities and
Berkshire Realty; this quarter featured Walden Residential agreeing to being
taken private by an opportunity fund. The hostile bid for Burnham Pacific
Properties, an owner of grocery-anchored shopping centers, by closely-held
Schottenstein Stores Group, represents an attempt to move those assets from
the public to the private markets. In the office market, there is widespread
speculation that Highwoods Properties is exploring strategic alternatives
that include a leveraged buyout. We have previously discussed the Board
approved buyout for Sunstone Hotels; although this asset class may be the
most difficult for private buyouts given it is the toughest market to achieve
high levels of financing.

The most recent decline in prices has served to increase the number of share
buyback programs. We have been advocating this approach since last fall given
that, for many companies, their stock is the best investment that most of the
REITs can identify in this competitive market for real estate. Due to the
large required dividend payout of the REIT structure, companies in the sector
can only generate modest levels of free cashflow to buyback shares. However,
we applaud the companies that have sold assets (at par) and redeployed that
capital into share repurchases (at a discount).

If current pricing persists we believe that we will see a continuing trend of
real estate moving from public into private hands. We also anticipate a
modest shrinking of the net equity base due to leveraged buyouts and larger
share repurchase programs. Finally, we expect to see a continuation of
public-to-public mergers. However, it is more likely to be the better-priced
companies acquiring lesser-priced companies as in the case of Equity
Residential Realty buying Lexford Properties. Since companies need to use
their own currency to effectuate a merger, only the better regarded companies
(or those trading at or near NAV) will be willing to issue shares in a
stock-for-stock merger. The quarter featured an example of a failed merger as
Regency Realty was unable to purchase the majority of Federal Realty due to
its weak stock price.

Many companies have developed more focused near term business plans that do
not require equity issuance. These business plans place an emphasis on
managing the existing portfolio and external growth, if planned, is funded by
asset sales or is accomplished within a joint venture structure. These
approaches provide variations on a theme of self-funding. We applaud the
approach of a strategy focused on growing NAV per share as opposed to a
strategy based simply on growing. The market demonstrated its distaste for
equity issuance when Duke-Weeks Realty issued stock in a direct placement at
a $3 to $4 discount to their stated NAV after assuring analysts that they had
the balance sheet capacity to finance their aggressive, albeit attractive,
development pipeline. The stock promptly declined almost 15% on significant
volume and, perhaps more importantly, the company has damaged, at least
temporarily, its stellar reputation. We believe that investor reaction to
Duke's actions demonstrate that there also exists a serious concern that any
improvement in pricing will cause REITs to issue equity, thereby placing a
ceiling on the price of the stocks.

There were two interesting joint ventures announced this quarter. AMB Realty
announced that they have raised funds to create a joint venture with an
investment objective that is parallel with AMB's core strategy of owning
industrial assets in major distribution hubs. The company will be the general
partner and earn various fees but will effectively be required to offer all
external growth opportunities to this partnership (this resembles Burnham
Pacific's structure with CalPers); although AMB's venture has multiple
investors. ProLogis announced an exciting $1 billion partnership structure
that will be the exclusive vehicle for the ownership of their European
industrial business. An interesting variation here is that ProLogis will
develop the properties and "sell" them to the partnership, thus retaining all
of the development profit.

We have continued to caution investors that there remain threats of
over-supply but strong demand is serving to mute any serious threat of
over-supply at this time. The following presents an outline of our views of
the risks of over-supply (or under-demand) in the real estate markets.
Generally, there continues to be evidence of trends leading to a modest level
of over-supply in many markets as they show continuing evidence that the
improvement in fundamentals have begun to plateau.

In contrast to the favorable data provided in the second quarter, the data
reported from the Census Bureau for the third quarter demonstrated an
increased level of risk to modest over-supply in the market for apartments.
Permits exceeded 330,000 units (annual pace on a seasonally adjusted basis),
for each of the three reported months (June, July, and August). This was
disappointing following sub 300,000 units per month permitted in each of
April and May. With net demand estimates in the 300,000 to 320,000 unit
range, we need to monitor this data for signs of further acceleration.
According to estimates by F.W. Dodge, prospective supply is running 1% ahead
of prospective demand on a nationwide basis for the next eight quarters. The
"watchlist" is dominated by Sunbelt cities.

98
<PAGE>

After rising for a record seven straight months, consumer confidence fell for
each of July, August and September. This has been linked to weakness in the
stock market and a decline in refinancing rates. Landlords continue to point
to a strong leasing environment as retailers are continuing to commit to new
stores and expansions. It is noteworthy that many of these retailers are also
capitalizing on e-commerce opportunities. As a result of this environment it
appears that occupancies in retail properties will increase from cyclical
high levels. The risk of e-commerce remains the key mitigating factor that
tempers enthusiasm for the sector. We expect reports of strong e-commerce
Christmas sales to provide increased pressure on the stocks in the sector.

First-half net absorption of 21 million sq. ft. compares to 35 mm in the
first half of 1998. Vacancy in the national office market increased modestly
from 9.5% in the first quarter to 9.6% in the second quarter, reflecting a
more stable level of occupancy for the office market after the sector posted
decreasing vacancies for the majority of the decade. Deliveries in 1998 did
not match demand and as a result rents increased by 10.6%; clearly rental
rates will slow given this stabilization in occupancy.

Similarly, the industrial market featured a modest increase in vacancy rates
from 7.4% in the first quarter to 7.5% in the second quarter. The largest
component of the industrial market, warehouse space, featured an increase in
vacancy from 9.1% to 9.4%, while the other two components, manufacturing and
research and development space, featured flat vacancy levels. The forecasted
level of new completions is less than 2% of existing supply.

Despite a strong economy and relatively easy comps versus last year, the
hotel market demonstrated only modest revenue per available room ("RevPar")
growth in the quarter. After reporting an increase of 4.2% for July, RevPar
only grew 3.1% in August as it is clear that the large supply of product
continues to put pressure on the market. Smith Travel Research has reported
year-to-date RevPar growth of 3.1% and most public companies have provided
projections comparable with this figure.

We have continued to shape the portfolio with companies offering attractive
fundamental valuations relative to their underlying real estate value.
Throughout the year, we have been encouraged by the strength of the U.S.
economy. Although we have articulated the case for a slowing of growth, we
remain constructive with regard to the likelihood that real estate
fundamentals will remain favorable. The top-down weightings in the portfolio
remain similar to last quarter, with a modest bias toward the more defensive
residential sector that would be relatively least affected by an overall
economic slowdown. We maintain an overweight position to markets with greater
barriers to entry, including west coast apartments and downtown office
buildings. We continue to utilize the relative similarity in pricing of
companies to upgrade the portfolio, measured both in terms of the quality of
properties held by the companies and the management teams at the companies.
During this quarter we utilized price weakness to add to existing positions
of companies including Equity Residential Properties, AvalonBay Communities,
Equity Office Properties, ProLogis Trust and Starwood Hotels.

Theodore R. Bigman
PORTFOLIO MANAGER

Douglas A. Funke
PORTFOLIO MANAGER

October 1999

99
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.4%)
DIVERSIFIED (7.8%)
51,800 Crescent Real Estate Equities, Inc. REIT....... $ 932
354,000 Pacific Gulf Properties, Inc. REIT............. 7,058
169,200 Pennsylvania REIT.............................. 3,194
187,300 Rouse Co. REIT................................. 4,308
72,500 Vornado Realty Trust REIT...................... 2,356
654,898 Wellsford Real Properties, Inc. ............... 6,222
-----------
24,070
-----------
HEALTH CARE (1.0%)
347,500 Meditrust Corp. REIT .......................... 2,954
-----------
LODGING/RESORTS (6.2%)
106,500 Candlewood Hotel Company, Inc. ................. 180
405,200 Host Marriott Corp. ............................ 3,849
32,838 Interstate Hotels Corp. ........................ 105
108,300 John Q Hammons Hotels, Inc., Class A............ 433
469,737 Starwood Lodging Trust REIT..................... 10,481
1,000 Sunstone Hotel Investors, Inc. REIT............. 9
92,900 Vistana, Inc. .................................. 1,393
1,006,754 Wyndham International, Inc. .................... 2,643
-----------
19,093
-----------
OFFICE/INDUSTRIAL (35.1%)
INDUSTRIAL (6.1%)
28,700 EastGroup Properties, Inc. ..................... 520
412,400 Prime Group Realty Trust REIT................... 6,186
650,960 Prologis Trust REIT............................. 12,287
-----------
18,993
-----------
OFFICE/INDUSTRIAL MIXED (2.6%)
140,000 Duke Realty Investment, Inc. REIT............... 2,730
179,010 PS Business Parks, Inc. REIT.................... 4,654
17,300 Spieker Properties, Inc. REIT................... 600
-----------
7,984
-----------
OFFICE (26.4%)
603,600 Arden Realty, Inc. REIT......................... 13,128
(e)335,100 Beacon Capital Partners, Inc. .................. 6,702
203,100 Boston Properties, Inc. REIT.................... 6,233
398,154 Brandywine Realty Trust REIT.................... 6,470
838,797 Brookfield Properties Corp. (Canada)............ 9,847
356,330 CarrAmerica Realty Corp. REIT................... 7,817
661,827 Equity Office Properties Trust REIT............. 15,388
598,300 Great Lakes, Inc. REIT.......................... 9,012
26,600 Highwoods Properties, Inc. ..................... 688
25,900 Mack-Cali Realty Corp. REIT..................... 694
309,100 Trizec Hahn Corp. .............................. 5,854
-----------
81,833
-----------
TOTAL OFFICE/INDUSTRIAL............................................ 108,810
-----------
OTHER (0.7%)
580,384 Atlantic Gulf Communities Corp. ................ 73
18,530 Merry Land Properties, Inc. .................... 102
142,600 Security Capital Group, Inc., Class B........... 2,094
-----------
2,269
-----------
RESIDENTIAL (24.6)
RESIDENTIAL APARTMENTS (19.3%)
97,300 Amli Residential Properties Trust REIT.......... $ 2,043
120,900 Apartment Investment & Management Co. REIT...... 4,624
338,210 Archstone Communities Trust REIT................ 6,532
462,900 Avalon Bay Communities, Inc. REIT............... 15,681
191,100 Berkshire Realty Co., Inc. REIT................. 2,293
163,818 Equity Residential Properties Trust REIT........ 6,942
355,200 Essex Property Trust, Inc. REIT................. 12,410
273,900 Smith (Charles E.) Residential Realty, Inc. REIT 9,364
-----------
59,889
-----------
RESIDENTIAL MANUFACTURED HOMES (5.3%)
537,452 Chateau Communities, Inc. REIT.................. 13,974
98,300 Manufactured Home Communities, Inc. REIT........ 2,298
400 Sun Communities, Inc. REIT...................... 13
-----------
16,285
-----------
TOTAL RESIDENTIAL.................................................. 76,174
-----------
RETAIL (18.2%)
RETAIL REGIONAL MALLS (8.3%)
502,700 Simon Property Group, Inc. REIT................. 11,279
929,478 Taubman Centers, Inc. REIT...................... 10,689
128,000 Urban Shopping Centers, Inc. REIT............... 3,712
-----------
25,680
-----------
RETAIL STRIP CENTERS (9.9%)
132,800 Acadia Realty Trust REIT........................ 697
944,890 Burnham Pacific Property Trust REIT............. 9,981
426,300 Federal Realty Investment Trust REIT............ 8,926
76,032 First Washington Realty Trust, Inc. REIT........ 1,597
183,700 Pan Pacific Retail Properties, Inc. REIT........ 3,134
7,700 Philips International Realty Corp. REIT......... 121
2,300 Ramco-Gershenson Properties Trust REIT.......... 34
289,000 Regency Realty Corp. REIT....................... 6,069
-----------
30,559
-----------
TOTAL RETAIL....................................................... 56,239
-----------
SELF STORAGE (3.8%)
455,866 Public Storage, Inc. REIT....................... 11,482
13,100 Shurgard Storage Centers, Inc., Series A REIT... 324
-----------
11,806
-----------
TOTAL COMMON STOCKS (Cost $330,320)................................ 301,415
-----------
CONVERTIBLE PREFERRED STOCKS (0.4%)
OTHER (0.4%)
107,021 Atlantic Gulf Communities Corp. ................ 709
75,765 Atlantic Gulf Communities Corp., Series B....... 502
-----------
TOTAL CONVERTIBLE PREFERRED STOCKs (Cost $1,828)................... 1,211
-----------
</TABLE>
100

<PAGE>

<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- --------------------------------------------------------------------------------
<S> <C> <C>

WARRANTS (0.0%)
OTHER (0.0%)
112,509 Atlantic Gulf Communities Corp., Class A........ $ 14
112,509 Atlantic Gulf Communities Corp., Class B........ 14
112,509 Atlantic Gulf Communities Corp., Class C........ 14
-----------
TOTAL WARRANTS (Cost $0)........................................... 42
-----------
<CAPTION>
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (0.8%)
OFFICE/INDUSTRIAL (0.8%)
OFFICE (0.8%)
$ 2,934 Brookfield Properties Corp. (Canada),
6.00%, 2/14/07 (Cost $2,256).................. 2,496
-----------
SHORT-TERM INVESTMENT (0.9%)
REPURCHASE AGREEMENT (0.9%)
2,896 Chase Securities, Inc. 5.05%, dated 9/30/99,
due 10/01/99, to be repurchased at $2,896,
collateralized by U.S. Treasury Bonds,
6.625% due 2/15/27, valued at $2,920
(Cost $2,896)................................. 2,896
-----------
TOTAL INVESTMENTS (99.5%)(Cost $337,300)........................... 308,060
-----------
OTHER ASSETS AND LIABILITIES (0.5%)
Other Assets..................................................... 7,225
Liabilities...................................................... (5,698)
-----------
1,527
-----------
NET ASSETS (100%).................................................. $309,587
-----------
<CAPTION>
-----------
CLASS A:
- --------
<S> <C> <C>
NET ASSETS......................................................... $ 294,642
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 24,123,361 outstanding $0.001 par value
shares (authorized 500,000,000 shares)......................... $ 12.21
-----------
-----------
CLASS B:
- --------
NET ASSETS......................................................... $ 14,945
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 1,228,238 outstanding $0.001 par value
shares (authorized 500,000,000 shares)......................... $ 12.17
-----------
-----------
- --------------------------------------------------------------------------------
</TABLE>

