MORGAN GRENFELL INVESTMENT TRUST
N-30D, 1996-02-21
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                                Morgan Grenfell
                                 SMALLCap FUND
                              1995 ANNUAL REPORT 

<PAGE>

Morgan Grenfell Capital Management, Inc. (the Advisor to the Morgan Grenfell 
SMALLCap Fund) is a subsidiary of Morgan Grenfell Asset Management Limited 
(MGAM), which in turn is a subsidiary of Morgan Grenfell Group PLC (Morgan 
Grenfell)*, and is responsible for the Deutsche Bank Group's institutional 
investment management activities worldwide. Morgan Grenfell was founded in 
1838 and is one of the UK's leading merchant banks and asset management 
groups. Since 1990, Morgan Grenfell has been a wholly- owned subsidiary of 
Deutsche Bank, AG, one of the largest financial institutions in the world. 
Currently MGAM manages in excess of $75 billion for a wide range of pension, 
corporate, insurance, local authority, government and private clients from 
more than 40 countries worldwide. 

*  In July 1995, it was announced that Deutsche Bank would be establishing an 
investment bank in London under the auspices of Morgan Grenfell Group, PLC. 
This investment bank will be named Deutsche Morgan Grenfell and will include 
MGAM. At the same time, MGAM will take control of Deutsche Bank's 
institutional investment management companies, DEGEF and Deutsche Bank Asset 
Management. 


                                       2
<PAGE>

To Our Shareholders: 

   Overall, 1995 was a "great" year for the stock market. It was also an 
excellent year for the Fund which gained +41.4% as measured by the change in 
net asset value, ranking it among the top performing closed-end equity funds. 

   Some of the Fund's achievements during the year and comments relating to 
the performance of our smaller capitalization equities team are highlighted 
below. 

   (bullet) The Fund's +41.4% gain in net asset value significantly exceeded 
            the S&P SmallCap 600 benchmark, which was up +30.0%. 

   (bullet) Although large companies outperformed the small cap indices in 
            1995; e.g., the S&P 500 and Dow Jones Industrial Average gained 
            +37.4% and +36.7%, respectively, the Fund also outperformed these 
            popular stock market averages. 

   (bullet) The Fund provided investors with consistent "value added" 
            performance throughout the year; e.g., the Fund's quarterly 
            performance exceeded the S&P SmallCap 600 index in each of the 
            four quarters. 

   (bullet) The Fund's performance was achieved while maintaining broad 
            diversification within the smaller company universe. 

   (bullet) Our small cap investment team added value virtually across all 
            economic sectors. 

   (bullet) Each member of the team achieved "value added" performance 
            relative to their respective universe of investment opportunity. 

   A detailed discussion of the Fund's performance and portfolio structure is 
contained in the "Review of 1995" section beginning on page four. 

   For the benefit of shareholders, and especially the Fund's new 
shareholders, a description of the Fund's universe of investment opportunity 
and how our smaller capitalization equities team is structured to find these 
opportunities is presented below. 

                               INVESTMENT UNIVERSE 
                               -------------------

   The Fund's investment universe is comprised of companies representing the 
lowest 20% of the market capitalization of all equities. Within this 
universe, the Fund focuses primarily on companies with market capitalizations 
of between $100 million and $1.6 billion. At the end of 1995, this 
capitalization range contained approximately 2,700 companies with a total 
market value of $1.2 trillion. 


                                       1
<PAGE>


                                INVESTMENT TEAM
                                ---------------

   Morgan Grenfell Capital Management's Smaller Capitalization Equities 
investment team is comprised of five experienced professionals. Four have 
investment research/portfolio management responsibility and work with our 
fifth member, a dedicated trader, to develop execution strategies. This 
unique approach, which has been designed specifically for smaller company 
investing, provides each member of the team with beginning-to-end involvement 
in the investment process as well as bottom-line accountability. 

   Our investment team, along with their primary economic sector 
responsibilities, is listed below. 

<TABLE>
<CAPTION>
<S>                               <C>                                         
SMALLER CAPITALIZATION 
EQUITIES TEAM                     SECTOR RESPONSIBILITY 
 ----------------------------     ----------------------------------------- 
Robert Kern (Manager)             Technology/Capital Goods 
David Baratta                     Consumer/Service 
Gerald Frey                       Technology/Health Care 
Audrey Jones                      Energy/Credit Sensitive/Transportation/ 
                                  Process Industries/Service 
Michael Murphy                    Trading 
</TABLE>

   Investment research specialization by economic sector provides the 
advantage of an in-depth understanding of each economic sector and industries 
within these sectors. This knowledge provides our team with the ability to 
make high quality individual company investment decisions. 

   A traditional approach to fundamental investment research represents the 
foundation of our investment product. Original investment research 
encompasses not only the financial analysis of companies, but also entails 
extensive travel by each member of the team to visit companies and discuss 
business strategies with corporate managements. 

   A team approach, with investment expertise across all economic sectors, 
provides the Fund with the ability to structure a broadly diversified 
portfolio within the universe of smaller companies as well as the ability to 
shift investment emphasis among sectors. 

                                     OUTLOOK 
                                     ------- 

   The current slowdown in economic growth and its negative impact on 
corporate profits represent a significant change in the investment 
environment as we enter 1996. Thus, while a low level of inflation and 
further declines in interest rates are expected to continue to be positives 
for stock prices, investment success will be more dependent upon selecting 
companies which meet or exceed earnings expectations. 

