MORGAN STANLEY EMERGING MARKETS FUND INC, N-30D, 1998-09-04

MORGAN STANLEY EMERGING MARKETS FUND INC
N-30D, 1998-09-04

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<PAGE>
- --------------------------------------------------------------------------------
MORGAN STANLEY
EMERGING MARKETS
FUND, INC.
- --------------------------------------------------------------------------------

SEMI-ANNUAL REPORT
JUNE 30, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER

MORGAN STANLEY
EMERGING MARKETS FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS

Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS

Michael F. Klein
PRESIDENT AND DIRECTOR

Peter J. Chase
DIRECTOR

John W. Croghan
DIRECTOR

David B. Gill
DIRECTOR

Graham E. Jones
DIRECTOR

John A. Levin
DIRECTOR

William G. Morton, Jr.
DIRECTOR

Stefanie V. Chang
VICE PRESIDENT

Harold J. Schaaff, Jr.
VICE PRESIDENT

Joseph P. Stadler
VICE PRESIDENT

Valerie Y. Lewis
SECRETARY

Joanna M. Haigney
TREASURER

Belinda A. Brady
ASSISTANT TREASURER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT ADVISER

Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
ADMINISTRATOR

The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIANS

Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201

The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT

Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(800) 730-6001
- --------------------------------------------------------------------------------
LEGAL COUNSEL

Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.

<PAGE>

LETTER TO SHAREHOLDERS
- ----------

For the six months ended June 30, 1998, the Morgan Stanley Emerging Markets
Fund, Inc. (the "Fund") had a total return, based on net asset value per share,
of -8.10% compared with -15.84% for the IFC Global Total Return Composite Index
(the "Index"). For the one year ended June 30, 1998, and for the period from
commencement of operations on November 1, 1991 through June 30, 1998, the Fund's
total return, based on net asset value per share, was -29.10% and 91.05%,
respectively, compared with -38.58% and 17.42%, respectively, for the Index. On
June 30, 1998, the closing price of the Fund's shares on the New York Stock
Exchange was $9 3/8, representing a 20.6% discount to the Fund's net asset value
per share.

The spectacular bust in Asia and the bear market in emerging countries have
heightened the importance of resolving the issues plaguing these markets. In
our view, investors are passing judgment that capitalism without democracy is
fundamentally flawed, and they are demanding politically open systems which
encourage the free flow of information of all kinds. This free flow of
information is ultimately the best natural "regulator" in the world. A free
press, full and frequent disclosure by corporations, government agencies and, in
particular, the banking system is vital for vibrant and effective economic
functioning.

It is our opinion that one of the most critical factors in the modernizing
equation for poor countries, particularly democracies, is the specter of mass
unemployment. Economic liberalization dramatically increases efficiency and is
fundamentally deflationary in its early stages. Japan, Asia and Russia are in
the throes of an inevitable adjustment, and Latin America, particularly Mexico,
is in the early stages of recovering from one. In truly impoverished countries,
unemployment is more than a statistic and a political inconvenience. Social
safety nets are crucial in countries with high illiteracy and low or no labor
mobility. Mass privatizations are critical, not only in increasing efficiency
and accountability in large parts of the economy, but also as an important
source of funding for social security and unemployment benefits.

At the micro economic level, a focus on shareholder values needs to replace the
idea of old style "Asian Values", i.e., corporations must be run in the interest
of the owners, and not directed by overweening politicians, ministries or run in
the "national interest". In today's world of low and declining tariffs, intense
global competition and readily available information, corporate survival will
increasingly depend on producing goods and services of better quality at lower
prices. The corporate largesse engendered by the corrupt nexus between
politics and big business must end. Increasingly, the ability to extract
earnings from assets that exceed their cost of capital will be key. Developing
countries will have to focus on nurturing and producing a professional cadre of
businessmen who can steer family-begun and run empires in a more competitive
global landscape. Education at the management and employee level will be
critical, otherwise technologically driven productivity jumps, primarily in the
West, will erode one of the important competitive edges of the Emerging Markets
- -- cheap and plentiful labor.

To summarize, we believe there are several important lessons to be learned from
the Asian currency crisis:

- Consistency in fiscal, monetary and currency policy is crucial.
Inconsistency is brutally punished.

- Banking systems are the heart of an economy and must be carefully and
rigorously supervised.

- Bankruptcy laws are crucial cleansing solvents, and must be clearly stated
and enforced.

- Return on equity must exceed the cost of equity. Prices of both must be
clear; shareholder and property rights must be respected in the capital
markets and in the board room.

- Deregulating capital markets without deregulating domestic industry is a
disastrous combination.

During the second quarter, a round of Asian contagion spread throughout the
emerging markets largely due to Japan's equity and currency malaise. The Fund's
edge over the Index was largely driven by strong stock selection, particularly
in Russia, Brazil, India, and Taiwan. Our underweight position in Malaysia was
the single most important contributor to outperformance on a country basis as
the market fell 46.1% during the second quarter. Also favorable was our
overweight exposure to Poland and Turkey which returned -2.7% and +9.5%,
respectively. The most notable negative was our underweight position in Greece
which was up 17.8% over the quarter.

The recent turmoil in the emerging markets has led to steep declines in all
the Latin markets. The Latin region fell 20.0% during the second quarter led
by Venezuela (-40.2%), Brazil (-22.0%), and Chile (-21.7%). Peru was the
best performing Latin market, falling 4.7%. Declining commodity prices
(particularly oil and copper) and political noise given upcoming presidential
elections (Brazil and Venezuela) have negatively affected these markets.

During the second quarter, we increased our Argentine exposure by approximately
2%, to a market weight position. This increase was driven by signs of economic
strength and the government's commitment to reform. We trimmed 2% from our
Brazilian holdings, bringing us to a

2
<PAGE>

market-neutral position. While Brazil offers attractive value and growth
opportunities on a stock level, it suffers from deteriorating macro variables,
such as a widening fiscal deficit and a vulnerable currency. In Argentina and
Brazil, we are focusing on the telecom sector given its strong operating
earnings growth and privatization potential. While remaining underweight, we
increased (+1%) our Mexican exposure during the month of April. Our underweight
position is driven by a deterioration in the macro environment (i.e., worsening
trade account and expectations for higher inflation and interest rates). We are
focusing on the consumer-related industries, such as beverages and retailers,
given the continued strength of the Mexican consumer.

The Asian markets plunged 33.2% during the second quarter, driven by declines in
Thailand (-52.6%), Indonesia (-52.5%), and Malaysia (-46.1%). The best
performing Asian market was Taiwan, which fell 23.1%. Asia's abysmal returns
were a result of renewed fears that Asia's currency markets would devalue again
based on currency instability in Japan and Russia. Also disconcerting for the
markets has been news of mounting bad bank loans, and rising interest rates,
inflation and unemployment within South East Asia. The most notable political
event took place in Indonesia, where President Suharto resigned on May 21 after
leading the country for 32 years. Vice President Habibie replaced him (to the
dismay of many student protesters) and has pledged new general elections next
year. We expect that Habibie will be in office on a transitional basis.

The equity markets of the Indian sub-continent plummeted, with India and
Pakistan falling 20.8% and 52.3%, respectively. Both markets toppled in the
aftermath of nuclear tests, sparking renewed tension in the region and economic
sanctions from the U.S. and Japan. We had been focusing on these markets as
they offered good value and growth potential. Nevertheless, with the
announcement of a disappointing Indian budget on June 1, we have begun to trim
our overweight position there.

Europe, Middle East and Africa posted disparate returns. The laggards included
Russia (-53.1%) and South Africa (-26.6%). Turkey and Israel were the star
performers of this region, returning +9.5% and +5.8%, respectively. Russia's
equity market was decimated in the second quarter given political changes,
pressure on the currency, and oil price declines. At the end of March,
President Yeltsin dismantled his cabinet in a successful effort to get rid of
then Prime Minister Chernomyrdin. Yeltsin assembled his new team headed by
Prime Minister Kiriyenko, who had previously been the Fuel and Energy Minister.
In the short-term, sentiment deteriorated as fears over currency instability
forced the central bank to hike interest rates by more than 100%.

