<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
Michael F. Klein Stefanie V. Chang
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones Joanna M. Haigney
DIRECTOR TREASURER
John A. Levin Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
- --------------------------------------------------------------------------------
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
(800) 730-6001
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse 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.
- --------------------------------------------------------------------------------
THE
LATIN AMERICAN
DISCOVERY
FUND, INC.
- --------------------------------------------------------------------------------
FIRST QUARTER REPORT
MARCH 31, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- -------------------------------------------------------------------------------
For the three months ended March 31, 1998, The Latin American Discovery Fund,
Inc. (the "Fund") had a total return, based on net asset value per share, of
4.66% compared with 0.19% for the Morgan Stanley Capital International Emerging
Markets Global Latin America Index (the "Index"). For the one year ended March
31, 1998, and for the period since commencement of operations on June 23, 1992
through March 31, 1998, the Fund's total return, based on net asset value per
share, was 28.20% and 184.55%, respectively, compared with 14.52% and 99.44%,
respectively, for the Index. On March 31, 1998, the closing price of the Fund's
shares on the New York Stock Exchange was $12.00 representing a 8.4% discount to
the Fund's net asset value per share.
Latin American equity markets have languished despite rallies in U.S. and
European stock markets. The largest contributor to the Fund's outperformance
relative to the benchmark was strong country and stock selection in Brazil. Both
overweighting Brazil, and focusing on the Brazilian telecoms and banks were
favorable for performance. Also positive were our underweights in Peru and
Venezuela, which fell 5.5% and 9.3%, respectively, during the quarter.
After declining in January, the Brazilian market rallied, gaining 7.7% during
the first quarter. January's negative return was driven by renewed concerns
that the currency might devalue and that interest rates, at over 40%, were too
high. The authorities reacted favorably by lowering interest rates in February
and March to approximately 28% by quarter end. To further boost market
sentiment, the Brazilian government focused on fiscal reforms. Specifically,
the Lower House of Congress is voting on reigning in future social security
expenditures. This vote is important as it has implications for narrowing the
country's budget deficit. We are particularly impressed with the government's
initiatives to cut expenditures in an election year and thus have further
increased our overweight position. Within Brazil, we are focusing on the
banking and telecom stocks. Brazilian banks are attractive given their cheap
valuations as they were oversold during the fourth quarter of 1997 and given a
declining interest rate environment. We are bullish on Brazil's telecom stocks
given attractive valuations coupled with strong growth expectations and steady
progress on the privatization front.
The Mexican equities market fell 6.4% during the quarter on a slowdown in
foreign portfolio investment and declining oil prices. We are neutral on Mexico
as a result of a worsening trade deficit and the potential for higher than
expected inflation and interest rate numbers. Central Bank Governor Ortiz
announced that he was prepared to live with higher inflation if a looser
monetary policy would help the trade balance. Within Mexico, we have continued
to focus on the consumer sector taking advantage of the consumer recovery which
began approximately ten months ago.
A rebound in depressed copper prices helped to firm Chile's equity market. The
market gained 0.6% during the quarter. We increased our Chilean exposure to
take advantage of the extreme price declines and widespread pessimism
attributable to commodity deflation and the Asian contagion.
In the other markets, Argentina gained 1.4% driven by positive news regarding
its economic reform program. Colombia was the worst performing market in the
region falling 22.7% on interest rate increases, a weakening peso and some poor
earnings announcements. Peru declined 5.5% on concerns about slowing economic
growth, while Venezuela fell 9.3% on higher interest rates and falling oil
prices.
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
April 1998
2
<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
INVESTMENT SUMMARY AS OF MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (%)
HISTORICAL ------------------------------------------------------------------------------------
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 8.71% -- 4.66% -- 0.19% --
One Year 33.93 33.93% 28.20 28.20% 14.52 14.52%
Five Year 153.47+ 20.44+ 145.54+ 19.68+ 95.71 14.37
Since Inception* 160.66+ 18.05+ 184.55+ 19.86+ 99.44 12.71
Past performance is not predictive of future performance.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
RETURNS AND PER SHARE INFORMATION
<TABLE>
<CAPTION>
[GRAPH]
Years ended December 31:
Three Months
Ended
March 31,
1992* 1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . . . . $15.23 $ 23.31 $ 17.16 $ 10.98 $ 14.77 $ 20.34 $ 13.10
Market Value Per Share . . . . . . . . . $13.25 $ 27.13 $ 18.25 $ 9.88 $ 12.50 $ 17.94 $ 12.00
Premium/(Discount) . . . . . . . . . . . -13.0% 16.4% 6.4% -10.0% -15.4% -11.8% -8.4%
Income Dividends . . . . . . . . . . . . -- -- $ 0.00# -- $ 0.16 -- --
Capital Gains Distributions. . . . . . . -- -- $ 5.74 $ 0.45 $ 1.14 $ 0.70 $ 6.66
Fund Total Return (2). . . . . . . . . . 8.01% 65.36%+ -0.14% -27.61%+ 47.19% 43.06% 4.66%
Index Total Return (3) . . . . . . . . . -2.26% 52.29% -3.69% -13.53% 21.96% 31.66% 0.19%
</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 than $0.01 per share.
