<PAGE>
THE MORGAN STANLEY HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
James W. Grisham
Michael F. Klein VICE PRESIDENT
PRESIDENT AND DIRECTOR
Harold J. Schaaff, Jr.
Peter J. Chase VICE PRESIDENT
DIRECTOR
Joseph P. Stadler
John W. Croghan VICE PRESIDENT
DIRECTOR
Valerie Y. Lewis
David B. Gill SECRETARY
DIRECTOR
Joanna M. Haigney
Graham E. Jones TREASURER
DIRECTOR
Belinda A. Brady
John A. Levin ASSISTANT TREASURER
DIRECTOR
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
For additional Fund information, including the Fund s net asset value per share
and information regarding the investments comprising the Fund s portfolio,
please call 1-800-221-6726.
- --------------------------------------------------------------------------------
THE
MORGAN STANLEY
HIGH YIELD
FUND, INC.
- --------------------------------------------------------------------------------
THIRD QUARTER REPORT
SEPTEMBER 30, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- ----------
For the nine months ended September 30, 1997, the Morgan Stanley High Yield
Fund, Inc. (the "Fund") had a total return, based on net asset value per share,
of 16.90% compared to 10.86% for the CS First Boston High Yield Index (the
"Index"). For the one year ended September 30, 1997, the Fund had a total
return, based on net asset value per share, of 23.93% compared to 15.75% for the
Index. For the period since the Fund's commencement of operations on November
30, 1993 through September 30, 1997, the Fund's total return based on net asset
value per share, was 63.64% compared to 46.65% for the Index. On September 30,
1997, the closing price of the Fund's shares on the New York Stock Exchange was
$15 5/8 representing a 1.3% discount to the Fund's net asset value per share.
The high-yield market continued its solid performance in the third quarter of
1997. The absence of Federal Reserve tightening, and favorable inflation
statistics resulted in ten year Treasury rates declining nearly 40 basis points
in the quarter. The stock market also provided a sound backdrop to the
high-yield market as the S&P 500 rose about 7 1/2 percent over the quarter.
High-yield bond yield spreads over US Treasuries continued to be at historically
narrow levels. These levels are supported by the solid US economy, strong
demand among mutual fund investors and others for high-yield bonds, and
favorable merger and acquisition activity affecting high-yield companies. The
telecommunications sector has been especially active in the merger and
acquisition and IPO fronts. The third quarter was capped by the proposed
acquisition of both MCI Communications and Brooks Fiber by Worldcom. These
transactions follow Worldcom's acquisition of MFS Communications completed
earlier in the year. These and similar transactions are being consummated
through stock swaps, and thus the combined companies have not increased debt
levels. Credit quality of the acquired companies has improved as a result of
the mergers, favorably impacting prices on their high-yield bonds. We believe
the accelerating demand for telecommunications services will continue to
favorably impact companies who have sound business strategies and attractive
fiber-optic networks. We have been significantly weighted in the sector, and
increased our commitment in the third quarter.
We continued to reduce our exposure to the cable television sector. In the
second quarter, Microsoft announced plans to make an investment in Comcast.
Telecommunications Inc., the leader in the industry, began to improve credit
quality by spinning off non-cable assets and entering into joint ventures to
realize efficiencies in parts of their cable system. Cable company stock
prices have soared this year indirectly helping bond prices and more directly
boosting returns on a TCI convertible bond investment we made earlier in the
year.
We continued to reduce our exposure to emerging market sovereign bonds, as that
sector has performed extremely well. We believe that much of the value in this
sector has been realize. We continue to look for attractive investment
opportunities in corporate bonds being issued in both the emerging markets and
the developed markets of Europe and Asia.
The portfolio continues to stress higher credit ratings when compared to other
high-yield managers, with an average credit quality of BB. We believe that
through active security selection we can perform favorably without reaching for
the higher current yields available in lower quality securities. The
interest-rate sensitivity of the portfolio continues to be similar to the
benchmark, reflecting our view that there is roughly fair value in the US bond
market.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Robert Angevine
Robert Angevine
PORTFOLIO MANAGER
October 1997
2
<PAGE>
MORGAN STANLEY HIGH YIELD FUND, INC.