(e) - 144A Security - certain conditions forpublic sale may exist.
REIT - Real Estate Investment Trust

101
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Other (0.5%)
Basic Materials (3.6%)
Utilities (1.7%)
Capital Goods (13.3%)
Transportation (1.8%)
Technology (12.3%)
Health Care (2.4%)
Communication Services (15.1%)
Financial (27.7%)
Consumer Cyclicals (11.1%)
Energy (4.9%)
Consumer Staples (5.6%)
</TABLE>

PERFORMANCE COMPARED TO THE S&P 500 INDEX AND
THE INDATA EQUITY-MEDIAN INDEX(1)
- ------------------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
----- ------ ------ ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A ... 7.53% 27.37% 18.60% 13.87%
PORTFOLIO -- CLASS B ... 7.28 27.22 N/A 16.60
S&P 500 INDEX --
CLASS A .............. 5.36 27.80 25.03 18.05
INDATA EQUITY-MEDIAN
INDEX -- CLASS A ..... 3.97 25.00 20.67 15.99
S&P 500 INDEX --
CLASS B .............. 5.36 27.80 N/A 23.50
INDATA EQUITY-MEDIAN
INDEX -- CLASS B ..... 3.97 25.00 N/A 19.47
</TABLE>

1. The S&P 500 Index is comprised of 500 large-cap U.S. companies with market
capitalization of $1 billion or more. These 500 companies are a
representative sample of some 100 industries chosen mainly for market size,
liquidity and industry group representation. The Indata Equity-Median Index
includes an average asset allocation of 91.7% equity and 8.3% cash based on
$455 trillion in assets among 995 portfolios for the period ended September
30, 1999.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE
PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.

The Value Equity Portfolio seeks long-term capital appreciation by investing
primarily in equity securities which the investment advisor believes to be
undervalued relative to the stock market in general at the time of purchase.

Our investment philosophy is based on the premise that a diversified
portfolio of undervalued securities should outperform the market over the
long-term, and would be expected to preserve principal in a difficult market
environment. Our Portfolio is characterized by a distinctly below average
price-to-earnings ratio, price-to-book ratio, and a high dividend yield.

For the nine months ended September 30, 1999, the Portfolio had a total
return of 7.53% for the Class A shares and 7.28% for the Class B shares
compared to 5.36% for the S&P 500 Index and 3.97% for the Indata Equity-
Median Index. For the one year period ended September 30, 1999, the Portfolio
had a total return of 27.37% for the Class A shares and 27.22% for the Class
B shares compared to 27.80% for the S&P 500 Index and 25.00% for the Indata
Equity-Median Index. For the five-year period ended September 30, 1999, the
average annual total return of Class A shares was 18.60% compared to 25.03%
for the S&P 500 Index and 20.67% for the Indata Equity-Median Index. For the
period since inception on January 31, 1990 through September 30, 1999, the
average annual total return of the Class A shares was 13.87% compared to
18.05% for the S&P 500 Index and 15.99% for the Indata Equity-Median Index.
For the period since inception on January 2, 1996 through September 30, 1999,
the average annual total return of Class B shares was 16.60% compared to
23.50% for the S&P 500 Index and 19.47% for the Indata Equity-Median Index.

For the third quarter ended September 30, 1999, the Portfolio had a total
return of -11.24% for Class A shares and -11.27% for Class B shares, compared
to -6.25% for the S&P 500 Index and - 4.05% for the Indata Equity-Median
Index.

Our value philosophy is to own "Great" companies at fair valuations; "Good"
companies at cheap valuations; and, "Questionable" companies at fire sale
valuations. We wait for the market to provide value investing opportunities
rather than forcing decisions. Our Portfolio is characterized by a distinctly
below average price-to-earnings ratio and price-to-book ratio, and an above
average dividend yield.

<TABLE>
<CAPTION>
1999 2000
Price- Price- Price-
Earnings Earnings to-Book
-------- -------- ---------
<S> <C> <C> <C>
Value Equity Portfolio.......... 14 times 12 4.9 times
S&P 500......................... 24 times 21 8.6 times
</TABLE>

102
<PAGE>

In the third quarter of 1999 it was back to the future with mega- cap growth
stocks reasserting performance dominance. For the S&P 500, four stocks
accounted for over 50% of the third quarter's return: Microsoft, Cisco,
General Electric, and IBM. These four stocks comprise 12% of the S&P 500 and
are valued at close to 50 times expected 1999 earnings.

The surprise of the third quarter of 1999 was that the market breadth was
even narrower than the extremely narrow third quarter of 1998 market without
the third quarter 1998 stresses such as Asia's recession, the Long-Term
Capital Management's liquidity crisis, and the Russian default. This year, we
have global economic growth, strong earnings recovery, and bond yields up 120
basis points. The result is a market concentrated into a handful of perceived
"bullet-proof" stocks with extraordinary valuations.

The Portfolio gave up much of its second quarter 1999 outperformance as many
of our 9-to-15 price-to-earnings stocks returned again to 6-to-11
price-to-earnings stocks. Although we have had only two stocks (Allstate and
Ogden) with fundamental changes in the earnings outlook, most of the
disappointing results in our stocks appear to have been driven by selling
that is unrelated to changes in the stock's fundamentals or selling that far
exceeded any changes in fundamentals.

The message was again clear this quarter: there is no valuation too low to
sell a stock with real or perceived earnings problems, and there is no
valuation too great to pay for a stock perceived to be "bullet-proof".

For the Portfolio, the top contributing stocks were Nielsen Media Research,
Nextel, Sprint, Audiocodes, and Bell Atlantic. Nielsen Media Research
received a cash offer of $37 a share from NVU of the Netherlands. (This time
last year, Nielsen Media Research, with a dominant franchise in television
monitoring and an emerging internet business, was languishing at 10 times
1998 earnings and was off 47% from its prior high of 15.) The performance of
Bell Atlantic, Sprint (now in an agreement with Worldcom to be purchased at
$76 per share, up from $54 at quarter-end.), and Nextel (purchased during a
sell-off in the high $30s and low $40s) reflect the continuing impact of the
explosive growth of the internet and wireless on infrastructure companies.

The top performance detractors were TJX companies, USEC, Cordant
Technologies, Lincoln National, and Allstate. While TJX has beaten earnings
estimates and same-store-sales estimates last year and all of this year, the
company trades at 18 times 1999 earnings and 15 times 2000 estimated
earnings, is growing earnings at 15%, is buying back stock, and has a very
well respected management team. Yet the stock was down 16% for the quarter.
We increased our position in TJX this quarter.

Cordant manufactures highly engineered airfoils for power generators and
airplane engines, space-shuttle rocket boosters, and highly engineered
fasteners-- in other words, for planes to fly, power generators to ship and
space-shuttles to launch, you need the assets and engineers Cordant
manufactures. Yet, because 2000 estimates went from $4.00 (January) to $4.50
(July) and back to $4.00-to-$4.25 (in September due to problems at Boeing),
Cordant was off 33% in the third quarter of 1999, is selling at 7 times
earnings and .4 times sales. We are buying Cordant at these valuations.

Lincoln National is selling at 11 times 2000 estimated earnings and is down
28% on both small estimate revisions and negative news items from its
reinsurance business. USEC's uranium enrichment business is performing well,
the dividend is secure, the company is buying shares, and the stock is 8
times earnings with an 11% yield. We have added to our positions both in USEC
and Lincoln National.

Allstate is a medium-term disappointment as they announced a 20% decrease in
earnings due to the effects of increased competition, higher catastrophe
losses, and higher claims cost. Allstate is down over 50% from its 1998 high
of $51.50, after the stock fell 30%, and is now almost at book value.
Allstate is the low cost provider of property and casualty insurance. It is a
well run company, buying back shares, and taking steps to further decrease
costs and grow revenues. We are meeting with Allstate management in early
fourth quarter 1999 to determine if now is the time to add to our position.

Our biggest positions are Sprint, TJX Companies, NISource, NewBridge
Networks, and Chase Manhattan. These five stocks account for 20% of the
Portfolio's net assets. Rounding out the top 10 positions are Allstate,
Meritor, BankBoston (now merged with Fleet), Lincoln National and Bell
Atlantic. These top 10 comprise 38% of the Portfolio.

Why are value stocks down, even when their fundamentals are strong and, in
some cases, getting better? I asked the CEO of one of our holdings why his
stock was down when his business was strong? His answer: his biggest holders
sell every day. These holders are mutual funds with a value bias and every
day they get withdrawals and everyday they sell his stock. At the aggregate
fund level, this more sellers-than-buyers phenomenon was reported by the Wall
Street Journal recently. According to the Journal, so far this year certain
identifiable value funds have had withdrawals well

103
<PAGE>

in excess of $22 billion (the total could be as high as two times this). At
the same time, growth funds have seen big inflows, with Janus Twenty taking
in an additional $7.3 billion alone. Interestingly, the biggest stock
holdings in the Janus Twenty in 1999 include AOL, Microsoft, Cisco, and
Dell--these four have an average 1999 price-to-earnings of almost 90 times.

The result of this more sellers-than-buyers condition is that we still have
a bi-furcated U.S. market with the "favored-few" mega-cap stocks selling at
extremely high multiples and at the same time there is a large supply of good
companies selling at reasonable-to-low valuations. We do not know when and
how this valuation anomaly will correct itself. Until then we will continue
to add to our core positions. In addition, we are also managing the tax
exposure by selling stocks with losses if we can replace them with existing
holdings.

Stephen C. Sexauer
PORTFOLIO MANAGER

October 1999

104
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.5%)
BASIC MATERIALS (3.6%)
CHEMICALS (SPECIALTY) (1.4%)
35,800 Milennium Chemicals, Inc. ..................... $ 732
-----------
METALS MINING (2.2%)
115,100 USEC, Inc. .................................... 1,180
-----------
TOTAL BASIC MATERIALS........................................... 1,912
-----------
CAPITAL GOODS (13.3%)
AEROSPACE/DEFENSE (4.1%)
47,200 Cordant Technologies, Inc. .................... 1,437
12,700 General Dynamics Corp. ........................ 793
-----------
2,230
-----------
ELECTRICAL EQUIPMENT (4.0%)
96,100 NiSource, Inc. ................................ 2,126
-----------
MACHINERY (DIVERSIFIED) (1.6%)
17,100 Case Corp. .................................... 852
-----------
MANUFACTURING (DIVERSIFIED) (3.6%)
32,800 United Technologies Corp. ..................... 1,945
-----------
TOTAL CAPITAL GOODS........................................... 7,153
-----------
COMMUNICATION SERVICES (15.1%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (2.0%)
6,900 Nextel Communications, Inc., Class A........... 468
23,100 Telesp Celular Participacoes S.A. ............. 604
-----------
1,072
-----------
TELECOMMUNICATIONS (LONG DISTANCE) (6.9%)
14,385 AT&T Corp. .................................... 626
10,800 MCI Worldcom, Inc. ............................ 776
42,800 Sprint Corp. .................................. 2,322
-----------
3,724
-----------
TELEPHONE (6.2%)
29,000 Bell Atlantic Corp. ........................... 1,952
23,800 U.S. WEST, Inc. ............................... 1,358
-----------
3,310
-----------
TOTAL COMMUNICATIONS SERVICES................................... 8,106
-----------
CONSUMER CYCLICALS (11.1%)
AUTO PARTS & EQUIPMENT (3.8%)
96,366 Meritor Automotive, Inc. ...................... 2,012
-----------
AUTOMOBILES (1.5%)
12,500 General Motors Corp. .......................... 787
-----------
BUILDING MATERIALS (0.2%)
4,000 Masco Corp. ................................... 124
-----------
PHOTOGRAPHY/IMAGING (0.8%)
5,900 Eastman Kodak Co. ............................. 445
-----------
PUBLISHING (NEWSPAPERS) (0.5%)
10,100 News Corp., Ltd. ADR........................... 269
-----------
RETAIL (SPECIALTY) (4.3%)
82,400 TJX Cos., Inc. ................................ 2,312
-----------
TOTAL CONSUMER CYCLICALS........................................ 5,949
-----------
CONSUMER STAPLES (5.6%)
BROADCASTING (TV, RADIO, CABLE) (3.7%)
8,600 Comcast Corp., Class A......................... 343
24,500 MediaOne Group, Inc. .......................... 1,674
-----------
2,017
-----------
SPECIALTY PRINTING (1.2%)
35,120 R.H. Donnelly Corp. ........................... $ 654
-----------
TOBACCO (0.7%)
10,800 Philip Morris Cos., Inc. ...................... 369
-----------
TOTAL CONSUMER STAPLES.......................................... 3,040
-----------
ENERGY (4.9%)
OIL (DOMESTIC INTEGRATED) (4.9%)
4,600 BP Amoco plc .................................. 510
61,200 Conoco, Inc. .................................. 1,698
15,000 USX-Marathon Group............................. 439
-----------
TOTAL ENERGY.................................................... 2,647
-----------
FINANCIAL (27.7%)
BANKS (MAJOR REGIONAL) (8.9%)
45,800 Bank Boston Corp. ............................. 1,987
16,700 Bank of New York Co., Inc. .................... 558
19,700 Fleet Financial Group, Inc. ................... 721
18,400 Mellon Bank Corp. ............................. 621
17,400 PNC Bank Corp. ................................ 917
-----------
4,804
-----------
BANKS (MONEY CENTER) (3.9%)
27,600 Chase Manhattan Corp. ......................... 2,080
-----------
CONSUMER FINANCE (1.4%)
23,000 Countrywide Credit Industries, Inc. ........... 742
-----------
FINANCIAL (DIVERSIFIED) (1.7%)
14,800 Federal National Mortgage Assoc. .............. 928
-----------
INSURANCE (LIFE & HEALTH) (5.9%)
19,500 American General Corp. ........................ 1,232
50,900 Lincoln National Corp. ........................ 1,912
-----------
3,144
-----------
INSURANCE (MULTI-LINE) (2.5%)
19,300 Loews Corp. ................................... 1,355
-----------
INSURANCE (PROPERTY - CASUALTY) (3.4%)
73,000 Allstate Corp. ................................ 1,820
-----------
TOTAL FINANCIAL................................................. 14,873
-----------
HEALTH CARE (2.4%)
HEALTH CARE (DRUGS - GENERIC & OTHERS) (0.3%)
10,700 ICN Pharmaceuticals, Inc. ..................... 184
-----------
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) (2.1%)
17,200 Bausch & Lomb, Inc. ........................... 1,134
-----------
TOTAL HEALTH CARE............................................... 1,318
-----------
TECHNOLOGY (12.3%)
COMMUNICATION EQUIPMENT (2.2%)
600 Airgate Pcs, Inc. ............................. 15
8,400 AudioCodes Ltd. ............................... 316
25,150 Harris Corp. .................................. 695
9,400 IXnet, Inc. ................................... 142
-----------
1,168
-----------
COMPUTERS (NETWORKING) (4.6%)
18,600 3Com Corp. .................................... 535
74,800 Newbridge Networks Corp. ...................... 1,949
-----------
2,484
-----------
COMPUTERS (SOFTWARE & SERVICES) (3.4%)
8,900 Networks Associates, Inc. ..................... 170
</TABLE>

