<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
James W. Grisham
Michael F. Klein VICE PRESIDENT
PRESIDENT AND DIRECTOR
Harold J. Schaaff, Jr.
Peter J. Chase VICE PRESIDENT
DIRECTOR
Joseph P. Stadler
John W. Croghan VICE PRESIDENT
DIRECTOR
Valerie Y. Lewis
David B. Gill SECRETARY
DIRECTOR
Joanna M. Haigney
Graham E. Jones TREASURER
DIRECTOR
Belinda A. Brady
John A. Levin ASSISTANT TREASURER
DIRECTOR
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
U.S. 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
(617) 575-3120
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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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.
- --------------------------------------------------------------------------------
THE
LATIN AMERICAN
DISCOVERY
FUND, INC.
- --------------------------------------------------------------------------------
THIRD QUARTER REPORT
SEPTEMBER 30, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the nine months ended September 30, 1997, The Latin American Discovery Fund,
Inc. (the "Fund") had a total return, based on net asset value per share, of
56.36% compared with 47.37% for the Morgan Stanley Capital International
Emerging Markets Global Latin America Index (the "Index"). For the one year
ended September 30, 1997, the Fund had a total return, based on net asset value
per share, of 63.66% compared to 51.47% for the Index. For the period since
commencement of operations on June 23, 1992 through September 30, 1997, the
Fund's total return, based on net asset value per share, was 197.15% compared
with 122.79% for the Index. On September 30, 1997, the closing price of the
Fund's shares on the New York Stock Exchange was $19 9/16 representing a 12.0%
discount to the net asset value per share.
After disappointing performance in August, Latin American equity markets resumed
their forward momentum in September.
The Brazilian stock market declined slightly during the quarter due to
exaggerated currency fears. Investors expected contagion from the Asian currency
crisis to impact Brazil due to the superficial similarities (current account
deficit and slightly overvalued exchange rate) with the South East Asian
countries. These fears were exacerbated by profit taking given the sharp equity
gains leading to the Asian crisis. Nevertheless, the market retraced most of
August's losses.
We reduced our overall Brazilian exposure during the quarter, specifically
lightening up our positions in the "Bras" names to take a defensive posture as
we believe some of the privatization potential of these companies has already
been priced into their valuations. The vulnerable macro outlook (current account
deficit, overvalued exchange rate, fiscal deficit and stubborn congress)
continues to make us cautious toward the Brazilian market. Nevertheless, very
positive themes such as the privatization process make us optimistic as
long-term investors.
Mexico's outstanding performance was due to the recovery of the Mexican consumer
as evidenced by improving retail and consumer product sales and increasing real
wages. With the consumer representing 65% of the economy and consumer related
stocks representing a significant portion of the total equity market cap, future
operating earning growth in the market should swell.
On the political front in Mexico, the smooth transition to a multi-party
Congressional leadership after the July 6th mid-term elections seems to have
appeased investors. The elections resulted in the governing party (PRI) losing
their majority representation in Congress. While we may see some political
jockeying for the lead spot in Congress, the broad consensus is that regardless
of who becomes leader, the economic acceleration will continue. We increased our
exposure during the quarter in response to the consumer-led economic progress
and the strong operating earnings growth potential.
Argentina continued its very strong economic acceleration which began at the end
of last year led by infrastructure and mining related industries. Domestic
consumption showed signs of recovery thereby bolstering equity market
performance. Politics continued to be benign although there were some rumblings
that the Peronist-led government may lose some political representation in
upcoming congressional elections.
Chile experienced a modest bout of profit taking. We lightened our exposure
early in the quarter to fund our purchases in Mexico and due to lackluster
Chilean earnings growth relative to the region.
In the other markets, Colombia benefited from an improvement in sentiment as
investors anticipated a bottoming of the economic slowdown from which forward
momentum will commence. Peru saw profit taking exacerbated by concerns over
effects of El Nino on the economy (e.g. fishmeal) and political instability.
