<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08044
---------------------------------------------
Morgan Stanley High Yield Fund, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1221 AVENUE OF THE AMERICAS 22ND FLOOR NEW YORK, NY 10020
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(Address of principal executive offices) (Zip code)
RONALD E. ROBISON
1221 AVENUE OF THE AMERICAS 34TH FLOOR NEW YORK, NY 10020
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-800-221-6726
----------------------------
Date of fiscal year end: 12/31
--------------------------
Date of reporting period: 6/30/04
-------------------------
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. Section 3507
<Page>
ITEM 1. REPORTS TO STOCKHOLDERS.
The Fund's semi-annual report transmitted to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 is as follows:
<Page>
SEMI-ANNUAL REPORT
MORGAN STANLEY HIGH YIELD FUND, INC.
JUNE 30, 2004
DIRECTORS
CHARLES A. FIUMEFREDDO JOSEPH J. McALINDEN
MICHAEL BOZIC VICE PRESIDENT
EDWIN J. GARN
WAYNE E. HEDIEN BARRY FINK
JAMES F. HIGGINS VICE PRESIDENT
DR. MANUEL H. JOHNSON
JOSEPH J. KEARNS STEFANIE V. CHANG
MICHAEL NUGENT VICE PRESIDENT
FERGUS REID
AMY R. DOBERMAN
OFFICERS VICE PRESIDENT [MORGAN STANLEY LOGO]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD JAMES W. GARRETT
TREASURER AND CHIEF MORGAN STANLEY
MITCHELL M. MERIN FINANCIAL OFFICER HIGH YIELD FUND, INC.
PRESIDENT
MICHAEL J. LEARY
ASSISTANT TREASURER
RONALD E. ROBISON
EXECUTIVE VICE PRESIDENT MARY E. MULLIN
AND PRINCIPAL EXECUTIVE SECRETARY
OFFICER
INVESTMENT ADVISER
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
ADMINISTRATOR
JPMORGAN INVESTOR SERVICES COMPANY
73 TREMONT STREET
BOSTON, MASSACHUSETTS 02108
CUSTODIAN
JPMORGAN CHASE BANK
270 PARK AVENUE
NEW YORK, NEW YORK 10017
STOCKHOLDER SERVICING AGENT
AMERICAN STOCK TRANSFER & TRUST COMPANY
59 MAIDEN LANE
NEW YORK, NEW YORK 10030
1 (800) 278-4353
LEGAL COUNSEL
CLIFFORD CHANCE US LLP
31 WEST 52ND STREET
NEW YORK, NEW YORK 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
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
OR VISIT OUR WEBSITE AT MORGAN STANLEY
www.morganstanley.com/im. INVESTMENT MANAGEMENT INC.
(C) 2004 MORGAN STANLEY INVESTMENT ADVISER
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
LETTER TO STOCKHOLDERS Overview
PERFORMANCE
For the six months ended June 30, 2004, the Morgan Stanley High Yield Fund, Inc.
(the "Fund") had a total return, based on net asset value per share of 1.83%
compared to 2.47% for the CSFB High Yield Index (the "Index"). On June 30, 2004,
the closing price of the Fund's shares on the New York Stock Exchange was $5.91,
representing a 13.3% discount to the Fund's net asset value per share.
FACTORS AFFECTING PERFORMANCE
- In the first half of 2004, the high-yield market benefited from a strong
economic environment, good corporate earnings and very low defaults.
Unfortunately, a poor technical situation caused by very large new
issuance and outflows from the asset class kept high-yield from
continuing the strong rally that began in late 2002.
- High-yield spreads tightened by 30 basis points during the period to
close at 456 basis points over treasuries while the yield to maturity of
the Index rose to 8.57% due to the significantly higher treasury yields.
- Lower-rated securities were the best performers during the period partly
due to the decline in treasury prices, which had a greater impact on
higher rated securities.
- Consumer products, metals, manufacturing and chemicals were the best
performers industries with returns over 6% while aerospace and
telecommunications produced negative returns. The airline industry, which
is a sub-sector of aerospace, took a particularly hard hit, declining
almost 20%. As the Fund did not own airlines in 2004, this benefited
performance.
- Good security selection in housing, wireless communications and
telecommunications added to relative performance during the first half of
2004. Security selection in cable, forest products and chemicals
detracted from returns.
MANAGEMENT STRATEGIES
- The Fund's main overweighted sectors are energy, housing and diversified
media while our main sector underweights include airlines, financials,
information technology, gaming/leisure and utilities. As a reminder, our
sector allocations are the result of our bottom-up security selection.
- In regards to credit quality, the Fund has a slightly higher average
credit quality than the overall market.
Sincerely,
/s/ Ronald E. Robison
Ronald E. Robison
Executive Vice President--
Principal Executive Officer
July 2004
2
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
STATEMENT OF NET ASSETS
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
June 30 2004 (unaudited)
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (94.0%)
AEROSPACE (0.3%)
Dunlop Standard Aerospace Holdings plc
11.875%, 5/15/09 $ (a)288 $ 307
=====================================================================================
BROADCASTING (1.5%)
Granite Broadcasting Corp.
9.75%, 12/1/10 (a)210 196
Interep National Radio Sales, Inc.
10.00%, 7/1/08 480 401
TV Azteca SA de CV
10.50%, 2/15/07 (b)980 1,005
- -------------------------------------------------------------------------------------
1,602
=====================================================================================
CABLE (6.1%)
Avalon Cable LLC
11.68%, 12/1/08 (c)148 158
Cablecom Luxembourg SCA
9.375%, 4/15/14 EUR (a)795 952
Cablevision Systems Corp.
5.66%, 4/1/09 $ (a)(d)175 180
Charter Communications Holdings LLC
0.00%, 1/15/11 (b)(c)642 473
9.625%, 11/15/09 100 82
10.25%, 1/15/10 (b)392 326
10.75%, 10/1/09 205 173
CSC Holdings, Inc.
8.125%, 7/15/09 (b)155 162
10.50%, 5/15/16 145 163
DirecTV Holdings LLC
8.375%, 3/15/13 (b)615 683
Echostar DBS Corp.
