<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
Frederick B. Whittemore Michael F. Klein
VICE-CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Joseph P. Stadler
John D. Barrett II VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
Gerard E. Jones SECRETARY
DIRECTOR Karl O. Hartmann
Andrew McNally, IV ASSISTANT SECRETARY
DIRECTOR James R. Rooney
Samuel T. Reeves TREASURER
DIRECTOR Joanna M. Haigney
Fergus Reid ASSISTANT TREASURER
DIRECTOR
Frederick O. Robertshaw
DIRECTOR
- --------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------
CUSTODIANS
The Chase Manhattan Bank, N.A.
770 Broadway
New York, New York 10003
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
- --------------------------------------------------
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
- --------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------
For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only when preceded or accompanied by prospectuses of the Morgan
Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1996
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Small Cap Value Equity Portfolio invests in small companies that our
research indicates are undervalued, of high quality, and will reward the
shareholder through high current dividend income. The Portfolio's disciplined
value approach seeks to outperform the Russell 2500 Small Company Index in the
longer term. We believe our emphasis on high quality companies will help the
Portfolio perform particularly well in difficult markets.
The Small Cap Value Equity Portfolio selects companies that can be purchased at
bargain prices. Bargains mostly arise as a result of public overreactions to
temporary problems associated with an otherwise healthy company, or because a
company is neglected and currently out-of-the limelight of investors' interest.
Often, these companies operate as major players in very focused markets and are
not widely followed by the investment community.
PERFORMANCE COMPARED TO THE RUSSELL 2500 INDEX AND S&P 500 INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- --------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A................ 4.62% 20.80% 12.21%
PORTFOLIO--CLASS B(3)............. 4.27 N/A N/A
RUSSELL 2500...................... 5.87 29.83 16.67
S&P 500........................... 5.36 32.07 15.81
</TABLE>
1. The Russell 2500 and the S&P 500 indices are unmanaged indices of common
stock.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
For the three month period ended March 31, 1996, the Portfolio had a total
return of 4.62% for the Class A shares and 4.27% for the Class B shares, as
compared to a total return of 5.87% and 5.36% for the Russell 2500 Index and S&P
500 Index, respectively. The average annual total return for the twelve months
ended March 31, 1996 and for the period from inception on December 17, 1992
through March 31, 1996 was 20.80% and 12.21%, respectively, for the Class A
shares, as compared to 29.83% and 16.67%, respectively, for the Russell 2500
Index and 32.07% and 15.81%, respectively, for the S&P 500 Index.
PERFORMANCE REVIEW
Volatility and opportunity were the key words for U.S. small cap market
performance for the first quarter of 1996. The Russell 2000 Small Company Index
recovered from an interim low of -4.5% in January to close at +5.1% by the end
of the quarter. Small company stock underperformance versus the S&P 500 reversed
in February, and by quarter-end the Russell 2000 Small Company Index lagged the
S&P 500 only slightly. Style effects with regard to 'value' or 'growth'
investing were very strong during each month. However, there was no clear trend
for either growth or value style throughout the three month period.
The consensus economic forecast at the beginning of the year called for a soft
landing and continued slow growth. Soon this forecast came into question as
being too conservative as economic data--despite severe winter weather in large
parts of the country--indicated a more vigorous U.S. economy. Interest rates
rose sharply as the bond market saw the renewed specter of accelerating
inflation. The impact on the Portfolio was mixed. The Portfolio's deeply
cyclical companies benefited nicely from the anticipation of stronger economic
growth and earnings. In particular, its holdings in the metal, paper and
packaging, capital goods, and consumer durable industries performed strongly.
The Portfolio's energy stocks also showed above market returns as higher energy
prices are expected to translate into improved earnings results for these
companies. While the Portfolio's small cap economic sensitive issues performed
well during the quarter their performance
2
<PAGE>
lagged large cap cyclical companies. We believe this was related to higher
trading liquidity of large cap stocks and, hence, expect small cap cyclical
companies' performance to follow suit. In addition to a slowly accelerating
domestic economic environment, small cap cyclical companies continue to benefit
from an inexpensive U.S. currency and strong product demand from Asia.
While expectations of accelerated economic growth was positive for the
Portfolio's cyclical companies it had a dampening impact on its interest rate
sensitive companies, particularly utilities, finance, and insurance companies.
Following a disappointing Christmas retail season and after being shunned for a
long time, the retail industry staged the first signs of a turnaround and
produced excellent returns averaging 13% for the Portfolio. We took advantage of
the high volatility in this sector and increased turnover in consumer retail
stocks.