   Slower economic growth is also expected to cause investors to focus on the 
superior growth prospects of many smaller companies. Importantly, the ability 
of these companies to achieve rapid growth 


                                       2
<PAGE>
 
is more dependent on individual company developments; e.g., new products, and 
less dependent on macro-economic trends. 

   Another positive factor in the current outlook for selected smaller 
companies is the expectation that cash flows into aggressive growth mutual 
funds will continue at a high level. 

   Overall, our team's goal is to provide the Fund's shareholders with "value 
added" performance relative to the S&P SmallCap 600 index as well as the S&P 
500 index, which represents a broad measure of the stock market. We expect to 
achieve this goal by focusing primarily on individual stock selection. 



Robert E. Kern, Jr. 
President 
Morgan Grenfell SMALLCap Fund 

January, 1996 


                                       3
<PAGE>

                                A REVIEW OF 1995
                                ----------------

   The following review covers the Fund's 1995 results and an analysis of the 
Fund's portfolio structure, including changes in economic sector weightings 
during 1995. 

                                   PERFORMANCE 
                                   ----------- 

   At the end of 1995, the Fund's net asset value was $12.31 per-share and 
when adjusted for the $2.133 per-share distribution from capital gains, the 
increase in net asset value for the year was +41.4%. 

   Performance of the Fund and comparisons with the popular stock market 
averages are presented in the table below. 

<TABLE>
<CAPTION>
                                           Smaller 
                                          Companies        Large Companies 
                      MG SMALLCap      ---------------   ------------------- 
                         fund                S&P           S&P 
Perod               Net Asset Value     SmallCap 600       500      D.J.I.A. 
 ---------------   ----------------    ---------------    ------   --------- 
<S>                <C>                 <C>               <C>       <C>
 1995                    +41.4%             +30.0%         +37.4%     +36.7% 
 1994                     -3.5               -4.8           +1.3       +4.9 
 1993                     +8.5              +18.8          +10.1      +17.0 
 1992                     +4.0              +21.0           +7.6       +7.4 
 1991                    +52.5              +48.5          +30.5      +24.2 
 1990                    -13.4              -23.7           -3.1      -0.4 
 1989                    +24.6              +13.9          +31.6      +31.6 
 1988                    +19.1              +19.5          +16.5      +15.9 
Total Return 
From Inception          +143.4%            +105.3%        +180.3%    +194.8% 
(5/6/87-12/31/95) 
</TABLE>

   Performance of the Fund's net asset value exceeded the S&P SmallCap 600 
index, which is representative of the smaller company universe. Although the 
large company stock market indices outperformed smaller companies during 
1995, the Fund also outperformed the S&P 500 and Dow Jones Industrial 
Average. 

   The price of the Fund's shares at the end of 1995 was $12.625 per share. 
This represented a discount of 12.6% when adjusted for the $2.133 per-share 
capital gain distribution, to the Fund's net asset value and compares with a 
discount of 13.1% at the beginning of the year. 


                                       4
<PAGE>

                              PORTFOLIO STRUCTURE
                              ------------------- 

   The following table presents the portfolio structure of the Fund by 
economic sector and changes in portfolio structure during 1995. 

<TABLE>
<CAPTION>
<S>                          <C>       <C>      <C>       <C>        <C>      <C>      <C>
                                   NO.                MARKET                % 
ECONOMIC SECTOR                 COMPANIES             VALUE             PORTFOLIO 
- -------------------------    ---------------   ------------------    -------------- 
                             1994      1995     1994       1995      1994     1995     Change 
                             ----      ----    -------   -------     ----     ----     ------ 
Technology                     17        17    $17.5MM   $18.7MM      27%      21%        -6 
Consumer                       15        18     10.3      13.2        16       15         -1 
Energy                         10        10      7.2      10.3        11       12         +1 
Credit Sensitive                3        12      1.4       9.8         2       11         +9 
Health Care                    12        12      7.3       9.4        11       11         +0 
Service Companies               8         8      8.7       9.4        13       10         -3 
Process Industries              8         6      5.6       4.5         9        5         -4 
Transportation                  4         4      3.9       1.9         6        2         -4 
Capital Goods                   1         1      0.9       1.4         1        2         +1 
- -------------------------     ----     ----    -------   -------    ----     ----      ----- 
TOTAL EQUITIES                 78        88    $62.8MM   $78.6MM      96%      89%        -7 
Cash and Cash Equivalents                        2.8       9.4         4       11         +7 
- -------------------------                      -------   -------    ----     ----      ----- 
TOTAL FUND                                     $65.6MM   $88.0MM     100%     100%       -- 
</TABLE>

   During 1995, the Fund's best performing sectors were: Health Care (+87%), 
Technology (+85%), Credit Sensitive (+62%), and Service Companies (+61%). 
Investment in these sectors represented approximately 50% of the Fund's total 
assets. 

   The nine percentage portfolio weighting increase in the Credit Sensitive 
sector provided a significant contribution to the Fund's performance; i.e., a 
+62% gain. A combination of declining interest rates and a high level of 
acquisitions benefited results. 

   Although the Fund's Consumer sector performed significantly better than 
the consumer stocks contained in the S&P SmallCap 600 index, the environment 
for many consumer companies remained very competitive during 1995. 

