<PAGE>
- --------------------------------------------------------------------------------
MORGAN STANLEY
GLOBAL OPPORTUNITY
BOND FUND, INC.
- --------------------------------------------------------------------------------
THIRD QUARTER REPORT
SEPTEMBER 30, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY
GLOBAL OPPORTUNITY BOND FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
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- --------------------------------------------------------------------------------
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.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the nine months ended September 30, 1998, the Morgan Stanley Global
Opportunity Bond Fund, Inc. (the "Fund") had a total return, based on net asset
value per share, of -27.84% compared to -9.73% for the Fund's benchmark
(described below). For the one year ended September 30, 1998 and for the period
since the Fund's commencement of operations on May 27, 1994 through September
30, 1998, the Fund's total return, based on net asset value per share was
- -29.95% and 25.40%, respectively, compared to -10.26% and 46.69%, respectively
for the benchmark. The Fund uses as its benchmark, for purpose of comparing its
performance, a composite comprised of 25% of the J.P. Morgan Latin Eurobond
Index, 25% of the J.P. Morgan Emerging Markets Bond Plus Index and 50% of the CS
First Boston High Yield Index. Prior to 1998, the Fund used a composite
comprised of 50% of the J.P. Morgan Emerging Markets Bond Plus Index and 50% of
the CS First Boston High Yield Index. However, the Fund's weightings in these
assets classes is not restricted and will, under normal circumstances, fluctuate
depending on market conditions. At September 30, 1998, the Fund's investments
in debt instruments was comprised of 60% emerging markets debt securities and
40% U.S. high yield securities.
On September 30, 1998, the closing price of the Fund's shares on the New York
Stock Exchange was $8 7/8, representing a 2.8% discount to the Fund's net asset
value per share.
For the three months ended September 30, 1998, the Fund had a total return based
on net asset value per share of -27.14% compared to -11.73% for the benchmark.
The Fund's decline since January 1, 1998, highlights the fact that the vast
majority of the negative price action has occurred during the third quarter.
In August, investor sensitivity to deteriorating credit fundamentals and a
worsened global environment for emerging countries reached a breakpoint and
precipitated the largest and broadest sell-off in emerging market debt history.
The sell-off transitioned from a focus on fundamentals to a technically driven
liquidation when Russia defaulted on its domestic debt (ruble denominated
Treasury bills) on August 17. The Russian restructuring forced many market
participants to sell non-Russian assets to meet margin calls, thereby
contaminating all emerging countries and causing widespread contagion. Spreads
on the broad emerging market debt benchmark widened by 861 basis points during
that month while high yield spreads widened to over 600 basis points, levels not
seen in the market in many years.
There have been several global events that have created a more precarious
investment environment over the course of this year.
Those events include:
- - The continued policy paralysis and deepening recession in Japan, which have
raised fears of currency devaluation in China, and a prolonged Asian
recession.
- - The collapse of the oil and commodity prices caused difficulty for several
emerging market countries particularly, Russia, Venezuela, Chile and
Ecuador.
- - The decline of the U.S. equity markets this summer.
- - The decline of emerging markets equity by over 38% year to date.
After having been underweight Russia in the spring, our investment strategy
included accumulating Russian debt in May and June because we felt the market
had overshot and was mispricing Russian risk. In retrospect, we underestimated
the risk associated with Russian assets. We had assigned a low probability to
the scenario in which Russia would devalue its currency and default on its
domestic debt. Much to our dismay, this scenario was played out.
From late July to mid-August the market sold off, due to both fundamental and
technical reasons. Hedge funds, trading desks and other leveraged market
participants were forced to liquidate to meet margin calls due to large losses
in ruble denominated debt.
As the prices for all Russian bonds fell (the Russian U.S. dollar debt bond
index returned -78% as of August 31, 1998 year to date), the Russian banks came
under considerable stress because of the decline in their asset portfolios and a
decrease in the amount of funds available to the them. On August 17, 1998 Russia
announced:
- - The ruble would float within a wider band (an effective devaluation).
- - The Russian domestic debt (GKO and OFZ's) which is scheduled to mature
before December 31, 1999 would be restructured.
- - A 90 day moratorium on payment of foreign debts held by major Russian
banks.
2
<PAGE>
All of the Russian bonds owned by the Fund are denominated in U.S. dollars and
are not in default. They are also not subject to the short term debt moratorium
imposed in mid-August and the Russian government has reiterated its intention to
continue to service its U.S. dollar denominated debt.
