MORGAN STANLEY FUND INC, N-30D, 1996-09-09

MORGAN STANLEY FUND INC
N-30D, 1996-09-09

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MORGAN STANLEY FUNDS

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MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
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MORGAN STANLEY GLOBAL FIXED INCOME FUND
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MORGAN STANLEY ASIAN GROWTH FUND
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MORGAN STANLEY AMERICAN VALUE FUND
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MORGAN STANLEY WORLDWIDE HIGH INCOME FUND
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MORGAN STANLEY LATIN AMERICAN FUND
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MORGAN STANLEY EMERGING MARKETS FUND
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MORGAN STANLEY AGGRESSIVE EQUITY FUND
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MORGAN STANLEY U.S. REAL ESTATE FUND
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MORGAN STANLEY HIGH YIELD FUND
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ANNUAL REPORT
JUNE 30, 1996
<PAGE>
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<PAGE>
MORGAN STANLEY FUNDS
TABLE OF CONTENTS

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<TABLE>
<S> <C>
Overview and Portfolio of Investments by Portfolio:
President's Letter.................................................. 1
Performance Summary................................................. 3
Global Equity Allocation Fund....................................... 4
Global Fixed Income Fund............................................ 15
Asian Growth Fund................................................... 20
American Value Fund................................................. 26
Worldwide High Income Fund.......................................... 32
Latin American Fund................................................. 38
Emerging Markets Fund............................................... 44
Aggressive Equity Fund.............................................. 51
U.S. Real Estate Fund............................................... 54
High Yield Fund..................................................... 58
Statement of Assets and Liabilities................................... 62
Statement of Operations............................................... 63
Statement of Changes in Net Assets.................................... 64
Financial Highlights ................................................. 74
Notes to Financial Statements......................................... 84
Report of Independent Accountants..................................... 89
Additional Information................................................ 90
</TABLE>
<PAGE>
PRESIDENT'S LETTER

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Dear Shareholders:

We are pleased to present to you the fourth annual report of the Morgan
Stanley Funds. The Fund seeks to meet the investment needs of individual
investors who place a premium on quality and service. Currently, the Fund offers
shares in eleven separate funds, each having specific investment goals and
objectives:

THE MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND seeks
long-term capital appreciation by investing in common stocks
of U.S. and non-U.S. issuers in accordance with country
weightings determined by the Adviser with stock selection
within each country designed to replicate a broad market
index.

THE MORGAN STANLEY GLOBAL FIXED INCOME FUND seeks to
produce an attractive real rate of return while preserving
capital by investing in fixed income securities of issuers
throughout the world, including U.S. issuers.

THE MORGAN STANLEY ASIAN GROWTH FUND seeks long-term
capital appreciation by investing primarily in common stocks
of Asian issuers, excluding Japan.

THE MORGAN STANLEY AMERICAN VALUE FUND seeks high
long-term total return by investing in undervalued common
stocks of small- to medium-sized corporations.

THE MORGAN STANLEY WORLDWIDE HIGH INCOME FUND seeks high
current income consistent with relative stability and
potential for capital appreciation by investing across three
broad classes: U.S. high yield, emerging country debt and
global fixed income.

THE MORGAN STANLEY LATIN AMERICAN FUND seeks to provide
long-term capital appreciation by investing primarily in
common stocks of Latin American issuers.

THE MORGAN STANLEY EMERGING MARKETS FUND seeks to provide
long-term capital appreciation by investing primarily in
common stocks of emerging country issuers.

THE MORGAN STANLEY AGGRESSIVE EQUITY FUND seeks capital
appreciation by investing primarily in a non-diversified
portfolio of corporate equity and equity-linked securities.

THE MORGAN STANLEY U.S. REAL ESTATE FUND seeks to provide
above-average current income and long-term capital
appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real
estate investment trusts.

THE MORGAN STANLEY HIGH YIELD FUND seeks to maximize total
return by investing in a diversified portfolio of high yield
income securities that offer a yield above that generally
available on debt securities in the three highest rating
categories of the recognized rating services.

THE MORGAN STANLEY INTERNATIONAL MAGNUM FUND, which
commenced operations on July 1, 1996, seeks long-term capital
appreciation by investing primarily in equity securities of
non-U.S. issuers within the EAFE universe of countries.

The Funds are designed to bring the individual investor the same high
quality professional investment management that Morgan Stanley has been
providing to institutional investors, including governments, corporations and
wealthy individuals, for many years. Together, the Morgan Stanley Funds make
available a range of investment choices so that a client may invest in a single
fund to meet a specific investment need or allocate assets among different funds
within the Morgan Stanley Funds as part of an overall investment strategy.

For the year ended June 30, 1996, a number of our Funds registered very good
performance in absolute terms as well as when measured against their benchmarks.
The Global Equity Allocation Fund and The Worldwide High Income Fund, strong
performers for the first half of the Funds' year, continued to perform well.
Additionally, the Latin American Fund performed strongly as certain of those
markets rallied in the first half of 1996. In our Emerging Markets Fund,
politics continued to be a dominant theme in 1996 and relative country
weightings within the emerging markets universe had a marked impact on

1
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performance. Our overweighted positions in countries such as India, Taiwan,
Russia, Mexico and Brazil and underweighted positions in Thailand, Malaysia and
South Africa all contributed positively to performance. On the domestic front,
the Aggressive Equity Fund, which commenced operations in 1996, has gotten off
to an impressive start.

The specific results for each Fund, together with a commentary by each
portfolio manager explaining the strategy and performance results are enclosed
in this report.

In terms of the outlook for the rest of 1996, our portfolio managers have
provided their insights in their individual reports. It bears repeating,
however, that each Fund will continue to closely adhere to its investment
strategy and style. As we have stated in the past, we are firmly of the view
that superior long-term results are best achieved by adhering to a rigorous,
well conceived and consistently applied investment strategy.

We hope that the following commentaries provide useful and informative
insights into the markets and our Funds. We very much value your participation
in the Morgan Stanley Funds and look forward to a successful year for the Fund
and its shareholders.

Sincerely,

(SIGNATURE)
Warren J. Olsen
President

August 8, 1996

2
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MORGAN STANLEY FUNDS
PERFORMANCE SUMMARY (UNAUDITED)

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JUNE 30, 1996

<TABLE>
<CAPTION>
AVERAGE ANNUAL SINCE
NET ONE YEAR TOTAL RETURN INCEPTION
ASSET -------------------------- -------------------------
NET VALUE WITH WITHOUT WITH WITHOUT
INCEPTION ASSETS PER SALES SALES COMPARABLE SALES SALES COMPARABLE
FUND DATES (000) SHARE CHARGE CHARGE INDICES CHARGE CHARGE INDICES
- ------------------------- --------- ------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL EQUITY ALLOCATION
Class A................ 1/4/93 $63,706 $14.75 18.70 % 24.62 % 18.43%(1) 12.99 % 14.58 % 15.72%(1)
Class B................ 8/1/95 14,786 14.46 13.08 18.08 18.43(1) N/A N/A N/A
Class C................ 1/4/93 63,025 14.49 22.65 23.65 18.43(1) 13.74 13.74 15.72(1)
GLOBAL FIXED INCOME
Class A................ 1/4/93 7,432 9.94 0.20 5.20 2.05(2) 5.64 7.12 8.77(2)
Class B................ 8/1/95 1,440 9.91 -1.24 3.76 2.05(2) N/A N/A N/A
Class C................ 1/4/93 2,844 9.90 3.47 4.47 2.05(2) 6.27 6.27 8.77(2)

ASIAN GROWTH
Class A................ 6/23/93 248,009 17.15 -0.52 4.45 8.17(3) 11.97 13.78 17.51(3)
Class B................ 8/1/95 52,853 16.81 -3.18 1.82 8.17(3) N/A N/A N/A
Class C................ 6/23/93 168,070 16.78 2.64 3.64 8.17(3) 12.98 12.98 17.51(3)

AMERICAN VALUE
Class A................ 10/18/93 19,674 14.63 11.83 17.41 24.18(4) 9.30 11.29 14.32(4)
Class B................ 8/1/95 2,485 14.63 7.29 12.29 24.18(4) N/A N/A N/A
Class C................ 10/18/93 21,193 14.64 15.50 16.50 24.18(4) 10.42 10.42 14.32(4)

WORLDWIDE HIGH INCOME
Class A................ 4/21/94 41,493 12.47 13.93 19.61 5.01(5) 10.80 13.28 7.80(5)
Class B................ 8/1/95 26,174 12.44 12.07 17.07 5.01(5) N/A N/A N/A
Class C................ 4/21/94 28,094 12.45 17.71 18.71 5.01(5) 12.45 12.45 7.80(5)

LATIN AMERICAN
Class A................ 7/6/94 18,701 12.63 32.73 39.35 17.44(6) 1.05 3.56 0.01(6)
Class B................ 8/1/95 2,041 12.45 24.96 29.96 17.44(6) N/A N/A N/A
Class C................ 7/6/94 6,780 12.43 37.26 38.26 17.44(6) 2.64 2.64 0.01(6)

EMERGING MARKETS
Class A................ 7/6/94 114,850 12.06 8.74 14.16 8.44(7) -1.96 0.47 3.49(7)
Class B................ 8/1/95 10,416 11.94 4.45 9.45 8.44(7) N/A N/A N/A
Class C................ 7/6/94 43,601 11.93 12.30 13.30 8.44(7) -0.29 -0.29 3.49(7)

AGGRESSIVE EQUITY
Class A................ 1/2/96 5,382 14.40 14.80 20.52 9.50(8) N/A N/A N/A
Class B................ 1/2/96 2,426 14.38 15.18 20.18 9.50(8) N/A N/A N/A
Class C................ 1/2/96 2,582 14.37 19.10 20.10 9.50(8) N/A N/A N/A

U.S. REAL ESTATE
Class A................ 5/1/96 1,829 12.52 -0.34 4.63 3.72(9) N/A N/A N/A
Class B................ 5/1/96 2,197 12.52 -0.46 4.54 3.72(9) N/A N/A N/A
Class C................ 5/1/96 1,782 12.52 3.54 4.54 3.72(9) N/A N/A N/A

HIGH YIELD
Class A................ 5/1/96 3,907 11.92 -4.47 0.29 1.01(10) N/A N/A N/A
Class B................ 5/1/96 3,421 11.93 -4.79 0.21 1.01(10) N/A N/A N/A
Class C................ 5/1/96 3,316 11.93 -0.79 0.21 1.01(10) N/A N/A N/A
</TABLE>

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<TABLE>
<CAPTION>
INDEXES:

<C> <S>
1) MSCI World Index
2) J.P. Morgan Traded Global Bond Index
3) MSCI Combined Far East Free ex-Japan Index
4) Russel 2500 Small Company Index
5) Lehman Aggregate Bond Index
6) MSCI Latin America Global Index
7) IFC Global Total Return Composite Index
8) Lipper Capital Appreciation Index
9) NAREIT Index
10) CS First Boston High Yield Index
</TABLE>

<TABLE>
<CAPTION>
YIELD INFORMATION AS OF
JUNE 30, 1996
------------------------
FUND 30-DAY CURRENT YIELD+
- --------------------------- ------------------------
<S> <C>
GLOBAL FIXED INCOME
Class A.................. 4.63%
Class B.................. 4.69
Class C.................. 3.94
WORLDWIDE HIGH INCOME
Class A.................. 12.56
Class B.................. 12.42
Class C.................. 12.40
HIGH YIELD
Class A.................. 7.82
Class B.................. 7.42
Class C.................. 7.42
</TABLE>

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

PAST PERFORMANCE SHOULD NOT BE CONSTRUED AS A GUARANTEE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE READ
THE FUND'S PROSPECTUSES CAREFULLY BEFORE YOU INVEST OR SEND MONEY.

3
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

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INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australia 2.6%
Austria 0.3%
Brazil 0.7%
France 4.3%
Germany 6.0%
Hong Kong 4.6%
Indonesia 0.3%
Italy 6.7%
Japan 23.5%
Malaysia 0.1%
Netherlands 1.5%
Singapore 2.1%
Spain 3.4%
Switzerland 1.5%
United Kingdom 4.6%
United States 31.4%
Other 6.4%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS

PERCENT
OF
NET
SECURITY COUNTRY ASSETS
- ---------------------------------------- --------------- --------
<S> <C> <C>
Morgan Stanley Asia-Pacific Fund, Inc. United States 1.9%
The Thai Fund, Inc. United States 1.6%
Ente Nazionale Idrocarburi S.p.A. Italy 1.6%
Bank of Tokyo-Mitsubishi Japan 1.2%
General Electric Co. United States 1.1%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS

PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- --------------------- ------- --------
<S> <C> <C>
Consumer Goods $25,971 18.4%
Finance 19,712 13.9%
Capital Equipment 16,858 11.9%
Energy 15,404 10.9%
Services 14,990 10.6%
</TABLE>

<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------
Class A Shares 18.70% 24.62% 12.99% 14.58%
- -----------------------------------------------------------------
Class B+ Shares 13.08% 18.08% N/A N/A
- -----------------------------------------------------------------
Class C Shares 22.65% 23.65% 13.74% 13.74%
- -----------------------------------------------------------------
MSCI World Index N/A 18.43% N/A 15.72%
- -----------------------------------------------------------------
</TABLE>

** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.

+ Class B shares have been offered since August 1, 1995.
The Morgan Stanley Capital International (MSCI) World Index is an unmanaged
index which includes securities listed on the stock exchanges of the U.S.,
Europe, Canada, Australia, New Zealand and the Far East and assumes dividends
are reinvested net of withholding tax.

COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C> <C>
Global Equity Allocation Fund Class A Global Equity Allocation Fund Class C MSCI World Index
1/4/93 9,525 10,000 10,000
6/30/93 10,563 10,939 11,515
6/30/94 11,516 11,972 12,696
6/30/95 12,286 12,671 14,050
6/30/96 15,311 15,667 16,640
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

The Global Equity Allocation Fund invests in global equity
markets, with emphasis placed upon country rather than stock
selection. This approach reflects an investment philosophy
that a diversified selection of securities representing
exposure to each country that we find attractive is, we
believe, an effective way to maximize the return and reduce
the risk associated with global investing.

For the year ended June 30, 1996, the Fund had a total return
exclusive of sales charge of 24.62% for the Class A shares,
18.08% for the Class B shares and 23.65% for the Class C
shares, and a total return with sales charge of 18.70% for
the Class A shares, 13.08% for the Class B shares and 22.65%
for the Class C shares, as compared to a total return of
18.43% for the Morgan Stanley Capital International (MSCI)
World Index (the "Index"). For the period from inception on
January 4, 1993 through June 30, 1996, the average annual
total return for the Fund exclusive of sales charge was
14.58% for the Class A shares and 13.74% for the Class C
shares and 12.99% for the Class A shares with sales charge as
compared to 15.72% for the Index for the same period. Class B
shares held prior to May 1, 1995 were renamed Class C shares.
The Fund began offering the current Class B shares on August
1, 1995.

With the exception of the emerging markets, world equity
markets enjoyed solid double digit returns in the year ended
June 30, 1996. For the year, in U.S. dollar terms, as
measured by the Morgan Stanley Capital International (MSCI)
indices, regional returns were: U.S. 26.2%, Europe 14.7%,
Japan 11.1%, Pacific Ex-Japan 15.4%, and the Emerging Markets
8.5%.

In local currency terms, the twelve month returns were: U.S.
26.2%, Europe 17.7%, Japan 43.5%, Pacific Ex-Japan 12.89% and
the Emerging Markets 19.6%.
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI WORLD INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.

4
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

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INVESTMENT OVERVIEW (CONT.)

In June, 1995 we brought the Fund's weighting in the U.S. and
Japan up to neutral relative to the MSCI World Index
benchmark and we went underweight Europe and overweight Asia.
As the year progressed, we gradually reduced the weighting in
the U.S. and increased our allocation to Europe and the
Emerging Markets. For the year, the Fund's performance
relative to the MSCI World benchmark was rewarded by our
country selection and currency hedging in Europe and by our
decision to increase the Japan weight, but to hedge 75% of
the position back into U.S. dollars. On the negative side,
portfolio performance was hurt by our reduction in the U.S.
weighting earlier this year, and by our overweight in Asia.

Going forward, our regional target weights relative to the
MSCI World benchmark are underweight the U.S. (28% vs. 42%),
slightly overweight Europe (30% vs. 28%) and Japan (24% vs.
22%), overweight Developed Asia (10% versus 6%) with 7% in
the Emerging Markets.

With regard to the U.S., we believe that the economy is
significantly more vigorous than the consensus thinks and
that wages are trending higher. The positive fundamentals of
accelerating income generation, (as noted in the July 5 labor
report), a (still) competitive currency, and ongoing capital
spending to meet productivity imperatives should continue to
provide broadly based support to final demand. Our
economists' newly revised forecast puts the U.S. economy on a
3.6% average growth path over the next four quarters ending
with the first quarter of 1997, fully 1.5 percentage points
above most estimates of the economy's inflation-stable growth
rate of 2.1%. Under these conditions, we believe the Federal
Reserve will need to tighten quite aggressively, and that
corporations will feel margin pressures from both pricing and
labor costs just as inflation and interests rates tip upward.
These factors, in combination with slowing equity mutual fund
flows, will lead to the next leg of the market correction.

"GOING FORWARD, WE EXPECT GREATER MARKET VOLATILITY..."

Within Europe, the Fund is overweight the major markets of
Germany, Italy, and Spain and underweight the U.K.,
Switzerland, the Netherlands, and Sweden. Issues that most
concern investors about Europe are short-term interest rates,
economic recovery and the direction of U.S. equities. With
the exception of the high yielding markets of Italy, Spain
and Sweden, we think most of the European interest rate cuts
are behind us. In Germany, the economy is strengthening
(recent production and orders data are trending up) and the
money markets are discounting a tightening of German short
rates. French rates (like the French economy) are closely
tied to Germany, and both the Netherlands and Switzerland
have already raised rates slightly. European monetary policy
has been very loose for some time however, which, in addition
to weak currencies, should have a positive lagged effect on
economic growth.

With regard to U.S. equities, we believe their direction will
be down, but a sharp crack would have a more negative impact
on the European bourses than a slow downward grind.
Historically, European markets have risen in five out of the
last eleven U.S. corrections and currently these markets have
several advantages vis a vis the U.S. European valuations are
not as overextended as their U.S. counterparts, they have
more restructuring and shareholder value potential ahead of
them, and they are much earlier in the profit and economic
cycles than the U.S. In addition, their economies should
benefit from the stronger dollar and the stronger U.S. and
Japanese economies.

Within Europe, the recent compromise on the Italian
supplementary budget package and the three-year budget plan
was disappointing and has dampened investor enthusiasm for
the Italian financial markets. We agree that the compromise
on worker compensation was disappointing and shatters hopes
of speeding up the disinflation process. However, it would
have been naive to assume that the vital support of the
far-left could have come at no cost. It is important to
remember that the passage of both the three year budget plan
and the supplementary budget package by the end of July is
not a bad result for a government in office for just two
months. The case for lower interest rates remains intact, as
does the attractiveness of Italian valuations. Hence, we
remain positive on the medium-term outlook for Italian
equities, although the recent budget wrangling and the bad
press they've received may lead to some underperformance in
the near term.

5
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

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INVESTMENT OVERVIEW (CONT.)

During the recent quarter, the Japanese market was very
sensitive to speculation about a Bank of Japan interest rate
hike. Liquidity has been the key to the market's 50% plus
rise in less than a year and to the Japanese economic
rebound. Recent focus by BOJ policy makers on a
"self-sustaining recovery" indicates that they clearly
realize the economy has been artificially boosted by large
doses of fiscal and monetary stimuli and we believe any
tightening will be either fiscal or monetary, but not both.
If the BOJ does not tighten by September, we doubt they will
tighten until mid-1997, as the fiscal package runs out at the
end of this year and the consumption tax will rise in April
1997 from 3% to 5%. The BOJ will not want to give the economy
a double punch. With regard to earnings and economic growth,
on which the next market leg up depends, we think earnings
will be two to three times the 6% consensus forecasts and
that economic growth will be aided both by the BOJ staying
off the brakes and by strong private sector demand. Imports
have been up for the past six to nine months and car sales
are strong. While we think the abnormally high equity returns
are behind us, we foresee a shallow uptrend in the Japanese
market, driven primarily by local investors.

Asian equities cause us the most concern at this stage in the
U.S. market cycle. As noted above, we believe the U.S. market
is headed for a decline and historic correlations would tell
us that this portends poorly for the Asian markets. On the
other hand, the weak yen has dampened inflationary pressures
in these markets and improving growth prospects in the U.S.,
Europe, and Japan are boosting corporate earnings potential.
We remain overweight in Asia, albeit a few percentage points
under our weighting for the previous quarter. Additionally,
at the end of June we rotated our Asian country weights,
selling the more fully valued markets of Indonesia and
Malaysia, and adding to Singapore -- as an oversold, high
quality market (the Switzerland of Asia) and to Hong Kong --
as a play on an easing of the austerity program in China. In
both Singapore and Hong Kong, property issues make up large
proportions of the market. In Hong Kong the residential
market has recovered strongly with prices rising by 10%-15%
and we expect commercial property values to recover as
mainland Chinese set up business locations in Hong Kong. In
Singapore, government anti-speculation measures announced in
May resulted in heavy selling of residential property stocks
and banks, but we believe the market is oversold, and
valuations of banks and office property stocks are
attractive.

With regard to currency hedging, we still believe in the
long-term secular strength of the U.S. dollar, but we allowed
one third of both our deutschemark and Japanese yen hedges to
roll off in early July. The dollar has made a big move in the
past twelve months and U.S. stock market weakness and the
relative monetary positions of the Fed, the BOJ and the
Bundesbank may cloud the issues. Specifically, with a German
rate cut looking less likely and sporadic rumors of a BOJ
rate hike, the U.S. Fed's hesitation to raise U.S. rates in
early July may dampen U.S. dollar sentiment over the near
term.

Going forward, we expect greater market volatility as global
economies move to greater synchronization and as earnings and
interest rates replace liquidity as the key market drivers.
We expect rotation out of the U.S. market into Japan, Asia
and the Emerging Markets to continue.

Barton M. Biggs
PORTFOLIO MANAGER

Madhav Dhar
PORTFOLIO MANAGER

Francine J. Bovich
PORTFOLIO MANAGER

Ann D. Thivierge
PORTFOLIO MANAGER

July 1996

6
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (86.5%)
AUSTRALIA (2.4%)
17,000 Amcor Ltd. ....................................... $ 116
21,500 Australian National Industries Ltd. .............. 17
27,200 Boral Ltd. ....................................... 71
6,700 Brambles Industries Ltd. ......................... 93
47,800 Broken Hill Proprietary Ltd. ..................... 660
14,900 Burns, Philip & Co., Ltd. ........................ 28
12,700 Coca-Cola Amatil Ltd. ............................ 141
34,300 Coles Myer Ltd. .................................. 125
8,000 CRA Ltd. ......................................... 123
27,400 CSR Ltd. ......................................... 97
61,600 Fosters Brewing Corp. ............................ 106
21,751 General Property Trust............................ 37
12,300 Gio Australia Holdings Ltd. ...................... 30
32,400 Gold Mines of Kalgoorlie Ltd. .................... 35
34,100 Goodman Fielder Ltd. ............................. 34
(a)5,488 Highlands Gold Ltd. (New)......................... 3
8,700 ICI Australia Ltd. ............................... 76
7,212 Lend Lease Corp., Ltd. ........................... 111
42,400 MIM Holdings Ltd. ................................ 55
35,100 National Australia Bank Ltd. ..................... 324
8,200 Newcrest Mining Ltd. ............................. 33
48,800 News Corp., Ltd. ................................. 277
(a)18,600 Normandy Mining Ltd. ............................. 29
19,256 North Broken Hill Peko Ltd. ...................... 55
27,900 Pacific Dunlop Ltd. .............................. 63
26,400 Pioneer International Ltd. ....................... 77
6,041 Renison Goldfields Consolidated Ltd. ............. 29
16,800 Santos Ltd. ...................................... 58
3,600 Sons of Gwalia Ltd. .............................. 25
20,100 Southcorp Holdings Ltd. .......................... 50
11,000 Tabcorp Holdings Ltd. ............................ 50
(a)9,000 TNT Ltd. ......................................... 10
26,800 Western Mining Corp. ............................. 192
48,000 Westpac Banking Corp., Ltd. ...................... 212
-------
3,442
-------
AUSTRIA (0.3%)
50 Austria Mikro Systems International AG............ 5
(a)60 Austrian Airlines AG.............................. 9
790 Bank of Austria AG................................ 64
(a)147 Bank of Austria AG (New).......................... 12
200 Bank of Austria AG-Partial Certificate............ 7
150 Bau Holdings AG................................... 9
210 Boehler-Udderholm AG.............................. 16
60 BWT AG............................................ 8
660 Creditanstalt-Bankverein.......................... 44
270 EA-Generali AG.................................... 80
240 Flughafen Wein AG................................. 17
80 Lenzing AG........................................ 5
(a)300 Mayr-Melnhof Karton AG............................ 13
780 Oesterreichische Elektrizitaets 'A'............... 60
300 OMV AG............................................ 30
510 Radex-Heraklith Industriebet AG................... 16
(a)80 Universale-Bau AG................................. 3
440 VA Technologie AG................................. 54
120 Wienerberger Baustoffindustrie AG................. 24
-------
476
-------

<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
BRAZIL (0.2%)
(a)243,000 Cia Paulista De Forca e Luz....................... $ 22
850,000 Cia Siderurgica Nacional.......................... 22
800,000 Eletrobras........................................ 215
184,000 Light............................................. 49
(a)(d)184,000 Light (New)....................................... 13
(a)17,828 Telesp ........................................... 3
-------
324
-------
FRANCE (4.3%)
575 Accor S.A. ....................................... 81
2,650 Alcatel Alsthom................................... 232
1,225 Air Liquide....................................... 217
2,956 AXA S.A. ......................................... 162
2,650 Banque Nationale de Paris......................... 93
2,027 Banque Paribas.................................... 120
500 BIC............................................... 71
582 Bouygues.......................................... 65
425 Canal Plus........................................ 104
635 Carrefour S.A. ................................... 356
1,600 Casino Guichard................................... 66
(a)125 Chargeurs International S.A. ..................... 6
343 Cie Bancaire S.A. ................................ 39
1,670 Cie de Saint-Gobain............................... 224
2,890 Cie de Suez S.A. ................................. 106
2,173 Cie Generale des Eaux............................. 243
5,540 Compagnie UAP..................................... 113
4,850 Elf Acquitaine.................................... 357
650 Eridania Beghin-Say S.A. ......................... 102
1,368 Groupe Danone RFD................................. 207
1,090 Havas S.A. ....................................... 89
1,927 Lafarge Coppee S.A. .............................. 117
510 Legrand S.A. ..................................... 91
1,220 L'Oreal........................................... 406
1,655 LVMH Moet Hennessy Louis Vuitton.................. 393
1,323 Lyonnaise des Eaux S.A. .......................... 126
2,310 Michelin (C.G.D.E.) 'B'........................... 113
(a)125 Pathe S.A. ....................................... 29
1,100 Pernod-Ricard..................................... 71
380 Pinault S.A. ..................................... 133
340 Promodes.......................................... 98
1,005 PSA Peugeot Citroen S.A. ......................... 135
5,862 Rhone-Poulenc S.A. 'A'............................ 154
85 Sagem............................................. 51
220 Saint Louis....................................... 59
1,755 Sanofi S.A. ...................................... 132
(a)2,550 Schneider S.A. ................................... 134
(a)600 Simco S.A. ....................................... 55
(a)29 Simco S.A. (New).................................. 2
90 Societe Eurafrance S.A. .......................... 35
1,589 Societe Generale.................................. 175
150 Sodexho S.A. ..................................... 67
2,750 Thomson CSF S.A. ................................. 77
4,000 Total S.A. 'B'.................................... 297
(a)5,040 Usinor Sacilor.................................... 73
-------
6,076
-------
GERMANY (5.8%)
(a)100 Aachener & Muenchener Beteiligungs AG............. 72
(a)900 Agiv AG........................................... 17
500 Allianz AG........................................ 870
100 Asko Deutsche Kaufhaus AG......................... 74
</TABLE>

The accompanying notes are an integral part of the financial statements.
7
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
GERMANY (CONT.)
1,400 BASF AG........................................... $ 399
16,000 Bayer AG.......................................... 564
5,400 Bayer Hypotheken Bank AG.......................... 131
5,850 Bayer Vereinsbank AG.............................. 164
(a)100 Beiersdorf AG..................................... 99
100 Bilfinger & Berger Bau AG......................... 42
150 Brau und Brunnen AG............................... 16
(a)400 Bremer Vulkan Verbund AG.......................... 1
50 CKAG Colonia Konz AG.............................. 40
2,400 Continental AG.................................... 39
(a)1,150 Daimler-Benz AG................................... 618
250 Degussa AG........................................ 85
10,500 Deutsche Bank AG.................................. 498
800 Deutsche Lufthansa AG............................. 113
11,000 Dresdner Bank AG.................................. 276
100 Heidelberger Zement AG............................ 69
200 Hochtief AG....................................... 89
300 Karstadt AG....................................... 120
200 Kaufhof Holding AG................................ 76
(a)1,350 Kloeckner-Humboldt-Deutz AG....................... 5
250 Linde AG.......................................... 162
(a)50 Linotype-Hell AG.................................. 2
250 MAN AG............................................ 63
850 Mannesmann AG..................................... 293
3,773 Merck KGAA........................................ 143
153 Muenchener Rueck (Registered)..................... 313
500 Preussag AG....................................... 126
7,600 RWE AG............................................ 296
1,410 SAP AG............................................ 208
1,550 Schering AG....................................... 113
13,150 Siemens AG........................................ 706
(a)50 Starbag AG........................................ 4
900 Thyssen AG........................................ 165
11,250 Veba AG........................................... 599
550 Viag AG........................................... 219
(a)128 Viag AG RFD....................................... 51
600 Volkswagen AG..................................... 224
-------
8,164
-------
HONG KONG (4.6%)
(a)28,000 Applied International Holdings Ltd. .............. 2
29,135 Bank of East Asia Ltd............................. 107
110,000 Cathay Pacific Airways Ltd. ...................... 202
82,000 Cheung Kong Holdings Ltd. ........................ 591
74,000 China Light and Power Co., Ltd. .................. 336
61,289 China Estate Holdings Ltd. ....................... 55
29,000 Dickson Concepts International Ltd. .............. 37
24,000 Giordano Holdings Ltd. ........................... 23
47,000 Hang Lung Development Corp. ...................... 88
71,600 Hang Seng Bank Ltd. .............................. 721
7,200 Hong Kong Aircraft Engineering Co., Ltd. ......... 22
72,480 Hong Kong & China Gas Co. ........................ 116
48,000 Hong Kong Shanghai Hotels......................... 82
404,516 Hong Kong Telecommunications Ltd. ................ 726
156,869 Hopewell Holdings Ltd. ........................... 85
131,000 Hutchison Whampoa Ltd. ........................... 824
38,000 Hysan Development Co. ............................ 116
15,000 Johnson Electric Holdings Ltd. ................... 34
2,400 Melco International Development Ltd. ............. 1
22,000 Miramar Hotel Investment Ltd. .................... 49
57,135 New World Development Co., Ltd. .................. 265
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
53,000 Oriental Press Goup............................... $ 28
14,300 Peregrine Investment Holdings..................... 21
40,905 Shangri-La Asia Ltd. ............................. 57
62,000 Shun Tak Holdings Ltd. ........................... 38
70,000 South China Morning Post.......................... 48
39,000 Stelux Holdings Ltd. ............................. 9
85,000 Sun Hung Kai Properties Ltd. ..................... 859
58,500 Swire Pacific Ltd. 'A'............................ 501
16,000 Television Broadcasting Ltd. ..................... 60
81,000 Wharf Holdings Ltd. .............................. 290
13,000 Winsor Industrial................................. 11
5,716 Wing Lung Bank.................................... 33
-------
6,437
-------
INDONESIA (0.3%)
(d)17,465 Bank Dagang Nasional (Foreign).................... 15
(d)31,294 Barito Pacific Timber (Foreign)................... 21
(d)26,949 Gadjah Tungal (Foreign)........................... 13
(d)80,000 Gudang Garam (Foreign)............................ 343
(d)8,966 Jakarta International Hotel (Foreign)............. 8
(d)9,500 Jaya Real Property (Foreign)...................... 31
11,500 Lippo Bank (Foreign).............................. 20
-------
451
-------
ITALY (6.6%)
44,475 Assicurazioni Generali S.p.A. .................... 1,027
90,300 Banca Commerciale Italiana........................ 182
29,900 Banco Ambrosiano Veneto........................... 80
13,000 Benetton Group S.p.A. ............................ 168
8,700 Cartiere Burgo S.p.A. ............................ 48
108,500 Credito Italiano S.p.A. .......................... 127
41,000 Edison S.p.A. .................................... 248
451,000 Ente Nazionale Idrocarburi S.p.A. ................ 2,252
(a)5,000 Falck Acciaierie & Ferriere Lombarde.............. 19
189,500 Fiat S.p.A. ...................................... 636
46,700 Fiat S.p.A. Di Risp NCS........................... 80
(a)31,000 Fidis Finanziaria di Sviluppo S.p.A. ............. 85
(a)16,000 Impreglio S.p.A. ................................. 17
47,600 Istituto Bancario San Paolo di Torina S.p.A. ..... 308
34,700 Istituto Mobiliare Italiano S.p.A. ............... 290
234,200 Istituto Nazionale delle Assicurazioni (INA)...... 350
15,800 Italcementi S.p.A. ............................... 127
8,650 Italcementi S.p.A. NCS............................ 27
38,400 Italgas........................................... 144
15,565 La Rinascente S.p.A. ............................. 112
26,500 Magneti Marelli S.p.A. ........................... 38
29,050 Mediobanca S.p.A. ................................ 185
(a)254,200 Montedison S.p.A. ................................ 148
(a)58,900 Montedison S.p.A. Di Risp NCS..................... 35
(a)210,750 Olivetti Group.................................... 114
(a)49,700 Parmalat Finanziaria S.p.A. ...................... 67
105,000 Pirelli S.p.A. ................................... 176
17,051 R.A.S. ........................................... 176
(a)1,800 Saffa S.p.A. 'A'.................................. 4
7,100 S.A.I. ........................................... 68
8,300 Sasib S.p.A. ..................................... 34
16,500 Sirti S.p.A. ..................................... 106
36,000 Snia BPD S.p.A. .................................. 40
371,700 Telecom Italia S.p.A. ............................ 800
97,500 Telecom Italia Di Risp S.p.A. .................... 168
375,300 Telecom Italia Mobile S.p.A....................... 840
-------
9,326
-------
</TABLE>

8
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
JAPAN (23.5%)
2,200 Advantest Corp. .................................. $ 88
24,000 Ajinomoto Co., Inc. .............................. 288
(a)12,000 Aoki Corp. ....................................... 45
1,000 Aoyama Trading Co., Ltd. ......................... 26
39,000 Asahi Bank Ltd. .................................. 453
12,000 Asahi Breweries Ltd. ............................. 140
36,000 Asahi Chemical Industry Co., Ltd. ................ 258
34,000 Asahi Glass Co. .................................. 407
(a)71,000 Bank of Tokyo-Mitsubishi.......................... 1,650
12,000 Bridgestone Corp. ................................ 229
18,000 Canon, Inc. ...................................... 375
7,000 Casio Computer Co., Ltd. ......................... 67
19,000 Chiba Bank........................................ 168
5,000 Chiyoda Corp. .................................... 59
12,000 Chugai Pharmaceutical Ltd. ....................... 117
24,000 Dai Nippon Printing Co., Ltd. .................... 465
16,000 Daiei Inc. ....................................... 193
12,000 Daikin Industries Ltd. ........................... 132
12,000 Daiwa House Industry.............................. 186
24,000 Daiwa Securities Co., Ltd. ....................... 309
8,000 Ebara Corp. ...................................... 128
5,100 Fanuc Co. ........................................ 203
45,000 Fuji Bank......................................... 971
12,000 Fuji Photo Film Ltd. ............................. 380
39,000 Fujitsu Ltd. ..................................... 357
19,000 Furukawa Electric................................. 114
(a)24,000 Hankyu Corp. ..................................... 141
12,000 Hazama-Gumi....................................... 53
60,000 Hitachi Ltd. ..................................... 560
19,000 Honda Motor Co. .................................. 494
38,000 Industrial Bank of Japan.......................... 945
8,000 Ito-Yokado Co., Ltd. ............................. 484
(a)48,000 Japan Airlines.................................... 389
30,000 Japan Energy Corp. ............................... 112
13,000 Joyo Bank......................................... 99
9,000 Jusco Co. ........................................ 295
24,000 Kajima Corp. ..................................... 248
12,800 Kansai Electric Power Co. ........................ 294
22,000 KAO Corp. ........................................ 298
61,000 Kawasaki Steel Corp. ............................. 220
36,050 Kinki Nippon Railway.............................. 260
24,000 Kirin Brewery Co. Ltd. ........................... 294
24,000 Komatsu Ltd. ..................................... 237
36,000 Kubota Corp. ..................................... 238
24,000 Kumagai Gumi Co., Ltd. ........................... 97
12,000 Kyowa Hakko Kogyo................................. 115
36,000 Marubeni Corp. ................................... 198
7,000 Marui Co. ........................................ 156
36,000 Matsushita Electric Industries Ltd. .............. 672
36,000 Mitsubishi Chemical Corp. ........................ 167
33,000 Mitsubishi Corp. ................................. 435
42,000 Mitsubishi Electric Corp. ........................ 294
26,000 Mitsubishi Estate Co., Ltd. ...................... 359
65,000 Mitsubishi Heavy Industries Ltd. ................. 567
24,000 Mitsubishi Materials Corp. ....................... 131
21,000 Mitsubishi Trust and Banking Corp. ............... 355
36,000 Mitsui & Co. ..................................... 327
(a)24,000 Mitsui Engineering & Shipbuilding Co., Ltd. ...... 73
19,000 Mitsui Fudosan Co., Ltd. ......................... 257
13,000 Mitsukoshi........................................ 139
5,000 Murata Manufacturing.............................. 190
29,000 NEC Corp. ........................................ 316
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
24,000 New OJI Paper Co., Ltd. .......................... $ 208
12,000 NGK Insulators Ltd. .............................. 135
12,000 Nippon Denko Co., Ltd. ........................... 261
23,000 Nippon Express Co., Ltd. ......................... 225
12,000 Nippon Fire & Marine Insurance Co. ............... 78
12,000 Nippon Light Metal Co. ........................... 68
12,000 Nippon Meat Packers............................... 171
36,000 Nippon Oil Co. ................................... 245
132,000 Nippon Steel Corp. ............................... 454
36,000 Nippon Yusen Kabushiki Kaisha..................... 209
45,000 Nissan Motor Co., Ltd. ........................... 401
(a)70,000 NKK Corp. ........................................ 213
36,000 Nomura Securities Co., Ltd. ...................... 705
23,690 Odakyu Electric Railway Co. ...................... 160
53,000 Osaka Gas Co. .................................... 194
12,000 Penta-Ocean Construction.......................... 81
4,000 Pioneer Electronic Corp. ......................... 95
2,000 Rohm Co. ......................................... 132
59,000 Sakura Bank....................................... 658
12,000 Sankyo Co., Ltd. ................................. 312
36,000 Sanyo Electric Co., Ltd. ......................... 220
3,000 Secom Co. ........................................ 199
1,800 Sega Enterprises.................................. 84
12,000 Sekisui House Ltd. ............................... 137
24,000 Sharp Corp. ...................................... 421
3,000 Shimano Inc. ..................................... 54
5,250 Shin-Etsu Chemical Co. ........................... 101
17,000 Shinizu Corp. .................................... 188
5,000 Shiseido Co., Ltd. ............................... 64
16,000 Shizuoka Bank..................................... 206
(a)24,000 Showa Denko K.K. ................................. 74
6,000 Sony Corp. ....................................... 396
52,000 Sumitomo Bank..................................... 1,008
48,000 Sumitomo Chemical Co. ............................ 230
24,000 Sumitomo Corp. ................................... 214
16,000 Sumitomo Electric Industries...................... 230
5,000 Sumitomo Forestry................................. 75
84,000 Sumitomo Metal Industries......................... 258
11,000 Sumitomo Metal Mining Co. ........................ 95
12,000 Sumitomo Osaka Cement Co., Ltd. .................. 59
24,000 Taisei Corp., Ltd. ............................... 171
24,000 Takeda Chemical Industries........................ 426
24,000 Teijin Ltd. ...................................... 131
24,000 Tobu Railway Co. ................................. 158
8,600 Tohoku Electric Power............................. 193
37,000 Tokai Bank........................................ 481
36,000 Tokio Marine & Fire Insurance Co. ................ 481
5,000 Tokyo Dome Corp. ................................. 101
22,200 Tokyo Electric Power Co. ......................... 565
3,000 Tokyo Electron Ltd. .............................. 88
35,000 Tokyo Gas Co. .................................... 128
24,000 Tokyu Corp. ...................................... 183
16,000 Toppan Printing Co., Ltd. ........................ 234
36,000 Toray Industries, Inc. ........................... 249
12,000 Toto Ltd. ........................................ 181
24,000 Toyobo Ltd. ...................................... 90
55,000 Toyota Motor Corp. ............................... 1,378
24,000 Ube Industries Ltd. .............................. 92
24,000 Yamaichi Securities............................... 165
24,000 Yasuda Trust & Banking............................ 152
-------
33,282
-------
</TABLE>