South African equity and currency markets faced an arduous June, as returns
spiraled downward throughout the month. The equity market fell 23.3% in June,
including a 15.7% decline in the currency versus the dollar. A weak supply of
foreign currency reserves left the government unable to ward off increasing
pressure on the currency, as speculators sensed vulnerability. A lack of
consistency in implementing monetary policy led to a loss of confidence in the
central bank. The central bank continued to tinker with overnight repurchase
rates throughout the month, only to induce more pessimism over the short-term
future of the South African market. Ongoing structural problems in wages, which
remain high in real terms, weaker dollar commodity prices and low economic
growth conspired to create an overvalued rand vis-a-vis Asian currencies,
further eroding the competitiveness of South African companies.

Over the course of the second quarter, we entered (+2%) the Greek market given
our expectation for improving macroeconomic numbers as Greece prepares to join
the European Union. We moved to an overweight stance on Hungary as a result of
improving economic growth and declining inflation. Though still overweight, we
trimmed 2% from our exposure to Russia as interest rates rose to astronomical
levels. Lastly, while maintaining our underweight position, we added 3% to
South Africa where we are focusing on the corporate restructuring story.

With most Asian markets down 75%-90% and others halved, we believe we are
somewhere close to an important economic and market trough. The speed and size
of the recovery in these countries will be a function of recognizing and
resolving the issues discussed in our general overview. In Asia, we are in the
midst of a Japan yen driven panic that has led to a second round of volatility
in Asia. Nonetheless, the early indications are that Korea and Thailand in
particular are starting to transform. Both these countries have new political
leadership which should pave a clearer path to readjustment. With the market
down 95% and Suharto ousted, it is easy, though glib to say that the worst is
over in Indonesia. The repair work to construct both a free market economy and
a functioning democracy is going to be long and painful. The ability of Russia
and China to adapt to economic recessions and the intense pressure to devalue
are important factors that have yet to play out.

The markets are in an unforgiving mood, having driven China/Hong Kong down 50%
and Russia down 70%. There may be worse economic, and perhaps political news
ahead, particularly if the Japanese mandarins don't take

3
<PAGE>

their heads out of the sand. However, we believe that the death knell to
socialism's last and true champions has been struck and the evidence indicates
that Darwinian adaptation is underway. Stock buybacks in Japan, chaebol asset
sales in Korea, bankruptcy law formulation in Thailand and the passage of social
security reform in Brazil are perhaps the first drops of rain after the long
drought.

Asset valuations are near bargain levels. Investor sentiment is the most
depressed that we have ever seen, and we are seeing the early signs of
restructuring across several markets. Yen stability and some decisive action by
Japan to end its crisis of confidence will most likely be the catalyst that
arrests the current free fall in sentiment and prices.

On July 28, 1998 the Fund announced that its Board of Directors had authorized a
share repurchase program for the Fund for the purposes of enhancing shareholder
value and reducing the discount at which the Fund's shares traded from their net
asset value. The Fund commenced the repurchase program in July 30th, and will
continue to repuchase the Fund's outstanding shares at such times and in such
amounts as it believes will further the accomplishment of the foregoing
objectives, subject to review by the Board of Directors. We will update you on
the progress of the repurchase program in future shareholder reports.

Beginning with this report, we are discontinuing our practice of designating an
individual portfolio manager to sign our reports to shareholders in order to
better reflect the "Team" investment approach of the Fund's investment adviser,
Morgan Stanley Asset Management ("MSAM"). The global emerging markets team at
MSAM has general oversight of the investment management of the Fund. Madhav Dhar
and Robert L. Meyer continue to have primary responsibility for the day-to-day
management of the Fund's assets.

Sincerely,

/s/ Michael F. Klein

Michael F. Klein
PRESIDENT AND DIRECTOR

July 1998

4
<PAGE>

Morgan Stanley Emerging Markets Fund, Inc.
Investment Summary as of June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

HISTORICAL
INFORMATION TOTAL RETURN (%)
-----------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year to Date -13.32% -- -8.10% -- -15.84% -
One Year -36.58 -36.58% -29.10 -29.10% -38.58 -38.58%
Five Year -6.93+ -1.43+ 29.86+ 5.37+ 1.93 0.38
Since Inception* 51.66+ 6.45+ 91.05+ 10.20+ 17.42 2.44

</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION

[GRAPH]

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
JUNE 30,
1991* 1992 1993 1994 1995 1996 1997 1998
------- ------ ------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share . . $ 14.71 $ 16.74 $ 28.20 $ 20.30 $ 14.69 $ 15.69 $ 15.52 $ 11.81
Market Value Per Share . . . $ 14.25 $ 18.13 $ 31.63 $ 21.50 $ 15.50 $ 13.88 $ 13.06 $ 9.38
Premium/(Discount). . . . . . -3.1% 8.3% 12.2% 5.9% 5.5% -11.5% -15.9% -20.6%
Income Dividends. . . . . . . $ 0.04 $ 0.01 -- -- -- $ 0.05 $ 0.01 $ 0.11
Capital Gains Distributions . -- $ 0.01 $ 1.49 $ 6.50 $ 1.29 $ 0.98 $ 0.01 $ 2.18
Fund Total Return (2) . . . . 4.61% 13.94% 95.22%+ -5.33% -16.30%+ 13.84% -0.97% -8.10%
Index Total Return (3). . . . 3.25% 0.33% 67.52% -0.51% -12.34% 7.84% -14.42% -15.84%
</TABLE>

(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund
during each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of
a shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The IFC Global Total Return Composite Index is an unmanaged index of
common stocks of developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa, including dividends.
* The Fund commenced operations on November 1, 1991.
+ This return does not include the effect of the rights issued in
connection with the Rights Offering.

5
<PAGE>

[CHART]
<TABLE>
<S> <C>
Equity Securities (96.1%)
Debt Instruments (0.2%)
Short Term Instruments (3.7%)
</TABLE>

- --------------------------------------------------------------------------------
SECTORS

[CHART]
<TABLE>
<S> <C>
Appliances & Household Durables (2.7%)
Banking (10.5%)
Beverages & Tobacco (8.8%)
Broadcasting & Publishing (3.8%)
Electronic Components & Instruments (4.3%)
Energy Sources (4.7%)
Metals -- Steel (2.4%)
Multi-industry (4.8%)
Other (24.8%)
Utilities -- Electrical & Gas (3.9%)
Telecommunications (29.3%)
</TABLE>

- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS

[CHART]
<TABLE>
<S> <C>
Brazil (16.6%)
Mexico (9.2%)
Russia (8.7%)
Turkey (8.2%)
South Africa (7.5%)
Other (25.7%)
Korea (4.0%)
Israel (4.2%)
Argentina (4.3%)
Taiwan (5.0%)
India (6.6%)
</TABLE>

- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS

<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Telebras (Brazil) 6.3%
2. Global Tele-Systems Ltd. (Russia) 5.8
3. CRT (Brazil) 3.1
4. Telmex (Mexico) 2.9
5. Yapi Ve Kredi Bankasi (Turkey) 2.8
6. Telefonica Argentina (Argentina) 2.5
7. FEMSA (Mexico) 2.3
8. Efes Sinai Yatirim (Turkey) 2.3
9. Cemig (Brazil) 1.9
10. Samsung Electronics Co. (Korea) 1.7
----------
31.6%
----------
----------
</TABLE>