INVESTMENT SUMMARY AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURN (%)
INFORMATION ----------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
--------------------- -------------------- -------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR TO DATE 13.94% -- 16.90% -- 10.86% --
ONE YEAR 19.93 19.93% 23.93% 23.93% 15.75 15.75%
SINCE INCEPTION* 61.42 13.30 63.64 13.70 46.65 10.50
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[CHART]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31: NINE MONTHS
ENDED
1993* 1994 1995 1996 SEPTEMBER 30, 1997
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value Per
Share . . . . . . . . . . . $14.10 $11.96 $13.63 $14.45 $15.84
Market Value Per Share . . . $14.75 $11.38 $12.88 $14.63 $15.63
Premium/(Discount) . . . . . 4.6% -4.8% -5.5% 1.3% -1.3%
Income Dividends . . . . . . -- $ 1.37 $ 1.27 $ 1.42 $ 0.97
Fund Total Return (2). . . . 0.00% -5.53% 26.07% 17.52% 16.90%
Index Total Return (1)(3). . 1.26% -0.98% 17.39% 12.40% 10.86%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
* The Fund commenced operations on November 30, 1993.
3
<PAGE>
MORGAN STANLEY HIGH YIELD FUND, INC.
INVESTMENT SUMMARY AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
[CHART]
Short-Term Investments (3.9%)
Debt Securities (89.1%)
Equity Securities (7.0%)
- --------------------------------------------------------------------------------
SECTORS
[CHART]
Other (32.4%)
Telecommunications (18.1%)
Multi-Industry (8.7%)
Asset-Backed Securities (5.8%)
Broadcast-Radio & Television (11.4%)
Diversified (4.4%)
Energy (4.9%)
Financial Services (3.3%)
Foreign Government Bonds (3.7%)
Gaming & Lodging (3.2%)
Metals (4.1%)
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
PERCENT OF
TOTAL
INVESTMENTS
-----------
1. Time Warner, Inc. 3.9%
2. DR Securitized Lease Trust 3.5
3. Brooks Fiber Properties 3.0
4. Teleport Communications 2.5
5. IXC Communications, Inc. 2.5
6. ISP Holdings, Inc. 2.5
7. Norcal Waste Systems Inc. 2.4
8. Dial Call Communications 2.3
9. Viacom, Inc. 2.3
10. Nextel Communications 2.2
----
27.1%
----
----
* Excludes short-term investments.
4
<PAGE>
INVESTMENTS (UNAUDITED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- ----------
SEPTEMBER 30, 1997
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (77.5%)
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.0%)
Jet Equipment Trust
'D-95' 144A 11.44%, 11/1/14 $ 1,100 $ 1,425
'C1' 144A 11.79%, 6/15/13 1,500 1,964
------
3,389
------
BANKING (1.3%)
Western Financial Bank
8.875%, 8/1/07 2,135 2,140
------
BROADCAST - RADIO & TELEVISION (11.4%)
Cablevision Systems Corp.
9.875%, 5/15/06 2,650 2,862
Comcast Cellular Corp. 144A
9.50%, 5/1/07 2,480 2,592
Fox/Liberty Networks LLC 144A
0.00%, 8/15/07 1,365 870
8.875%, 8/15/07 845 850
Paramount Communications
8.25%, 8/1/22 2,600 2,567
Rogers Cablesystems
10.125%, 9/1/12 650 705
Rogers Cablesystems 'B'
10.00%, 3/15/05 2,210 2,423
TV Azteca 'B' 144A
10.50%, 2/15/07 2,470 2,618
Viacom, Inc.
8.00%, 7/7/06 3,840 3,831
------
19,318
------
BUSINESS SERVICES (1.8%)
Outdoor Systems Inc. 144A
8.875%, 6/15/07 2,955 3,014
------
CHEMICALS (1.0%)
+Huntsman Corp. 144A
9.094%, 7/1/07 1,650 1,716
------
COAL, GAS & OIL (2.0%)
Snyder Oil Corp.
8.75%, 6/15/07 3,350 3,346
------
COMPUTERS (1.8%)
Advanced Micro Devices, Inc.
11.00%, 8/1/03 2,670 2,994
------
DIVERSIFIED (0.5%)
KMart Corp.
7.75%, 10/1/12 725 679
8.375%, 7/1/22 185 177
------
856
------
- --------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
ENERGY (4.9%)
National Power Corp.
7.875%, 12/15/06 $ 1,825 $ 1,780
Nuevo Energy Co.
9.50%, 4/15/06 2,760 2,946
Quezon Power Ltd.
8.86%, 6/15/17 2,900 2,922
Transamerican Energy 144A
0.00%, 6/15/02 945 749
------
8,397
------
ENVIRONMENTAL CONTROLS (2.4%)
Norcal Waste Systems Inc.