The accompanying notes are an integral part of the financial statements.
9
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
MALAYSIA (0.1%)
2,000 Commerce Asset Holdings Bhd. ..................... $ 12
1,000 Hong Leong Industries Bhd. ....................... 5
4,000 Land & General Bhd. .............................. 10
4,000 Leader Universal Holdings Bhd. ................... 11
2,000 Malaysian Mining Corp. Bhd. ...................... 2
1,000 Malaysian Oxygen Bhd. ............................ 5
9,000 Metroplex Bhd. ................................... 10
5,000 United Engineers Bhd. ............................ 35
-------
90
-------
NETHERLANDS (1.5%)
2,822 ABN-Amro Holdings N.V. ........................... 152
700 Akzo Nobel N.V. .................................. 84
5,800 Elsevier N.V. .................................... 88
350 Heineken N.V. .................................... 78
6,905 ING Groep N.V. ................................... 206
785 KLM Royal Dutch Airlines N.V. .................... 25
1,239 Koninklijke Ahold N.V. ........................... 67
278 Koninklijke Hoogovens............................. 10
900 Koninklijke KNP BT................................ 22
9,067 Koninklijke PTT Nederland N.V. ................... 344
200 Nedlloyd Groep N.V. .............................. 5
2,900 Phillips Electronics N.V. ........................ 94
4,700 Royal Dutch Petroleum N.V. ....................... 727
289 Stork N.V. ....................................... 8
1,400 Unilever N.V. .................................... 203
640 Wolters Kluwer N.V. .............................. 73
-------
2,186
-------
SINGAPORE (2.1%)
11,000 Amcol Holdings Ltd. .............................. 24
(a)29,000 City Developments Ltd. ........................... 226
7,000 Cycle & Carriage Ltd. ............................ 75
34,000 DBS Land Ltd. .................................... 117
20,000 Development Bank of Singapore..................... 249
9,000 First Capital Corp. .............................. 22
11,200 Fraser & Neave Ltd. .............................. 116
12,000 Hai Sun Hup Group Ltd. ........................... 9
12,000 Hotel Properties Ltd. ............................ 21
5,000 Inchcape Bhd. .................................... 16
5,000 Jurong Shipyard Ltd. ............................. 25
19,000 Keppel Corp. ..................................... 159
15,000 Natsteel Ltd. .................................... 30
21,000 Neptune Orient Lines Ltd. ........................ 22
28,000 Oversea-Chinese Banking Corp. .................... 327
5,000 Overseas Union Enterprise Ltd. ................... 27
11,000 Parkway Holdings Ltd. ............................ 33
2,000 Robinson & Co., Ltd. ............................. 8
5,000 Shangri-La Hotel Ltd. ............................ 18
27,000 Singapore Airlines Ltd. (Foreign)................. 285
10,600 Singapore Press Holdings (Foreign)................ 208
21,000 Singapore Technologies Industrial Corp. .......... 56
222,000 Singapore Telecommunications Ltd. ................ 592
10,000 Straits Trading Co., Ltd. ........................ 26
51,000 United Industrial Corp. Ltd. ..................... 52
21,000 United Overseas Bank Ltd. ........................ 201
-------
2,944
-------
SPAIN (3.4%)
540 Acerinox S.A. .................................... 56
2,000 Aguas De Barcelona S.A. .......................... 74
5,800 Argentaria S.A. .................................. 253
9,353 Autopistas Concesionaria Espanola S.A. ........... 109
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
10,300 Banco Bilbao Vizcaya (Registered)................. $ 418
7,500 Banco Central Hispanoamericano S.A. .............. 153
7,300 Banco Santander S.A. ............................. 341
700 Corporacion Financiera Alba S.A. ................. 58
99 Corporacion Mapfre S.A. .......................... 4
1,250 Corporacion Mapfre ADR S.A. ...................... 64
2,650 Dragados & Construcciones S.A. ................... 35
2,200 Ebro Agricolas, Compania de Alimentacion S.A. .... 25
950 Empresa Nacional de Cellulosas S.A. .............. 14
11,700 Empresa Nacional de Electricidad S.A. ............ 731
317 Energia y Indsutrias Aragonesas................... 2
(a)11,300 Ercros S.A. ...................................... 7
700 Fomento de Construcciones y Contratas S.A. ....... 58
1,700 Gas Natural SDG 'E'............................... 358
200 Gines Navarro Construction Co. ................... 2
42,700 Iberdrola S.A. ................................... 439
1,025 Inmobiliaria Metropolitana Vasco Central S.A. .... 35
400 Portland Vaderrivas S.A. ......................... 26
13,800 Repsol S.A. ...................................... 481
1,700 Tabacalera S.A. 'A'............................... 86
43,000 Telefonica de Espana.............................. 793
13,400 Union Electrica Fenosa S.A. ...................... 86
2,400 Uralita S.A. ..................................... 23
1,950 Vallehermoso S.A. ................................ 39
1,050 Viscofan Industria Navarra De Envolturas
Celulosicas S.A. ............................... 17
380 Zardoya-Otis S.A. ................................ 36
-------
4,823
-------
SWITZERLAND (1.5%)
60 ABB AG (Bearer)................................... 74
25 Adia S.A. (Bearer)................................ 6
25 Alusuisse-Lonza Holding AG (Bearer)............... 21
50 Alusuisse-Lonza Holding AG (Registered)........... 41
30 Ciba-Geigy AG (Bearer)............................ 36
160 Ciba-Geigy AG (Registered)........................ 195
800 CS Holding AG (Registered)........................ 76
10 Georg Fischer AG (Bearer)......................... 12
45 Holderbank Financiere Glaris AG, 'B' (Bearer)..... 36
30 Merkur Holding AG (Registered).................... 6
250 Nestle S.A. (Registered).......................... 286
10 Roche Holding AG (Bearer)......................... 124
45 Roche Holding AG-Genusshein....................... 344
225 Sandoz AG (Registered)............................ 258
(a)25 SMH AG (Bearer)................................... 17
(a)100 SMH AG (Registered)............................... 16
10 Societe Generale de Surveillance Holding S.A.
(Bearer)........................................ 24
25 Sulzer AG (Registered)............................ 16
563 Swiss Bank Corp. (Registered)..................... 111
100 Swiss Reinsurance Co. (Registered)................ 103
(a)25 SwissAir AG (Registered).......................... 24
140 Union Bank of Switzerland (Bearer)................ 137
150 Union Bank of Switzerland (Registered)............ 32
250 Zuerich Versicherungs-Gesellschaft (Registered)... 68
-------
2,063
-------
</TABLE>

10
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
UNITED KINGDOM (4.6%)
12,500 Abbey National plc................................ $ 105
11,200 Argyll Group plc.................................. 60
8,300 Arjo Wiggins Appleton plc......................... 23
3,800 Associated British Foods plc...................... 23
12,926 Barclays plc...................................... 155
8,100 Bass plc.......................................... 102
26,300 BAT Industries plc................................ 205
5,100 BICC plc.......................................... 25
9,684 Blue Circle Industries plc........................ 54
4,600 BOC Group plc..................................... 66
9,500 Boots Co. plc..................................... 85
6,400 BPB Industries plc................................ 32
3,814 British Aerospace plc............................. 58
8,958 British Airways plc............................... 77
35,600 British Gas plc................................... 100
43,286 British Petroleum Co. plc......................... 380
11,800 British Sky Broadcasting Group plc................ 81
16,500 British Steel plc................................. 42
41,400 British Telecommunications plc.................... 223
32,506 BTR plc........................................... 128
2,219 Burmah Castrol plc................................ 35
19,196 Cable & Wireless plc.............................. 127
9,100 Cadbury Schweppes plc............................. 72
5,900 Caradon plc....................................... 20
6,671 Coats Viyella plc................................. 18
3,865 Commercial Union plc.............................. 35
3,800 Courtaulds plc.................................... 25
2,100 De La Rue plc..................................... 19
3,800 General Accident plc.............................. 39
29,000 General Electric plc.............................. 156
4,129 GKN plc........................................... 63
26,600 Glaxo Wellcome plc................................ 358
5,200 Granada Group plc................................. 70
20,800 Grand Metropolitan plc............................ 138
9,200 Great Universal Stores plc........................ 93
12,600 Guardian Royal Exchange plc....................... 48
15,700 Guinness plc...................................... 114
46,447 Hanson plc........................................ 130
9,200 Harrisons & Crosfield plc......................... 19
14,382 HSBC Holdings plc................................. 220
6,500 Imperial Chemical Industries plc.................. 79
12,808 Ladbroke Group plc................................ 36
5,700 Land Securities plc............................... 55
5,900 Lasmo plc......................................... 16
39,700 Lloyds TSB Group plc.............................. 194
6,700 Lonrho plc........................................ 19
26,300 Marks & Spencer plc............................... 192
4,300 MEPC plc.......................................... 27
10,800 National Power plc................................ 87
7,300 Peninsular & Oriental Steam Navigation Co. ....... 55
10,800 Pilkington plc.................................... 30
19,308 Prudential Corp. plc.............................. 122
7,000 Rank Organisation plc............................. 54
6,062 Redland plc....................................... 38
5,100 Reed International plc............................ 85
14,200 Reuters Holdings plc.............................. 172
4,300 Rexam plc......................................... 23
2,400 RMC Group plc..................................... 38
3,838 Royal Bank of Scotland plc........................ 29
6,400 Royal Insurance Holdings plc...................... 40
11,100 RTZ Corp. plc (Registered)........................ 164
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
11,047 Sainsbury (J) plc................................. $ 65
1,900 Schroders plc..................................... 40
6,800 Scottish Power plc................................ 32
14,100 Sears plc......................................... 22
2,200 Sedwick Group plc................................. 5
3,200 Slough Estates plc................................ 11
20,569 Smithkline Beecham plc............................ 220
2,700 Southern Electric plc............................. 30
10,162 Tarmac plc........................................ 18
5,400 Taylor Woodrow plc................................ 13
14,631 Tesco plc......................................... 67
5,100 Thames Water plc.................................. 45
4,600 Thorne EMI plc.................................... 128
3,831 TI Group plc...................................... 32
5,800 Unilever plc...................................... 115
4,900 United Utilities plc.............................. 41
27,200 Vodafone Group plc................................ 101
6,600 Zeneca Group plc.................................. 146
-------
6,509
-------
UNITED STATES (25.3%)
9,400 Abbott Laboratories............................... 409
(a)6,600 Airtouch Communications, Inc. .................... 186
3,000 Aluminum Co. of America........................... 172
6,100 American Express Co. ............................. 272
8,400 American Home Products Corp. ..................... 505
4,600 American International Group, Inc. ............... 454
14,900 American Telephone & Telegraph Co. ............... 924
6,400 Amoco Corp. ...................................... 463
(a)3,000 AMR Corp. ........................................ 273
2,200 Atlantic Richfield Co. ........................... 261
3,000 Automatic Data Processing, Inc. .................. 116
6,010 Banc One Corp. ................................... 204
6,000 BankAmerica Corp. ................................ 454
1,000 Bankers Trust New York Corp. ..................... 74
5,500 Bell Atlantic Corp. .............................. 351
6,400 BellSouth Corp. .................................. 271
6,000 Boeing Co. ....................................... 523
5,900 Bristol-Myers Squibb Co. ......................... 531
5,100 Campbell Soup Co. ................................ 360
3,000 Caterpillar, Inc. ................................ 203
4,000 Chevron Corp. .................................... 236
4,900 Chrysler Corp. ................................... 304
6,000 Chubb Corp. ...................................... 299
(a)4,000 Cisco Systems, Inc. .............................. 226
4,900 Citicorp.......................................... 405
25,400 Coca-Cola Co. .................................... 1,241
5,400 Columbia HCA/Healthcare Corp. .................... 288
3,000 Computer Associates International, Inc. .......... 214
6,000 Consolidated Edison Co. of New York, Inc. ........ 176
3,000 Cooper Industries, Inc. .......................... 124
3,000 Corning, Inc. .................................... 115
2,100 CSX Corp. ........................................ 101
1,500 Deere & Co. ...................................... 60
4,400 Dow Chemical Co. ................................. 334
8,800 Du Pont (EI) de Nemours Co. ...................... 696
6,000 Duke Power Co. ................................... 307
3,000 Dun & Bradstreet Corp. ........................... 188
6,000 Eastman Kodak Co. ................................ 466
3,000 Edison International.............................. 53
3,000 Electronic Data Systems Corp. .................... 161
3,648 Eli Lilly & Co. .................................. 237
</TABLE>

The accompanying notes are an integral part of the financial statements.
11
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
UNITED STATES (CONT.)
4,000 Enron Corp. ...................................... $ 164
900 Entergy Corp. .................................... 26
14,700 Exxon Corp. ...................................... 1,277
10,800 Federal National Mortgage Association............. 362
2,800 Fleet Financial Group, Inc. ...................... 122
6,000 FPL Group, Inc. .................................. 276
2,300 Gannett Co., Inc. ................................ 163
17,400 General Electric Co. ............................. 1,505
9,600 General Motors Corp. ............................. 503
1,800 General RE Corp. ................................. 274
3,000 Goodyear Tire & Rubber Co. ....................... 145
1,200 H&R Block, Inc. .................................. 39
(a)1,500 Harrah's Entertainment, Inc. ..................... 42
6,000 Hewlett-Packard Co. .............................. 598
5,550 H.J. Heinz Co. ................................... 169
5,900 Home Depot, Inc. ................................. 319
8,800 Intel Corp. ...................................... 646
6,800 International Business Machines Corp. ............ 673
2,000 International Game Technology..................... 34
3,000 International Paper Co. .......................... 111
3,500 J.C. Penney Co., Inc. ............................ 184
13,400 Johnson & Johnson................................. 663
8,900 Kmart Corp. ...................................... 110
3,000 May Department Stores Co. ........................ 131
7,400 McDonald's Corp. ................................. 346
3,000 Melville Corp. ................................... 121
11,800 Merck & Co., Inc. ................................ 763
(a)5,900 Microsoft Corp. .................................. 709
6,000 Minnesota Mining & Manufacturing Co. ............. 414
5,100 Mobil Corp. ...................................... 572
9,000 Monsanto.......................................... 292
3,000 Morgan (J.P.) & Co., Inc. ........................ 254
7,200 Motorola, Inc. ................................... 453
6,000 NationsBank Corp. ................................ 496
2,400 Norfolk Southern Corp. ........................... 203
6,400 Norwest Corp. .................................... 223
(a)4,600 Novell, Inc. ..................................... 64
1,300 Nucor Corp. ...................................... 66
(a)4,500 Oracle System Corp. .............................. 177
8,700 Pacific Gas & Electric Co. ....................... 202
(a)480 Payless ShoeSource, Inc. ......................... 15
20,000 PepsiCo, Inc. .................................... 707
3,100 Pfizer, Inc. ..................................... 221
7,800 Philip Morris Cos., Inc. ......................... 811
1,900 PPG Industries, Inc. ............................. 93
8,800 Procter & Gamble Co. ............................. 797
8,900 Public Service Enterprise Group, Inc. ............ 244
6,000 Rockwell International Corp. ..................... 344
1,900 Salomon, Inc. .................................... 84
6,700 SBC Communications, Inc. ......................... 330
5,800 Schering-Plough Corp. ............................ 364
6,000 Sears, Roebuck & Co. ............................. 292
8,900 Southern Co. ..................................... 219
5,900 Sprint Corp. ..................................... 248
6,000 Suntrust Banks, Inc. ............................. 222
(a)9,200 Tele-Communications, Inc., 'A'.................... 166
2,700 Texas Instruments, Inc. .......................... 135
6,000 Texas Utilities Co. .............................. 256
5,974 The Limited, Inc. ................................ 128
6,000 Time Warner, Inc. ................................ 236
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
(a)6,000 Toys 'R' Us, Inc. ................................ $ 171
6,900 Travelers, Inc. .................................. 315
1,500 U.S. Healthcare, Inc. ............................ 82
2,900 Union Pacific Corp. .............................. 203
(a)3,400 Viacom, Inc. 'B'.................................. 132
17,900 Wal-Mart Stores, Inc. ............................ 454
6,409 Walt Disney Co. .................................. 403
3,400 Warner-Lambert Co. ............................... 187
900 Wells Fargo & Co. ................................ 215
8,900 Westinghouse Electric Corp. ...................... 167
6,000 Weyerhaeuser Co. ................................. 255
5,400 WMX Technologies, Inc. ........................... 177
-------
35,801
-------
TOTAL COMMON STOCKS (COST $108,650)..............................
122,394
-------
PREFERRED STOCKS (0.9%)
AUSTRALIA (0.1%)
24,000 News Corp., Ltd. ................................. 117
-------
BRAZIL (0.5%)
10,000 Aracruz Cellelose 'B'............................. 19
7,773,000 Banco Bradesco.................................... 64
(a)598,000 Banco do Brasil................................... 5
(a)331,000 Banespa........................................... 1
80,000 Brahma............................................ 48
405,000 Cevel Alimentos S.A. ............................. 4
363,000 Cia Brazil Petro Ipiranga......................... 5
1,293,000 Cia Energetica de Minas Gerais.................... 34
(a)27,000 Cia Energetica de Sao Paulo....................... 1
520,000 Cia Sider Tubarao 'B'............................. 8
150,000 Eletrobras 'B'.................................... 43
10,000 Industrias Klabin Papel e Cellulose............... 13
37,000 Investimentos Itausa S.A. ........................ 28
85,000 Itaubanco......................................... 35
799,000 Petrobras......................................... 98
8,000 Sadia-Concordia S.A. ............................. 6
3,311,000 Telebras.......................................... 231
416,000 Telesp............................................ 89
19,733,000 Usiminas.......................................... 21
2,448 Vale do Rio Doce.................................. 47
-------
800
-------
GERMANY (0.2%)
4,650 RWE AG............................................ 143
926 SAP AG............................................ 138
-------
281
-------
ITALY (0.1%)
60,500 Fiat S.p.A. ...................................... 106
-------
TOTAL PREFERRED STOCKS (COST $1,166).............................
1,304
-------
INVESTMENT COMPANIES (6.1%)
UNITED STATES
(g)95,900 Latin American Discovery Fund, Inc. .............. 1,211
(g)70,000 Morgan Stanley Africa Investment Fund, Inc. ...... 884
(g)224,333 Morgan Stanley Asia-Pacific Fund, Inc. ........... 2,692
20,109 The Korea Fund, Inc. ............................. 425
(g)96,105 The Thai Fund, Inc. .............................. 2,270
(a)(g)100,000 The Morgan Stanley India Investment Fund, Inc. ... 1,125
-------
TOTAL INVESTMENT COMPANIES (COST $8,799).........................
8,607
-------
</TABLE>

12
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- ----------------------------------------------------------------
<C> <S> <C>
RIGHTS (0.0%)
GERMANY (0.0%)
(a)(d)1,150 Daimler Benz, expiring 7/5/96..................... $ --
-------
INDONESIA (0.0%)
(a)(d)24,000 Jakarta International Hotel, expiring 7/22/96..... 5
(a)(d)46,000 Polysindo (Foreign), expiring 7/10/96............. 12
(a)(d)5,750 Lippo Bank, expiring 7/18/96...................... 4
-------
21
-------
MALAYSIA (0.0%)
(a)(d)3,000 Malaysian Mining Corp. Bhd., expiring 7/8/96...... 1
-------
SINGAPORE (0.0%)
(a)(d)1,600 Oversea-Chinese Banking Corp., expiring 7/12/96... 13
-------
SPAIN (0.0%)
(a)(d)380 Zardoya Otis S.A., expiring 7/28/96............... --
-------
TOTAL RIGHTS (COST $16)..........................................
35
-------
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
WARRANTS (0.0%)
FRANCE (0.0%)
(a)(d)5 Sodexho S.A., expiring 6/7/04..................... --
HONG KONG (0.0%)
(a)(d)2,000 Applied International Holdings Ltd., expiring
12/30/99........................................ --
(a)(d)8,540 Hong Kong & China Gas Co., Ltd., expiring
9/30/97......................................... --
(a)(d)1,400 Hysan Development Co., expiring 4/30/98........... --
(a)(d)1,230 Peregrine Investment Holdings Ltd., expiring
5/15/98......................................... --
-------
--
-------
INDONESIA (0.0%)
(a)(d)4,800 Indah Kiat Pulp & Paper (Foreign), expiring
4/13/01......................................... --
-------
ITALY (0.0%)
(a)(d)578 La Rinascente S.p.A., expiring 12/31/99........... --
(a)880 R.A.S. S.p.A., expiring 12/31/97.................. 3
(a)420 R.A.S. S.p.A. (Savings Shares), expiring
12/31/97........................................ 1
-------
4
-------
MALAYSIA (0.0%)
(a)(d)1,500 Metroplex Bhd., expiring 7/8/96................... --
-------
SINGAPORE (0.0%)
(a)(d)6,750 Straits Steamship, expiring 12/12/00.............. 9
-------
SWITZERLAND (0.0%)
(a)(d)55 Roche Holdings, expiring 5/5/98................... --
(a)(d)65 Swiss Bank Corp., expiring 6/30/00................ --
-------
--
-------
UNITED KINGDOM (0.0%)
(a)(d)119 British Aerospace plc, expiring 11/15/00.......... 1
-------
TOTAL WARRANTS (COST $4).........................................
14
-------
<CAPTION>

NO. OF VALUE
UNITS (000)
<C> <S> <C>
- ----------------------------------------------------------------
UNITS (0.1%)
AUSTRALIA (0.1%)
25,986 Westfield Trust (COST $46)........................ $ 47
-------
<CAPTION>
FACE
AMOUNT
(000)
- -------------
<C> <S> <C>
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 5 Sodexho S.A. 6.00%, 6/7/04........................ 4
287 Sanofi S.A. 4.00%, 1/1/00......................... 25
-------
29
-------
ITALY (0.0%)
ITL 2,125 Mediobanca S.p.A. 6.00%, 12/31/02................. 1
-------
TOTAL COVERTIBLE DEBENTURES (COST $25)...........................
30
-------
TOTAL FOREIGN & U.S. SECURITIES (93.6%) (COST $118,706)..........
132,431
-------
SHORT-TERM INVESTMENT (3.4%)
REPURCHASE AGREEMENT (3.4%)
UNITED STATES
$ 4,813 Chase Securities, Inc., 5.15%, dated 6/28/96, due
7/1/96, to be repurchased at $4,815,
collateralized by $4,730 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $4,836 (COST
$4,813)......................................... 4,813
-------
TOTAL INVESTMENT IN SECURITIES (97.0%) (COST $123,519)...........
137,244
-------
FOREIGN CURRENCY (0.3%)
ATS 127 Austrian Schilling................................ 12
BEF 450 Belgian Franc..................................... 14
BRC 12 Brazilian Real.................................... 12
GBP 16 British Pound..................................... 24
CAD 47 Canadian Dollar................................... 35
DEM 9 Deutsche Mark..................................... 6
FRF 133 French Franc...................................... 26
HKD 1,044 Hong Kong Dollar.................................. 135
IDR 2,983 Indonesian Rupiah................................. 1
ITL 4,467 Italian Lira...................................... 3
JPY 4,208 Japanese Yen...................................... 38
MYR 7 Malaysian Ringgit................................. 3
NLG 63 Netherlands Guilder............................... 37
SGD 4 Singapore Dollar.................................. 3
ESP 3,611 Spanish Peseta.................................... 28
CHF 28 Swiss Franc....................................... 22
-------
TOTAL FOREIGN CURRENCY (COST $399)............................... 399
-------
TOTAL INVESTMENTS (97.3%) (COST $123,918)........................ 137,643
OTHER ASSETS IN EXCESS OF LIABILITIES (2.7%)..................... 3,874
-------
NET ASSETS (100%)................................................ $141,517
-------
-------
</TABLE>

<TABLE>
<S> <C>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1
to financial statements.
(g) -- The Fund is advised by an affiliate.
NCS -- Non Convertible Shares.
RFD -- Ranked for Dividend.
FRF -- French Franc
ITL -- Italian Lira
</TABLE>

The accompanying notes are an integral part of the financial statements.
13
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996

FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:

Under the terms of forward foreign currency exchange contracts open at June 30,
1996, the Fund is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:

<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE NET UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- -------------- --------- ----------- ------------ --------- ---------------
<C> <C> <C> <S> <C> <C>
MYR 2,353 $ 943 7/2/96 $ 943 $ 943 $ --
MYR 55 22 7/3/96 $ 22 22 --
$ 2 2 7/3/96 MYR 6 2 --
$ 10 10 7/10/96 IDR 23,000 10 --
DEM 11,929 7,856 7/15/96 $ 7,821 7,821 (35)
JPY 884,769 8,113 7/15/96 $ 8,383 8,383 270
$ 5 5 7/19/96 IDR 12,075 5 --
ATS 10,197 955 7/31/96 $ 951 951 (4)
JPY 1,243,446 11,429 7/31/96 $ 11,700 11,700 271
NLG 5,139 3,022 7/31/96 $ 3,331 3,331 309
CHF 2,476 1,987 7/31/96 $ 2,017 2,017 30
$ 1,030 1,030 7/31/96 NLG 1,685 991 (39)
$ 70 70 7/31/96 CHF 87 70 --
FRF 28,883 5,633 8/14/96 $ 5,619 5,619 (14)
JPY 1,428,001 13,153 8/14/96 $ 14,149 14,149 996
$ 3,325 3,325 8/30/96 JPY 292,833 2,703 (622)
--------- --------- ------
$ 57,555 $ 58,717 $ 1,162
--------- --------- ------
--------- --------- ------
</TABLE>

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

ATS -- Austrian Shilling
DEM -- Deutsche Mark
FRF -- French Franc
IDR -- Indonesian Rupiah
JPY -- Japanese Yen
MYR -- Malaysian Ringgit
NLG -- Netherlands Guilder
CHF -- Swiss Franc

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

SUMMARY OF FOREIGN & U.S. EQUITY SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Consumer Goods................................................................... $ 25,971 18.4%
Finance.......................................................................... 19,712 13.9
Capital Equipment................................................................ 16,858 11.9
Energy........................................................................... 15,404 10.9
Services......................................................................... 14,990 10.6
Materials........................................................................ 10,313 7.3
Investment Companies............................................................. 8,607 6.1
Telecommunications............................................................... 6,748 4.8
Insurance........................................................................ 5,730 4.0
Multi-Industry................................................................... 4,245 3.0
Real Estate...................................................................... 3,636 2.6
Gold Mines....................................................................... 217 0.1
--------- ---
$ 132,431 93.6%
--------- ---
--------- ---
</TABLE>

14
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australian Dollar 2.4%
British Pound
Sterling 5.7%
Canadian Dollar 3.3%
Danish Krone 6.1%
Deutsche Mark 17.0%
French Franc 3.1%
Italian Lira 5.9%
Japanese Yen 8.0%
Netherland Guilder 3.7%
Spanish Peseta 0.9%
Swedish Krona 6.1%
United States Dollar 19.2%
Other 18.6%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS

PERCENT
OF
NET
SECURITY CURRENCY ASSETS
- ---------------------------------------- -------------------------- --------
<S> <C> <C>
Federal National Mortgage Association
Pool #336411 6.50%, 2/1/26 United States Dollar 16.1%
German Unity Fund 8.00%, 1/21/02 Deutsche Mark 7.1%
Republic of Italy 10.50%, 11/1/00 Italian Lira 5.9%
Government of Sweden 13.00%, 6/15/01 Swedish Krona 5.2%
Treuhandanstalt 6.875%, 6/11/03 Deutsche Mark 4.9%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE CURRENCY DENOMINATIONS

PERCENT
OF
VALUE NET
CURRENCY (000) ASSETS
- --------------------- ------- --------
<S> <C> <C>
United States Dollar $ 2,254 19.2%
Deutsche Mark 1,990 17.0%
Japanese Yen 934 8.0%
Danish Krone 710 6.1%
Swedish Krona 710 6.1%
</TABLE>

<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------
Class A Shares 0.20% 5.20% 5.64% 7.12%
- -----------------------------------------------------------------
Class B+ Shares -1.24% 3.76% N/A N/A
- -----------------------------------------------------------------
Class C Shares 3.47% 4.47% 6.27% 6.27%
- -----------------------------------------------------------------
J.P. Morgan Traded
Global Bond Index N/A 2.05% N/A 8.77%
- -----------------------------------------------------------------
</TABLE>

** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.

+ Class B shares have been offered since August 1, 1995.

The J.P. Morgan Traded Global Bond Index is an unmanaged index of government
bond issues that includes Australia, Belgium, Canada, Denmark, France, Germany,
Italy, Japan, the Netherlands, Spain, Sweden, the United Kingdom and the United
States excluding withholding tax.

COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C> <C>
Global Fixed Income Fund Class A Global Fixed Income Fund Class C MSCI World Index
1/4/93 9,525 10,000 10,000
6/30/93 10,289 10,653 10,760
6/30/94 10,331 10,733 11,187
6/30/95 11,509 11,833 13,139
6/30/96 12,107 12,362 13,408
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

The Global Fixed Income Fund seeks to produce an attractive
real rate of return while preserving capital by investing in
fixed income securities of U.S. and foreign issuers
denominated in U.S. dollars and in other currencies.

For the year ended June 30, 1996, the Fund had a total return
exclusive of sales charge of 5.20% for the Class A shares,
3.76% for the Class B shares and 4.47% for the Class C
shares, and a total return with sales charge of 0.20% for the
Class A shares, -1.24% for the Class B shares and 3.47% for
the Class C shares, as compared to a total return of 2.05%
for the JP Morgan Traded Global Bond Index (the "Index"). For
the period since inception on January 4, 1993 through June
30, 1996, the average annual total return of the Fund
exclusive of sales charge was 7.12% for the Class A shares
and 6.27% for the Class C shares, and 5.64% for the Class A
shares with sales charge, as compared to 8.77% for the Index.
As of June 30, 1996, the SEC 30-day yield for the Fund's
shares was 4.63% for Class A shares, 4.69% for Class B shares
and 3.94% for Class C shares. Class B shares held prior to
May 1, 1995 were renamed Class C shares. The Fund began
offering the current Class B shares on August 1, 1995.

Fixed income markets produced healthy returns over the period
with European bonds outperforming the U.S. and Japanese
markets. Overall local currency returns ranged from 2.0% in
Japan to 24.6% in Italy. Markets rallied during the second
half of 1995 due to the positive influences of weak economic
growth, falling inflation, lower interest rates and
restrictive fiscal policies. However, during the first half
of 1996 yields came under some upward pressure as markets
began to worry about the growth and inflationary consequences
of easy monetary policies.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.

15
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

The U.S. Treasury market produced an overall return of 4.5%.
The market rallied into the new year with the key 30-year
long bond yield briefly moving through 6.0% as the economic
recovery faltered, inflation remained well behaved and the
Federal Reserve cut the Fed Funds rate to 5.25%. However in
1996 stronger than expected employment figures, buoyant
domestic spending and other data fuelled speculation that the
Fed would have to begin tightening monetary policy. Yields
began to rise and longer dated bonds suffered significant
capital losses. Some comfort was gained from the subdued
inflation background, although the market became increasingly
concerned that the tight labor market would lead to a
sustained acceleration in wage inflation. During the period,
the Fund maintained a lower than benchmark allocation to U.S.
bonds with a slightly short duration. Active use was made of
the mortgage sector to the benefit of performance. The market
will continue to assess the strength of the second and third
quarter economic growth. If the economy shows no sign of
returning to the 2.5% GDP trend desired by the Fed, then the
forward market's expectations of monetary tightening are
likely to be fulfilled and yields will rise further. However
there is every prospect that the market driven tightening in
yields (30-year up 110 basis points this year) will
eventually help slow activity.

The Fund maintained an overweight position in Canadian bonds
which strongly outperformed their U.S. counterparts. The
market returned 9.9% with the ten year yield spread narrowing
sharply to below 100 basis points. Three month Canada/U.S.
bill spreads became negative for the first time in over a
decade as the Bank of Canada maintained a very accommodative
monetary stance and lowered rates independently of the Fed.
Lackluster growth in the economy, very subdued inflation,
improving federal and provincial budget deficits and a
resolution of the Quebec question supported developments. A
small allocation was also held in Australian bonds which
narrowed their yield spread to the U.S. down to 200 basis
points and returned an overall 9.8%. They were aided by
currency strength, prospects for fiscal tightening and an
improving inflation trend. Hampered by the world's only
inverse yield curve, New Zealand bonds returned only 2.8% as
political uncertainty increased and the Reserve Bank
sanctioned bill rates in excess of 10% in response to above
target inflation data. The Fund's holdings of New Zealand
bonds were liquidated in February.

Japanese bonds labored under the negative influences of a low
running yield, a weaker yen, the large fiscal deficit and a
recovery in the stock market. The surprising surge in GDP
growth in 1996, improving Tankan business surveys and rising
private demand then caused a deterioration in short term
interest expectations. The Fund was significantly underweight
the market for the whole period but added some exposure in
1996 to lock in some relative performance. Looking forward
the stronger growth profile has elevated Bank of Japan
tightening risks and suggests further increases in yields.
However rates may remain on hold for some time because of the
continued fragility of the banking sector and the fact that
fiscal policy will automatically turn less accommodative
later in the year as public spending projects mature. This
together with a very muted inflation background should limit
any sell off in the market.

"INFLATION AND INTEREST RATES TRENDS CONTINUE TO FAVOR EUROPEAN MARKETS OVER THE
U.S. AND JAPAN."

Weak economic growth, falling inflation and lower interest
rates supported European markets, where the Fund had its
largest relative weightings. In addition, yield convergence
remained a dominant theme in 1996 as the peripheral markets
performed very well. A significant position was held in
Italian bonds as they rallied in response to the general
election result which offered prospects for political
stability and progress on fiscal deficit reduction. Investors
remained attracted to the high yields available as falling
inflation levels and an appreciation of the lira increased
the likelihood of interest rate reductions. Profits were
taken on part of the lira bond position towards the end of
the period. Positions in Spanish and Swedish debt also
benefited from falling inflation and a steady reduction in
interest rates as the markets returned 23.2% and 22.7%
respectively. High yielding markets were generally encouraged
by increased optimism for European Monetary Union and the
appreciation of the dollar. This also helped the French
market, which ended with ten-year yield spreads flat to
Germany, and Danish bonds which returned 15.0%. The German
market was boosted in April when the Bundesbank cut the key
discount rate to a historic low of 2.5%, the economy recorded
a first quarter contraction and inflation fell to below 1.5%.
Bonds were subsequently disappointed by money market repo
rates being held at 3.3% together with above target

16
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

money supply growth and increasing signs that economic
activity was set to recover in the second half of the year.
The yield curve remained at historically steep levels but
flattened in June in response to falling expectations of a
repo cut and increased short end supply. The overall market
return was 9.8%. The next move in German official rates is
most likely to be up but will probably not occur before the
first quarter of next year. U.K. bonds returned 11.6% but
were overshadowed by political uncertainty and a perception
of a more advanced U.K. recovery relative to the continent.

On the foreign exchanges the dollar maintained a positive
tone during the period ending around 9.0% higher against core
European currencies and 23.0% higher against the yen.
Cyclical factors regarding growth and interest rate
expectations continued to be dollar positive over the period
while official rhetoric was broadly supportive. Wide interest
rate differentials continued to offer investors attractive
hedging premiums into the dollar while making it expensive to
bet against the currency. A sharp fall in the Japanese trade
surplus also encouraged a continued trend decline in the yen.
In the other dollar bloc countries the Australian dollar
appreciated 11.0%, reaching five-year highs of over 0.80
cents before succumbing to profit taking. It was aided by
global demand for its raw materials, high nominal yields and
capital inflows from Japan. The Canadian dollar was supported
by competitive valuation levels, low inflation and
improvements in the country's balance of payments and fiscal
deficits. However, this was negated by the Bank of Canada's
easy monetary stance and it ended little changed against the
U.S. dollar. In 1996 the deutschemark continued to display
general weakness on the European cross rates and its trade
weighted index ended the period over 7% down from the highs
of early 1995. The Italian lira recovered strongly due to
improving political and economic fundamentals and speculation
of its return to the exchange rate mechanism. Sterling rose
over 6.0% against the deutschemark as the effects of the
stronger dollar and the U.K.'s relative economic strength
outweighed political uncertainty and lower base rates.