   Cash reserves were 11% of total assets on 12/31/95. A portion of this 
total has been utilized to fund payment of the $2.133 per-share capital gains 
distribution paid on January 26, 1996. 


                                       5
<PAGE>

                            TWENTY LARGEST HOLDINGS
                            -----------------------
                                December 31, 1995
                                -----------------

<TABLE>
<CAPTION>
 COMPANY                               SYMBOL     LISTED     BUSINESS FOCUS 
- ----------------------------------     -------    -------    ------------------------------------ 
<S>                                    <C>        <C>        <C>
Phycor Inc.                            PHYC       OTC        Physician Practice Management Co. 
Delta & Pine Land Co.                  DLP        NYSE       Largest Cotton Seed Company 
Paging Network Inc.                    PAGE       OTC        Paging Services 
Tidewater Inc.                         TDW        NYSE       Marine Support Vessels 
MEMC Electronic Materials, Inc.        WFR        NYSE       Silicon Wafer Manufacturer 
New England Business Service           NEB        NYSE       Business Forms 
Dionex Corp.                           DNEX       OTC        Analytical Instruments 
Dime Bancorp Inc.                      DME        NYSE       New York Savings Bank 
Adobe Systems Inc.                     ADBE       OTC        Applications Software 
Devon Energy Corp.                     DVN        AMEX       Oil & Gas Producer 
Baybanks Inc.                          BBNK       OTC        Massachusetts Bank 
Micrel Inc.                            MCRL       OTC        Analog Semiconductors 
Furon Co.                              FCY        NYSE       Engineered Components 
Computervision Corp.                   CVN        NYSE       Computer-Aided Design Systems 
Community Health Systems Inc.          CYH        NYSE       Hospital Management Company 
Staples Inc.                           SPLS       OTC        Office Products Superstores 
Platinum Technology                    PLAT       OTC        System Software Products 
BJ Services Co.                        BJS        NYSE       Stimulation & Pumping Services 
Department 56 Inc.                     DFS        NYSE       Specialty Giftware 
Ceridian Corporation                   CEN        NYSE       Human Resource Services 
</TABLE>

   The top twenty holdings, which represent approximately 40% of the Fund's 
total value, are comprised primarily of high quality emerging growth 
companies. At the end of 1995, the average market capitalization of companies 
held in the Fund was $1.039 billion. 

                     DIVIDENDS AND CAPITAL GAINS DISTRIBUTION 
                     ---------------------------------------- 

   During 1995, the Fund declared a capital gains distribution of $2.133 per 
share. This distribution was made on January 26, 1996, to shareholders of 
record on December 29, 1995. 

   Entering 1996, the Fund has a net unrealized capital gain totaling 
$19,672,203, or approximately $3.26 per share. 

   Net investment income represents dividends and interest income less 
expenses. The Fund's investment objective is to seek capital appreciation; as 
a result, focus will be on stocks with no significant yield. As in prior 
years, the Fund had a net investment expense for 1995 and it is unlikely the 
Fund will pay a dividend from net investment income. 


                                       6
<PAGE>

                            SCHEUDLE OF INVESTMENTS
                            -----------------------
                              December 31, 1995 
                              ----------------- 

<TABLE>
<CAPTION>
<S> <C>                                  <C>                                   <C>        <C>
    COMMON STOCKS:              89.3% 
    --------------------------------- 
                                                                                              MARKET 
    TECHNOLOGY:                 21.2%    BUSINESS FOCUS                        SHARES         VALUE 
    ---------------------------------    ---------------------------------     -------   -------------- 
*   MEMC Electronic Materials Inc.       Silicon Wafer Manufacturer            66,600     $  2,172,825 
*   Dionex Corp.                         Analytical Instruments                31,000        1,759,250 
    Adobe Systems Inc.                   Applications Software                 25,000        1,550,000 
*   Micrel Inc.                          Analog Semiconductors                 75,000        1,462,500 
*   Computervision Corp.                 Computer-Aided Design Systems         94,700        1,456,013 
*   Platinum Technology                  System Software Products              71,600        1,315,650 
*   Ceridian Corp.                       Human Resource Services               30,000        1,237,500 
    Linear Technology Corp.              Advanced Linear Circuits              28,000        1,099,000 
*   Xilinx Inc.                          Field Programmable Gate Arrays        35,000        1,067,500 
*   Synopsys Inc.                        CAE Software                          25,200          957,600 
*   Progress Software Corp.              Database Software                     23,000          862,500 
*   Geoworks                             System & Application Software         40,800          775,200 
*   Mercury Interactive Corp.            Computer Software                     40,700          742,775 
*   FTP Software Inc.                    Internetworking Software              24,000          696,000 
*   Discreet Logic Inc.                  Computer Software                     25,500          637,500 
*   Rational Software Corp.              Computer Software                     21,400          478,825 
*   Integrated Process Equip. Inc.       Semiconductor Equipment               17,000          399,500 
                                                                                          ------------ 
                                                                                           $18,670,138 
    CONSUMER:                   15.0% 
    --------------------------------- 
*   Staples Inc.                         Office Products Superstores           55,050      $ 1,341,844 
*   Department 56 Inc.                   Specialty Giftware                    34,000        1,304,750 
*   Garden Ridge Corp.                   Specialty Home Accessories            29,000        1,123,750 
*   Nine West Group Inc.                 Women's Footwear Retailer             26,800        1,005,000 
*   Blyth Industries Inc.                Candles and Accessories               30,200          890,900 
    Family Dollar Stores                 Discount Stores                       63,650          875,187 
    Lancaster Colony Corp.               Consumer Products                     19,400          722,650 
*   Damark International Inc.            General Merchandise                   91,450          685,875 
*   Mohawk Industries Inc.               Carpet Manufacturer                   43,800          684,375 
    Leggett & Platt Inc.                 Furniture Components                  25,500          618,375 
*   Stations Casinos Inc.                Multi-Jurisdictional Gaming           40,000          585,000 
*   Micro Warehouse Inc.                 Computer Direct Marketer              13,400          579,550 
*   West Marine Inc.                     Boating Supplies Retailer             18,500          578,125 
*   Daka International Inc.              Restaurants                           19,700          541,750 
*   Sonic Corp.                          Drive-In Restaurants                  27,000          513,000 
*   PetsMart Inc.                        Pet Supplies Superstores              15,650          485,150 
*   Micros Systems Inc.                  Electronic Information Systems         9,300          458,025 
*   Global Direct Mail Corp.             Computer/Office Prod. Marketer         8,000          220,000 
                                                                                          -------------- 
                                                                                           $13,213,306 
</TABLE>