Venezuela's appreciation was supported by its economic reform progress and
strong GDP growth.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Robert L. Meyer
Robert L. Meyer
PORTFOLIO MANAGER
/s/ Andy Skov
Andy Skov
PORTFOLIO MANAGER
October 1997
2
<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
INVESTMENT SUMMARY AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURN (%)
INFORMATION -----------------------------------------------------------------------------------
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 62.58% -- 56.36% -- 47.37% --
ONE YEAR 67.82 67.82% 63.66 63.66% 51.47 51.47%
FIVE YEAR 194.97+ 24.15+ 204.49+ 24.94+ 161.03 21.15
SINCE INCEPTION* 161.50+ 19.99+ 197.15+ 22.94+ 122.79 16.41
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
<TABLE>
<CAPTION>
[GRAPH]
YEARS ENDED DECEMBER 31:
NINE MONTHS
ENDED
1992* 1993 1994 1995 1996 SEPTEMBER 30, 1997
----- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . $ 15.23 $ 23.31 $ 17.16 $ 10.98 $ 14.77 $ 22.23
Market Value Per Share . . . . . . $ 13.25 $ 27.13 $ 18.25 $ 9.88 $ 12.50 $ 19.56
Premium/(Discount) . . . . . . . . -13.0 % 16.4 % 6.4 % -10.0 % -15.4 % -12.0 %
Income Dividends . . . . . . . . . -- -- $ 0.00# -- $ 0.16 --
Capital Gains Distributions. . . . -- -- $ 5.74 $ 0.45 $ 1.14 $ 0.70
Fund Total Return (2). . . . . . . 8.01% 65.36%+ -0.14% -27.61%+ 47.19% 56.36%
Index Total Return (3) . . . . . . -2.26% 52.29% -3.69% -13.53% 21.96% 47.37%
</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 Morgan Stanley Capital International Emerging Markets Global Latin
America Index (MSCI EMG Latin America Index) is a broad based market cap
weighted composite index covering at least 60% of markets in Mexico,
Argentina, Brazil, Chile, Colombia, Peru and Venezuela, including
dividends.
* The Fund commenced operations on June 23, 1992.
# Amount is less $0.01 per share.
+ This return excludes the effect of the rights issued in connection with the
Rights Offerings.
3
<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
PORTFOLIO SUMMARY AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
[CHART]
Short-Term Investments (2.1%)
Equity Securities (97.9%)
- --------------------------------------------------------------------------------
SECTORS
[CHART]
Other (11.1%)
Utilites-Electrical & Gas (9.5%)
Telecommunications (28.0%)
Retail-Major Department Stores (3.4%)
Banking (3.3%)
Beverages & Tobbacco (13.7%)
Broadcasting & Publishing (8.8%)
Energy Sources (5.5%)
Forest Products & Paper (5.7%)
Merchandising (7.4%)
Metals-Steel (3.6%)
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
Other (1.6%)
Columbia (1.8%)
Peru (2.3%)
Venezuela (3.6%)
Chile (7.3%)
Argentina (8.0%)
Brazil (38.1%)
Mexico (37.3%)
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
PERCENT OF PERCENT OF
NET ASSETS NET ASSETS
---------- ----------
1. CRT 10.2% 6. Televisa 4.4%
2. Telebras 8.7 7. YPF 4.1
3. FEMSA 6.2 8. Cemig 3.7
4. Kimberly 5.3 9. Soriana 3.4
5. TV Azteca 4.4 10. Cifra 3.3
---
53.7%
----
----
4
<PAGE>
INVESTMENTS (UNAUDITED)
- -------
SEPTEMBER 30, 1997
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (98.1%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
ARGENTINA (8.0%)
BANKING
Banco del Suquia 322,479 U.S.$ 1,129
------------
BEVERAGES & TOBACCO
Quilmes 38,290 536
------------
ENERGY SOURCES
YPF ADR 284,000 10,472
------------
METALS - STEEL
Acindar 765,837 2,409