The Fund maintained an overweight dollar currency exposure
gained by hedging from Europe and Japan. This was profitable
and also earned hedging premiums from the interest rate
differentials.

The current economic background would appear rather
uninspiring for fixed income securities. Global economic
growth has accelerated this year and shows no signs of fading
in the second half. Interest rates have bottomed out in the
major economies and while inflation promises to remain well
contained, it has little potential to fall further. However
sharp declines in bond prices are unlikely from present
levels. Yield curves are steep in many markets and offer good
break even levels over cash rates. Prospective real yields
are quite attractive, at least in Europe, and some monetary
tightening is already factored into forward curves. In
addition, budgetary austerity is a theme across OECD
economies and promises to dampen growth prospects. Inflation
and interest rate trends continue to favor European markets
over the U.S. and Japan.

Currency developments this year have had the effect of
unwinding the dramatic moves of 1995. The dollar has now
risen back to levels last seen in 1994, both against the yen
and the deutschemark, and similar patterns are reflected in
European cross rates. Exchange rates have arguably moved
closer to fair value. Nonetheless, the dollar currently
appears well underpinned by relative growth differentials and
the likelihood of the U.S. authorities being the first to
tighten monetary policy. A relatively favorable budget
deficit position, prospects for some improvement in the trade
figures and competitive valuation levels are also positives.
An international desire to avoid a renewed depreciation of
the dollar remains intact for the time being. The dollar
could come under downward pressure by year end if speculation
of a Bundesbank tightening coincides with a relative slowdown
in the U.S. economy.

Michael J. Smith
PORTFOLIO MANAGER

Robert M. Smith
PORTFOLIO MANAGER

July 1996

17
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------
<C> <S> <C>
FIXED INCOME SECURITIES (81.4%)
AUSTRALIAN DOLLAR (2.4%)
GOVERNMENT BONDS
AUD 240 Government of Australia 9.75%,
3/15/02..................... $ 197
100 Government of Australia 9.00%,
9/15/04..................... 80
---------
TOTAL AUSTRALIAN DOLLAR................... 277
---------
BRITISH POUND STERLING (5.7%)
GOVERNMENT BONDS
GBP 320 United Kingdom 9.75%,
8/27/02..................... 550
80 United Kingdom 7.75%,
9/8/06...................... 123
---------
TOTAL BRITISH POUND STERLING.............. 673
---------
CANADIAN DOLLAR (3.3%)
GOVERNMENT BOND
CAD 530 Government of Canada 7.50%,
12/1/03..................... 390
---------
DANISH KRONE (6.1%)
GOVERNMENT BONDS
DKK 2,500 Kingdom of Denmark 8.00%,
11/15/01.................... 456
1,500 Kingdom of Denmark 7.00%,
12/15/04.................... 254
---------
TOTAL DANISH KRONE........................ 710
---------
DEUTSCHE MARK (17.0%)
GOVERNMENT BONDS
DEM 1,150 German Unity Fund 8.00%,
1/21/02..................... 832
400 Deutschland Republic 7.13%,
12/20/02.................... 277
850 Treuhandanstalt 6.875%,
6/11/03..................... 579
450 Treuhandanstalt 6.75%,
5/13/04..................... 302
---------
TOTAL DEUTSCHE MARK....................... 1,990
---------
FRENCH FRANC (3.1%)
GOVERNMENT BOND
FRF 1,700 French Treasury Bill 7.75%,
4/12/00..................... 358
---------
ITALIAN LIRA (5.9%)
GOVERNMENT BOND
ITL 1,000,000 Republic of Italy 10.50%,
11/1/00..................... 695
---------
JAPANESE YEN (8.0%)
EUROBONDS
JPY 15,000 European Investment Bank
6.63%, 3/15/00.............. 159
30,000 World Bank 5.25%, 3/20/02..... 313
45,000 World Bank 4.75%, 12/20/04.... 462
---------
TOTAL JAPANESE YEN........................ 934
---------

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

NETHERLANDS GUILDER (3.7%)
GOVERNMENT BONDS
NLG 390 Government of the Netherlands
9.00%, 1/15/01.............. $ 261
300 Government of the Netherlands
5.75%, 1/15/04.............. 172
---------
TOTAL NETHERLANDS GUILDER................. 433
---------
SPANISH PESETA (0.9%)
GOVERNMENT BOND
ESP 12,500 Government of Spain 11.30%,
1/15/02..................... 110
---------
SWEDISH KRONA (6.1%)
GOVERNMENT BONDS
SEK 600 Government of Sweden 10.25%,
5/5/00...................... 100
3,300 Government of Sweden 13.00%,
6/15/01..................... 610
---------
TOTAL SWEDISH KRONA....................... 710
---------
UNITED STATES DOLLAR (19.2%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(19.2%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION
$ 2,019 Pool # 336411 6.50%, 2/1/26... 1,888
---------
U.S. TREASURY NOTES
375 5.13%, 11/30/98............... 366
---------
TOTAL UNITED STATES DOLLAR................ 2,254
---------
TOTAL FIXED INCOME SECURITIES (COST
$9,569)..................................... 9,534
---------
SHORT-TERM INVESTMENTS (13.5%)
TIME DEPOSIT (3.4%)
JAPANESE YEN
JPY 44,512 UBS Time Deposit 0.25%,
7/3/96...................... 407
---------
REPURCHASE AGREEMENT (10.1%)
UNITED STATES DOLLAR
$ 1,179 Chase Securities, Inc., 5.15%,
dated 6/28/96, due 7/1/96,
to be repurchased at $1,180,
collateralized by $1,160
U.S. Treasury Notes, 7.125%,
due 9/30/99, valued at
$1,186...................... 1,179
---------
TOTAL SHORT-TERM INVESTMENTS (COST
$1,586)..................................... 1,586
---------
TOTAL INVESTMENTS (94.9%) (COST $11,155).... 11,120
OTHER ASSETS IN EXCESS OF LIABILITIES
(5.1%)...................................... 596
---------
NET ASSETS (100%)........................... $ 11,716
---------
---------
</TABLE>

18
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996

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

FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:

<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------- --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
NLG 1,100 $ 648 8/13/96 $654 $ 654 $ 6
$ 234 234 8/13/96 NLG 400 236 2
$ 184 184 8/14/96 CAD 250 183 (1)
CAD 400 293 8/14/96 $293 293 -
DEM 2,250 1,485 8/20/96 $ 1,475 1,475 (10)
$ 917 917 8/20/96 DEM 1,400 924 7
ITL 286,000 186 8/30/96 JPY 20,000 185 (1)
JPY 50,000 462 8/30/96 ITL 730,075 474 12
SEK 1,700 257 8/30/96 ESP 32,105 250 (7)
DEM 1,200 793 9/9/96 $ 790 790 (3)
SEK 1,200 181 9/17/96 $ 179 179 (2)
--------- --------- ---
$5,640 $ 5,643 $ 3
--------- --------- ---
--------- --------- ---
</TABLE>

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

<TABLE>
<S> <C> <C>
CAD -- Canadian Dollar
DEM -- Deutsche Mark
ITL -- Italian Lira
JPY -- Japanese Yen
NLG -- Netherland Guilder
ESP -- Spanish Peseta
SEK -- Swedish Krona
</TABLE>

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

The accompanying notes are an integral part of the financial statements.
19
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
China 0.5%
Hong Kong 27.1%
India 0.5%
Indonesia 7.7%
Korea 4.2%
Malaysia 21.0%
Philippines 5.3%
Singapore 12.9%
Taiwan 5.0%
Thailand 11.3%
Other 4.5%
100.0%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT
OF
NET
SECURITY COUNTRY ASSETS
- ---------------------------------------- ------------- --------
<S> <C> <C>
Cheung Kong Holdings Ltd. Hong Kong 4.0%
Hutchison Whampoa Ltd. Hong Kong 3.5%
Hong Kong & Shanghai Bank Hong Kong 3.0%
Hong Kong Telecommunications Ltd. Hong Kong 2.7%
Genting Bhd. Malaysia 2.6%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- --------------------- -------- --------
<S> <C> <C>
Finance $114,628 24.5%
Multi-Industry 66,822 14.2%
Services 57,262 12.2%
Real Estate 49,623 10.6%
Telecommunications 48,664 10.4%
</TABLE>

<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------
Class A Shares -0.52% 4.45% 11.97% 13.78%
- -----------------------------------------------------------------
Class B+ Shares -3.18% 1.82% N/A N/A
- -----------------------------------------------------------------
Class C Shares 2.64% 3.64% 12.98% 12.98%
- -----------------------------------------------------------------
MSCI CFEF ex-Japan
Index N/A 8.17% N/A 17.51%
- -----------------------------------------------------------------
</TABLE>

** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.

+ Class B shares have been offered since August 1, 1995.

The Morgan Stanley Capital International (MSCI) Combined Far East Free (CFEF)
ex-Japan Index is an unmanaged index of common stocks and includes Indonesia,
Hong Kong, Malaysia, the Philippines, Korea, Taiwan and Thailand (assumes
dividends are reinvested).
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C> <C>
Asian Growth Fund Class A Asian Growth Fund Class C MSCI Combined Far East Free ex-Japan Index
06/23/93 9,525 10,000 10,000
06/30/93 9,525 10,000 10,000
06/30/94 12,303 12,705 13,265
06/30/95 13,472 13,951 15,055
06/30/96 14,071 14,459 16,286
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

The investment objective of the Asian Growth Fund is
long-term capital appreciation through investment in the
stock markets of Asia excluding Japan. The benchmark for
investment performance is the Morgan Stanley Capital
International (MSCI) Combined Far East Free ex-Japan Index.

For the year ended June 30, 1996, the Fund had a total return
exclusive of sales charge of 4.45% for the Class A shares,
1.82% for the Class B shares and 3.64% for the Class C
shares, and a total return with sales charge of -0.52% for
the Class A shares, -3.18% for the Class B shares and 2.64%
for the Class C shares, as compared to a total return of
8.17% for the Morgan Stanley Capital International (MSCI)
Combined Far East Free ex-Japan Index (the "Index"). For the
period from inception on June 23, 1993 through June 30, 1996,
the average annual total return for the Fund exclusive of
sales charge was 13.78% for the Class A shares and 12.98% for
the Class C shares and 11.97% for the Class A shares with
sales charge, as compared to 17.51% for the Index for the
same period. Class B shares held prior to May 1, 1995 were
renamed Class C shares. The Fund began offering the current
Class B shares on August 1, 1995.

Sentiment on Hong Kong continued to be weighed down by fears
of rising interest rates in the U.S. and by uncertainties
associated with the return of the territory to China next
year. With 1997 approaching, the stepping up of Chinese
interests in Hong Kong becomes increasingly evident. This was
manifested in the restructuring of shareholdings in Dragonair
and Cathay Pacific with China National Aviation Corporation
(CNAC) becoming the single largest shareholder in Dragonair
and Citic Pacific stepping up its interest in Cathay Pacific.
The residential market recovered strongly with prices rising
by 10-15%, helped by lower mortgage rates. Capital values and
rents of office properties also appeared to have bottomed
out. Hong Kong Telecom faced heavy selling pressure due to
uncertainties over possible regulatory changes and a more
competitive operating environment in the future.
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI COMBINED FAR EAST FREE EX-JAPAN INDEX AND ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
FUND'S FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE
SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.

20
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

In Malaysia, the surprise return of Tengku Razaleigh (former
opposition rival to the Prime Minister) to UMNO has fortified
Mahathir's stronghold on the dominant political party and
reassured him of an unassailable position in the upcoming
party elections at the end of 1996. On the economic front,
trade statistics through the calendar year to April 1996
appear to indicate a bottoming out of the current account
deficit. However, a more convincing reduction in the current
account from the present 8% of GDP is only expected in 1998.
Loan growth remained alarmingly high at above 30% which
prompted the Central Bank to raise the Statutory Reserve
Ratio twice this year to 13.5% (+2%). In addition, rising
interest rates, a crunch in margin financing for speculative
shares and an impending dilution in weighting in the
rebalanced benchmark MSCI indices caused weakness in share
prices in June.

In Singapore, the Government's announcement of
anti-speculation measures in May to cool the residential
property market resulted in heavy selling of residential
property stocks. Meanwhile, stocks which were recently
included in the MSCI indices came under the spotlight, with
Singapore Telecom and STIC rising strongly before
profit-taking pared their gains. Share price performance of
banks remained lackluster due to concerns over slow earnings
growth, while news from the marine sector was still bleak.

The Thailand market fell 2.4% in the three months ended June
30 and remained one of the worst performing markets in Asia.
Rumors about bad debts in finance companies and banks sparked
panic selling. There was also talk of property companies not
being able to service their debt. On the macroeconomics
front, the trade deficit improved in May but loan growth,
exports and foreign direct investment continued to slow.
Fears that the slowdown in the economy may accelerate,
prompted the central bank to allow some commercial banks to
lower lending rates. Lastly, there were major downward
earnings revisions in sectors like banks, finance companies
and telecommunications.

In Indonesia, political unrest coupled with a reduction in
the country weighting within the rebalanced MSCI indices
sparked off heavy institutional selling in the Indonesian
market in June. Rioting in the streets in support of the
ousted Megawati Sukarno, former chairperson of PDI
(effectively the only opposition party) ignited fears among
investors of a potential blowup of anti-establishment
sentiment in the run-up to the Presidential elections next
year. As for the market, continued weak performance in
exports which led to an upward revision in the current
account deficit for 1996 and a widening of the Rupiah band to
accelerate the currency depreciation were factors that sapped
investors' enthusiasm towards the market. This, together with
increased cash calls, and anticipation of a second tranche
placement of PT Telkom's shares weighed down investors'
sentiment in the market.

"FEARS OF RISING U.S. INTEREST RATES AND TRADE ISSUES REMAIN THE MAJOR CONCERN
AMONG EQUITY INVESTORS..."

The Korean market was plagued by concerns over trade and
current account deficits, which arose from lower growth of
such major exports as semiconductors, textiles and
automobiles. The government's planned W2.5 trillion new
equity supply in the third quarter of 1996 also discouraged
stock investment. The persistent weakness of the market was
also attributable to the liquidation of close to W 1 trillion
of outstanding margin positions.

The Philippines market produced a 16.1% gain for the three
months ended June 30. Upward earnings revisions continued in
the quarter, making it the market with the strongest earnings
momentum in Asia. On the economic front, GNP for the first
quarter of 1996 grew at 6.2% versus 5.7% in the fourth
quarter of 1995 and interest rates inched up slightly on the
T-bill auction. Moreover, index-linked buying helped the
market, led by Petron which rose 33% for the three months
ended June 30. Mid-cap and small-cap stocks took a breather
from the heady rally over the last few months.

In Taiwan, the Central Bank continued to ease monetary
policy. Money supply growth began to pick up after a period
of contraction. The market rebounded sharply in April
following the easing of cross-strait tensions and on news
that MSCI was proposing to include Taiwan in its indices. The
market saw moderate profit-taking in May, before another wave
of buying in June sent the index up another 13% when Taiwan's
weighting in the MSCI indices turned out to be higher than
what most investors had expected.

21
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

In India, the market rally was encouraged by Prime Minister
Gowda's plans to continue with liberalization and reforms.
The market was lifted further by strong corporate results.

In China, earnings for 1995 were below analysts' expectations
and austerity measures were blamed for the earnings
shortfall. Since then, the authorities have selected 300
companies which will be given priority loans in the second
half of 1996, signifying a fiscal stimulus. In addition, news
that the Guangdong government wanted to revive the stock
market led to further buying frenzy. For the three months
ended June 30, 1996, the MSCI China Free Index was virtually
unchanged, while the Shenzhen and Shanghai Stock Indices rose
21% and 5% respectively.

OUTLOOK

Fears of rising U.S. interest rates and trade issues remain
the major concerns among equity investors, but these may have
already been reflected in the stock prices.

Demand for Hong Kong equities may be affected slightly by its
reduced weight in the MSCI indices.

A turnaround in the Hong Kong property market and the Chinese
economy should help corporate earnings and provide firm
support for share prices.

Barring any sharp downturn in the U.S. market in the medium
term, the Malaysian market is expected to record its
traditional August rally ahead of the interim announcement
season and the October Budget. The Central Bank is expected
to continue its policy of gradually tightening credit in the
system to reduce the level of loan expansion. Administrative
controls may also be selectively introduced in order to deter
unproductive expenditures. Based on the current valuation of
20 times prospective 1996 price-to-earnings, which is close
to the average of the last 5 years, downside risk is not
substantial.

The Singapore market appears to be out of favor with
institutional investors because of high foreign premia and
the lack of earnings growth momentum. Stocks with high
exposure to the residential sector are likely to continue to
mark time as sales of private leasehold residential
properties will likely slow with the advent of competitively
priced government executive condominiums. Valuations of banks
and office property stocks are attractive and should
outperform the market.

The market in Thailand is expected to languish at current
levels for a while as investors await second quarter
earnings. Reported earnings are likely to be weak and may
prompt further selling. The depth of the correction is masked
by the fact that several blue-chip stocks are holding up the
Index. In reality the prices of many sector/stocks have
corrected sharply during 1996. This presents a good
opportunity for investors to start accumulating. While the
market may not take off from here, unless the economy or the
currency goes into a tailspin, the downside risk on the
market would seem limited.

Investors are expected to demand a higher risk premium on the
Indonesian market in view of the recent political
developments. Further agitations on the political front are
expected to undermine both direct investments and portfolio
investments leading to a deterioration in economic outlook.
External accounts are not expected to show a significant
improvement in the short term and monetary policy will remain
tight. Strong earnings growth and reasonable market
valuation, however, are expected to limit downside risk to
the market in the short term.

The market in Korea is likely to recover strongly in the
second half of 1996 on the back of improving trade and
current account numbers, declining interest rates and a
recovery in export earnings. The W 1 trillion margin
liquidation is expected to end in July, thereby reducing
further retail selling pressure. The recent underperformance
of the export-oriented sectors and blue-chips (e.g. Samsung
Electronics) may be coming to an end. Values in the banking
and non-life insurance sectors look compelling given an
improving operating environment and the prospect of a
turnaround in earnings.

22
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

Earnings growth in the Philippines will remain strong
although there are creeping signs of excessive optimism in
the share prices. Inflation stabilized at 10.4% in May from
11.6% in the first quarter of 1996. This would imply little
room for monetary ease in the short term, which may cap the
market's rise. We expect that the market should hold up
relatively well, although profit-taking may pare some of the
gains this year.

The small but rapidly growing over-the-counter (OTC) market
in Taiwan has attracted strong interest from investors. The
stock market rally has become more broadly based with
rotational buying. Stock prices should be supported by easier
monetary policy and the gradual recovery of the real estate
market. The finance sector should benefit from the recovery
of the real estate market, while the eventual establishment
of direct shipping links between Taiwan and China should help
earnings of shipping companies. Performance of electronics
stocks in the near term is likely to remain lackluster due to
uncertainties over near term earnings outlook. Plastics and
textile stocks are still affected by excess supply and weak
demand, but stock prices appear to have moved ahead of
fundamentals. The overall market is supported by strong
domestic liquidity and the continued building of portfolio
positions by foreign investors.

Investors are waiting for the coalition government in India
to announce its budget which will provide concrete evidence
of its intention and ability to continue with reforms. The
market could be dampened as inflation is expected to
increase. In addition, many Indian companies are raising
money via GDRs thus soaking liquidity from the system.
Liquidity should improve because of increased foreign
investment.

Rumors about interest rate cuts anticipated to be in July,
drew more buyers into the Chinese market. Several companies
announced share placements. Sizable listings of
China-infrastructure related companies dampened liquidity
slightly. The interest rate cut, if it came about, could add
another boost to the market. The sharp rise in the market
cannot be sustained, and the market will probably stabilize
over the next one or two months. Investors will also have to
contend with cash calls and dilution as more new issues in
the form of IPOs and rights issues are expected over the
course of the year. This may soak liquidity from the system.

Stronger than expected GDP growth of 1.8% in Australia for
the first quarter of 1996 saw economists revise upward the
economic forecasts from 2.5% to 3% for the year ending June
1997. A mini price war on mortgages sparked selling in the
banking sector. They recovered, however, towards the end of
June. Resource stocks fell sharply on the back of the panic
over copper prices after the Sumitomo incident. Weak steel
prices took its toll on BHP, a steel producer. Strong
economic growth may eventually filter through to corporate
earnings. Industrials are likely to do well from here after a
period of depressed performance. Fears over rising U.S.
interest rates may dampen investor interest. Anticipation of
rising labor costs that will hurt companies' margins may
prevent the strong economic growth from filtering down to
corporate earnings. Selling prices are also under pressure.
Selected stocks, however, offer good value especially in the
industrial sector.

Ean Wah Chin
PORTFOLIO MANAGER

Kiat Seng Seah
PORTFOLIO MANAGER

July 1996

23
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (95.5%)
CHINA (0.5%)
412,060 China Merchants Shokou Port Services 'B'.......... $ 181
2,661,000 Harbin Power Equipment Co. ....................... 399
14,800 Jilin Chemical Industrial Co. ADR................. 272
831,800 Jinqiao Export Processing Zone Development Co.
Ltd. 'B'........................................ 324
(a)763,000 Shenzhen North Jianshe Motorcycle Co. Ltd......... 266
4,538,000 Yizheng Chemical Fibre Co. 'H'.................... 1,003
--------
2,445
--------
HONG KONG (27.1%)
(a)247,000 Asia Satellite Telecommunications Holdings Ltd.... 732
3,736,000 Charoen Pokphand Co............................... 1,484
2,600,000 Cheung Kong Holdings Ltd.......................... 18,726
753,000 China Light and Power Co. Ltd..................... 3,414
1,635,000 Citic Pacific Ltd................................. 6,611
4,924,000 Guangdong Investments Ltd......................... 3,117
(a)25,000 Guangshen Railway Co. Ltd. ADR.................... 478
860,600 Hang Seng Bank Ltd................................ 8,672
935,424 Hong Kong & Shanghai Bank......................... 14,139
703,000 Hong Kong Electric Holdings....................... 2,143
7,081,200 Hong Kong Telecommunications Ltd.................. 12,716
2,353,000 Hopewell Holdings Ltd............................. 1,277
2,575,000 Hutchison Whampoa Ltd............................. 16,200
1,990,000 New World Development Co. Ltd..................... 9,229
1,106,100 Sun Hung Kai Properties Ltd....................... 11,181
1,248,300 Swire Pacific Ltd. 'A'............................ 10,684
1,122,000 Varitronix International Ltd...................... 2,341
1,153,000 Wharf Holdings Ltd................................ 4,126
--------
127,270
--------
INDIA (0.5%)
38,000 Grasim Industries Ltd. GDR........................ 703
(a)(e)49,000 Hindalco Industries Ltd........................... 1,850
--------
2,553
--------
INDONESIA (7.7%)
1,442,000 Astra International (Foreign)..................... 2,091
(d)509,000 Bank International Indonesia (Foreign)............ 2,515
(d)1,333,000 Barito Pacific Timber (Foreign)................... 873
(d)816,000 Bimantara Citra (Foreign)......................... 1,026
(d)1,671,000 Gudang Garam (Foreign)............................ 7,161
(d)390,600 Hanjaya Mandala Sampoerna (Foreign)............... 4,447
(d)3,253,000 Indah Kiat Pulp & Paper (Foreign)................. 3,180
(d)472,000 Indocement Tunggal (Foreign)...................... 1,622
(d)393,000 Kalbe Farma (Foreign)............................. 878
(d)375,500 Semen Gresik (Foreign)............................ 1,093
(d)311,000 Sorini Corp. (Foreign)............................ 1,710
(a)(d)41,000 Suba Indah (Foreign).............................. 32
(a)(d)6,241,500 Telekomunikasi (Foreign).......................... 9,453
--------
36,081
--------
KOREA (4.2%)
(a)(d)17,892 Cho Sun Brewery Co., Ltd. (Foreign)............... 611
(d)37,632 Hyundai Engineering & Construction Co.
(Foreign)....................................... 1,720
(d)55,220 Korea Electric Power (Foreign).................... 2,230
(a)(d)44,520 Korea Housing Bank (Foreign)...................... 1,224
(a)(d)1,829 Korea Mobile Telecommunications Corp. (Foreign)... 2,164

<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
61,000 Korea Mobile Telecommunications Corp. ADR......... $ 1,045
69,600 Pohang Iron & Steel Ltd. ADR...................... 1,697
(a)47,011 Samsung Electronics Co. (Foreign)................. 3,947
(e)3,534 Samsung Electronics Co. ADS....................... 183
(a)(e)18,989 Samsung Electronics Co. GDR (New)................. 983
(a)1,607 Samsung Fire & Marine Insurance (Foreign)......... 1,159
(d)107,957 Shinhan Bank Co. Ltd. (Foreign)................... 2,521
--------
19,484
--------
MALAYSIA (21.0%)
247,000 AMMB Holdings Bhd................................. 3,466
514,000 Edaran Otomobil Nasional Bhd...................... 4,925
1,569,400 Genting Bhd....................................... 12,268
1,585,000 IOI Corp. Bhd..................................... 2,199
(a)79,000 Konsortium Perkapalan Bhd......................... 475
194,000 Land & General Bhd................................ 478
813,000 Leader Universal Holdings Bhd..................... 2,298
677,500 Magnum Corp. Bhd.................................. 1,146
1,205,500 Malayan Banking Bhd............................... 11,598
1,397,000 Malaysian International Shipping (Foreign)........ 4,340
2,126,000 Petronas Gas Bhd.................................. 9,119
786,000 Public Bank Bhd. (Foreign)........................ 2,174
3,328,000 Renong Bhd........................................ 5,310
1,547,000 Resorts World Bhd................................. 8,868
872,000 Sime Darby Bhd.................................... 2,412
1,477,000 TA Enterprise Bhd................................. 2,309
214,000 Tan Chong Motor Holdings Bhd...................... 312
1,344,000 Telekom Malaysia Bhd.............................. 11,961
1,992,000 Tenaga Nasional Bhd............................... 8,385
655,000 United Engineers Bhd.............................. 4,543
--------
98,586
--------
PHILIPPINES (5.3%)
749,872 Ayala Corp. 'B'................................... 1,417
896,225 Ayala Land, Inc. 'B'.............................. 1,608
2,902,200 C&P Homes, Inc.................................... 2,520
(a)1,975,200 DMCI Holdings, Inc................................ 1,414
13,836,900 JG Summit Holding 'B'............................. 5,176
358,465 Manila Electric 'B'............................... 3,763
6,603,125 Petron Corp....................................... 3,024
51,500 Philippine Long Distance Telephone................ 3,066
9,800 Philippine Long Distance Telephone ADR............ 570
8,289,480 SM Prime Holdings, Inc............................ 2,151
84,100 San Miguel Corp. 'B'.............................. 290
--------
24,999
--------
SINGAPORE (12.9%)
88,800 City Developments Ltd............................. 692
2,283,000 Comfort Group Ltd................................. 2,265
980,000 CSA Holdings Ltd.................................. 965
266,000 DBS Land Ltd...................................... 913
580,500 Development Bank of Singapore (Foreign)........... 7,241
189,600 Fraser & Neave Ltd................................ 1,962
2,327,000 Kay Hian James Capel Holdings Ltd. (Foreign)...... 2,457
845,000 Keppel Corp....................................... 7,067
673,666 Oversea-Chinese Banking Corp. (Foreign)........... 7,878
281,000 Sembawang Corp. Ltd............................... 1,394
456,000 Singapore Airlines Ltd. (Foreign)................. 4,815
126,400 Singapore Press Holdings (Foreign)................ 2,482
</TABLE>

24
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND

<TABLE>
<S> <C> <C>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to
financial statements.
(e) -- 144A Security -- certain conditions for public
sale may exist.
ADR -- American Depositary Receipt.
ADS -- American Depositary Share.
GDR -- Global Depositary Receipt.
MYR -- Malaysian Ringgit.
</TABLE>

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

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)

<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ----------------------------------- -------- --------
<S> <C> <C>
Finance............................ $114,628 24.5%
Multi-Industry..................... 66,822 14.2
Services........................... 57,262 12.2
Real Estate........................ 49,623 10.6
Telecommunications................. 48,664 10.4
Energy............................. 31,751 6.8
Capital Equipment.................. 25,806 5.5
Materials.......................... 24,473 5.2
Consumer Goods..................... 22,692 4.8
Insurance.......................... 8,096 1.7
-------- --------
$449,817 95.9%
-------- --------
-------- --------
</TABLE>

The accompanying notes are an integral part of the financial statements.
25
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- -------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Aerospace 1.9%
Banking 11.1%
Building 3.2%
Capital Goods 4.0%
Chemicals 4.0%
Communications 0.6%
Consumer - Durables 5.3%
Consumer - Retail 4.3%
Consumer - Staples 4.2%
Energy 3.3%
Financial -
Diversified 5.4%
Health Care 6.2%
Industrial 4.1%
Insurance 6.0%
Metals 2.1%
Paper & Packaging 2.1%
Services 10.6%
Technology 8.3%
Transportation 2.0%
Utilities 6.8%
Other 4.5%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
<S> <C> <C>
PERCENT
OF
NET
SECURITY INDUSTRY ASSETS
- ---------------------------------------- ------------------------------ -----
Central Hudson Gas & Electric Corp. Utilities 1.4 %
Block Drug Co. 'A' Consumer - Staples 1.4 %
Analogic Corp. Health Care 1.4 %
Selective Insurance Group, Inc. Insurance 1.3 %
Peoples Heritage Financial Group, Inc. Banking 1.3 %
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
<S> <C> <C>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------------ --------- ------------
Banking $ 4,807 11.1%
Services 4,585 10.6%
Technology 3,606 8.3%
Utilities 2,960 6.8%
Health Care 2,697 6.2%
</TABLE>

<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------------- -------------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
- ------------------------------------------------------------
Class A Shares 11.83% 17.41% 9.30% 11.29%
- -----------------------------------------------------------------------------
Class B+ Shares 7.29% 12.29% N/A N/A
- -----------------------------------------------------------------------------
Class C Shares 15.50% 16.50% 10.42% 10.42%
- -----------------------------------------------------------------------------
Russell 2500
Small Company Index N/A 24.18% N/A 14.32%
- -----------------------------------------------------------------------------
S&P 500 Index N/A 25.98% N/A 17.27%
- -----------------------------------------------------------------------------
</TABLE>

* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The Russell 2500 Small Company Index and S&P 500 Index are unmanaged indices of
common stocks. The S&P 500 Index assumes dividends are reinvested.

COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C> <C> <C>
American Value Fund Class A American Value Fund Class C Russell 2500 Small Company Index S&P 500 Index
10/18/93 9,525 10,000 10,000 10,000
6/30/94 9,418 9,732 9,409 9,662
6/30/95 10,831 11,219 11,560 12,205
6/30/96 12,717 13,069 14,355 15,376
</TABLE>

In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; the maximum deferred sales charge was
deducted from the value of the investment of $10,000 in Class C shares; all
recurring fees (including management fees) were deducted; and all dividends and
distributions were reinvested. The graph presents the performance of Class A and
Class C shares which have been in existence since the Fund's inception. The
performance of Class B shares will vary based upon the different inception date
and the sales charge and fees assessed to that Class.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The American Value Fund invests in domestic small- to
medium-sized companies that our research indicates are
undervalued, of high quality, and will reward the shareholder
through high current dividend income. The Fund's disciplined
value approach seeks to outperform the Russell 2500 Small
Company Index in the longer term. We believe our emphasis on
high quality companies and high yielding securities will help
the Fund perform particularly well in difficult markets.
The Fund selects companies that can be purchased at bargain
prices. Bargains mostly arise as a result of public
overreactions to temporary problems associated with an
otherwise healthy company, or because a company is neglected
and currently out-of-the limelight of investors' interest.
Often, these companies operate as major players in very
focused markets and are not widely followed by the investment
community.
For the year ended June 30, 1996, the Fund had a total return
exclusive of sales charge of 17.41% for the Class A shares,
12.29% for the Class B shares and 16.50% for the Class C
shares, and a total return with sales charge of 11.83% for
the Class A shares, 7.29% for the Class B shares and 15.50%
for the Class C shares, as compared to a total return of
24.18% for the Russell 2500 Small Company Index and 25.98%
for the S&P 500 Index for the same period. For the period
since inception on October 18, 1993 through June 30, 1996,
the average annual total return of the Fund exclusive of
sales charge was 11.29% for the Class A shares and 10.42% for
the Class C shares and 9.30% for the Class A shares with
sales charge as compared to the average annual total return
of 14.32% for the Russell 2500 Small Company Index and 17.27%
for the S&P 500 Index for the same period. Class B
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.

26
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

shares held prior to May 1, 1995 were renamed Class C shares.
The Fund began offering the current Class B shares on August
1, 1995.

Perception on the direction of economic growth staged a full
turnaround during the past twelve months: Fear of a
considerable slowdown in economic growth and pending
recession dominated the summer of 1995. By year-end the
consensus focused on "soft landing" and moderate growth
expectations for 1996. Soon this forecast came into question
as too conservative as economic data -- despite severe winter
weather in large parts of the country -- indicated a more
vigorous U.S. economy. By June 1996 the economy accelerated
sufficiently leading to fears of an upside break out. Driven
by the turnaround in expectations for economic growth
interest rates fluctuated dramatically and equity markets
reacted strongly.

The slowdown in economic growth during 1995 led to a sharp
drop in long term interest rates. Markets responded with
enthusiasm. The bellwether S&P 500 Index rose 37.5% for the
full year 1995 and 14.5% during the second half of the year.
Since the rally in equities was interest rate driven,
interest rate sensitive "growth" companies rose most sharply.
The most dramatic example of this could be seen in the areas
of technology and health care. By mid-year 1995 the average
small cap technology company was trading at a
price-to-earnings multiple of 30.2 times, more than twice as
expensive as the average stock in your American Value Fund.
Periods of such market ebullience are expected to produce
high absolute returns for the American Value Fund. They are,
however, the most difficult time for the small cap value
style to better the small cap averages. The market's normal
desire for dividend income and bargain values is superseded
by its willingness to count on extraordinarily high future
earnings growth.

The best performing industries in the Fund during the last
six months of 1995 were health care, followed by companies in
the banking and insurance industries, aerospace and electric
utilities. The Fund's health care companies returned more
than 30% during the second half of 1995. In particular,
Kinetic Concepts Inc., whose major source of revenues comes
from rental of hospital beds, advanced by 70% during that
period. The overall return impact on the Fund's health care
issues was somewhat muted, since the Fund -- true to its
mission of seeking "value" companies -- has been underweight
in this high flying industry. The Fund's banking stocks
returned 29.8% for the second half of 1995. Since banks began
the year as truly undervalued securities with good growth
prospects, the Fund benefited from an overweight in that
industry. While falling interest rates provided for healthy
fundamental earnings growth, the sharp rally in banking
stocks was fueled by announced mergers and acquisitions
affecting highly visible money center banks, midsize regional
banks, as well as small community banks. The Fund's insurance
companies returned 29.2% during the second half of 1995. We
believe the success in the industry was the result of falling
interest rates which led to strongly improved earnings for
the Fund's companies. Another bright spot during the second
half of 1995 proved to be companies in the electric utility
industry. At the beginning of the year confidence in U.S.
utilities was badly shaken by the specter of loss of their
monopoly status which led to extremely attractive valuations
in that industry. However, as utilities prepared for
increased wholesale and retail competition by dramatically
improving their cost structure they managed to show positive
earnings surprises as the year progressed.

"THE FUND IS DESIGNED TO OUTPERFORM SMALL CAP INDICES IN THE LONG TERM."

The weakest areas in the Fund during the second half of 1995
turned out to be companies in cyclical industries. The
slowdown in economic growth and the mid-year fear of slipping
into a recession penalized companies in deep cyclical
industries. The slowdown in U.S automobile sales and
production had a ripple effect on the Fund's auto part
suppliers. Weakening steel prices, falling prices for paper
products and chemicals were interpreted as harbingers of a
looming recession and not simply as the result of a mid-cycle
inventory correction.

In September we increased our holdings in Real Estate
Investment Trusts (REITS). At the time of purchase, REITS
were valued at the largest discount relative to the yield on
U.S Treasury bonds since 1990. Unlike in 1990, fundamentals
in the real estate sector appeared very promising: interest
rates were low, internal growth solid, and there were few new
equity offerings in the making. The Fund took positions in
two financially conservatively managed apartment REITS
(Wellsford Residential Property Trust and Southwestern
Property Trust) that also traded at significant price-to-cash
flow discounts relative to their peers.

27
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

As the economic outlook turned from fear of recession to fear
of excessive growth during the past six months, interest
rates rose sharply. The return impact on the Fund was
reversed from the prior six months for many of its economic
sectors.

The Fund's deeply cyclical companies' fundamental earnings
outlook improved significantly in anticipation of stronger
economic growth. Paper companies witnessed some rebound in
paper prices and the steel industry showed a modest recovery
from late last year's slowdown. In addition to an
accelerating domestic economic environment, small cap
cyclical companies continue to benefit from an inexpensive
U.S. currency and strong product demand from Asia. Although
the fundamental outlook for cyclical companies has improved
significantly during the past six months, relative valuations
for these companies have become more attractive. This opened
up bargains for the Fund's value oriented stock selection
strategy such as Commercial Intertech Corp., an Ohio
manufacturer of hydraulic equipment, water purification
products, and metal buildings. We purchased the company in
May at an attractive price of 10 times this year's expected
earnings.

Reflecting stronger consumer confidence, and after being
shunned for a long time, the retail industry staged a strong
turnaround and produced excellent returns for the Fund. We
took advantage of the high volatility in this sector and
increased turnover in consumer retail stocks. We purchased
Stanhome Inc, a marketer of precious, collectible giftware
such as figurines and dolls, at a low 10 times estimated
earnings and a dividend yield of 3.7%. Stanhome also operates
a direct selling group in Europe offering consumer products
through independent representatives. We expect the company to
grow its earnings substantially in 1996 based on turnaround
performance in its direct marketing division. Other trades in
the retail sector include the sale of DEB Shops and the
purchase of Lillian Vernon Corp. Lillian Vernon retails
household, kitchen and garden items through mail order. We
purchased the company at close to its book value. Last year's
earnings were penalized by higher catalog paper costs which
we expect to be mostly reversed in 1996.