                                       7
<PAGE>

<TABLE>
<CAPTION>
<S> <C>                                  <C>                                   <C>        <C>
                                                                                             MARKET 
    ENERGY:                     11.7%    BUSINESS FOCUS                         SHARES        VALUE 
    ---------------------------------    ---------------------------------     -------   -------------- 
    Tidewater Inc.                       Marine Support Vessels                 70,000     $ 2,205,000 
    Devon Energy Corp.                   Oil & Gas Producer                     58,500       1,491,750 
*   BJ Services Co.                      Stimulation & Pumping Services         45,000       1,305,000 
*   Triton Energy Corp.                  Oil & Gas Producer                     18,000       1,032,750 
*   United Meridian Corp.                Oil & Gas Producer                     46,500         807,937 
    Camco International Inc.             Oil Field Services & Equipment         28,500         798,000 
    Diamond Shamrock Inc.                Refiner and Marketer                   30,500         789,188 
*   Benton Oil & Gas Co.                 Oil & Gas Producer                     52,000         780,000 
    Parker & Parsley Pete Co.            Oil & Gas Producer                     25,000         550,000 
*   Coda Energy Inc.                     Oil & Gas Producer                     68,000         505,750 
                                                                                          -------------- 
                                                                                           $10,265,375 
    CREDIT SENSITIVE:           11.2% 
    --------------------------------- 
*   Dime Bancorp Inc.                    New York Savings Bank                 138,500     $ 1,610,063 
    Baybanks Inc.                        Massachusetts Bank                     15,000       1,473,750 
*   Glendale Fed Bank Fed Svgs           California Savings & Loan              59,750       1,045,625 
    Lennar Corp.                         Residential & Commer. Builders         40,000       1,005,000 
*   Credit Acceptance Corp.              Auto Financing                         48,300       1,002,225 
    Long Island Bancorp Inc.             New York Savings Bank                  29,000         764,875 
    Peoples Heritage Finanacial Group    Maine Savings Bank                     27,000         614,250 
    Amresco Inc.                         Real Estate Financial Services         47,500         605,625 
    Paine Webber Group Inc.              Financial Broker                       29,250         585,000 
*   Triangle Pacific Corp.               Flooring & Kitchen Cabinets            31,000         530,875 
*   First Bell Bancorp Inc.              Pennsylvania Savings Bank              30,000         401,250 
*   HFNC Financial Corp.                 North Carolina Savings & Loan          14,000         183,750 
                                                                                          -------------- 
                                                                                           $ 9,822,288 
    HEALTH CARE:                10.7% 
    --------------------------------- 
*   Phycor Inc.                          Physician Practice Management Co.      66,675     $ 3,371,255 
*   Community Health Systems Inc.        Hospital Management Company            38,600       1,375,125 
*   Henry Schein Inc.                    Healthcare Products Distributor        23,500         693,250 
*   American Oncology Inc.               Physician Practice Management Co.      14,000         680,750 
*   Gensia Pharmaceuticals Inc.          Pharmaceuticals                       102,500         538,125 
*   Perseptive Biosystems Inc.           Analytical Instruments                 62,500         531,250 
*   ImmuLogic Pharmaceutical Corp.       Pharmaceuticals                        25,000         481,250 
*   Uromed Corp.                         Urological Devices                     35,500         457,063 
*   Agouron Pharmaceuticals Inc.         Pharmaceuticals                        13,500         442,125 
*   Gilead Sciences Inc.                 Pharmaceuticals                        13,500         432,000 
*   IDX Systems Corp.                    Health Care Information Systems        10,800         375,300 
*   Sun Healthcare Group Inc.            Health Care Services                    2,000          27,000 
                                                                                          -------------- 
                                                                                           $ 9,404,493 
</TABLE>