6
<PAGE>

FINANCIAL STATEMENTS
- --------
STATEMENT OF NET ASSETS (Unaudited)
- --------
JUNE 30, 1998

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.1%)
(Unless otherwise noted)
- ----------------------------------------------------------------------------------------------------
ARGENTINA (4.3%)
AUTOMOBILES
CIADEA 1 U.S.$ -- @
-------------
ENERGY SOURCES
YPF ADR 44,760 1,346
-------------
TELECOMMUNICATIONS
Nortel ADR 27,415 682
Telecom Argentina ADR 93,642 2,791
Telefonica Argentina ADR 210,525 6,829
-------------
10,302
-------------
11,648
-------------
- ----------------------------------------------------------------------------------------------------
BRAZIL (16.6%)
BANKING
Banco Bradesco (Preferred) 196,156,974 1,645
(a,b)Banco Nacional (Preferred) 61,598,720 3
Unibanco (Preferred) GDR 79,000 2,330
-------------
3,978
-------------
BEVERAGES & TOBACCO
Brahma (Preferred) 4,293,209 2,673
Brahma (Preferred) ADR 3,454 43
-------------
2,716
-------------
ENERGY SOURCES
Petrobras (Preferred) 6,816,999 1,267
Petrobras ADR 144A 22,595 422
-------------
1,689
-------------
FOOD & HOUSEHOLD PRODUCTS
Pao de Acucar (Preferred) 6,460,000 145
(a)Pao de Acucar (Preferred) ADR
144A 19,305 423
-------------
568
-------------
MERCHANDISING
(a)Lojas Arapua (Preferred) 30,412,000 19
(a)Lojas Arapua (Preferred) ADR 31,540 17
Lojas Renner (Preferred) 14,237,000 419
-------------
455
-------------
METALS -- NON-FERROUS
CVRD (Preferred) 16,102 320
CVRD (Preferred) ADR 42,769 904
-------------
1,224
-------------
TELECOMMUNICATIONS
CRT (Preferred) 'A' 7,602,541 8,289
CRT Receipts 286,847 313
Telebras 6,831,000 543
Telebras (Preferred) 48,651,183 5,292
Telebras (Preferred) ADR 103,123 11,260
(a)Telerj Cellular (Preferred) 'B' 3,113,000 183
Telesp (Preferred) 1,999,313 470
TELECOMMUNICATIONS (Continued)
(a,b)Telesp (Preferred) (Rights) 93,963 U.S.$ 2
(a)Telesp Cellular (Preferred) 'B' 19,315,313 1,603
-------------
27,955
-------------
TEXTILES & APPAREL
Coteminas 2,200,500 599
Coteminas ADR 144A 23,460 320
Encorpar 2,980,000 7
-------------
926
-------------
UTILITIES -- ELECTRICAL & GAS
Cemig (Preferred) 110,193,230 3,430
Cemig (Preferred) ADR 44,068 1,364
Cemig (Preferred) ADR 144A 9,209 292
(a)EBE (Preferred) 273,700 4
Eletricidade de Sao Paulo (Preferred) 273,700 20
(a)EMAE (Preferred) 273,700 -- @
EPTE (Preferred) 273,700 1
Light Services de Electricidad 334,349 103
Lightpar 161,000 -- @
-------------
5,214
-------------
44,725
-------------
- ----------------------------------------------------------------------------------------------------
CHILE (0.7%)
BEVERAGES & TOBACCO
CCU ADR 28,420 601
-------------
MERCHANDISING
Santa Isabel ADR 13,022 143
-------------
UTILITIES -- ELECTRICAL & GAS
Endesa ADR 17,235 246
Enersis ADR 30,835 753
-------------
999
-------------
1,743
-------------
- ----------------------------------------------------------------------------------------------------
CHINA (0.7%)
AUTOMOBILES
Qingling Motors Co. 'H' 484,000 134
-------------
ENERGY SOURCES
(a)Yanzhou Coal Mining Co., Ltd. ADR 68,330 666
-------------
TRANSPORTATION -- ROAD & RAIL
Zhenhai Refining & Chemical Co., Ltd. 'H' 4,046,000 522
-------------
UTILITIES -- ELECTRICAL & GAS
(a)Huaneng Power International, Inc. ADR 42,385 570
-------------
1,892
-------------
- ----------------------------------------------------------------------------------------------------
COLOMBIA (0.0%)
BANKING
Bancolombia (Preferred) 6,249 12
-------------
- ----------------------------------------------------------------------------------------------------
</TABLE>

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

7
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
EGYPT (1.7%)
BANKING
Commercial International Bank 50,747 U.S.$ 559
-------------
BEVERAGES & TOBACCO
Al-Ahram Beverages Co. GDR 12,000 377
Eastern Tobacco 31,090 558
-------------
935
-------------
BUILDING MATERIALS & COMPONENTS
Ameriyah Cement Co. 30,000 519
Helwan Portland Cement Co. 34,500 521
-------------
1,040
-------------
CHEMICALS
Egyptian Finance & Industrial Co. 29,700 636
Paints & Chemical Industries 2,000 57
Paints & Chemical Industries
GDR 55,700 493
-------------
1,186
-------------
MULTI-INDUSTRY
Industrial & Engineering Enterprises Co. 11,690 190
-------------
REAL ESTATE
Madinet Nasr Housing & Development 7,000 335
-------------
UTILITIES - ELECTRICAL & GAS
Egypt Gas Co. 3,500 336
-------------
4,581
-------------
- ----------------------------------------------------------------------------------------------------
GREECE (2.2%)
BANKING
National Bank of Greece 4,440 570
-------------
ENERGY SOURCES
(a)Helenic Petroleum 55,470 454
-------------
TELECOMMUNICATIONS
Hellenic Telecommunication Organization 137,097 3,518
-------------
(a)STET Hellas Telecommunications
ADR 30,290 1,257
-------------
4,775
-------------
5,799
-------------
- ----------------------------------------------------------------------------------------------------

HONG KONG (1.4%)
BROADCASTING & PUBLISHING
South China Morning Post (Holdings) Ltd. 795,000 382
-------------
MULTI-INDUSTRY
China Resources Enterprise Ltd. 243,000 251
Ng Fung Hong Ltd. 1,226,000 846
Shanghai Industrial Holdings Ltd. 73,000 172
-------------
1,269
-------------
REAL ESTATE
Sun Hung Kai Properties Ltd. 129,000 548
-------------
TRANSPORTATION -- ROAD & RAIL
Zhejiang Expressway Co., Ltd. 'H' 1,683,000 U.S.$ 283
-------------
UTILITIES -- ELECTRICAL & GAS
CLP Holdings Ltd. 306,000 1,394
-------------
3,876
-------------
- ----------------------------------------------------------------------------------------------------
HUNGARY (2.8%)
BANKING
OTP Bank Rt. 16,200 796
-------------
ENERGY SOURCES
(a)MOL Magyar Olaj-es Gazipari Rt. GDR 152,190 4,102
-------------
HEALTH & PERSONAL CARE
Richter Gedeon Rt. 13,663 1,100
(a)Richter Gedeon Rt. GDR 3,100 254
-------------
1,354
-------------
TELECOMMUNICATIONS
Matav Tavkozlesi Rt. 42,700 248
(a)Matav Tavkozlesi Rt. ADR 37,740 1,111
-------------
1,359
-------------
7,611
-------------
- ----------------------------------------------------------------------------------------------------
INDIA (6.4%)
AUTOMOBILES
Bajaj Auto Ltd. 110,300 1,488
Hero Honda Ltd. 85,550 1,767
Tata Engineering &
Locomotive Ltd. 797 3
-------------
3,258
-------------
BANKING
(a)State Bank of India Ltd. 5,100 25
-------------
BEVERAGES & TOBACCO
ITC Ltd. 57,412 883
-------------
CHEMICALS
Reliance Industries Ltd. 1,604 5
-------------
DATA PROCESSING & REPRODUCTION
Infosys Technology Ltd. 20,000 1,049
-------------
ELECTRICAL & ELECTRONICS
Bharat Heavy Electricals Ltd. 732,100 4,247
-------------
ENERGY SOURCES
(a)Bharat Petroleum Corp., Ltd. 23,500 194
Hindustan Petroleum Corp., Ltd. 31,000 286
-------------
480
-------------
FINANCIAL SERVICES
Housing Development Finance Corp., Ltd. 26,933 1,901
-------------
HEALTH & PERSONAL CARE
Hoechst Marion Roussel India Ltd. 50,000 467
-------------
- ----------------------------------------------------------------------------------------------------
</TABLE>