While expectations of accelerated economic growth was
positive for the Fund's cyclical companies it had a dampening
impact on its interest rate sensitive companies. Utilities,
finance, and insurance companies in particular suffered from
their perceived excess interest rate sensitivity. While the
Russell 2000 Small Company Index advanced almost ten percent
during the first six months of 1996, utility companies
trading at the NYSE stood at a standstill advancing by only
0.5%, and the NASDAQ's insurance index advanced by only 1.6%.
In addition to improving relative valuations, we continue to
believe in a very favorable fundamental business outlook for
financial companies. Steady loan growth, favorable net
interest margins, continued high asset quality, and improved
efficiencies drove our optimism for that sector. We added
Susquehanna Bancshares and Astoria Financial Corp. to the
Fund's bank holdings. Susquehanna Bancshares (1.2 times
price-to-book ratio, 4.5% dividend yield) is expanding its
banking franchise into the lucrative Washington D.C./
Baltimore area while still being priced as an undiscovered
Pennsylvania community bank. We purchased Astoria Financial
Corp., a New York thrift institution, at book value and 9.1
times this year's expected cash earnings. While Astoria is
extremely attractive on valuation alone, we expected a
favorable supervisory goodwill ruling to provide extra upside
momentum for the stock.

Domestic small company markets saw extraordinary gains in
April and May. The driving force behind this strength has
been the market's unquestioned affection for technology
stocks. Two months into the second quarter growth-oriented
small cap issues were leading value-oriented small cap
companies by almost 800 basis points as measured by Russell
2000 Growth and Value Indices. June brought a steep reversal
of that trend as the small cap growth advantage shrunk to 160
basis points. The market's fondness for the technology sector
has been put to the test by lower than expected sales and
ensuing inventory overhang, particularly for semiconductors
and related products. Since we believe the sector has been
valued fairly richly, the Fund was underweight in technology
issues and avoided much of the volatility.

Six of the Fund's companies were involved in takeover
activities during the past twelve months and subsequently
triggered sales for the Fund: Joslyn Corp., a Chicago maker
of electric components, Wallace Computer Services Inc., a
printer of business forms, Summit Bancorp in New Jersey,
Pratt & Lambert, United Co., Scitex Corp., and, most
recently, Commercial Intetech Inc after an unusually short
holding period of only one month. Following our sell
discipline, the Fund sold its

28
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

holding in the company as the price moved up to 15 times
earnings in response to the buyout offer. While we do not aim
to construct a Fund of takeover candidates, these companies
shared in common an undervalued stock price and a franchise
that made them special to their acquisitors.

As we have stated in the past the Fund is designed to
outperform small cap indices in the long term, as well as do
so with lower return volatility. In times of sharp -- almost
speculative -- market advances such as we have witnessed for
much of the preceding twelve months, the Fund is expected to
provide strong absolute returns but may not participate fully
in speculative rallies. However, we expect the Fund's
undervalued, under-researched and dividend paying companies
to outperform small company indices in difficult market
environments.

The Fund offers the consistent application of a disciplined
value driven investment process to its participants. As such,
we will pursue our search for smaller companies that our
research shows are undervalued, are of high quality and pay
above average dividend yield. We believe these companies will
be well positioned to achieve superior total return for the
longer term.

Gary D. Haubold
PORTFOLIO MANAGER

William Gerlach
PORTFOLIO MANAGER

July 1996

-------------------------------------------------------------
Christian Stadlinger, the portfolio manager of the Portfolio,
resigned from Morgan Stanley Asset Management Inc. in August
1996. Gary D. Haubold and William Gerlach have replaced Mr.
Stadlinger and now have primary responsibility for managing
the assets of the Portfolio.

29
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (95.5%)
AEROSPACE (1.9%)
20,400 AAR Corp.......................................... $ 415
10,300 Thiokol Corp...................................... 407
-------
822
-------
BANKING (11.1%)
13,600 Astoria Financial Corp............................ 369
18,250 First Security Corp............................... 438
18,500 Greenpoint Financial Corp......................... 523
15,100 Onbankcorp., Inc.................................. 495
28,000 Peoples Heritage Financial Group, Inc............. 570
12,200 Standard Federal Bank............................. 470
18,000 Susquehanna Bancshares, Inc....................... 482
22,500 Trustmark Corp.................................... 472
14,800 Union Planters Corp............................... 450
18,000 Washington Mutual, Inc............................ 538
-------
4,807
-------
BUILDING (3.2%)
13,200 Ameron, Inc....................................... 521
34,000 Gilbert Associates, Inc. 'A'...................... 433
30,000 Ryland Group, Inc................................. 450
-------
1,404
-------
CAPITAL GOODS (4.0%)
13,600 Binks Manufacturing Corp.......................... 371
34,400 Cascade Corp...................................... 460
18,900 Starret (L.S.) Co. 'A'............................ 491
7,900 Tecumseh Products 'A'............................. 425
-------
1,747
-------
CHEMICALS (4.0%)
25,440 Aceto Corp........................................ 401
16,500 Dexter Corp....................................... 491
8,300 LeaRonal, Inc..................................... 208
17,400 Quaker Chemical Corp.............................. 222
12,000 Witco Corp........................................ 412
-------
1,734
-------
COMMUNICATIONS (0.6%)
9,500 Comsat Corp....................................... 247
-------
CONSUMER--DURABLES (5.3%)
22,700 A.O. Smith Corp................................... 568
19,900 Arvin Industries, Inc............................. 443
17,420 Knape & Vogt Manufacturing Co..................... 274
26,000 Oneida Ltd........................................ 488
19,000 Stanhome, Inc..................................... 503
-------
2,276
-------
CONSUMER--RETAIL (4.3%)
26,200 CPI Corp.......................................... 432
17,800 Guilford Mills, Inc............................... 445
35,000 Lillian Vernon Corp............................... 446
11,100 Springs Industries, Inc. 'A'...................... 561
-------
1,884
-------
CONSUMER--STAPLES (4.2%)
14,121 Block Drug Co. 'A'................................ 593
21,000 Coors (Adolph) 'B'................................ 375
21,300 International Multifoods Corp..................... 389

<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------
<C> <S> <C>
30,400 Nash Finch Co..................................... $ 486
-------
1,843
-------
ENERGY (3.3%)
20,300 Ashland Coal, Inc................................. 528
14,500 Diamond Shamrock, Inc............................. 419
16,100 Ultramar Corp..................................... 467
-------
1,414
-------
FINANCIAL--DIVERSIFIED (5.4%)
6,900 FINOVA Group, Inc................................. 336
11,600 GATX Corp......................................... 560
27,400 Manufactured Home Communities, Inc. REIT.......... 527
33,000 South West Property Trust REIT.................... 441
21,000 Wellsford Residential Property Trust REIT......... 473
-------
2,337
-------
HEALTH CARE (6.2%)
22,000 Analogic Corp..................................... 588
9,200 Beckman Instruments, Inc.......................... 350
14,000 Bergen Brunswig Corp. 'A'......................... 389
30,000 Bindley Western Industries, Inc................... 502
21,600 Kinetic Concepts, Inc............................. 335
20,500 United Wisconsin Services, Inc.................... 533
-------
2,697
-------
INDUSTRIAL (4.1%)
12,200 American Filtrona Corp............................ 390
8,700 Barnes Group, Inc................................. 445
4,400 Commercial Intertech Corp......................... 113
28,100 Gencorp, Inc...................................... 425
41,100 Kaman Corp. 'A'................................... 416
-------
1,789
-------
INSURANCE (6.0%)
14,600 Argonaut Group, Inc............................... 456
17,000 Enhance Financial Services Group.................. 476
13,600 Provident Companies, Inc.......................... 503
17,600 Selective Insurance Group, Inc.................... 572
17,250 US Life Corp...................................... 567
-------
2,574
-------
METALS (2.1%)
31,500 Birmingham Steel Corp............................. 516
10,300 Cleveland-Cliffs Iron Co.......................... 403
-------
919
-------
PAPER & PACKAGING (2.1%)
16,500 Ball Corp......................................... 474
10,900 Potlatch Corp..................................... 427
-------
901
-------
SERVICES (10.6%)
18,200 Angelica Corp..................................... 430
23,600 Bowne & Co........................................ 487
26,200 Cross A.T. Co. 'A'................................ 465
41,500 Jackpot Enterprises, Inc.......................... 529
22,100 New England Business Services, Inc................ 431
26,800 Ogden Corp........................................ 486
46,500 Piccadilly Cafeterias, Inc........................ 488
28,500 Russ Berrie & Co., Inc............................ 524
</TABLE>

30
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND

FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.1%)
REPURCHASE AGREEMENT (3.1%)
$ 1,363 Chase Securities, Inc., 5.15%, dated 6/28/96, due
7/1/96, to be repurchased at $1,364,
collateralized by $1,340 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $1,370
(COST $1,363)................................... $ 1,363
-------
TOTAL INVESTMENTS (98.6%) (COST $37,597).................... 42,755
OTHER ASSETS IN EXCESS OF LIABILITIES (1.4%)................ 597
-------
NET ASSETS (100%)........................................... $43,352
-------
-------
</TABLE>

<TABLE>
<S> <C> <C>
- ---------------
REIT -- Real Estate Investment Trust.
</TABLE>

The accompanying notes are an integral part of the financial statements.
31
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Argentina 8.6%
Brazil 12.0%
Canada 1.0%
Cayman Islands 1.9%
Colombia 0.4%
Ecuador 3.4%
Mexico 11.0%
Morocco 2.9%
Netherlands 0.3%
Nigeria 1.1%
Poland 2.3%
Russia 10.5%
South Africa 3.6%
Turkey 3.4%
United Kingdom 0.5%
United States 27.1%
Venezuela 6.4%
Other 3.6%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS

<S> <C> <C>
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ---------------------------- --------- --------------
Ministry of Finance Tranche
IV 3.00%, 5/14/03 Russia 7.2%
Republic of Venezuela Front
Loaded Interest Reduction
Bond, Series A, 6.375%,
3/31/07 Venezuela 6.4%
Bank for Foreign Economic
Affairs Russia 3.3%
Federative Republic of
Brazil, Series C, PIK,
8.00%, 4/15/14 Brazil 3.3%
Lojas Americanas S.A.
11.00%, 6/4/04 Brazil 3.1%
</TABLE>

<TABLE>
<CAPTION>
TOTAL RETURNS**
----------------------------------------------------
AVERAGE ANNUAL SINCE
ONE YEAR INCEPTION
------------------------- -------------------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
- ----------------------------------------------------------------
Class A Shares 13.93% 19.61% 10.80% 13.28%
- ------------------------------------------------------------------------------------
Class B+ Shares 12.07% 17.07% N/A N/A
- ------------------------------------------------------------------------------------
Class C Shares 17.71 % 18.71 % 12.45 % 12.45 %
- ------------------------------------------------------------------------------------
Lehman Aggregate Bond Index N/A 5.01 % N/A 7.80 %
- ------------------------------------------------------------------------------------
</TABLE>

* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares and the 1% contingent deferred sales charge for Class C shares.

** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.

+ Class B shares have been offered since August 1, 1995.

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

<TABLE>
<CAPTION>
TOP FIVE SECTORS

<S> <C> <C>
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ----------------------------- --------- -------------
Foreign Government Bonds $ 36,064 37.7%
Consumer Goods 11,030 11.5%
Services 10,544 11.0%
Materials 8,560 9.0%
Loan Agreements 5,901 6.2%
</TABLE>

COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C> <C>
Worldwide High Income Fund Class A Worldwide High Income Fund Class C Lehman Aggregate Bond Index
4/21/1994 $9,525 $10,000 $10,000
6/30/1994 $9,797 $10,160 $9,976
6/30/1995 $10,470 $10,899 $11,229
6/30/1996 $12,524 $12,938 $11,791
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

The Worldwide High Income Fund seeks to offer investors a
high current income consistent with relative stability of
principal and potential for capital appreciation. To achieve
this objective, the Fund will invest across three broad asset
classes, namely U.S. high yield, emerging country debt, and
global fixed income.

For the year ended June 30, 1996, the Fund had a total return
exclusive of sales charge of 19.61% for the Class A shares,
17.07% for the Class B shares and 18.71% for the Class C
shares, and a total return with sales charge of 13.93 % for
the Class A shares, 12.07% for the Class B shares and 17.71%
for the Class C shares, as compared to a total return of
5.01% for the Lehman Aggregate Bond Index. For the period
from inception on April 21, 1994 through June 30, 1996, the
Fund had an average annual total return exclusive of sales
charge of 13.28% for the Class A shares, and 12.45% for the
Class C shares, and an average annual total return with sales
charge of 10.80% for the Class A shares as compared to an
average annual total return of 7.80% for the Lehman Aggregate
Bond Index for the same period. As of June 30, 1996, the SEC
30-day yield for the Fund's shares was 12.56% for Class A
shares, 12.42% for Class B shares and 12.40% for Class C
shares. Class B shares held prior to May 1, 1995 were renamed
Class C shares. The Fund began offering the current Class B
shares on August 1, 1995.

The last twelve months in the emerging markets debt have been
gratifying. Following a period when default probabilities in
emerging markets rose considerably, bond markets were
becalmed by U.S. Treasury, IMF and World Bank support for
Mexico and Argentina. Multilateral support not withstanding,
governments irrespective of their political complexions,
deepened their commitments to reform and de-regulation by and
large across the emerging market universe.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.

32
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

A slow down in growth and declining inflation prompted a
rally in G7 fixed income markets in the second half of 1995.
Markets, particularly in the U.S. questioned the slowdown
thesis in early 1996 and the yield curve moved up 120-150
basis points during the course of the first half of 1996. In
what was to become a regular feature of the market, any signs
of growth in the economy caused sharp sell-offs in the U.S.
bond markets during 1996. Emerging markets debt de-coupled
from the U.S. bond market during 1996. Improving credit
stories in emerging market countries successively
counteracted the negative influence of rising interest rates.
Emerging market debt continues to be viewed with skepticism
and therefore remains mispriced and offers potential above
average risk adjusted returns. Its gradual acceptance by the
mainstream institutional investors should drive spreads lower
as the market becomes more efficient.

The broadly diversified nature of the Fund's portfolio, both
in terms of credit and country risks, has reduced volatility
and at the same time captured attractive returns available in
the market. The Fund's portfolio has been defensively
positioned to minimize the affect of rising rates, with a
concentration in floating-rate bonds and some investments in
the money-market instruments in high-yielding foreign
currencies as well a greater degree of diversification across
countries in the emerging debt universe.

The non-performing loans of Russia, Panama and Peru and the
high-yielding sector, comprised of Venezuela and Ecuador,
outperformed during 1996. Investors were attracted by the
possibility of dramatic spread tightening and high yields.
Among the major Latin countries, Brazil outperformed
Argentina and Mexico on the back of hopes that the
politicians would deliver on constitutional and structural
reforms. The corporate Eurobond sector rallied as
corporations regained access to the capital markets and
domestic economies bounced back from recessions in 1995.

Mexican external debt trailed the market despite being able
to refinance its 1996 amortizations at very attractive terms.
Lingering concerns over the fragile economic recovery in the
domestic non-tradable sector and the need for an adjustment
in the nominal value of the exchange rate made investors shy
away from Mexican bonds. The local currency denominated
treasury bills continued to be the best performing sector. We
allowed our investments in these instruments to mature and
have not re-invested proceeds into the local market as
current returns are not high enough to compensate us for the
risk. We increased our allocation to Mexico, by buying higher
yielding dollar denominated corporate Eurobonds towards the
end of the fiscal year as we believed investor skepticism to
have peaked. The domestic political situation continues to
warrant a close watch as the investigation of various
financial scandals could unearth skeletons in the cupboards
of the ruling elites.

"DESPITE A NEGATIVE U.S. RATE ENVIRONMENT IN THE FIRST HALF OF 1996, EMERGING
DEBT HAS PERFORMED WELL."

Based on the prospects of an economic rebound in 1996,
Argentine assets rallied in the last quarter of 1995 but
underperformed the market in 1996, despite signs that an
economic recovery was underway. We reduced our allocation to
Argentina marginally in 1996 as tax receipts continued to
stagnate and the fiscal targets agreed to with the IMF
continued to look ambitious. High unemployment and low
consumer confidence continue to prove to be a drag on the
recovery. Despite abundant liquidity in the banking system, a
consumption and trade led economic recovery is taking a long
time to take hold. Unless a durable and sustained recovery
becomes a reality in the second half, Argentina faces a
difficult economic future in the months ahead. Rising U.S.
interest rates and a firm dollar will prove to be a
considerable headwind for the Convertibility Plan to weather.
We do not anticipate making any changes to our allocation to
Argentina in the immediate future.

Brazil came under closer scrutiny as a leading academic
questioned the sustainability of the Real plan. Questions
related to its burgeoning internal debt and overvalued
exchange rates led some to draw parallels with Mexico's
situation in 1994. We do not believe that Brazil and Mexico
should be put in the same basket. Brazil's economic
performance is far less dependent on external capital, (in
fact it could be argued that a withdrawal of short-term
capital will probably be of benefit) and the overvaluation of
its currency is less significant, for any comparisons to
Mexico to setoff any alarm bells at this juncture. There is
no doubt that the long-run sustainability of the Real plan
requires a

33
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

fiscal adjustment. Political wrangling should not be allowed
to derail the process of stabilization. Progress towards
implementing a fiscal adjustment remains one of the elements
that we would be watching for to justify maintaining our
allocation to Brazil. We increased our allocations towards
the end of the quarter as the administration sought to
counteract market pressure related to the stagnation of its
various reform proposals in the legislature by becoming more
ambitious in the fields of privatization and de-regulation of
the economy. Our allocations to Brazil have remained largely
unchanged for most of the year.

Venezuela's economic performance in 1995 deteriorated and as
a result we had reduced our exposure to that country to
approximately 5%. The country was pushed into seeking IMF
support to stabilize its economy. We raised our exposure to
Venezuela as it became clear that it had no other
alternatives but to reverse the populist policies it had
pursued in the past and implement an orthodox stabilization
program designed in conjuction with the IMF.

We increased exposure to Russian non-performing loans as we
expect economic stabilization and relative political
stability to return after a long period of economic
transition. To finance deficits and attract foreign capital,
Russia would need to normalize relations with its external
creditors. Despite pre-election jitters Russian loans were
the best performing asset in 1996. Based on the proposed
terms of their restructuring, Russian risk was being priced
at absurdly high levels. Cheap valuations and a dramatic
reduction in political risk prompted a sharp rally in the
loans in 1996. We reduced our exposure into the post election
euphoric rally in prices.

Other high yielding markets of Ecuador and Bulgaria witnessed
volatility as Ecuador braced for the second round of its
Presidential elections and Bulgaria coped with economic
distress after swallowing the bitter pill of an IMF program.

Despite a negative U.S. rate environment in the first half of
1996, emerging debt has performed well. Improvement in the
economic fortunes of most of the countries included in the
universe has delivered handsome returns. What is underway is
the dramatic re-rating of this asset class, a process that
was interrupted by the Mexican crisis of 1994. Barring
changes in the economic outlook of the various countries,
this process has not yet been finished.

Robert Angevine
PORTFOLIO MANAGER

Paul Ghaffari
PORTFOLIO MANAGER

July 1996

34
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
FIXED INCOME SECURITIES (95.7%)
CORPORATE BONDS AND NOTES (35.6%)
BRAZIL (3.1%)
$3,000 Lojas Americanas S.A. 11.00%, 6/4/04.............. $ 2,955
--------
COLOMBIA (0.4%)
(n)750 Occidente Y Caribe 0.00%, 3/15/04................. 383
--------
MEXICO (5.8%)
(e)2,000 Empresas ICA Sociedad 11.875%, 5/30/01............ 2,002
(e)1,500 Empresas La Moderna 11.375%, 1/25/99.............. 1,554
2,000 Grupo Elektra S.A. 12.75%, 5/15/01................ 2,017
--------
5,573
--------
PHILIPPINES (0.0%)
20 Philippine Long Distance Telephone 9.25%,
6/30/06......................................... 20
--------
UNITED KINGDOM (0.5%)
(n)825 Telewest plc. 0.00%, 10/1/07...................... 489
--------
UNITED STATES (25.8%)
100 Big V Supermarkets, Inc. 11.00%, 2/15/04.......... 93
(e)(n)1,000 Brooks Fiber Properties 0.00%, 3/1/06............. 530
550 Cablevision Systems Corp. 9.875%, 5/15/06......... 529
240 Collins & Aikman Products 11.50%, 4/15/06......... 244
265 Comcast Cellular Corp. Series A, Zero Coupon,
3/5/00.......................................... 182
440 Comcast Cellular Corp. Series B, Zero Coupon,
3/5/00.......................................... 302
500 Comcast Corp. 9.50%, 1/15/08...................... 484
610 Continental Cablevision, Inc. 9.50%, 8/1/13....... 660
640 Courtyard By Marriott 10.75%, 2/1/08.............. 626
320 Crown Paper Co. 11.00%, 9/1/05.................... 304
991 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07.............................. 833
208 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10.............................. 157
(e)(n)920 Echostar Satellite Broadcast 0.00%, 3/15/04....... 570
100 Exide Corp 2.90%, 12/15/05........................ 54
200 Gaylord Container Corp. 11.50%, 5/15/01........... 204
200 Gaylord Container Corp. 12.75%, 5/15/05........... 211
275 G-l Holdings, Inc. Series B, Zero Coupon,
10/1/98......................................... 221
70 Grand Casinos, Inc. 10.125%, 12/1/03.............. 72
285 Harris Chemical 10.25%, 7/15/01................... 286
525 HMC Acquisition Properties 9.00%, 12/15/07........ 480
835 Home Holdings, Inc. 8.625%, 12/15/03.............. 543
100 Homeside, Inc. 11.25%, 5/15/03.................... 103
675 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05......................................... 647
(e)200 Jet Equipment Trust 11.79%, 6/15/13............... 225
(e)300 Jet Equipment Trust, Series 1995-D, 11.44%,
11/1/14......................................... 329
135 La Quinta Inns, Inc. 9.25%, 5/15/03............... 138
1,165 Lenfest Communications 8.375%, 11/1/05............ 1,066
130 Lenfest Communications 10.50%, 6/15/06............ 131
(n)400 Marcus Cable Co. 0.00%, 8/1/04.................... 247
(n)665 Marcus Cable Co. 0.00%, 12/15/05.................. 411
20 MDC Holdings, Series B, 11.125%, 12/15/03......... 19
(n)1,525 MFS Communications 0.00%, 1/15/06................. 928
295 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................. 309
305 Midland Funding II, Series A 11.75%, 7/23/05...... 319
(n)2,160 Nextel Communications 0.00%, 8/15/04.............. 1,269
(n)450 Norcal Waste Systems 12.75%, 11/15/05............. 474

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
$395 Nuevo Energy 9.50%, 4/15/06....................... $ 390
575 Owens-Illinois, Inc. 11.00%, 12/1/03.............. 618
545 Reliance Group Holdings, Inc. 9.00%, 11/15/00..... 540
800 Revlon Worldwide Series B, Zero Coupon, 3/15/98... 666
100 RJR Nabisco 8.75%, 8/15/05........................ 100
625 Rogers Cablesystems Series B 10.00%, 3/15/05...... 619
230 SD Warren Co., Series B, 12.00%, 12/15/04......... 243
100 Sheffield Steel Corp. 12.00%, 11/1/01............. 88
(n)1,000 Six Flags Theme Parks, Inc., Series A, 0.00%,
6/15/05......................................... 851
445 Smith's Food & Drug 11.25%, 5/15/07............... 451
965 Southland Corp. 5.00% 12/15/03.................... 753
900 Stone Container Corp. 10.75%, 10/1/02............. 909
740 TCI Communications, Inc. 7.875%, 2/15/26.......... 647
360 TLC Beatrice International Holdings 11.50%,
10/1/05......................................... 365
550 Trump Atlantic 11.25%, 5/1/06..................... 551
(e)520 Unisys Corp. 12.00%, 4/15/03...................... 528
(e)250 United Savings Texas 8.55%, 5/15/98............... 251
1,000 Viacom, Inc. 8.00%, 7/7/06........................ 915
1,000 Westpoint Stevens, Inc. 9.375%, 12/15/05.......... 972
--------
24,657
--------
TOTAL CORPORATE BONDS AND NOTES (COST $34,454)................ 34,077
--------
COLLATERALIZED MORTGAGE OBLIGATION (0.6%)
UNITED STATES (0.6%)
500 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D, 12.75%, 6/15/06......... 500
105 PNC Mortgage Securities Corp. Series 1995-2, Class
B4, REMIC, 7.50%, 9/25/25....................... 79
--------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $583)......... 579
--------
EUROBONDS (36.8%)
ARGENTINA (4.4%)
1,500 Industrias Pescarmana S.A. 11.75%, 3/27/98........ 1,515
(h)3,465 Republic of Argentina Series L, 6.313%, 3/31/05... 2,707
--------
4,222
--------
BRAZIL (8.9%)
1,350 Comp Brazil De Projertos 12.50%, 12/22/97......... 1,389
(h)2,000 Federated Republic of Brazil Debt Conversion Bond,
Series Z-L, 6.563%, 4/15/12..................... 1,370
(h)1,000 Federative Republic of Brazil Par Bond, Series
Z-L, 6.50%, 4/15/24............................. 711
(b)(h)(u)5,033 Federative Republic of Brazil Series C, PIK,
8.00%, 4/15/14.................................. 3,114
2,000 Iochpe-Maxion S.A. 12.375%, 11/8/02............... 1,890
--------
8,474
--------
ECUADOR (3.4%)
(b)(h)3,124 Republic of Equador Past Due Interest Bond, PIK
6.0625%, 2/27/15................................ 1,423
5,000 Ecuador Par Bond-U.S. Definitive 3.25%, 2/28/25... 1,794
--------
3,217
--------
MEXICO (3.1%)
MXP 32,143 Banamex Pagare Zero Coupon, 10/9/97............... 2,927
--------
NIGERIA (1.1%)
$2,000 Central Bank of Nigeria 6.25%, 11/15/20........... 1,065
--------
</TABLE>

The accompanying notes are an integral part of the financial statements. 35
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
POLAND (2.3%)
$2,471 Republic of Poland Note Zero Coupon, 1/8/97....... $ 2,225
--------
RUSSIA (7.2%)
(b)(e)16,200 Ministry of Finance Tranche IV 3.00%, 5/14/03..... 6,925
--------
VENEZUELA (6.4%)
(h)8,500 Republic of Venezuela Front Loaded Interest
Reduction Bond, Series A 6.375%, 3/31/07........ 6,152
--------
TOTAL EUROBONDS (COST $34,565)................................ 35,207
--------
FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (8.9%)
CAYMAN ISLANDS (1.9%)
ZAR 8,000 Nacional Financiera 17.00%, 2/26/99............... 1,800
--------
SOUTH AFRICA (3.6%)
1,750 Republic of South Africa Series 147, 11.50%,
5/30/00......................................... 372
4,060 Republic of South Africa Series 162, 12.50%,
1/15/02......................................... 867
1,400 Republic of South Africa Series 175, 9.00%,
10/15/02........................................ 246
2,090 Republic of South Africa Series 150, 12.00%,
2/28/05......................................... 419
1,050 Republic of South Africa Series 177, 9.50%,
5/15/07......................................... 171
7,080 Republic of South Africa Series 153, 13.00%,
8/31/10......................................... 1,442
--------
3,517
--------
TURKEY (3.4%)
TRL84,000,000 Turkish Treasury Bill Zero Coupon, 7/10/96........ 994
210,000,000 Turkish Treasury Bill Zero Coupon, 9/4/96......... 2,237
--------
3,231
--------
TOTAL FOREIGN GOVERNMENT & AGENCY OBLIGATIONS
(COST $10,394)............................................... 8,548
--------
LOAN AGREEMENTS (6.2%)
MOROCCO (2.9%)
$ (l)3,800 Kingdom of Morocco Restructuring and Consolidation
Agreement `A' 1990 1/1/09 (Participation: The
Chase Manhattan Bank, N.A., J.P. Morgan, Lehman
Brothers, Salomon Brothers)..................... 2,741
--------
RUSSIA (3.3%)
(b)6,500 Bank for Foreign Economic Affairs................. 3,161
--------
TOTAL LOAN AGREEMENTS (COST $5,304)........................... 5,902
--------
YANKEE BONDS (7.6%)
ARGENTINA (4.2%)
1,850 Bridas Corp. 12.50%, 11/15/99..................... 1,924
1,000 Metrogas S.A. Series A, 12.00%, 8/15/00........... 1,069
1,000 Metrogas S.A. Series B, 10.875%, 5/15/01.......... 1,018
--------
4,011
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
CANADA (1.0%)
$1,000 Algoma Steel, Inc. 12.375%, 7/15/05............... $ 975
--------
MEXICO (2.1%)
2,000 Grupo Industrial Durango 12.00%, 7/15/01.......... 2,013
--------
NETHERLANDS (0.3%)
290 APP International Finance Co. 11.75%, 10/1/05..... 299
--------
TOTAL YANKEE BONDS (COST $6,929).............................. 7,298
--------
TOTAL FIXED INCOME SECURITIES (COST $92,229) ................... 91,611
--------
<CAPTION>
SHARES
- ------------
<C> <S> <C>
EQUITY SECURITIES (0.7%)
PREFERRED STOCKS (0.7%)
UNITED STATES
(e)705 Time Warner, Inc. `K'............................. 691
--------
WARRANTS (0.0%)
NIGERIA (0.0%)
(a)(d)2,000 Central Bank of Nigeria, expiring 11/15/20........ --
--------
UNITED STATES (0.0%)
(a)500 Sheffield Steel Corp., expiring 2001.............. 2
--------
TOTAL EQUITY SECURITIES (COST $711)............................. 693
--------
TOTAL INVESTMENTS (96.4%) (COST $92,940)........................ 92,304
OTHER ASSETS IN EXCESS OF LIABILITIES (3.6%).................... 3,457
--------
NET ASSETS (100%)............................................... $ 95,761
--------
--------
- ---------------
(a) -- Non-income producing.
(b) -- Non-income producing -- in default.
(d) -- Security is valued at fair value -- see
note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for
public sale may exist.
(h) -- Variable/floating rate security -- rate
disclosed is as of June 30, 1996.
(l) -- Participation interests were acquired
through the financial institutions
listed parenthetically.
(n) -- Step Bond-coupon rate increases in
increments to maturity. Rate disclosed
is as of 6/30/96. Maturity date
disclosed is the ultimate maturity date.
(u) -- 4.00% of 8.00% represents amount paid in
cash. Cash payment rate is low for an
initial period and then increases in
increments to maturity. The remainder is
Payment in Kind.
DCB -- Debt Conversion Bond
PIK -- Paid-in-Kind. Income may be received in
additional securities or cash at the
discretion of the issuer.
REMIC -- Real Estate Mortgage Investment Conduit
MXP -- Mexican Peso
TRL -- Turkish Lira
ZAR -- South African Rand
</TABLE>

36 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996

SUMMARY OF FIXED INCOME SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)

<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- -------- --------
<S> <C> <C>
Foreign Government Bonds ............... $ 36,064 37.7%
Consumer Goods ......................... 11,029 11.5
Services ............................... 10,544 11.0
Materials .............................. 8,560 9.0
Loan Agreements ........................ 5,902 6.2
Capital Equipment ...................... 5,854 6.1
Finance ................................ 5,369 5.6
Energy ................................. 4,729 4.9
Multi-Industry ......................... 1,898 2.0
Insurance .............................. 1,083 1.1
Collateralized Mortgage Obligations .... 579 0.6
-------- ---
$ 91,611 95.7%
-------- ---
-------- ---
</TABLE>

The accompanying notes are an integral part of the financial statements. 37
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Argentina 8.8%
Brazil 44.3%
Chile 7.5%
Colombia 5.2%
Mexico 27.0%
Peru 0.9%
Venezuela 2.6%
Other 3.7%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS

<S> <C> <C>
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------ --------- -----------
Telebras PN Brazil 5.9%
Brahma Brazil 5.1%
Telebras PN ADR Brazil 4.8%
Banco Bradesco Brazil 4.1%
Lojas Renner Brazil 4.0%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS

<S> <C> <C>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------------------------- --------- ------------
Telecommunications $ 6,127 22.3%
Finance 5,008 18.2%
Consumer Goods 4,260 15.5%
Energy 3,515 12.8%
Services 2,737 9.9%
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
---------------------- ----------------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------
- ------------------------------------------------------------
Class A Shares 32.73% 39.35% 1.05% 3.56%
- --------------------------------------------------------------------------
Class B+ Shares 24.96% 29.96% N/A N/A
- --------------------------------------------------------------------------
Class C Shares 37.26 % 38.26 % 2.64 % 2.64 %
- --------------------------------------------------------------------------
MSCI Latin America Global
Index N/A 17.44 % N/A 0.01 %
- --------------------------------------------------------------------------
</TABLE>

** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.

+ Class B shares have been offered since August 1, 1995.
The MSCI Latin America Global 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 (assumes dividends are reinvested).
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C> <C>
Latin American Latin American MSCI Latin America
Fund Class A Fund Class C Global Index
07/06/94 $9,525 $10,000 $10,000
06/30/95 $7,327 $7,542 $8,517
06/30/96 $10,210 $10,532 $10,002
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

The investment objective of the Latin American Fund is to
provide long-term capital appreciation by investing in common
stocks of Latin American issuers.

For the year ended June 30, 1996, the Fund had a total return
exclusive of sales charge of 39.35% for the Class A shares,
29.96% for the Class B shares and 38.26% for the Class C
shares, and a total return with sales charge of 32.73% for
the Class A shares, 24.96% for the Class B shares and 37.26%
for the Class C shares, as compared to a total return of
17.44% for the Morgan Stanley Capital International ("MSCI")
Latin America Global Index (the "Index") for the same period.
For the period from inception on July 6, 1994 through June
30, 1996, the average annual total return for the Fund
exclusive of sales charge was 3.56% for the Class A shares
and 2.64% for the Class C shares and 1.05% for the Class A
shares with sales charge as compared to 0.01% for the Index
for the same period. Class B shares held prior to May 1, 1995
were renamed Class C shares. The Fund began offering the
current class B shares on August 1, 1995.

The table below presents the percentage change in the Morgan
Stanley Capital International indices for each respective
country, in U.S. dollar terms, as of June 30, 1996, for the
periods presented:

<TABLE>
<CAPTION>
3 MONTH 6 MONTH 12 MONTH
------- ------- --------
<S> <C> <C> <C>
Argentina.......................... 15.3% 14.8% 36.2%
Brazil............................. 15.4 28.4 31.2
Chile.............................. 11.2 1.7 (13.6)
Colombia........................... 7.5 2.9 (17.2)
Mexico............................. 4.8 15.6 19.7
Peru............................... 9.1 8.8 19.6
Venezuela.......................... 40.0 56.4 31.3
</TABLE>

courtesy: FAME/Randall-Helms
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI LATIN AMERICA GLOBAL INDEX AND ARE FOR INFORMATIONAL
PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.

38
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

ARGENTINA

The rally in the Argentine stock market was due primarily to
signs of economic recovery after the strong recession in
1995. Liquidity in the local financial system is very high
and local short term rates are low. The market had two
successful IPOs in the second quarter and inflation is almost
nonexistent. Nevertheless, we are somewhat cautious on the
market due to the absence of strong earnings growth at the
corporate level and the potential for rising rates in the
U.S. to spill over into Argentina. The lingering unemployment
(17%) is also acting to restrain somewhat economic growth and
complicating fiscal accounts which are highly dependent on
domestic economic activity. On the positive side, Argentine
trade accounts are benefiting enormously from the sharp rise
in agricultural commodity prices.

BRAZIL

In spite of an absence of tangible political progress on the
economic reform front, the stock market had a robust
performance. What we have seen, and we expect to continue to
see unfolding for the remainder of the year, is an increased
emphasis on company fundamentals and economic variables and a
decreased emphasis on the political process. This is not to
say that the political process is unimportant nor that it is
incapable of delivering either positive or negative
surprises, but rather that, as a stock market factor, it has
receded in importance. We view this process as a healthy sign
of the "maturation" of the market and a symptom of Brazil's
emergence as a relatively stable economy and marketplace. The
Real Plan now has two years under its belt, inflation is
benign if not yet slayed, the trade accounts are balanced,
and interest rates are continuing to fall. In short, the
Brazilian turnaround is becoming increasingly entrenched, and
the financial markets are recognizing this relative
stability.

Nevertheless, there remains much work to be done, to be sure.
The fiscal accounts are still in deficit at the operational
level (though improving), the state's finances are still
problematic, the social security fund will soon be bankrupt,
tax levels are too high, and so on. The important thing,
though, is that the government has proven itself to be adept
at managing the components of the economy over which it has
direct control, even while showing itself to be somewhat less
adept at quickly maneuvering legislation through congress.
The areas that we are particularly encouraged by are those
sectors in which the government owns the monopolies -- i.e.
oil and gas, mining, telecommunications, and electric
generation. In each of these extremely important sectors, the
government will either liberalize or privatize the state-run
companies that currently exist. These sectors -- together
with ports and railroads, which will likewise be privatized
or liberalized -- form the backbone of economic development
and in Brazil's case will help propel the dramatic economic
restructuring and growth unfolding before our eyes. So even
if congress slows down the reform process to a snail's pace,
we are increasingly of the opinion that the economy can still
grow at a reasonable pace.
"OVERALL, WE ARE EXCITED ABOUT THE GROWTH PROSPECTS OF OUR COMPANIES AND THE
RECOVERY OF THE LATIN AMERICAN ECONOMIES."

The telecommunications industry, through monopoly provider
Telebras and its operating subsidiaries, has witnessed a
dramatic turnaround in profitability due to tariff reform
implemented by the government. Further, draft legislation is
circulating which will create a regulatory framework for the
sector as well as provide the basis for free competition in
the cellular telephony business. Eventually, we are
increasingly of the opinion that the government will
privatize the entire sector, via Telebras.

Electric generation, while slightly more cumbersome to
reorganize than telecommunications, is likewise witnessing
positive change. After much delay, the government
successfully privatized Rio-based electric distributor Light.
Profitability is improving, if not robust, due to tariff
reform. A regulatory framework is being established, and
steps are being taken to prepare pieces of the sector for
privatization. The timing of a dramatic restructuring of the
industry, however, will likely be more drawn out than with
telecommunications.

We expect interest rates to find a bottom sometime in the
second half of the year, as the economy picks up steam and
municipal election-related spending kicks into gear.
Corporate profits, while

39
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

spotty in the private sector and strong in the tariff-reform
led public sector, should gather momentum in the latter part
of the year together with the economy. We expect inflation to
continue benign, the currency to move with inflation
differentials, the trade accounts to remain roughly in
balance or slightly deteriorate as the economy picks up, and
the fiscal deficit to persist but improve.

