<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
Michael F. Klein Stefanie V. Chang
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones Joanna M. Haigney
DIRECTOR TREASURER
John A. Levin Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
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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 LLP
200 Park Avenue
New York, New York 10166
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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.
- --------------------------------------------------------------------------------
FIRST QUARTER REPORT
MARCH 31, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
For the three months ended March 31, 1998, The Morgan Stanley High Yield Fund,
Inc. (the "Fund") had a total return, based on net asset value per share, of
5.02% compared to 3.01% for the CS First Boston High Yield Index (the "Index").
For the one year ended March 31, 1998, and, for the period since the Fund's
commencement of operations on November 30, 1993 through March 31, 1998, the
Fund's total return, based on net asset value per share, was 23.45% and 74.17%,
respectively, compared to 14.35% and 53.50%, respectively, for the Index. On
March 31, 1998, the closing price of the Fund's shares on the New York Stock
Exchange was $16 1/16 , representing a 2.8% premium to the Fund's net asset
value per share.
U.S. high-yield bonds outperformed high quality bonds in the first quarter of
1998, against the backdrop of fairly stable U.S. Treasury yields and a strong
U.S. stock market.
For the first quarter the Fund outperformed the Index. This outperformance was
primarily due to superior performance in the communications sector and strong
results in non-U.S. corporates, led by Korea.
Within our commitment to the communications sector we benefited from additional
merger and acquisition activity. Brooks Fiber, a competitive local exchange
carrier whose bonds we had owned for some time, was recently acquired by
WorldCom. This acquisition resulted in the February announcement of a tender
offer for the Brooks Fiber bonds at a favorable price to the investor. Also,
late in the quarter, Qwest Communications agreed to acquire LCI International in
a stock swap; this transaction was viewed favorably by investors and caused
Qwest's bond prices to rise. The combined company should have a very strong
competitive position in the U.S. market for long-distance voice and data
transmissions. New investments made in the quarter included NEXTLINK, another
competitive local exchange carrier, and RSL Communications, a company focused on
the European telephone business, which is undergoing significant deregulation
following similar developments in the U.S..
The current popularity of Real Estate Investment Trust (REIT) structures in the
U.S. capital markets has favorably affected the Fund. Early in 1998, one of our
gaming companies, Station Casinos was acquired by a REIT; now Vencor, a
healthcare company, announced plans to spin-off a REIT which would hold all of
their real-estate assets. Because of covenants in the indenture of the bonds
this transaction resulted in an attractive tender offer for our position. A new
position in the healthcare sector was Columbia/HCA Corporation, which was
purchased following its downgrade to below-investment grade by Moody's Investor
Service. We believe the market price of the bonds declined more than warranted
given our assessment of the prospects for stabilization and recovery in the
company's credit profile.
There were no significant changes in sector weightings during the quarter. We
continue to see value in the communication industry as well as selected non-U.S.
issuers. We believe the U.S. economic and financial environment continues to be
favorable for the credit quality of high-yield issuers. Yield spreads remain
historically narrow, and we continue to emphasize above-average credit quality
in the Fund. Additionally, we intend to maintain interest rate sensitivity
which is no longer than that of the benchmark.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Robert Angevine
Robert Angevine
PORTFOLIO MANAGER
April 1998
2
<PAGE>
MORGAN STANLEY HIGH YIELD FUND, INC.
INVESTMENT SUMMARY AS OF MARCH 31, 1998 (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 2.13% - 5.02% - 3.01% -
One Year 26.94 26.95% 23.45 23.45% 14.35 14.35%
Since Inception* 79.11 14.39 74.17 13.66 53.50 10.40
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
RETURNS AND PER SHARE INFORMATION
<TABLE>
<CAPTION>
[GRAPH]
YEARS ENDED DECEMBER 31:
THREE MONTHS
ENDED
MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . . . . $ 14.10 $ 11.96 $ 13.63 $ 14.45 $ 15.19 $ 15.62
Market Value Per Share . . . . . . . . . $ 14.75 $ 11.38 $ 12.88 $ 14.63 $ 16.06 $ 16.06
Premium/(Discount) . . . . . . . . . . . 4.6% -4.8% -5.5% 1.3% 5.7% 2.8%
Income Dividends . . . . . . . . . . . . -- $ 1.37 $ 1.27 $ 1.42 $ 1.36 $ 0.33
Capital Gains Distributions. . . . . . . -- -- -- -- $ 0.48 $ --
Fund Total Return (2). . . . . . . . . . 0.00% -5.53% 26.07% 17.52% 18.48% 5.02%
Index Total Return (1)(3). . . . . . . . 1.26% -0.98% 17.39% 12.40% 12.65% 3.01%
</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.