While the Russian debt owned by the Fund is not directly affected by the
devaluation of the ruble, the devaluation is a symptom of the poor health of the
Russian economy. The value of the U.S. dollar bonds fell dramatically in August
and are currently trading at distressed levels.
Due to the events that occurred in the third quarter, we have had to reevaluate
our position in Russian debt and have reduced the Russian weighting in the
portfolio to about 2%. The country has lost its economic anchor (stable
currency and low inflation) and these events have increased the scope for
political uncertainty. The change in leadership, which was announced on August
24, is evidence of the fragile political landscape. We expect both the
political and economic climate to remain worrisome in the near term. Russian
foreign exchange reserves are extremely low and they will likely rely on capital
controls to prevent a complete run on the ruble. The Russians will also have to
renegotiate the terms of their existing IMF agreement before receiving any
further money. We have also repositioned the portfolio with higher quality
credits, such as Colombia and Panama and with uncorrelated credits such as
Turkey and Bulgaria.
In September, emerging debt markets rebounded smartly from August's dramatic
sell off. During the month, the market benefited from a slight increase in
commodity prices, a reduction in U.S. rates and most importantly from supportive
comments from members of the G7, the IMF and the World Bank, who expressed their
desire to stop economic chaos from spreading any further. These factors caused
the market to jump by almost 10% with Venezuela, Bulgaria and Morocco leading
the pack and Mexico, Brazil and Russia lagging.
Corporate securities which represent less than 15% of the portfolio are less
liquid than sovereign securities. Broadly speaking, corporate euro-bonds did not
rally with sovereign debt in September, as the dramatic sell-off in August
raised the premium demanded by investors for liquidity. In addition, many of
the macro economic policies prescribed by the IMF to shore up fiscal imbalances,
such as tight monetary policy, decreased government expenditures and increased
taxes, would limit economic growth and adversely impact business conditions.
During the month, Venezuela benefited from an increase in oil prices and a
decline in the lead held by the ex-coup leader Chavez in presidential
pre-election polls. Chavez has made frequent non-investor friendly statements
throughout his campaign and has openly discussed restructuring Venezuela's
external debt. While the market was relieved by a decrease in his lead, we
still view the political situation in Venezuela as too risky and remain
underweight.
OUTLOOK
Over the next few months, the ability of the emerging debt market to enjoy a
sustained rally is largely in the hands of Brazil. We will be watching to see
how quickly and decisively the authorities act towards addressing fiscal
imbalances and securing multilateral aid. An aid package alone will not cure
Brazil's ailments. Any aid must be coupled with a significant fiscal
adjustment, which would include large spending cuts and structural reform. As
would be imagined, implementing large spending cuts is politically difficult.
In addition, the government must carefully manage its monetary policy to avoid a
recession. We will continue to underweight Brazil in this environment. There
are no easy answers for Brazil and we expect the road to recovery to be strewn
with potholes of disappointment. Without further clarity with regard to Brazil,
the market's upside potential will be limited. During the next quarter, the
global backdrop will likely remain problematic and liquidity for emerging market
countries will remain constrained. These factors coupled with year-end selling
pressure should cause volatility to remain high.
For the high yield position of the Fund, the U.S. Treasuries market was one of
the few markets that performed well. Ten-year Treasuries returned slightly over
9% for the third quarter compared to a loss of 7% in the stock market averages
(and more for most mutual fund investors) and a loss of 4.8% in the high yield
market. As a result of the diverging moves of the high yield and Treasury
markets, high yield spreads widened to over 600 basis points; levels not seen in
markets in many years. The high yield market is pricing a recession for the U.S.
economy, an event not yet evident in the financial statements of the companies
we invest in nor in the aggregate economic statistics.
The best performing sectors in the market were the most defensive, higher
quality credits in less cyclical industries. Our focus on larger capitalization
public
3
<PAGE>
companies helped support the high yield side of the portfolio. The losers in
the quarter were venture-capital-like telecom bonds, European issuers and
companies of weaker credit quality.
The market has become quite illiquid. Dealers are trying to keep inventories
low, mutual fund flows are low to negative and some hedge funds have been
attempting to sell. As a result it is very difficult to reposition the
portfolio. We have made some minor moves to buy some out of favor cyclical
bonds, but we also have interest in better quality cable bonds or energy bonds
that have also cheapened sharply in the market.