+ This return excludes the effect of the rights issued in connection with the
Rights Offerings.
3
<PAGE>
The Latin American Discovery Fund, Inc.
Portfolio Summary as of March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Short-Term Investments 3.0%
Equity Securities 97.0%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
[CHART]
<TABLE>
<S> <C>
Other 10.5%
Utilities - Electrical & Gas 11.3%
Telecommunications 42.1%
Banking 9.4%
Beverages & Tobacco 6.4%
Broadcasting & Publishing 4.1%
Building Materials & Components 4.9%
Energy Sources 3.4%
Food & Household Products 3.0%
Merchandising 2.5%
Metals - Steel 2.4%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Other 2.3%
Venezuela 0.5%
Colombia 0.6%
Peru 0.8%
Argentina 7.0%
Chile 7.8%
Mexico 29.4%
Brazil 51.6%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
1. Telebras (Brazil) 15.6%
2. CRT (Brazil) 12.2
3. Telmex (Mexico) 5.9
4. Cemig (Brazil) 5.3
5. Unibanco (Brazil) 4.6
6. Cemex (Mexico) 4.5%
7. Telefonica Argentina (Argentina) 4.4
8. FEMSA (Mexico) 4.0
9. Televisa (Mexico) 3.6
10. Kimberly Clark de Mexico (Mexico) 3.0
----
63.1%
----
----
</TABLE>
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ------------------------------------------------------------------------------
MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.3%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
ARGENTINA (7.0%)
BANKING
Banco del Suquia 24,517 U.S.$ 66
---------------
BEVERAGES & TOBACCO
Quilmes Industrial ADR 16,025 183
---------------
ENERGY SOURCES
YPF ADR 27,060 920
---------------
TELECOMMUNICATIONS
Telecom Argentina ADR 89,290 3,198
Telefonica Argentina ADR 194,119 7,389
---------------
10,587
---------------
11,756
---------------
- --------------------------------------------------------------------------------
BRAZIL (51.6%)
BANKING
Banco Bradesco (Preferred) 316,441,495 3,270
Banespa (Preferred) 14,432,000 965
Banco Nacional (Preferred) 95,420,000 4
Unibanco (Preferred) GDR 210,555 7,633
---------------
11,872
---------------
BUILDING MATERIALS & COMPONENTS
Cia Cimento Portland Itau (Preferred) 2,435,000 574
---------------
CONSTRUCTION & HOUSING
Rossi Residencial GDR 109,272 697
Rossi Residencial GDS 269,535 1,718
---------------
2,415
---------------
ENERGY SOURCES
Petrobras (Preferred) 7,111,000 1,695
Petrobras ADR 129,515 3,029
---------------
4,724
---------------
MERCHANDISING
Globex Utilidades (Preferred) 14,200 125
Lojas Arapua (Preferred) 41,337,400 138
Lojas Arapua (Preferred) ADR 20,775 71
Lojas Renner (Preferred) 32,504,000 1,229
---------------
1,563
---------------
METALS -- NON-FERROUS
CVRD (Preferred) ADR 77,750 1,875
CVRD Bonus 116,420 --
---------------
1,875
---------------
METALS -- STEEL
Gerdau (Preferred) 98,533,422 1,846
---------------
MULTI-INDUSTRY
Iven (Preferred) 1,268,500 608
---------------
TELECOMMUNICATIONS
CRT (Preferred) 'A' 16,226,205 20,408
Telebras (Preferred) 133,863,740 17,625
Telebras (Preferred) ADR 64,312 8,348
---------------
46,381
---------------
- --------------------------------------------------------------------------------
TEXTILES & APPAREL
Coteminas 5,426,400 1,408
Coteminas ADR 9,305 120
Encorpar (Preferred) 8,492,000 33
---------------
1,561
---------------
UTILITIES -- ELECTRICAL & GAS
Cemig (Preferred) 113,017,000 5,487
Cemig (Preferred) ADR 69,465 3,378
Copel (Preferred) 'B' 269,456,000 3,842
---------------
12,707
---------------
86,126
---------------
- --------------------------------------------------------------------------------
CHILE (7.4%)
AEROSPACE & MILITARY TECHNOLOGY
LANCHILE ADR 3,000 41
---------------
BANKING
Banco Edwards ADR 7,740 127
Banco Santander Chile ADR 14,900 210
Banco Santiago ADR 14,300 322
---------------
659
---------------
BEVERAGES & TOBACCO
CCU ADR 54,925 1,661
---------------
FINANCE
Citicorp-Chile Financiero Fund 3,801 73
---------------
MERCHANDISING
Santa Isabel ADR 44,705 813
---------------
MULTI-INDUSTRY
Quinenco ADR 51,020 628
---------------