13.00%, 11/15/05 3,575 4,111
------
FINANCIAL SERVICES (2.3%)
Geberit International 144A
10.125%, 4/15/07 DEM 1,700 1,055
ITT Promedia 144A
9.125%, 9/15/07 2,950 1,734
PTC International Finance BV 144A
0.00%, 7/1/07 $ 1,820 1,192
------
3,981
------
FOOD (1.7%)
Ameriserve Food Co. 144A
10.125%, 7/15/07 795 824
Fleming Companies, Inc. 144A
10.50%, 12/1/04 1,455 1,522
10.625%, 7/31/07 460 486
------
2,832
------
FOOD SERVICE & LODGING (2.1%)
Courtyard By Marriott 'B'
10.75%, 2/1/08 1,520 1,647
Host Marriott Travel
9.50%, 5/15/05 1,835 1,932
------
3,579
------
FOREST PRODUCTS & PAPER (1.5%)
APP Fin II Mauritius Ltd. 144A
12.00%, 2/15/04 2,490 2,534
------
GAMING & LODGING (3.2%)
Grand Casinos
10.125%, 12/1/03 2,495 2,654
Louisiana Casino Cruise
11.50%, 12/1/98 318 322
Station Casinos, Inc.
10.125%, 3/15/06 2,485 2,522
------
5,498
------
HEALTH CARE SUPPLIES & SERVICES (1.5%)
Tenet Healthcare Corp.
8.625%, 1/15/07 2,405 2,492
------
- --------------------------------------------------------------------------------
5
<PAGE>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
METALS (4.1%)
Hylsa 144A
9.25%, 9/15/07 $ 2,350 $ 2,388
Impress Metal Packaging 144A
9.875%, 5/29/07 DEM 2,750 1,651
Murrin Murrin Holdings Pty 144A 9.375%, 8/31/07 $ 2,785 2,862
------
6,901
------
MULTI-INDUSTRY (8.7%)
Brooks Fiber Properties
0.00%, 3/1/06 5,395 4,329
0.00%, 11/1/06 1,095 846
CA FM Lease Trust 144A
8.50%, 7/15/17 1,481 1,568
Echostar Satellite Broadcast
0.00%, 3/15/04
ISP Holdings, Inc. 'B'
9.00%, 10/15/03 4,065 4,253
Multicanal S.A. 144A
10.50%, 2/1/07 1,205 1,288
SD Warren Co. 'B'
12.00%, 12/15/04 2,235 2,528
------
14,812
------
REAL ESTATE (1.8%)
HMC Acquisition Properties
9.00%, 12/15/07 2,050 2,106
Residential Reins 97A A2 144A
11.45%, 12/15/98 1,000 1,028
------
3,134
------
RETAIL - GENERAL (2.0%)
Southland Corp.
5.00%, 12/15/03 4,000 3,450
------
SOAP & TOILETRIES (0.8%)
Revlon Worldwide 'B'
0.00%, 3/15/01 1,975 1,434
------
TELECOMMUNICATIONS (16.0%)
Dial Call Communications
0.00%, 4/15/04 2,500 2,334
Dial Call Communications 'B'
0.00%, 12/15/05 1,860 1,662
Globalstar LP 144A
11.375%, 2/15/04 1,925 2,012
Iridium LLC/Capital Corp. 144A
13.00%, 7/15/05 840 876
IXC Communications, Inc.
12.50%, 10/1/05 2,195 2,535
Nextel Communications
0.00%, 8/15/04 4,275 3,703
Occidente y Caribe
0.00%, 3/15/04 3,125 2,465
Qwest Communications International
144A 10.875%, 4/1/07 775 876
Rogers Communications, Inc.
8.875%, 7/15/07 750 755
9.125%, 1/15/06 800 814
TCI Satellite Entertainment 144A
0.00%, 2/15/07 4,295 2,802
- --------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
Tele-Communications, Inc.