While we may not be at a market bottom yet, the high yield market looks as
attractive as it has in quite some time. One can now earn in three years in the
high yield market what it would take to earn in five years in the Treasury
market. With the market now yielding about 11%, double digit returns could be
in our not too distant future.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR,
October 1998
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
- --------------------------------------------------------------------------------
EFFECTIVE OCTOBER 1998, THOMAS L. BENNETT, STEPHEN F. ESSER AND ABIGAIL L.
MCKENNA HAVE JOINED ROBERT E. ANGEVINE, CURRENTLY A PORTFOLIO MANAGER OF THE
FUND, IN THE DAY-TO-DAY MANAGEMENT OF THE FUND'S ASSETS. THOMAS L. BENNETT, A
MANAGING DIRECTOR OF MORGAN STANLEY & CO. INCORPORATED ("MS&CO"), JOINED MORGAN
STANLEY ASSET MANAGEMENT ("MSAM") IN 1996 AND HAS BEEN A PORTFOLIO MANAGER WITH
MSAM'S AFFILIATE, MILLER ANDERSON & SHERRERD, LLP ("MAS") SINCE 1984. STEPHEN F.
ESSER, A MANAGING DIRECTOR OF MS&CO JOINED MSAM IN 1996 AND HAS BEEN A PORTFOLIO
MANAGER WITH MAS SINCE 1988. ABIGAIL L. MCKENNA JOINED MSAM IN 1996 AND IS A
VICE PRESIDENT OF MSAM AND MS&CO. PRIOR TO JOINING MSAM, SHE WAS A SENIOR
PORTFOLIO MANAGER AT MIMCO FROM 1995 TO 1996 AND A LIMITED PARTNER AT WEISS PECK
& GREER FROM 1991 TO 1995, WHERE SHE WAS RESPONSIBLE FOR THE TRADING AND
MANAGEMENT OF CORPORATE BOND PORTFOLIOS.
4
<PAGE>
Morgan Stanley Global Opportunity Bond Fund, Inc.
Investment Summary as of September 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
------------------------------------------------------------------------------------
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 -26.65% -- -27.84% -- 9.73% --
One Year -27.47 -27.47% -29.95 -29.95% 10.26 10.26%
Since Inception* 21.77 4.36 25.40 5.34 46.69 9.22
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION:
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
ENDED
SEPTEMBER 30,
1994* 1995 1996 1997 1998
------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . $ 12.25 $ 12.99 $ 14.86 $ 13.74 $ 9.14
Market Value Per Share . . . . $ 12.50 $ 12.50 $ 14.63 $ 13.13 $ 8.88
Premium/(Discount) . . . . . . 2.0% -3.8% -1.5% 4.4% 2.8%
Income Dividends . . . . . . . $ 0.91 $ 1.59 $ 1.49 $ 1.30 $ 0.90
Capital Gains Distributions. . -- -- $ 0.50 $ 2.30 $ 0.06
Fund Total Return (2). . . . . -6.42% 20.34% 31.45% 17.38% 27.84%
Index Total Return (3) . . . . 0.46% 22.37% 25.36% 12.56% -9.73%
</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 Global Opportunity Blended Composite is comprised of 25% of the J.P.
Morgan Latin Eurobond Index, 25% of the J.P. Morgan Emerging Markets Bond
Plus Index, and 50% of the CS First Boston High Yield Index. Prior to 1998,
the Fund used a composite comprised of 50% of the J.P. Morgan Emerging
Markets Bond Plus Index and 50% of the CS First Boston High Yield Index.
However, the Fund's weighting in these asset classes is not restricted and
will, under normal circumstances, fluctuate depending on market conditions.
As of September 30, 1998, the Fund's investment in debt instruments was
comprised of 60% emerging markets debt securities and 40% U.S. high yield
securities.
* The Fund commenced operations on May 27, 1994.
5
<PAGE>
Morgan Stanley Global Opportunity Bond Fund, Inc.