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

8
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INDIA (Continued)
Industrial Components
Apollo Tyres Ltd. 8,675 U.S.$ 18
ITW Signode India Ltd. 136,800 181
MRF Ltd. 10,000 455
-------------
654
-------------
MACHINERY & ENGINEERING
Larsen & Toubro Ltd. 43,000 233
Larsen & Toubro Ltd. GDR 60,000 561
Thermax Ltd. 50 -- @
-------------
794
-------------
MULTI-INDUSTRY
(a,d)Morgan Stanley Growth Fund 6,881,800 974
-------------
TRANSPORTATION -- ROAD & RAIL
Container Corp. of India Ltd. 221,500 2,387
-------------
17,124
-------------
- ----------------------------------------------------------------------------------------------------
INDONESIA (0.9%)
BEVERAGES & TOBACCO
Gudang Garam 834,160 492
-------------
BUILDING MATERIALS & COMPONENTS
Semen Gresik 173,500 99
-------------
ENERGY SOURCES
(a)Gulf Indonesia Resources Ltd. 15,800 182
-------------
FOREST PRODUCTS & PAPER
Indah Kait Pulp & Paper 3,264,905 625
-------------
TELECOMMUNICATIONS
Telekomunikasi Indonesia 3,103,000 878
Telekomunikasi Indonesia ADR 34,170 199
-------------
1,077
-------------
2,475
-------------
- ----------------------------------------------------------------------------------------------------
ISRAEL (4.2%)
BANKING
Bank Hapoalim Ltd. 616,470 1,864
First International Bank of
Israel '5' 192,020 1,502
-------------
3,366
-------------
ELECTRICAL & ELECTRONICS
(a)Elbit Systems Ltd. 1 -- @
-------------
ELECTRONIC COMPONENTS & INSTRUMENTS
(a)Orbotech Ltd. 30,514 1,110
-------------
ENERGY SOURCES
(a)Dor Energy Ltd. 42,500 306
-------------
MERCHANDISING
Super Sol Ltd. 963,400 3,174
-------------
MULTI-INDUSTRY
Koor Industries Ltd. 29,950 3,461
-------------
11,417
-------------
- ----------------------------------------------------------------------------------------------------
KOREA (4.0%)
APPLIANCES & HOUSEHOLD DURABLES
Samsung Electronics Co. 145,475 U.S.$ 4,503
Samsung Electronics Co.
GDR -- New 144A 3,072 43
-------------
4,546
-------------
BUILDING MATERIALS & COMPONENTS
Hankuk Glass Industry Co., Ltd. 43,000 470
-------------
ELECTRONIC COMPONENTS & INSTRUMENTS
S1 Corp. 9,360 947
-------------
INSURANCE
Samsung Fire & Marine Insurance Co. 70 12
-------------
METALS -- STEEL
(b)Pohang Iron & Steel Co., Ltd. 119,790 3,927
-------------
TELECOMMUNICATIONS
(b)SK Telecom Co., Ltd. 2,043 923
-------------
10,825
-------------
- ----------------------------------------------------------------------------------------------------
MALAYSIA (2.4%)
BANKING
Malayan Banking Bhd 606,000 610
-------------
BEVERAGES & TOBACCO
Carlsberg Brewery Malaysia Bhd 37,000 112
R.J. Reynolds Bhd 106,000 147
Rothmans of Pall Mall Bhd 109,200 757
-------------
1,016
-------------
ENERGY SOURCES
Petronas Gas Bhd 327,000 607
-------------
FOOD & HOUSEHOLD PRODUCTS
Nestle Bhd 80,000 362
-------------
LEISURE & TOURISM
Genting Bhd 431,400 779
(a)Magnum Corp. Bhd 288,000 107
-------------
886
-------------
MISCELLANEOUS MATERIALS & COMMODITIES
Golden Hope Plantations Bhd 418,000 383
Kuala Lumpur Kepong Bhd 259,000 418
-------------
801
-------------
TELECOMMUNICATIONS
Technology Resources Industries Bhd 226,000 155
Telekom Malaysia Bhd 723,000 1,220
-------------
1,375
-------------
TRANSPORTATION -- SHIPPING
Malaysian International Shipping Bhd
(Foreign) 105,000 153
-------------
UTILITIES -- ELECTRICAL & GAS
Tenaga Nasional Bhd 620,000 747
-------------
6,557
-------------
- ----------------------------------------------------------------------------------------------------
</TABLE>

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

9
<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
MEXICO (9.2%)
BANKING
(a)Banacci 'B' 565,790 U.S.$ 1,102
(a)Banacci 'L' 45,447 73
Bancomer 'B' 207,250 77
Bancomer 'B' ADR 144A 29,660 219
-------------
1,471
-------------
BEVERAGES & TOBACCO
(a)FEMSA 190,915 5,946
(a)FEMSA ADR 6,268 197
-------------
6,143
-------------
BROADCASTING & PUBLISHING
(a)Televisa CPO GDR 100,844 3,794
TV Azteca ADR 35,401 383
-------------
4,177
-------------
BUILDING MATERIALS & COMPONENTS
Cemex 'B' 10,740 47
Cemex 'B' ADR 41,876 369
Cemex CPO 413,040 1,548
Cemex CPO ADR 145,999 1,096
-------------
3,060
-------------
HEALTH & PERSONAL CARE
Kimberly Clark de Mexico 'A' 566,516 2,001
-------------
TELECOMMUNICATIONS
Telmex ADR 14,070 676
Telmex 'L' ADR 148,907 7,157
-------------
7,833
-------------
24,685
-------------
- ----------------------------------------------------------------------------------------------------
PAKISTAN (1.9%)
CHEMICALS
Fauji Fertilizer Co., Ltd. 1,335,700 1,442
-------------
ENERGY SOURCES
Pakistan State Oil Co., Ltd. 166,918 264
-------------
TELECOMMUNICATIONS
Pakistan Telecommunications
Corp. 7,743,700 2,721
Pakistan Telecommunications
Corp. GDR 7,650 264
-------------
2,985
-------------
UTILITIES -- ELECTRICAL & GAS
Hub Power Co. 466,000 128
(a)Sui Northern Gas Co. 886,995 167
-------------
295
-------------
4,986
-------------
- ----------------------------------------------------------------------------------------------------
PHILIPPINES (1.8%)
BEVERAGES & TOBACCO
San Miguel Corp. 'B' 616,560 813
-------------
MULTI-INDUSTRY
Ayala Corp. 3,345,120 862
-------------
REAL ESTATE
Ayala Land, Inc. 'B' 67,032 U.S.$ 19
SM Prime Holdings, Inc. 'B' 3,862,580 612
-------------
631
-------------
TELECOMMUNICATIONS
Philippine Long Distance
Telephone Co. 71,390 1,626
Philippine Long Distance
Telephone Co. ADR 6,000 136
-------------
1,762
-------------
UTILITIES -- ELECTRICAL & GAS
Manila Electric Co. 'B' 329,490 869
-------------
4,937
-------------
- ----------------------------------------------------------------------------------------------------
POLAND (3.3%)
BANKING
Bank Handlowy W Warszawie 16,039 306
Bank Rozwoju Eksportu 24,750 671
(a)Bank Rozwoju Eksportu (Rights) 24,750 7
Bank Slaski 8,300 557
BIG Bank Gdanski GDR 60,000 1,167
BIG Bank Inicjatyw 192,900 257
-------------
2,965
-------------
CHEMICALS
(a,c)Eastbridge 33,600 2,259
Polifarb Cieszyn - Wroclaw 118,603 306
Polifarb Cieszyn - Wroclaw
(Rights) 3,268 8
-------------
2,573
-------------
CONSTRUCTION & HOUSING
(a)Exbud GDR 13,440 162
-------------
FOOD & HOUSEHOLD PRODUCTS
(a)Agros Holdings 'C' 36,870 539
-------------
INDUSTRIAL COMPONENTS
(a)Debica 24,000 482
-------------
WHOLESALE & INTERNATIONAL TRADE
(a)Elektrim 174,231 2,124
-------------
8,845
-------------
- ----------------------------------------------------------------------------------------------------
RUSSIA (8.7%)
BROADCASTING & PUBLISHING
(a,b)Storyfirst Communications, Inc.
'C' (Preferred) 270 386
(a,b)Storyfirst Communications, Inc.
'D' (Preferred) 720 1,030
(a,b)Storyfirst Communications, Inc.
'E' (Preferred) 780 1,115
(a,b)StoryFirst Communications, Inc.
'F' (Preferred) 139 398
(a,b)Storyfirst Communications, Inc.,
First Section, (Convertible) 604 863
- ----------------------------------------------------------------------------------------------------
</TABLE>