9.25%, 1/15/23 $ 1,930 $ 2,077
Teleport Communications
0.00%, 7/1/07 5,480 4,288
------
27,199
------
TRANSPORTATION (0.3%)
Hermes Europe Railtel BV 144A
11.50%, 8/15/07 480 516
------
UTILITIES (2.4%)
Cleveland Electric
8.375%, 12/1/11 440 450
8.375%, 8/1/12 1,050 1,075
Midland Cogeneration Ventures 'C-91'
10.33%, 7/23/02 581 622
Midland Funding Corp. I 'C-94'
10.33%, 7/23/02 1,122 1,201
Midland Funding Corp. II 'A'
11.75%, 7/23/05 650 765
------
4,113
------
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $123,580) 131,756
-------
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (5.8%)
Aircraft Lease Portfolio
Securitization Ltd. 1996-1 P1D 12.75%, 6/15/06 1,770 1,910
DLJ Mortgage Acceptance Corp. 1997-CF2 S 144A
0.357%, 10/15/30 33,000 875
DR Securitized Lease Trust
1993-K1 A1 6.66%, 8/15/10 2,164 1,972
1994-K1 A1 7.60%, 8/15/07 3,517 3,422
1994-K2 A2 9.35%, 8/15/19 500 507
First Home Mortgage Acceptance Corp.,
96-B, C 144A 7.929%, 11/1/18 1,344 1,205
------
- --------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $9,084) 9,891
------
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (2.1%)
GE Capital Mortgage Services
1995-12 144A 7.911%, 8/25/25 646 599
GMAC IO 1996-C1 CL X2 REMIC
1.96%, 3/15/21 6,675 623
Long Beach Auto 1997-1, 'B' 144A
14.22%, 10/26/03 1,731 1,744
PNC Mortgage Services Corp.,
1995-2 B4 7.50%, 9/25/25 716 650
------
- --------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $3,515) 3,616
------
- --------------------------------------------------------------------------------
6
<PAGE>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
FOREIGN GOVERNMENT BONDS (3.7%)
- --------------------------------------------------------------------------------
ARGENTINA (1.9%)
Republic of Argentina 'L' Par Bond
5.50%, 3/31/23 $ 2,555 $ 1,933
+Republic of Argentina Bearer Bond
6.688%, 3/31/05 14 14
Republic of Argentina Pre 4 Bocon
0.00%, 9/1/02 1,100 1,329
------
3,276
------
COLOMBIA (0.5%)
Republic of Colombia
8.70%, 2/15/16 750 764
------
MAURITIUS (0.3%)
Pindo Deli Finance Mauritius 144A
10.75%, 10/1/07 560 570
------
MEXICO (1.0%)
United Mexican States
0.00%, 6/30/03 2,125 --@
United Mexican States Discount Bond
(Rights Attached)
6.25%, 12/31/19 2,125 1,766
------
1,766
------
- --------------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $5,476) 6,376
------
- --------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------
PREFERRED STOCK (6.8%)
- --------------------------------------------------------------------------------
DIVERSIFIED (3.9%)
Time Warner, Inc. Series 'M' 10.25% 5,803 6,644
------
FINANCIAL SERVICES (1.0%)
Sinclair Capital 144A 11.625% 15,290 1,659
------
TELECOMMUNICATIONS (1.9%)
IXC Communications, Inc. 144A PIK 12.50% 1,500 1,740
TCI Communications, Inc. 5.00% (Convertible) 11,580 1,455
------
3,195
------
- --------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost $10,009) 11,498
------
- --------------------------------------------------------------------------------
NO. OF
WARRANTS
- --------------------------------------------------------------------------------
WARRANTS (0.2%)
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.0%)
Sabreliner Corp. 144A, expiring 4/15/03 2,000 --@
------
GAMING & LODGING (0.0%)
Louisiana Casino Cruises, expiring 12/1/98 1,108 --@
------
- --------------------------------------------------------------------------------
NO. OF VALUE
WARRANTS (000)
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.2%)
Globalstar Telecom 144A, expiring 2/15/04 $ 1,925 $ 231
Iridium World Communications,
Inc., expiring 7/15/05 840 126
Nextel Communications, expiring 4/25/99 2,500 --@
Occidente y Caribe 144A, expiring 3/15/04 12,500 --@
------
357
------
- --------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $40) 357
------
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (3.9%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Chase Securities, Inc., 5.75%, dated 9/30/97,
due 10/1/97, to be repurchased at $6,601,
collateralized by United States Treasury
Bonds, 8.50%, due 2/15/20, valued at $6,730
(Cost $6,600) 6,600 6,600
------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100%)
(Cost $158,304) 170,094
-------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
Other Assets 25,601
Liabilities (57,049) (31,448)
-------- --------
- --------------------------------------------------------------------------------
NET ASSETS
Applicable to 8,755,247 issued and outstanding
0.01 par value shares (100,000,000 shares
authorized) $ 138,646
---------
---------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 15.84
---------
---------
- --------------------------------------------------------------------------------
@ -- Value is less than $500.
+ -- Variable/floating rate security - rate disclosed is as of September
30, 1997.
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
IO -- Interest Only.
REMIC -- Real Estate Mortgage Investment Conduit.
7