On a company fundamental basis the most exciting events were earnings reports
for the last quarter and full year of 1995. We are pleased to observe strong
earnings comparisons for the Portfolio's companies. In particular, 71% of
reporting companies showed positive comparisons over last year, with an average
positive earnings increase of 33%.
During the quarter, we purchased Dallas Semiconductor, Susquehanna Bancshares,
True North Communications Inc., and Stanhome Inc. Dallas Semiconductor produces
electronic items for various niche markets. Its largest segments are electronic
time keeping products for PC and non-PC markets. We expect this financially
sound company to show an earnings growth rate of 20%. Trading at a
price-earnings multiple of 14.0 times, we regard these shares to be undervalued.
Susquehanna Bancshares (1.2x price-to-book ratio, 4.5% dividend yield) is
expanding its banking franchise into the lucrative Washington D.C./Baltimore
area while still being priced as an undiscovered Pennsylvania community bank. We
purchased Stanhome Inc, a marketer of precious, collectible giftware such as
figurines and dolls, at a low 10x earnings and a dividend yield of 3.7%.
Stanhome also operates a direct selling group in Europe offering consumer
products sold by independent representatives. We expect the company to grow its
earnings substantially in 1996 based on turnaround performance in its direct
marketing division. We also took a position in True North Communications, a
Chicago based advertising agency. We purchased True North at 13.0 times earnings
and a dividend yield of 3.0%. We took advantage of increased price volatility in
the retail sector through the sale of DEB Shops and the recently purchased
Lillian Vernon Corp. Lillian Vernon retails household, kitchen and garden items
through mail order. We purchased the company at close to its book value. Last
year's earnings were penalized by higher catalog paper costs which we expect to
be mostly reversed in 1996.
The Small Cap Value Equity Portfolio offers the consistent application of a
disciplined value driven investment process to its shareholders. As such, we
will pursue our search for smaller companies that our research shows are
undervalued, are of high quality and pay above average dividend yield. We
believe these companies will be well positioned to achieve superior total return
for the longer term.
Christian K. Stadlinger
PORTFOLIO MANAGER
April 1996
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (95.8%)
AEROSPACE (2.0%)
27,000 AAR Corp. $ 550
13,000 Thiokol Corp. 570
300 United Industrial Corp. 2
---------
1,122
---------
BANKING (10.6%)
26,175 First Security Corp. (Delaware) 726
27,000 Greenpoint Financial Corp. 742
17,600 Onbancorp, Inc. 616
29,000 Peoples Heritage Financial Group,
Inc. 631
16,000 Standard Federal Bank 680
20,000 Susquehanna Bancshares, Inc. 565
29,000 Trustmark Corp. 653
20,000 Union Planters Corp. 605
21,000 Washington Mutual, Inc. 625
---------
5,843
---------
BUILDING (1.7%)
13,300 Ameron, Inc. (Delaware) 497
38,800 Gilbert Associates, Inc., Class A 436
---------
933
---------
CAPITAL GOODS (4.2%)
21,403 Binks Manufacturing Co. 474
43,200 Cascade Corp. 616
21,600 Starret (L.S.) Co., Class A 540
12,200 Tecumseh Products Co., Class A 718
---------
2,348
---------
CHEMICALS (4.8%)
33,792 Aceto Corp. 532
23,400 Dexter Corp. 620
19,400 Learonal, Inc. 480
29,800 Quaker Chemical Corp. 402
18,000 Witco Corp. 634
---------
2,668
---------
COMMUNICATIONS (1.3%)
30,200 Comsat Corp. 706
---------
CONSUMER-DURABLES (3.9%)
26,200 Arvin Industries, Inc. 544
30,298 Knape & Vogt Manufacturing Co. 417
31,300 Oneida Ltd. 536
27,100 Smith (A.O.) Corp., Class B 640
---------
2,137
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
CONSUMER-RETAIL (5.1%)
34,800 CPI Corp. $ 557
25,700 Guilford Mills, Inc. 630
20,100 Ross Stores, Inc. 505
