<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.
EMERGING MARKETS DEBT PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1996
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the Emerging Markets Debt Portfolio is high total
return through investment primarily in debt securities of government,
government-related and corporate issuers located in emerging countries.
For the three month period ended March 31, 1996, the Portfolio had a total
return of 5.01% for the Class A shares and 3.92% for the Class B shares, as
compared to a total return of 3.76% for the J.P. Morgan Emerging Markets Bond
Index. The average annual total return for the twelve months ended March 31,
1996 and for the period from inception on February 1, 1994 through March 31,
1996 was 57.20% and 6.96%, respectively, for the Class A shares, as compared to
48.81% and 3.44%, respectively, for the Index. As of March 31, 1996, the
Portfolio had an SEC 30-day yield of 14.80% for the Class A shares and 14.48%
for the Class B shares.
PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING MARKETS BOND INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- --------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A................ 5.01% 57.20% 6.96%
PORTFOLIO--CLASS B(3)............. 3.92 N/A N/A
INDEX............................. 3.76 48.81 3.44
</TABLE>
1. The J.P. Morgan Emerging Markets Bond Index is a market weighted index
composed of all Brady bonds outstanding and includes Argentina, Brazil,
Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela.
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 IN THIS OVERVIEW 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.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The positive momentum that emerging markets debt witnessed in the first few
weeks of the year faded as the U.S. bond markets re-evaluated the likely future
direction of U.S. interest rates. The U.S. yield curve at that point of time was
discounting continued easing of monetary policy, given the weak state of the
economy. The inventory adjustment combined with a restrictive fiscal stance and
weak conditions in the external sector had produced sub-par growth for the
fourth quarter of 1995. The continuation of these conditions into 1996 was
questioned by bond market participants at the beginning of the year and
leveraged investors unwound positions in the short end of the market and
initiated the reversal in yields. This back-up in yields was exacerbated by a
spate of economic releases which suggested that the economy was in fact picking
up steam in the first quarter. Rates eventually increased by 120 bps in the
short end and 80 bps at the long end of the yield curve.
The reversal in the fortunes of the U.S. bond market had an adverse impact on
emerging market debt asset prices. Deleveraging and a reduction in risk
exposures to the asset class prompted a 10% correction in prices over a course
of four weeks. Fixed rate collateralized bonds, bonds with the highest interest
rate duration, were the hardest hit. Floating-rate non-collateralized bonds
outperformed due to their low interest rate durations.
The Portfolio outperformed over the quarter as it was defensively positioned for
the move in interest rates, overweight positions in money market and floating
rate assets with low durations and a sizable cash position during the correction
in the market. Our country allocations also were defensive in nature;
underweight in Argentina, Mexico and Brazil, the countries whose assets were
most likely to be negatively affected by overall market conditions, and
overweight in Russia, Morocco, Venezuela and Panama, countries with lower than
average market exposure.
Over the quarter, Bulgaria, Argentina, Mexico and Russia underperformed the
overall index and Peru, Panama, Poland, Venezuela and Ecuador outperformed the
market on average. Poland received an investment grade rating from S&P and
became the first emerging country to migrate from the asset class. Polish Brady
bonds rallied strongly on the news as rating action recognized the strong
performance of the economy and the implementation of structural reforms over the
last four years. Panama and Peru outperformed as they continued with their
steady economic performance and underweight investors
2
<PAGE>
sought to increase their exposures to these countries. Some questions were
raised about the sustainability of growth in Peru, given the continuation of
large current account deficits and a strong exchange rate. Remedial action in
the form of a tightening of monetary policy to cool aggregate demand should
alleviate these concerns. We had retained our overweight positions in Panama for
most of the quarter and had reduced some of our exposure into market strength.
We remain positive on the credit and will seek to maintain our current exposure.
Venezuela continued to make slow and steady progress towards implementing an
orthodox stabilization program. Progress was not without hiccups as the
political leadership postponed making harsh economic decisions, until there were
really no alternatives left to rescue the economy from an implosion resulting
from a severe decline in confidence. The eventual program had most of the
elements of an orthodox stabilization program. Venezuelan bonds rallied into the
news of the impending program as default risk was sharply reduced. We increased
our exposure to Venezuela during a bout of market skepticism and will retain our
aggressive overweight position to capture high yields and possible further
tightening of credit spreads.
Argentina underperformed during the first quarter by 500 basis points as
continued weakness in the economy, resulting from the tequila affect induced
1995 recession, produced another round of political wrangling between the
President and his Finance Minister over policy alternatives available to jump
start growth in 1996. Economic growth should gather steam as the year
progresses, as firms rebuild inventories and consumer expenditures pick up. We
reduced our exposure to Argentina in the middle of the quarter as we became more
defensive on the market and increased it again towards the end of the quarter as
political problems appeared to have been sorted out.