CHILE

After a long period of underperformance the Chilean market
has rallied recently. Expectations are that interest rate
tightening is coming to an end as the torrid pace of economic
growth begins to weaken. We are positioned in a couple of
fast growing consumer stocks which are benefiting from strong
demand and who are taking their management skills and setting
up operations in neighboring countries. Andina is a Coca-Cola
bottler and Santa Isabel is a supermarket chain. We are less
excited about the growth prospects of the rest of the stock
market.

COLOMBIA
The Colombian market is still in the grips of the political
crisis over the tenure of President Samper. Hopes that he
would resign were dashed when the Colombian Congress found
him innocent of knowingly accepting drug money to fund his
1994 Presidential campaign. The U.S. government has
threatened sanctions in response.

The Central Bank's fight against inflation continues to keep
real interest rates at high levels, though concern over the
slowing of the economy prompted a slight temporary easing in
the second quarter. GDP growth has slowed down from prior
years' levels and will likely fall in the 3% to 4% range for
the entire year. We remain optimistic about our holdings in
the financial sector, which are experiencing improving
profitability due to good interest rate spreads, cost-cutting
and improved asset quality.

MEXICO

The market rise has been driven by expectations of a strong
economic recovery during the second half of 1996, lower
inflation and interest rates, and a strengthening peso in
real terms. Holding the market back somewhat has been a
series of political and business scandals. Year-to-date,
domestic stocks have clearly outperformed exporters as signs
of an economic recovery begin to emerge. Unemployment has
fallen from 6.4% in January to 5.4% in May, and GDP growth
consensus estimates have risen to 3.7% for 1996. Furthermore,
the Mexican government has returned to international capital
markets and has raised $6.5 billion, refinancing outstanding
debts at more attractive rates. Macroeconomic fundamentals
continue to move in a positive direction as inflation for the
first six months of 1996 is at 15.3% versus 32.9% during the
first 6 months of 1995. The trade surplus continues to grow
albeit at a slower pace at $3.3 billion for the first five
months of 1996. Foreign exchange reserves remain at $15
billion, about the same level at which they finished 1995.

The market continues to look attractive as domestically
driven companies should show strong growth in the second half
of 1996. Nevertheless, as democratic opening occurs, the
possibility of corruption scandals continue to lurk in the
background. Domestic growth will pick up in the second half
as inflation continues to decline, interest rates remain
stable and the peso continues to strengthen. Under this
scenario the Portfolio is emphasizing interest rate sensitive
banks, consumer companies, and cement stocks. Bancomer should
continue to benefit from falling interest rates, economic
recovery, and reduced risk in the banking system. Femsa holds
undervalued assets in the beer, packaging and retail sectors.
Cemex is participating in the recovery of cement prices and
cement demand in Mexico.

PERU

The Peruvian market has recently begun to rebound on waning
concerns about the economy and renewed interest in the market
on the back of a successful July placement of over US$1
billion of Telefonica del Peru stock in local and
international markets.

Investors modified their overly pessimistic outlook for the
economy, which recorded negative growth figures for the first
quarter, but began turning around in subsequent months.
Visibility into

40
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

future performance increased with the signing of an IMF
agreement during the second quarter which outlined
conservative economic targets, including a 1% primary fiscal
surplus and a shrinking current account deficit over the next
few years. The soft landing engineered by the government to
transition the country into a period of sustained growth
around the 4.5% level appears to have been successful at the
expense of an expected 2% to 3% growth performance for 1996.
The government continues its firm commitment to
privatization, currently targeting the oil and mining
sectors, and President Fujimori's popularity remains strong.

Our position in Telefonica del Peru (which increased on July
1) anticipates 20% net income growth each year until 1998,
after more than doubling earnings in 1995.

VENEZUELA

The introduction of a free-market economic stabilization plan
under IMF auspices propelled the stock and bond markets.
Capital and price controls were abolished and the currency
and interest rates allowed to float freely, marking the end
of a two-year closed-economy experiment that brought about
high rates of inflation and poor economic performance. While
we are optimistic about long term prospects in Venezuela, we
recognize that the economy must undergo a lengthy adjustment
process in order for the government to successfully control
inflation, allow for positive real interest rates, set a
rational trading range for the currency and privatize
inefficient state enterprises. We are therefore maintaining
our position in Venezuelan fixed income, which we feel will
more immediately benefit from the country's improved ability
and willingness to service debt, while providing an
attractive yield.

Overall, we are excited about the growth prospects of our
companies and the recovery of the Latin American economies.
The markets should continue to perform well assuming a
relatively benign U.S. environment.

Robert L. Meyer
PORTFOLIO MANAGER

July 1996

41
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (61.5%)
ARGENTINA (8.8%)
(a)21,541 Banco del Sud S.A. 'B' ........................... $ 252
72,701 Banco del Suquia S.A. 'B' ........................ 138
(a)17,365 Disco S.A. ADR.................................... 384
9,955 Quilmes Industrial................................ 102
(a)47,615 Siderar S.A. 'A' ................................. 122
(a)(e)6,570 Siderar S.A. ADR.................................. 135
5,556 Telecom Argentina S.A. ADR........................ 261
25,665 Telefonica de Argentina S.A. ADR.................. 760
11,458 YPF S.A. ADR...................................... 258
--------
2,412
--------
BRAZIL (13.2%)
(e)683 Cia Energetica de Minas Gerais GDR................ 18
3,789,000 Eletrobras........................................ 1,019
10,515 Eletrobras ADR.................................... 141
(a)(d)530,000 Light (New)....................................... 37
(e)15,324 Pao de Acucar GDR................................. 254
(e)1,900 Pao de Acucar GDS................................. 31
10,650,000 Telebras PN....................................... 626
19,080 Telebras PN ADR................................... 1,329
(a)970,041 Telesp............................................ 171
--------
3,626
--------
CHILE (7.5%)
20,198 Embotelladora Adina S.A. ADR...................... 742
6,454 Empresa Nacional de Electricidad S.A. ADR......... 139
2,905 Enersis S.A. ADR.................................. 90
39,108 Santa Isabel S.A. ADR............................. 1,085
--------
2,056
--------
COLOMBIA (4.1%)
2,438,971 Banco de Colombia................................. 926
(e)20,300 Banco de Colombia GDR............................. 178
1,575 Banco Ganadero S.A. ADR........................... 38
--------
1,142
--------
MEXICO (27.0%)
65,187 ALFA S.A. de C.V. 'A' ............................ 293
68,645 Apasco S.A. de C.V. .............................. 379
(a)109,210 Banacci 'B' ...................................... 227
(a)166,310 Banacci 'L' ...................................... 316
232,284 Cemex 'CPO' ...................................... 824
7,880 Cemex S.A. de C.V. ADR............................ 55
(a)276,110 Cifra S.A. 'B' ................................... 398
(a)54,075 Cifra S.A. de C.V. 'C' ........................... 77
(a)106,090 Controladora Comercial Mexicana S.A. 'B' ......... 99
(a)15,951 Empresas ICA Sociedad Controladora S.A. de
C.V. ........................................... 221
321,420 Formento Economico Mexicano S.A. 'B' ............. 911
92,460 Farmacias Benavides S.A. 'B' ..................... 179
(a)25,550 Gruma S.A. 'B' ................................... 118
(a)(e)6,165 Grupo Carso S.A. ADR.............................. 87
41,380 Grupo Cementos Chihuahua 'B' ..................... 42
(a)435,280 Grupo Financiero Bancomer 'B' .................... 190
(a)(e)75,902 Grupo Financiero Bancomer 'B' ADR................. 655
(a)16,367 Grupo Televisa S.A. GDR........................... 503
13,040 Kimberly-Clark de Mexico S.A. 'A' ................ 237
7,351 Pan American Beverages, Inc. 'A' ................. 327
(a)72,270 Sears Roebuck de Mexico 'B1' ..................... 190
32,867 Telefonos de Mexico 'L' ADR....................... 1,101
--------
7,429
--------

<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
PERU (0.9%)
127,885 Telefonica del Peru 'B' .......................... $ 258
--------
TOTAL COMMON STOCKS (COST $15,324).............................. 16,923
--------
PREFERRED STOCKS (31.6%)
BRAZIL (NON-VOTING STOCKS) (31.1%)
138,397,107 Banco Bradesco.................................... 1,130
(d)8,115,000 Banco Nacional.................................... 1
2,339,819 Brahma............................................ 1,396
2,644,000 Casa Anglo Brasileri S.A. ........................ 145
7,266,000 Cia Energetica de Minas Gerais.................... 193
6,269 Cia Energetica de Minas Gerais ADR................ 178
(a)9,395,000 Cia Paulista de Forca e Luz....................... 618
507,000 Coteminas......................................... 200
143,293 Dixie Toga S.A. .................................. 138
(a)732,000 Electricidade de Sao Paulo S.A. .................. 77
705,000 Eletrobras 'B' ................................... 202
174,000 Investimentos Itausa S.A. ........................ 133
1,625,100 Itaubanco......................................... 660
21,035,000 Lojas Renner...................................... 1,110
4,440,000 Petrobras......................................... 546
23,233,383 Telebras PN....................................... 1,622
11,645 Vale do Rio Doce.................................. 226
--------
8,575
--------
COLOMBIA (0.5%)
268,716 Banco Ganadero Series L........................... 53
4,370 Banco Ganadero S.A. ADR........................... 85
--------
138
--------
TOTAL PREFERRED STOCKS (COST $6,758)............................ 8,713
--------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ------------
<C> <S> <C>
CONVERTIBLE DEBENTURE (0.6%)
COLOMBIA (0.6%)
$ (e)180 Banco de Colombia 5.20%, 2/1/99 (COST $159)....... 161
--------
</TABLE>

<TABLE>
<C> <S> <C>
FOREIGN GOVERNMENT BOND (2.6%)
VENEZUELA (2.6%)
(h)1,000 Republic of Venezuela Series L, 6.625%, 12/18/07
(COST $596)..................................... 708
--------
TOTAL FOREIGN SECURITIES (96.3%) (COST $22,837)................. 26,505
--------
FOREIGN CURRENCY (0.2%)
ARP 2 Argentine Peso.................................... 2
BRC 9 Brazilian Real.................................... 9
PSS 116 Peruvian Sol...................................... 47
--------
TOTAL FOREIGN CURRENCY (COST $58)............................... 58
--------
TOTAL INVESTMENTS (96.5%) (COST $22,895)........................ 26,563
OTHER ASSETS IN EXCESS OF LIABILITIES (3.5%).................... 959
--------
NET ASSETS (100%)............................................... $ 27,522
--------
--------
- ---------------
</TABLE>

<TABLE>
<S> <C><C>
(a) -- Non-income producing securities.
(d) -- Security valued at fair value -- see note A-1 to
financial statements.
(e) -- 144A Security -- Certain conditions for public
sale may exist.
(h) -- Variable or floating rate securities -- rate
disclosed is as of June 30, 1996.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Share
</TABLE>

42 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)

<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------------------------- --------- ---------------
<S> <C> <C>
Telecommunications ........................................................ $ 6,127 22.3%
Finance ................................................................... 5,008 18.2
Consumer Goods ............................................................ 4,260 15.5
Energy .................................................................... 3,515 12.8
Services .................................................................. 2,737 9.9
Materials ................................................................. 2,020 7.3
Multi-Industry ............................................................ 1,624 5.9
Foreign Government Bond ................................................... 707 2.6
Capital Equipment ......................................................... 507 1.8
--------- -----
$ 26,505 96.3%
--------- -----
--------- -----
</TABLE>

The accompanying notes are an integral part of the financial statements. 43
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Argentina 1.5%
Brazil 14.0%
Chile 0.2%
China 0.7%
Colombia 0.1%
Egypt 0.3%
Greece 1.0%
Hong Kong 5.0%
Hungary 0.1%
India 11.7%
Indonesia 5.5%
Israel 2.7%
Korea 2.3%
Mexico 9.6%
Morocco 0.3%
Pakistan 3.0%
Philippines 3.0%
Poland 1.5%
Portugal 0.1%
Russia 5.6%
South Africa 3.6%
Singapore 0.3%
Taiwan 4.7%
Thailand 4.2%
Turkey 5.7%
Other 13.3%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
<S> <C> <C>
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ----------------------------- --------- ------------
Telebras ADR Brazil 3.7%
Brahma Brazil 2.0%
Telebras Brazil 1.9%
Telefonos de Mexico 'L' ADR Mexico 1.7%
Banco Bradesco Brazil 1.7%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
<S> <C> <C>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------------ --------- ------------
Consumer Goods $ 29,434 17.4%
Telecommunications 24,864 14.7%
Finance 24,783 14.7%
Materials 17,809 10.5%
Energy 13,983 8.3%
</TABLE>

<TABLE>
<CAPTION>
TOTAL RETURNS**
------------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------------ -------------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------
Class A Shares 8.74% 14.16% -1.96% 0.47%
- ------------------------------------------------------------------
Class B+ Shares 4.45% 9.45% N/A N/A
- ------------------------------------------------------------------
Class C Shares 12.30% 13.30% -0.29% -0.29%
- ------------------------------------------------------------------
IFC Global Total
Return Composite Index N/A 8.44% N/A 3.49%
- ------------------------------------------------------------------
</TABLE>

** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.

+ Class B shares have been offered since August 1, 1995
The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South Asia,
Europe, the Middle East and Africa (assuming dividends are reinvested).
COMPARISON OF CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C> <C>
IFC Global Retail Return Composite
Emerging Markets Fund Class A Emerging Markets Fund Class C Index
7/6/1994 $9,525 $10,000 $10,000
6/30/1995 $8,422 $8,688 $9,868
6/30/1996 $9,614 $9,942 $10,698
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The investment objective of the Emerging Markets Fund is to
provide long-term capital appreciation by investing in common
stocks of emerging country issuers.

For the year ended June 30, 1996, the Fund had a total return
exclusive of sales charge of 14.16% for the Class A shares,
9.45% for the Class B shares and 13.30% for the Class C
shares, and a total return with sales charge of 8.74% for the
Class A shares, 4.45% for the Class B shares and 12.30% for
the Class C shares, as compared to a total return of 8.44%
for the IFC Global Total Return Composite Index (the "Index")
for the same period. For the period from inception on July 6,
1994 through June 30, 1996, the Fund had an average annual
total return exclusive of sales charge of 0.47% for the Class
A shares, and -0.29% for the Class C shares, and -1.96% for
the Class A shares with sales charge as compared to 3.49% for
the Index for the same period. Class B shares held prior to
May 1, 1995 were renamed Class C shares. The Fund began
offering the current Class B shares on August 1, 1995.

Politics have been the dominant theme of the second quarter
of 1996. Within the emerging market universe major elections
have been held in Russia, the Czech Republic, India, Israel
and South Korea. In addition, Taiwan held presidential
elections in late March which also had a marked impact on
quarterly performance.

Overweight positions in India, Taiwan, Russia, Mexico and
Brazil and underweight positions in Thailand, Malaysia and
South Africa all contributed positively to performance.

Arguably, the most important election for the Portfolio was
held in Russia. The voters had a stark choice in their first
democratic election since the fall of communism. On one side
there was Boris Yeltsin and a continuation of the reform
process. On the other side there was Zyuganov and a return
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE IFC GLOBAL TOTAL RETURN REGIONAL OR COUNTRY INDICES AND ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
FUND'S FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE
SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.

44
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

to old style communism with the potential reversal of the
reform process coupled with a mass exodus by foreign
investors from the embryonic stock market. The Russian people
voted decisively for Yeltsin, reform and democracy. The stock
market rose over 140% during the quarter and dollar
denominated Russian debt also appreciated strongly.

Nobody who visits Russia can miss the raw potential of the
country or the problems which have to be tackled. The economy
is close to the bottom, asset values are attractive and the
stock market will be underwritten by the increasing foreign
access to Russian securities over the coming months. Progress
has been made on inflation, which is now 60% per annum
compared to 110% in 1995.

Concern remains, however, over Yeltsin's health although he
is assembling a strong team around him. The return of the
reform-minded Chubais as chief-of-staff is particularly
positive. The well known and highly respected Prime Minister
Chernomyrdin would temporarily succeed as President in the
event of Yeltsin's demise.

Although the IMF profess satisfaction that Russia has not
exceeded the ceiling on the budget deficit, tax collection
has fallen dramatically and the complex tax system cries out
for simplification. In sum, we believe these and other
problems will be addressed and we remain enthusiastic about
the potential of Russia.

The election in India was less in danger of producing a
complete change of policy but nonetheless there was
uncertainty due to the widely expected defeat of the ruling
Congress party. The new government formed by Mr. Deve Gowda's
National Front-Left Front coalition is foreign investor-
friendly and has no ambition to produce changes in economic
policy.

The real economy in India continues to perform well. GDP
growth is 7% per annum with corporate earnings rising in
excess of 25%. The July 22nd budget will be critical in
determining the direction of the stock market in the short
run. We anticipate that the domestic investor will return to
the market as interest rates continue to fall. India is
currently trading at the cheap end of its valuation range and
we remain overweight.
"THE SECOND HALF OF 1996 COULD PROVE A TESTING PERIOD FOR GLOBAL FINANCIAL
MARKETS..."

Unlike Russia and India which had run-ups prior to their
elections, Taiwan has been one of the strongest performers in
the last 3 months following the election of President Lee and
the easing of tensions with mainland China. The market is
supported by strong domestic liquidity and will receive a
boost on its inclusion in the MSCI indices in September.

The election in Israel was a breathtakingly close race
between the previous Prime Minister Shimon Peres and the
Likud candidate Benjamin Netanyahu. The election of Prime
Minister Netanyahu has heralded a 20% decline in the local
Mishtanim Index due to domestic, not foreign, selling.
Netanyahu is focusing on economic reform and interest rates
are moving higher to deal with above-target inflation of 14%.
Time will reveal whether concerns are justified that the
Middle East peace process will stall under the new
leadership.

With the exception of Taiwan, Asia had a disappointing
quarter. Contagion from potential interest rate rises in the
U.S. have negatively impacted Hong Kong and Malaysia while
Thailand has fallen on fears of earnings disappointment from
the financial stocks which dominate the stock market. In
Indonesia, rioting in the streets in support of President
Suharto's opposition ignited fears of social unrest in the
months before the 1997 Presidential election. Korean
investors were concerned over trade and current account
deficits and a slowdown in the textile, semiconductor and
auto sectors.

Latin America had an upbeat quarter, free from any election
angst. Interest rates are falling in Brazil, privatization is
progressing, albeit slowly, and the monopoly
Telecommunications supplier Telebras had outstanding results.
Brazil continues to be the largest holding in the Portfolio.
Mexico is facing growing political and business scandals on
one hand and seeing economic recovery, lower interest rates
and inflation and a stable currency on the other. We are
marginally overweight in Mexico to take advantage of the
strong earnings recovery now in evidence.

We have initiated a position in Egypt where the market sells
on 8 times 1996 estimated earnings and, unusual, for an
emerging market, has a 9% plus yield. Economic growth is 4%
in real terms and inflation is around 9%.

45
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

The second half of 1996 could prove a testing period for
global financial markets as interest rates move upwards in
the U.S. on stronger than expected economic growth. We are
entering the third quarter with a focus on markets not highly
correlated with the U.S. such as Russia, India and Taiwan,
cheap markets with strong potential earnings growth such as
Brazil, Mexico and Pakistan and the smaller stock markets
such as Peru, Chile, Egypt, Hungary and Poland. Whatever the
path of U.S. interest rates, the emerging markets should
continue to have upward momentum from here based on their
relatively attractive valuations and growth prospects.

Madhav Dhar
PORTFOLIO MANAGER

Marianne Hay
PORTFOLIO MANAGER

July 1996

46
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (77.9%)
ARGENTINA (1.5%)
18,082 Telecom Argentina S.A. ADR........................ $ 847
42,430 Telefonica de Argentina S.A. ADR.................. 1,252
36,212 Quilmes Industrial................................ 371
----------
2,470
----------
BRAZIL (5.9%)
(e)4,302 Cia Energetica de Minas Gerais GDR................ 115
5,020 Cia Vale Do Rio Doce ADR.......................... 98
6,627,000 Eletrobras........................................ 1,782
(d)667,000 Light............................................. 47
(e)29,701 Pao de Acucar GDR................................. 492
(e)1,960 Pao de Acucar GDS................................. 32
15,499,000 Telebras.......................................... 911
89,685 Telebras ADR...................................... 6,244
(a)948,397 Telesp............................................ 167
----------
9,888
----------
CHILE (0.2%)
12,125 Santa Isabel S.A. ADR............................. 332
----------
CHINA (0.7%)
531,700 China International Marine Containers Ltd......... 460
(a)234,000 Shenzhen North Jianshe Motorcycle Co., Ltd........ 82
2,056,000 Yizheng Chemical Fibre Co. 'H'.................... 454
756,000 Zhenhai Refining and Chemical Co.................. 215
----------
1,211
----------
EGYPT (0.3%)
4,548 Ameriyah Cement Co................................ 62
1,572 Commercial International Bank..................... 180
5,750 Eastern Tobacco................................... 63
5,775 Egyptian Finance & Industrial..................... 61
10,275 Helwan Portland Cement............................ 97
1,500 Madinet Housing & Development..................... 40
1,950 North Cairo Flour Mills........................... 46
2,385 Tora H. Portland Cement........................... 31
----------
580
----------
GREECE (1.0%)
16,500 Aegek............................................. 110
2,103 Alpha Credit Bank................................. 111
19,500 Delta Dairy S.A................................... 238
7,000 Ergo Bank S.A..................................... 386
16,700 Hellenic Bottling Co. S.A......................... 555
4,370 Titan Cement Co. S.A.............................. 216
----------
1,616
----------
HONG KONG (5.0%)
934,000 Charoen Pokphand Co............................... 371
173,000 Cheung Kong Holdings Ltd.......................... 1,246
285,000 Citic Pacific Ltd................................. 1,152
684,000 Guangdong Investments Ltd......................... 433
(a)6,000 Guangshen Railway Co. Ltd. ADR.................... 115
434,400 Hong Kong Telecommunications Ltd.................. 780
17,000 Hopewell Holdings Ltd............................. 9
187,000 Hutchison Whampoa Ltd............................. 1,177
154,000 New World Development Co., Ltd.................... 714
63,000 Sun Hung Kai Properties Ltd....................... 637

<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
134,000 Swire Pacific Ltd. 'A'............................ $ 1,147
(a)1,438,000 Tingyi Holdings Co................................ 395
167,000 Varitronix International Ltd...................... 348
----------
8,524
----------
HUNGARY (0.1%)
(a)2,000 Cofinec GDR....................................... 96
----------
INDIA (11.7%)
(a)12,369 Century Textiles & Industries GDR................. 1,973
(e)157,950 E.I.D. Parry GDR.................................. 450
198,800 Great Eastern Shipping GDR........................ 1,715
100,000 Gujarat Ambuja Cement GDR......................... 1,275
214,816 Gujarat Narmada Valley Fertilizers Co., Ltd....... 1,423
504,000 Hindustan Development Corp. Ltd................... 315
(a)60,000 ITC Ltd. GDS...................................... 622
75,000 India Cements Ltd. GDR............................ 412
71,000 Indian Petrochemical Corp., Ltd. GDR.............. 1,189
22,000 Indian Rayon & Industries GDR..................... 325
(a)83,750 Indo Rama Synthetics Ltd. GDR..................... 1,078
(a)(e)25,000 Indo Rama Synthetics Ltd. GDR..................... 322
(a)4,320 JCT Ltd. GDR...................................... 17
(e)160 JCT Ltd. GDR...................................... 1
(a)230,750 JK Corp. GDR...................................... 721
50,000 Mahindra & Mahindra Ltd. GDR...................... 550
(a)(g)186,045 Morgan Stanley India Investment Fund, Inc......... 2,070
83,500 Raymond Ltd. GDR.................................. 1,744
317,000 SIV Industries GDR................................ 951
(a)280,000 Sanghi Polyester Ltd. GDR......................... 812
310,300 Tube Investments of India......................... 968
60,550 United Phosphorus Ltd. GDR........................ 734
----------
19,667
----------
INDONESIA (5.5%)
(d)143,000 Bank International Indonesia (Foreign)............ 706
(d)436,000 Barito Pacific Timber (Foreign)................... 286
(d)459,000 Bimantara Citra (Foreign)......................... 577
(d)38,500 Charoen Pokphand Co., Ltd. (Foreign).............. 74
(a)(d)347,000 Gudang Garam (Foreign)............................ 1,487
(d)93,500 Hanjaya Mandala Sampoerna (Foreign)............... 1,065
(d)833,500 Indah Kiat Pulp & Paper (Foreign)................. 815
(d)91,000 Indocement Tunggal (Foreign)...................... 313
(d)110,500 Indosat (Foreign)................................. 371
(d)104,000 Kalbe Farma (Foreign)............................. 232
(a)(d)96,500 Semen Gresik (Foreign)............................ 281
(d)52,666 Sorini Corp. (Foreign)............................ 290
(d)1,790,000 Telekomunikasi (Foreign).......................... 2,711
(d)40,500 United Tractors (Foreign)......................... 64
----------
9,272
----------
ISRAEL (2.7%)
18,250 Elbit Ltd......................................... 1,087
680 First International Bank of Israel Ltd. '1'....... 71
4,465 First International Bank of Israel Ltd. '5'....... 498
(a)94,327 Israel Land Development Co., Ltd.................. 232
5,100 Koor Industries Ltd............................... 432
16,500 Koor Industries Ltd. ADR.......................... 283
89,000 Osem Investment Ltd............................... 524
55,000 Super Sol Ltd..................................... 1,170
</TABLE>

The accompanying notes are an integral part of the financial statements. 47
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
ISRAEL (CONT.)
7,000 Teva Pharmaceutical Industries Ltd. ADR........... $ 265
----------
4,562
----------
KOREA (2.3%)
(a)(d)1,960 Chosun Brewery (Foreign).......................... 67
(d)17,380 Korea Electric Power (Foreign).................... 702
(d)29,250 Korea Housing Bank................................ 804
(a)(d)537 Korea Mobile Telecommunications Corp. (Foreign)... 636
5,000 Korea Mobile Telecommunications Corp. ADR......... 86
(d)2,800 Pohang Iron & Steel Ltd. (Foreign)................ 228
5,220 Samsung Electronics Co. GDS....................... 270
(a)5,680 Samsung Electronics Co. (Foreign)................. 476
(d)25,345 Shinhan Bank Co., Ltd. (Foreign).................. 592
3,000 Yukong Ltd. (Foreign)............................. 88
----------
3,949
----------
MEXICO (9.6%)
137,011 ALFA S.A. de C.V.................................. 615
87,770 Apasco S.A. de C.V................................ 485
(a)659,310 Banacci 'B'....................................... 1,370
(a)193,888 Banacci 'L'....................................... 368
480,112 Cemex 'CPO'....................................... 1,703
(e)65,099 Cemex S.A. de C.V. ADR............................ 450
(a)193,050 Cifra S.A. 'B'.................................... 279
(a)404,375 Cifra S.A. 'C'.................................... 577
(a)27,385 Empresas ICA Sociedad Controladora S.A. de C.V.... 380
828,920 Formento Economico Mexicano S.A. 'B'.............. 2,350
(a)(e)32,410 Grupo Carso S.A. ADR.............................. 459
(a)2,484,875 Grupo Financiero Bancomer 'B'..................... 1,082
(a)(e)154,870 Grupo Financiero Bancomer 'B' ADR................. 1,336
(a)35,745 Grupo Televisa S.A. GDR........................... 1,099
20,628 Pan American Beverages, Inc. 'A'.................. 918
83,985 Telefonos de Mexico 'L' ADR....................... 2,814
----------
16,285
----------
MOROCCO (0.3%)
2,700 Banque Morocaine.................................. 121
3,500 Banque Morocaine GDR.............................. 50
3,200 Omnium Nord Africain S.A.......................... 147
2,500 Sni Maroc......................................... 157
(a)2,000 Wafabank.......................................... 93
----------
568
----------
PAKISTAN (3.0%)
98,600 Dewan Salman Fibre................................ 118
157,300 D.G. Khan Cement Ltd.............................. 62
569,700 Fauji Fertilizer Co., Ltd......................... 1,465
(a)181,500 Karachi Electric.................................. 191
(a)150,000 Nishat Mills Ltd.................................. 60
35,100 Pakistan State Oil Co. Ltd........................ 414
(a)19,825 Pakistan Telecommunication Co..................... 2,265
(a)399,000 Sui Northern Gas Pipelines........................ 456
----------
5,031
----------
PHILIPPINES (3.0%)
252,425 Ayala Land, Inc. 'B'.............................. 453
734,200 C&P Homes, Inc.................................... 638
(a)519,000 DMCI Holdings, Inc................................ 371
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
2,433,800 JG Summit Holding 'B'............................. $ 910
74,900 Manila Electric 'B'............................... 786
1,288,350 Petron Corp....................................... 590
13,200 Philippine Long Distance Telephone ADR............ 786
1,867,080 SM Prime Holdings, Inc............................ 485
2,200 San Miguel Corp. 'B'.............................. 8
----------
5,027
----------
POLAND (1.5%)
12,500 Bank Rozwoju Eksportu S.A......................... 327
75,000 Big Bank Inicjatyw................................ 94
(a)15,750 Debica S.A........................................ 383
1,800 E. Wedel S.A...................................... 81
31,300 Elektrim.......................................... 257
(a)8,000 Fabryka Kotlow Rafako S.A......................... 47
48,000 Mostostal-Export.................................. 164
(a)69,000 Polifarb Wroclaw S.A.............................. 348
32,000 Wielkopolski Bank Kredytowy....................... 173
7,700 Zywiec............................................ 595
----------
2,469
----------
PORTUGAL (0.0%)
(a)6,000 Filmes Lusomundo.................................. 37
----------
RUSSIA (5.2%)
(a)15,372,000 Irkutskenergo..................................... 1,783
(a)110,000 Lukoil Holdings................................... 1,210
(e)14,635 Lukoil Holdings ADR............................... 626
2,200,000 Moscow Energy (Mosenergo)......................... 1,958
(a)459,000 Rostelekom........................................ 1,102
(a)22,130,000 Unified Energy System............................. 2,080
----------
8,759
----------
SOUTH AFRICA (3.6%)
100,000 Amalgamated Banks of South Africa................. 554
12,500 Anglo American Industrial Corp. Ltd............... 502
49,500 Barlow Ltd........................................ 517
119,473 Bidvest Group Ltd................................. 714
15,400 Drifontein Consolidation Ltd...................... 206
43,500 Gencor Ltd........................................ 161
101,500 JD Group Ltd...................................... 550
(g)34,265 Morgan Stanley Africa Investment Fund, Inc........ 428
37,850 Rembrant Group Ltd................................ 356
308,175 SA Iron & Steel Corp. Ltd......................... 241
60,000 Sage Group Ltd.................................... 288
142,865 Sasol Ltd......................................... 1,550
72,300 Spescom Electronics Ltd........................... 67
----------
6,134
----------
SINGAPORE (0.3%)
(a)186,000 Want Want Holdings................................ 500
----------
TAIWAN (4.7%)
277,000 Cathay Life Insurance Co., Ltd.................... 1,953
1,568,000 China Steel Corp.................................. 1,641
318,000 Hua Nan Commercial Bank........................... 1,676
(a)238,068 Mosel Vitelic Ltd................................. 335
(a)377,640 Taiwan Semiconductor Co........................... 789
235,460 United Micro Electronics Corp., Ltd............... 349
857,000 Yang Ming Marine Transport........................ 1,264
----------
8,007
----------
</TABLE>

48 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
THAILAND (4.2%)
35,300 Advanced Information Services Co., Ltd.
(Foreign)....................................... $ 523
94,100 Bangkok Bank Co., Ltd. (Foreign).................. 1,275
237,300 Finance One Co., Ltd. (Foreign)................... 1,533
61,000 National Finance & Securities Co., Ltd.
(Foreign)....................................... 272
25,800 Shinawatra Computer Co., Ltd. (Foreign)........... 559
113,000 Siam Commercial Bank Co., Ltd. (Foreign).......... 1,638
115,900 Thai Farmer's Bank Public Co. (Foreign)........... 1,269
----------
7,069
----------
TURKEY (5.6%)
1,762,554 Aksa Akrilik Kimya Sanayii A.S.................... 370
2,820,500 Arcelik A.S....................................... 261
355,000 Bagfas Bandirma Gubre Fabrikalari A.S............. 96
1,660,000 Borusan Birmesik.................................. 137
4,185,000 Bossa Ticaret ve Sanayii Isletmeleri T.A.S........ 423
5,500,000 Demirbank Tas..................................... 188
2,070,000 Ege Biracilik Ve Malt Sanayii..................... 945
2,820,000 Ege Seramik Co., Inc.............................. 113
900,000 Erciyas Biracilik Ve Malt Sanayii................. 510
17,000,000 Eregli Demir Ve Celik Fabrikalari T.A.S........... 1,884
2,508,000 Guney Biraculik Ve Malt Sana...................... 580
387,000 Migros Turk....................................... 339
7,776,000 Sabah............................................. 215
835,979 Tat Konserve...................................... 196
4,340,000 Tofas Turk Otomobil Fabrikasi..................... 209
11,735,058 Trakya Cam Sanayii A.S............................ 643
11,115,000 Turkiye Garanti Bankasi........................... 758
13,893,750 Turkiye Garanti Banksai RFD....................... 879
17,539,000 Yapi Ve Kredi Bankasi A.S......................... 497
8,799,000 Yapi Ve Kredi Bankasi A.S. RFD.................... 228
----------
9,471
----------
TOTAL COMMON STOCKS (COST $121,237)................................. 131,524...
----------
PREFERRED STOCKS (8.6%)
BRAZIL (NON-VOTING STOCKS) (8.1%)
341,907,584 Banco Bradesco.................................... 2,793
(d)11,156,000 Banco Nacional.................................... 1
5,793,099 Brahma............................................ 3,456
16,664,000 Cia Energetica de Minas Gerais.................... 443
2,747 Cia Energetica de Minas Gerais ADR................ 78
2,080,000 Eletrobras 'B'.................................... 595
166,000 Investimentos Itausa S.A.......................... 127
4,061,200 Itaubanco......................................... 1,650
10,145,000 Petrobras......................................... 1,248
4,660,000 Pao de Acucar..................................... 77
45,436,390 Telebras.......................................... 3,172
789,000 Telesp............................................ 169
----------
13,809
----------
PORTUGAL (0.1%)
11,780 Filmes Lusomundo.................................. 94
----------
RUSSIA (0.4%)
(a)450,000 Rostelecom........................................ 664
----------
TOTAL PREFERRED STOCKS (COST $11,903)............................... 14,567
----------
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
RIGHTS (0.1%)
POLAND (0.0%)
(a)48,000 Mostostal-Export, expiring 8/14/96................ $ 3
----------
TURKEY (0.1%)
(a)627,000 Tat Konserve A.S., expiring 7/24/96............... 93
----------
TOTAL RIGHTS (COST $128)............................................ 96
----------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------
<C> <S> <C>
CONVERTIBLE DEBENTURES (0.1%)
COLOMBIA (0.1%)
$ (e)170 Banco de Colombia 5.20%, 2/1/99................... 152
----------
INDIA (0.0)
120 Tata Iron & Steel Co. 2.25%, 4/1/99............... 115
----------
TOTAL CONVERTIBLE DEBENTURES (COST $300)............................ 267
----------
TOTAL FOREIGN SECURITIES (86.7%) (COST $133,568).................... 146,454
----------
SHORT TERM INVESTMENT (10.4%)
REPURCHASE AGREEMENT (10.4%)
17,521 Chase Securities, Inc., 5.15%, dated 6/28/96, due
7/1/96, to be repurchased at $17,529,
collateralized by $17,215 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $17,600
(COST $17,521).................................. 17,521
----------
TOTAL INVESTMENT IN SECURITIES (COST $151,089)...................... 163,975
----------
FOREIGN CURRENCY (1.3%)
ARP 14 Argentine Peso.................................... 14
BRC 800 Brazilian Real.................................... 797
EGP 33 Egyptian Pound.................................... 10
HKD 120 Hong Kong Dollar.................................. 15
IDR 461,247 Indonesian Rupiah................................. 198
ISS 4 Israeli Shekel.................................... 1
KRW 7,198 Korean Won........................................ 9
MEP 5 Mexican Pesos..................................... 1
PKR 15,164 Pakistani Rupee................................... 433
PLZ 10 Polish Zloty...................................... 4
ZAR 3 South African Rand................................ 1
TWD 17,599 Taiwan Dollar..................................... 640
TRL 4,801,341 Turkish Lira...................................... 58
----------
TOTAL FOREIGN CURRENCY (COST $2,181)................................ 2,181
----------
TOTAL INVESTMENTS (98.4%) (COST $153,270)........................... 166,156
OTHER ASSETS IN EXCESS OF LIABILITIES (1.6%)........................ 2,711
----------
NET ASSETS (100%)................................................... $ 168,867
----------
----------
</TABLE>

<TABLE>
<S> <C> <C>
- ------------
(a) -- Non-income producing.
(d) -- Security is valued at fair value -- see note A-1
to financial statements.
(e) -- 144A Security -- certain conditions for public
sale may exist.
(g) -- The Fund is advised by an affiliate.
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
GDS -- Global Depositary Share.
RFD -- Ranked for Dividend.
</TABLE>

The accompanying notes are an integral part of the financial statements. 49
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)

<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- ------------- --------
<S> <C> <C>
Consumer Goods.......................... $ 29,434 17.4%
Telecommunications...................... 24,864 14.7
Finance................................. 24,783 14.7
Materials............................... 17,809 10.6
Energy.................................. 13,983 8.3
Multi-Industry.......................... 13,244 7.8
Capital Equipment....................... 10,845 6.4
Services................................ 4,819 2.9
Real Estate............................. 4,226 2.5
Insurance............................... 2,241 1.3
Gold Mines.............................. 206 0.1
------------- ---
$ 146,454 86.7%
------------- ---
------------- ---
</TABLE>

50 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Capital Goods /
Construction 9.3%
Consumer - Cyclical 23.7%
Consumer - Staples 31.8%
Diversified 5.5%
Finance 22.0%
Materials 1.4%
Technology 1.4%
Other 4.9%
100.0%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS

<S> <C> <C>
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ------------------ ----------------- ------------
Philip Morris Consumer -
Cos., Inc. Staples 12.9%
RJR Nabisco Consumer -
Holdings Corp. Staples 12.5%
United Capital
Technologies Goods/Construction
Corp. 6.9%
CMAC Investment Finance
Corp. 6.4%
HFS, Inc. Consumer -
Cyclical 5.5%
</TABLE>

<TABLE>
<CAPTION>
TOTAL RETURNS SINCE INCEPTION (JANUARY 2, 1996)**
- -----------------------------------------------------------
WITH WITHOUT
SALES SALES
CHARGE* CHARGE
<S> <C> <C>
- -----------------------------------------------------------
- --------------------------------------------------
Class A Shares 14.80% 20.52%
- -----------------------------------------------------------
Class B Shares 15.18% 20.18%
- -----------------------------------------------------------
Class C Shares 19.10% 20.10%
- -----------------------------------------------------------
Lipper Capital Appreciation
Index N/A 9.50%
- -----------------------------------------------------------
S&P 500 Index N/A 10.09 %
- -----------------------------------------------------------
</TABLE>

** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.

The Lipper Capital Appreciation Index is a composite of mutual funds managed for
maximum capital gains. The S&P 500 Index is an unmanaged index of common stocks.
The S&P 500 Index assumes dividends are reinvested.
<TABLE>
<CAPTION>
<S> <C> <C>
TOP FIVE SECTORS

VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------- --------- ---------------
<S> <C> <C>
Consumer - Staples $ 3,305 31.8%
Consumer - Cyclical 2,467 23.7%
Finance 2,286 22.0%
Capital Goods/Construction 971 9.3%
Diversified 570 5.5%
</TABLE>

COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
AGGRESSIVE EQUITY AGGRESSIVE EQUITY AGGRESSIVE EQUITY LIPPER CAPITAL
FUND CLASS A FUND CLASS B FUND CLASS C APPRECIATION INDEX S&P 500 INDEX
<S> <C> <C> <C> <C> <C>
1/2/96 9,500 10,000 10,000 10,000 10,000
6/30/96 11,480 11,518 11,910 10,950 11,009
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

The objective of the Aggressive Equity Fund is to provide
capital appreciation by investing primarily in a
non-diversified portfolio of corporate equity and
equity-linked securities. Equity and equity-linked securities
include common and preferred stock, convertible securities,
rights and warrants to purchase common stock, options,
futures and specialty securities. The Fund is allowed to sell
securities short.