PORTFOLIO SUMMARY AS OF MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Short-Term Investments 0.9%
Debt Securities 93.9%
Equity Securities 5.2%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
[CHART]
<TABLE>
<S> <C>
Other 26.6%
Telecommunications 17.4%
Multi-Industry 5.8%
Asset-Backed Securities 5.8%
Broadcast -- Radio & Television 12.6%
Collateralized Mortgage Obligations 3.7%
Energy 4.7%
Financial Services 4.1%
Gaming & Lodging 3.1%
Health Care Supplies & Services 7.2%
Metals 9.0%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
Percent of
Total
Investments
-----------
<S> <C>
1. DR Securitized Lease Trust 3.8%
2. Columbia/HCA Healthcare 3.1
3. Nextel Communications, Inc. 3.0
4. Pohang Iron & Steel Co., Ltd. 3.0
5. IXC Communications, Inc. 2.7
6. Time Warner, Inc. 2.6
7. Southland Corp. 2.3
8. Jet Equipment Trust 2.3
9. CSC Holdings Inc. 2.3
10. Dial Call Communications 2.3
----
27.4%
----
----
</TABLE>
* Excludes short-term investments.
4
<PAGE>
INVESTMENTS (UNAUDITED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
MARCH 31, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS AND NOTES (81.3%)
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.3%)
Jet Equipment Trust
'D-95' 11.44%, 11/1/14 $ 1,100 $ 1,470
'C1' 11.79%, 6/15/13 1,500 2,020
---------------
3,490
---------------
- --------------------------------------------------------------------------------
BANKING (1.9%)
Korea Development Bank
7.375%, 9/17/04 (Korea) 590 535
Western Financial Bank
8.875%, 8/1/07 2,385 2,302
---------------
2,837
---------------
- --------------------------------------------------------------------------------
BROADCAST -- RADIO & TELEVISION (12.6%)
Comcast Cellular Holdings 'B'
9.50%, 5/1/07 2,480 2,629
CSC Holdings Inc.
7.875%, 12/15/07 575 592
9.875%, 5/15/06 2,650 2,895
Fox/Liberty Networks LLC
(a) 0.00%, 8/15/07 3,390 2,305
8.875%, 8/15/07 845 877
Lenfest Communications
8.375%, 11/1/05 1,660 1,731
RBS Participacoes
11.00%, 4/1/07 (Brazil) 850 860
Rogers Cablesystems
10.125%, 9/1/12 650 716
Rogers Cablesystems 'B'
10.00%, 3/15/05 2,210 2,475
Sinclair Broadcast Group
9.00%, 7/15/07 1,370 1,428
TV Azteca 'B'
10.50%, 2/15/07 (Mexico) 2,470 2,649
---------------
19,157
---------------
- --------------------------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS (1.1%)
American Standard Companies Inc.
7.375%, 2/1/08 1,685 1,657
---------------
- --------------------------------------------------------------------------------
BUSINESS SERVICES (2.1%)
Outdoor Systems Inc.
8.875%, 6/15/07 2,955 3,103
---------------
- --------------------------------------------------------------------------------
COAL, GAS & OIL (2.3%)
Snyder Oil Corp.
8.75%, 6/15/07 3,350 3,442
---------------
- --------------------------------------------------------------------------------
COMPUTERS (2.1%)
Advanced Micro Devices, Inc.
11.00%, 8/1/03 2,970 3,178
---------------
- --------------------------------------------------------------------------------
ELECTRONIC COMPONENTS & INSTRUMENTS (0.1%)
AST Research Inc.
7.45%, 10/1/02 175 157
---------------
- --------------------------------------------------------------------------------
ENERGY (4.7%)
National Power Corp.
7.875%, 12/15/06 1,825 1,660
Nuevo Energy Co.
9.50%, 4/15/06 2,760 2,939
Quezon Power Ltd.
8.86%, 6/15/17 (Philippines) 2,900 2,538
---------------
7,137
---------------
- --------------------------------------------------------------------------------
FINANCIAL SERVICES (3.0%)
Geberit International
10.125%, 4/15/07 DEM 1,700 1,042
Indah Kiat Finance Mauritius
10.00%, 7/1/07 (Indonesia) $ 420 349
Navistar Financial Corp. 'B'
9.00%, 6/1/02 300 315
PTC International Finance BV
0.00%, 7/1/07 2,470 1,729
SB Treasury Co. LLC
9.40%, 12/29/49 1,010 1,044
---------------
4,479
---------------
- --------------------------------------------------------------------------------
FOOD SERVICE & LODGING (0.2%)
Smithfield Foods, Inc.