105
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONT.)
COMPUTERS (SOFTWARE & SERVICES) (CONT.)
16,516 Philips Electronics N.V. (NY Shares)........... $ 1,668
-----------
1,838
-----------
ELECTRONICS (DEFENSE) (2.1%)
20,400 Litton Industries, Inc. ....................... 1,117
-----------
TOTAL TECHNOLOGY................................................ 6,607
-----------
TRANSPORTATION (1.8%)
AIRLINES (1.8%)
29,900 Continental Airlines, Inc., Class B............ 979
-----------
UTILITIES (1.7%)
ELECTRIC COMPANIES (1.7%)
15,100 New Century Energies, Inc. .................... 505
11,500 Pinnacle West Capital Corp. ................... 418
-----------
TOTAL UTILITIES................................................. 923
-----------
TOTAL COMMON STOCKS (Cost $49,273)................................. 53,507
-----------
<CAPTION>
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (0.4%)
REPURCHASE AGREEMENT (0.4%)
$ 201 Chase Securities, Inc. 5.05%, dated 9/30/99,
due 10/01/99, to be repurchased at $201,
collateralized by U.S. Treasury Bonds,
6.00%, due 2/15/26, valued at $203
(Cost $201).................................... 201
-----------
TOTAL INVESTMENTS (99.9%) (Cost $49,474)........................... 53,708
-----------
OTHER ASSETS AND LIABILITIES (0.1%)
Other Assets.................................................... 782
Liabilities..................................................... (725)
-----------
57
-----------
NET ASSETS (100%).................................................. $ 53,765
<CAPTION> -----------
CLASS A: -----------
--------
<S> <C> <C>
NET ASSETS......................................................... $ 52,616
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 4,738,263 outstanding $0.001 par
value shares (authorized 500,000,000 shares)................... $ 11.10
CLASS B:
--------
NET ASSETS $ 1,149
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 103,800 outstanding $0.001 par
value shares (authorized 500,000,000 shares)................... $ 11.07
-----------
-----------
- --------------------------------------------------------------------------------
</TABLE>
ADR -- American Depositary Receipt

106
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Other (3.4%)
Venezuela (5.0%)
Turkey (5.1%)
South Korea (0.6%)
Algeria (0.8%)
Russia (6.4%)
Argentina (21.8%)
Poland (1.0%)
Philippines (2.2%)
Peru (1.8%)
Brazil (20.6%)
Panama (1.2%)
Morocco (2.8%)
Bulgaria (3.3%)
Colombia (4.6%)
Mexico (16.0%)
Ecuador (0.6%)
Indonesia (1.4%)
Jordan (1.0%)
Ivory Coast (0.4%)
100%
</TABLE>

PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING
MARKETS BOND PLUS INDEX(1)
- ------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
----- ------ ------ ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A ... 12.98% 25.49% 8.93% 6.45%
PORTFOLIO -- CLASS B ... 12.03 25.09 N/A 6.58
INDEX -- CLASS A ....... 11.90 23.00 11.59 8.12
INDEX -- CLASS B ....... 11.90 23.00 N/A 11.27
</TABLE>

1. The J.P. Morgan Emerging Markets Bond Plus Index is a market weighted index
composed of all Brady bonds, outstanding loans and Eurobonds, as well as U.S.
Dollar local market instruments of Argentina, Brazil, Bulgaria, Colombia,
Equador, Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland,
Russia, South Korea and Venezuela.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE
PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING. YIELDS WILL FLUCTUATE
AS MARKET CONDITIONS CHANGE.

The investment objective of the Emerging Markets Debt Portfolio is high total
return through investment primarily in debt securities of government and
government-related issuers and, to a lesser extent, of corporate issuers
located in emerging countries.

For the nine months ended September 30, 1999, the Portfolio had a total
return of 12.98% for the Class A shares and 12.03% for the Class B shares
compared to 11.90% for the J.P. Morgan Emerging Markets Bond Plus Index (the
"Index"). For the one year period ended September 30, 1999, the Portfolio had
a total return of 25.49% for the Class A shares and 25.09% for the Class B
shares compared to 23.00% for the Index. For the five-year period ended
September 30, 1999, the average annual total return of Class A shares was
8.93% compared to 11.59% for the Index. For the period since inception on
February 1, 1994 through September 30, 1999, the average annual total return
of Class A shares was 6.45% compared to 8.12% for the Index. For the period
since inception on January 2, 1996 through September 30, 1999, the average
annual total return of Class B shares was 6.58% compared to 11.27% for the
Index. As of September 30, 1999 the Portfolio had a SEC 30-day yield of
14.96% for the Class A shares and 14.72% for the Class B shares.

Over the last few months, bad headlines plagued the emerging markets; panics
over the fate of the Argentine peso, Fed rate hikes in the U.S., scandals in
Russia, a bloodless political coup in Venezuela, increased violence in
Colombia and Indonesia, default in Ecuador, and a severe earthquake in Turkey.

Notwithstanding these events, emerging market debt has remained in a narrow
trading range. During this time, investors have collected a healthy amount of
coupon income while experiencing little overall capital appreciation or
depreciation. Considering all of the negatives mentioned above, the seemingly
miraculous performance of emerging debt is evidence of its relative cheapness
and under-representation in portfolios. Current prices for emerging market
debt remain close to those seen during the Mexican and Russian crises.
Relative valuations remain near historically wide levels as measured by
spread differentials with other fixed income alternatives. Simply put
emerging market bonds no longer sell-off on bad news.

Within the Portfolio, overweight positions in Colombia and Morocco and
underweight positions in Korea and Ecuador contributed to relative returns.
Colombian assets rallied after the announcement that the country had signed a
letter of intent with the IMF, which should lead to a $2.5 billion extended
funds facility. An overweight in Turkish local

107
<PAGE>

currency Treasury bills bolstered returns, as the high yield-to-maturity and
short duration characteristics of these securities allowed them to outperform
the market, despite the earthquake in Turkey. Relative performance was
adversely effected by security selection decisions in Russia, an underweight
in Venezuela, and overweights in Ivory Coast and Indonesian assets.

Beyond valuation arguments, there are fundamental reasons why we think
emerging debt is attractive at current levels. Recent economic indicators
have reinforced our view that the world economy is steadily improving. The
resumption of growth in Japan and in Western Europe has positively impacted
commodity prices and economic activity in the emerging world. All indications
are that economic activity has bottomed out during the third quarter in most
of Latin America and in either the second or third quarter in Eastern Europe.
Growth in Emerging Asia continues to surprise on the upside. These are only a
few of the developments that point to a global economy moving beyond healing
and into growth.

For these reasons we believe that emerging market debt currently offers
attractive risk/return characteristics and we will continue to position the
Portfolio more aggressively. However, we are unlikely to get immediate
gratification from this new posture. Seasonal factors such as the "year end
effect" and the lagged nature of economic statistics required to verify our
expectation of economic recoveries might inhibit any substantial rally.
However, over the medium term, we believe that the Portfolio should benefit
from this shift in stance.

Stephen F. Esser
PORTFOLIO MANAGER

Abigail L. McKenna
PORTFOLIO MANAGER

October 1999

108
<PAGE>

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
DEBT INSTRUMENTS (92.8%)
ALGERIA (0.8%)
SOVEREIGN (0.8%)

U.S.$ 200 Republic of Algeria, 0.00%, 3/31/00............ $ 151
300 Republic of Algeria, 0.00%, 3/31/00............ 211
-----------
362
-----------
ARGENTINA (21.8%)
CORPORATE (2.3%)
(e)200 Cablevision S.A., 13.75%, 5/01/09.............. 185
ARP 100 CIA International Telecommunications,
10.375%, 8/01/04............................. 74
850 CIA International Telecommunications,
10.375%, 8/01/04............................. 629
U.S.$ (e)348 Nortel Inversora, Series A, 6.00%, 3/31/07..... 209
-----------
1,097
-----------
SOVEREIGN (19.5%)
3,210 Republic of Argentia, Global Bond,
11.75%, 4/07/09.............................. 3,109
700 Republic of Argentia, Global Units (Euro),
12.125%, 2/15/19............................. 704
ARP 524 Republic of Argentina, 2.77%, 4/01/07.......... 360
U.S.$ 1,275 Republic of Argentina, Global Bond,
11.375%, 1/30/17............................. 1,205
(v)4,557 Republic of Argentina, Global Bond, Series L,
(Floating Rate), (Bearer), 5.938%, 3/31/05... 3,993
-----------
9,371
-----------
10,468
-----------
BRAZIL (20.6%)
SOVEREIGN (20.6%)
(v)6,460 Federative Republic of Brazil, C Bond, PIK,
8.00%, 4/15/14............................... 4,042
89 Federative Republic of Brazil, C Bond, PIK,
8.00%, 4/15/14............................... 56
2,120 Federative Republic of Brazil,
Debt Conversion Bond, Series L,
(Floating Rate), 5.938%, 4/15/12............. 1,272
(v)2,700 Federative Republic of Brazil,
Debt Conversion Bond, Series L,
(Floating Rate), 5.938%, 4/15/12............. 1,620
(v)500 Federative Republic of Brazil,
Front Loaded Interest Reduction Bond,
Series L, (Floating Rate), 5.00%, 4/15/09.... 297
(v)2,200 Federative Republic of Brazil,
New Money Bonds, Series L,
(Floating Rate), 5.938%, 4/15/09............. 1,557
U.S.$ (v)998 Federative Republic of Brazil, Series IE-L,
(Bearer), (Floating Rate), 5.875%, 4/15/06... $ 782
100 Federative Republic of Brazil, Series L,
(Floating Rate), 4.50%, 4/15/09.............. 60
250 Federative Republic of Brazil, Series L,
(Floating Rate), 5.938%, 4/15/09............. 177
-----------
9,863
-----------
BULGARIA (3.3%)
SOVEREIGN (3.3%)
770 Republic of Bulgaria, Discount Bond, Series A,
6.50%, 7/28/24............................... 531
750 Republic of Bulgaria, Front Loaded Interest
Reduction Bond, 2.75%, 7/28/12............... 474
820 Republic of Bulgaria, Interest Arrears PDI Bond,
(Floating Rate), 6.50%, 7/28/11.............. 585
-----------
1,590
-----------
COLOMBIA (4.6%)
CORPORATE (0.4%)
(n)300 Occidente y Caribe Cellular, Series B,
0.00%, 3/15/04............................... 172
-----------
SOVEREIGN (4.2%)
510 Republic of Colombia, (Floating Rate),
12.471%, 8/13/05............................. 474
945 Republic of Colombia, Global Bond,
10.875%, 3/09/04............................. 935
700 Republic of Colombia, Global Bond,
9.75%, 4/23/09............................... 601
-----------
2,010
-----------
2,182
-----------
ECUADOR (0.6%)
SOVEREIGN (0.6%)
(v)980 Republic of Ecuador, Discount Bond,
(Floating Rate), 6.75%, 2/28/25.............. 301
------------
INDONESIA (1.4%)
CORPORATE (1.4%)
280 Idah Kiat, International Finance, Series B,
11.875%, 6/15/02............................. 214
600 Tjiwi Kimia International BV, Global Bond,
13.25%, 8/01/01.............................. 465
-----------
679
-----------
IVORY COAST (0.4%)
SOVEREIGN (0.4%)
(n)1,000 Ivory Coast, Front Loaded Interest Reduction
Bond, (Floating Rate), 2.00%, 3/29/18........ 200
-----------
</TABLE>

109
<PAGE>

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
JORDAN (1.0%)
SOVEREIGN (1.0%)