                                       8
<PAGE>
 
<TABLE>
<CAPTION>
<S> <C>                                    <C>                                   <C>       <C>
                                                                                                MARKET 
    SERVICE COMPANIES:            10.6%    BUSINESS FOCUS                        SHARES         VALUE 
    -----------------------------------    ---------------------------------    -------   -------------- 
    Delta & Pine Land Co.                  Largest Cotton Seed Company           68,133      $ 2,503,887 
*   Paging Network Inc.                    Paging Services                       96,500        2,352,188 
    New England Business Service           Business Forms                        80,100        1,742,175 
*   Daisytek International Corp.           Non-Paper Office Supplies             30,500          937,875 
*   Vanguard Cellular Systems              Cellular Telephone Service            35,800          724,950 
*   BISYS Group Inc.                       Information Processing System         16,000          492,000 
    National Data Corp.                    Information Processing System         12,500          309,375 
*   Corestaff Inc.                         Temporary/Contract Personnel           8,000          292,000 
                                                                                           -------------- 
                                                                                             $ 9,354,450 
    PROCESS INDUSTRIES:            5.2% 
    ----------------------------------- 
    Riverwood International Corp.          Paperboard Packaging Systems          50,000      $   956,250 
    Rayonier Inc.                          Forest Products & Specialty Pulp      27,500          917,812 
    P.H. Glatfelter Co.                    Paper Manufacturer                    50,000          856,250 
    Potlatch Corp.                         Forest Products                       19,000          760,000 
    Bowater Inc.                           Newsprint and Paper Producer          20,000          710,000 
    Rock-Tenn Co.                          Paperboard Recycling                  21,000          341,250 
                                                                                           -------------- 
                                                                                             $  4,541,562 
    TRANSPORTATION:                2.1% 
    ----------------------------------- 
    TNT Freightways Corp.                  Regional Trucker                      53,900      $ 1,084,737 
    Atlantic Southeast Airlines            Air Carrier                           19,800          425,700 
*   American Freightways Corp.             Regional Trucker                      28,000          290,500 
*   Western Pacific Airlines Inc.          Airline                                3,000           50,250 
                                                                                           -------------- 
                                                                                             $ 1,851,187 
    CAPITAL GOODS:                 1.6% 
    ----------------------------------- 
    Furon Co.                              Engineered Components                 72,700      $ 1,454,000 
                                                                                           -------------- 
                                                                                             $ 1,454,000 
    TOTAL COMMON STOCKS                    (cost $58,904,597)                                $78,576,799 

    COMMERCIAL PAPER:             10.7% 
    ----------------------------------- 
    Associates Corp. 5.754% due 1/2/96                                                       $ 9,366,000 
    -----------------------------------                                                    -------------
    TOTAL: 100% (cost 68,270,597)                                                            $87,942,799
                                                                                           ============= 
</TABLE>

* Non-income producing security. 

                 See accompanying notes to financial statements


                                       9
<PAGE>
- --------------------------------------------------------------------------------
                      Statement of Assets and Liabilities
                              December 31, 1995 
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S>                                                          <C>
 Assets: 
Investments in securities at market value, 
  cost $68,270,597 (Note 1)                                  $87,942,799 

Receivables 
 Dividends and interest                                           24,812 
                                                             ----------- 
Total assets                                                 $87,967,611 

Liabilities: 
Dividend payable                                             $12,888,514 
Payable for investment securities purchased                      358,513 
Accrued expenses                                                 241,009 
Due to custodian                                                  77,881 
                                                             ----------- 
Total liabilities                                            $13,565,917 

Net assets                                                   $74,401,694 
                                                             =========== 
Net assets: 
Common stock, $0.01 par value; 6,042,435 shares issued; 
  150,000,000 shares authorized                              $    60,424 
Capital in excess of par value                                53,503,539 
Net unrealized appreciation of investments                    19,672,203 
Undistributed net capital gains                                1,165,528 
                                                             ----------- 
Net assets                                                   $74,401,694 
                                                             =========== 

Net asset value per share as of the close of business on 
  December 31, 1995                                          $     12.31 
                                                             =========== 
</TABLE>

                 See accompanying notes to financial statements


                                       10
<PAGE>

- --------------------------------------------------------------------------------
                            Statement of Operations
                     For the Year Ended December 31, 1995 
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S>                                                          <C>
Investment income: 
 Interest                                                     $    643,504 
 Cash dividends                                                    407,245 
 Miscellaneous income                                               14,736 
                                                             ------------- 
                                                              $  1,065,485 

Expenses: 
 Investment advisory fees (Note 2)                            $    743,088 
 Custodian and transfer agent fees                                  99,956 
 Professional fees                                                  69,934 
 Shareholder communications                                         61,999 
 Directors' fees                                                    52,002 
 Insurance                                                          31,912 
 Registration and listing fees                                      20,947 
 Miscellaneous                                                       6,979 
                                                             ------------- 

                                                              $  1,086,817 
Net investment expense                                        $    (21,332) 

Realized and unrealized gain/(loss) on investments: 

 Proceeds from sales                                          $ 79,312,314 
 Less-cost of securities sold                                   65,323,084 
                                                             ------------- 
 Net realized gain on investments                             $ 13,989,230 

 Unrealized appreciation: 
  Beginning of year                                           $  8,092,049 
  End of year                                                   19,672,203 
                                                             ------------- 
 Net increase in unrealized appreciation on investments       $ 11,580,154 

                                                             ------------- 
 Net realized and unrealized gain on investments              $ 25,569,384 
                                                             ------------- 
Net increase in net assets resulting 
  from operations                                             $ 25,548,052 
                                                             ============= 
</TABLE>