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

10
<PAGE>

VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
RUSSIA (CONTINUED)
(a,b)Storyfirst Communications, Inc.,
First Section, Tranche I
(Convertible) 35 U.S.$ 50
(a,b)Storyfirst Communications, Inc.,
Second Section, Tranche II
(Convertible) 152 217
(a,b)Storyfirst Communications, Inc.,
Tranche IV (Convertible) 207 296
-------------
4,355
-------------
ENERGY SOURCES
AO Tatneft ADR 28,805 223
Lukoil Holdings ADR 8,550 286
Mosenergo 594,000 30
Surgutneftegaz ADR 53,537 214
Surgutneftegaz (Preferred) 11,700 47
-------------
800
-------------
FOREST PRODUCTS & PAPER
(b)Alliance Cellulose Ltd. 'B' 156,075 621
-------------
MULTI-INDUSTRY
Pliva d.d. GDR 144A 24,150 393
-------------
TELECOMMUNICATIONS
(a)Global Tele-Systems Ltd. 321,427 15,670
(a,b)Russian Telecom Development
Corp. 176,000 836
(a)Vimpel-Communications ADR 18,112 810
-------------
17,316
-------------
23,485
-------------
- ----------------------------------------------------------------------------------------------------
SOUTH AFRICA (7.5%)
BANKING
Coronation Holdings Ltd.
'N' - New 19,700 296
NBS Boland Group Ltd. 927,350 1,206
Orion Selections Ltd. 293,970 365
Orion Selections Holdings Ltd. 435,570 736
-------------
2,603
-------------
BEVERAGES & TOBACCO
Rembrandt Group Ltd. 155,485 972
South African Breweries Ltd. 80,730 1,664
-------------
2,636
-------------
BROADCASTING & PUBLISHING
(a)Primedia Ltd. 98,500 647
-------------
BUSINESS & PUBLIC SERVICES
Persetel Holdings Ltd. 167,600 1,500
The Education Investment
Corp., Ltd. 476,114 865
-------------
2,365
-------------
CHEMICALS
SASOL Ltd. 356,040 2,066
(a)SASOL Ltd. 8.50%
(Convertible Preferred) 3,200 18
-------------
2,084
-------------
FINANCIAL SERVICES
ABSA Group Ltd. 138,140 U.S.$ 864
-------------
FOOD & HOUSEHOLD PRODUCTS
Illovo Sugar Ltd. 387,500 484
-------------
INSURANCE
Forbes Group Ltd. 122,000 242
Liberty Life Association
of Africa Ltd. 104,078 2,033
-------------
2,275
-------------
MERCHANDISING
Ellerine Holdings Ltd. 239,880 1,317
-------------
MISCELLANEOUS MATERIALS & COMMODITIES
Malbak Ltd. 224,375 152
-------------
MULTI-INDUSTRY
Barlow Ltd. 73,432 388
Bidvest Group Ltd. 94,968 726
(d)Morgan Stanley Africa
Investment Fund, Inc. 74,015 879
(a)New Africa Investments
Ltd. (Preferred) 'N' 1,480,100 1,588
Woolworths Holdings Ltd. 781,100 580
-------------
4,161
-------------
RETAIL -- MAJOR DEPARTMENT STORES
Protea Furnishers Ltd. 673,671 478
-------------
20,066
-------------
- ----------------------------------------------------------------------------------------------------
TAIWAN (5.0%)
BANKING
(a)Chinatrust Commercial Bank 1,166,000 1,150
-------------
CONSTRUCTION & HOUSING
(a)Kuoyang Construction 382,500 601
-------------
ELECTRONIC COMPONENTS & INSTRUMENTS
(a)Asustek Computer, Inc. 242,500 1,983
(a)Compal Electronics 708,464 1,907
(a)Hon Hai Precision Industry 364,000 1,843
(a)Siliconware Precision
Industries Co. 1,301,800 1,891
(a)Taiwan Semiconductor Co. 642,000 1,327
-------------
8,951
-------------
MERCHANDISING
President Chain Store Corp. 278,000 886
-------------
TEXTILES & APPAREL
Far East Textile 2,530,410 1,959
-------------
13,547
-------------
- ----------------------------------------------------------------------------------------------------
THAILAND (2.4%)
AUTOMOBILES
(a,b)Thai Engine Manufacturing
Public Co., Ltd. (Foreign) 63,100 24
-------------
- ----------------------------------------------------------------------------------------------------
</TABLE>

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

11
<PAGE>

VALUE
SHARES (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
THAILAND (Continued)
BANKING
Bangkok Bank Public Co., Ltd.
(Foreign) 955,700 U.S.$ 1,178
Siam Commercial Bank Co., Ltd.
(Foreign) 680,233 217
(a)Siam Commercial Bank Co., Ltd.
(Foreign)(Warrants),
expiring 12/31/02 280,333 -- @
-------------
1,395
-------------
BROADCASTING & PUBLISHING
BEC World plc (Foreign) 72,100 275
(b)Grammy Entertainment
Public Co., Ltd. (Foreign) 132,500 308
-------------
583
-------------
BUILDING MATERIALS & COMPONENTS
(a)Siam City Cement Public Co., Ltd. (Foreign) 27,800 20
-------------
CHEMICALS
(a,b)National Petrochemical Ltd. (Foreign) 195,500 54
-------------
CONSTRUCTION & HOUSING
(a,b)Bangkok Expressway Public Co., Ltd. (Foreign) 910,300 350
-------------
ELECTRICAL & ELECTRONICS
Shinawatra Computer Public Co., Ltd. (Foreign) 201,900 737
-------------
ELECTRONIC COMPONENTS & INSTRUMENTS
Delta Electronics Public Co., Ltd. (Foreign) 124,200 706
-------------
ENERGY SOURCES
Lanna Lignite Co., Ltd. (Foreign) 66,400 46
(a)PTT Exploration & Production
Public Co., Ltd. (Foreign) 160,500 1,217
-------------
1,263
-------------
TELECOMMUNICATIONS
Advanced Information Services Public Co., Ltd. (Foreign) 340,400 1,452
-------------
6,584
-------------
- ----------------------------------------------------------------------------------------------------
TURKEY (8.2%)
APPLIANCES & HOUSEHOLD DURABLES
Arcelik 18,396,000 863
Vestel Elektronik Sanayi Ve
Ticaret AS 13,334,000 1,778
-------------
2,641
-------------
BANKING
Akbank TAS 6,171,200 199
Akbank TAS ADR 144A 30,240 195
(a,b)Akbank TAS (Rights) 3,857,000 99
Turkiye Is Bankasi 16,697,500 674
Yapi Ve Kredi Bankasi 296,552,442 7,573
-------------
8,740
-------------
BEVERAGES & TOBACCO
(a,b)Efes Sinai Yatirim 30,236,087 U.S.$ 6,131
Ege Biracilik Ve Malt Sanayii 8,817,000 1,043
Erciyas Biracilik 1,131,000 172
-------------
7,346
-------------
ENERGY SOURCES
Petrol Ofisi AS 2,268,000 579
-------------
MERCHANDISING
Migros Turk TAS 337,000 329
-------------
METALS -- STEEL
(a)Eregli Demir Ve Celik
Fabrikalari TAS 15,068,000 2,348
-------------
MISCELLANEOUS MATERIALS & COMMODITIES
Turk Sise Ve Cam
Fabrikalari AS 5,020,000 166
(a,b)Turk Sise ve Cam
Fabrikalari AS (Rights) 5,020,000 37
-------------
203
-------------
22,186
-------------
- ----------------------------------------------------------------------------------------------------
VENEZUELA (0.1%)
UTILITIES -- ELECTRICAL & GAS
Electricidad de Caracas 388,650 176
-------------
- ----------------------------------------------------------------------------------------------------