Portfolio Summary as of September 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Debt Instruments (99.9%)
Short-Term Investments (0.1%)
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Other (13.0%)
United Kingdom (1.4%)
Panama (1.9%)
Colombia (1.9%)
Russia (2.0%)
Korea (2.4%)
Bulgaria (2.9%)
Brazil (7.6%)
Argentina (13.9%)
United States (38.7%)
Mexico (14.3%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. United Mexican StatesPar Bond 'W-B'
6.25%, 12/31/19 (Mexico) 5.9%
2. Republic of Argentina
6.188%, 3/31/05 (Argentina) 5.6
3. Republic of Argentina Par Bond 'L-GP'
5.75%, 3/31/23 (Argentina) 3.3
4. Republic of Argentina Global Bond
11.375%, 1/30/17 (Argentina) 2.7
5. Federative Republic of Brazil 'EI-L' Bond
6.625%, 4/15/06 (Brazil) 2.6
6. Federative Republic of Brazil
9.375%, 4/7/08 (Brazil) 2.5
7. United Mexican States
11.50%, 5/15/26 (Mexico) 2.3
8. United Mexican States Global Bond
11.375%, 9/15/16 (Mexico) 1.9
9. Federative Republic of Brazil Debt
Conversion 'L' Bond
9.375%, 4/7/08 (Brazil) 1.8
10. National Financiera
17.00%, 2/26/99 (Mexico) 1.6
----
30.2%
----
----
</TABLE>
6
<PAGE>
FINANCIAL STATEMENTS
- -------
STATEMENT OF NET ASSETS (UNAUDITED)
- -------
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
DEBT INSTRUMENTS(96.8%)
- -----------------------------------------------------------------------------
ARGENTINA (13.9%)
CORPORATE (2.3%)
(b) Acindar Industries
11.555%, 11/12/98 U.S.$ 300 U.S.$ 291
(a) CIA International Telecom
10.375%, 8/1/04 ARP 700 420
(a) Supercanal Holdings S.A.
11.50%, 5/15/05 U.S.$ 300 174
------------
885
------------
SOVEREIGN (11.6%)
(b) Republic of Argentina
6.188%, 3/31/05 2,698 2,135
Republic of Argentina Global Bond
9.75%, 9/19/27
11.375%, 1/30/17 1,100 1,012
(c) Republic of Argentina Par Bond 'L-GP'
5.75%, 3/31/23 1,880 1,268
------------
4,415
------------
5,300
------------
- -----------------------------------------------------------------------------
AUSTRALIA (0.7%)
CORPORATE (0.7%)
Murrin Murrin Holdings Property Ltd.
9.375%, 8/31/07 300 249
------------
- -----------------------------------------------------------------------------
BERMUDA (0.3%)
CORPORATE (0.3%)
Flag Ltd.
8.25%, 1/30/08 100 95
------------
- -----------------------------------------------------------------------------
BRAZIL (7.6%)
CORPORATE (0.8%)
(a,c)Compania Energetica Sao Paulo
9.125%, 6/26/07 100 68
(a) Globopar
10.50%, 12/20/06 80 42
10.625%, 12/5/08 400 210
------------
320
------------
SOVEREIGN (6.8%)
Federative Republic of Brazil
9.375%, 4/7/08 1,520 943
(b) Federative Republic of Brazil
'EI-L' Bond
6.625%, 4/15/06 1,698 980
(b) Federative Republic of Brazil Debt
Conversion 'L' Bond
6.688%, 4/15/12 1,330 668
------------
2,591
------------
2,911
------------
- -----------------------------------------------------------------------------
BULGARIA (2.9%)
SOVEREIGN (2.9%)
(b) Republic of Bulgaria Discount
Bond 'A' Euro
6.688%, 7/28/24 770 491
(c) Republic of Bulgaria Front Loaded
Interest Reduction Bond
2.50%, 7/28/12 450 207
(b) Republic of Bulgaria Past Due
Interest Bond 6.688%, 7/28/11 700 413
------------
1,111
------------
- -----------------------------------------------------------------------------
CAYMAN ISLANDS (1.2%)
CORPORATE (0.4%)
(a) Hutchinson Whampoa Financial 'B'
7.45%, 8/1/17 215 153
SOVEREIGN (0.8%)
(a) Pera Financial Services
9.375%, 10/15/02 450 290
------------
443
------------
- -----------------------------------------------------------------------------
CHILE (0.7%)
CORPORATE (0.7%)
Endesa
7.75%, 7/15/08 315 279
------------
- -----------------------------------------------------------------------------
COLOMBIA (1.9%)
SOVEREIGN (1.9%)
Republic of Colombia
7.625%, 2/15/07 330 228
(b) 8.82%, 8/13/05 600 505
------------
733
------------
- -----------------------------------------------------------------------------
ECUADOR (1.0%)
CORPORATE (0.7%)
(a) Conecel
14.00%, 5/1/02 500 260
------------
SOVEREIGN (0.3%)
(b) Republic of Ecuador Discount Bond
6.625%, 2/28/25 250 117
------------
377
------------
- -----------------------------------------------------------------------------
GERMANY (0.6%)
CORPORATE (0.6%)
(c) RSL Communications plc
0.00%, 6/15/08 DEM 500 144
(a) Sirona Dental Systems
9.125%, 7/15/08 175 94
------------
238
------------
- -----------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
INDONESIA (0.5%)
CORPORATE (0.5%)
Hermes Europe Railtel B.V.