                 See accompanying notes to financial statements


                                       11
<PAGE>
- --------------------------------------------------------------------------------
                       Statement of Changes in Net Assets
                For the Years Ended December 31, 1995 and 1994 
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     1995             1994 
                                                                  ------------   ------------ 
<S>                                                              <C>             <C>
Increase (decrease) in net assets resulting from operations: 
 Net investment expense                                          $    (21,332)   $   (389,775) 
 Net realized gain on investments                                  13,989,230       7,888,625 
 Net change in unrealized appreciation                             11,580,154      (9,866,262) 
                                                                   ----------     ----------- 
  Net increase in net assets resulting from operations           $ 25,548,052    $ (2,367,412) 
Distributions from net realized gains                             (12,888,514)     (7,096,506) 
Share transactions                                                  2,648,895       1,235,783 
                                                                   ----------     ----------- 
Increase/(Decrease) in net assets                                $ 15,308,433     $(8,228,135) 

Net assets: 

Beginning of year                                                  59,093,261      67,321,396 
                                                                   ----------     ----------- 
End of year                                                      $ 74,401,694     $59,093,261 
                                                                   ==========     =========== 
</TABLE>

                 See accompanying notes to financial statements


                                       12
<PAGE>
 
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                          December 31, 1995 and 1994
                          --------------------------

1. Significant Accounting Policies 

   Morgan Grenfell SMALLCap Fund, Inc. (the "Fund") was organized as a 
Maryland corporation on January 16, 1987 and is registered under the 
Investment Company Act of 1940, as amended, as a closed-end, diversified 
management investment company. The Fund commenced operations on May 6, 1987. 

   The following is a summary of the significant accounting policies 
consistently followed by the Fund in the preparation of its financial 
statements. The policies are in conformity with generally accepted accounting 
principles. 

   Portfolio valuation: Securities listed on an exchange and over-the-counter 
securities quoted on the NASDAQ system are valued on the basis of the last 
sale price on the last business day of the year. Over-the-counter securities 
not quoted on the NASDAQ system are valued on the basis of the average bid 
and asked prices on that date. Commercial paper is carried at cost, which 
approximates market. 

   Securities transactions and investment income: Securities transactions are 
recorded on a trade date basis. Dividend income is recorded on the 
ex-dividend date and interest income is recorded on the accrual basis. 
Realized gains and losses from securities transactions are recorded on the 
basis of identified cost. 

   Federal income taxes: It is the policy of the Fund to qualify as a 
regulated investment company by complying with provisions available to 
certain investment companies, as defined in applicable sections of the 
Internal Revenue Code, and to make distributions of income and securities 
profits (after application of net capital loss carryovers) sufficient to 
relieve it from all, or substantially all, Federal income taxes. 

2. Investment Advisory Fee and Other Transactions with Affiliates 

   The Fund pays advisory fees for investment and advisory services to Morgan 
Grenfell Capital Management Inc. ("MGCM"), a wholly-owned subsidiary of 
Morgan Grenfell PLC. Under the terms of the investment advisory agreement, 
the management fee is calculated at an annual rate of one percent of the 
Fund's average daily net assets. 

   Certain individuals who are officers or directors, or both, of the Fund 
are also officers or directors, or both, of MGCM. 


                                       13
<PAGE>
 
3. Capital Share Transactions 

   On April 29, 1987, the Fund issued 10,782 shares to MGCM for $100,003. 
Subsequent to a public offering, the Fund issued 5,000,000 additional shares 
on May 6, 1987 for net proceeds of $46,375,000 after deducting underwriting 
discounts of $3,625,000. Arrangements were made to borrow from MGCM an amount 
equal to the underwriting discount so that at the conclusion of the offering, 
the Fund had available for investment an amount equal to the gross proceeds 
of the offering. Initial registration fees amounting to $57,407 were charged 
against paid in capital at the time of issuance of these shares. 

   During 1995, 1994, 1992 and 1990 the Fund issued 256,925, 103,447, 441,639 
and 229,642 shares, respectively, under the dividend reinvestment plan. 

4. Investment Transactions 

   The aggregate cost of securities purchased and the aggregate proceeds of 
securities sold during the year ended December 31, 1995, excluding short-term 
investments, were $69,533,278 and $79,312,314, respectively. At December 31, 
1995, the cost of investments for Federal income tax purposes was 
substantially the same as the cost for financial reporting purposes. 

5. Dividend Reinvestment Plan 

   Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all 
dividends from net investment income and/or all capital gain distributions 
will be reinvested by The Bank of New York, as agent for shareholders in 
administering the Plan (the "Plan Agent"), in additional shares of the Fund. 
Registered shareholders are deemed to participate in the Plan unless they 
elect to receive all dividends from net investment income and/or all capital 
gains distributions in the form of cash. Each registered shareholder at the 
time of purchase will receive from the Plan Agent an authorization card to be 
signed and returned if the shareholder elects to receive distributions from 
net investment income in cash or elects not to receive capital gain 
distributions in the form of a stock dividend. Shareholders whose shares are 
held in the name of a broker or nominee or shareholders transferring such an 
account to a new broker should contact such broker or nominee to elect to 
participate in the Plan or to receive their distributions in cash. 