U.S.$ (v)279 Government of Jordan, Discount Bond,
(Floating Rate), 6.188%, 12/23/23............ $ 184
(e,v)443 Government of Jordan, Discount Bond,
(Floating Rate), 6.188%, 12/23/23............ 292
-----------
476
-----------
MEXICO (16.0%)
CORPORATE (3.1%)
440 Petroleos Mexicanos, (Floating Rate),
9.52%, 7/15/05............................... 420
(e)1,100 Petroles Mexicanos, 9.50%, 9/15/27............. 1,060
-----------
1,480
-----------
SOVEREIGN (12.9%)
(v)200 United Mexican States, Discount Bond, Series A,
(Floating Rate), 6.116%, 12/31/19............ 171
(v)1,450 United Mexican States, Discount Bond, Series B,
(Floating Rate), 5.875%, 12/31/19............ 1,240
1,600 United Mexican States, Discount Bond, Series C,
(Floating Rate) 5.874%, 12/31/19............. 1,368
(v)1,010 United Mexican States, Discount Bond, Series D,
(Floating Rate), 6.068%, 12/31/19............ 864
465 United Mexican States, Global Bond, Series XW,
10.375%, 2/17/09............................. 472
(v)1,250 United Mexican States, Par Bond, Series W-A,
6.25%, 12/31/19.............................. 921
(v)1,561 United Mexican States, Par Bond, Series W-B,
6.25%, 12/31/19.............................. 1,150
-----------
6,186
-----------
7,666
-----------
MOROCCO (2.8%)
SOVEREIGN (2.8%)
1,569 Government of Morocco, Reconstruction &
Consolidation Agreement, Series A,
(Floating Rate), 5.906%, 1/01/09............. 1,336
-----------
PANAMA (1.2%)
SOVEREIGN (1.2%)
(n,v)600 Republic of Panama, Global Bonds,
9.375%, 4/01/29.............................. 560
------------
PERU (1.8%)
SOVEREIGN (1.8%)
(e,n,v)748 Republic of Peru, Front Loaded Interest
Reduction Bond, 3.25%, 3/07/17............... 405
U.S.$ (n,v)50 Republic of Peru, Front Loaded Interest
Reduction Bond, 3.75%, 3/07/17............... $ 27
680 Republic of Peru, PDI Bond, (Floating Rate),
4.00%, 3/07/17............................... 421
-----------
853
-----------
PHILIPPINES (2.2%)
CORPORATE (1.2%)
(e)600 Bayan Telecommunications, 13.50%, 7/15/06...... 567
-----------
SOVEREIGN (1.0%)
500 Republic of Philippines, Global Bond,
9.875%, 1/15/19.............................. 475
-----------
1,042
-----------
POLAND (1.0%)
CORPORATE (1.0%)
(e)500 Netia Holdings II B.V., 13.125%, 6/15/09....... 485
------------
RUSSIA (6.4%)
SOVEREIGN (6.4%)
(e)430 Russian Federation, 8.75%, 7/24/05............. 181
(e)2,970 Russian Federation, 11.00%, 7/24/18............ 1,247
650 Russian Interest Arrears Note, (Floating Rate),
6.063%, 12/15/15............................. 74
16,771 Russian Principal Loans, (Floating Rate),
6.063%, 12/15/20............................. 1,562
-----------
3,064
-----------
SOUTH KOREA (0.6%)
SOVEREIGN (0.6%)
300 Republic of Korea, 8.875%, 4/15/08............. 312
-----------
TURKEY (1.3%)
CORPORATE (1.3%)
(e)520 Cellco Finance NV, 15.00%, 8/01/05............. 542
100 Cellco Finance NV, 15.00%, 8/01/05............. 104
-----------
646
-----------
VENEZUELA (5.0%)
SOVEREIGN (5.0%)
1,250 Government of Venezuela, 9.25%, 9/15/27........ 826
2,024 Republic of Venezuela, Debt Conversion Bond,
Series DL, (Floating Rate),
6.313%, 12/18/07............................. 1,557
-----------
2,383
-----------
TOTAL DEBT INSTRUMENTS (Cost $43,579).............................. 44,468
-----------
</TABLE>

110
<PAGE>

<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
MEXICO (0.0%)
6,554 United Mexican States, Value Recovery Rights,
expiring 6/30/03 (Cost $0)................... $ --
-----------
NO. OF
WARRANTS
- -----------------
WARRANTS (0.0%)
ARGENTINA (0.0%)
1,900 Republic of Argentina, expiring 2/15/00........ 3
------------
COLOMBIA (0.0%)
(e)12,600 Occidente y Caribe Cellular, expiring 3/15/04.. 19
-----------
TOTAL WARRANTS (Cost $8)........................................... 22

-----------
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (3.8%)
TURKEY (3.8%)
TREASURY BILLS (3.8%)
TRL 830,988,000 57.12%, 2/09/00................................ 1,398
222,532,000 58.75%, 3/15/00................................ 350
24,000,000 63.19%, 10/27/99............................... 50
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $2,091)......................... 1,798
-----------
TOTAL INVESTMENTS (96.6%) (Cost $45,678)........................... 46,288
-----------
OTHER ASSETS AND LIABILITIES (3.4%)
Other Assets.................................................... 3,218
Liabilities..................................................... (1,597)
-----------
1,621
-----------
NET ASSETS (100%).................................................. $ 47,909
-----------
-----------

AMOUNT
(000)
- --------------------------------------------------------------------------------
<CAPTION>
CLASS A:
<S> <C> <C>
NET ASSETS......................................................... $ 47,036
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE Applicable to 15,909,768 outstanding $0.001
par value shares (authorized 500,000,000 shares)................ $ 2.96
-----------
-----------
CLASS B:
NET ASSETS......................................................... $ 873
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE Applicable to 292,599 outstanding $0.001
par value shares (authorized 500,000,000 shares)................ $ 2.98
-----------
-----------
</TABLE>

- ------------------------------------------------------------------------------
(e) -- 144A Security - certain conditions for public resale may exist.
(n) -- Step Bond - coupon rate increases in increments to maturity. Rate
disclosed is as of September 30, 1999. Maturity date disclosed is
the ultimate maturity.
(v) -- Security is a Brady Bond, created through the debt restructuring
exchange of commercial bank loans to foreign entities for new fixed
income obligations. These bonds may be collateralized and are actively
traded on the over-the-counter secondary market.
ARPA - Argentina Peso
PDI -- Past Due Interest
PIK -- Payment-In-Kind. Income may be received in additional securities or
cash at the discretion of the issuer.
TRL -- Turkish Lira
Floating Rate Security -- The interest rate on these instruments are based on
changes in a designated base rate. The rates shown are those in effect
on September 30, 1999.

111
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- ------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- ------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Yankee Bonds (5.9%)
Asset Backed Securities (9.5%)
Corporate Bonds and Notes (33.5%)
Collateralized Mortgage
Obligations (6.7%)
U.S. Government and Agency
Obligations (49.4%)
Other (-5.0%)
</TABLE>

PERFORMANCE COMPARED TO THE LEHMAN
AGGREGATE BOND INDEX(1)
- ----------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
------ ------ ----- ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A ... -1.54% -1.43% 7.79% 7.47%
PORTFOLIO -- CLASS B ... -1.61 -1.39 N/A 5.27
INDEX -- CLASS A -0.70 -0.37 7.84 7.66
INDEX -- CLASS B -0.70 -0.37 N/A 5.61
</TABLE>

(1) The Lehman Aggregate Bond Index is an unmanaged index comprised of the
Government/Corporate Bond Index, the Mortgage-Backed Securities Index and
the Asset-Backed Securities Index.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE PERFORMANCE
RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE
SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT
PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.

The Fixed Income Portfolio seeks to provide a high total return consistent with
the preservation of capital by investing primarily in a diversified portfolio of
fixed income securities.

For the nine months ended September 30, 1999, the Portfolio had a total return
of -1.54% for the Class A shares and -1.61% for the Class B shares compared to
- -0.70% for the Lehman Aggregate Bond Index (the "Index"). For the one year
period ended September 30, 1999, the Portfolio had a total return of -1.43%
for the Class A shares and -1.39% for the Class B shares compared to -0.37%
for the Index. For the five-year period ended September 30, 1999, the average
annual total return of Class A shares was 7.79% compared to 7.84% for the
Index. For the period since inception on May 15, 1991 through September 30,
1999, the average annual total return of Class A shares was 7.47% compared to
7.66% for the Index. For the period since inception on January 2, 1996 through
September 30, 1999, the average annual total return of Class B shares was
5.27% compared to 5.61% for the Index. As of September 30, 1999, the Portfolio
had a SEC 30-day yield of 6.54% for the Class A shares and 6.39% for the
Class B shares.

U.S. fixed income markets generally improved during September, partially
reversing a pattern of rising rates and widening yield spreads that had
prevailed for most of the third quarter.

The relatively small net changes in interest rates and yield spreads actually
masked a fair amount of interim volatility during the period. Market psychology
was quite negative early in the quarter as credit markets were strongly
influenced by continued tightness in labor markets and associated inflation
risks, typified by a reported 1% rise in labor costs in the second quarter. In
reaction to this news, as well as to rising commodities prices, yields on
Treasuries rose for most of the summer. Investors in the non-Treasury sectors
suffered even more, as yield spreads versus Treasuries also rose due to concerns
regarding a potential flood of new corporate bond issuance. Market psychology
eventually improved, however. Several economic reports subsequently revealed
favorable trends in core consumer and producer price levels. Moreover, while the
actual amount of new corporate debt issues was indeed large, it was well below
the volume originally expected by the market, thus fostering a rebound in the
non-Treasury sectors.

While there are surely inflationary risks to the U.S. economy, we do not believe
it is correct to view tight labor markets as a sign that higher inflation is
imminent. These risks have already been evident for several years without

112
<PAGE>

leading to higher inflation in terms of consumer prices or the GDP deflator.
The combination of excess global productive capacity and favorable productivity
trends also counters such risks. These factors, combined with a vigilant Federal
Reserve -- as evidenced by the central bank's August tightening action -- should
keep actual inflation measures below those reflected in the term structure of
interest rates.

Our above-benchmark interest-rate sensitivity (IRS) strategy had an unfavorable
impact on relative performance, as most interest rates rose slightly over the
course of the quarter. Real interest rates remain well above long-term averages,
reflecting lingering market expectations of a significant rise in inflation. We
note that historically the market has a poor record predicting inflation, and
that the prevailing level of high real rates -- currently near 4% -- represents
an attractive value opportunity. Consequently, the Portfolio's level of IRS
remains at approximately 0.3 years above the benchmark.

The yield curve does not present any compelling value opportunities, so our
yield-curve positioning remains close to that of the benchmark. With
inflation-protected Treasuries (TIPS) outperforming nominal Treasuries for most
of this year, their once significant relative value advantages continued to
diminish. In reaction, we trimmed TIPS holdings again so that the proceeds
could be reinvested in more attractive opportunities in the non-Treasury
sectors of the market.

Most corporate bonds recovered in September following difficult months in both
July and August. While the new issue calendar posed a major challenge for the
market, investment grade issues eventually found significant interest as the
quarter came to a close and many new offerings were oversubscribed.
Nevertheless, yield spreads versus Treasuries remained extremely wide, and we
continued to take advantage of the apparent disconnect between market valuations
and actual fundamentals, most notably in the industrial sectors. Our actions
allowed us to maintain or increase the Portfolio's above-benchmark sensitivity
to changes in corporate yield spreads.

Mortgages eventually posted a recovery from the unfavorable returns experienced
earlier in the quarter. An unusual combination of high yield spreads -- rivaling
those seen during the height of the "flight-to-quality" last October -- and low
prepayment (or refinancing) risk presented us with a significant value
opportunity, so we increased the mortgage allocation during August. The
Portfolio experienced an immediate benefit from this action as yield spreads
subsequently declined. Our mortgage strategy remains focused on highly-liquid
fixed-rate Agency mortgage-backed issues with coupons in the 6% to 7% range.
While the Portfolio continues to have an above- benchmark sensitivity to changes
in mortgage yield spreads, the overall sensitivity to prepayment risk remains
near that of the broader market indices.

Warren Ackerman, III
PORTFOLIO MANAGER

October 1999

113
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- ------------------------------------------------------------------------------
INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- ------------------------------------------------------------------------------

FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C>
FIXED INCOME SECURITIES (105.0%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (49.4%)
FEDERAL HOME LOAN MORTGAGE CORPORATION (8.8%)
$ 17,429 6.00%, 12/01/28 ............................... $ 16,296
6 13.00%, 9/01/10 ............................... 7
-----------
16,303
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (24.3%)
7,318 5.50%, 5/01/14 ................................ 6,895
2,594 6.00%, 9/01/10 ................................ 2,522
3,779 6.00%, 2/01/11 ................................ 3,675
6,110 6.00%, 4/01/13 ................................ 5,881
15,995 6.00%, 4/01/28 ................................ 14,940
9,758 6.00%, 2/01/29 ................................ 9,115
1,856 8.00%, 2/01/12 ................................ 1,901
-----------
44,929
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (6.4%)
9,500 7.00%, 10/01/29 TBA ........................... 9,340
2,500 7.50%, 10/01/29 TBA ........................... 2,511
-----------
11,851
-----------
U.S. TREASURY BONDS (7.7%)
12,000 8.125%, 8/15/19 ............................... 14,203
-----------
U.S. TREASURY NOTES (2.2%)
4,000 6.00%, 7/31/02 ................................ 4,029
-----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS ................... 91,315
-----------
CORPORATE BONDS AND NOTES (33.5%)
AUTOMOTIVE (1.9%)
2,000 Delphi Auto Systems Corp., 7.125%, 5/01/29 .... 1,801
2,000 Ford Motor Co., 6.375%, 2/01/29 ............... 1,726
-----------
3,527
-----------
BANKING (0.7%)
1,500 Chase Manhattan Corp., 6.00%, 2/15/09 ......... 1,382
-----------
CHEMICALS (2.0%)
(e)2,000 Monsanto Co., 6.60%, 12/ 01/28 ................ 1,742
(e)2,000 Rohm & Hass Co., 7.85%, 7/15/29 ............... 2,039
-----------
3,781
-----------
FINANCE (21.4%)
(e)2,000 American General Institutional Capital,
Series A, 7.57%, 12/01/45 ................... 1,845
2,500 Associates Corp. of North America, 5.80%,
4/20/04 ..................................... 2,405
2,000 BT Capital Trust, Series B1, 7.90%, 1/15/27 ... 1,869
3,000 CNA Financial Corp., 6.50%, 4/15/05 ........... 2,828
2,000 Donaldson, Lufkin & Jenrette, Inc., 6.90%,
10/01/07 .................................... 1,936
(e)2,500 Farmers Exchange Capital, 7.05%, 7/15/28 ...... 2,159
(e)2,000 First Chicago Corp., 7.75%, 12/01/26 .......... 1,892
2,000 Ford Motor Credit Co., 6.125%, 4/28/03 ........ 1,961
2,000 General Motors Acceptance Corp., 6.75%,
2/07/02 ..................................... 2,013
(e)2,500 Goldman Sachs Group, 6.34%, 3/01/06 ........... 2,379
2,650 John Hancock, 7.375%, 2/15/24 ................. 2,514
2,350 Lehman Brothers Holdings, Inc., 6.625%,
4/01/04 ..................................... 2,271
(e)3,000 Liberty Mutal Insurance Co., 8.20%, 5/04/07 3,073
(e)2,000 Lumbermans Mutual Casualty Co., 8.45%,
12/01/2097 .................................. 1,703
3,000 Merrill Lynch & Co., 6.00%, 2/12/03 ........... 2,942
(e)2,500 Prudential Insurance Co., 6.375%, 7/23/06 ..... 2,385
2,000 Salomon, Inc., 7.30%, 5/15/02 ................. 2,032
1,500 Simon Debartolo Group, MTN, 7.125%, 9/20/07 ... 1,411
-----------
39,618
-----------
HEALTH CARE SUPPLIES & SERVICES (0.8%)
1,500 Columbia/HCA Healthcare, MTN, 8.85%, 1/01/07 .. 1,459
-----------
MULTI-INDUSTRY (0.7%)
(e)1,250 Home Depot, Inc., 6.50%, 9/15/04 .............. 1,254
-----------
TELECOMMUNICATIONS (2.8%)
2,500 AT&T Corp., 6.50%, 3/15/29 .................... 2,212
3,000 Worldcom, Inc., 6.40%, 8/15/05 ................ 2,899
-----------
5,111
-----------
TRANSPORTATION-RAIL (1.2%)
2,500 Union Pacific Co., 6.625%, 2/01/29 ............ 2,130
-----------
UTILITIES (2.0%)
2,000 Conoco, Inc., 6.95%, 4/15/29 .................. 1,861
(e)1,826 Oil Enterprises Ltd., 6.239%, 6/30/08 ......... 1,759
-----------
3,620
-----------
TOTAL CORPORATE BONDS AND NOTES ................................... 61,882
-----------
ASSET BACKED SECURITIES (9.5%)
(e)3,000 Aesop Funding II LLC, Series 97-1, Class A1,
6.22%, 10/20/01 ............................. 3,001
3,000 COMED, Series 98-1, Class A2, 5.29%, 6/25/03 .. 2,966
5,000 Ford Credit Auto Owner Trust, Series 98-B,
5.85%, 10/15/01 ............................. 4,989
2,124 Mid-State Trust, Series IV A, 8.33%, 4/01/30 .. 2,196
1,250 Peco Energy Transition Trust, Series 99-A,
Class A6, 6.05%, 3/01/09 .................... 1,181
3,250 Team Fleet Financing Corp., Series 97-1A,
7.35%, 5/15/03 .............................. 3,299
-----------
TOTAL ASSET BACKED SECURITIES ..................................... 17,632
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS (6.7%)
632 Chase Commercial Mortgage Securities Corp.,
Series 97-2, Class A1, 6.45%, 12/19/04 ...... 620
2,467 First Union-Lehman Brothers Commercial
Mortgage, 6.479%, 3/18/04 ................... 2,465
3,965 Lehman Brothers Large Loan, Series 97-LLIA1,
6.79%, 6/12/04 .............................. 3,936
2,659 Merrill Lynch Mortgage Investors, Inc.,
Series 98-C2, Class A1, 6.22%, 2/15/30 ...... 2,604
(e)2,848 World Financial Credit, 6.91%, 9/01/13 ........ 2,750
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS ......................... 12,375
-----------

</TABLE>

114
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- ------------------------------------------------------------------------------
INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------

FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C>
YANKEE BONDS (5.9%)
ELECTRONICS (1.6%)
$ 3,000 Sony Corp., 6.125%, 3/04/03 ................... $ 2,967
-----------
FINANCE (1.0%)
2,000 Ahold Finance, 6.875%, 5/01/29 ................ 1,804
-----------
FOREIGN GOVERNMENT OBLIGATION BOND (1.3%)
2,000 Republic of Colombia, 9.75%, 4/23/09 .......... 1,718
(e)750 State of Qatar, 9.50%, 5/21/09 ................ 781
-----------
2,499
-----------
TELECOMMUNICATIONS (1.1%)
(e)2,000 AT&T Canada, Inc., 7.65%, 9/15/06 ............. 2,007
-----------
UTILITIES (0.9%)
1,700 Endesa-Chile, 7.75%, 7/15/08 .................. 1,605
-----------
TOTAL YANKEE BONDS ............................................. 10,882
-----------
-----------
TOTAL FIXED INCOME SECURITIES (COST $201,103) ..................... 194,086
-----------
SHORT-TERM INVESTMENT (0.3%)
REPURCHASE AGREEMENT (0.3%)
493 Chase Securities, Inc., 5.05%, dated 9/30/99,
due 10/01/99, to be repurchased at $493,
collateralized by U.S. Treasury Bond, 6.00%
due 2/15/26, valued at $497 (Cost $493) ..... 493
-----------
TOTAL INVESTMENTS (105.3%) (COST $201,596) ........................ 194,579
-----------
OTHER ASSETS AND LIABILITIES (-5.3%)
Other Assets ................................................... $ 5,192
Liabilities .................................................... (14,997)
-----------
(9,805)
-----------
NET ASSETS (100%) ................................................. $ 184,774
-----------
-----------

CLASS A:
NET ASSETS ........................................................ $ 182,283
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 17,403,006 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ............................... $ 10.47
-----------
-----------
CLASS B:
NET ASSETS ........................................................ $ 2,491
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 237,629 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ............................... $ 10.49
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
(e) -- 144A Security - certain conditions for public resale may exist.
MTN -- Medium Term Note
TBA -- Security is subject to delayed delivery.

115
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

<TABLE>
[CHART]
<S> <C>
Australian Dollar (2.3%)
British Pound (7.1%)
Canadian Dollar (3.2%)
Danish Krone (6.1%)
Euro (31.2%)
Japanese Yen (12.0%)
Swedish Krona (4.4%)
United States Dollar (25.2%)
Other (8.5%)
</TABLE>

PERFORMANCE COMPARED TO THE J.P. MORGAN
TRADED GLOBAL BOND INDEX(1)
- ---------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
------ ------ ------ ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A .. -5.36% -3.62% 6.93% 6.78%
PORTFOLIO -- CLASS B .. -5.53 -3.74 N/A 3.91
INDEX -- CLASS A ...... -3.54 -0.66 7.13 8.07
INDEX -- CLASS B ...... -3.54 -0.66 N/A 4.46
</TABLE>

(1) The J.P. Morgan Traded Global Bond Index is an unmanaged index of securities
and includes Australia, Belgium, Canada, Denmark, Finland, France, Germany,
Ireland, Italy, Japan, The Netherlands, New Zealand, Portugal, South Africa,
Spain, Sweden, the United Kingdom and the United States.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE PERFORMANCE
RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE
SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.

The Global Fixed Income Portfolio seeks to produce an attractive real rate of
return while preserving capital by investing primarily in high quality fixed
income securities issued by U.S. and foreign issuers including governments,
agencies, supranational entities, eurobonds and corporations with varying
maturities in various currencies.

For the nine months ended September 30, 1999, the Portfolio had a total return
of -5.36% for the Class A shares and -5.53% for the Class B shares compared to
- -3.54% for the J.P. Morgan Traded Global Bond Index (the "Index"). For the one
year period ended September 30, 1999, the Portfolio had a total return of -3.62%
for the Class A shares and -3.74% for the Class B shares compared to - 0.66% for
the Index. For the five-year period ended September 30, 1999, the average annual
total return of Class A shares was 6.93% compared to 7.13% for the Index. For
the period since inception on May 1, 1991 through September 30, 1999, the
average annual total return of Class A shares was 6.78% compared to 8.07% for
the Index. For the period since inception on January 2, 1996 through September
30, 1999, the average annual total return of Class B shares was 3.91% compared
to 4.46% for the Index. As of September 30, 1999 the Portfolio had a SEC 30-day
yield of 4.51% for the Class A shares and 4.36% for the Class B shares.

During the third quarter, the greatest change in sentiment occurred in Europe
where growth and interest rate expectations underwent a significant upward
revision.

In the euro area, bond yields moved appreciably higher as signs of a broadening
economic recovery saw the yield curve shift to price in a significant eventual
tightening by the European Central Bank. The peripheral markets also experienced
a similar move and the U.K. and Sweden were two of the poorest performers
globally. In the U.K., the continued buoyancy in the housing market was seen as
one of the reasons for the unexpected 25 basis points hike in the base rate,
while in Sweden, strong growth and concern that inflation would breach the
Riksbank's target prompted a reappraisal of monetary policy.

In the U.S., yields rose only slightly as the general tone of economic data
remained broadly unchanged and the widely anticipated 25 basis point tightening
by the Fed in August brought little market reaction.

In contrast, the Japanese bond market rallied, seemingly at odds with the
continued signs of stronger growth both from the domestic economy and the Asian
region as a whole, but supported at least in part by the strength of the yen.

The sharp rise in the yen against both the dollar and the euro was the most
significant change in financial markets during

116
<PAGE>

the quarter. The improving Japanese economy was supportive of the currency, as
was the Bank of Japan's apparent unwillingness to implement quantitative easing.

The most significant factor contributing to performance during the third quarter
was our 5-7% underweight exposure to the Japanese yen which subtracted over 50
basis points from relative performance.

Our exposure to corporate bonds also detracted from returns given the widening
in corporate spreads.

Country allocation made a modest negative contribution to performance given our
underweight exposure to the Japanese bond market versus the European and dollar
bloc markets. Within Europe, our lack of exposure to the ultra-long part of the
U.K. curve and our overweighting to the short-end of the Swedish yield curve
were negatives.

As the most dramatic shift has been seen in the dollar swap market, we retain
our bias to dollar issues.

There was no change to our broad interest rate strategy during the third
quarter. The Portfolio remained long duration in the dollar bloc and European
markets and short duration in the Japanese market. The overall duration of the
Portfolio was held at approximately 0.4 years longer than the Index.

In terms of yield curve positioning, we removed our barbell strategy in Europe
as we no longer viewed the 30-year part of the euro curve, which we had
overweighted, as undervalued.

During September, we raised our exposure to the Japanese yen from 7% to 5%
underweight. While we maintain our long-term bearish stance on the yen, current
market volatility means it is appropriate to move our portfolio closer to
benchmark weighting.

We continued to increase our exposure to the credit sector, taking advantage of
some attractively priced dollar denominated issues.

The outlook for the global economy continues to improve. In the U.S., there has
been no appreciable slowing in the strong pace of economic growth while in
Europe more recent data all points to a significant broadening in the economic
recovery. The Japanese economy is also showing tentative signs of growth while
activity in the Asian region as a whole is rebounding. This more positive growth
environment has prompted many central banks to shift monetary policy to a
tightening bias which is reflected in both the dollar bloc and European yield
curves. Despite these developments, we remain constructive on the inflation
outlook and reasonably positive on the prospects for global bond markets with
the exception of Japan.

In the U.S., the Fed has already reversed all but 25 basis points of its easing
of last autumn and the market is pricing in a further 75 basis points of
tightening over the next year. We regard this as somewhat pessimistic. Current
economic conditions in the U.S. are not significantly different from a year ago
in terms of growth and inflation but bond yields are considerably higher. We
believe that any further tightening by the Fed in this cycle will be modest
unless there is a significant emergence of inflationary pressures.

In Europe, the stronger pace of growth and current exceptionally loose monetary
policy means we expect the European Central Bank to move to raise interest rates
over the next three to six months. However, we expect that continued good
inflation performance and the still existing slack in the economy should keep
this tightening modest. As a result, we believe that the degree of tightening
currently priced into the euro curve, approximately 100 basis points before end
March, is overly pessimistic. Taken together with our positive value indicators,
this leads us to be modestly bullish on the euro market.

The Japanese bond market reflects a very different outlook to the dollar bloc
and European markets and we view this disparity as somewhat misplaced. While we
expect any pick up in growth in Japan to be gradual, we would not expect the
economy to be immune to stronger activity in the rest of the global economy, and
would therefore guard against being overly negative on the economy's prospects.
We believe the risk of tightening in Japan to be minimal, however, the market is
already pricing in a scenario of no tightening over the next two years and, as
such, there is a risk of market disappointment. This, combined with our
continued concerns over supply, means we remain bearish.

117
<PAGE>

Our long-term bearish view on the Japanese yen also remains unchanged,
particularly versus the euro. The dependency of the Japanese economy on its
exporters means that the strong yen risks undermining the fledgling Japanese
recovery which is clearly not an acceptable scenario for either the Bank of
Japan or the Ministry of Finance. However, over the short-term we are more
cautious on the yen given the current level of uncertainty and the resultant
unwillingness of Japanese investors to recycle their current account surplus.