For the period from inception on January 2, 1996 through June
30, 1996, the Fund had a total return exclusive of sales
charge of 20.52% for the Class A shares, 20.18% for the Class
B shares, and 20.10% for the Class C shares, and a total
return with sales charge of 14.80% for the Class A shares,
15.18% for the Class B shares, and 19.10% for the Class C
shares, as compared to 9.50% for the Lipper Captial
Appreciation Index and 10.09% for the S&P 500 Index for the
same period.

At June 30, 1996, cash accounted for approximately 11% of the
Fund's net assets. We do not attempt to time the market, nor
do we attempt to project economic trends. The cash at quarter
end had built up as a residual of our normal investment
activity, as some of our large positions had moved up
significantly and we elected to reduce our exposure to them.

The top twelve holdings represented 73% of the Fund at June
30, underscoring the high degree of concentration employed.
The largest position was Philip Morris, at 12.9% of assets.
Philip Morris has been the largest position since the Fund's
inception in January 1996. But when the tobacco group sold
off in March and April of this year on investor concerns over
political and legal issues, and Philip Morris traded down
into the mid-$80s, we took advantage of our ability to
concentrate and went to as much as 22% of assets in the
stock. To us, the risk/reward at that point was overwhelming
because: business trends were great; EPS estimates were
rising; the company was taking advantage of weakness to
accelerate share repurchases; and non-tobacco consumer staple
growth stocks were rising, making the relative valuation of
Philip Morris extremely compelling.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.

51
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

From the low point in April, the stock rallied 25%, and we
subsequently cut our bet almost in half. This 25% move began
to look particularly rewarding in June, when many high flying
and widely owned growth stocks were crushed.

Unlike Philip Morris, which we still like a lot, we actually
added to our RJR Nabisco bet throughout the June quarter. We
hope RJR is Philip Morris two years ago: unloved, underowned
and a powerful cash generator with improving business trends.
Statistically, RJR, a 12.5% holding at June 30, looks
incredible. At $30 1/4, the price to estimated 1996 free cash
flow per share of $4.10 is 7.4 times, and the dividend yield
is 6.1%. We expect RJR to raise the dividend significantly in
March of 1997 and again in March of 1998. Finally, another
potential kicker to ignite performance would be the spin-off
of the food assets.
"WE HOPE RJR IS PHILIP MORRIS TWO YEARS AGO..."

Other large holdings include United Technologies, mortgage
insurer CMAC Investment, HFS and Loews Corp.

Kurt A. Feuerman
PORTFOLIO MANAGER

July 1996

52
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (94.8%)
CAPITAL GOODS / CONSTRUCTION (9.3%)
AEROSPACE & DEFENSE (9.1%)
800 General Dynamics Corp............................. $ 50
3,800 McDonnell Douglas Corp............................ 184
6,200 United Technologies Corp.......................... 713
-------
947
-------
BUILDING & CONSTRUCTION (0.2%)
(a)1,100 AMRE, Inc......................................... 24
-------
TOTAL CAPITAL GOODS / CONSTRUCTION........................... 971
-------
CONSUMER--CYCLICAL (23.7%)
BROADCASTING--RADIO & TELEVISION (1.0%)
(a)3,500 Heftel Broadcasting Corp. `A'..................... 104
-------
ENTERTAINMENT & LEISURE (3.3%)
(a)11,600 Gtech Holdings Corp............................... 344
-------
FOOD SERVICE & LODGING (15.5%)
(a)13,600 Boston Chicken, Inc............................... 442
(a)1,700 Foodmaker, Inc.................................... 15
(a)8,100 HFS, Inc.......................................... 567
5,400 ITT Corp. (New)................................... 358
6,700 La Quinta Inns, Inc............................... 225
-------
1,607
-------
LEISURE RELATED (0.5%)
3,300 International Game Technology..................... 56
-------
PHOTOGRAPHY & OPTICAL (0.9%)
5,800 PCA International, Inc............................ 97
-------
PUBLISHING (1.8%)
12,000 K-III Communications Corp......................... 150
1,000 New York Times Co. `A'............................ 33
-------
183
-------
RETAIL--GENERAL (0.7%)
(a)1,600 Petsmart, Inc..................................... 76
-------
TOTAL CONSUMER--CYCLICAL..................................... 2,467
-------
CONSUMER--STAPLES (31.8%)
BEVERAGES (2.3%)
6,950 Coca-Cola Enterprises, Inc........................ 241
-------
FOOD (2.8%)
4,000 Kellogg Co........................................ 293
-------
TOBACCO (26.7%)
12,900 Philip Morris Cos., Inc........................... 1,342
42,000 RJR Nabisco Holdings Corp......................... 1,302
3,700 UST, Inc.......................................... 127
-------
2,771
-------
TOTAL CONSUMER--STAPLES...................................... 3,305
-------
DIVERSIFIED (5.5%)
DIVERSIFIED (5.5%)
1,700 Allied Signal, Inc................................ 97
6,000 Loews Corp........................................ 473
-------
TOTAL DIVERSIFIED............................................ 570
-------

<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<C> <S> <C>
FINANCE (21.7%)
BANKING (5.4%)
1,700 Citicorp.......................................... $ 140
1,783 Wells Fargo Co.................................... 426
-------
566
-------
FINANCIAL SERVICES (7.4%)
10,000 American Express Co............................... 446
1,400 CIGNA Corp........................................ 165
2,100 Student Loan Marketing Association................ 155
-------
766
-------
INSURANCE (8.5%)
1,800 ACE Ltd........................................... 84
11,600 CMAC Investment Corp.............................. 667
2,100 PMI Group, Inc.................................... 89
1,400 PartnerRe Holdings Ltd............................ 42
-------
882
-------
REAL ESTATE (0.4%)
(a)1,600 Insignia Financial Group, Inc. `A'................ 43
-------
TOTAL FINANCE................................................ 2,257
-------
MATERIALS (1.4%)
CHEMICALS (1.4%)
1,000 Olin Corp......................................... 89
800 Potash Corp. of Saskatchewan, Inc................. 53
-------
142
-------
TECHNOLOGY (1.4%)
ELECTRONICS (0.9%)
1,300 Intel Corp........................................ 95
-------
SOFTWARE SERVICES (0.5%)
1,200 IMC Global, Inc................................... 45
-------
TOTAL TECHNOLOGY............................................. 140
-------
TOTAL COMMON STOCKS (COST $9,506).............................. 9,852
-------
NO. OF
CONTRACTS
- -----------
CALL OPTIONS (0.3%)
FINANCE
(a)500 Wells Fargo Co., expiring 1/17/98 (COST $24)...... 29
-------
FACE
AMOUNT
(000)
- -----------
SHORT-TERM INVESTMENT (11.9%)
U.S. GOVERNMENT OBLIGATIONS (11.9%)
$1,250 U.S. Treasury Bill, 8/29/96 (COST $1,239)......... 1,239
-------
TOTAL INVESTMENTS (107.0%) (COST $10,769)...................... 11,120
LIABILITIES IN EXCESS OF OTHER ASSETS (-7.0%).................. (730)
-------
NET ASSETS (100%).............................................. $10,390
-------
-------
</TABLE>

<TABLE>
<S> <C> <C>
- ---------------
(a) -- Non-income producing.
</TABLE>

<TABLE>
<CAPTION>
SECURITIES SOLD SHORT (NOTE A-6) VALUE
SHARES (000)
------------------------------------------------------ ------
<C> <S> <C>
1,100 Coca-Cola Enterprises, Inc......... $ 38
3,900 HFS, Inc........................... 273
800 McDonnell Douglas Corp............. 39
1,600 Philip Morris Cos., Inc............ 166
11,000 RJR Nabisco Holdings Corp.......... 341
3,700 UST, Inc........................... 127
------
(TOTAL PROCEEDS $907).............. $ 984
------
------
</TABLE>

The accompanying notes are an integral part of the financial statements. 53
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Apartment 22.0%
Land 0.7%
Lodging / Leisure 12.0%
Manufactured Home 7.6%
Office & Industrial 31.6%
Retail 14.9%
Self Storage 4.9%
Other 6.3%
100.0%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS

<S> <C> <C>
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ------------------------- ------------- ------------
ROC Communities, Inc. Manufactured
REIT Home 7.6%
Meridian Industrial Trust Industrial
REIT 7.4%
Avalon Properties, Inc. Apartment
REIT 5.8%
Pacific Gulf Properties, Industrial
Inc. REIT 4.6%
Bedford Property Office &
Investors, Inc. REIT Industrial 4.2%
</TABLE>

<TABLE>
<CAPTION>
TOTAL RETURNS SINCE INCEPTION (MAY 1,
1996)**
- ----------------------------------------
WITH WITHOUT
SALES SALES
CHARGE* CHARGE
<S> <C> <C>
- ----------------------------------------
- ----------------------------------------
Class A Shares -0.34% 4.63%
- ----------------------------------------
Class B Shares -0.46% 4.54%
- ----------------------------------------
Class C Shares 3.54% 4.54%
- ----------------------------------------
NAREIT Index N/A 3.72%
- ----------------------------------------
</TABLE>

** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.

The NAREIT Index is an unmanaged market weighted index of tax qualified REITs
(excluding healthcare REITs) listed on the New York Stock Exchange, American
Stock Exchange and the NASDAQ National Market System, including dividends.
<TABLE>
<CAPTION>
<S> <C> <C>
TOP FIVE SECTORS

VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------- --------- ---------------
<S> <C> <C>
Office & Industrial $ 1,834 31.6%
Apartment 1,278 22.0%
Retail 864 14.9%
Lodging/Leisure 695 12.0%
Manufactured Home 444 7.6%
</TABLE>

COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C> <C> <C>
U.S. Real Estate Fund Class A U.S. Real Estate Fund Class B U.S. Real Estate Fund Class C NAREIT Index
05/1/96 9,525 10,000 10,000 10,000
06/30/96 9965 9954 10372 10354
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

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

For the period from inception on May 1, 1996 through June 30,
1996, the Fund had a total return exclusive of sales charge
of 4.63% for the Class A shares, 4.54% for the Class B shares
and 4.54% for the Class C shares, and a total return with
sales charge of -0.34% for the Class A shares, -0.46% for the
Class B shares and 3.54% for the Class C shares, as compared
to 3.72% for the National Association of Real Estate
Investment Trusts (NAREIT) Index (excluding Healthcare) for
the same period.

The continued gradual appreciation in the Index together with
average dividend yields for the companies comprising the
Index are consistent with our view of a commercial real
estate market in the United States that is making a
transition from recovery to overall equilibrium. Net
absorption of all types of real estate continued to be
positive in the second quarter of 1996, and there are even
some indications of a pick-up in spatial demand commensurate
with an increase this year in the overall level of economic
activity. As occupancy rates have continued to rise, rental
growth has become generally more widespread, and many
property types are registering not only nominal, but positive
REAL growth as well for the preceding twelve months.

With the growth in rental rates and occupancy, new
construction of real estate has now become economically
feasible for the first time in over five years. While
providers of capital (including the public REIT market) are
generally skeptical of speculative development, new projects
which are well-supported by pre-leasing and which are
conservatively financed are being developed in today's
environment. In those markets which have reached equilibrium,
that is, where new construction is taking place, we can
expect rental growth to begin to moderate. Clearly, our focus
in the coming quarters will be to monitor market conditions
to identify which markets, if any, are subject to potential
overbuilding which could lead to a deterioration in operating
results. With the exception of a handful of apartment
markets, new development, where it is taking place, does not
appear excessive in comparison to tenant demand.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.

54
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

The real estate capital markets have continued to become more
liquid. We believe that this phenomenon is a function of
three key factors: first, the gradual recovery in the markets
has reduced perceived risk and therefore enticed investors to
re-enter the market; second, the withdrawal of traditional
capital providers and the resumption of selective development
has created a substantial need for new capital in the
industry, and third, concern about potential risk in the
equity and fixed income markets has led to a search for
defensive investments such as real estate that provide low or
negative correlations with the primary asset classes.

Our strategy is to manage the Fund on the basis of
establishing an overall asset allocation framework defined by
target exposures to each property type and region based upon
our analysis of underlying property supply and demand
fundamentals. We then select individual securities based upon
our analysis of underlying property value. Using this
methodology, the overall shape and composition of the Fund's
portfolio continues to evolve over the course of each
quarter.

To begin with, our policy is to under-weight the apartment
sector versus the weighting for the Index of 26%. As alluded
to above, the apartment markets today are generally in
equilibrium, and new construction has led to a leveling-off
in rental growth in most markets. While apartments serve as a
relatively low volatility core to our portfolio, we can find
more attractive total return investment opportunities in
other sectors. The focus of our investments is in regions
(e.g., the Pacific Coast) or sub-markets (e.g., Class "B"
apartments in the sun-belt) where rental growth continues to
exceed the inflation rate.

The Manufactured Home sector is over-weighted in the Fund
with a 7.6% position. While dividend and property yields in
this sector are relatively modest, we believe that the
combination of modest new construction, minimal capital
requirements and low volatility make this an attractive
anchor to the Fund's portfolio.

We have underweighted the Retail sector with a 14.9% position
versus its Index weighting of 36%. While share prices in the
retail sector recovered in May and June after a significant
fall during the first four months of 1996, we believe that
the secular bear market in retail continues unabated and that
the sector offers no better than fair value relative to an
increasing level of operating risk. To put our view in some
perspective, the overall level of new retail construction is
now at levels not seen since the height of the real estate
development boom in 1986. At the same time, the fundamentals
of tenant demand and credit risk remain shaky at best.
Increasingly today retail landlords are being asked to take
what are in effect venture capital risks in sponsoring new
retail tenants in their malls and yet are being compensated
with fixed income type returns. We do not believe that this
disequilibrium between risk and reward will be alleviated
until the retail market undergoes the kind of wash-out that
occurred in the office, apartment and hotel sectors. Of
course, that wash-out was characterized by 7 years of no
construction, tremendous vacancy rates, a precipitous fall in
nominal rents and a huge erosion in operating margins. Under
these circumstances, we have concentrated our retail holdings
in names with the highest quality malls that will best
withstand the downturn in capital values and in companies
with a regional focus that provides the best protection
against new competition.
"OUR STRATEGY IS TO MANAGE THE FUND ON THE BASIS OF ESTABLISHING AN OVERALL
ASSET ALLOCATION FRAMEWORK..."

Our intention is to remain overweight in the office and
industrial sectors but to rigorously review our commitments
with a view towards finding attractive underlying asset
value. We feel that this strategy was necessitated by a
sector which boasted the most attractive fundamentals in the
industry but where share prices exceeded intrinsic value by a
widening margin. Our exposure to the sector is approximately
31.6% versus 18% for the Index, and we have continued to
identify positions which offer discounts to underlying asset
value. We have invested in Bedford Properties, Pacific Gulf,
the Parkway Company and Eastgroup Properties, four companies
with significant exposure to the office or industrial markets
in California and in other selective sun-belt locations. All
four trade at attractive levels relative to underlying assets
and are capitalized to grow through acquisitions and new
development. These four companies, together with Meridian
Industrial, Duke Realty and Liberty Property Trust, form the
backbone of our overweighting in the office and industrial
sectors today.

55
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

Lastly, we are overweighted in the lodging sector (12.0%
versus 6% for the Index), in large part because of the
continuing attractive operating fundamentals in the
full-service components of the sector. While we remain
convinced that full service hotels can deliver attractive
capital appreciation in the coming year, we are becoming
increasingly selective in our picks in this sector and will
have a bias towards lightening our exposure should share
prices continue their rapid rise.

Russell Platt
PORTFOLIO MANAGER

Theodore R. Bigman
PORTFOLIO MANAGER

July 1996

56
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND

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

RETAIL (14.9%)
FACTORY OUTLET CENTER (0.4%)
500 Factory Stores of America, Inc. REIT.............. $ 4
800 Horizon Group, Inc. REIT.......................... 16
------
20
------
REGIONAL MALL (8.7%)
12,500 DeBartolo Realty Corp. REIT....................... 202
1,400 Glimcher Realty Trust REIT........................ 24
10,000 Taubman Center, Inc. REIT......................... 111
7,100 Urban Shopping Centers, Inc. REIT................. 169
------
506
------
SHOPPING CENTER (5.8%)
13,400 Alexander Haagen Properties, Inc. REIT............ 171
11,300 Burnham Pacific Property Trust REIT............... 131
1,100 Price, Inc. REIT.................................. 36
------
338
------
TOTAL RETAIL.............................................. 864
------
SELF STORAGE (4.9%)
100 Public Storage, Inc. REIT......................... 2
9,300 Shurgard Storage Centers, Inc. 'A' REIT........... 235
2,500 Storage Trust Realty REIT......................... 51
------
288
------
TOTAL COMMON STOCKS (COST $5,234)........................... 5,444
------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- --------
<C> <S> <C>
SHORT-TERM INVESTMENT (5.0%)
REPURCHASE AGREEMENT (5.0%)
$ 289 Chase Securities, Inc., 5.15%, dated 6/28/96, due
7/1/96, to be repurchased at $289,
collateralized by $285 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $291 (COST
$289)........................................... 289
-------
TOTAL INVESTMENTS (98.7%) (COST $5,523)..................... 5,733
OTHER ASSETS IN EXCESS OF LIABILITIES (1.3%)................ 75
-------
NET ASSETS (100%)........................................... $ 5,808
-------
-------
- ---------------
</TABLE>

<TABLE>
<S> <C><C>
(a) -- Non-income producing.
REIT -- Real Estate Investment Trust.
</TABLE>

The accompanying notes are an integral part of the financial statements.
57
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Broadcast - Radio & Television 8.50%
Building Materials &
Construction 0.90%
Capital Goods & Components 0.40%
Chemicals 0.70%
Computers 1.90%
Consumer - Cyclical 0.30%
Diversified 1.20%
Energy 1.10%
Entertainment & Leisure 2.00%
Environmental Controls 3.80%
Finance 2.10%
Food 1.40%
Food Services & Lodging 1.40%
Foreign Government Bonds 10.70%
Forest Products & Paper 2.60%
Gaming & Lodging 4.70%
Health Care Supplies & Services 0.50%
Insurance 3.50%
Metals 1.40%
Packaging & Container 5.40%
Retail - General 2.10%
Soap & Toiletries 2.00%
Telecommunications 19.90%
Textiles & Apparel 2.10%
Transportation 1.60%
Other 17.80%
100.00%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS

<S> <C> <C>
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ------------------ ----------------- -----------
Republic of
Argentina Series
L, 5.25%, 3/31/23 Foreign 4.1%
Government Bonds
Nextel
Communications,
0.00%, 8/15/04 Telecommunications 3.9%
Federal Republic
of Brazil
Par Bond, Series
2-L, 5.00%,
4/15/24 Foreign 3.4%
Government Bonds
Stone Container
Corp, 10.75%,
10/1/02 Packaging & 3.0%
Container
MFS
Communications,
0.00%, 1/15/06 Telecommunications 2.9%
</TABLE>

<TABLE>
<CAPTION>
TOTAL RETURNS SINCE INCEPTION (MAY 1, 1996)**
- ------------------------------------------------------
WITH WITHOUT
SALES SALES
CHARGE* CHARGE
<S> <C> <C>
- ------------------------------------------------------
- --------------------------------------------------
Class A Shares -4.47% 0.29%
- ------------------------------------------------------
Class B Shares -4.79% 0.21%
- ------------------------------------------------------
Class C Shares -0.79% 0.21%
- ------------------------------------------------------
CS First Boston High Yield
Index N/A 1.01%
- ------------------------------------------------------
</TABLE>

** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.

The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
<TABLE>
<CAPTION>
<S> <C> <C>
TOP FIVE SECTORS

VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------- --------- ---------------
<S> <C> <C>
Telecommunications $ 2,121 19.9%
Foreign Government Bonds 1,141 10.7%
Broadcast-Radio & Television 900 8.5%
Packaging & Container 572 5.4%
Gaming & Lodging 504 4.7%
</TABLE>

COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C> <C> <C>
CS First Boston High Yield
High Yield Fund Class A High Yield Fund Class B High Yield Fund Class C Index
5/1/1996 9,500 10,000 10,000 10,000
6/30/96 9,553 9,521 9,921 10,501
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

The investment objective of the High Yield Fund is to
maximize total return by investing in a diversified portfolio
of high yield fixed income securities that offer a yield
above that generally available on debt securities in the four
highest rating categories of the recognized rating services.

For the period from inception on May 1, 1996 through June 30,
1996, the Fund had a total return exclusive of sales charge
of 0.29% for the Class A shares, 0.21% for the Class B shares
and 0.21% for the Class C shares and a total return with
sales charge of -4.47% for the Class A shares, -4.79% for the
Class B shares, and -0.79% for the Class C shares, as
compared to 1.01% for the CS First Boston High Yield Index.
As of June 30, 1996, the SEC 30-day yield for the Fund's
shares was 7.82% for Class A shares and 7.42% for the Class B
shares and Class C shares.

Over the period May 1, 1996 through June 30, 1996. U.S.
Treasuries have been choppy, but as of this writing are about
where they were when we started the Fund. On the other hand,
the stock market is down about five percent.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.

58
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND

- -------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

In the current market environment, there are a couple of
sectors that we find attractive. On the one hand, the cable
television sector has performed poorly this year in sympathy
with rising Treasury yields. However, the underlying credit
fundamentals are strong and as a result, we feel this may be
an opportune time to overweight this sector.

Conversely, some of the cyclical issuers in the paper and
steel industries appear to be at attractive prices. Earnings
of these companies are volatile and securities' prices tend
to discount news of the future. Because the outlook for these
sectors anticipates lower earnings, bond prices lagged other
parts of the high yield market. We believe there are selected
opportunities here. We have also taken a position in emerging
markets debt such as Argentina, Brazil and Venezuela.

We currently have 61 securities in the Fund, the average
rating is BB- which is toward the upper end of the high yield
market.

Robert Angevine
PORTFOLIO MANAGER

July 1996

59
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES (67.8%)
BROADCAST--RADIO & TELEVISION (8.5%)
$130 Cablevision Systems Corp., 9.875%, 5/15/06........ $ 125
150 Continental Cablevision, Inc., 9.50%, 8/1/13...... 163
(n)300 Marcus Cable Co., Series B, 0.00%, 12/15/05....... 185
200 Rogers Cablesystems Ltd., 10.00%, 3/15/05......... 198
250 Viacom, Inc., 8.00%, 7/7/06....................... 229
------
900
------
BUILDING MATERIALS & COMPONENTS (0.9%)
125 G-I Holdings, Inc., Series B, Zero Coupon,
10/1/98......................................... 100
------
CAPITAL GOODS & CONSTRUCTION (0.4%)
40 MDC Holdings, Series B, 11.125%, 12/15/03......... 39
------
CHEMICALS (0.7%)
80 Harris Chemical, 10.25%, 7/15/01.................. 80
------
COMPUTERS (1.9%)
(e)200 Unisys Corp., 12.00%, 4/15/03..................... 203
------
CONSUMER--CYCLICAL (0.3%)
65 Exide Corp., 2.90%, 12/15/05...................... 36
------
DIVERSIFIED (1.2%)
125 TLC Beatrice International Holdings, 11.50%,
10/1/05......................................... 127
------
ENERGY (1.1%)
120 Nuevo Energy, 9.50%, 4/15/06...................... 119
------
ENTERTAINMENT & LEISURE (2.0%)
250 Six Flags Theme Park, Inc., Series A, 12.25%,
6/15/05......................................... 213
------
ENVIRONMENTAL CONTROLS (3.8%)
116 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................. 120
125 Midland Funding II, Series A, 11.75%, 7/23/05..... 131
150 Norcal Waste Systems, 12.75%, 11/15/05............ 158
------
409
------
FOOD (1.4%)
150 Smith's Food & Drug, 11.25%, 5/15/07.............. 152
------
FOOD SERVICE & LODGING (1.4%)
150 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05......................................... 144
------
FOREST PRODUCTS & PAPER (2.6%)
180 Crown Paper Co., 11.00%, 9/1/05................... 171
100 SD Warren Co., Series B, 12.00%, 12/15/04......... 106
------
277
------
GAMING & LODGING (4.7%)
(e)200 Courtyard By Marriott, 10.75%, 2/1/08............. 196
20 Grand Casinos, Inc., 10.125%, 12/1/03............. 21
(e)150 HMC Acquisition Properties, Series B, 9.00%,
12/15/07........................................ 137
150 Trump Atlantic, 11.25%, 5/1/06.................... 150
------
504
------

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------
<C> <S> <C>
HEALTH CARE SUPPLIES & SERVICES (0.5%)
$(e)50 Homeside, Inc., 11.25%, 5/15/03................... $ 52
------
INSURANCE (3.5%)
275 Home Holdings, Inc., 8.625%, 12/15/03............. 179
200 Reliance Group Holdings, Inc., 9.00%, 11/15/00.... 198
------
377
------
METALS ( 1.4%)
150 Algoma Steel, Inc. (Yankee Bond), 12.375%,
7/15/05......................................... 146
------
PACKAGING & CONTAINER (5.4%)
150 Owens-Illinois, Inc., 11.00%, 12/1/03............. 161
50 Gaylord Container Corp., 11.50%, 5/15/01.......... 51
45 Gaylord Container Corp., 12.75%, 5/15/05.......... 47
310 Stone Container Corp., 10.75%, 10/1/02............ 313
------
572
------
RETAIL--GENERAL (2.1%)
280 Southland Corp., 5.00%, 12/15/03.................. 218
------
SOAP & TOILETRIES (2.0%)
250 Revlon Worldwide, Series B, Zero Coupon,
3/15/98......................................... 208
------
TELECOMMUNICATIONS (19.9%)
(e)(n)300 Brooks Fiber Properties, 0.00%, 3/1/06............ 159
215 Comcast Cellular Corp., Series B, Zero Coupon,
3/5/00.......................................... 148
110 Comcast Corp., Series A, 9.375%, 5/15/05.......... 106
(e)(n)250 Echostar Satellite Broadcast, 0.00%, 3/15/04...... 155
325 Lenfest Communications, 8.375%, 11/1/05........... 297
(e)35 Lenfest Communications, 10.50%, 6/15/06........... 35
(n)510 MFS Communications, 0.00%, 1/15/06................ 311
(n)700 Nextel Communications, 0.00%, 8/15/04............. 411
(n)275 Occidente Y Caribe, 0.00%, 3/15/04................ 140
40 Philippines Long Distance Telephone, 9.25%,
6/30/06......................................... 40
250 TCI Communications, Inc., 7.875%, 2/15/26......... 218
(n)170 Telewest plc., 0.00%, 10/1/07..................... 101
------
2,121
------
TEXTILES & APPAREL (2.1%)
60 Collins & Aikman Products, 11.50%, 4/15/06........ 61
165 Westpoint Stevens, Inc., 9.375%, 12/15/05......... 160
------
221
------
TOTAL CORPORATE BONDS AND NOTES (COST $7,320)............... 7,218
------
</TABLE>

60
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND

- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------
<C> <S> <C>
ASSET BACKED SECURITIES (3.7%)
FINANCE (2.1%)
$ 263 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07.............................. $ 221
------
TRANSPORTATION (1.6%)
175 Aircraft Lease Portfolio Securization Ltd., Series
1996-1, Class D, 12.75%, 6/15/06 175
------
TOTAL ASSET BACKED SECURITIES (COST $395)................... 396
------
FOREIGN GOVERNMENT BONDS (10.7%)
(n)800 Republic of Argentina Series L, 5.25%, 3/31/23.... 439
(h)650 Federal Republic of Brazil Par Bond, Series Z-L,
5.00%, 4/15/24.................................. 361
250 United Mexican States, Series B, 6.25%,
12/31/19........................................ 160
(h)250 Government of Venezuela Front Loaded Interest
Reduction Bond, Series A, 6.375%, 3/31/07....... 181
------
TOTAL FOREIGN GOVERNMENT BONDS (COST $1,122)................ 1,141
------
</TABLE>

<TABLE>
<CAPTION>
SHARES
- ------------
<C> <S> <C>
PREFERRED STOCKS (2.0%)
(a)(e)215 Time Warner, Inc., Series K (COST $215).... 211
--------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
RIGHTS
- ------------
<C> <S> <C>
RIGHTS (0.0%)
(a)(d)250,000 United Mexican States, expiring 12/31/96
(COST $0)................................ --
--------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (16.5%)
COMMERCIAL PAPER (14.1%)
$ 300 AT&T Corp., 5.34%, 7/24/96................. $ 299
300 Dun & Bradstreet, 5.36%, 7/25/96........... 299
300 Gannett, 5.33%, 7/19/96.................... 299
300 IBM, 5.36%, 7/8/96......................... 300
300 Motorola, 5.33%, 7/16/96................... 299
--------
1,496
--------
REPURCHASE AGREEMENT (2.4%)
253 Chase Securities, Inc., 5.15%, dated
6/28/96, due 7/1/96, to be repurchased at
$253, collateralized by $250 U.S Treasury
Notes, 7.125%, due 9/30/99, valued at
$258..................................... 253
--------
TOTAL SHORT-TERM INVESTMENTS (COST $1,749)............... 1,749
--------
TOTAL INVESTMENTS (100.7%) (COST $10,801)................ 10,715
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.7%)............ (71)
--------
NET ASSETS (100%)........................................ $ 10,644
--------
--------
- ---------------
</TABLE>

<TABLE>
<S> <C><C>
(a) -- Non-income producing.
(d) -- Security is valued at fair value -- see note A-1
to financial statements.
(e) -- 144A Security -- certain conditions for public
sale may exist.
(h) -- Variable or floating rate securities -- rate
disclosed is as of June 30, 1996.
(n) -- Step Bond -- coupon rate increases in increments
to maturity. Rate disclosed is as of June 30,
1996. Maturity date disclosed is the ultimate
maturity date.
</TABLE>

The accompanying notes are an integral part of the financial statements.
61
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES

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

JUNE 30, 1996
<TABLE>
<CAPTION>
GLOBAL GLOBAL WORLDWIDE
EQUITY FIXED ASIAN AMERICAN HIGH LATIN EMERGING
ALLOCATION INCOME GROWTH VALUE INCOME AMERICAN MARKETS
FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in
Securities, at Value
(Note 1) -- See
accompanying
portfolios $ 137,244 $ 11,120 $ 463,721 $ 42,755 $ 92,304 $ 26,505 $ 163,975
Foreign Currency at
Value 399 -- 3,142 -- -- 58 2,181
Cash 1 723 -- -- 232 -- 685
Receivable for:
Investments Sold 2,238 -- 4,348 428 1,448 792 3,510
Fund Shares Sold 1,832 11 1,821 369 1,708 1,258 2,142
Dividends 399 -- 757 95 -- 130 596
Interest 2 155 6 1 1,684 6 12
Foreign Withholding
Tax Reclaim 73 6 25 -- -- -- 3
Unrealized Gain on
Forward Foreign
Currency Contracts 1,162 3 -- -- -- -- --
Deferred Organization
Costs 43 43 35 52 59 58 57
Receivable from
Investment Adviser -- 17 -- 60 -- -- --
Securities, at Value,
Held as Collateral for
Securities Loaned 23,165 -- -- -- -- -- --
Other 5 -- 18 -- -- -- 1
------------- ----------- ----------- ----------- ----------- ----------- -----------
Total Assets 166,563 12,078 473,873 43,760 97,435 28,807 173,162
------------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES:
Payable for:
Investments Purchased 1,086 288 984 111 662 802 3,430
Fund Shares Redeemed 153 4 710 31 287 24 65
Bank Overdraft -- -- 662 -- -- 335 --
Dividends Declared -- 1 -- 23 309 -- --
Investment Advisory
Fees 219 -- 1,153 95 115 15 320
Administrative Fees 40 4 114 11 23 8 39
Custody Fees 73 4 204 5 17 28 108
Professional Fees 38 34 72 26 48 34 51
Distribution Fees 211 21 682 72 154 29 173
Shareholder Reporting
Expenses 41 6 150 32 37 7 39
Directors' Fees and
Expenses 2 -- 7 1 -- -- 1
Securities Sold Short -- -- -- -- -- -- --
Filing and
Registration Fees 14 -- 46 1 21 3 34
Deferred Country Tax 1 -- 157 -- -- -- 35
Dividend Payable on
Securities Sold Short -- -- -- -- -- -- --
Collateral on
Securities Loaned 23,165 -- -- -- -- -- --
Other 3 -- -- -- 1 -- --
------------- ----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities 25,046 362 4,941 408 1,674 1,285 4,295
------------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS $ 141,517 $ 11,716 $ 468,932 $ 43,352 $ 95,761 $ 27,522 $ 168,867
------------- ----------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS CONSIST OF:
Capital Stock at Par $ 10 $ 1 $ 28 $ 3 $ 8 $ 2 $ 14
Paid in Capital in
Excess of Par 119,218 11,909 426,860 35,893 91,713 25,263 157,148
Undistributed
(Distribution in
excess of) Net
Investment Income 2,710 (36) (160) (23) 1,157 132 306
Accumulated
(Distribution in
excess of) Net
Realized Gain (Loss) 4,743 (124) 4,456 2,321 3,553 (1,541) (1,451)
Unrealized Appreciation
(Depreciation) on
Investments and
Foreign Currency
Translations* 14,836 (34) 37,748 5,158 (670) 3,666 12,850
------------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS $ 141,517 $ 11,716 $ 468,932 $ 43,352 $ 95,761 $ 27,522 $ 168,867
------------- ----------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ----------- -----------
CLASS A SHARES:
Net Assets $ 63,706 $ 7,432 $ 248,009 $ 19,674 $ 41,493 $ 18,701 $ 114,850
Shares Issued and
Outstanding ($.001 par
value) (Authorized
2,625,000,000) 4,318 748 14,464 1,345 3,326 1,481 9,521
Net Asset Value and
Redemption Price Per
Share $ 14.75 $ 9.94 $ 17.15 $ 14.63 $ 12.47 $ 12.63 $ 12.06
------------- ----------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ----------- -----------
Maximum Sales Charge 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
Maximum Offering Price
Per Share (Net Asset
Value Per Share x
100/95.25) $ 15.49 $ 10.44 $ 18.01 $ 15.36 $ 13.09 $ 13.26 $ 12.66
------------- ----------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ----------- -----------
CLASS B SHARES:
Net Assets $ 14,786 $ 1,440 $ 52,853 $ 2,485 $ 26,174 $ 2,041 $ 10,416
Shares Issued and
Outstanding ($.001 par
value) (Authorized
2,625,000,000) 1,022 145 3,144 170 2,104 164 873
Net Asset Value and
Offering Price Per
Share $ 14.46 $ 9.91 $ 16.81 $ 14.63 $ 12.44 $ 12.45 $ 11.94
------------- ----------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ----------- -----------
CLASS C SHARES:
Net Assets $ 63,025 $ 2,844 $ 168,070 $ 21,193 $ 28,094 $ 6,780 $ 43,601
Shares Issued and
Outstanding ($.001 par
value) (Authorized
2,625,000,000) 4,349 287 10,015 1,448 2,257 546 3,654
Net Asset Value and
Offering Price Per
Share $ 14.49 $ 9.90 $ 16.78 $ 14.64 $ 12.45 $ 12.43 $ 11.93
------------- ----------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ----------- -----------
Investments at Cost,
Including Foreign
Currency $ 123,918 $ 11,155 $ 428,959 $ 37,597 $ 92,940 $ 22,895 $ 153,270
------------- ----------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ----------- -----------

AGGRESSIVE U.S. HIGH
EQUITY REAL ESTATE YIELD
FUND FUND FUND
(000) (000) (000)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
ASSETS:
Investments in
Securities, at Value
(Note 1) -- See
accompanying
portfolios $ 11,120 $ 5,733 $ 10,715
Foreign Currency at
Value -- -- --
Cash -- -- 40
Receivable for:
Investments Sold 1,017 -- 87
Fund Shares Sold 141 182 10
Dividends 32 39 --
Interest -- -- 143
Foreign Withholding
Tax Reclaim -- -- --
Unrealized Gain on
Forward Foreign
Currency Contracts -- -- --
Deferred Organization
Costs 100 39 39
Receivable from
Investment Adviser 12 26 25
Securities, at Value,
Held as Collateral for
Securities Loaned -- -- --
Other -- -- --
------------- ------------- -------------
Total Assets 12,422 6,019 11,059
------------- ------------- -------------
LIABILITIES:
Payable for:
Investments Purchased 432 118 240
Fund Shares Redeemed -- -- --
Bank Overdraft 552 1 --
Dividends Declared 10 12 86
Investment Advisory
Fees -- -- --
Administrative Fees 3 1 2
Custody Fees 4 1 1
Professional Fees 20 26 26
Distribution Fees 13 6 12
Shareholder Reporting
Expenses 4 5 6
Directors' Fees and
Expenses -- -- --
Securities Sold Short 984 -- --
Filing and
Registration Fees 3 2 4
Deferred Country Tax -- -- --
Dividend Payable on
Securities Sold Short 7 -- --
Collateral on
Securities Loaned -- -- --
Other -- 39 38
------------- ------------- -------------
Total Liabilities 2,032 211 415
------------- ------------- -------------
NET ASSETS $ 10,390 $ 5,808 $ 10,644
------------- ------------- -------------
------------- ------------- -------------
NET ASSETS CONSIST OF:
Capital Stock at Par $ 1 $ -- $ 9
Paid in Capital in
Excess of Par 9,175 5,579 10,706
Undistributed
(Distribution in
excess of) Net
Investment Income -- 19 18
Accumulated
(Distribution in
excess of) Net
Realized Gain (Loss) 940 -- (3)
Unrealized Appreciation
(Depreciation) on
Investments and
Foreign Currency
Translations* 274 210 (86)
------------- ------------- -------------
NET ASSETS $ 10,390 $ 5,808 $ 10,644
------------- ------------- -------------
------------- ------------- -------------
CLASS A SHARES:
Net Assets $ 5,382 $ 1,829 $ 3,907
Shares Issued and
Outstanding ($.001 par
value) (Authorized
2,625,000,000) 374 146 328
Net Asset Value and
Redemption Price Per
Share $ 14.40 $ 12.52 $ 11.92
------------- ------------- -------------
------------- ------------- -------------
Maximum Sales Charge 4.75% 4.75% 4.75%
Maximum Offering Price
Per Share (Net Asset
Value Per Share x
100/95.25) $ 15.12 $ 13.14 $ 12.51
------------- ------------- -------------
------------- ------------- -------------
CLASS B SHARES:
Net Assets $ 2,426 $ 2,197 $ 3,421
Shares Issued and
Outstanding ($.001 par
value) (Authorized
2,625,000,000) 169 175 287
Net Asset Value and
Offering Price Per
Share $ 14.38 $ 12.52 $ 11.93
------------- ------------- -------------
------------- ------------- -------------
CLASS C SHARES:
Net Assets $ 2,582 $ 1,782 $ 3,316
Shares Issued and
Outstanding ($.001 par
value) (Authorized
2,625,000,000) 180 142 278
Net Asset Value and
Offering Price Per
Share $ 14.37 $ 12.52 $ 11.93
------------- ------------- -------------
------------- ------------- -------------
Investments at Cost,
Including Foreign
Currency $ 10,769 $ 5,523 $ 10,801
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

- ------------
* Net of accrual for Country tax of U.S. $1,000 for Global Equity Allocation
Fund, $157,000 for Asian Growth Fund and $34,000 for Emerging Markets Fund.