   Participating shareholders will receive dividends from net investment 
income and/or all capital gain distributions in additional shares issued by 
the Fund if the shares are trading at a premium; i.e., the net asset value 
("NAV") is less than the then-current market price. In such event, the number 
of additional shares to be issued by the Fund will be determined by valuing 
such shares at the higher of (i) their net asset value or (ii) 95% of the 
market price. If shares of the Fund are trading at a discount; i.e., the NAV 
exceeds the then-current market price, the Plan Agent will, as agent for the 
participants, apply such dividends or distributions to purchase shares in the 
open market, on the New York Stock Exchange or elsewhere, for the 
participants' accounts. In such case, the price of the shares to each 
participating shareholder will be the average market price at which such 
shares were purchased under the direction of the Plan Agent. There will be no 
brokerage charges for shares directly issued by the Fund; however, brokerage 
commissions incurred on open market purchases will be borne pro rata by each 
participant. There is no direct service charge to participants in the Plan; 
the fees of the Plan Agent will be borne by the Fund. However, the Fund 
reserves the right to amend the Plan to include such a charge payable by the 
participants or for other reasons. 


                                       14
<PAGE>
 
5. Dividend Reinvestment Plan - continued 

   Participants in the Plan may elect to withdraw from the Plan at any time 
upon written notice to the Plan Agent and thereby elect to receive all 
distributions from net investment income in cash and/or all capital gain 
distributions either in the form of a stock dividend or in cash. The written 
notice will not be effective with respect to distributions made within seven 
days of its receipt by the Plan Agent. If notice is received after a record 
date, a shareholder's request will be completed after the determination of 
shares for that dividend has been credited to the shareholder's account. 
Dividends and capital gain distributions are taxable whether paid in cash or 
reinvested in additional shares, and the reinvestment of dividends and 
capital gain distributions will not relieve participants of liability for any 
U.S. income tax that may be payable (or required to be withheld) on such 
dividends or distributions. Additional information about the Plan is 
available by calling the Plan Agent's Shareholder Relations Department at 
1-800-432-8224. 


                                       15
<PAGE>

                           SUPPLEMENTARY INFORMATION
                           -------------------------
                             Financial Highlights 

   Contained below is per-share operating performance data for a share of 
common stock outstanding, total investment return, ratios to average net 
assets, and other supplemental data for the eight years ended December 31, 
1995, and for the period May 6, 1987 (commencement of operations) through 
December 31, 1987. This information has been derived from information 
provided in the financial statements and market price data for the Fund's 
shares. 

<TABLE>
<CAPTION>
                                                   Years Ended December 31 
                                     --------------------------------------------------- 
                                          1995             1994               1993 
                                     --------------   --------------     --------------- 
<S>                                  <C>              <C>                <C>
PER SHARE OPERATING PERFORMANCE: 
Net asset value, 
  beginning of period                   $ 10.21           $ 11.85           $ 11.97 

  Net investment income 
    (expense)                             (0.00)            (0.07)            (0.08) 
  Net gain/(loss) on securities 
    (realized and unrealized)              4.23             (0.34)             1.10 
                                        -------           -------           ------- 
Total from investment operations        $  4.23           $ (0.41)          $  1.02 
Less dividends and distributions: 
  Tax return 
  of capital distribution                 (2.13)            (1.23)            (1.14) 
                                        -------           -------           ------- 
Total dividends and distributions       $ (2.13)          $ (1.23)          $ (1.14) 
                                        -------           -------           ------- 
Net asset value, end of year            $ 12.31           $ 10.21           $ 11.85 
                                        =======           =======           ======= 
Market value per share, 
  end of year                           $12.625(1)        $ 8.875           $10.875 

TOTAL INVESTMENT RETURN: 
Based on market value per share           +42.3%             -7.1%             -1.9% 
Based on net asset value per share        +41.4%             -3.5%             +8.5% 

RATIOS TO AVERAGE NET ASSETS: 
Expenses                                   1.51%             1.52%             1.39% 
Net investment income 
  (expense)                               (0.03%)           (0.59%)           (0.74%) 

SUPPLEMENTAL DATA: 
Net assets at end of year 
  (000 omitted)                         $74,402           $59,093           $67,321 
Average net assets during year 
  (000 omitted)                         $72,202           $66,064           $69,048 
Portfolio turnover                          110%              105%               89% 
Total debt outstanding at end 
  of year (000 omitted)                     -0-               -0-               -0- 
Asset coverage per $1000 of debt 
  (000 omitted)                             N/A               N/A               N/A 
</TABLE>

*Annualized. 

(1) The Fund declared a $2.133 capital gain distribution payable to 
shareholders of record on December 29, 1995. The dividend was paid on January 
26, 1996 and the Fund's shares traded with the dividend until the ex-dividend 
date, January 29, 1996. 


                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                                         May 6, 1987 
                      Years Ended December 31                           (commencement
- -----------------------------------------------------------------        operations) 
    1992        1991          1990          1989          1988        through 12/31/87
- ----------    ----------   ----------    ----------    ----------    ----------------- 
<S>           <C>          <C>           <C>           <C>              <C>
$ 12.30       $  8.70      $  10.80      $   8.87      $   7.45         $    9.27 

  (0.09)        (0.10)        (0.11)        (0.11)        (0.11)            (0.16) 

   0.58          4.67         (1.34)         2.29          1.53             (1.66) 
- ----------     --------      --------      --------      --------     ------------
$  0.49       $   4.57      $  (1.45)     $   2.18      $   1.42         $  (1.82) 