J. David Germany
PORTFOLIO MANAGER

Michael B. Kushma
PORTFOLIO MANAGER

Paul F. O'Brien
PORTFOLIO MANAGER

Ram Willner
PORTFOLIO MANAGER

Christian G. Roth
PORTFOLIO MANAGER

October 1999

118
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- ------------------------------------------------------------------------------
INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- ------------------------------------------------------------------------------

FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
FIXED INCOME SECURITIES (91.5%)
AUSTRALIAN DOLLAR (2.3%)
GOVERNMENT BOND (1.4%)
AUD 700 Government of Australia 9.75%, 3/15/02 $ 501
-----------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (0.9%)
500 Federal National Mortgage Association -
Global 6.375%, 8/15/07 ...................... 321
-----------
822
-----------
BRITISH POUND (7.1%)
GOVERNMENT BOND (7.1%)
GBP 1,350 United Kingdom Treasury Gilt 8.50%, 7/16/07 ... 2,551
-----------
CANADIAN DOLLAR (3.2%)
GOVERNMENT BONDS (3.2%)
CAD 1,500 Government of Canada 8.75%, 12/01/05 .......... 1,179
-----------
DANISH KRONE (6.1%)
GOVERNMENT BONDS (6.1%)
DKK 4,800 Kingdom of Denmark 8.00%, 5/15/03 ............. 760
4,600 Kingdom of Denmark 7.00%, 12/15/04 ............ 718
4,400 Kingdom of Denmark 8.00%, 3/15/06 ............. 721
-----------
2,199
-----------
EURO (31.2%)
CORPORATE BONDS (4.5%)
EUR 200 BAT International Finance 4.875%, 2/25/09 ..... 193
200 Burmah Castrol Plc 4.875%, 3/31/09 ............ 198
500 Depfa Pfandbriefbank 5.50%, 1/15/10 ........... 530
(e)150 Dresdner Funding Trust 5.79%, 6/30/11 ......... 146
200 Mannesmann Finance BV 4.75%, 5/27/09 .......... 194
200 Philip Morris Financial 4.50%, 4/06/06 ........ 199
150 Royal Bank of Scotland Plc 4.875%, 3/26/09 145
-----------
1,605
-----------
GOVERNMENT BONDS (26.7%)
1,000 Bundesobligation 5.00%, 8/20/01 ............... 1,090
1,000 Buoni Poliennali Del Tesoro 9.50%, 2/01/06 .... 1,320
500 Deutschland Republic 6.50%, 7/04/27 ........... 576
800 Deutschland Republic, Series 91, 8.375%,
5/21/01 ..................................... 915
1,800 Government of France 5.25%, 4/25/08 ........... 1,926
1,000 Government of France 6.00%, 10/25/25 .......... 1,091
1,350 Government of The Netherlands, Series 1,
8.25%, 2/15/02 .............................. 1,572
1,000 Spanish Government 7.90%, 2/28/02 ............. 1,159
-----------
9,649
-----------
11,254
-----------
JAPANESE YEN (12.0%)
GOVERNMENT BONDS (12.0%)
JPY 300,000 Government of Japan, Series 207, 0.90%,
12/22/08 .................................... $ 2,585
155,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04 ................. 1,738
-----------
4,323
-----------
SWEDISH KRONA (4.4%)
GOVERNMENT BONDS (4.4%)
SEK 7,000 Swedish Government 13.00%, 6/15/01 ............ 969
4,900 Swedish Government 6.00%, 2/09/05 ............. 612
-----------
1,581
-----------
UNITED STATES DOLLAR (25.2%)
CORPORATE BONDS AND NOTES (9.5%)
U.S.$ 260 AT&T Corp. 6.50%, 3/15/29 ..................... 230
220 BankAmerica Corp. 5.875%, 2/15/09 ............. 201
200 Conoco, Inc., 6.95%, 4/15/29 .................. 186
400 Deutsche Ausgleichsbank, Series E, MTN 5.125%,
9/22/03 ..................................... 383
(e)250 Farmers Exchange Capital 7.05%, 7/15/28 ....... 214
(e)150 First Chicago Corp., 7.75%, 12/01/26 .......... 142
(e)100 Florida Windstorm 7.125%, 2/25/19 ............. 93
250 Ford Motor Co., 6.375%, 2/01/29 ............... 215
150 General Motors 6.75%, 5/01/28 ................. 135
300 Lucent Technologies 6.45%, 3/15/29 ............ 270
250 Merrill Lynch & Co., Inc. 6.875%, 11/15/18 229
(e)300 Metropolitan Life Insurance 7.45%, 11/01/23 279
(e)200 Monsanto Co., 6.60%, 12/01/28 ................. 173
(e)300 Nationwide Mutual Insurance 7.50%, 2/15/24 281
150 Wal-Mart Stores 6.875%, 8/10/09 ............... 150
250 Wells Fargo Co. 6.625%, 7/15/04 ............... 248
-----------
3,429
-----------
EUROBONDS (1.1%)
(e)150 Bayer Hypo-Vereinsbank 8.741%, 6/30/31 ........ 149
200 Kingdom of Belgium 9.20%, 6/28/10 ............. 233
-----------
382
-----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (14.6%)
U.S. TREASURY BONDS (5.9%)
1,800 U.S. Treasury Bond 8.125%, 8/15/19 ............ 2,131
-----------
U.S. TREASURY NOTES (8.7%)
700 U.S. Treasury Note 6.25%, 10/31/01 ............ 708
1,950 U.S. Treasury Note 7.50%, 2/15/05 ............. 2,084
350 U.S. Treasury Note 6.25%, 2/15/07 ............. 353
-----------
3,145
-----------
-----------
9,087
-----------
TOTAL FIXED INCOME SECURITIES (Cost $33,497) ...................... 32,996
-----------
</TABLE>

119
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- ------------------------------------------------------------------------------
INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------

FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENT (6.8%)
REPURCHASE AGREEMENT (6.8%)
U.S.$ 2,459 Chase Securities, Inc. 5.05%, dated 9/30/99,
due 10/01/99, to be repurchased at $2,459,
collateralized by U.S. Treasury Bonds, 6.0%,
due 2/15/26, valued at $2,479 (Cost $2,459) $ 2,459
-----------
TOTAL INVESTMENTS (98.3%) (Cost $35,956) .......................... 35,455
-----------
OTHER ASSETS AND LIABILITIES (1.7%)
Other Assets ................................................... 6,037
Liabilities .................................................... (5,418)
-----------
619
-----------
NET ASSETS (100%) ................................................. $ 36,074
-----------
-----------
CLASS A:
NET ASSETS ........................................................ $ 35,744
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 3,093,493 outstanding $0.001 par value shares
(authorized 500,000,000 shares) .............................. $ 11.55
-----------
-----------
CLASS B:
NET ASSETS ........................................................ $ 330
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 28,620 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ............................. $ 11.51
-----------
-----------

</TABLE>

- --------------------------------------------------------------------------------
(e) -- 144A Security - certain conditions for public sale may exist
MTN -- Medium Term Notes

120
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)
- -------------------------------------------------

[CHART]
<TABLE>
<S> <C>
Other (8.2%)
Warrants (0.2%)
Preferred Stocks (2.1%)
Mortgage Pass Through (0.2%)
Corporate Bonds and Notes (89.3%)
</TABLE>

PERFORMANCE COMPARED TO THE CS FIRST
BOSTON HIGH YIELD INDEX(1)

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
----- ----- ------- ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A .. 3.46% 9.13% 11.37% 10.95%
PORTFOLIO -- CLASS B .. 3.32 8.91 N/A 9.45
INDEX -- CLASS A ...... 1.17 3.95 8.61 8.83
INDEX -- CLASS B ...... 1.17 3.95 N/A 6.97
</TABLE>

1. The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION
TO PURCHASE OR SELL THE SECURITIES MENTIONED. INVESTING IN HIGH YIELD FIXED
INCOME SECURITIES, OTHERWISE KNOWN AS "JUNK BONDS" IS SPECULATIVE AND INCLUDES
GREATER RISK OF LOSS OF PRINCIPAL AND INTEREST. THE PERFORMANCE RESULTS PROVIDED
ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE
OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE
OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.

The High Yield Portfolio seeks to maximize total return by investing primarily
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.

For the nine months ended September 30, 1999, the Portfolio had a total return
of 3.46% for the Class A shares and 3.32% for the Class B shares compared to
1.17% for the CS First Boston High Yield Index (the "Index"). For the one year
period ended September 30, 1999, the Portfolio had a total return of 9.13% for
the Class A shares and 8.91% for the Class B shares compared to 3.95% for the
Index. For the five-year period ended September 30, 1999, the average annual
total return of Class A shares was 11.37% compared to 8.61% for the Index. For
the period since inception on September 28, 1992 through September 30, 1999, the
average annual total return of Class A shares was 10.95% compared to 8.83% for
the Index. For the period since inception on January 2, 1996 through
September 30, 1999, the average annual total return of Class B shares was
9.45% compared to 6.97% for the Index. As of September 30, 1999 the Portfolio
had a SEC 30-day yield of 9.98% for the Class A shares and 9.72% for the
Class B shares.

The high yield market underperformed higher quality bonds in the third quarter.
The stock market declined, interest rates rose slightly, and the Federal Reserve
tightened interest rates by 25 basis points. A large new issue calendar led to
supply problems, which forced high yield spreads wider. Dealers also were
lowering inventories to begin preparing for Y2K. These technical factors
occurred at the same time that net cash flows into high yield mutual funds
turned negative. High yield spreads ended the quarter 551 basis points above
treasuries, 54 basis points wider than at the end of the second quarter.

For the three months ended September 30, 1999, the Portfolio had a total return
of -0.65% for the Class A shares and -0.71% for the Class B shares compared to
- -1.60% for the Index. The Portfolio's overall higher quality versus the Index
was a major reason for the outperformance. Spreads widened throughout the high
yield market, but BB's performed better than lower quality bonds. The
Portfolio's exposure to emerging markets debt was another positive contributor
to performance as spreads generally tightened as worldwide economies improved
and commodity prices moved higher. The Portfolio also did a much better job at
avoiding problem credits than the market averages.

We continued to have an overweighting to the telecommunications sector. This
sector, along with cable and media, have continued to benefit from merger and

121
<PAGE>

investment activity. This activity has been very favorable for the credit
quality of high yield bonds because it usually involves a higher quality company
investing in or acquiring a lower rated company. Consolidation is being driven
by company attempts to position themselves to take advantage of the growth
prospects in these businesses in a rapidly evolving competitive environment.
Examples of transactions that occurred in the third quarter include: Cincinnati
Bell agreeing to acquire IXC Communications, France Telecom investing in NTL
Inc., Telewest receiving an equity infusion from both Microsoft and Liberty
Media, and GE's purchase of a 32% equity stake in Paxson Communications. Prices
of many issues not directly involved in a transaction have also benefited as
these deals continue to highlight the inherent asset values of many of the
companies in these sectors.

In terms of portfolio activity, we sold Rogers Cable and Communications, a
Canadian cable and telecom services provider, on strength. We also sold Allied
Waste and purchased Waste Management as we felt it had much more value. We
started this position after Waste Management was downgraded by both Moody's and
S&P. We also purchased a new deal for Stater Brothers, a west coast supermarket
chain, which we felt came at a very attractive spread. We also added to some
positions in the gaming and healthcare sectors, where we find increased value.

We expect to see continued good economic growth for the foreseeable future and
do not believe that inflation will rise meaningfully from current levels. We
feel that this economic environment, along with the widening of spreads in the
third quarter, has created an excellent opportunity for good performance in the
high yield market. We expect the technical factors that hindered the high yield
market in the third quarter will improve over the next few months. The Portfolio
held a reasonably high level of cash in the third quarter as the market drifted
lower. We will be spending a portion of this cash in the coming month, as we see
opportunities, to take advantage of this decline and in anticipation of a better
environment ahead.

Robert Angevine
PORTFOLIO MANAGER

Stephen F. Esser
PORTFOLIO MANAGER

Gordon W. Loery
PORTFOLIO MANAGER

October 1999

122
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- ------------------------------------------------------------------------------
INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- ------------------------------------------------------------------------------

FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS AND NOTES (89.3%)
ASSET BACKED CORPORATES (0.3%)
$ 554 Long Beach Auto, Series 97-1, Class B,
14.22%, 10/26/03 ........................... $ 550
-----------
CABLE (5.5%)
2,200 Adelphia Communications, Series B, 8.375%,
2/01/08 .................................... 2,057
475 Adelphia Communications, Series B, 9.875%,
3/01/07 .................................... 485
1,175 CSC Holdings, Inc., 9.875%, 5/15/06 .......... 1,226
(n)3,050 NTL, Inc., 0.00%, 4/01/08 .................... 2,013
410 Rogers Cablesystems of America, 10.125%,
9/01/12 .................................... 443
(e,n)3,300 Telewest Communication plc, 0.00%,
4/15/09 .................................... 1,988
1,740 United Pan-Europe Communications N.V.,
10.875%, 8/01/09 ........................... 1,757
-----------
9,969
-----------
CHEMICALS (2.0%)
(e)1,900 Huntsman ICI Chemicals, Inc., 10.125%,
7/01/09 .................................... 1,852
(e)1,700 Lyondell Chemical Co, 9.625%, 5/01/07 ........ 1,694
-----------
3,546
-----------
COMMUNICATIONS (21.7%)
1,765 American Cellular Corp., 10.50%, 5/15/08 ..... 1,818
1,195 AMSC Acquisition Co., Inc., 12.25%, 4/01/08 .. 848
(e)1,475 Centennial Cellular, 10.75%, 12/15/08 ........ 1,540
(n)9 Dobson Communications Corp., 0.00%, 1/01/80 .. 820
1,255 Dobson Communications Corp., 11.75%, 4/15/07 . 1,324
(n)2,425 Dolphin Telecom plc, 0.00%, 6/01/08 .......... 1,025
(e,n)300 Dolphin Telecom plc, 0.00%, 5/15/09 .......... 120
965 Esprit Telecom Group plc, 10.875%, 6/15/08 ... 967
600 Esprit Telecom Group plc, 11.50%, 12/15/07 ... 614
1,495 Global Crossing Holdings, 9.625%, 5/15/08 .... 1,536
1,175 Globalstar Capital Corp., 11.375%, 2/15/04 ... 764
310 Globalstar LP, 11.50%, 6/01/05 ............... 195
1,760 Hermes Europe Railtel BV, 11.50%, 8/15/07 .... 1,778
(n)1,510 Hyperion Telecommunication, 0.00%, 4/15/03 ... 1,268
(n)2,400 Intermedia Communications, Inc., Series B,
0.00%, 7/15/07 ............................. 1,596
1,500 Intermedia Communications, Inc., Series B,
8.50%, 1/15/08 ............................. 1,301
1,620 Iridium LLC/Capital Corp., Series A, 13.00%,
7/15/05 .................................... 170
1,020 Metromedia Fiber Network, 10.00%, 11/15/08 ... 989
(n)1,860 Nextel Communications, Inc., 9.75%, 8/15/04 .. 1,876
(n)4,100 Nextel Communications, Inc., 0.00%, 9/15/07 .. 3,024
(n)735 Nextel Communications, Inc., 0.00%, 2/15/08 .. 511
(n)2,550 NEXTLINK Communications, Inc., 0.00%,
4/15/08 .................................... 1,532
450 NEXTLINK Communications, Inc., 10.75%,
11/15/08 ................................... 453
(e)1,290 Onepoint Communications Corp., 14.50%,
6/01/08 .................................... 826
1,315 Primus Telecommunications Group, Inc., 9.875%,
5/15/08 .................................... 1,151
(e)640 Primus Telecommunications Group, Inc., 11.25%,
1/15/09 .................................... 608
1,120 Psinet, Inc., 10.00%, 2/15/05 ................ 1,075
670 Psinet, Inc., 11.00%, 8/01/09 ................ 660
(n)245 RCN Corp., 0.00%, 10/15/07 ................... 159
(n)2,265 RCN Corp., 0.00%, 2/15/08 .................... 1,352
(n)2,250 Rhythms Netconnections, 0.00%, 5/15/08 ....... 1,119
(n)1,440 RSL Communications, plc, 0.00%, 3/01/08 ...... 810
3,225 RSL Communications, plc, 9.125%, 3/01/08 ..... 2,757
51 RSL Communications, plc, 12.25%, 11/15/06 .... 51
(e)1,025 Tele1 Europe BVC, 13.00%, 5/15/09 ............ 1,005
(n)1,440 Viatel, Inc., 0.00%, 4/15/08 ................. 821
(n)1,290 Wam!Net, Inc., 13.25%, 3/01/05 ............... 769
-----------
39,232
-----------
ENERGY (2.0%)
(e,n)800 Husky Oil Ltd., 8.90%, 8/15/28 ............... 766
2,040 Snyder Oil Corp., 8.75%, 6/15/07 ............. 2,017
300 Vintage Petroleum, 8.625%, 2/01/09 ........... 289
570 Vintage Petroleum, 9.75%, 6/30/09 ............ 583
-----------
3,655
-----------
FOOD & BEVERAGES (0.8%)
1,625 Smithfield Foods, Inc., 7.625%, 2/15/08 1,463
-----------
GAMING & LODGING (6.7%)
2,800 Harrahs Operating Co., Inc., 7.875%,
12/15/05 ................................... 2,681
(e)1,965 Horseshoe Gaming Holdings Corp., 8.625%,
5/15/09 .................................... 1,872
(e)2,655 International Game Technology, 8.375%,
5/15/09 .................................... 2,541
1,975 Park Place Entertainment, 7.875%, 12/15/05 ... 1,864
1,300 Station Casinos, Inc., 8.875%, 12/01/08 ...... 1,261
470 Station Casinos, Inc., 9.75%, 4/15/07 ........ 477
1,413 Station Casinos, Inc., 10.125%, 3/15/06 ...... 1,452
-----------
12,148
-----------
GENERAL INDUSTRIAL (3.9%)
(e)820 Applied Power, Inc., 8.75%, 4/01/09 .......... 767
950 Axia, Inc., 10.75%, 7/15/08 .................. 879
(e)2,000 Hayes Lemmerz International, Inc., 8.25%,
12/15/08 ................................... 1,760

</TABLE>

123
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- ------------------------------------------------------------------------------
INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------

FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
GENERAL INDUSTRIAL (CONT.)
$ (n)1,150 Norcal Waste Systems, Inc., Series B, 13.50%,
11/15/05 ................................... $ 1,230
965 Sequa Corp, 9.00%, 8/01/09 ................... 948
215 Waste Management, Inc., 6.875%, 5/15/09 ...... 188
355 Waste Management, Inc., 7.00%, 10/15/06 ...... 320
330 Waste Management, Inc., 7.125%, 10/01/07 ..... 298
400 Waste Management, Inc., 7.125%, 12/15/17 ..... 330
450 Waste Management, Inc., 7.65%, 3/15/11 ....... 411
-----------
7,131
-----------
HEALTH CARE (7.1%)
2,100 Columbia/HCA Healthcare Corp., 7.69%,
6/15/25 .................................... 1,724
1,500 Columbia/HCA Healthcare Corp., 6.91%,
6/15/05 .................................... 1,351
1,570 Columbia/HCA Healthcare Corp., 7.25%,
5/20/08 .................................... 1,392
600 Columbia/HCA Healthcare Corp., 7.58%,
9/15/25 .................................... 479
895 Columbia/HCA Healthcare Corp., 8.13%,
8/04/03 .................................... 871
1,450 Columbia/HCA Heathcare Corp., 7.00%,
7/01/07 .................................... 1,277
(e)1,730 Fresenius Medical Capital Trust II, 7.875%,
2/01/08 .................................... 1,592
2,250 Tenet Healthcare Corp., 8.125%, 12/01/08 ..... 2,059
2,175 Tenet Healthcare Corp., 8.625%, 1/15/07 ...... 2,072
-----------
12,817
-----------
HOTEL/MOTEL (2.8%)
1,925 Hilton Hotels Corp., 7.95%, 4/15/07 .......... 1,838
2,100 HMH Properties, Inc., Series A, 7.875%,
8/01/05 .................................... 1,932
625 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05 .................................... 650
(e)700 Host Marriott LP, 8.375%, 2/15/06 ............ 658
-----------
5,078
-----------
MEDIA & ENTERTAINMENT (4.2%)
1,770 Chancellor Media Corp., 8.125%, 12/15/07 ...... 1,708
1,805 Chancellor Media Corp., 9.00%, 10/01/08 ....... 1,832
(e)2,100 Echostar DBS Corp., 9.375%, 2/01/09 ........... 2,066
2,000 Outdoor Systems, Inc., 8.875%, 6/15/07 ........ 2,055
-----------
7,661
-----------
METALS (2.6%)
435 Glencore Nickel Property Ltd., 9.00%,
12/01/14 .................................... 371
2,080 Murrin Murrin Holdings, PTY, (Yankee
Bond), 9.375%, 8/31/07 ...................... 1,841
1,800 National Steel Corp., 9.875%, 3/01/09 ......... 1,782
825 Republic Technologies International LLC/RTI
Capital Corp., 13.75%, 7/15/09 .............. 783
-----------
4,777
-----------
PACKAGING (3.2%)
1,950 Norampac, Inc., 9.50%, 2/01/08 ................ 1,979
(e)1,945 Pacifica Papers, Corp., 10.00%, 3/15/09 ....... 1,967
1,145 SD Warren Co., 12.00%, 12/15/04 ............... 1,207
660 Tembec Industries, Inc., 8.625%, 6/30/09 ...... 647
-----------
5,800
-----------
REAL ESTATE (3.1%)
2,390 American Standard, Cos., Inc., 7.375%,
2/01/08 ..................................... 2,181
1,855 D R Horton, Inc., 8.00%, 2/01/09 .............. 1,651
(e)1,970 Nortek, Inc., 8.875%, 8/ 01/08 ................ 1,862
-----------
5,694
-----------
RETAIL (8.1%)
(e)1,616 CA FM Lease Trust, 8.50%, 7/15/17 ............. 1,511
(e)2,150 Cex Holdings, Inc., 9.625%, 6/01/08 ........... 2,276
586 DR Securitized Lease Trust, Series 93-K1,
Class A1, 6.66%, 8/15/10 .................... 535
2,079 DR Securitized Lease Trust, Series 94-K1,
Class A1, 7.60%, 8/15/07 .................... 2,018
1,175 DR Securitized Lease Trust, Series 94-K1,
Class A2, 8.375%, 8/15/15 ................... 1,122
2,275 HMV Media Group plc, Series A, 10.25%,
5/15/08 ..................................... 2,230
1,250 Kmart Funding Corp., 8.80%, 7/01/10 ........... 1,262
500 Musicland Group, Inc., 9.00%, 6/15/03 ......... 485
2,245 Musicland Group, Inc., 9.875%, 3/15/08 ........ 2,043
1,100 Stater Brothers Holdings, Inc., 10.75%,
8/15/06 ..................................... 1,122
-----------
14,604
-----------
SOVEREIGN & EMERGING MARKETS (10.5%)
970 Asia Pulp & Paper Co., Ltd., 12.00%, 2/15/04 .. 514
(e)1,350 AST Research, Inc., 7.45%, 10/01/02 ........... 1,298
2,000 Bayan Telecommunications, Inc., 13.50%,
7/15/06 ..................................... 1,890
(e)850 Cablevision SA, 13.75%, 5/01/09 ............... 799
(e,n)795 Cia Energitica de Sao Paulo, 9.125%, 6/26/07 .. 690
(n)2,600 CTI Holdings, 0.00%, 4/15/08 .................. 1,287
975 Hyundai Semiconductor, 8.625%, 5/15/07 ........ 759
2,225 Indah Kiat Financial Mauritius, 10.00%,
7/01/07 ..................................... 1,212
1,640 Multicanal SA, 10.50%, 2/01/07 ................ 1,338
(e)1,375 Netia Holdings II BV, 13.125%, 6/15/09 ........ 1,365
(e)1,010 NSM Steel, Inc., 12.25%, 2/01/08 .............. 1
(e,n)2,275 Occidente y Caribe Cellular, 0.00%, 3/15/04 ... 1,240
1,350 Pindo Deli Finance Mauritius, 10.75%, 10/01/07 736
(n)1,690 PTC International Finance BV, 0.00%, 7/01/07 1,183
950 Republic of Columbia, 9.75%, 4/23/09 .......... 819
1,180 Satelites Mexicanos, 10.125%, 11/01/04 ........ 920
2,475 TV Azteca, Series B, 10.50%, 2/15/07 .......... 1,906
1,500 United Mexican States, 6.25%, 12/31/19 ........ 1,106
-----------
19,063
-----------

</TABLE>

124
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- ------------------------------------------------------------------------------
INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------

FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (0.1%)
$ 320 Entex Telecom Group plc, 12.50%, 8/01/06 ...... $ 198
-----------
TRANSPORTATION (2.0%)
1,677 Aircraft Lease Portfolio Securitization Ltd.,
Series 96-1 P1, Class D, 12.75%, 6/15/06..... 1,677
(e)525 Jet Equipment Trust, Series 95-D, 11.44%,
11/01/14 .................................... 626
1,050 Jet Equipment Trust, Series C-1, 11.79%,
6/15/13 ..................................... 1,266
-----------
3,569
-----------
UTILITIES (2.7%)
1,780 AES Corp., 8.50%, 11/01/07 .................... 1,624
2,400 CMS Energy, 7.50%, 1/15/09 .................... 2,214
(e)1,185 Ras Laffan Gas Liquified Natural Gas, 8.294%,
3/15/14 ..................................... 1,085
-----------
4,923
-----------
TOTAL CORPORATE BONDS AND NOTES (Cost $175,014) ................... 161,878
-----------

MORTGAGE PASS-THROUGH (0.2%)
COMMERCIAL MORTGAGES (0.2%)
(e)875 FMAC Loan Receivables Trust, Series 96-B,
Class C (Floating Rate), 7.929%,
11/01/18 (Cost $749) ........................ 306
-----------
SHARES
------------
COMMON STOCKS (0.0%)
HOTEL/MOTEL (0.0%)
(e)1,300 Motels of America, Inc. (Cost $85) ............ 14
-----------
PREFERRED STOCKS (2.1%)
COMMUNICATIONS (1.3%)
7,940 Concentric Network Corp. ...................... 731
1,475 IXC Communications, Inc., Series B, PIK ....... 1,578
-----------
2,309
-----------
MEDIA & ENTERTAINMENT (0.8%)
10,719 Paxson Communications Corp., PIK, 13.25%,
11/15/06 .................................... 1,158
(e)3,536 Paxson Communications Corp., PIK, 9.75%,
12/31/06 .................................... 389
-----------
1,547
-----------
TOTAL PREFERRED STOCKS (Cost $3,147) .............................. 3,856
-----------
NO. OF
WARRANTS
------------
WARRANTS (0.2%)
COMMUNICATIONS (0.1%)
(e)18,450 American Mobile Satellite Corp., expiring
4/01/08 ..................................... 65
(e)600 Globalstar Telecommunications Ltd., expiring
2/15/04 ..................................... 55
(e)605 Iridium World Communications, Inc., expiring
7/15/05 ..................................... 1
(e)12,900 Onepoint Communications Corp., expiring
6/1/08 ...................................... 1

NO. OF VALUE
WARRANTS (000)
-----------------------------------------------------------
10,250 Tele1 Europe B.V, expiring 5/15/09 ............ $ 76
38,700 Wam!Net, Inc., expiring 3/01/05 ............... 88
-----------
286
-----------
MEDIA & ENTERTAINMENT (0.0%)
(e)1,024 Paxson Communications Corp., expiring 6/30/03 . --
-----------
SOVERIGN & EMERGING MARKETS (0.1%)
(e)6,394,240 NSM Steel Ltd., Inc., expiring 2/01/08 ........ 6
91,000 Occidente y Caribe Cellular, expiring 3/15/04 . 138
-----------
144
-----------
TOTAL WARRANTS (Cost $0) .......................................... 430
-----------
FACE
AMOUNT
(000)
------------
SHORT-TERM INVESTMENT (6.2%)
REPURCHASE AGREEMENT (6.2%)
$ 11,158 Chase Securities, Inc. 5.05%, dated 9/30/99,
due 10/1/99, to be repurchased at $11,160,
collateralized by U.S. Treasury Bonds,
6.00% due 2/15/26, valued at $11,249
(Cost $11,158) .............................. 11,158
-----------
TOTAL INVESTMENTS (98.0%) (Cost $190,153) ......................... 177,642
-----------
OTHER ASSETS AND LIABILITIES (2.0%)
Other Assets ................................................... 16,897
Liabilities .................................................... (13,317)
-----------
3,580
-----------
NET ASSETS (100%) ................................................. $ 181,222
-----------
-----------
CLASS A:
NET ASSETS ........................................................ $ 134,213
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 12,790,732 outstanding $0.001 par value shares
(authorized 500,000,000 shares) .............................. $ 10.49
-----------
-----------
CLASS B:
NET ASSETS ........................................................ $ 47,009
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 4,491,440 outstanding $0.001 par value shares
(authorized 500,000,000 shares) .............................. $ 10.47
-----------
-----------

</TABLE>

- --------------------------------------------------------------------------------
(e) -- 144A Security - certain conditions for public resale may exist.
(n) -- Step Bond - coupon rate increases in increments to maturity. Rate
disclosed is as of September 30, 1999. Maturity Date is the ultimate
maturity date.
PIK -- Payment-in-Kind. Income may be received in additional securities
or cash at the discretion of the issuer.
Floating Rate Security -- The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are in
effect on September 30, 1999.