9.125%, 1/15/09 (b)829 913
Kabel Deutschland GmbH
10.625%, 7/1/14 (a)600 619
Pegasus Communications Corp.
9.75%, 12/1/06 (e)130 64
12.50%, 8/1/07 (e)140 69
Pegasus Satellite Communications, Inc.
12.375%, 8/1/06 (e)55 27
Renaissance Media Group LLC
10.00%, 4/15/08 (c)275 285
Satelites Mexicanos SA de CV
10.125%, 11/1/04 (e)1,105 470
Telenet Communications NV
9.00%, 12/15/13 EUR (a)365 447
Telenet Group Holding NV
0.00%, 6/15/14 $ (a)(c)495 $ 317
- -------------------------------------------------------------------------------------
6,563
=====================================================================================
CHEMICALS (6.8%)
Avecia Group plc
11.00%, 7/1/09 307 235
Cognis Deutschland GmbH & Co. KG
6.897%, 11/15/13 EUR (a)(d)540 652
Equistar Chemicals LP
10.125%, 9/1/08 $ (b)601 661
10.625%, 5/1/11 145 162
FMC Corp.
10.25%, 11/1/09 (b)300 347
Huntsman Advanced Materials LLC
11.00%, 7/15/10 (a)235 266
Huntsman International LLC
10.125%, 7/1/09 (b)378 387
10.125%, 7/1/09 EUR 405 494
ISP Chemco, Inc.
10.25%, 7/1/11 $ (b)375 419
ISP Holdings, Inc.
10.625%, 12/15/09 (b)330 365
Koppers, Inc.
9.875%, 10/15/13 175 192
Millennium America, Inc.
7.00%, 11/15/06 330 341
9.25%, 6/15/08 438 473
Nalco Co.
7.75%, 11/15/11 (a)(b)655 689
8.875%, 11/15/13 (a)315 332
Rhodia SA
8.875%, 6/1/11 (a)610 518
Rockwood Specialties Group, Inc.
10.625%, 5/15/11 400 428
Westlake Chemical Corp.
8.75%, 7/15/11 260 283
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7,244
=====================================================================================
CONSUMER PRODUCTS (2.6%)
Amscan Holdings, Inc.
8.75%, 5/1/14 (a)330 326
Leiner Health Products, Inc.
11.00%, 6/1/12 (a)320 332
Oxford Industries, Inc.
8.875%, 6/1/11 (a)255 270
Prestige Brands, Inc.
9.25%, 4/15/12 (a)460 444
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 3
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
STATEMENT OF NET ASSETS (CONT'D) June 30, 2004 (unaudited)
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------------
CONSUMER PRODUCTS (CONT'D)
Rayovac Corp.
8.50%, 10/1/13 $ 385 $ 406
Safilo Capital International SA
9.625%, 5/15/13 EUR (a)660 761
Tempur-Pedic, Inc.
10.25%, 8/15/10 $ 189 214
- -------------------------------------------------------------------------------------
2,753
=====================================================================================
DIVERSIFIED MEDIA (8.1%)
Advanstar Communications, Inc.
8.75%, 8/15/08 (d)859 903
10.75%, 8/15/10 100 111
Alliance Atlantis Communications, Inc.
13.00%, 12/15/09 734 811
Cinemark, Inc.
0.00%, 3/15/14 (a)(b)(c)730 480
Dex Media, Inc.
0.00%, 11/15/13 (a)(c)795 517
Dex Media East LLC
12.125%, 11/15/12 415 487
Dex Media West LLC
9.875%, 8/15/13 425 468
Hollinger Participation Trust, PIK
12.125%, 11/15/10 (a)759 888
Lighthouse International Co. SA
(Registered)
8.00%, 4/30/14 EUR 400 473
Muzak LLC
9.875%, 3/15/09 $ 508 393
10.00%, 2/15/09 350 310
Nebraska Book Co., Inc.
8.625%, 3/15/12 490 483
Nevada Power Co.
9.00%, 8/15/13 800 874
PEI Holdings, Inc.
11.00%, 3/15/10 180 210
Primedia, Inc.
8.875%, 5/15/11 (b)620 617
Vivendi Universal SA
6.25%, 7/15/08 180 192
9.25%, 4/15/10 385 455
- -------------------------------------------------------------------------------------
8,672
=====================================================================================
ENERGY (8.8%)
BRL Universal Equipment 2001 A LP
8.875%, 2/15/08 (b)702 755
CHC Helicopter Corp.
7.375%, 5/1/14 $ (a)625 $ 617
Chesapeake Energy Corp.
7.50%, 9/15/13 (b)745 778
Citgo Petroleum Corp.
11.375%, 2/1/11 260 303
El Paso Production Holding Co.
7.75%, 6/1/13 (a)650 600
7.75%, 6/1/13 (b)455 420
GulfTerra Energy Partners LP
8.50%, 6/1/10 119 130
10.625%, 12/1/12 (b)613 733
Hanover Compressor Co.
8.625%, 12/15/10 120 125
9.00%, 6/1/14 450 469
Hanover Equipment Trust
8.50%, 9/1/08 405 430
8.75%, 9/1/11 250 269
Hilcorp Energy I LP
10.50%, 9/1/10 (a)685 745
Husky Oil Co.
8.90%, 8/15/28 (b)(d)855 969
Magnum Hunter Resources, Inc.
9.60%, 3/15/12 355 392
Pemex Project Funding Master Trust
9.125%, 10/13/10 (b)345 397
Plains Exploration & Production Co.
7.125%, 6/15/14 (a)235 240
Tesoro Petroleum Corp.
9.00%, 7/1/08 250 259
9.625%, 4/1/12 200 225
Vintage Petroleum, Inc.
7.875%, 5/15/11 545 561
- -------------------------------------------------------------------------------------
9,417
=====================================================================================
FINANCIALS (1.3%)
iStar Financial, Inc.
8.75%, 8/15/08 (b)490 544
JSG Funding plc
10.125%, 10/1/12 EUR 621 826
- -------------------------------------------------------------------------------------
1,370
=====================================================================================
FOOD & DRUG (1.9%)
CA FM Lease Trust
8.50%, 7/15/17 $ (a)659 731
Delhaize America, Inc.