62 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF OPERATIONS

- -------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL ASIAN AMERICAN WORLDWIDE LATIN
GLOBAL EQUITY FIXED GROWTH VALUE HIGH AMERICAN
ALLOCATION INCOME FUND FUND FUND INCOME FUND FUND
FUND YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
YEAR ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
JUNE 30, 1996 1996 1996 1996 1996 1996
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 2,529 $ -- $ 6,265 $ 1,339 $ -- $ 484
Interest 201 1,058 798 122 9,661 125
Less Foreign Taxes Withheld (165) (3) (570) -- -- (29)
------------- ----------- ----------- ----------- ----------- -----------
Total Income 2,565 1,055 6,493 1,461 9,661 580
------------- ----------- ----------- ----------- ----------- -----------
EXPENSES:
Investment Advisory Fees
Basic Fee 1,048 122 3,762 364 527 219
Less: Fees Waived (371) (112) -- (134) (97) (206)
------------- ----------- ----------- ----------- ----------- -----------
Investment Advisory Fees -- Net 677 10 3,762 230 430 13
Administrative Fees 390 57 1,115 135 213 70
Custodian Fees 217 20 631 20 58 120
Filing and Registration Fees 15 2 48 3 23 5
Directors' Fees and Expenses 6 2 19 3 4 2
Professional Fees 72 42 136 35 70 46
Shareholder Reports 80 15 308 53 60 18
Dividend Expense on Securities Sold
Short -- -- -- -- -- --
Distribution Fees
Class A 126 26 516 57 90 28
Class B 47 3 194 14 112 6
Class C 496 56 1,505 187 231 55
Amortization of Organizational Costs 23 22 14 20 19 18
Blue Sky Fees
Class A 11 12 14 14 14 11
Class B 1 -- 2 1 4 1
Class C 11 6 10 12 9 5
Country Tax Expense -- -- -- -- -- 8
Other 29 10 63 11 20 11
Expenses Reimbursed by Adviser -- -- -- -- -- --
------------- ----------- ----------- ----------- ----------- -----------
Net Expenses 2,201 283 8,337 795 1,357 417
------------- ----------- ----------- ----------- ----------- -----------
Net Investment Income (Loss) 364 772 (1,844) 666 8,304 163
------------- ----------- ----------- ----------- ----------- -----------
NET REALIZED GAIN (LOSS) ON:
Investments 5,761 400 5,503 2,783 3,822 765
Securities Sold Short -- -- -- -- -- --
Foreign Currency Translations 5,888 89 (139) -- 238 (13)
------------- ----------- ----------- ----------- ----------- -----------
Net Realized Gain (Loss) 11,649 489 5,364 2,783 4,060 752
------------- ----------- ----------- ----------- ----------- -----------
CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION ON:
Investments 8,929 (481) 9,619 3,203 (627) 5,112
Foreign Currency Translations 849 (32) (154) -- (10) --
------------- ----------- ----------- ----------- ----------- -----------
Change in Unrealized
Appreciation/Depreciation 9,778 (513) 9,465 3,203 (637) 5,112
------------- ----------- ----------- ----------- ----------- -----------
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation 21,427 (24) 14,829 5,986 3,423 5,864
------------- ----------- ----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 21,791 $ 748 $ 12,985 $ 6,652 $ 11,727 $ 6,027
------------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- -----------

<CAPTION>
EMERGING AGGRESSIVE U.S. REAL HIGH YIELD
MARKETS EQUITY FUND ESTATE FUND FUND
FUND JANUARY 2, MAY 1, MAY 1,
YEAR ENDED 1996* 1996* TO 1996* TO
JUNE 30, TO JUNE 30, JUNE 30, JUNE 30,
1996 1996 1996 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 2,100 $ 87 $ 39 $ --
Interest 632 24 12 141
Less Foreign Taxes Withheld (132) -- -- --
----------- ----------- ----- -----
Total Income 2,600 111 51 141
----------- ----------- ----- -----
EXPENSES:
Investment Advisory Fees
Basic Fee 1,082 31 9 13
Less: Fees Waived (355) (31) (9) (13)
----------- ----------- ----- -----
Investment Advisory Fees -- Net 727 -- -- --
Administrative Fees 274 11 3 5
Custodian Fees 359 7 1 1
Filing and Registration Fees 37 3 2 4
Directors' Fees and Expenses 41 -- -- --
Professional Fees 79 21 26 27
Shareholder Reports 69 5 5 6
Dividend Expense on Securities Sold
Short -- 11 -- --
Distribution Fees
Class A 131 4 1 2
Class B 35 10 3 5
Class C 309 10 3 5
Amortization of Organizational Costs 18 -- 1 1
Blue Sky Fees
Class A 13 3 -- --
Class B 1 1 -- --
Class C 7 2 -- --
Country Tax Expense 14 -- -- --
Other 21 6 -- --
Expenses Reimbursed by Adviser -- (10) (26) (25)
----------- ----------- ----- -----
Net Expenses 2,135 84 19 31
----------- ----------- ----- -----
Net Investment Income (Loss) 465 27 32 110
----------- ----------- ----- -----
NET REALIZED GAIN (LOSS) ON:
Investments (427) 876 -- (3)
Securities Sold Short -- 67 -- --
Foreign Currency Translations (91) -- -- --
----------- ----------- ----- -----
Net Realized Gain (Loss) (518) 943 -- (3)
----------- ----------- ----- -----
CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION ON:
Investments 14,569 274 210 (86)
Foreign Currency Translations (37) -- -- --
----------- ----------- ----- -----
Change in Unrealized
Appreciation/Depreciation 14,532 274 210 (86)
----------- ----------- ----- -----
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation 14,014 1,217 210 (89)
----------- ----------- ----- -----
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 14,479 $ 1,244 $ 242 $ 21
----------- ----------- ----- -----
----------- ----------- ----- -----
</TABLE>

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

The accompanying notes are an integral part of the financial statements. 63
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS

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

GLOBAL EQUITY ALLOCATION FUND

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 364 $ 487
Net Realized Gain 11,649 137
Change in Unrealized Appreciation/Depreciation 9,778 3,795
------------- --------
Net Increase in Net Assets from Operations 21,791 4,419
------------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A (1,295) --
Class B (69)
Class C (1,106) --
In Excess of Net Investment Income:
Class A -- (168)
Class C -- (82)
------------- --------
(2,470) (250)
------------- --------
Net Realized Gains:
Class A (1,591) (427)
Class B (96) --
Class C (1,624) (407)
------------- --------
(3,311) (834)
------------- --------
Net Decrease in Net Assets Resulting from Distributions (5,781) (1,084)
------------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 58,409 32,645
Distributions Reinvested 5,268 996
Redeemed (21,216) (17,247)
------------- --------
Net Increase in Net Assets Resulting from Capital Share Transactions 42,461 16,394
------------- --------
Total Increase in Net Assets 58,471 19,729
NET ASSETS -- Beginning of Year 83,046 63,317
------------- --------
NET ASSETS -- End of Year (Including distributions in excess of net investment income of
$2,710 and $990, respectively) $ 141,517 $ 83,046
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Subscribed 1,702 1,341
Distributions Reinvested 197 45
Redeemed (960) (794)
------------- --------
Net Increase in Class A Shares Outstanding 939 592
------------- --------
------------- --------
Dollars:
Subscribed $ 23,872 $ 16,461
Distributions Reinvested 2,639 546
Redeemed (13,331) (9,697)
------------- --------
Net Increase $ 13,180 $ 7,310
------------- --------
------------- --------
Class B+:
--------
Shares:
Subscribed 1,017 --
Distributions Reinvested 12 --
Redeemed (7) --
------------- --------
Net Increase in Class B Shares Outstanding 1,022 --
------------- --------
------------- --------
Dollars:
Subscribed $ 14,112 $ --
Distributions Reinvested 158 --
Redeemed (100) --
------------- --------
Net Increase $ 14,170 $ --
------------- --------
------------- --------
Class C:
--------
Shares:
Subscribed 1,482 1,329
Distributions Reinvested 186 38
Redeemed (575) (623)
------------- --------
Net Increase in Class C Shares Outstanding 1,093 744
------------- --------
------------- --------
Dollars:
Subscribed $ 20,425 $ 16,184
Distributions Reinvested 2,471 450
Redeemed (7,785) (7,550)
------------- --------
Net Increase $ 15,111 $ 9,084
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

+ The Fund began offering Class B shares on August 1, 1995.

64 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS

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

GLOBAL FIXED INCOME FUND

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 772 $ 869
Net Realized Gain (Loss) 489 (435)
Change in Unrealized Appreciation /Depreciation (513) 1,228
------------- --------
Net Increase in Net Assets Resulting from Operations 748 1,662
------------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A (771) (369)
Class B (21) --
Class C (399) (173)
In Excess of Net Investment Income:
Class A (23) --
Class B (1) --
Class C (12) --
------------- --------
Net Decrease in Net Assets Resulting from Distributions (1,227) (542)
------------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 8,720 8,903
Distributions Reinvested 676 328
Redeemed (14,258) (9,070)
------------- --------
Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions (4,862) 161
------------- --------
Total Increase (Decrease) in Net Assets (5,341) 1,281
NET ASSETS -- Beginning of Year 17,057 15,776
------------- --------
NET ASSETS -- End of Year (Including undistributed (distributions in excess of) net
investment income of $(36) and $330, respectively) $ 11,716 $ 17,057
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Subscribed 589 682
Distributions Reinvested 50 27
Redeemed (975) (712)
------------- --------
Net Decrease in Class A Shares Outstanding (336) (3)
------------- --------
------------- --------
Dollars:
Subscribed $ 5,929 $ 6,628
Distributions Reinvested 507 258
Redeemed (9,791) (6,878)
------------- --------
Net Increase (Decrease) $ (3,355) $ 8
------------- --------
------------- --------
Class B+:
--------
Shares:
Subscribed 150 --
Distributions Reinvested 1 --
Redeemed (6) --
------------- --------
Net Increase in Class B Shares Outstanding 145 --
------------- --------
------------- --------
Dollars:
Subscribed $ 1,496 $ --
Distributions Reinvested 14 --
Redeemed (63) --
------------- --------
Net Increase $ 1,447 $ --
------------- --------
------------- --------
Class C:
--------
Shares:
Subscribed 130 239
Distributions Reinvested 15 7
Redeemed (443) (228)
------------- --------
Net Increase (Decrease) in Class C Shares Outstanding (298) 18
------------- --------
------------- --------
Dollars:
Subscribed $ 1,295 $ 2,275
Distributions Reinvested 155 70
Redeemed (4,404) (2,192)
------------- --------
Net Increase (Decrease) $ (2,954) $ 153
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

+ The Fund began offering Class B shares on August 1, 1995.

The accompanying notes are an integral part of the financial statements. 65
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS

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

ASIAN GROWTH FUND

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Loss $ (1,844) $ (944)
Net Realized Gain 5,364 5,252
Change in Unrealized Appreciation/Depreciation 9,465 19,182
------------- -----------------
Net Increase in Net Assets Resulting from Operations 12,985 23,490
------------- -----------------
DISTRIBUTIONS:
Net Realized Gain:
Class A -- (4,935)
Class C -- (4,055)
In Excess of Net Realized Gain
Class A -- (241)
Class C -- (198)
------------- -----------------
Net Decrease in Net Assets Resulting From Distributions -- (9,429)
------------- -----------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 241,482 109,249
Distributions Reinvested -- 8,260
Redeemed (103,699) (68,507)
------------- -----------------
Net Increase in Net Assets Resulting from Capital Share Transactions 137,783 49,002
------------- -----------------
Total Increase in Net Assets 150,768 63,063
NET ASSETS -- Beginning of Year 318,164 255,101
------------- -----------------
NET ASSETS -- End of Year $ 468,932 $ 318,164
------------- -----------------
------------- -----------------
- -----------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Subscribed 7,522 3,855
Distributions Reinvested -- 299
Redeemed (3,936) (2,192)
------------- -----------------
Net Increase in Class A Shares Outstanding 3,586 1,962
------------- -----------------
------------- -----------------
Dollars:
Subscribed $ 127,388 $ 62,609
Distributions Reinvested -- 4,563
Redeemed (65,894) (35,024)
------------- -----------------
Net Increase $ 61,494 $ 32,148
------------- -----------------
------------- -----------------
Class B+:
--------
Shares:
Subscribed 3,225 --
Redeemed (81) --
------------- -----------------
Net Increase in Class B Shares Outstanding 3,144 --
------------- -----------------
------------- -----------------
Dollars:
Subscribed $ 54,005 $ --
Redeemed (1,375) --
------------- -----------------
Net Increase $ 52,630 $ --
------------- -----------------
------------- -----------------
Class C:
--------
Shares:
Subscribed 3,629 2,904
Distributions Reinvested -- 245
Redeemed (2,229) (2,123)
------------- -----------------
Net Increase in Class C Shares Outstanding 1,400 1,026
------------- -----------------
------------- -----------------
Dollars:
Subscribed $ 60,089 $ 46,640
Distributions Reinvested -- 3,697
Redeemed (36,430) (33,483)
------------- -----------------
Net Increase $ 23,659 $ 16,854
------------- -----------------
------------- -----------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

+ The Fund began offering Class B shares on August 1, 1995.

66 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS

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

AMERICAN VALUE FUND

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 666 $ 474
Net Realized Gain 2,783 362
Change in Unrealized Appreciation /Depreciation 3,203 2,637
------------- --------
Net Increase in Net Assets Resulting from Operations 6,652 3,473
------------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A (443) (350)
Class B (17) --
Class C (209) (143)
In Excess of Net Investment Income:
Class A (12) --
Class B (1) --
Class C (10) --
------------- --------
(692) (493)
------------- --------
Net Realized Gain:
Class A (331) (260)
Class B (20) --
Class C (252) (167)
------------- --------
(603) (427)
------------- --------
Net Decrease in Net Assets Resulting from Distributions (1,295) (920)
------------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 18,813 15,936
Distributions Reinvested 900 472
Redeemed (16,260) (2,373)
------------- --------
Net Increase in Net Assets Resulting from Capital Share Transactions 3,453 14,035
------------- --------
Total Increase in Net Assets 8,810 16,588
NET ASSETS -- Beginning of Year 34,542 17,954
------------- --------
NET ASSETS -- End of Year (Including undistributed (distributions in excess of) net
investment income of $(23) and $13, respectively) $ 43,352 $ 34,542
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Subscribed 515 794
Distributions Reinvested 42 29
Redeemed (816) (135)
------------- --------
Net Increase (Decrease) in Class A Shares Outstanding (259) 688
------------- --------
------------- --------
Dollars:
Subscribed $ 7,053 $ 9,738
Distributions Reinvested 573 351
Redeemed (11,471) (1,647)
------------- --------
Net Increase (Decrease) $ (3,845) $ 8,442
------------- --------
------------- --------
Class B+:
--------
Shares:
Subscribed 174 --
Distributions Reinvested 3 --
Redeemed (7) --
------------- --------
Net Increase in Class B Shares Outstanding 170 --
------------- --------
------------- --------
Dollars:
Subscribed $ 2,376 $ --
Distributions Reinvested 36 --
Redeemed (93) --
------------- --------
Net Increase $ 2,319 $ --
------------- --------
------------- --------
Class C:
--------
Shares:
Subscribed 685 506
Distributions Reinvested 21 11
Redeemed (334) (60)
------------- --------
Net Increase in Class C Shares Outstanding 372 457
------------- --------
------------- --------
Dollars:
Subscribed $ 9,384 $ 6,198
Distributions Reinvested 291 121
Redeemed (4,696) (726)
------------- --------
Net Increase $ 4,979 $ 5,593
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

+ The Fund began offering Class B shares on August 1, 1995.

The accompanying notes are an integral part of the financial statements. 67
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS

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

WORLDWIDE HIGH INCOME FUND

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,304 $ 2,264
Net Realized Gain (Loss) 4,060 (470)
Change in Unrealized Appreciation /Depreciation (637) 82
------------- --------
Net Increase in Net Assets Resulting from Operations 11,727 1,876
------------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A (3,806) (1,262)
Class B (1,176) --
Class C (2,325) (906)
------------- --------
(7,307) (2,168)
------------- --------
Net Realized Gain:
Class A -- (104)
Class C -- (97)
------------- --------
-- (201)
------------- --------
Net Decrease in Net Assets Resulting from Distributions (7,307) (2,369)
------------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 103,978 21,132
Distributions Reinvested 3,981 918
Redeemed (43,317) (7,796)
------------- --------
Net Increase in Net Assets Resulting from Capital Share Transactions 64,642 14,254
------------- --------
Total Increase in Net Assets 69,062 13,761
NET ASSETS -- Beginning of Year 26,699 12,938
------------- --------
NET ASSETS -- End of Year (Including undistributed net investment income of $1,157 and
$165, respectively) $ 95,761 $ 26,699
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Subscribed 4,713 1,277
Distributions Reinvested 190 51
Redeemed (2,858) (611)
------------- --------
Net Increase in Class A Shares Outstanding 2,045 717
------------- --------
------------- --------
Dollars:
Subscribed $ 56,635 $ 14,466
Distributions Reinvested 2,294 542
Redeemed (34,479) (6,987)
------------- --------
Net Increase $ 24,450 $ 8,021
------------- --------
------------- --------
Class B+:
--------
Shares:
Subscribed 2,125 --
Distributions Reinvested 44 --
Redeemed (65) --
------------- --------
Net Increase in Class B Shares Outstanding 2,104 --
------------- --------
------------- --------
Dollars:
Subscribed $ 25,745 $ --
Distributions Reinvested 538 --
Redeemed (797) --
------------- --------
Net Increase $ 25,486 $ --
------------- --------
------------- --------
Class C:
--------
Shares:
Subscribed 1,792 564
Distributions Reinvested 95 35
Redeemed (656) (73)
------------- --------
Net Increase in Class C Shares Outstanding 1,231 526
------------- --------
------------- --------
Dollars:
Subscribed $ 21,598 $ 6,666
Distributions Reinvested 1,149 376
Redeemed (8,041) (809)
------------- --------
Net Increase $ 14,706 $ 6,233
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

+ The Fund began offering Class B shares on August 1, 1995.

68 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS

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

LATIN AMERICAN FUND

<TABLE>
<CAPTION>
YEAR ENDED JULY 6, 1994* TO
JUNE 30, 1996 JUNE 30, 1995
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 163 $ (58)
Net Realized Gain (Loss) 752 (2,340)
Change in Unrealized Appreciation/Depreciation 5,112 (1,446)
------------- --------
Net Increase (Decrease) in Net Assets Resulting from Operations 6,027 (3,844)
------------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A (18) --
Paid in Capital:
Class A -- (124)
Class C -- (50)
------------- --------
Net Decrease in Net Assets Resulting from Distributions (18) (174)
------------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 19,885 21,076
Distributions Reinvested 15 135
Redeemed (10,130) (5,450)
------------- --------
Net Increase in Net Assets Resulitng from Capital Share Transactions 9,770 15,761
------------- --------
Total Increase in Net Assets 15,779 11,743
NET ASSETS-- Beginning of Period 11,743 --
------------- --------
NET ASSETS -- End of Period (Including undistributed net investment income of $132 and $0,
respectively) $ 27,522 $ 11,743
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Subscribed 1,373 1,235
Distributions Reinvested 1 9
Redeemed (737) (400)
------------- --------
Net Increase in Class A Shares Outstanding 637 844
------------- --------
------------- --------
Dollars:
Subscribed $ 14,772 $ 14,271
Distributions Reinvested 15 103
Redeemed (7,673) (3,781)
------------- --------
Net Increase $ 7,114 $ 10,593
------------- --------
------------- --------
Class B+:
--------
Shares:
Subscribed 169 --
Redeemed (5) --
------------- --------
Net Increase in Class B Shares Outstanding 164 --
------------- --------
------------- --------
Dollars:
Subscribed $ 1,858 $ --
Redeemed (52) --
------------- --------
Net Increase $ 1,806 $ --
------------- --------
------------- --------
Class C:
--------
Shares:
Subscribed 316 613
Distributions Reinvested -- 3
Redeemed (224) (162)
------------- --------
Net Increase in Class C Shares Outstanding 92 454
------------- --------
------------- --------
Dollars:
Subscribed $ 3,255 $ 6,805
Distributions Reinvested -- 32
Redeemed (2,405) (1,669)
------------- --------
Net Increase $ 850 $ 5,168
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations
+ The Fund began offering Class B shares on August 1, 1995.

The accompanying notes are an integral part of the financial statements. 69
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS

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

EMERGING MARKETS FUND

<TABLE>
<CAPTION>
YEAR ENDED JULY 6, 1994* TO
JUNE 30, 1996 JUNE 30, 1995
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 465 $ 119
Net Realized Loss (518) (1,064)
Change in Unrealized Appreciation/Depreciation 14,532 (1,682)
------------- --------
Net Increase (Decrease) in Net Assets Resulting from Operations 14,479 (2,627)
------------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A (142) --
------------- --------
In Excess of Net Realized Gain:
Class A (3) --
Class C (2) --
------------- --------
Net Decrease in Net Assets Resulting from Distributions (5) --
------------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 141,283 57,700
Distributions Reinvested 133 --
Redeemed (35,217) (6,737)
------------- --------
Net Increase in Net Assets Resulting from Capital Share Transactions 106,199 50,963
------------- --------
Total Increase in Net Assets 120,531 48,336
NET ASSETS -- Beginning of Period 48,336 --
------------- --------
NET ASSETS -- End of Period (Including undistributed net investment income of $306 and $94,
respectively.) $ 168,867 $ 48,336
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Subscribed 9,551 2,800
Distributions Reinvested 13 --
Redeemed (2,502) (341)
------------- --------
Net Increase in Class A Shares Outstanding 7,062 2,459
------------- --------
------------- --------
Dollars:
Subscribed $ 106,764 $ 31,244
Distributions Reinvested 131 --
Redeemed (27,528) (3,679)
------------- --------
Net Increase $ 79,367 $ 27,565
------------- --------
------------- --------
Class B+:
--------
Shares:
Subscribed 883 --
Redeemed (10) --
------------- --------
Net Increase in Class B Shares Outstanding 873 --
------------- --------
------------- --------
Dollars:
Subscribed $ 9,848 $ --
Redeemed (116) --
------------- --------
Net Increase $ 9,732 $ --
------------- --------
------------- --------
Class C:
--------
Shares:
Subscribed 2,245 2,392
Distributions Reinvested -- --
Redeemed (703) (280)
------------- --------
Net Increase in Class C Shares Outstanding 1,542 2,112
------------- --------
------------- --------
Dollars:
Subscribed $ 24,671 $ 26,456
Distributions Reinvested 2 --
Redeemed (7,573) (3,058)
------------- --------
Net Increase $ 17,100 $ 23,398
------------- --------
------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations
+ The Fund began offering Class B shares on August 1, 1995.

70 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS

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

AGGRESSIVE EQUITY FUND

<TABLE>
<CAPTION>
JANUARY 2,
1996* TO
JUNE 30, 1996
(000)
<S> <C>
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 27
Net Realized Gain 943
Change in Unrealized Appreciation/Depreciation 274
-------------
Net Increase in Net Assets from Operations 1,244
-------------
DISTRIBUTIONS:
Net Investment Income:
Class A (17)
Class B (6)
Class C (7)
-------------
Net Decrease in Net Assets Resulting from Distributions (30)
-------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 9,793
Distributions Reinvested 10
Redeemed (627)
-------------
Net Increase in Net Assets Resulting from Capital Share Transactions 9,176
-------------
Total Increase in Net Assets 10,390
NET ASSETS -- Beginning of Period --
-------------
NET ASSETS -- End of Period $ 10,390
-------------
-------------
- ----------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Subscribed 410
Distributions Reinvested 1
Redeemed (37)
-------------
Net Increase in Class A Shares Outstanding 374
-------------
-------------
Dollars:
Subscribed $ 5,351
Distributions Reinvested 9
Redeemed (479)
-------------
Net Increase $ 4,881
-------------
-------------
Class B:
--------
Shares:
Subscribed 170
Redeemed (1)
-------------
Net Increase in Class B Shares Outstanding 169
-------------
-------------
Dollars:
Subscribed $ 2,086
Redeemed (11)
-------------
Net Increase $ 2,075
-------------
-------------
Class C:
--------
Shares:
Subscribed 190
Distributions Reinvested --
Redeemed (10)
-------------
Net Increase in Class C Shares Outstanding 180
-------------
-------------
Dollars:
Subscribed $ 2,356
Distributions Reinvested 1
Redeemed (137)
-------------
Net Increase $ 2,220
-------------
-------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations

The accompanying notes are an integral part of the financial statements. 71
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS

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

U.S. REAL ESTATE FUND

<TABLE>
<CAPTION>
MAY 1, 1996*
TO
JUNE 30, 1996
(000)
<S> <C>
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 32
Change in Unrealized Appreciation /Depreciation 210
------
Net Increase in Net Assets Resulting from Operations 242
------
DISTRIBUTIONS:
Net Investment Income:
Class A (5)
Class B (4)
Class C (4)
------
Net Decrease in Net Assets Resulting from Distributions (13)
------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 5,578
Distributions Reinvested 1
------
Net Increase in Net Assets Resulting from Capital Share Transactions 5,579
------
Total Increase in Net Assets 5,808
NET ASSETS -- Beginning of Period --
------
NET ASSETS -- End of Period (Including undistributed net investment income of $19) $ 5,808
------
------
- ----------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Subscribed 146
Distributions Reinvested --
------
Net Increase in Class A Shares Outstanding 146
------
------
Dollars:
Subscribed $ 1,753
Distributions Reinvested 1
------
Net Increase $ 1,754
------
------
Class B:
--------
Shares:
Subscribed 175
------
Net Increase in Class B Shares Outstanding 175
------
------
Dollars:
Subscribed $ 2,116
------
Net Increase $ 2,116
------
------
Class C:
--------
Shares:
Subscribed 142
------
Net Increase in Class C Shares Outstanding 142
------
------
Dollars:
Subscribed $ 1,709
------
Net Increase $ 1,709
------
------
- ----------------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations

72 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS

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

HIGH YIELD FUND

<TABLE>
<CAPTION>
MAY 1, 1996*
TO
JUNE 30, 1996
(000)
<S> <C>
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 110
Net Realized Loss (3)
Change in Unrealized Appreciation /Depreciation (86)
-------------
Net Increase in Net Assets Resulting from Operations 21
-------------
DISTRIBUTIONS:
Net Investment Income:
Class A (38)
Class B (27)
Class C (27)
-------------
Net Decrease in Net Assets Resulting from Distributions (92)
-------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 10,709
Distributions Reinvested 6
-------------
Net Increase in Net Assets Resulting from Capital Share Transactions 10,715
-------------
Total Increase in Net Assets 10,644
NET ASSETS -- Beginning of Period --
-------------
NET ASSETS -- End of Period (Including undistributed net investment income of $18) $ 10,644
-------------
-------------
- ----------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Subscribed 327
Distributions Reinvested --
-------------
Net Increase in Class A Shares Outstanding 327
-------------
-------------
Dollars:
Subscribed $ 3,930
Distributions Reinvested 5
-------------
Net Increase $ 3,935
-------------
-------------
Class B:
--------
Shares:
Subscribed 287
Distributions Reinvested --
-------------
Net Increase in Class B Shares Outstanding 287
-------------
-------------
Dollars:
Subscribed $ 3,443
Distributions Reinvested 1
-------------
Net Increase $ 3,444
-------------
-------------
Class C:
--------
Shares:
Subscribed 278
-------------
Net Increase in Class C Shares Outstanding 278
-------------
-------------
Dollars:
Subscribed $ 3,336
-------------
Net Increase $ 3,336
-------------
-------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations

The accompanying notes are an integral part of the financial statements. 73
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
GLOBAL EQUITY ALLOCATION FUND

<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------- -----------
JANUARY 4, AUGUST 1,
YEAR ENDED YEAR ENDED YEAR ENDED 1993* 1995+ TO
SELECTED PER SHARE DATA JUNE 30, JUNE 30, JUNE 30, TO JUNE 30, JUNE 30,
AND RATIOS 1996 1995 1994 1993 1996
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.60 $ 11.99 $ 11.09 $ 10.00 $ 13.01
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.19 0.12 0.10 0.04 0.30
Net Realized and
Unrealized Gain 2.82 0.67 0.90 1.05 1.98
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations 3.01 0.79 1.00 1.09 2.28
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.39) -- (0.03) -- (0.35)
In Excess of Net
Investment Income -- (0.05) -- -- --
Net Realized Gain (0.47) (0.13) (0.07) -- (0.48)
----------- ----------- ----------- ----------- -----------
Total Distributions (0.86) (0.18) (0.10) -- (0.83)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 14.75 $ 12.60 $ 11.99 $ 11.09 $ 14.46
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (1) 24.62% 6.69% 9.02% 10.90% 18.08%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 63,706 $ 42,586 $ 33,425 $ 10,434 $ 14,786
Ratio of Expenses to
Average Net Assets 1.70% 1.70% 1.70% 1.70%** 2.45%**
Ratio of Net Investment
Income to Average Net
Assets 0.71% 1.01% 0.98% 1.04%** 0.45%**
Portfolio Turnover Rate 44% 39% 30% 14% 44%
- ----------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Income $ 0.10 $ 0.04 $ 0.09 $ 0.08 $ 0.22
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.06% 2.03% 2.58% 3.65%** 2.81%**
Net Investment Income
(Loss) to Average Net
Assets 0.35% 0.68% 0.10% (0.91)%** 0.09%**
- ----------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------
JANUARY 4,
YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1996 1995 1994 1993
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.43 $ 11.90 $ 11.05 $ 10.00
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.12 0.04 0.06 0.01
Net Realized and
Unrealized Gain 2.75 0.65 0.86 1.04
----------- ----------- ----------- -----------
Total From Investment
Operations 2.87 0.69 0.92 1.05
----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.33) -- -- --
In Excess of Net
Investment Income -- (0.03) -- --
Net Realized Gain (0.48) (0.13) (0.07) --
----------- ----------- ----------- -----------
Total Distributions (0.81) (0.16) (0.07) --
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 14.49 $ 12.43 $ 11.90 $ 11.05
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TOTAL RETURN (1) 23.65% 5.84% 8.34% 10.50%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 63,025 $ 40,460 $ 29,892 $ 6,995
Ratio of Expenses to
Average Net Assets 2.45% 2.45% 2.45% 2.45%**
Ratio of Net Investment
Income to Average Net
Assets (0.04)% 0.25% 0.23% 0.29%**
Portfolio Turnover Rate 44% 39% 30% 14%
- --------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Income $ 1.16 $ 0.05 $ 0.12 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.81% 2.78% 3.34% 4.40%**
Net Investment Income
(Loss) to Average Net
Assets (0.40)% (0.08)% (0.66)% (1.66)%**
- --------------------------------------------------------------------------------
</TABLE>

* Commencement of operations

**Annualized

+ The Fund began offering Class B shares on August 1, 1995.

(1)Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.

74 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS

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

GLOBAL FIXED INCOME FUND

<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------- -----------
JANUARY 4, AUGUST 1,
YEAR ENDED YEAR ENDED YEAR ENDED 1993* 1995+ TO
SELECTED PER SHARE DATA JUNE 30, JUNE 30, JUNE 30, TO JUNE 30, JUNE 30,
AND RATIOS 1996 1995 1994 1993 1996
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.23 $ 9.53 $ 10.55 $ 10.00 $ 10.24
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.53 0.56 0.52 0.25 0.64
Net Realized and
Unrealized Gain (Loss) (0.01) 0.50 (0.42) 0.55 (0.26)
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations 0.52 1.06 0.10 0.80 0.38
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.79) (0.36) (0.50) (0.25) (0.69)
In Excess of Net
Investment Income (0.02) -- (0.12) -- (0.02)
Net Realized Gains -- -- (0.47) -- --
In Excess of Realized
Gains -- -- (0.03) -- --
----------- ----------- ----------- ----------- -----------
Total Distributions (0.81) (0.36) (1.12) (0.25) (0.71)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 9.94 $ 10.23 $ 9.53 $ 10.55 $ 9.91
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (1) 5.20% 11.41% 0.41% 8.02% 3.76%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 7,432 $ 11,092 $ 10,369 $ 6,633 $ 1,440
Ratio of Expenses to
Average Net Assets 1.45% 1.45% 1.45% 1.45%** 2.20%**
Ratio of Net Investment
Income to Average Net
Assets 5.02% 5.84% 4.70% 5.00%** 3.38%**
Portfolio Turnover Rate 223% 169% 168% 55% 223%
- ----------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Income $ 0.07 $ 0.07 $ 0.11 $ 0.07 $ 0.12
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.16% 2.22% 2.48% 2.88%** 3.57%**
Net Investment Income
to Average Net Assets 4.31% 5.07% 3.67% 3.57%** 2.01%**

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

<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------
JANUARY 4,
YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1996 1995 1994 1993
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.20 $ 9.54 $ 10.56 $ 10.00
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.37 0.49 0.43 0.21
Net Realized and
Unrealized Gain (Loss) 0.08 0.47 (0.40) 0.55
----------- ----------- ----------- -----------
Total From Investment
Operations 0.45 0.96 0.03 0.76
----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.73) (0.30) (0.44) (0.20)
In Excess of Net
Investment Income (0.02) -- (0.11) --
Net Realized Gains -- -- (0.47) --
In Excess of Realized
Gains -- -- (0.03) --
----------- ----------- ----------- -----------
Total Distributions (0.75) (0.30) (1.05) (0.20)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 9.90 $ 10.20 $ 9.54 $ 10.56
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TOTAL RETURN (1) 4.47% 10.24% (0.25)% 7.61%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 2,844 $ 5,965 $ 5,407 $ 6,120
Ratio of Expenses to
Average Net Assets 2.20% 2.20% 2.20% 2.20%**
Ratio of Net Investment
Income to Average Net
Assets 4.35% 5.09% 3.95% 4.25%**
Portfolio Turnover Rate 223% 169% 168% 55%
- --------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Income $ 0.06 $ 0.08 $ 0.12 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.87% 2.97% 3.29% 3.63%**
Net Investment Income
to Average Net Assets 3.68% 4.32% 2.86% 2.82%**

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

* Commencement of operations

**Annualized

+ The Fund began offering Class B shares on August 1, 1995.

(1)Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.

The accompanying notes are an integral part of the financial statements. 75
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS

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

ASIAN GROWTH FUND

<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------- -----------
JUNE 23, AUGUST 1,
YEAR ENDED YEAR ENDED YEAR ENDED 1993* 1995+ TO
SELECTED PER SHARE DATA JUNE 30, JUNE 30, JUNE 30, TO JUNE 30, JUNE 30,
AND RATIOS 1996 1995 1994 1993 1996
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.42 $ 15.50 $ 12.00 $ 12.00 $ 16.51
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.04) -- (0.03) -- (0.03)
Net Realized and
Unrealized Gain 0.77 1.43 3.53 -- 0.33
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations 0.73 1.43 3.50 -- 0.30
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Realized Gain -- (0.49) -- -- --
In Excess of Net
Realized Gain -- (0.02) -- -- --
----------- ----------- ----------- ----------- -----------
Total Distributions -- (0.51) -- -- --
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 17.15 $ 16.42 $ 15.50 $ 12.00 $ 16.81
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (1) 4.45% 9.50% 29.17% 0.00% 1.82%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 248,009 $ 178,667 $ 138,212 $ 11,770 $ 52,853
Ratio of Expenses to
Average Net Assets 1.88% 1.90% 1.90% 1.90%** 2.61%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.16)% 0.04% (0.24)% (0.81)%** (0.52%)**
Portfolio Turnover Rate 38% 34% 34% 0% 38%
- ----------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Loss -- -- $ 0.03 $ 0.01 --
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.88% 1.90% 2.17% 11.83%** 2.61%**
Net Investment Income
(Loss) to Average Net
Assets (0.16)% 0.04% (0.51)% (10.74)%** (0.52)%**

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

<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------
JUNE 23,
YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1996 1995 1994 1993
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.19 $ 15.40 $ 12.00 $ 12.00
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.13) (0.12) (0.10) --
Net Realized and
Unrealized Gain 0.72 1.42 3.50 --
----------- ----------- ----------- -----------
Total From Investment
Operations 0.59 1.30 3.40 --
----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Realized Gain -- (0.49) -- --
In Excess of Net
Realized Gain -- (0.02) -- --
----------- ----------- ----------- -----------
Total Distributions -- (0.51) -- --
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 16.78 $ 16.19 $ 15.40 $ 12.00
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TOTAL RETURN (1) 3.64% 8.71% 28.33% 0.00%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 168,070 $ 139,497 $ 116,889 $ 8,491
Ratio of Expenses to
Average Net Assets 2.63% 2.63% 2.65% 2.65%**
Ratio of Net Investment
Income (Loss) to Average
Net Assets (0.94)% (0.77)% (0.99)% (1.56)%**
Portfolio Turnover Rate 38% 34% 34% 0%
- --------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Loss -- -- $ 0.03 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.63% 2.65% 2.92% 12.64%**
Net Investment Income
(Loss) to Average Net
Assets (0.94)% (0.77)% (1.26)% (11.55)%**

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

* Commencement of operations

**Annualized

+ The Fund began offering Class B shares on August 1, 1995.