11.50%, 8/15/07 U.S.$ 190 U.S.$ 201
------------
- -----------------------------------------------------------------------------
JAMAICA (0.9%)
CORPORATE (0.9%)
Mechala Group Jamaica, Ltd. 'B'
12.75%, 12/30/99 500 347
------------
- -----------------------------------------------------------------------------
KOREA (2.4%)
CORPORATE (1.2%)
Korea Electric Power Corp.
7.00%, 10/1/02 500 395
(a) Samsung Electronics, Co.
7.45%, 10/1/02 100 73
------------
468
------------
SOVEREIGN (1.2%)
Korea Development Bank
7.125%, 9/17/01 500 431
------------
899
------------
- -----------------------------------------------------------------------------
MEXICO (14.3%)
CORPORATE (1.1%)
(a) Innova
12.875%, 4/1/07 370 205
(b) Petro Mexicanos
11.157%, 7/15/05 240 207
------------
412
------------
SOVEREIGN (13.2%)
National Financiera
17.00%, 2/26/99 ZAR 4,000 612
United Mexican States
11.50%, 5/15/26 U.S.$ 910 883
(b) United Mexican States
Discount Bond 'A'
6.594%, 12/31/19 10 8
(b) United Mexican States Discount Bond 'B'
6.477%, 12/31/19 250 194
(b) United Mexican States Discount Bond 'D'
6.602%, 12/31/19 300 232
United Mexican States Global Bond
9.875%, 1/15/07 160 148
11.375%, 9/15/16 750 713
United Mexican States Par Bond 'W-B`
6.25%, 12/31/19 3,050 2,265
------------
5,055
------------
5,467
------------
- -----------------------------------------------------------------------------
NETHERLANDS (0.7%)
CORPORATE (0.7%)
(a) Cellco Finance NV
15.00%, 8/1/05 320 259
------------
- -----------------------------------------------------------------------------
PANAMA (1.9%)
SOVEREIGN (1.9%)
Republic of Panama
8.875%, 9/30/27 870 731
------------
- -----------------------------------------------------------------------------
PERU (1.0%)
SOVEREIGN (1.0%)
(a,c)Peru Past Due Interest Bond
0.00%, 3/7/17 250 127
(c) Republic of Peru Front Loaded
Interest Reduction Bond
3.25%, 3/7/17 250 113
3.25%, 3/7/17 350 158
------------
398
------------
- -----------------------------------------------------------------------------
PHILIPPINES (0.5%)
CORPORATE (0.5%)
Philippine Long Distance Telephone
7.85%, 3/6/07 250 191
------------
- -----------------------------------------------------------------------------
RUSSIA (2.0%)
CORPORATE (0.5%)
(c) PTC International Finance B.V.
0.00%, 7/1/07 300 180
(a) Unexim International Finance
9.875%, 8/1/00 250 15
9.875%, 8/1/00 50 3
------------
198
------------
SOVEREIGN (1.5%)
(b) Russia Principal Note, PIK
3.313%, 12/15/20 3,180 208
(a) Russian Federation
8.75%, 7/24/05 800 143
11.00%, 7/24/18 1,130 198
------------
549
------------
747
------------
- -----------------------------------------------------------------------------
TURKEY (0.7%)
SOVEREIGN (0.7%)
(a) Pera Financial Services
9.375%, 10/15/02 400 258
------------
- -----------------------------------------------------------------------------
UNITED KINGDOM (1.4%)
CORPORATE (1.4%)
Colt Telecommunications Group plc
7.625%, 7/31/08 DEM 225 121
(c) Dolphin Telecommunications plc
0.00%, 6/1/08 ECU 190 90
- -----------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
(a) Esprit Telecommunications Group plc
11.00%, 6/15/08 DEM 655 U.S.$ 337
------------
548
------------
- -----------------------------------------------------------------------------
UNITED STATES (38.7%)
ASSET - BACKED SECURITIES (3.6%)
Aircraft Lease Portfolio
Securitization Ltd. 1996-1 P1D
12.75%, 6/15/06 U.S.$ 360 360
CFS 1997-5 'A1'
7.72%, 6/15/05 253 257
DR Securitized Lease Trust
1993-K1 A1 6.66%, 8/15/10 152 146
1994-K1 A1 7.60%, 8/15/07 438 443
(a) First Home Mortgage Acceptance Corp.,
1996-B, Class C 7.929%, 11/1/18 243 186
------------
1,392
------------
CORPORATE (34.6%)
AES Corp.