Siderar 'A' 202,582 1,135
Siderar ADR 31,274 1,388
------------
4,932
------------
TELECOMMUNICATIONS
Argentine Cellular Communications 454,000 --@
Telecom Argentina ADR 16,855 513
Telefonica Argentina ADR 82,340 3,016
------------
3,529
------------
20,598
------------
- --------------------------------------------------------------------------------
BRAZIL (38.1%)
BANKING
Banco Bradesco (Preferred) 38,716,000 408
Banco Nacional (Preferred) 95,420,000 5
Itaubanco (Preferred) 387,000 250
Unibanco (Preferred) GDR 15,915 583
------------
1,246
------------
BEVERAGES & TOBACCO
Brahma (Preferred) 2,585,000 1,982
Brahma (Preferred) ADR 141,705 2,179
Souza Cruz 4,700 45
------------
4,206
------------
BUILDING MATERIALS & COMPONENTS
Duratex (Preferred) 1,124,000 68
------------
CONSTRUCTION & HOUSING
Rossi Residencial GDR 204,960 2,203
Rossi Residencial GDS 96,330 1,036
------------
3,239
------------
ENERGY SOURCES
Petrobras (Preferred) 771,000 219
Petrobras ADR 144A 129,515 3,659
------------
3,878
------------
FOREST PRODUCTS & PAPER
Klabin (Preferred) 1,143,600 1,013
------------
MERCHANDISING
Globex Utilidades (Preferred) 14,200 172
Lojas Arapua (Preferred) 121,844,400 1,284
Lojas Arapua (Preferred) ADR 20,775 218
Lojas Renner (Preferred) 50,330,000 2,320
Pao de Acucar (Preferred) ADR 48,335 1,106
------------
5,100
------------
- --------------------------------------------------------------------------------
METALS - NON-FERROUS
CVRD (Preferred) ADR 148,320 3,597
CVRD (Preferred) 147,820 3,614
CVRD Bonus 116,420 --@
------------
7,211
------------
METALS - STEEL
Gerdau (Preferred) 143,522,000 3,275
------------
MULTI-INDUSTRY
Iven (Preferred) 1,698,400 1,085
------------
TELECOMMUNICATIONS
CRT (Preferred) 'A' 20,385,305 26,478
Telebras 7,924,000 915
Telebras (Preferred) 56,776,740 7,333
Telebras (Preferred) ADR 111,065 14,300
------------
49,026
------------
TEXTILES & APPAREL
Coteminas (Preferred) 6,297,000 2,414
ENCORPAR 8,492,000 --@
------------
2,414
------------
UTILITIES - ELECTRICAL & GAS
Cemig (Preferred) 133,790,000 7,474
Cemig (Preferred) ADR 35,420 1,966
Copel (Preferred) ADR 82,310 1,420
CPFL (Preferred) 6,086,969 972
Eletrobras 4,702,000 2,489
Eletrobras (Preferred) 'B' 1,621,000 917
Eletrobras ADR 17,315 455
Lightpar 3,132,000 1,115
------------
16,808
------------
98,569
------------
- ------------------------------------------------------------------------------
CHILE (7.0%)
BEVERAGES & TOBACCO
Andina 'B' ADR 26,820 651
CCU ADR 154,300 4,436
------------
5,087
------------
FOOD & HOUSEHOLD PRODUCTS
Unimarc ADR 15,825 253
------------
INVESTMENT COMPANY
Citicorp-Chile Financiero Fund 3,953 78
------------
MERCHANDISING
Santa Isabel ADR 233,009 5,432
------------
TELECOMMUNICATIONS
CTC ADR 111,685 3,616
------------
UTILITIES - ELECTRICAL & GAS
Chilectra ADR 115,280 3,689
------------
18,155
------------
- --------------------------------------------------------------------------------
5
<PAGE>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
COLOMBIA (1.8%)
BANKING
Banco de Colombia 3,528,597 U.S.$1,347
------------
BEVERAGES & TOBACCO
Bavaria 314,640 3,285
------------
MULTI-INDUSTRY
Corfivalle 2 --@
------------
4,632
------------
- --------------------------------------------------------------------------------
MEXICO (37.3%)
BANKING
Banacci 'B' 268,420 847
Banacci 'L' 645,651 1,896
Bancomer 'B' 939,240 641
Bancomer 'B' ADR 144A 28,743 392