8.125%, 4/15/11 (b)695 762
</Table>
4 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
STATEMENT OF NET ASSETS (CONT'D) June 30, 2004 (unaudited)
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------------
FOOD & DRUG (CONT'D)
Rite Aid Corp.
7.125%, 1/15/07 $ 375 $ 385
8.125%, 5/1/10 135 143
- -------------------------------------------------------------------------------------
2,021
=====================================================================================
FOOD & TOBACCO (2.3%)
Michael Foods, Inc.
8.00%, 11/15/13 415 430
Pilgrim's Pride Corp.
9.625%, 9/15/11 935 1,038
Smithfield Foods, Inc.
7.625%, 2/15/08 (b)945 997
- -------------------------------------------------------------------------------------
2,465
=====================================================================================
FOREST PRODUCTS (5.9%)
Abitibi-Consolidated, Inc.
6.00%, 6/20/13 645 574
Georgia-Pacific Corp.
8.875%, 2/1/10 (b)825 938
Graphic Packaging International Corp.
9.50%, 8/15/13 (a)665 725
9.50%, 8/15/13 (b)45 49
Norampac, Inc.
6.75%, 6/1/13 295 291
Owens-Brockway
7.75%, 5/15/11 50 52
8.75%, 11/15/12 125 136
Owens-Illinois, Inc.
7.35%, 5/15/08 (b)360 361
7.50%, 5/15/10 (b)1,035 1,020
Pliant Corp.
13.00%, 6/1/10 712 641
Tekni-Plex, Inc.
8.75%, 11/15/13 (a)205 197
12.75%, 6/15/10 523 504
Tembec Industries, Inc.
8.50%, 2/1/11 (b)780 792
- -------------------------------------------------------------------------------------
6,280
=====================================================================================
GAMING & LEISURE (6.6%)
Caesars Entertainment, Inc.
7.875%, 12/15/05 355 374
8.875%, 9/15/08 250 272
Global Cash Access LLC
8.75%, 3/15/12 (a)300 313
Hilton Hotels Corp.
7.625%, 12/1/12 $ (b)185 $ 200
7.95%, 4/15/07 (b)647 702
Horseshoe Gaming Holding Corp.
8.625%, 5/15/09 (b)667 699
Host Marriott Corp.
7.875%, 8/1/08 150 155
Host Marriott LP
7.125%, 11/1/13 230 226
MGM Mirage
6.00%, 10/1/09 (b)885 872
Starwood Hotels & Resorts Worldwide, Inc.
7.375%, 5/1/07 (b)170 180
7.875%, 5/1/12 (b)575 618
Station Casinos, Inc.
6.00%, 4/1/12 765 744
8.375%, 2/15/08 1,150 1,249
Venetian Casino Resort LLC
11.00%, 6/15/10 (b)364 422
- -------------------------------------------------------------------------------------
7,026
=====================================================================================
HEALTH CARE (4.9%)
AmerisourceBergen Corp.
8.125%, 9/1/08 (b)604 653
Fisher Scientific International, Inc.
8.00%, 9/1/13 60 64
8.125%, 5/1/12 (b)360 387
Fresenius Medical Care Capital Trust II
7.875%, 2/1/08 865 915
HCA, Inc.
6.30%, 10/1/12 80 80
6.91%, 6/15/05 (b)905 932
MedCath Holdings Corp.
9.875%, 7/15/12 (a)305 310
National Nephrology Associates, Inc.
9.00%, 11/1/11 (a)100 115
Team Health, Inc.
9.00%, 4/1/12 (a)460 444
Tenet Healthcare Corp.
6.50%, 6/1/12 (b)432 378
7.375%, 2/1/13 (b)160 146
9.875%, 7/1/14 (a)265 271
VWR International, Inc.
6.875%, 4/15/12 (a)235 237
8.00%, 4/15/14 (a)290 299
- -------------------------------------------------------------------------------------
5,231
=====================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 5
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
STATEMENT OF NET ASSETS (CONT'D) June 30, 2004 (unaudited)
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------------
HOUSING (5.3%)
Associated Materials, Inc.
0.00%, 3/1/14 $ (a)(c)1,250 $ 844
C.B. Richard Ellis Services, Inc.
9.75%, 5/15/10 32 35
11.25%, 6/15/11 807 923
Interface, Inc.
7.30%, 4/1/08 135 134
9.50%, 2/1/14 (a)535 535
10.375%, 2/1/10 165 185
LNR Property Corp.
7.625%, 7/15/13 (b)520 520
Nortek Holdings, Inc.
0.00%, 5/15/11 (a)(b)(c)1,130 910
Schuler Homes, Inc.
9.375%, 7/15/09 (b)295 325
Technical Olympic USA, Inc.
9.00%, 7/1/10 (b)573 591
10.375%, 7/1/12 (b)380 398
WII Components, Inc.
10.00%, 2/15/12 (a)230 227
- -------------------------------------------------------------------------------------
5,627
=====================================================================================
INFORMATION TECHNOLOGY (2.2%)
Iron Mountain, Inc.
7.75%, 1/15/15 (b)375 374
8.625%, 4/1/13 (b)570 607
Nortel Networks Ltd.
6.125%, 2/15/06 590 596
Xerox Corp.
7.125%, 6/15/10 730 748
- -------------------------------------------------------------------------------------
2,325
=====================================================================================
MANUFACTURING (4.6%)
ABB International Finance Ltd. MTN
11.00%, 1/15/08 EUR 320 454
Brand Services, Inc.
12.00%, 10/15/12 $ 285 326
Flowserve Corp.
12.25%, 8/15/10 (b)543 618
Johnsondiversey, Inc.
9.625%, 5/15/12 511 559
9.625%, 5/15/12 EUR 235 311
Manitowoc Co., Inc.
10.375%, 5/15/11 768 1,044
NMHG Holding Co.
10.00%, 5/15/09 $ 633 699
Trimas Corp.