8.50%, 11/1/07 215 202
(a) American Cellular Corp.
10.50%, 5/15/08 160 155
American Standard Cos., Inc.
7.375%, 2/1/08 200 202
AMSC Acquisition Co., Inc. 'B'
12.25%, 4/1/08 180 104
(a) CA FM Lease Trust
8.50%, 7/15/17 239 269
CB Richard Ellis Services
8.875%, 6/1/06 55 54
Chancellor Media Corp. 'B'
8.125%, 12/15/07 135 131
Chesapeake Energy Corp. 'B'
9.625%, 5/1/05 35 31
Columbia/HCA Healthcare
6.91%, 6/15/05 300 293
7.00%, 7/1/07 90 87
7.69%, 6/15/25 350 312
Comcast Cellular Holdings 'B'
9.50%, 5/1/07 75 77
CSC Holdings, Inc.
7.25%, 7/15/08 180 179
7.875%, 12/15/07 175 181
9.875%, 5/15/06 220 239
Dobson Communications Corp.
11.75%, 4/15/07 75 73
(a) EES Coke Battery Co., Inc.
9.382%, 4/15/07 100 98
(a) Fresenius Medical Care AG
7.875%, 2/1/08 130 122
Globalstar LP
11.375%, 2/15/04 165 112
Grand Casinos
10.125%, 12/1/03 400 424
HMH Properties 'A'
7.875%, 8/1/05 355 359
(c) Intermedia Communications, Inc. 'B'
0.00%, 7/15/07 565 407
Iridium LLC/Capital Corp. 'A'
13.00%, 7/15/05 90 78
(a) Iridium LLC/Capital Corp.
13.00%, 7/15/05 55 48
ISP Holdings, Inc. 'B'
9.00%, 10/15/03 195 203
IXC Communications, Inc.
9.00%, 4/15/08 305 300
Jet Equipment Trust 'C1'
C1' 11.79%, 6/15/13 175 243
K Mart Funding Corp. 'F'
8.80%, 7/1/10 100 106
Lenfest Communications, Inc.
8.375%, 11/1/05 335 351
(a) Level 3 Communications, Inc.
9.125%, 5/1/08 125 118
Musicland Group, Inc.
9.00%, 6/15/03 100 95
Musicland Group, Inc. 'B'
9.875%, 3/15/08 175 167
Navistar Financial Corp. 'B'
9.00%, 6/1/02 65 68
(c) Nextel Communications, Inc.
0.00%, 8/15/04 485 467
0.00%, 9/15/07 360 229
0.00%, 2/15/08 150 90
(c) NEXTLINK Communications, Inc.
0.00%, 4/15/08 375 215
Niagara Mohawk Power 'G'
7.75%, 10/1/08 48 51
(c) Niagara Mohawk Power 'H'
0.00%, 7/1/10 86 62
(c) Norcal Waste Systems, Inc.
13.50%, 11/15/05 250 274
(a) NSM Steel, Inc.
12.25%, 2/1/08 100 45
(a,c)NTL Inc.
0.00%, 4/1/08 GBP 330 286
(a) Onepoint Communications Corp.
14.50%, 6/1/08 U.S.$ 145 110
Outdoor Systems, Inc.
8.875%, 6/15/07 410 423
Primus Telecommunications Group 'B'
9.875%, 5/15/08 145 126
PSINet, Inc. 'B'
10.00%, 2/15/05 110 110
- -----------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Qwest Communications International
10.875%, 4/1/07 U.S.$ 135 U.S.$ 155
(c) 0.00%, 10/15/07 485 374
(c) RCN Corp.