14,100 Springs Industries, Inc., Class A 649
15,400 Stanhome, Inc. 491
---------
2,832
---------
CONSUMER-STAPLES (3.8%)
15,246 Block Drug Co., Inc., Class A 631
25,400 Coors (Adolph), Inc., Class B 454
29,900 International Multifoods Corp. 572
26,400 Nash Finch Co. 442
---------
2,099
---------
ENERGY (3.3%)
24,600 Ashland Coal, Inc. 575
18,000 Diamond Shamrock, Inc. 585
23,500 Ultramar Corp. 679
---------
1,839
---------
FINANCIAL-DIVERSIFIED (4.6%)
11,900 Finova Group, Inc. 650
12,100 GATX Corp. 557
32,000 Manufactured Home Communities,
Inc. REIT 568
28,000 South West Property Trust REIT 375
19,000 Wellsford Residential Property
Trust REIT 416
---------
2,566
---------
HEALTH CARE (6.1%)
30,000 Analogic Corp. 563
14,500 Beckman Instruments, Inc. 566
22,400 Bergen Brunswig Corp., Class A 585
35,500 Bindley Western Industries, Inc. 564
40,700 Kinetic Concepts, Inc. 544
26,000 United Wisconsin Services, Inc. 562
---------
3,384
---------
INDUSTRIAL (4.3%)
17,200 American Filtrona Corp. 593
15,400 Barnes Group, Inc. 691
50,700 GenCorp, Inc. 634
44,500 Kaman Corp., Class A 484
---------
2,402
---------
INSURANCE (5.5%)
16,200 Argonaut Group, Inc. 502
27,000 Enhance Financial Services Group,
Inc. 746
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
INSURANCE (CONTINUED)
<C> <S> <C>
21,500 Provident Companies, Inc. $ 653
15,900 Selective Insurance Group, Inc. 572
19,950 USLife Corp. 586
---------
3,059
---------
METALS (2.2%)
41,000 Birmingham Steel Corp. 605
14,100 Cleveland-Cliffs Iron Co. 624
---------
1,229
---------
PAPER & PACKAGING (2.4%)
23,500 Ball Corp. 729
13,900 Potlatch Corp. 594
---------
1,323
---------
SERVICES (11.8%)
23,200 ABM Industries, Inc. 768
21,200 Angelica Corp. 450
30,000 Bowne & Co. 548
30,700 Cross (A.T.) Co., Class A 484
43,000 Jackpot Enterprises, Inc. 484
15,400 National Service Industries, Inc. 558
25,900 New England Business Services,
Inc. 434
24,400 Ogden Corp. 476
55,400 Piccadilly Cafeterias, Inc. 519
41,500 Russ Berrie & Co., Inc. 705
25,000 Sbarro, Inc. 631
18,300 True North Communications, Inc. 456
---------
6,513
---------
TECHNOLOGY (8.6%)
38,000 Augat, Inc. 665
48,000 Core Industries, Inc. 708
21,800 Cubic Corp. 586
25,000 Dallas Semiconductor Corp. 459
33,700 Gerber Scientific, Inc. 505
18,900 MTS Systems Corp. 709
30,500 National Computer Systems, Inc. 618
36,000 Scitex Ltd. 499
---------
4,749
---------
TRANSPORTATION (2.5%)
22,000 Airborne Freight Corp. 556
19,800 Overseas Shipholding Group, Inc. 361
33,000 SkyWest, Inc. 433
---------
1,350
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
UTILITIES (7.1%)
19,700 Central Hudson Gas & Electric $ 596
13,300 Commonwealth Energy Systems Cos. 622
15,000 Eastern Enterprises 533
25,900 Oneok, Inc. 618
13,700 Orange & Rockland Utilities, Inc. 491
13,700 SJW Corp. 536
28,500 Washington Water Power Co. 545
---------
3,941
---------
TOTAL COMMON STOCKS (Cost $46,208) 53,043
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (4.1%)
REPURCHASE AGREEMENT (4.1%)
$ 2,264 The Chase Manhattan Bank, N.A.,
5.15%, dated 3/29/96, due
4/01/96, to be repurchased at
$2,265, collateralized by $1,520
United States Treasury Bonds,
11.25%, due 2/15/15, valued at
$2,312 (Cost $2,264) 2,264
---------
TOTAL INVESTMENTS (99.9%) (Cost $48,472) 55,307
---------
OTHER ASSETS AND LIABILITIES (0.1%)
Other Assets 227
Liabilities (153)
---------
74
---------
NET ASSETS (100%) $55,381
---------
---------
CLASS A SHARES:
Net Assets $54,249
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 4,353
Net Asset Value, Offering and Redemption Price
Per Share $12.46
---------
---------
CLASS B SHARES:
Net Assets $1,132
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 91
Net Asset Value, Offering and Redemption Price
Per Share $12.46
---------
---------
</TABLE>
- ----------------------------------
REIT -- Real Estate Investment Trust
5