125
<PAGE>

COMPOSITION OF NET ASSETS (AT SEPTEMBER 30, 1999)

[CHART]
<TABLE>
<S> <C>
Variable/Floating Rate
Instruments (6.4%)
Fixed Rate Instruments (97.6%)
Other (-4.0%)
</TABLE>

PERFORMANCE COMPARED TO THE LEHMAN
7-YEAR MUNICIPAL BOND INDEX(1)

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
AVERAGE
ONE ANNUAL
YTD YEAR SINCE INCEPTION
------ ------ ---------------
<S> <C> <C> <C>
Portfolio -- Class A ... -1.67% -1.46% 4.96%
Index .................. -0.05 0.57 6.37
</TABLE>

(1) The Lehman 7-Year Municipal Bond Index consists of investment grade bonds
with maturities between 6-8 years, rated BAA or better. All bonds have been
taken from issues of at least $50 million in size sold within the last five
years.

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

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES MENTIONED. THE PERFORMANCE
RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE
SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.

The Municipal Bond Portfolio seeks high current income consistent with
preservation of principal through investment in a portfolio consisting primarily
of intermediate and long-term investment grade municipal obligations, the
interest on which is exempt from Federal income tax.

For the nine months ended September 30, 1999, the Portfolio had a total return
of -1.67% for the Class A shares compared to -0.05% for the Lehman 7-Year
Municipal Bond Index (the "Index"). For the one year period ended September 30,
1999, the Portfolio had a total return of -1.46% for the Class A shares compared
to 0.57% for the Index. For the period since inception on January 18, 1995
through September 30, 1999, the average annual total return of Class A shares
was 4.96% compared to 6.37% for the Index. As of September 30, 1999 the
Portfolio had a SEC 30-day yield of 4.69% for the Class A shares.

The Portfolio underperformed during the third quarter due to the Portfolio
duration being slightly longer than the Index. With the shorter end of the yield
curve significantly outperforming the longer end, the Portfolio's longer
holdings, especially the current coupon housing bonds, lagged during the
quarter. The housing sector has historically been attractive because these bonds
tend to generate an attractive level of current income. Going into the fourth
quarter, we have shortened the maturity of the Portfolio to bring it closer in
line with the Index. We believe our emphasis on premium coupon noncallable bonds
should help the Portfolio ride out what could be a difficult period in the fixed
income markets over the next few months.

The municipal bond market had a slightly better tone during the third quarter
but still struggled with the pattern of rising rates that has prevailed
throughout the year. Bonds with maturities of 10 years and in managed to post
positive returns for the quarter, while bonds maturing 15 years and out posted
negative returns. During the quarter, individual investors showed support for
the market, hence the positive performance in the 1-10 year range. Long-term
bond funds and property and casualty insurance companies were either net sellers
during the quarter or focused on tax swapping, selling poorly structured bonds
purchased when interest rates were lower and replacing them with more attractive
current coupon bonds. This left little support for bonds on the longer end of
the yield curve. Weak performance on the long end was magnified by current
coupon bonds suddenly becoming market discount bonds, subjecting purchasers to
the market discount penalty. This penalty on deep discount results from the tax
liability realized on the difference between the coupon on the bonds and the
current purchase yield. As is common during difficult market environments, a
clear two-tiered market developed during the quarter.

126
<PAGE>

Bonds with a good structure (i.e. noncallable bonds with a premium coupon)
and clean credit profile saw strong bids and better relative performance
while bonds with poor structure (i.e. deep discount coupons, short calls)
and weaker credits saw limited support as they accumulated in dealer
inventories. Dealer reluctance to continue to support the "less desirable"
bonds could cause a further widening of the spread between good vs. bad
structure bonds as 1999 draws to a close.

The relatively small net change in interest rates during the quarter (the
30-year U.S. Treasury started the quarter yielding 5.96% and ended the
quarter yielding 6.05%) actually masked a fair amount of interim volatility
during the period. Market psychology was negative early in the quarter as
credit markets were strongly influenced by continued tightness in labor
markets and associated inflation risks, typified by a 1% rise in labor costs
during the second quarter. As expected, at the August 25th FOMC meeting, the
Federal Reserve decided to hike its federal funds rate target by 25 basis
points to 5.25% and to raise the discount rate to 4.75%. There was no bias in
terms of future policy changes, and the statement that accompanied the policy
action was somewhat friendlier than after the June 30th meeting. However,
the market became acutely aware that additional hikes remained possible if
strong economic data continued to prevail. In reaction to the Fed tightening,
as well as rising commodity prices, an unstable dollar, and a surge in
corporate borrowing, yields on Treasuries rose for most of the summer. Market
psychology eventually improved as several economic reports subsequently
revealed favorable trends in core consumer and producer price levels. As the
quarter came to a close, the markets traded in a tight range awaiting the
October FOMC meeting.

For the first nine months of the year, municipal new issue volume is down 20%
from the same period last year. Looking forward, there appears to be many
bonds coming down the new issue pipeline, particularly in the public power
sector. In the new era of electric power deregulation, municipal electric
utility systems will need to restructure and lower debt service costs. We
expect this type of issuance to remain strong for the rest of 1999 and
continue well into the year 2000.

The municipal bond market could be headed for a bumpy ride through the end of
the year. New issuance is expected to pick up prior to an expected Y2K
slowdown at the beginning of next year. This additional supply could be met
with a lack of interest from traditional crossover buyers as the corporate
supply rush continues to create an investment alternative for these
institutional buyers. We would look for any further widening of the
Municipal/Treasury yield ratio to be a very attractive municipal bond buying
opportunity.

Lori A. Cohane
PORTFOLIO MANAGER

October 1999

127
<PAGE>

MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- ------------------------------------------------------------------------------

FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TAX-EXEMPT INSTRUMENTS (104.0%)
FIXED RATE INSTRUMENTS (97.6%)
$ 250 Bernalillo County, New Mexico, Revenue Bonds,
5.00%, 4/01/12 ................................ $ 243
1,220 City of Dallas, Texas, General Obligation
Bonds, 6.00%, 2/15/06 ......................... 1,304
1,500 Connecticut State, General Obligation Bonds,
Series E, 6.00%, 3/15/12 ...................... 1,603
525 Delaware Transit Authority, 5.75%, 7/01/08 ...... 545
500 Fairfax County, Virginia, Water Authority
Revenue Bonds, 6.00%, 4/01/22 Prerefunded
4/01/07 at 102 ................................ 545
1,500 Florida State Board of Education, Capital
Outlay, Public Education, General Obligation
Bonds, 6.40%, 6/01/19 ......................... 1,573
160 Georgia State, General Obligation Bonds,
Series B, 6.00%, 3/01/12 ...................... 171
500 Georgia State, General Obligation Bonds,
Series F, 6.50%, 12/01/06 ..................... 555
1,000 Gwinnett County, Georgia, General Obligation
Bonds, 6.00%, 1/01/11 ......................... 1,057
1,000 Hawaii State, General Obligation Bonds,
Series CJ, Revenue Bonds, 6.20%, 1/01/12
Prerefunded 1/01/ 05 at 100 ................... 1,072
570 Huntsville, Alabama, General Obligation Bonds,
Series A, 5.50%, 2/01/20 ...................... 549
1,000 Kentucky State Housing Corp., Revenue Bonds,
Series A, 6.00%, 7/01/10 ...................... 1,014
1,625 Michigan State Housing Development Authority,
Revenue Bonds, Series A, 6.75%, 12/01/14 ...... 1,680
1,225 Minnesota State Housing Finance Agency, 5.55%,
7/01/14 ....................................... 1,218
1,400 Mississippi State, General Obligation Bonds,
6.00%, 2/01/09, Prerefunded 2/01/05 at 100 .... 1,486
675 Monroe County, NY, 5.125%, 3/01/10 .............. 677
500 Municipal Assistance Corp. for City of New York,
NY, Revenue Bonds, 6.00%, 7/01/04 ............. 531
935 Ohio State, Housing Finance Agency, Residential
Mortgage Revenue Bonds, Series A- 1, 6.20%,
9/01/14 ....................................... 967
1,000 Orlando, Florida, Utilities Commission Water &
Electric, Revenue Bonds, Series D, 6.75%,
10/01/17 ...................................... 1,139
600 Salt Lake City, Utah, General Obligation Bonds,
6.375%, 6/15/11 ............................... 619
1,385 Shelby County, Tennessee, General Obligation
Bonds, Series B, 5.50%, 8/01/10 ............... 1,431
1,500 Texas State, Public Finance Authority, Series A,
5.95%, 10/01/15, Prerefunded 4/01/05 at
100 ........................................... 1,591
500 Triborough Bridge & Tunnel Authority, New York,
Revenue Bonds, Series Y, 6.00%, 1/01/12 ....... 533
725 Utah State Housing Finance Agency, Single
Family Mortgage Revenue Bonds, 5.45%,
7/01/11 ....................................... 721
275 Utah State, Housing Financing Agency, Single
Family Mortgage Revenue Bonds, Series G-1,
Class I, 5.50%, 7/01/16 ....................... 266
500 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds,
Series B, 6.60%, 1/01/12 ...................... 515
1,000 Washington State, General Obligation Bonds,
Series B, 6.40%, 6/01/17 ...................... 1,094
1,115 Wisconsin State, General Obligation Bonds,
Series 2, 5.125%, 11/01/11 .................... 1,108
-----------
TOTAL FIXED-RATE INSTRUMENTS (Cost $25,530) ....................... 25,807
-----------
VARIABLE/FLOATING RATE INSTRUMENTS (6.4%)
700 Hapeville, Georgia, Industrial Development
Authority, Series 85, 4.70%, 11/01/15 ......... 700
400 Manatee County, Florida, Pollution Control,
Revenue Bonds, 3.80%, 9/01/24 ................. 400
300 New York, NY, Series B, 4.15%, 10/01/20 ......... 300
300 Saint Lucie County, Florida, Pollution Control
Revenue Bonds, 3.35%, 1/01/26 ................. 300
-----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS (Cost $1,700) ......... 1,700
-----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $27,230) ....................... 27,507
-----------
TOTAL INVESTMENTS (104.0%) (Cost $27,230) ......................... 27,507
-----------
OTHER ASSETS AND LIABILITIES (-4.0%)
Other Assets ................................................... 953
Liabilities .................................................... (2,012)
-----------
(1,059)
-----------
NET ASSETS (100%) ................................................. $ 26,448
-----------
-----------
CLASS A:
NET ASSETS ........................................................ $ 26,448
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 2,683,549 outstanding $0.001 par value shares
(authorized 500,000,000 shares) ............................... $ 9.86
-----------
-----------
</TABLE>
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Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based on changes upon a designated base rate. These
instruments are payable on demand.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the
next interest reset dates which are seven days or less.
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Prerefunded Bonds -- Outstanding bonds have been refunded to the first call
date (prerefunded date) by the issuance of new bonds. Principal and
interest are paid from monies escrowed in the U.S. Treasury
securities. Prerefunded bonds are generally re- rated AAA due to the
U.S. Treasury escrow.

128
<PAGE>

MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND, INC.
- ------------------------------------------------------------------------------

DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley Dean Witter
Investment Management Inc. and Morgan Stanley Dean Witter
Investment Management Limited; Managing
Director, Morgan Stanley & Co. Incorporated

Michael F. Klein
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Dean Witter Investment
Management Inc. and Morgan Stanley & Co.
Incorporated

John D. Barrett II
Chairman and Director,
Barrett Associates, Inc.

Gerard E. Jones
Partner, Richards & O'Neil LLP

Andrew McNally IV
River Road Partners

Samuel T. Reeves
Chief Executive Officer,
Pinnacle Trading, LLC

Fergus Reid
Chairman and Chief Executive Officer,
LumeLite Plastics Corporation

Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin & Boehm, P.C.

INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020

DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020

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

LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pennsylvania 19103

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036

OFFICERS
Stefanie V. Chang
VICE PRESIDENT

Harold J. Schaaff, Jr.
VICE PRESIDENT

Joseph P. Stadler
VICE PRESIDENT

Mary E. Mullin
SECRETARY

Belinda A. Brady
TREASURER

FOR CURRENT PERFORMANCE, CURRENT NET ASSET VALUE, OR FOR ASSISTANCE WITH YOUR
ACCOUNT, PLEASE CONTACT THE FUND AT (800) 548-7786, OR VISIT OUR WEBSITE AT
WWW.MSDW.COM/INSTITUTIONAL/INVESTMENTMANAGEMENT.

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