ZIMBABWE (0.7%)
MERCHANDISING
Meikles Africa Ltd. 342,000 419
-------------
MULTI-INDUSTRY
Delta Corp., Ltd. 1,297,991 850
Trans Zambezi Industries
Ltd. ADR 144A 4,000,000 500
-------------
1,350
-------------
1,769
-------------
- ----------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S. $294,947) 261,551
-------------
- ----------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------------
DEBT INSTRUMENTS (0.2%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INDIA (0.2%)
BROADCASTING & PUBLISHING
(b)Supreme Petrochem Ltd.
2.25%, 4/22/02 INR 227 64
-------------
METALS -- STEEL
(b)Shri Ishar Alloy Steels Ltd. 15.00%, 4/21/01 581 113
-------------
MULTI-INDUSTRY
(b,e)DCM Shriram Industries Ltd. 9.90%, 2/21/02 335 221
- ----------------------------------------------------------------------------------------------------
</TABLE>

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

12
<PAGE>

FACE VALUE
AMOUNT (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INDIA (Continued)
MULTI-INDUSTRY (CONTINUED)
(b)DCM Shriram Industries Ltd. (Convertible)
7.50%, 2/21/02 INR 330 U.S.$ 173
-------------
394
-------------
- ----------------------------------------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$1,604) 571
-------------
- ----------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.4%)
- ----------------------------------------------------------------------------------------------------
UNITED STATES (0.4%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 5.40%,
dated 6/30/98, due 7/1/98,
to be repurchased at
U.S.$1,123, collateralized by
U.S.$1,000, United States
Treasury Bonds, 6.625%, due
2/15/27, valued at U.S.$1,154
(Cost U.S.$1,123) U.S.$ 1,123 1,123
-------------
- ----------------------------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (3.3%)
Argentine Peso ARP 6 6
Brazilian Real BRL 567 490
Canadian Dollar CAD 1 1
Colombian Peso COP 160 -- @
Egyptian Pound EGP 345 101
Hong Kong Dollar HKD 5,279 681
Hungarian Forint HUF 326 1
Indian Rupee INR 20,668 487
Indonesian Rupiah IDR 601,852 41
Israeli Shekel ISS 1,407 384
Malaysian Ringgit MYR 621 150
Mexican Peso MXP 4,836 538
Moroccan Dirham MAD 1,954 200
Pakistani Rupee PKR 35,800 776
Peruvian New Sol PSS 4 1
Philippine Peso PHP 1,076 26
Polish Zloty PLZ 8 2
South African Rand ZAR 6,490 1,096
South Korean Won KRW 253,543 185
Taiwan Dollar TWD 127,121 3,700
Venezuelan Bolivar VEB 3,666 7
-------------
(Cost U.S. $8,941) 8,873
-------------
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.0%)
(Cost U.S. $306,615) 272,118
-------------
- ----------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS (1.3%)
Net Unrealized Gain on Foreign
Currency Exchange Contracts 1,287
Dividends Receivable 848
Receivable for Investments
Sold U.S.$ 786
Foreign Withholding Tax Reclaim
Receivable 306
Interest Receivable 171
Other Assets 45 U.S.$ 3,443
-------------- -------------
- ----------------------------------------------------------------------------------------------------
LIABILITIES (-2.3%)
Deferred Country Taxes (219)
Payable For:
Investments Purchased (2,821)
Bank Overdraft (1,815)
Custodian Fees (525)
Investment Advisory Fees (283)
Professional Fees (82)
Directors' Fees and Expenses (75)
Shareholder Reporting Expenses (67)
Closed Foreign Currency
Exchange Contract (40)
Administrative Fees (34)
Other Liabilities (46) (5,788)
-------------- -------------
- ----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 22,824,344, issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$ 269,554
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 11.81
- ----------------------------------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------
Common Stock U.S.$ 23
Capital Surplus 342,234
Accumulated Net Investment Loss (1,432)
Accumulated Net Realized Loss (36,437)
Unrealized Depreciation on Investments
and Foreign Currency Translations
(net of accrued foreign tax of U.S.$1,442
on unrealized appreciation) (34,834)
- ----------------------------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 269,554
- ----------------------------------------------------------------------------------------------------
</TABLE>

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

13
<PAGE>

(a) -- Non-income producing
(b) -- Security valued at fair value -- see note A-1 to financial statements.
(c) -- Security valued at cost -- see note A-1 to financial statements.
(d) -- The Fund is advised by an affiliate.
(e) -- Variable/floating rate security -- rate disclosed is as of
June 30, 1998.
@ -- Value is less than U.S.$500.
144A -- Certain conditions for public sale may exist.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
NOTE: Prior governmental approval for foreign investments may be required
under certain circumstances in some emerging markets, and foreign
ownership limitations may also be imposed by the charters of individual
companies in emerging markets. As a result, an additional class of
shares designated as "foreign" may be created, and offered for
investment. The "local" and "foreign" shares' market values may vary.

FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Fund is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:

<TABLE>
<CAPTION>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- --------------- -------------- ---------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
MAD 1,954 U.S.$ 201 07/01/98 U.S.$ 199 U.S.$ 199 U.S.$ (2)
U.S.$ 366 366 07/01/98 BRL 423 366 --
144 144 07/01/98 MYR 591 142 (2)
HKD 5,003 646 07/02/98 U.S.$ 646 646 --
MYR 15,532 3,670 08/11/98 4,127 4,127 457
ZAR 21,019 3,431 09/18/98 3,788 3,788 357
3,215 511 12/23/98 555 555 44
12,967 2,061 12/24/98 2,199 2,199 138
16,068 2,568 12/28/98 2,748 2,748 180
KRW 848,033 613 12/29/98 557 557 (56)
ZAR 2,010 321 12/31/98 330 330 9
KRW 2,163,987 1,564 01/04/99 1,402 1,402 (162)
ZAR 19,381 2,974 06/21/99 3,298 3,298 324
------------- ------------- -------------
U.S.$ 19,070 U.S.$ 20,357 U.S.$ 1,287
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------
JUNE 30, 1998 EXCHANGE RATES:
- ------------------------------------------------------------
<C> <S> <C>
ARP Argentina Peso 1.000 = U.S. $1.00
BRL Brazilian Real 1.157 = U.S. $1.00
CAD Canadian Dollar 1.472 = U.S. $1.00
COP Colombian Peso 1,369.605 = U.S. $1.00
EGP Egyptian Pound 3.411 = U.S. $1.00
HKD Hong Kong Dollar 7.748 = U.S. $1.00
HUF Hungarian Forint 218.680 = U.S. $1.00
INR Indian Rupee 42.400 = U.S. $1.00
IDR Indonesian Rupiah 14,750.000 = U.S. $1.00
ISS Israeli Shekel 3.670 = U.S. $1.00
MYR Malaysian Ringgit 4.150 = U.S. $1.00
MXP Mexican Peso 8.991 = U.S. $1.00
MAD Morrocan Dhiram 9.753 = U.S. $1.00
PKR Pakistani Rupee 46.105 = U.S. $1.00
PSS Peruvian New Sole 2.938 = U.S. $1.00
PHP Phillipine Peso 41.700 = U.S. $1.00
PLZ Polish Zlotey 3.487 = U.S. $1.00
ZAR South African Rand 5.919 = U.S. $1.00
KRW South Korean Won 1,373.000 = U.S. $1.00
TWD Taiwan Dollar 34.361 = U.S. $1.00
VEB Venezuelan Bolivar 553.000 = U.S. $1.00
- ------------------------------------------------------------
</TABLE>

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

14
<PAGE>

SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- JUNE 30, 1998

<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- ----------------------------------------------------------------------------
<S> <C> <C>
Appliances & Household Durables U.S.$ 7,187 2.7%
Automobiles 3,416 1.3
Banking 28,240 10.5
Beverages & Tobacco 23,581 8.8
Broadcasting & Publishing 10,208 3.8
Building Materials & Components 4,689 1.7
Business & Public Services 2,365 0.9
Chemicals 7,344 2.7
Construction & Housing 1,113 0.4
Data Processing & Reproduction 1,049 0.4
Electrical & Electronics 4,984 1.9
Electronic Components & Instruments 11,714 4.3
Energy Sources 12,738 4.7
Financial Services 2,765 1.0
Food & Household Products 1,953 0.7
Forest Products & Paper 1,246 0.5
Health & Personal Care 3,822 1.4
Industrial Components 1,136 0.4
Insurance 2,287 0.9
Leisure & Tourism 886 0.3
Machinery & Engineering 794 0.3
Merchandising 6,723 2.5
Metals -- Non-Ferrous 1,224 0.5
Metals -- Steel 6,388 2.4
Miscellaneous Materials & Commodities 1,156 0.4
Multi-Industry 13,054 4.8
Real Estate 1,514 0.6
Retail -- Major Department Stores 478 0.2
Telecommunications 79,114 29.3
Textiles & Apparel 2,885 1.1
Transportation -- Road & Rail 3,192 1.2
Transportation -- Shipping 153 0.0
Utilities -- Electrical & Gas 10,600 3.9
Wholesale & International Trade 2,124 0.8
Other 9,996 3.7
------------- ------
U.S.$ 272,118 101.0%
------------- ------
------------- ------
- ---------------------------------------------------------------------------
</TABLE>

SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
JUNE 30, 1998

<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- ----------------------------------------------------------------------------
<S> <C> <C>
Argentina U.S.$ 11,648 4.3%
Brazil 44,725 16.6
Chile 1,743 0.7
China 1,892 0.7
Colombia 12 0.0
Egypt 4,581 1.7
Greece 5,799 2.2
Hong Kong 3,876 1.4
Hungary 7,611 2.8
India 17,695 6.6
Indonesia 2,475 0.9
Israel 11,417 4.2
Korea 10,825 4.0
Malaysia 6,557 2.4
Mexico 24,685 9.2
Pakistan 4,986 1.9
Philippines 4,937 1.8
Poland 8,845 3.3
Russia 23,485 8.7
South Africa 20,066 7.5
Taiwan 13,547 5.0
Thailand 6,584 2.4
Turkey 22,186 8.2
United States (short-term investment) 1,123 0.4
Venezuela 176 0.1
Zimbabwe 1,769 0.7
Other 8,873 3.3
------------- -----
U.S.$ 272,118 101.0%
------------- -----
------------- -----
- ---------------------------------------------------------------------------
</TABLE>

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

15
<PAGE>

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- --------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 3,533
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
Less: Foreign Taxes Withheld . . . . . . . . . . . . . . . . . . . . . . . . (157)
- -------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,632
- -------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 1,902
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 665
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Shareholder Reporting Expenses . . . . . . . . . . . . . . . . . . . . . . . 61
Country Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 31
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
- --------------------------------------------------------------------------------------------------
TOTAL EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,038
- --------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . 594
- --------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . (21,578)
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . (1,091)
- --------------------------------------------------------------------------------------------------
Net Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,669)
- --------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . (11,878)
Appreciation on Foreign Currency Translations. . . . . . . . . . . . . . . . 1,709
- --------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . (10,169)
- --------------------------------------------------------------------------------------------------
Total Net Realized Loss and Change in Unrealized Appreciation/Depreciation . . (32,838)
- --------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . U.S.$ (32,244)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income. . . . . . . . . . . . . . . . . . . . . U.S.$ 594 U.S.$ 621
Net Realized Gain (Loss) . . . . . . . . . . . . . . . . . . . (22,669) 41,204
Change in Unrealized Appreciation/Depreciation . . . . . . . . (10,169) (45,450)
- --------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . . . . . (32,244) (3,625)
- --------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . . . . . . . . . . (2,602) (220)
Net Realized Gain. . . . . . . . . . . . . . . . . . . . . . . (49,737) (244)
- --------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . (52,339) (464)
- --------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (29,974 shares). . . . . . . . . -- 475
- --------------------------------------------------------------------------------------------------
Total Decrease . . . . . . . . . . . . . . . . . . . . . . . . (84,583) (3,614)
Net Assets:
Beginning of Period. . . . . . . . . . . . . . . . . . . . . . 354,137 357,751
- --------------------------------------------------------------------------------------------------
End of Period (including undistributed net investment income
(accumulated net investment loss) of U.S.$(1,432) and
U.S.$576, respectively). . . . . . . . . . . . . . . . . . . U.S.$ 269,554 U.S.$ 354,137
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>

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

16
<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS: JUNE 30, 1998 ----------------------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD. . . . . . . . . . . . . U.S.$ 15.52 U.S.$ 15.69 U.S.$ 14.69 U.S.$ 20.30 U.S.$ 28.20 U.S.$ 16.74
- -----------------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . -- -- -- (0.03) (0.02) (0.03)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) . . . . 0.03 0.03 0.10 0.06 (0.12) --
Net Realized and Unrealized Gain
(Loss) on Investments. . . . . . . (1.45) (0.18) 1.92 (3.14) (1.30) 13.96
- -----------------------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations . . . . . . . . . . (1.42) (0.15) 2.02 (3.08) (1.42) 13.96
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . (0.11) (0.01) -- -- -- --
In Excess of Net Investment
Income . . . . . . . . . . . . . -- -- (0.05) -- -- --
Net Realized Gain. . . . . . . . . (2.18) (0.01) (0.84) (1.29) (6.50) (1.04)
In Excess of Net Realized Gain . . -- -- (0.14) -- -- (0.45)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . (2.29) (0.02) (1.03) (1.29) (6.50) (1.49)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset
Value from Capital Share
Transaction. . . . . . . . . . . . -- -- 0.01** (1.21)+++ 0.04++ (0.98)+
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . U.S.$ 11.81 U.S.$ 15.52 U.S.$ 15.69 U.S.$ 14.69 U.S.$ 20.30 U.S.$ 28.20
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE,
END OF PERIOD . . . . . . . . . . U.S.$ 9.38 U.S.$ 13.06 U.S.$ 13.88 U.S.$ 15.50 U.S.$ 21.50 U.S.$ 31.63
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . (13.32)% (5.75)% (4.59)% (16.61)%++++ (10.61)% 100.96%++++
Net Asset Value (1). . . . . . . . (8.10)% (0.97)% 13.84% (16.30)%++++ (5.33)% 95.22%++++
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(THOUSANDS). . . . . . . . . . . . U.S.$269,554 U.S.$354,137 U.S.$357,751 U.S.$332,879 U.S.$321,729 U.S.$411,975
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets . . . . . . . . 2.00%* 1.84% 1.87% 1.86% 1.75% 1.85%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . 0.39%* 0.15% 0.58% 0.30% (0.48)% (0.03)%
Portfolio Turnover Rate. . . . . . . 44% 90% 67% 61% 52% 68%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Annualized
** Increase (decrease) per share due to reinvestment of distributions.
+ Consists of $0.03 per share increase from reinvestment of distributions
and $1.01 decrease per share due to Common Stock issued through Rights
Offering during the year.
++ Consists of $0.02 per share increase from reinvestment of distributions
and $0.02 increase per share due to Common Stock Offering during the
year.
+++ Increase (decrease) per share due to Common Stock issued through Rights
Offering during the year.
++++ This return does not include the effect of the rights issued in
connection with the Rights Offering.
(1) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund
during each period, and assumes dividends and distributions, if any,
were reinvested. This percentage is not an indication of the performance
of a shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset
value per share of the Fund.

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

17
<PAGE>

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
- -----------
Morgan Stanley Emerging Markets Fund, Inc. (the "Fund") was incorporated on
August 27, 1991 and is registered as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is long-term capital appreciation through
investments primarily in equity securities.

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

1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities for
which market quotations are readily available are valued at the last sales
price on the valuation date, or if there was no sale on such date, at the
mean between the current bid and asked prices. Securities which are traded
over-the-counter are valued at the average of the mean of current bid and
asked prices obtained from reputable brokers. Short-term securities which
mature in 60 days or less are valued at amortized cost. All other
securities and assets for which market values are not readily available
(including investments which are subject to limitations as to their sale)
are valued at fair value as determined in good faith by the Board of
Directors (the "Board"), although the actual calculations may be done by
others. At June 30, 1998, securities valued at $20,500,000 representing
7.6% of net assets have been fair valued. The amounts realized upon
disposition may differ from the assigned valuations and such differences
could be material.

2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for U.S. Federal income taxes is required in the financial
statements.

The Fund may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as such income and/or gains
are earned.