7.625%, 2/15/08 325 323
---------------
- --------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (1.4%)
APP Fin II Mauritius Ltd.
12.00%, 2/15/04 (Indonesia) 2,490 2,067
---------------
- --------------------------------------------------------------------------------
GAMING & LODGING (3.1%)
Grand Casinos
10.125%, 12/1/03 1,495 1,630
Louisiana Casino Cruise
11.50%, 12/1/98 318 318
Station Casinos, Inc.
10.125%, 3/15/06 2,485 2,789
---------------
4,737
---------------
- --------------------------------------------------------------------------------
HEALTH CARE SUPPLIES & SERVICES (7.2%)
Columbia/HCA Healthcare
6.91%, 6/15/05 3,260 3,065
7.00%, 7/1/07 1,705 1,588
Integrated Health Services 'A'
9.50%, 9/15/07 1,940 2,061
Magellan Health Services
9.00%, 2/15/08 950 957
Pharmerica, Inc.
8.375%, 4/1/08 730 734
Tenet Healthcare Corp.
8.625%, 1/15/07 2,405 2,507
---------------
10,912
---------------
- --------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
METALS (9.0%)
Grupo Minero Mexico 'A'
8.25%, 4/1/08 (Mexico) $ 1,515 $ 1,503
Hylsa
9.25%, 9/15/07 1,900 1,900
Impress Metal Packaging
9.875%, 5/29/07 DEM 3,150 1,810
Murrin Murrin Holdings Pty
9.375%, 8/31/07 $ 2,785 2,771
NSM Steel Ltd.
12.25%, 2/1/08 1,150 1,104
Pohang Iron & Steel Co., Ltd.
7.125%, 7/15/04 (Korea) 5,070 4,487
---------------
13,575
---------------
- --------------------------------------------------------------------------------
MULTI-INDUSTRY (5.8%)
Ameriserve Food Co.
10.125%, 7/15/07 795 855
Brooks Fiber Properties
0.00%, 11/1/06 1,095 919
CA FM Lease Trust
8.50%, 7/15/17 1,459 1,528
Multicanal
10.50%, 2/1/07 1,705 1,820
Reliance Industries Ltd.
9.375%, 6/24/26 445 447
Revlon Worldwide Corp.
0.00%, 765 774
SD Warren Co. 'B'
12.00%, 12/15/04 2,235 2,498
---------------
8,841
---------------
- --------------------------------------------------------------------------------
REAL ESTATE (2.1%)
HMC Acquisition Properties
9.00%, 12/15/07 2,050 2,176
Residential Reinsurance 97A A2
11.45%, 12/15/98 1,000 1,011
---------------
3,187
---------------
- --------------------------------------------------------------------------------
RETAIL -- GENERAL (2.3%)
Southland Corp.
5.00%, 12/15/03 4,000 3,500
---------------
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS (15.9%)
Dial Call Communications
0.00%, 4/15/04 2,500 2,500
Dial Call Communications 'B'
0.00%, 12/15/05 1,000 985
Espirit Telecom Group 'DM'
11.50%, 12/15/07 DEM 2,000 1,184
Flag Ltd.
8.25%, 1/30/08 $ 725 745
Globalstar LP
11.375%, 2/15/04 1,000 1,050
Iridium LLC/Capital Corp. 'A'
13.00%, 7/15/05 840 941
IXC Communications, Inc.
12.50%, 10/1/05 1,745 2,077
Nextel Communications, Inc.
0.00%, 8/15/04 1,675 1,612
0.00%, 9/15/07 4,460 2,988
Occidente y Caribe
0.00%, 3/15/04 (Colombia) 3,125 2,750
Qwest Communications International
0.00%, 2/1/08 1,000 705
10.875%, 4/1/07 775 899
Rogers Communications, Inc.
8.875%, 7/15/07 750 757
9.125%, 1/15/06 800 818
RSL Communications, Ltd.
0.00%, 3/15/08 DEM 2,700 902
9.125%, 3/1/08 $ 1,035 1,045
12.25%, 11/15/06 125 142
Satelites Mexicanos
10.125%, 11/1/04 (Mexico) 440 455
TCI Satellite Entertainment
0.00%, 2/15/07 2,260 1,622
---------------
24,177
---------------
- --------------------------------------------------------------------------------
TRANSPORTATION (0.4%)
Hermes Europe Railtel, BV
11.50%, 8/15/07 480 544
---------------
- --------------------------------------------------------------------------------
UTILITIES (1.7%)
Korea Electric Power Corp.