------------
3,776
------------
BEVERAGES & TOBACCO
Coke-FEMSA ADR 35,065 2,036
FEMSA 'B' 1,784,330 15,352
FEMSA ADR 91,830 791
Panamco 104,206 4,071
------------
22,250
------------
BROADCASTING & PUBLISHING
Televisa CPO GDR 315,762 11,308
TV Azteca ADR 506,000 11,385
------------
22,693
------------
BUILDING MATERIALS & COMPONENTS
Cemex 'B' 196,010 1,175
Cemex 'B' ADR 198,772 2,360
Cemex CPO 646,188 3,388
------------
6,923
------------
FOOD & HOUSEHOLD PRODUCTS
Maseca 'B' 347,685 422
Maseca 'B' ADR 45,940 832
------------
1,254
------------
FOREST PRODUCTS & PAPER
Kimberly 2,607,639 13,636
------------
MERCHANDISING
Cifra 'B' 1,947,065 4,599
Cifra 'B' ADR 35,560 84
Cifra 'C' 1,771,310 3,883
------------
8,566
------------
METALS - STEEL
Hylsamex ADR (Registered) 22,925 1,158
------------
RECREATION, OTHER CONSUMER GOODS
Blockbuster de Mexico ADR 40,000 7
------------
RETAIL - MAJOR DEPARTMENT STORES
Soriana 'B' 2,222,615 8,674
------------
TELECOMMUNICATIONS
Telmex ADR 142,338 7,366
------------
96,303
------------
- --------------------------------------------------------------------------------
PERU (2.3%)
BANKING
Banco Wiese ADR 152,620 U.S.$1,049
------------
TELECOMMUNICATIONS
Tel Peru 'B' ADR 206,216 4,872
------------
5,921
------------
- --------------------------------------------------------------------------------
VENEZUELA (3.6%)
BUILDING MATERIALS & COMPONENTS
Sivensa ADR 205,610 1,211
------------
TELECOMMUNICATIONS
CANTV ADR 88,245 4,037
------------
UTILITIES - ELECTRICAL & GAS
Electricidad de Caracas 2,518,491 4,057
------------
9,305
------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$220,663) 253,483
------------
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (1.6%)
- --------------------------------------------------------------------------------
CHILE (0.3%)
TIME DEPOSIT
Citibank 6.22%, 12/1/97 CLP 314,400 766
------------
- ------------------------------------------------------------------------------
UNITED STATES (1.3%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 5.75%,
dated 9/30/97, due
10/1/97, to be
repurchased at U.S.$3,210,
collateralized by United
States Treasury Bonds,
7.875%, due 2/15/21,
valued at U.S.$3,275 U.S.$ 3,209 3,209
------------
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$3,965) 3,975
------------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.6%)
Argentine Peso ARP 9 9
Brazil Real BRL 20 19
Chilean Peso CLP 70 --@
Colombian Peso COP 187,443 151
Mexican Peso MXP 72 9
Peruvian New Sol PSS 3,519 1,327
Venezuelan Bolivar VEB 15,172 30
------------
(Cost U.S.$1,562) 1,545
------------
- --------------------------------------------------------------------------------
6
<PAGE>
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost U.S.$226,190) U.S.$259,003
------------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
Other Assets U.S.$ 3,742
Liabilities (4,434) (692)
------------ ------------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 11,617,984 issued and outstanding
U.S.$0.01 par value shares (100,000,000 shares
authorized) U.S.$258,311
------------
------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 22.23
------------
------------
- --------------------------------------------------------------------------------
@ - Value is less than U.S.$500.
ADR - American Depositary Receipt.
GDR - Global Depositary Receipt.
GDS - Global Depositary Shares.
7