3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To
the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to determine
the adequacy of the collateral. In the event of default on the obligation
to repurchase, the Fund has the right to liquidate the collateral and apply
the proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counterparty to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal
proceedings.

4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the mean of the bid and asked prices of such currencies
against U.S. dollars last quoted by a major bank as follows:

- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;

- investment transactions and investment income at the prevailing rates
of exchange on the dates of such transactions.

Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.

Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign

18
<PAGE>

currency translations in the Statement of Net Assets. The change in net
unrealized currency gains (losses) for the period is reflected in the
Statement of Operations.

The Fund intends to use derivatives more actively than it has in the past. The
Fund intends to engage in transactions in futures contracts on foreign
currencies, stock indices, as well as in options, swaps and structured notes.
Consistent with the Fund's investment objectives and policies, the Fund intends
to use derivatives for non-hedging as well as hedging purposes.

Following is a description of derivative instruments and their associated
risks that the Fund intends to utilize:

5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.

6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, the Fund may purchase
securities on a when-issued or delayed delivery basis. Securities purchased
on a when-issued or delayed delivery basis are purchased for delivery
beyond the normal settlement date at a stated price and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets in an amount at least equal in value to the Fund's
commitments to purchase such securities or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward commitment or when-issued or delayed-delivery basis may involve a
risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss
at the time of delivery.

7. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange the
return generated by one security, instrument or basket of instruments for
the return generated by another security, instrument or basket of
instruments. The following summarizes swaps which may be entered into by
the Fund:

INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.

TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security, instrument or basket of
instruments underlying the transaction exceeds or falls short of the
offsetting interest obligation, the Fund will receive a payment from or
make a payment to the counterparty, respectively. Total return swaps are
marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gains or losses in the Statement
of Operations. Periodic payments received or made at the end of each
measurement period, but prior to termination, are recorded as realized
gains or losses in the Statement of Operations.

Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Fund terminated its position in the agreement. Risks may
arise upon entering into these agreements from the potential inability of
the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the date of default.

8. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with or purchase

19
<PAGE>

by an entity of specified instruments and the issuance by that entity of
one or more classes of securities ("Structured Securities") backed by, or
representing interests in, the underlying instruments. Structured
Securities generally will expose the Fund to credit risks of the underlying
instruments as well as of the issuer of the structured security. Structured
Securities are typically sold in private placement transactions with no
active trading market. Investments in structured securities may be more
volatile than their underlying instruments, however, any loss is limited to
the amount of the original investment.

9. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.

10. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis. Dividend income is recorded on
the ex-date (except certain dividends which may be recorded as soon as the
Fund is informed of such dividends) net of applicable withholding taxes
where recovery of such taxes is not reasonably assured.

The amount and character of income and capital gain distributions to be
paid are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences
are primarily due to differing book and tax treatments for foreign currency
transactions, gains on certain securities of corporations designated as
"passive foreign investment companies" and the timing of the recognition of
gains or losses on securities.

Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.

Adjustments for permanent book-tax differences, if any, are not reflected
in ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.

B. Morgan Stanley Asset Management Inc. (the "Adviser") provides investment
advisory services to the Fund under the terms of an Investment Advisory
Agreement (the "Agreement"). Under the Agreement, the Adviser is paid a fee
computed weekly and payable monthly at an annual rate of 1.25% of the Fund's
average weekly net assets.

C. The Chase Manhattan Bank, through its corporate affiliate Chase Global
Funds Services Company (the "Administrator"), provides administrative services
to the Fund under an Administration Agreement. Under the Administration
Agreement, the Administrator is paid a fee computed weekly and payable monthly
at an annual rate of 0.08% of the Fund's average weekly net assets, plus $65,000
per annum. In addition, the Fund is charged certain out-of-pocket expenses by
the Administrator. The Chase Manhattan Bank acts as custodian for the Fund's
assets held in the United States.

D. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with a Custody Agreement. Custodian fees are payable
monthly based on assets under custody, investment purchase and sale activity, an
account maintenance fee, plus reimbursement for certain out-of-pocket expenses.
Investment transaction fees vary by country and security type. For the six
months ended June 30, 1998, the Fund incurred fees of $623,000 with the
International Custodian, of which $460,000 was payable to the International
Custodian at June 30, 1998. In addition, for the six months ended June 30, 1998,
the Fund has earned interest income of $30,000 and incurred interest expense of
$13,000 on balances with the International Custodian.

E. During the six months ended June 30, 1998, the Fund made purchases and
sales totaling approximately $131,101,000 and $166,054,000, respectively, of
investment securities other than long-term U.S. Government securities and
short-term investments. There were no purchases or sales of long-term U.S.
Government securities. For the six months ended June 30, 1998, the Fund incurred
$46,000 as brokerage commissions to Morgan Stanley & Co. Incorporated, an
affiliate of the Adviser. At June 30, 1998, the U.S. Federal income tax cost
basis of securities was $297,674,000 and, accordingly, net unrealized
depreciation for U.S. Federal income tax purposes was $34,429,000 of which
$38,184,000 related to appreciated securities and $72,613,000 related to
depreciated securities.

F. A significant portion of the Fund's net assets consist of securities of
issues located in emerging markets, which are denominated in foreign currencies.
Changes in cur-

20
<PAGE>

rency exchange rates will affect the value of and investment income from such
securities. Emerging market securities are often subject to greater price
volatility, limited capitalization and liquidity, and higher rates of inflation
than U.S. securities. In addition, emerging market issues may be subject to
substantial governmental involvement in the economy and greater social, economic
and political uncertainty. Accordingly, the price which the Fund may realize
upon sale of securities in such markets may not be equal to its value as
presented in the financial statements.

G. Each Director of the Fund who is not an officer of the Fund or an
affiliated person as defined under the Investment Company Act of 1940, as
amended, may elect to participate in the Directors' Deferred Compensation Plan
(the "Plan"). Under the Plan, such Directors may elect to defer payment of a
percentage of their total fees earned as a Director of the Fund. These deferred
portions are treated, based on an election by the Director, as if they were
either invested in the Fund's shares or invested in U.S. Treasury Bills, as
defined under the Plan. The deferred fees payable, under the Plan, at June 30,
1998 totaled $64,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.

H. In June, the Board of Directors amended your Fund's by-laws to require
advance notice of any proposals to be made at stockholders' meetings. For annual
meetings the notice must be given to the Fund's secretary at least 60 days
before the anniversary date of the previous year's annual meeting. This year's
annual meeting of stockholders was held on June 24. This provision was adopted
to permit the Fund's stockholders and Directors to consider every stockholder
proposal on an informed basis and in an organized fashion, taking into account
the interests of all affected constituencies.

I. Supplemental Proxy Information

The Annual Meeting of the Stockholders of the Morgan Stanley Emerging Markets
Fund, Inc. was held on June 24, 1998. The following is a summary of each
proposal presented and the total number of shares voted:

<TABLE>
<CAPTION>
VOTES IN VOTES AUTHORITY VOTES
PROPOSAL: FAVOR OF AGAINST WITHHELD ABSTAINED
- --------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C>
1. To elect the following Directors: Michael F. Klein. . . . . . . . 18,762,458 -- 223,304 --
Barton M. Biggs . . . . . . . . 18,825,393 -- 160,370 --
John A. Levin . . . . . . . . . 18,809,333 -- 176,430 --
William G. Morton, Jr.. . . . . 18,790,818 -- 194,945 --

2. To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the Fund. . . . . . . . . . . . . . . . . . . . . . . 18,884,310 62,400 -- 39,053

</TABLE>

21
<PAGE>

DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN

Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each shareholder will be deemed to have elected, unless Boston Equiserve (the
"Plan Agent") is otherwise instructed by the shareholder in writing, to have all
distributions automatically reinvested in Fund shares. Participants in the Plan
have the option of making additional voluntary cash payments to the Plan Agent,
annually, in any amount from $100 to $3,000, for investment in Fund shares.

Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.

The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
shareholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.

In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.

Shareholders who do not wish to have distributions automatically reinvested
should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:

Morgan Stanley Emerging Markets Fund, Inc.
Boston Equiserve
Dividend Reinvestment Unit
P.O. Box 1681
Boston, MA 02105-1681
1-800-730-6001