(1)Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.

76 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS

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

AMERICAN VALUE FUND

<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------- -----------
OCTOBER 18, AUGUST 1,
YEAR ENDED YEAR ENDED 1993* 1995+ TO
SELECTED PER SHARE DATA JUNE 30, JUNE 30, TO JUNE 30, JUNE 30,
AND RATIOS 1996 1995 1994 1996
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.89 $ 11.70 $ 12.00 $ 13.37
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.27 0.27 0.17 0.15
Net Realized and
Unrealized Gain (Loss) 1.94 1.44 (0.30) 1.46
----------- ----------- ----------- -----------
Total from Investment
Operations 2.21 1.71 (0.13) 1.61
----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.27) (0.28) (0.17) (0.15)
In Excess of Net
Investment Income (0.01) -- -- (0.01)
Net Realized Gains (0.19) (0.24) -- (0.19)
----------- ----------- ----------- -----------
Total Distributions (0.47) (0.52) (0.17) (0.35)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 14.63 $ 12.89 $ 11.70 $ 14.63
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TOTAL RETURN (1) 17.41% 15.01% (1.12)% 12.29%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net assets, End of Period
(000's) $ 19,674 $ 20,675 $ 10,717 $ 2,485
Ratio of Expenses to
Average Net Assets 1.50% 1.50% 1.50%** 2.25%**
Ratio of Net Investment
Income to Average Net
Assets 1.90% 2.29% 2.14%** 1.18%**
Portfolio Turnover Rate 41% 23% 17% 41%
- --------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Income $ 0.04 $ 0.05 $ 0.08 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.81% 1.96% 2.48%** 2.61%**
Net Investment Income
to Average Net Assets 1.59% 1.83% 1.16%** 0.82%**

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

<TABLE>
<CAPTION>
CLASS C
---------------------------------------
OCTOBER 18,
YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.89 $ 11.69 $ 12.00
----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.16 0.17 0.11
Net Realized and
Unrealized Gain (Loss) 1.94 1.44 (0.31)
----------- ----------- -----------
Total from Investment
Operations 2.10 1.61 (0.20)
----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.15) (0.17) (0.11)
In Excess of Net
Investment Income (0.01) -- --
Net Realized Gains (0.19) (0.24) --
----------- ----------- -----------
Total Distributions (0.35) (0.41) (0.11)
----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 14.64 $ 12.89 $ 11.69
----------- ----------- -----------
----------- ----------- -----------
TOTAL RETURN (1) 16.50% 14.13% (1.70)%
----------- ----------- -----------
----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net assets, End of Period
(000's) $ 21,193 $ 13,867 $ 7,237
Ratio of Expenses to
Average Net Assets 2.25% 2.25% 2.25%**
Ratio of Net Investment
Income to Average Net
Assets 1.17% 1.54% 1.39%**
Portfolio Turnover Rate 41% 23% 17%
- ------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Income $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.58% 2.71% 3.28%**
Net Investment Income
to Average Net Assets 0.84% 1.08% 0.36%**

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

* Commencement of operations

**Annualized

+ The Fund began offering Class B shares on August 1, 1995.
(1)Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.

The accompanying notes are an integral part of the financial statements. 77
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS

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

WORLDWIDE HIGH INCOME FUND

<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------- -----------
APRIL 21, AUGUST 1,
YEAR ENDED YEAR ENDED 1994* 1995+ TO
SELECTED PER SHARE DATA JUNE 30, JUNE 30, TO JUNE 30, JUNE 30,
AND RATIOS 1996 1995 1994 1996
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.57 $ 12.17 $ 12.00 $ 11.63
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 1.36 1.26 0.18 1.18
Net Realized and
Unrealized Gain (Loss) 0.80 (0.52) 0.16 0.72
----------- ----------- ----------- -----------
Total From Investment
Operations 2.16 0.74 0.34 1.90
----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (1.26) (1.22) (0.17) (1.09)
Realized Gains -- (0.12) -- --
----------- ----------- ----------- -----------
Total Distributions (1.26) (1.34) (0.17) (1.09)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 12.47 $ 11.57 $ 12.17 $ 12.44
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TOTAL RETURN (1) 19.61% 6.87% 2.86% 17.07%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net assets, End of Period
(000's) $ 41,493 $ 14,819 $ 6,857 $ 26,174
Ratio of Expenses to
Average Net Assets 1.55% 1.55% 1.55%** 2.30%**
Ratio of Net Investment
Income to Average Net
Assets 11.95% 11.53% 8.29%** 12.06%**
Portfolio Turnover Rate 220% 178% 19% 220%
- --------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Income $ 0.02 $ 0.05 $ 0.02 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.69% 1.97% 3.23%** 2.47%**
Net Investment Income
to Average Net Assets 11.81% 11.11% 6.61%** 11.89%**

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

<TABLE>
<CAPTION>
CLASS C
---------------------------------------
APRIL 21,
YEAR ENDED YEAR ENDED 1994*
SELECTED PER SHARE DATA JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.58 $ 12.16 $ 12.00
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 1.30 1.17 0.17
Net Realized and
Unrealized Gain (Loss) 0.77 (0.50) 0.15
----------- ----------- -----------
Total From Investment
Operations 2.07 0.67 0.32
----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (1.20) (1.13) (0.16)
Realized Gains -- (0.12) --
----------- ----------- -----------
Total Distributions (1.20) (1.25) (0.16)
----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 12.45 $ 11.58 $ 12.16
----------- ----------- -----------
----------- ----------- -----------
TOTAL RETURN (1) 18.71% 6.20% 2.62%
----------- ----------- -----------
----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net assets, End of Period
(000's) $ 28,094 $ 11,880 $ 6,081
Ratio of Expenses to
Average Net Assets 2.30% 2.30% 2.30%**
Ratio of Net Investment
Income to Average Net
Assets 11.40% 10.72% 7.54%**
Portfolio Turnover Rate 220% 178% 19%
- ------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Income $ 0.04 $ 0.05 $ 0.06
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.44% 2.74% 4.00%**
Net Investment Income
to Average Net Assets 11.26% 10.28% 5.84%**

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

* Commencement of operations

**Annualized

+ The Fund began offering Class B shares on August 1, 1995.

(1)Total return is calculated exclusive of sales charges or deferred sales
charges. Total return for periods of less than one year are not annualized.

78 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS

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

LATIN AMERICAN FUND

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------- ----------- -------------------------
JULY 6, AUGUST 1, JULY 6,
YEAR ENDED 1994* 1995+ TO YEAR ENDED 1994*
SELECTED PER SHARE DATA JUNE 30, TO JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1996 1995 1996 1996 1995
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.08 $ 12.00 $ 9.58 $ 8.99 $ 12.00
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.10 (0.02) 0.03 0.04 (0.08)
Net Realized and
Unrealized Gain (Loss) 3.47 (2.70) 2.84 3.40 (2.73)
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations 3.57 (2.72) 2.87 3.44 (2.81)
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.02) -- -- -- --
Paid in Capital -- (0.20) -- -- (0.20)
----------- ----------- ----------- ----------- -----------
Total Distributions (0.02) (0.20) -- -- (0.20)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 12.63 $ 9.08 $ 12.45 $ 12.43 $ 8.99
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (1) 39.35% (23.07)% 29.26% 38.26% (23.83)%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 18,701 $ 7,658 $ 2,041 $ 6,780 $ 4,085
Ratio of Expenses to
Average Net Assets 2.11% 2.46%** 2.87%** 2.86% 3.20%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets 1.18% (0.44)%** 0.88%** 0.42% (1.16)%**
Portfolio Turnover Rate 131% 107% 131% 131% 107%
- -----------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to
Net Investment Loss $ 0.09 $ 0.13 $ 0.04 $ 0.12 $ 0.12
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.28% 4.30%** 3.89%** 4.06% 5.20%**
Net Investment Income
(Loss) to Average Net
Assets 0.01% (2.26)%** (0.14)%* (0.78)% (3.16)%*
Ratio of Expenses to
Average Net Assets
excluding Country Tax
expense 2.10% 2.10%** 2.85%** 2.85% 2.85%**

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

* Commencement of operations

**Annualized

+ The Fund began offering Class B shares on August 1, 1995.

(1)Total return is calculated exclusive of sales charges or deferred sales
charges. Total return for periods of less than one year are not annualized.

The accompanying notes are an integral part of the financial statements. 79
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS

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

EMERGING MARKETS FUND

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------------- --------------- ----------------------------------
JULY 6, 1994* AUGUST 1, 1995+ JULY 6, 1994*
SELECTED PER SHARE DATA AND YEAR ENDED TO JUNE 30, TO YEAR ENDED TO JUNE 30,
RATIOS JUNE 30, 1996 1995 JUNE 30, 1996 JUNE 30, 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.61 $ 12.00 $ 10.91 $ 10.53 $ 12.00
--------------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss) 0.05 0.05 0.01 (0.01) --
Net Realized and Unrealized
Gain (Loss) 1.44 (1.44) 1.02 1.41 (1.47)
--------------- ------- ------- ------- -------
Total From Investment
Operations 1.49 (1.39) 1.03 1.40 (1.47)
--------------- ------- ------- ------- -------
DISTRIBUTION:
Net Investment Income (0.04) -- -- -- --
In Excess of Net Realized
Gain -- -- -- -- --
--------------- ------- ------- ------- -------
Total Distributions (0.04) -- -- -- --
--------------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 12.06 $ 10.61 $ 11.94 $ 11.93 $ 10.53
--------------- ------- ------- ------- -------
--------------- ------- ------- ------- -------
TOTAL RETURN (1) 14.16% (11.58)% 9.45% 13.30% (12.25)%
--------------- ------- ------- ------- -------
--------------- ------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 114,850 $ 26,091 $ 10,416 $ 43,601 $ 22,245
Ratio of Expenses to Average
Net Assets 2.16% 2.33%** 2.91%** 2.91% 3.08%**
Ratio of Net Investment Income
(Loss) to Average Net Assets 0.93% 0.81%** 0.30%** (0.11)% 0.06%**
Portfolio Turnover Rate 42% 32% 42% 42% 32%
- ---------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income (Loss) $ 0.02 $ 0.04 $ 0.02 $ 0.03 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.56% 3.10%** 3.31%** 3.34% 3.90%**
Net Investment Income (Loss)
to Average Net Assets 0.53% 0.04%** (0.10)%** (0.54)% (0.76)%**
Ratio of Expenses to Average
Net Assets excluding Country
Tax expense 2.15% 2.15%** 2.90%** 2.90% 2.90%**

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

* Commencement of operations

**Annualized

+ The Fund began offering Class B shares on August 1, 1995.

(1)Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.

80 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS

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

AGGRESSIVE EQUITY FUND

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------- --------------- ---------------
JANUARY 2, JANUARY 2, JANUARY 2,
1996* 1996* 1996*
SELECTED PER SHARE DATA AND TO JUNE 30, TO JUNE 30, TO JUNE 30,
RATIOS 1996 1996 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.00 $ 12.00 $ 12.00
------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.06 0.03 0.03
Net Realized and Unrealized
Gain 2.40 2.39 2.38
------- ------- -------
Total From Investment
Operations 2.46 2.42 2.41
------- ------- -------
DISTRIBUTION:
Net Investment Income (0.06) (0.04) (0.04)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 14.40 $ 14.38 $ 14.37
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 20.52% 20.18% 20.10%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 5,382 $ 2,426 $ 2,582
Ratio of Expenses to Average
Net Assets 2.03%** 2.67%** 2.67%**
Ratio of Net Investment Income
to Average Net Assets 1.22%** 0.43%** 0.44%**
Portfolio Turnover Rate 204% 204% 204%
- -------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income $ 0.06 $ 0.07 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.26%** 3.79%** 3.80%**
Net Investment Income (Loss)
to Average Net Assets (0.01)%** (0.69)%** (0.69)%**
Ratio of Expenses to Average
Net Assets excluding
dividend expense on
securities sold short 1.50%** 2.25%** 2.25%**

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

* Commencement of operations

**Annualized

(1)Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.

The accompanying notes are an integral part of the financial statements. 81
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS

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

U.S. REAL ESTATE FUND

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------- --------------- ---------------
MAY 1, 1996* MAY 1, 1996* MAY 1, 1996*
SELECTED PER SHARE DATA AND TO JUNE 30, TO JUNE 30, TO JUNE 30,
RATIOS 1996 1996 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.00 $ 12.00 $ 12.00
------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.08 0.07 0.07
Net Realized and Unrealized
Gain 0.48 0.48 0.48
------- ------- -------
Total From Investment
Operations 0.56 0.55 0.55
------- ------- -------
DISTRIBUTION:
Net Investment Income (0.04) (0.03) (0.03)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 12.52 $ 12.52 $ 12.52
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 4.63% 4.54% 4.54%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 1,829 $ 2,197 $ 1,782
Ratio of Expenses to Average
Net Assets 1.55%** 2.30%** 2.30%**
Ratio of Net Investment Income
to Average Net Assets 4.11%** 3.35%** 3.39%**
Portfolio Turnover Rate 0% 0% 0%
- -------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income $ 0.08 $ 0.07 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 5.58%** 6.34%** 6.32%**
Net Investment Income to
Average Net Assets 0.08%** (0.69)%** (0.63)%**

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

* Commencement of operations

**Annualized

(1)Total return is calculated exclusive of sales charges or deferred sales
charges. Total return for periods of less than one year are not annualized.

82 The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS

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

HIGH YIELD FUND

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------- --------------- ---------------
MAY 1, 1996* MAY 1, 1996* MAY 1, 1996*
SELECTED PER SHARE DATA AND TO JUNE 30, TO JUNE 30, TO JUNE 30,
RATIOS 1996 1996 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.00 $ 12.00 $ 12.00
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.13 0.12 0.12
Net Realized and Unrealized
Loss (0.09) (0.09) (0.09)
------ ------ ------
Total From Investment
Operations 0.04 0.03 0.03
------ ------ ------
DISTRIBUTION:
Net Investment Income (0.12) (0.10) (0.10)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 11.92 $ 11.93 $ 11.93
------ ------ ------
------ ------ ------
TOTAL RETURN (1) 0.29% 0.21% 0.21%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 3,907 $ 3,421 $ 3,316
Ratio of Expenses to Average
Net Assets 1.25%** 2.00%** 2.00%**
Ratio of Net Investment Income
to Average Net Assets 6.85%** 6.08%** 6.07%**
Portfolio Turnover Rate 10% 10% 10%
- -------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income $ 0.04 $ 0.04 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.51%** 4.25%** 4.25%**
Net Investment Income to
Average Net Assets 4.59%** 3.83%** 3.82%**

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

* Commencement of operations

**Annualized

(1)Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.

The accompanying notes are an integral part of the financial statements. 83
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996

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

Morgan Stanley Fund, Inc. (the "Fund") was incorporated under the laws of
Maryland on August 14, 1992 and commenced operations on January 4, 1993. The
Fund is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company which offers redeemable shares of
diversified and non-diversified investment portfolios. As of June 30, 1996, the
Fund had ten separate active investment portfolios: Morgan Stanley Global Equity
Allocation Fund, Morgan Stanley Global Fixed Income Fund, Morgan Stanley Asian
Growth Fund, Morgan Stanley American Value Fund, Morgan Stanley Worldwide High
Income Fund, Morgan Stanley Latin American Fund, Morgan Stanley Emerging Markets
Fund, Morgan Stanley Aggressive Equity Fund, Morgan Stanley U.S. Real Estate
Fund and Morgan Stanley High Yield Fund (referred to herein respectively as
"Global Equity Allocation Fund", "Global Fixed Income Fund", "Asian Growth
Fund", "American Value Fund", "Worldwide High Income Fund", "Latin American
Fund", "Emerging Markets Fund", "Aggressive Equity Fund", "U.S. Real Estate
Fund" and "High Yield Fund" individually a "Portfolio" and collectively as the
"Portfolios"). The Fund currently offers three classes of shares, Class A, Class
B and Class C shares. Class A shares are sold with a front-end sales charge of
up to 4.75%. Class B shares are sold with a contingent deferred sales charge on
redemptions made within 6 years of purchase which declines annually from 5% for
redemptions made in year one, down to 1% in year six. The contingent deferred
sales charge is based on the lesser of the current market value of the shares
redeemed or the total cost of such shares. Class B shares will automatically
convert to Class A shares after the seventh year following purchase. Class C
shares are sold with a contingent deferred sales charge of 1% for shares that
are redeemed within one year of purchase, based on the lesser of the current
market value of the shares redeemed or the total cost of such shares. All three
classes of shares have identical voting, dividend, liquidation and other rights.
The Fund began offering the current Class B shares on August 1, 1995. Class B
shares held prior to May 1, 1995 were renamed Class C shares.

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

1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service which are based primarily on institutional size trading in
similar groups of securities. Debt securities purchased with remaining
maturities of 60 days or less are valued at amortized cost, if it approximates
market value. All other securities and assets for which market values are not
readily available, including restricted securities, are valued at fair value as
determined in good faith by the Board of Directors, although the actual
calculations may be done by others.

2. TAXES: It is each Portfolio's intention to qualify as a regulated investment
company and distribute all of its taxable income. Accordingly, no provision for
Federal income taxes is required in the financial statements. A Portfolio 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 capital gains and net
unrealized appreciation as the income and/or capital gains is earned.

During the year ended June 30, 1996, the Global Fixed Income Fund utilized
capital loss carryforwards for U.S. Federal income tax purposes of approximately
$256,000.

At June 30, 1996, the following Funds had available capital loss carryforwards
to offset future net capital gains, to the extent provided by regulations,
through the indicated expiration dates:

<TABLE>
<CAPTION>
EXPIRATION DATE
JUNE 30,
(000)
-------------------------------
FUND 2000 2003 2004
- ----------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Global Fixed Income...................... $ -- $ 110 $ --
Latin American........................... 1,310 -- --
Emerging Markets......................... -- -- 1,033
</TABLE>

To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by a Portfolio for gains realized and not distributed. To the extent that
capital gains are so offset, such gains will not be distributed to shareholders.

Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the period

84
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1996

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

from November 1, 1995 to June 30, 1996 certain Funds incurred and elected to
defer until July 1, 1996 for U.S. Federal income tax purposes net currency
losses of approximately:

<TABLE>
<CAPTION>
CURRENCY
FUND LOSSES (000)
- ------------------------------------------------------ -------------
<S> <C>
Global Fixed Income................................... $ 113
Asian Growth.......................................... 158
Latin American........................................ 15
Emerging Markets...................................... 80
</TABLE>

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 AND FOREIGN INVESTMENTS: 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. However, pursuant to U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions and
the foreign currency portion of gain and losses realized on sales and maturities
of foreign denominated debt securities are treated as ordinary income for U.S.
Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward 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 the
Statement of Assets and Liabilities. The change in net unrealized currency gains
(losses) for the period is reflected on the Statement of Operations.

Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibly lower level of
governmental supervision and regulation of foreign securities markets and the
possibility of political or economic instability.

Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investment in
domestic companies may be subject to limitation in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Portfolio of Investments) may be created and offered for investment. The
"local" and "foreign" shares' market values may vary.

5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Each Portfolio may enter into
forward foreign currency exchange contracts to attempt to protect securities and
related receivables and payables against changes in future foreign currency
exchange rates. A forward 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 using the forward rate and the change in
market value is recorded by the Portfolio as unrealized gain or loss. The
Portfolio 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 the
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar.

85
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1996

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

6. SHORT SALES: The Aggressive Equity Fund may sell securities short. A short
sale is a transaction in which the Portfolio sells securities it may or may not
own, but has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolio is obligated to replace the borrowed securities at the
market price at the time of replacement. The Portfolio may have to pay a premium
to borrow the securities as well as pay any dividends or interest payable on the
securities until they are replaced. The Portfolio's obligation to replace the
securities borrowed in connection with a short sale will generally be secured by
collateral deposited with the broker that consists of cash, U.S. government
securities or other liquid, high grade debt obligations. In addition, the
Portfolio will place in a segregated account with its Custodian an amount of
cash, U.S. government securities or other liquid high grade debt obligations
equal to the difference, if any, between (1) the market value of the securities
sold at the time they were sold short and (2) any cash, U.S. government
securities or other liquid high grade debt obligations deposited as collateral
with the broker in connection with the short sale (not including the proceeds of
the short sale). Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases cannot exceed the total amount
invested.

7. PURCHASED OPTIONS: Certain Portfolios may purchase call or put options on
their portfolio securities. A Portfolio may purchase call options to protect
against an increase in the price of a security it anticipates purchasing. A
Portfolio may purchase put options on securities which it holds to protect
against a decline in the value of the security. Risks may arise from an
imperfect correlation between the change in market value of the securities held
by the Portfolio and the prices of options relating to the securities purchased
or sold by the Portfolio and from the possible lack of a liquid secondary market
for an option. The maximum exposure to loss for any purchased option is limited
to the premium initially paid for the option.

8. SECURITY LENDING: Each Portfolio may lend its investment securities to
qualified institutional investors who borrow securities in order to complete
certain transactions. By lending its investment securities, a Portfolio attempts
to increase its net investment income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that might
occur and any interest earned or dividends declared during the term of the loan
would be for the account of the Portfolio. Risks of delay in recovery of the
securities or even loss of rights in the collateral may occur should the
borrower of the securities fail financially. Risks may also arise to the extent
that the value of the collateral decreases below the value of the securities
loaned.

Portfolios that lend securities receive cash, securities issued or guaranteed by
the U.S. Government or letters of credit as collateral in an amount equal to or
exceeding 100% of the current market value of the loaned securities. Any cash
received as collateral is invested in interest bearing repurchase agreements
with approved counterparties. A portion of the interest received on the
repurchase agreements is retained by the Fund and the remainder is rebated to
the borrower of the securities. The net amount of interest earned and interest
rebated is included in the Statement of Operations as interest income. The value
of loaned securities and related collateral outstanding at June 30, 1996 are as
follows:

<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
FUND (000) (000)
- ------------------------------------- --------------- -----------
<S> <C> <C>
Global Equity Allocation............. $ 21,884 $ 23,165
</TABLE>

At June 30, 1996, the Fund had invested the cash collateral in a repurchase
agreement with Goldman Sachs. Such repurchase agreement was collateralized by
U.S. Treasury Obligations.

Morgan Stanley Trust Company administers the security lending program and has
received fees for its services in the amount of $3,087 for the year ended June
30, 1996.

9. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio 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, each Portfolio 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
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed delivery basis, it establishes
a segregated account in which it maintains liquid assets in an amount at least
equal in value to the Portfolio's commitments to purchase such securities.
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.

10. ORGANIZATIONAL COSTS: The organizational costs of the Portfolios are being
amortized on a straight line basis over a period of five years beginning with
each Portfolio's commencement of operations. Morgan Stanley Asset Management,
Inc. has agreed that in the event any of it's initial shares in a Portfolio
which comprised the Fund at it's inception are redeemed, the proceeds on
redemption will be reduced by

86
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1996

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

the pro-rata portion of any unamortized organizational costs in the same
proportion as the number of shares redeemed bears to the initial shares held at
time of redemption.

11. 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. Dividend income
is recorded on the ex-dividend date (except for certain foreign 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. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased are
amortized according to the effective yield method over their respective lives.
Most expenses of the Fund can be directly attributed to a particular Portfolio.
Expenses which cannot be directly attributed are apportioned among the
Portfolios based upon relative net assets. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses are allocated to
each class of shares based upon their relative net assets. Distributions from
the Portfolios are recorded on the ex-distribution date.

Certain portfolios own shares of real estate investment trusts ("REITs") which
report information on the source of their distributions annually. A portion of
distributions received from REITs during the year is estimated to be a return of
capital and is recorded as a reduction of their cost.

The amount and character of income and capital gain distributions to be paid by
the Fund 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 treatment for foreign currency
transactions, net operating losses, foreign taxes on net realized gains,
deductibility of interest expense on short sales and gains on certain securities
of corporations designated as "passive foreign investment companies".

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

Permanent book and tax basis differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income for the purpose
of calculating net investment income (loss) per share in the Financial
Highlights.

B. ADVISER: Morgan Stanley Asset Management, Inc. (the "Adviser" or "MSAM"), a
wholly-owned subsidiary of Morgan Stanley Group, Inc., provides the Fund with
investment advisory services at a fee paid quarterly and calculated at the
annual rates of average daily net assets indicated below. The Adviser has agreed
to reduce advisory fees payable to it and to reimburse the Portfolios, if
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:

<TABLE>
<CAPTION>
CLASS B
AND
CLASS A CLASS C
MAXIMUM MAXIMUM
OPERATING OPERATING
ADVISORY EXPENSE EXPENSE
FUND FEE RATIO RATIO
- ------------------------------------------------------------------------------------------ -------- ------- -------
<S> <C> <C> <C>
Global Equity Allocation.................................................................. 1.00% 1.70% 2.45%
Global Fixed Income....................................................................... 0.75% 1.45% 2.20%
Asian Growth.............................................................................. 1.00% 1.90% 2.65%
American Value............................................................................ 0.85% 1.50% 2.25%
Worldwide High Income..................................................................... 0.75% 1.55% 2.30%
Latin American............................................................................ 1.25% 2.10% 2.85%
Emerging Markets.......................................................................... 1.25% 2.15% 2.90%
Aggressive Equity......................................................................... 0.90% 1.50% 2.25%
U.S. Real Estate.......................................................................... 1.00% 1.55% 2.30%
High Yield................................................................................ 0.75% 1.25% 2.00%
</TABLE>

C. ADMINISTRATOR: MSAM also provides the Fund with administrative services
pursuant to an administrative agreement for a monthly fee which on an annual
basis equals 0.25% of the average daily net assets of each Portfolio, plus
reimbursement of out-of-pocket expenses. Under an agreement between MSAM and The
Chase Manhattan Bank ("Chase"), effective September 1, 1995, Chase through its
affiliate Chase Global Funds Services Company ("CGFSC"), formerly Mutual Funds
Service Company ("MFSC"), provides certain administrative services to the Fund.
Chase is compensated for such services by MSAM from the fee it receives from the
Fund. Certain employees of CGFSC are officers of the Fund. Prior to September 1,
1995, MFSC was an affiliate of the United States Trust Company of New York and
provided administrative services to the Fund under the same terms, conditions
and fees as stated above.

D. DISTRIBUTOR: Morgan Stanley & Co. Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley Group, Inc., and an affiliate of MSAM,
serves as the distributor of the Fund and provides all classes of each Portfolio
with distribution services pursuant to separate Distribution Plans in accordance
with Rule 12b-1 under the Investment Company Act of 1940. The Distributor is
entitled to receive from the Portfolios a distribution fee, which is accrued
daily and paid quarterly, of up to 0.25% for the Class A shares of each
Portfolio and up to 1.00% on an annualized basis, of the average daily net
assets attributable to the Class B and Class C shares of each Portfolio.

The Distributor may receive a contingent deferred sales charge for certain
purchases of Class A, Class B and Class C shares of each Portfolio redeemed
within one to six years following such purchase. For the year ended June 30,
1996, the Distributor has advised the Fund that it earned initial

87
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1996

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

sales charges of $234,000 for Class A shares and deferred sales charges of
$70,000 and $115,000 for Class B shares and Class C shares, respectively.

E. CUSTODIANS: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley Group Inc., acts as custodian for the Fund's assets held
outside the United States in accordance with a custodian agreement. Effective
September 1, 1995, Chase replaced the United States Trust Company of New York as
custodian for the Fund's domestic assets in accordance with a Custodian
Agreement. Custodian fees are computed and payable monthly based on assets held,
investment purchases and sales activity, an account maintenance fee, plus
reimbursement for certain out-of-pocket expenses.

For the year ended June 30, 1996, the following Portfolios incurred custody fees
and had amounts payable to MSTC at June 30, 1996:

<TABLE>
<CAPTION>
MSTC CUSTODY
CUSTODY FEES
FEES PAYABLE
INCURRED TO MSTC
FUND (000) (000)
- ---------------------------------------------------------------------------------------------------- --------- -------
<S> <C> <C>
Global Equity Allocation............................................................................ $ 210 $ 71
Global Fixed Income................................................................................. 14 3
Asian Growth........................................................................................ 623 202
Worldwide High Income............................................................................... 40 13
Latin American...................................................................................... 114 26
Emerging Markets.................................................................................... 333 101
</TABLE>

In addition, for the year ended June 30, 1996, certain Portfolios earned
interest income and/or incurred interest expense in amounts not exceeding
$10,000 per Portfolio on balances maintained with MSTC.

F. PURCHASES AND SALES: For the year ended June 30, 1996, purchases and sales of
investment securities other than long-term U.S. Government securities and
short-term investments were:

<TABLE>
<CAPTION>
PURCHASES SALES
FUND (000) (000)
- ---------------------------------------------------------------------------------------------------- --------- -------
<S> <C> <C>
Global Equity Allocation............................................................................ $ 80,860 $43,973
Global Fixed Income................................................................................. 18,816 21,909
Asian Growth........................................................................................ 254,082 138,019
American Value...................................................................................... 20,177 16,468
Worldwide High Income............................................................................... 196,699 140,733
Latin American...................................................................................... 31,022 22,136
Emerging Markets.................................................................................... 120,624 31,439
Aggressive Equity................................................................................... 20,548 11,959
U.S. Real Estate.................................................................................... 5,262 --
High Yield.......................................................................................... 9,556 530
</TABLE>

Purchases and sales of long-term U.S. Government securities during the year
ended June 30, 1996 occurred in the Global Fixed Income Fund and totaled
$14,788,000 and $17,575,000, respectively.

G. OTHER: At June 30, 1996, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency. Changes
in currency exchange rates will affect the U.S. dollar value of and investment
income from such securities.

Foreign denominated assets and liabilities, including Portfolio securities and
foreign currency holdings, were translated at the following exchange rates as of
June 30, 1996:

<TABLE>
<S> <C> <C> <C>
Argentine Peso............................. 0.99963 = $ 1.00
Australian Dollar.......................... 1.27235 = $ 1.00
Austrian Shilling.......................... 10.69550 = $ 1.00
Brazilian Real............................. 1.00395 = $ 1.00
British Pound.............................. 0.64371 = $ 1.00
Canadian Dollar............................ 1.36455 = $ 1.00
Colombian Peso............................. 1,067.00000 = $ 1.00
Danish Krone............................... 5.85550 = $ 1.00
Deutsche Mark.............................. 1.52000 = $ 1.00
Egyptian Pound............................. 3.40200 = $ 1.00
French Franc............................... 5.13900 = $ 1.00
Greek Drachma.............................. 240.47000 = $ 1.00
Hong Kong Dollar........................... 7.74075 = $ 1.00
Indian Rupee............................... 35.23000 = $ 1.00
Indonesian Rupiah.......................... 2,327.50000 = $ 1.00
Israeli Shekel............................. 3.20030 = $ 1.00
Italian Lira............................... 1,530.84000 = $ 1.00
Japanese Yen............................... 109.32500 = $ 1.00
Korean Won................................. 811.20000 = $ 1.00
Malaysian Ringgit.......................... 2.49450 = $ 1.00
Mexican Peso............................... 7.58250 = $ 1.00
Moroccan Dirham............................ 8.72285 = $ 1.00
Netherlands Guilder........................ 1.70450 = $ 1.00
Pakistani Rupee............................ 35.00500 = $ 1.00
Peruvian Sol............................... 2.44300 = $ 1.00
Philippine Peso............................ 26.20000 = $ 1.00
Polish Zloty............................... 2.71710 = $ 1.00
Portuguese Escudo.......................... 156.30000 = $ 1.00
Singapore Dollar........................... 1.41100 = $ 1.00
South African Rand......................... 4.33300 = $ 1.00
Spanish Peseta............................. 127.91500 = $ 1.00
Swedish Krona.............................. 6.61490 = $ 1.00
Swiss Franc................................ 1.24950 = $ 1.00
Taiwan Dollar.............................. 27.52000 = $ 1.00
Thailand Baht.............................. 25.38500 = $ 1.00
Turkish Lira............................... 82,100.00000 = $ 1.00
</TABLE>

During the year ended June 30, 1996, Asian Growth Fund, Latin American Fund and
Emerging Markets Fund incurred approximately $164,000, $2,000 and $15,000,
respectively, as brokerage commissions with Morgan Stanley & Co. Incorporated,
an affiliated broker/dealer.

At June 30, 1996 the Global Equity Allocation Fund and Emerging Markets Fund
owned shares of an affiliate fund for which the Fund earned dividend income of
$174,000 and $42,000, respectively.

At June 30, 1996, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of each Portfolio were

<TABLE>
<CAPTION>
NET
APPRECIATION
COST APPREC. (DEPREC.) (DEPRECIATION)
FUND (000) (000) (000) (000)
- -------------------------------------------------------------------------------- -------- ------- --------- --------------
<S> <C> <C> <C> <C>
Global Equity Allocation........................................................ $123,716 $15,798 $ (2,270) $13,528
Global Fixed Income............................................................. 11,168 115 (163) (48)
Asian Growth.................................................................... 426,428 54,966 (17,673) 37,293
American Value.................................................................. 37,623 5,884 (752) 5,132
Worldwide High Income........................................................... 92,940 2,591 (3,227) (636)
Latin American.................................................................. 23,068 4,112 (675) 3,437
Emerging Markets................................................................ 151,506 19,065 (6,596) 12,469
Aggressive Equity............................................................... 10,838 408 (126) 282
U.S. Real Estate................................................................ 5,523 232 (22) 210
High Yield...................................................................... 10,804 36 (125) (89)
</TABLE>

88
<PAGE>
MORGAN STANLEY FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS

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

To the Shareholders and Board of Directors of
Morgan Stanley Fund, Inc.

In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Global Equity Allocation Fund,
Global Fixed Income Fund, Asian Growth Fund, American Value Fund, Worldwide High
Income Fund, Latin American Fund, Emerging Markets Fund, Aggressive Equity Fund,
U.S. Real Estate Fund and High Yield Fund (constituting the Morgan Stanley Fund,
Inc., hereafter referred to as the "Fund") at June 30, 1996, the results of each
of their operations, the changes in each of their net assets and the financial
highlights for each of the Funds for each of the respective periods presented,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at June 30, 1996 by
correspondence with the custodians and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036

August 6, 1996

89
<PAGE>
MORGAN STANLEY FUNDS

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

FEDERAL INCOME TAX INFORMATION: (UNAUDITED)

For the year ended June 30, 1996, the percentage of dividends that qualify for
the 70% dividend received deduction for corporate shareholders of the Global
Equity Allocation Fund, American Value Fund, Emerging Markets Fund and
Aggressive Equity Fund are 12.72%, 86.19%, 3.27% and 7.31%, respectively.

Global Equity Allocation Fund and American Value Fund have designated
approximately $3,312,000 and $370,000 as long-term capital gain for the fiscal
year ended June 30, 1996.

Foreign taxes paid during the fiscal year ended June 30, 1996 amounting to
$165,000, $3,000, $570,000, $29,000 and $138,000 for Global Equity Allocation
Fund, Global Fixed Income Fund, Asian Growth Fund, Latin American Fund and
Emerging Markets Fund, respectively are expected to be passed through to
shareholders as foreign tax credits on Form 1099-DIV for the year ending
December 31, 1996, which will be sent to shareholders in late January 1997. In
addition, for the year ended June 30, 1996, gross income derived from sources
within foreign countries amounted to $1,561,000, $791,000, $6,316,000, $549,000,
and $2,065,000 for Global Equity Allocation Fund, Global Fixed Income Fund,
Asian Growth Fund, Latin American Fund, and Emerging Markets Fund, respectively.

90
<PAGE>
MORGAN STANLEY FUNDS

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

DIRECTORS

Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley Asset Management Inc.
and Morgan Stanley Asset Management Limited;
Managing Director, Morgan Stanley & Co. Incorporated;
Director, Morgan Stanley Group Inc.

Frederick B. Whittemore
VICE-CHAIRMAN OF THE BOARD
Advisory Director, Morgan Stanley & Co.
Incorporated

Warren J. Olsen
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated

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

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

Andrew McNally IV
Chairman and Chief Executive Officer, Rand McNally

Samuel T. Reeves
Chairman of the Board and CEO, Pinacle L.L.C.

Fergus Reid
Chairman and Chief Executive Officer, LumeLite Corporation

Frederick O. Robertshaw
Of Counsel, Bryan, Cave

INVESTMENT ADVISER AND ADMINISTRATOR

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

DISTRIBUTOR

Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020

CUSTODIANS

Morgan Stanley Trust Company (International)
One Pierrepont Plaza
Brooklyn, New York 11210

The Chase Manhattan Bank (Domestic)
770 Broadway
New York, NY 10003

LEGAL COUNSEL

Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103

DIVIDEND DISBURSING AND TRANSFER AGENT

The Chase Manhattan Bank
73 Tremont Street
Boston, MA 02108

INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036

OFFICERS

James W. Grisham
VICE PRESIDENT

Michael F. Klein
VICE PRESIDENT

Harold J. Schaaff, Jr.
VICE PRESIDENT

Joseph P. Stadler
VICE PRESIDENT

Valerie Y. Lewis
SECRETARY

James R. Rooney
TREASURER

Joanna M. Haigney
ASSISTANT TREASURER

Karl O. Hartmann
ASSISTANT SECRETARY

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

FOR INFORMATION ON HOW TO INVEST, PLEASE CONTACT YOUR ACCOUNT REPRESENTATIVE OR
THE FUND AT (800) 282-4404.

THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY
PROSPECTUSES OF THE MORGAN STANLEY FUND, INC. WHICH DESCRIBES IN DETAIL EACH OF
THE INVESTMENT FUNDS' INVESTMENT POLICIES, FEES AND EXPENSES. PLEASE READ THE
PROSPECTUSES CAREFULLY BEFORE YOU INVEST OR SEND MONEY.