Mexican Brady bonds underperformed the market as it was affected by concerns
over the impact of higher interest rates on the domestic economy. Our exposure
is limited primarily to local currency denominated treasury bills, which
performed well as the currency strengthened in nominal terms and interest rates
came down from the lofty levels seen at the beginning of the year. Mexican Brady
bonds trade at relatively tight spreads compared to the rest of the market and
we do not believe they offer value at such levels. The export-led economic
recovery seems to be taking a firmer hold and a drastic reduction in inflation
towards to the second half of the year should result in a virtuous cycle of low
inflation, low interest rates and higher growth. The economy, however, remains
vulnerable to external shocks and the recent appreciation of the peso could
portend trouble ahead. We remain cautious on Mexico and believe higher yields
elsewhere in the market are more attractive.
Brazil continues to be the solid performer of the market. A strong vibrant
private sector, reasonable economic growth, lower inflation, and high foreign
reserves make it a safer place to invest in the long term. In the short run,
however, momentum to implement reforms that would increase the long term
viability of the Real plan, such as the measures to reform social security and
the administrative machinery of the state, appears to be getting caught in the
politics as usual pre-election atmosphere of the Brazilian congress. Significant
progress on these issues is necessary to contain the fiscal deficit and maintain
economic stability. Brazil will remain a core holding in our portfolio, but we
will not overweight Brazil in the absence of any real chance of the leadership
regaining the upper hand in its attempt to push through necessary reform
measures in 1996.
Russia remains one of our largest positions. Russian loans underperformed in the
first quarter as concerns over a possible Communist victory in the Presidential
elections depressed prices. We believe that the incumbent President will gain
ground as the election date approaches and prices should rally in the next
quarter. Current valuations suggest that Russian non-performing loans trade at
wider spreads than Bulgaria. Based on credit fundamentals fair value should be
at least 500 basis points tighter than current levels.
We remain cautiously optimistic on emerging markets debt. Despite a negative
U.S. rate environment in the first quarter, emerging debt has performed well.
This has been true because of a contraction of credit spreads based on improving
economic stories. Management of portfolio duration remains a key aspect of
performance. Credit spreads are likely to be volatile in an environment when
interest rates are likely to go up. Our exposure to money market instruments in
local currencies should provide us with some diversification benefits.
Paul Ghaffari
PORTFOLIO MANAGER
April 1996
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
DEBT INSTRUMENTS (88.6%)
ARGENTINA (12.4%)
BONDS (12.4%)
$ 2,000 Republic of Argentina BOCON,
Series M1, (Floating Rate),
3.565% 4/01/07 $ 1,385
9,000 Republic of Argentina BOCON,
Series 1 DL, (Floating Rate),
3.188%, 4/01/01 8,415
ARP 3,000 Republic of Argentina BOCON,
Series 2, (Floating Rate), 3.565%
9/01/02 2,003
$ 6,000 Republic of Argentina Discount
Bonds, (Floating Rate), 6.563%,
3/31/23 3,859
7,673 Republic of Argentina, Series L,
"Euro", (Floating Rate), 6.813%,
3/31/05 5,534
---------
21,196
---------
BRAZIL (18.1%)
BONDS (18.1%)
20,000 Federative Republic of Brazil Par
Bond, Series Z-L, (Floating
Rate), 6.813%, 4/15/24 12,825
14,000 Federative Republic of Brazil Par
Bond, Series Z-L, (Floating
Rate), 4.25%, 4/15/24 7,123
18,794 Federative Republic of Brazil,
Series C, "Euro", (Floating
Rate), PIK, 8.00%, 4/15/14 11,088
---------
31,036
---------
BULGARIA (2.0%)
BONDS (2.0%)
5,000 Bulgaria Discount Bonds, Series A,
"Euro" (Floating Rate), 6.25%,
7/28/24 2,491
2,000 Bulgaria Interest Arrears Bonds,
(Floating Rate), 6.25%, 7/28/11 884
---------
3,375
---------
ECUADOR (1.7%)
BONDS (1.7%)
1,000 Republic of Ecuador Discount