9.875%, 6/15/12 $ 847 $ 903
- -------------------------------------------------------------------------------------
4,914
=====================================================================================
METALS (1.7%)
General Cable Corp.
9.50%, 11/15/10 255 275
Glencore Nickel Property Ltd.
9.00%, 12/1/14 (f)515 @--
Murrin Murrin Holding Ltd.
9.375%, 8/31/07 (f)1,595 @--
Republic Technologies International LLC
13.75%, 7/15/09 (e)(f)720 @--
SGL Carbon Luxembourg SA
8.50%, 2/1/12 EUR (a)290 345
UCAR Finance, Inc.
10.25%, 2/15/12 $ 530 592
United States Steel Corp.
9.75%, 5/15/10 555 618
- -------------------------------------------------------------------------------------
1,830
=====================================================================================
RETAIL (1.3%)
General Nutrition Centers, Inc.
8.50%, 12/1/10 (a)355 370
J.C. Penney Co., Inc.
7.95%, 4/1/17 (b)190 212
9.00%, 8/1/12 (b)273 323
J.C. Penney Co., Inc. MTN
6.875%, 10/15/15 1 1
Petro Stopping Centers LP
9.00%, 2/15/12 (a)515 512
- -------------------------------------------------------------------------------------
1,418
=====================================================================================
SERVICES (2.9%)
Allied Waste North America
8.875%, 4/1/08 (b)791 870
Buhrmann US, Inc.
8.25%, 7/1/14 (a)625 626
Encompass Services Corp.
10.50%, 5/1/09 (e)(f)405 @--
MSW Energy Holdings LLC
8.50%, 9/1/10 105 112
MSW Energy Holdings LLC II
7.375%, 9/1/10 (a)495 495
United Rentals North America, Inc.
6.50%, 2/15/12 485 461
7.75%, 11/15/13 610 579
- -------------------------------------------------------------------------------------
3,143
=====================================================================================
</Table>
6 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
STATEMENT OF NET ASSETS (CONT'D) June 30, 2004 (unaudited)
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------------
TELECOMMUNICATIONS (3.5%)
Axtel SA
11.00%, 12/15/13 $ (a)745 $ 709
Esprit Telecommunications Group plc
11.50%, 12/15/07 EUR (e)(f)665 @--
Exodus Communications, Inc.
11.625%, 7/15/10 $ (e)(f)1,098 @--
Knology, Inc., PIK
12.00%, 11/30/09 (a)629 595
Primus Telecommunications Group, Inc.
8.00%, 1/15/14 (a)1,055 934
Qwest Communications International, Inc.
4.75%, 2/15/09 (a)(d)515 484
Qwest Corp.
5.625%, 11/15/08 115 113
6.625%, 9/15/05 235 241
Qwest Services Corp.
13.00%, 12/15/07 (a)550 630
Rhythms NetConnections, Inc.
13.878%, 5/15/08 (e)(f)2,591 @--
14.00%, 2/15/10 (e)(f)1,476 @--
- -------------------------------------------------------------------------------------
3,706
=====================================================================================
TRANSPORTATION (3.4%)
Amsted Industries, Inc.
10.25%, 10/15/11 (a)505 551
AutoNation, Inc.
9.00%, 8/1/08 (b)552 627
Laidlaw International, Inc.
10.75%, 6/15/11 715 784
Sonic Automotive, Inc.
8.625%, 8/15/13 (b)510 534
Tenneco Automotive, Inc.
11.625%, 10/15/09 475 513
TRW Automotive, Inc.
9.375%, 2/15/13 607 687
- -------------------------------------------------------------------------------------
3,696
=====================================================================================
UTILITIES (7.6%)
AES Corp. (The)
7.75%, 3/1/14 300 290
8.875%, 2/15/11 59 62
9.00%, 5/15/15 (a)(b)570 613
9.375%, 9/15/10 88 94
Allegheny Energy, Inc.
7.75%, 8/1/05 (b)285 296
Calpine Corp.
8.50%, 7/15/10 (a)(b)785 654
CMS Energy Corp.
7.50%, 1/15/09 $ 75 $ 75
8.50%, 4/15/11 (b)450 461
Dynegy Holdings, Inc.
6.875%, 4/1/11 (b)708 613
9.875%, 7/15/10 (a)(b)440 475
Ipalco Enterprises, Inc.
8.625%, 11/14/11 165 180
Monongahela Power Co.
5.00%, 10/1/06 570 585
Northwest Pipeline Corp.
8.125%, 3/1/10 115 125
Ormat Funding Corp.
8.25%, 12/30/20 (a)899 854
Pacific Energy Partners LP
7.125%, 6/15/14 (a)450 459
PG&E Corp.
6.875%, 7/15/08 (a)(b)265 278
PSEG Energy Holdings LLC
8.625%, 2/15/08 (b)541 585
Southern Natural Gas Co.
8.875%, 3/15/10 235 258
Transcontinental Gas Pipe Line Corp.
8.875%, 7/15/12 210 238
Williams Cos., Inc.
7.875%, 9/1/21 970 939
- -------------------------------------------------------------------------------------
8,134
=====================================================================================
WIRELESS COMMUNICATIONS (4.4%)
American Tower Corp.
7.50%, 5/1/12 (a)365 355
9.375%, 2/1/09 (b)575 617
Centennial Communications Corp.
8.125%, 2/1/14 (a)725 676
MetroPCS, Inc.
10.75%, 10/1/11 590 643
Nextel Partners, Inc.
11.00%, 3/15/10 300 336
Rural Cellular Corp.
6.02%, 3/15/10 (a)(b)(d)305 316
SBA Communications Corp.
10.25%, 2/1/09 1,033 1,063
UbiquiTel Operating Co.
0.00%, 4/15/10 (c)185 184
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 7
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
STATEMENT OF NET ASSETS (CONT'D) June 30, 2004 (unaudited)
<Table>
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS (CONT'D)
US Unwired, Inc.