RETAIL -- MAJOR DEPARTMENT STORES
D&S ADR 37,675 655
---------------
TELECOMMUNICATIONS
CTC ADR 58,720 1,618
---------------
UTILITIES -- ELECTRICAL & GAS
Chilectra ADR 103,090 2,910
Endesa ADR 68,190 1,313
Enersis ADR 51,540 1,627
Gener ADR 13,680 329
---------------
6,179
---------------
12,327
---------------
- --------------------------------------------------------------------------------
COLOMBIA (0.6%)
BANKING
Banco de Colombia 10,373 3
---------------
BEVERAGES & TOBACCO
Bavaria 87,449 514
---------------
FINANCIAL SERVICES
Valores Bavaria 159,679 432
---------------
MULTI-INDUSTRY
Corfivalle 2 --@
---------------
949
---------------
- --------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
MEXICO (29.4%)
BANKING
Banacci 'B' 130,200 U.S.$ 331
Banacci 'L' 645,651 1,499
Bancomer 'B' 1,422,260 838
---------------
2,668
---------------
BEVERAGES & TOBACCO
FEMSA 'B' 816,895 5,925
FEMSA ADR 91,830 663
Grupo Modelo 'C' 106,975 909
Panamco 21,260 853
---------------
8,350
---------------
BROADCASTING & PUBLISHING
Televisa CPO GDR 164,972 6,042
TV Azteca ADR 41,886 822
---------------
6,864
---------------
BUILDING MATERIALS & COMPONENTS
Cemex 'B' 216,845 1,172
Cemex 'B' ADR 199,837 2,197
Cemex CPO 932,058 4,152
---------------
7,521
---------------
FOOD & HOUSEHOLD PRODUCTS
Kimberly Clark de Mexico 'A' 982,059 5,049
---------------
MERCHANDISING
Cifra 'C' 239,362 424
Cifra 'V' ADR 3,970 73
Cifra 'V' 716,002 1,309
---------------
1,806
---------------
METALS -- STEEL
Tamsa ADR 115,565 2,160
---------------
MULTI-INDUSTRY
ALFA 'A' 147,535 833
Grupo Carso 'A1' 135,260 824
Desc ADR 19,940 613
---------------
2,270
---------------
RECREATION, OTHER CONSUMER GOODS
Blockbuster de Mexico ADR 40,000 --
---------------
RETAIL -- MAJOR DEPARTMENT STORES
Soriana 'B' 629,170 2,396
---------------
TELECOMMUNICATIONS
Telmex 'L' ADR 175,458 9,891
---------------
48,975
---------------
- --------------------------------------------------------------------------------
PERU (0.8%)
BANKING
Banco Wiese ADR 76,620 421
---------------
TELECOMMUNICATIONS
Tel Peru 'B' ADR 41,440 894
---------------
1,315
---------------
- --------------------------------------------------------------------------------
VENEZUELA (0.5%)
TELECOMMUNICATIONS
CANTV ADR 20,765 868
---------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$151,364) 162,316
---------------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (2.5%)
- --------------------------------------------------------------------------------
CHILE (0.4%)
TIME DEPOSIT
Citibank 7.80%, 6/1/98 CLP 24 744
---------------
- --------------------------------------------------------------------------------
UNITED STATES (2.1%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 5.60%,
dated 3/31/98, due 4/1/98, to
be repurchased at U.S.$3,518,
collateralized by U.S.$3,450,
United States Treasury Notes,
6.25%, due 4/30/01, valued at
U.S.$3,600 U.S.$ 3,517 3,517
---------------
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$4,262) 4,261
---------------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.5%)
Argentine Peso ARP 423 423
Brazil Real BRL 180 158
Chilean Peso CLP 30 --@
Colombian Peso COP 173,782 128
Mexican Peso MXP 55 6
Peruvian New Sol PSS 107 38
Venezuelan Bolivar VEB 25,608 49
---------------
(Cost U.S.$803) 802
---------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost U.S.$156,429) 167,379
---------------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3)%
Other Assets U.S.$ 4,418
Liabilities (4,987) (569)
--------------- ---------------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 12,736,125 issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$166,810
---------------
---------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 13.10
---------------
---------------
- --------------------------------------------------------------------------------
</TABLE>
@ -- Value is less than U.S.$500.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
6