Bonds, "Euro", (Floating Rate)
6.063%, 2/28/25 541
181 Republic of Ecuador Discount
Bonds, (Floating Rate) 6.063%,
2/28/25 98
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
$ 3,230 Republic of Ecuador IE Bonds,
(Floating Rate), 6.50%, 12/21/04 $ 2,229
---------
2,868
---------
MEXICO (4.7%)
BONDS (4.7%)
MXP 19,092 Banamex Pagare Discount Bond,
4/03/97 1,798
32,143 Banamex Pagare Discount Bond,
10/09/97 2,635
$ 1,000 Grupo Mexicano de Desarrollo,
8.25%, 2/17/01 520
MXP 8,000 National Financiera, 17.00%,
2/26/99 1,992
$ 1,500 Mexican Discount Bond, Series A,
(Floating Rate), 6.766%,
12/31/19, (Value Recovery Rights
Attached) 1,133
---------
8,078
---------
MOROCCO (2.8%)
LOAN AGREEMENT (2.8%)
7,000 Kingdom of Morocco Restructuring
and Consolidating Agreement,
Tranche A, (Floating Rate),
1/01/09 (Participation: Chase,
Morgan Guaranty Trust Co. of
N.Y.) 4,874
---------
NIGERIA (1.5%)
BOND (1.5%)
5,000 Nigeria Par Bonds, (Floating
Rate), 6.25%, 11/15/20, (Warrants
Attached) 2,556
---------
PANAMA (5.0%)
LOAN AGREEMENT (5.0%)
10,113 Republic of Panama Loans 8,596
---------
PERU (2.9%)
BOND (2.9%)
9,699 Peru Working Capital Lines,
12/29/49 (Floating Rate) 4,910
---------
POLAND (1.1%)
NOTE (1.1%)
2,224 Republic of Poland Note, Zero
Coupon, 1/08/97 1,903
---------
RUSSIA (18.0%)
LOAN AGREEMENTS (10.5%)
CHF 12,800 Bank for Foreign Economic Affairs,
(Floating Rate) 3,615
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
RUSSIA (CONTINUED)
DEM 56,500 Bank for Foreign Economic Affairs,
(Floating Rate) $ 14,396
---------
18,011
---------
BONDS (7.5%)
$ 5,440 Ministry of Finance Tranche III,
3.00%, 5/14/99 3,937
21,450 Ministry of Finance Tranche IV,
3.00%, 5/14/03 8,915
---------
12,852
---------
30,863
---------
SOUTH AFRICA (4.4%)
BONDS (4.4%)
ZAR 3,500 Republic of South Africa, Series
147, 11.50%, 5/30/00 793
18,340 Republic of South Africa, Series
153, 13.00%, 8/31/10 4,020
8,120 Republic of South Africa, Series
162, 12.50%, 1/15/02 1,849
2,800 Republic of South Africa, Series
175, 9.00%, 10/15/02 529
2,100 Republic of South Africa, Series
177, 9.50%, 5/15/07 366
---------
7,557
---------
VENEZUELA (14.0%)
BONDS (14.0%)
$ 28,000 Republic of Venezuela Debt
Conversion Bonds, Series DL,
(Floating Rate), 6.563%, 12/18/07 16,975
12,500 Republic of Venezuela Par Bond,
Series W-B, 6.75%, 3/31/20 (Oil
Warrants Attached) 7,078
---------
24,053
---------
TOTAL DEBT INSTRUMENTS (Cost $152,806) 151,865
---------
SHORT-TERM INVESTMENTS (12.2%)
MEXICO (6.5%)
BILLS (6.5%)
MXP 19,994 Mexican Cetes, Zero Coupon,
7/18/96 2,372
41,820 Mexican Cetes, Zero Coupon,
8/08/96 4,862
35,000 Mexican Cetes, Zero Coupon,
9/26/96 3,889
---------
11,123
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
TURKEY (3.3%)
BILLS (3.3%)
TRL 298,720,000 Turkish T-Bill, Zero Coupon,
6/26/96 $ 3,395
204,000,000 Turkish T-Bill, Zero Coupon,
7/10/96 2,240
---------
5,635
---------
UNITED STATES (2.4%)
REPURCHASE AGREEMENT (2.4%)
$ 4,058 The Chase Manhattan Bank, N.A.,
5.15%, dated 3/29/96, due
4/01/96, to be repurchased at
$4,060, collateralized by $4,115
United States Treasury Notes,
6.00%, due 8/31/97, valued at
$4,083 (Cost $4,058) 4,058
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $23,904) 20,816
---------
TOTAL INVESTMENTS (100.8%) (Cost $176,710) 172,681
---------
OTHER ASSETS AND LIABILITIES (-0.8%)
Other Assets 53,044
Liabilities (54,402)
---------
(1,358)
---------
NET ASSETS (100%) $ 171,323
---------
---------
CLASS A SHARES:
Net Assets $169,452
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 18,782
Net Asset Value, Offering and Redemption Price
Per Share $9.02
---------
---------
CLASS B SHARES:
Net Assets $1,871
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 208
Net Asset Value, Offering and Redemption Price
Per Share $9.02
---------
---------
</TABLE>
- ----------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ARP -- Argentine Peso
CHF -- Swiss Franc
DEM -- Deutsche Mark
MXP -- Mexican Peso
TRL -- Turkish Lira
ZAR -- South African Rand
PIK -- Payment-In-Kind. Income may be paid in additional
securities or cash at the discretion of the issuer.
</TABLE>
5