10.00%, 6/15/12 $ (a)485 $ 492
- -------------------------------------------------------------------------------------
4,682
=====================================================================================
TOTAL CORPORATE BONDS AND NOTES
(Cost $100,781) 100,426
=====================================================================================
<Caption>
SHARES
- -------------------------------------------------------------------------------------
COMMON STOCKS (0.0%)
BROADCASTING (0.0%)
Paxson Communications Corp. (g)59,742 5
=====================================================================================
TELECOMMUNICATIONS (0.0%)
Viatel Holding Bermuda Ltd. (g)1,106 2
=====================================================================================
TOTAL COMMON STOCKS
(Cost $1,951) 7
=====================================================================================
PREFERRED STOCKS (1.5%)
BROADCASTING (0.6%)
Paxson Communications Corp.,
PIK, 14.25% 79 699
=====================================================================================
UTILITIES (0.9%)
TNP Enterprises, Inc.,
PIK, 14.50% 851 953
=====================================================================================
TOTAL PREFERRED STOCKS
(Cost $722) 1,652
=====================================================================================
<Caption>
NO. OF
WARRANTS
- -------------------------------------------------------------------------------------
WARRANTS (0.0%)
METALS (0.0%)
Republic Technologies International
LLC, expiring 7/15/09 (a)(f)(g)7,200 @--
=====================================================================================
UTILITIES (0.0%)
SW Acquisition LP, expiring 4/1/11 (a)(g)1,677 22
=====================================================================================
TOTAL WARRANTS
(Cost $45) 22
=====================================================================================
<Caption>
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (4.5%)
REPURCHASE AGREEMENT (4.3%)
J.P. Morgan Securities, Inc., 1.25%,
dated 6/30/04, due 7/1/04,
repurchase price $4,591 $ (h)4,591 4,591
=====================================================================================
U.S. TREASURY SECURITIES (0.2%)
United States Treasury Bills
0.94%, 7/15/04 (b)100 100
<Caption>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------------
0.99%, 9/23/04 $ (b)100 $ 100
- -------------------------------------------------------------------------------------
200
=====================================================================================
TOTAL SHORT TERM INVESTMENTS
(Cost $4,791) 4,791
=====================================================================================
TOTAL INVESTMENTS (100.0%)
(Cost $108,290) 106,898
=====================================================================================
<Caption>
AMOUNT
(000)
- -------------------------------------------------------------------------------------
OTHER ASSETS
Interest Receivable 2,011
Receivable for Investments Sold 1,273
Other 9 3,293
=====================================================================================
LIABILITIES
Payable For:
Reverse Repurchase Agreements (26,905)
Investments Purchased (2,471)
Dividends Declared (468)
Due to Bank (229)
Net Unrealized Depreciation on
Foreign Currency Exchange
Contracts (109)
Investment Advisory Fees (46)
Directors' Fees and Expenses (24)
Due to Broker (22)
Administrative Fees (7)
Custodian Fees (2)
Other Liabilities (82) (30,365)
=====================================================================================
NET ASSETS
Applicable to 11,700,448, issued and
outstanding $ 0.01 par value shares
(100,000,000 shares authorized) $ 79,826
=====================================================================================
NET ASSET VALUE PER SHARE $ 6.82
=====================================================================================
AT JUNE 30, 2004, NET ASSETS CONSISTED OF:
Common Stock $ 117
Paid-in Capital 156,101
Undistributed (Distributions in Excess of) Net
Investment Income (66)
Accumulated Net Realized Gain (Loss) (74,722)
Unrealized Appreciation (Depreciation)
on Investments, Foreign Currency Exchange
Contracts and Translations (1,604)
=====================================================================================
TOTAL NET ASSETS $ 79,826
=====================================================================================
</Table>
8 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
STATEMENT OF NET ASSETS (CONT'D) June 30, 2004 (unaudited)
(a) 144A Security - Certain conditions for public sale may exist.
(b) Denotes all or a portion of securities subject to repurchase under the
Reverse Repurchase Agreements as of June 30, 2004. See note A-3 to
financial statements.
(c) Step Bond - coupon rate increases in increments to maturity. Rate disclosed
is as of June 30, 2004. Maturity date disclosed is ultimate maturity.
(d) Variable/Floating Rate Security -- Interest rate changes on these
instruments are based on changes in designated base rates. The rates shown
are those in effect on June 30, 2004.
(e) Security is in default.
(f) Security was valued at fair value - At June 30, 2004, the Fund held
fair-valued securities, each valued at less than $500, representing less
than 0.05% of net assets.
(g) Non-income producing.
(h) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of this statement of
net assets. The investment in the repurchase agreement is through
participation in a joint account with affiliated funds.
@ Amount is less than $500.
EUR Euro
MTN Medium-term Note
PIK Payment-in-Kind. Income may be paid in additional securities or cash at the
discretion of the issuer.