0.00%, 10/15/07 725 395
Revlon, Inc.
8.125%, 2/1/06 125 123
(a,c)Rhythms Netconnections
0.00%, 5/15/08 400 160
Rogers Cablesystems 'B'
10.00%, 3/15/05 425 462
Rogers Communications, Inc.
9.125%, 1/15/06 90 90
RSL Communications plc
9.125%, 3/1/08 315 274
(a) Samsung Electron America
9.75%, 5/1/03 300 227
(a,c)SB Treasury Co. LLC
9.40%, 12/29/49 100 88
SD Warren Co. 'B'
12.00%, 12/15/04 215 235
Sinclair Broadcast Group
9.00%, 7/15/07 475 475
Smithfield Foods, Inc.
7.625%, 2/15/08 50 49
(a) Smithfield Foods, Inc.
7.625%, 2/15/08 95 93
(a) Snyder Oil Corp.
8.75%, 6/15/07 315 321
Southland Corp.
5.00%, 12/15/03 315 262
Station Casinos, Inc.
9.625%, 6/1/03 175 172
Tenet Healthcare Corp.
8.625%, 1/15/07 405 420
Vencor, Inc.
9.875%, 5/1/05 250 200
(a,c)Viatel, Inc.
0.00%, 4/15/08 105 50
(c) WAM! Net Inc. 'B'
0.00%, 3/1/05 200 109
Western Financial Bank
8.875%, 8/1/07 120 100
------------
13,210
------------
Collateralized Mortgage Obligation (0.5%)
Long Beach Auto 1997-1, 'B'
14.22, 10/26/03 179 178
------------
14,780
------------
- -----------------------------------------------------------------------------
VENEZUELA (1.0%)
SOVEREIGN (1.0%)
(c) Republic of Venezuela Debt
Conversion Bond 'DL'
6.625%, 12/18/07 679 388
------------
- -----------------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$42,626) 36,950
------------
- -----------------------------------------------------------------------------
<CAPTION>
NO. OF
RIGHTS
- -----------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
- -----------------------------------------------------------------------------
MEXICO (0.0%)
United Mexican States
0.00%, 6/30/03 (Cost U.S.$0) 862,000 --
------------
- -----------------------------------------------------------------------------
<CAPTION>
NO. OF
WARRANTS
- -----------------------------------------------------------------------------
<S> <C> <C>
WARRANTS(0.0%)
- -----------------------------------------------------------------------------
NIGERIA (0.0%)
Central Bank of Nigeria, expiring 250 --
------------
- -----------------------------------------------------------------------------
UNITED STATES (0.0%)
(a) American Mobile Satellite Corp.,
expiring 4/1/08 180 -- @
(a) NSM Steel, Inc., expiring 2/1/08 63,309 -- @
WAM! Net., Inc., expiring 3/1/05 600 3
------------
3
------------
- -----------------------------------------------------------------------------
TOTAL WARRANTS
(Cost U.S.$0) 3
------------
- -----------------------------------------------------------------------------
<CAPTION>
SHARES
- -----------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCK (0.0%)
- -----------------------------------------------------------------------------
UNITED STATES
IXC Communications, Inc. 'B' PIK 4 5
Viatel, Inc., Series 'A' 10.00% 52 -- @
------------
- -----------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost U.S.$0) 5
------------
- -----------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
- -----------------------------------------------------------------------------
<S> <C> <C>
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.0%)
Argentine Peso ARP 16 16
French Franc FRF 1 -- @
------------
(Cost U.S.$16) 16
------------
- -----------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS (96.8%)
(Cost U.S.$42,642) U.S.$36,974
------------
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (3.2%)
Other Assets U.S.$ 4,541
Liabilities (3,332) 1,209
------------- ------------
- -----------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 4,178,082 issued and
outstanding U.S.$0.01 par value
shares (100,000,000 shares
authorized) U.S.$38,183
------------
------------
- -----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 9.14
------------
------------
- -----------------------------------------------------------------------------
</TABLE>
@ -- Value is less than U.S.$500.
(a) -- 144A Security - certain conditions for public sale may exist.
(b) -- Variable/floating rate security -- rate disclosed is as of September
30, 1998.
(c) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of September 30, 1998. Maturity date disclosed is
the ultimate maturity.
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
11