  (0.82)         (0.97)        (0.65)        (0.25)           --              -- 
- ----------     --------      --------      --------      --------     ------------
$ (0.82)      $  (0.97)     $  (0.65)     $  (0.25)     $  0.00          $   0.00 
- ----------     --------      --------      --------      --------     ------------ 
$ 11.97       $  12.30      $   8.70      $  10.80      $   8.87         $    7.45 
==========     ========      ========      ========      ========     ============

$12.250       $ 12.875      $  8.750      $  9.625      $  7.375         $   6.000 

   +1.5%        +58.0%         -2.2%        +34.2%        +22.9%            -40.0% 
   +4.0%        +52.5%        -13.4%        +24.6%        +19.1%            -19.7% 

   1.44%         1.79%         2.01%         2.13%         2.56%             4.32%* 

  (0.83%)       (0.85%)       (1.05%)       (1.10%)       (1.30%)           (1.80%)* 

$68,013       $ 64,461      $ 45,581      $ 54,136      $ 44,462         $  37,316 

$64,644       $ 58,900      $ 51,121      $ 50,522      $ 43,422         $  44,062 
     89%           70%           75%           80%           83%               98%* 

    -0-       $  1,060      $  1,724      $  2,324      $  2,868         $   3,360 

    N/A       $   60.8      $   26.4      $   23.3      $   15.5         $    11.1 
</TABLE>


                                       17
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT
                          ----------------------------

To the Board of Directors and Shareholders 
Morgan Grenfell SMALLCap Fund, Inc.: 

   We have audited the accompanying statement of assets and liabilities, 
including the schedule of investments, of Morgan Grenfell SMALLCap Fund, Inc. 
as of December 31, 1995, and the related statement of operations for the year 
then ended, the statement of changes in net assets for each of the years in 
the two-year period ended December 31, 1995, and the financial highlights for 
each of the years in the eight-year period ended December 31, 1995 and for 
the period May 6, 1987 (commencement of operations) through December 31, 
1987. These financial statements and financial highlights are the 
responsibility of the Fund's management. Our responsibility is to express an 
opinion on these financial statements and financial highlights based on our 
audits. 

   We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audits to 
obtain reasonable assurance about whether the financial statements and 
financial highlights are free of material misstatement. An audit includes 
examining, on a test basis, evidence supporting the amounts and disclosures 
in the financial statements. Our procedures include confirmation of 
securities owned as of December 31, 1995, by correspondence with the 
custodian and brokers. An audit also includes assessing the accounting 
principles used, and significant estimates made by management, as well as 
evaluating the overall financial statement presentation. We believe that our 
audits provide a reasonable basis for our opinion. 

   In our opinion, the financial statements and financial highlights referred 
to above present fairly, in all material respects, the financial position of 
Morgan Grenfell SMALLCap Fund, Inc., as of December 31, 1995, the result of 
its operations for the year then ended, changes in net assets for each of the 
years in the two-year period ended December 31, 1995 and the financial 
highlights for each of the years in the eight-year period ended December 31, 
1995, and for the period May 6, 1987 (commencement of operations) through 
December 31, 1987, in conformity with generally accepted accounting 
principles. 

                                                         KPMG PEAT MARWICK LLP 

New York, New York 
January 31, 1996 


                                       18
<PAGE>
 
            MORGAN GRENFELL SMALLCap FUND -- DIRECTORS AND OFFICERS
            -------------------------------------------------------

<TABLE>
<CAPTION>
<S>                                            <C>
 Michael Bullock                               Audrey M.T. Jones 
CHAIRMAN AND DIRECTOR                          VICE PRESIDENT 
Chief Investment Officer                       Senior Director 
Morgan Grenfell Asset Management, Ltd.         Morgan Grenfell Capital 
                                               Management, Inc. 

Robert E. Kern, Jr.                            Gerald S. Frey 
PRESIDENT AND DIRECTOR                         VICE PRESIDENT 
Executive Vice President                       Senior Director 
Morgan Grenfell Capital                        Morgan Grenfell Capital 
  Management, Inc.                              Management, Inc. 

Robert E. Greeley                              Mark G. Arthus 
DIRECTOR                                       SECRETARY AND TREASURER 
Partner                                        Director of Administration and Compliance 
Cypress Cove Fund L.P.                         Morgan Grenfell Capital 
                                               Management, Inc. 

Joseph J. Incandela 
DIRECTOR                                       TRANSFER AGENT 
Partner/Managing Director                      The Bank of New York 
Thomas H. Lee Co.                              101 Barclay Street 
                                               New York, NY 10286 
Richard D. Wood 
                                               CORPORATE OFFICES 
DIRECTOR                                       Morgan Grenfell Capital Management, Inc. 
Consultant                                     885 Third Avenue 
                                               32nd Floor 
                                               New York, NY 10022 
</TABLE>

Shares of the Morgan Grenfell SMALLCap Fund are traded on the New York Stock 
Exchange under the symbol "MGC." 

In accordance with Section 23(c) of the Investment Company Act of 1940, the 
Fund hereby serves notice that it may from time to time repurchase shares of 
the Fund in the open market at the option of the Board of Directors. 


                                       19
<PAGE>
 
                        SHAREHOLDER INFORMATION SERVICE
                        -------------------------------

Information regarding the Fund's net asset value is available by calling 
1-800-888-8060. Additional shareholder information can be obtained by calling 
1-800-432-8224 through the Bank of New York's Shareholder Relations 
Department. The Fund's net asset value is reported each week in The Wall 
Street Journal and Barron's. 


                                       20
<PAGE>


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