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
The Fund had the following foreign currency exchange contract(s) open at
period end:
<Table>
<Caption>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE APPRECIATION
DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION)
(000) (000) DATE (000) (000) (000)
- -------------------------------------------------------------------------
EUR 1,315 $1,603 7/26/04 US$ 1,557 $1,557 $(46)
EUR 2,185 2,663 7/26/04 US$ 2,604 2,604 (59)
EUR 150 183 7/26/04 US$ 179 179 (4)
EUR 1,790 2,180 9/28/04 US$ 2,175 2,175 (5)
US$ 178 178 7/26/04 EUR 150 183 5
US$ 167 167 7/6/04 EUR 137 167 @--
=========================================================================
$6,974 $6,865 $(109)
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 9
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
Financial Statements
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2004
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest $ 4,371
Dividends 23
========================================================================================================================
TOTAL INCOME 4,394
========================================================================================================================
EXPENSES
Investment Advisory Fees 282
Interest Expense on Reverse Repurchase Agreements 188
Professional Fees 41
Administrative Fees 27
Stockholder Reporting Expenses 21
Stockholder Servicing Fees 14
Custodian Fees 10
Interest Expense 1
Other Expenses 21
========================================================================================================================
TOTAL EXPENSES 605
========================================================================================================================
NET INVESTMENT INCOME 3,789
========================================================================================================================
NET REALIZED GAIN (LOSS) ON:
Investments 1,766
Foreign Currency Transactions 183
Futures Contracts 45
========================================================================================================================
NET REALIZED GAIN (LOSS) 1,994
========================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON:
Investments (4,781)
Foreign Currency Translations 207
Futures Contracts 23
========================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (4,551)
========================================================================================================================
NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (2,557)
========================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,232
========================================================================================================================
</Table>
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2004 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2003
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income $ 3,789 $ 7,874
Net Realized Gain (Loss) 1,994 (21,789)
Change in Unrealized Appreciation (Depreciation) (4,551) 38,052
========================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,232 24,137
========================================================================================================================
Distributions from and/or in excess of:
Net Investment Income (2,808) (6,671)
========================================================================================================================
Capital Share Transactions:
Reinvestment of Shares (9,704 shares in 2003) -- 58
========================================================================================================================
TOTAL INCREASE (DECREASE) (1,576) 17,524
========================================================================================================================
Net Assets:
Beginning of Period 81,402 63,878
========================================================================================================================
END OF PERIOD (INCLUDING UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET
INVESTMENT INCOME OF $(66) AND $(1,047), RESPECTIVELY) $ 79,826 $ 81,402
========================================================================================================================
</Table>
10 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
Financial Statements
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2004
(UNAUDITED)
STATEMENT OF CASH FLOWS (000)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from Sales and Maturities of Long-Term Investments $ 29,007
Purchases of Long-Term Investments (27,417)
Net (Increase) Decrease in Short-Term Investments (2,769)
Net Realized Gain (Loss) on Foreign Currency Transactions 183
Net Realized Gain (Loss) on Futures Contracts 45
Net Investment Income 3,789
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Net (Increase) Decrease in Receivables Related to Operations 186
Net Increase (Decrease) in Payables Related to Operations (156)
Accretion/Amortization of Discounts and Premiums (258)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 2,922
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received for Reverse Repurchase Agreements 941
Cash Distributions Paid (3,863)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) for Financing Activities (2,922)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash --
CASH AT BEGINNING OF PERIOD --
- ------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ --
========================================================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 11
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
SELECTED PER SHARE DATA AND RATIOS Financial Highlights
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 ---------------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.96 $ 5.46 $ 7.26 $ 9.31 $ 12.73 $ 13.62
- ----------------------------------------------------------------------------------------------------------------------------
Net Investment Income 0.32+ 0.67+ 0.78+ 1.15 1.26 1.28
Net Realized and Unrealized Gain (Loss) on
Investments (0.22) 1.40 (1.80) (2.01) (3.38) (0.44)
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.10 2.07 (1.02) (0.86) (2.12) 0.84
- ----------------------------------------------------------------------------------------------------------------------------
Distributions from and/or in excess of:
Net Investment Income (0.24) (0.57) (0.78) (1.19) (1.30) (1.38)
- ----------------------------------------------------------------------------------------------------------------------------
Decrease in Net Asset Value due to
Shares issued through Rights Offering -- -- -- -- -- (0.32)
- ----------------------------------------------------------------------------------------------------------------------------
Offering Costs -- -- -- -- -- (0.03)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 6.82 $ 6.96 $ 5.46 $ 7.26 $ 9.31 $ 12.73
============================================================================================================================
PER SHARE MARKET VALUE, END OF PERIOD $ 5.91 $ 6.55 $ 5.38 $ 8.04 $ 9.44 $ 11.06
============================================================================================================================
TOTAL INVESTMENT RETURN:
Market Value (6.23)%** 33.13% (24.16)% (2.82)% (4.02)% (18.14)%
Net Asset Value (1) 1.83%** 39.29% (14.69)% (11.05)% (17.72)% 6.34%
============================================================================================================================
RATIOS, SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) $ 79,826 $81,402 $63,878 $84,577 $107,840 $147,289
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.50%* 1.50% 2.92% 4.02% 3.84% 2.99%
Ratio of Expenses Excluding Interest Expense
to Average Net Assets 1.03%* 1.05% 1.25% 1.17% 1.05% 1.09%
Ratio of Net Investment Income to Average
Net Assets 9.40%* 10.57% 12.69% 13.37% 11.02% 9.43%
Portfolio Turnover Rate 29%** 68% 56% 51% 35% 40%
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
(1) 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. This percentage is not an indication of the performance of a
stockholder'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.
+ Per share amount is based on average shares outstanding.
* Annualized
** Not Annualized
12 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
NOTES TO FINANCIAL STATEMENTS June 30, 2004 (Unaudited)
Morgan Stanley High Yield Fund, Inc. (the "Fund") was incorporated on
September 23, 1993 and is registered as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940 (the "1940 Act"), as
amended. The Fund's primary objective is to produce high current income and as a
secondary objective, to seek capital appreciation, through investments primarily
in high yield securities.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with accounting principles generally accepted in the United States.
Such policies are consistently followed by the Fund in the preparation of its
financial statements. Accounting principles generally accepted in the United
States may require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange are valued
at the latest quoted sales price on the valuation date. Equity securities
listed or traded on NASDAQ, for which market quotations are available, are
valued at the NASDAQ Official Closing Price. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued at the mean between the current bid and asked
prices obtained from reputable brokers. Bonds and other fixed income
securities may be valued according to the broadest and most representative
market. In addition, bonds and other fixed income securities may be valued
on the basis of prices provided by a pricing service. The prices provided
by a pricing service take into account broker dealer market price
quotations for institutional size trading in similar groups of securities,
security quality, maturity, coupon and other security characteristics as
well as any developments related to the specific securities. Debt
securities purchased with remaining maturities of 60 days or less are
valued at amortized cost, if it approximates value.
All other securities and investments for which market values are not
readily available, including restricted securities, and those securities
for which it is inappropriate to determine prices in accordance with the
aforementioned procedures, are valued at fair value as determined in good
faith under procedures adopted by the Board of Directors, although the
actual calculations may be done by others. Factors considered in making
this determination may include, but are not limited to, information
obtained by contacting the issuer, analysts, or the appropriate stock
exchange (for exchange-traded securities), analysis of the issuer's
financial statements or other available documents and, if necessary,
available information concerning other securities in similar circumstances.
Most foreign markets close before the New York Stock Exchange (NYSE).