7.75%, 4/1/13 (Korea) 1,810 1,538
Midland Funding Corp. I 'C-94'
10.33%, 7/23/02 1,017 1,109
---------------
2,647
---------------
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $117,661) 123,147
---------------
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (5.8%)
Aircraft Lease Portfolio Securitization Ltd.
1996-1 P1D 12.75%, 6/15/06 1,770 1,773
DR Securitized Lease Trust
1993-K1 A1 6.66%, 8/15/10 2,111 1,963
1994-K1 A1 7.60%, 8/15/07 3,397 3,344
1994-K2 A2 9.35%, 8/15/19 500 519
First Home Mortgage Acceptance
Corp., 1996-B, Class C
7.929%, 11/1/18 1,312 1,174
---------------
- --------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $8,038) 8,773
---------------
- --------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (3.7%)
DLJ Mortgage Acceptance Corp.
1997-CF2 S 0.357%, 10/15/30 $ 32,925 $ 867
GMAC IO 1996-C1 CL X2 REMIC
1.868%, 3/15/21 6,589 553
Long Beach Auto 1997-1, 'B'
14.22%, 10/26/03 2,857 2,854
OHA Auto Grantor Trust 1997-1, 'B'
11.00%, 9/15/03 1,444 1,422
---------------
- --------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $5,859) 5,696
---------------
- --------------------------------------------------------------------------------
FOREIGN GOVERNMENT BONDS (3.1%)
- --------------------------------------------------------------------------------
ARGENTINA (2.0%)
+Republic of Argentina
6.625%, 3/31/05 1,819 1,679
Republic of Argentina Pre 4 Bocon PIK
0.00%, 9/1/02 1,100 1,347
---------------
3,026
---------------
- --------------------------------------------------------------------------------
MAURITIUS (1.1%)
Pindo Deli Finance Mauritius
10.75%, 10/1/07 1,955 1,618
---------------
- --------------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $4,682) 4,644
---------------
- --------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------
PREFERRED STOCK (5.0%)
- --------------------------------------------------------------------------------
DIVERSIFIED (2.6%)
Time Warner, Inc. Series 'M' 10.25% 3,452 3,866
---------------
- --------------------------------------------------------------------------------
FINANCIAL SERVICES (1.1%)
Sinclair Capital 11.625% 15,290 1,697
---------------
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS (1.3%)
IXC Communications, Inc. PIK 12.50% 1,593 1,944
---------------
- --------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost $6,624) 7,507
---------------
- --------------------------------------------------------------------------------
NO. OF
WARRANTS
- --------------------------------------------------------------------------------
WARRANTS (0.2%)
GAMING & LODGING (0.0%)
Louisiana Casino Cruises, expiring 12/1/98 1,108 --
---------------
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.2%)
Globalstar Telecom, expiring 2/15/04 1,000 150
Iridium World Communications, Inc.,
expiring 7/15/05 840 202
Nextel Communications, expiring 4/25/99 2,500 --
Occidente y Caribe, expiring 3/15/04
(Colombia) 12,500 --
---------------
352
---------------
- --------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $--@) 352
---------------
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (0.9%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 5.60%,
dated 3/31/98, due 4/1/98, to
be repurchased at $1,386,
collateralized by $1,390,
United States Treasury Notes,
6.375%, due 3/31/01, valued
at $1,418 (Cost $1,386) $ 1,386 1,386
---------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $144,250) 151,505
---------------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
Other Assets 15,334
Liabilities (29,670) (14,336)
--------------- ---------------
- --------------------------------------------------------------------------------
NET ASSETS
Applicable to 8,780,766 issued and
outstanding $0.01 par value shares
(100,000,000 shares authorized) 137,169
---------------
---------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
$ 15.62
---------------
---------------
- --------------------------------------------------------------------------------
</TABLE>
(a) -- Step Bond - coupon rate increases in increments to maturity.
Rate disclosed is as of March 31, 1998. Maturity date disclosed
is the ultimate maturity.
@ -- Amount is less than $500.
+ -- Variable/floating rate security--rate disclosed is as of
March 31, 1998.
PIK -- Payment-in-Kind. Income may be paid in additional securities or
cash at the discretion of the issuer.
7