Occasionally, developments that could affect the closing prices of
securities and other assets may occur between the times at which valuations
of such securities are determined (that is, close of the foreign market on
which the securities trade) and the close of business on the NYSE. If these
developments are expected to materially affect the value of the securities,
the valuations may be adjusted to reflect the estimated fair value as of
the close of the NYSE, as determined in good faith under procedures
established by the Board of Directors.
2. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements under
which the Fund lends excess cash and takes possession of securities with an
agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as custodian
for the Fund takes possession of the underlying securities (collateral),
with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that
any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy
of the collateral. In the event of default on the obligation to repurchase,
the Fund has the right to liquidate the collateral and apply the proceeds
in satisfaction of the obligation. In the event of default or bankruptcy by
the counter-party to the agreement, realization and/or retention of the
collateral or proceeds may be subject to legal proceedings.
The Fund, along with other affiliated investment companies, may utilize a
joint trading account for the purpose of entering into one or more
repurchase agreements.
3. REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements with institutions that the Fund's investment adviser has
determined are creditworthy. Under a reverse repurchase agreement, the Fund
sells securities and agrees to repurchase them at a mutually agreed upon
date and price. Reverse repurchase agreements involve the risk that the
market value of the securities purchased with the proceeds from the sale of
securities received by the Fund may decline below the price of the
securities the Fund is obligated to repurchase. Reverse repurchase
agreements also involve credit risk with the counterparty to the extent
that the value of securities subject to repurchase exceed the Fund's
13
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D) June 30, 2004 (Unaudited)
liability under the reverse repurchase agreement. Securities subject to
repurchase under reverse repurchase agreements, if any, are designated as
such in the Statement of Net Assets.
At June 30, 2004, the Fund had a reverse repurchase agreement outstanding
with UBS Warburg as follows:
<Table>
<Caption>
MATURITY IN
LESS THAN
365 DAYS
- ----------------------------------------------------------------
Value of Securities Subject to Repurchase $26,553,000
Liability Under Reverse Repurchase
Agreement $25,905,000
Weighted Average Days to Maturity 11
</Table>
The weighted average weekly balance of reverse repurchase agreements
outstanding during the six months ended June 30, 2004 was approximately
$13,287,000 at a weighted average weekly interest rate of 1.50%.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the mean of the bid and asked prices of such currencies
against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates
of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) due to securities transactions
are included in the reported net realized and unrealized gains (losses) on
investment transactions and balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Net
Assets. The change in net unrealized currency gains (losses) on foreign
currency translations for the period is reflected in the Statement of
Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. dollar
denominated transactions as a result of, among other factors, the
possibility of lower levels of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
The Fund may use derivatives to achieve its investment objectives. The Fund may
engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in options, swaps and structured notes. Consistent with the
Fund's investment objectives and policies, the Fund may use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments that the Fund have utilized
and their associated risks:
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counter parties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
6. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of
14
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D) June 30, 2004 (Unaudited)
restructuring the investment characteristics of sovereign debt obligations.
This type of restructuring involves the deposit with or purchase by an
entity of specified instruments and the issuance by that entity of one or
more classes of securities ("Structured Securities") backed by, or
representing interests in, the underlying instruments. Structured
Securities generally will expose the Fund to credit risks of the underlying
instruments as well as of the issuer of the Structured Security. Structured
Securities are typically sold in private placement transactions with no
active trading market. Investments in Structured Securities may be more
volatile than their underlying instruments, however, any loss is limited to
the amount of the original investment.
7. FUTURES: The Fund may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party
of a specified amount of a specified security, index, instrument or basket
of instruments. Futures contracts (secured by cash or government securities
deposited with brokers or custodians as "initial margin") are valued based
upon their quoted daily settlement prices; changes in initial settlement
value (represented by cash paid to or received from brokers as "variation
margin") are accounted for as unrealized appreciation (depreciation). When
futures contracts are closed, the difference between the opening value at
the date of purchase and the value at closing is recorded as realized gains
or losses in the Statement of Operations.
The Fund may use futures contracts in order to manage exposure to the stock
and bond markets, to hedge against unfavorable changes in the value of
securities or to remain fully invested and to reduce transaction costs.
Futures contracts involve market risk in excess of the amounts recognized
in the Statement of Net Assets. Risks arise from the possible movements in
security values underlying these instruments. The change in value of
futures contracts primarily corresponds with the value of their underlying
instruments, which may not correlate with the change in value of the hedged
investments. In addition, there is the risk that the Fund may not be able
to enter into a closing transaction because of an illiquid secondary
market.
8. OVER-THE-COUNTER TRADING: Securities and other derivative instruments that
may be purchased or sold by the Fund may consist of instruments not traded
on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
9. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis and discounts and premiums on
investments purchased are accreted or amortized in accordance with the
effective yield method over their respective lives, except where collection
is in doubt. Distributions to stockholders are recorded on the ex-dividend
date.
B. ADVISER: Morgan Stanley Investment Management Inc. (the "Adviser") provides
investment advisory services to the Fund under the terms of an Investment
Advisory and Management Agreement (the "Agreement"). Under the Agreement, the
Adviser is paid a fee computed weekly and payable monthly at an annual rate of
0.70% of the Fund's average weekly net assets.
C. ADMINISTRATOR: JPMorgan Chase Bank, through its corporate affiliate J.P.
Morgan Investor Services Co. (the "Administrator"), provides administrative
services to the Fund under an Administration Agreement. The Administrator is
paid a fee computed weekly and payable monthly at an annual rate of 0.02435% of
the Fund's average weekly net assets, plus $24,000 per annum. In addition, the
Fund is charged for certain out-of-pocket expenses incurred by the Administrator
on its behalf. An employee of the Administrator is an Officer of the fund.
D. CUSTODIAN: JPMorgan Chase Bank and its affiliates serve as custodian for the
Fund. The Custodian holds cash, securities, and other assets of the Fund as
required by the 1940 Act. Custody fees are payable monthly based on assets held
in custody, investment purchases and sales activity and account maintenance
fees, plus reimbursement for certain out-of-pocket expenses.
E. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the financial
statements. Dividend income and distributions to stockholders are recorded on
the ex-dividend date.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income and/or
15
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D) June 30, 2004 (Unaudited)
capital gains earned or repatriated. Taxes are accrued and applied to net
investment income, net realized gains and net unrealized appreciation as such
income and/or gains are earned.
The tax character of distributions paid may differ from the character of
distributions shown on the Statements of Changes in Net Assets due to short-term
capital gains being treated as ordinary income for tax purposes. The tax
character of distributions paid during 2003 and 2002 were as follows:
<Table>
<Caption>
2003 DISTRIBUTIONS 2002 DISTRIBUTIONS
PAID FROM: PAID FROM:
(000) (000)
- --------------------------------- ------------------------
LONG-TERM LONG-TERM
ORDINARY CAPITAL ORDINARY CAPITAL
INCOME GAIN INCOME GAIN
- ------------------------------------------------------------
$6,671 $-- $9,048 $--
</Table>
The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations, which
may differ from accounting principles generally accepted in the United States.
The book/tax differences are considered either temporary or permanent in nature.
Temporary differences are attributable to differing book and tax treatments for
the timing of the recognition of gains and losses on certain investment
transactions and the timing of the deductibility of certain expenses.
Permanent book and tax basis differences may result in reclassifications among
undistributed (distributions in excess of) net investment income (or accumulated
net investment loss), accumulated net realized gain (loss) and paid-in capital.
At December 31, 2003, the components of distributable earnings on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY INCOME LONG-TERM CAPITAL GAIN
(000) (000)
- ----------------------------------------------------
$115 $--
====================================================
</Table>
At June 30, 2004, the Federal income tax cost basis of securities was
$108,290,000 and, accordingly, net unrealized depreciation for Federal income
tax purposes was $1,392,000 of which $7,153,000 related to appreciated
securities and $8,545,000 related to depreciated securities.
At December 31, 2003, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $72,207,000 available to offset future
capital gains of which $1,337,000 will expire on December 31, 2007, $4,197,000
will expire on December 31, 2008, $4,214,000 to expire on December 31, 2009,
$24,375,000 will expire on December 31, 2010 and $38,084,000 will expire on
December 31, 2011.
To the extent that capital loss carryforwards are used to offset any future
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by the Fund for gains realized and not distributed. To the extent that capital
gains are offset, such gains will not be distributed to the stockholders.
Net capital and currency losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the year ended December 31, 2003, the Fund deferred to January
1, 2004, for U.S. Federal income tax purposes, post-October capital losses of
$3,413,000 and post-October currency losses of $82,000.
F. CONTRACTUAL OBLIGATIONS: The Fund enters into contracts that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
G. OTHER: During the six months ended June 30, 2004, the Fund made purchases and
sales totaling approximately $29,888,000 and $30,405,000, respectively, of
investment securities other than long-term U.S. Government securities and
short-term investments. There were no purchases or sales of long-term U.S.
Government securities.
A substantial portion of the Fund's total investments consist of high yield
securities rated below investment grade. Investments in high-yield securities
are accompanied by a greater degree of credit risk and the risk tends to be more
sensitive to economic conditions than higher-rated securities. These investments
are often traded by one market maker who may also be utilized by the Fund to
provide pricing information used to value such securities. The amounts which
will be realized upon disposition of the securities may differ from the value
reflected on the statement of net assets and the differences could be material.
On June 21, 2004, the Board of Directors declared a distribution of $0.04 per
share, derived from net investment income, payable on July 15, 2004, to
stockholders of record on June 30, 2004.
16
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MORGAN STANLEY HIGH YIELD FUND, INC.
NOTES TO FINANCIAL STATEMENTS June 30, 2004 (Unaudited)
H. SUPPLEMENTAL PROXY INFORMATION:
The Annual Meeting of the Stockholders of the Fund was held on June 22, 2004.
The following is a summary of the proposal presented and the total number of
shares voted:
PROPOSAL:
1. To elect the following Directors:
<Table>
<Caption>
VOTES IN VOTES
FAVOR OF AGAINST
- -----------------------------------------------------------
Wayne E. Hedien 9,773,758 170,633
James F. Higgins 9,773,758 170,633
Dr. Manuel H. Johnson 9,773,758 170,633
</Table>
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A copy of (1) the Fund's policies and procedures with respect to the voting of
proxies relating to the Fund's portfolio securities; and (2) how the Fund voted
proxies relating to portfolio securities during the most recent twelve-month
period ended June 30, 2004 is available without charge, upon request, by calling
1-800-548-7786 or by visiting our website at www.morganstanley.com/im. This
information is also available on the Securities and Exchange Commission's
website at www.sec.gov.
17
<Page>
MORGAN STANLEY HIGH YIELD FUND, INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each stockholder will be deemed to have elected, unless American Stock Transfer
& Trust Company (the "Plan Agent") is otherwise instructed by the stockholder in
writing, to have all distributions automatically reinvested in Fund shares.
Participants in the Plan have the option of making additional voluntary cash
payments to the Plan Agent, annually, in any amount from $100 to $3,000, for
investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
stockholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of stockholders, such as banks, brokers or nominees, that hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
stockholder as representing the total amount registered in the stockholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Stockholders who do not wish to have distributions automatically reinvested
should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and stockholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
Morgan Stanley High Yield Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
59 Maiden Lane
New York, New York 10030
1-800-278-4353
18
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ITEM 2. CODE OF ETHICS. Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable for semi-annual
reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable for semi-annual
reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable for semi-annual
reports.
ITEM 6. [RESERVED.]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. Not applicable for semi-annual reports.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not Applicable
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 10. CONTROLS AND PROCEDURES.
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 11. EXHIBITS.
(a) Code of Ethics - Not applicable for semi-annual reports.
(b) Certifications of Principal Executive Officer and Principal Financial
Officer attached hereto as part of EX-99.CERT.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Morgan Stanley High Yield Fund, Inc.
By: /s/ Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2004
By: /s/ James W. Garrett
Name: James W. Garrett
Title: Principal Financial Officer
Date: August 19, 2004