MORGAN STANLEY INSTITUTIONAL FUND INC, N-30D, 1996-09-09

MORGAN STANLEY INSTITUTIONAL FUND INC
N-30D, 1996-09-09

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MORGAN STANLEY

MORGAN STANLEY
INSTITUTIONAL FUND, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1996
[LOGO]
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
President's Letter.......................... 1
Performance Summary......................... 2
Managers' Reports and Statements of Net
Assets by Portfolio:
Global and International Equity Portfolios:
Active Country Allocation................. 4
Asian Equity.............................. 15
Emerging Markets.......................... 22
European Equity .......................... 31
Global Equity ............................ 36
Gold...................................... 41
International Equity ..................... 45
International Magnum ..................... 52
International Small Cap................... 59
Japanese Equity........................... 64
Latin American............................ 68
U.S. Equity Portfolios:
Aggressive Equity......................... 73
Emerging Growth........................... 77
Equity Growth............................. 82
Small Cap Value Equity.................... 87
U.S. Real Estate.......................... 91
Value Equity.............................. 96
Balanced Portfolio.......................... 100
Fixed Income Portfolios:
Emerging Markets Debt..................... 104
Fixed Income.............................. 109
Global Fixed Income....................... 113
High Yield................................ 120
Municipal Bond............................ 126
Money Market Portfolios:
Money Market.............................. 130
Municipal Money Market.................... 134
Statement of Operations..................... 141
Statement of Changes in Net Assets.......... 145
Financial Highlights ....................... 158
Notes to Financial Statements............... 182
Officers and Directors ..................... 189
</TABLE>

This report is authorized for distribution only when preceded or accompanied by
prospectuses of the Morgan Stanley Institutional Fund, Inc. Prospectuses
describe in detail each of the Portfolio's investment policies to the
prospective investor. Please read the prospectuses carefully before you invest
or send money.

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<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PRESIDENT'S LETTER
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FELLOW SHAREHOLDERS:

We are pleased to present the Fund's semi-annual report for the six months
ended June 30, 1996. Our Fund now offers 25 portfolios, including 11 global and
international equity portfolios, 6 U.S. equity portfolios, a balanced portfolio,
5 fixed-income portfolios and 2 money market portfolios.

The performance of each of the portfolios and commentaries from the
portfolio managers discussing the results of each portfolio are contained in
this report. The investment performance of the portfolios relative to their
respective benchmarks is also presented in the performance summary on page two
of this report.

For the first half of 1996, a number of the Fund's emerging markets
portfolios were among its top performers on both an absolute and relative basis.
Each of the Latin American Portfolio, the Emerging Markets Portfolio and the
Emerging Markets Debt Portfolio had strong relative and absolute performance.
Although the U.S. equity market became increasingly volatile during the period,
several of our U.S. Equity portfolios registered strong performance. In
particular, the Aggressive Equity and Equity Growth Portfolios performed very
well. Several of our global and international portfolios turned in credible
performances as well, including the Global Equity and International Equity
Portfolios. Although the fixed income markets were difficult during the first
six months of the year, both the Fixed Income and High Yield Portfolios
continued to be top performers in their respective asset classes.

Our portfolio managers have provided their insights as to the outlook for
the remainder of 1996 in their commentaries. It bears repeating, however, that
each Portfolio will continue to adhere to its investment strategy and style. We
remain firmly of the view that superior long-term results are best achieved by
adhering to a rigorous, well conceived and consistently applied investment
strategy.

Looking ahead, we expect to commence offering shares in a new Technology
Portfolio in the early Fall. We hope you find the enclosed report informative.
We very much appreciate your support of the Fund.

Sincerely,

[SIGNATURE]

Warren J. Olsen
PRESIDENT

August 16, 1996

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1
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PERFORMANCE SUMMARY (UNAUDITED)
JUNE 30, 1996
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<TABLE>
<CAPTION>
NET ASSET VALUE PER
INCEPTION DATES NET ASSETS SHARE
-------------------- ----------------------- --------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
--------- --------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL
EQUITY PORTFOLIOS:
Active Country Allocation 1/17/92 1/02/96 $ 175,678 $ 720 $ 12.58 $ 12.57
Asian Equity 7/01/91 1/02/96 428,915 13,479 20.60 20.59
Emerging Markets 9/25/92 1/02/96 1,337,315 14,801 15.81 15.79
European Equity 4/02/93 1/02/96 139,785 2,060 15.57 15.56
Global Equity 7/15/92 1/02/96 78,960 1,908 16.23 16.21
Gold 2/01/94 1/02/96 35,688 1,027 10.95 10.94
International Equity 8/04/89 1/02/96 2,027,199 4,798 16.87 16.85
International Magnum 3/15/96 3/15/96 61,738 1,630 10.44 10.42
International Small Cap 12/15/92 -- 232,463 -- 17.28 --
Japanese Equity 4/25/94 1/02/96 225,965 5,489 9.99 9.97
Latin American 1/18/95 1/02/96 27,055 817 12.19 12.17
U.S. EQUITY PORTFOLIOS:
Aggressive Equity 3/08/95 1/02/96 42,760 5,571 14.87 14.86
Emerging Growth 11/01/89 1/02/96 96,512 4,984 23.01 22.98
Equity Growth 4/02/91 1/02/96 186,848 4,903 16.44 16.43
Small Cap Value Equity 12/17/92 1/02/96 46,746 1,511 13.00 12.99
U.S. Real Estate 2/24/95 1/02/96 119,709 4,803 12.54 12.52
Value Equity 1/31/90 1/02/96 134,316 1,954 15.04 15.02
BALANCED PORTFOLIO 2/20/90 1/02/96 13,173 2,356 10.27 10.26
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 1/02/96 191,976 3,074 10.17 10.15
Fixed Income 5/15/91 1/02/96 157,098 1,271 10.48 10.47
Global Fixed Income 5/01/91 1/02/96 116,382 1,617 11.06 11.05
High Yield 9/28/92 1/02/96 87,902 3,499 10.50 10.47
Municipal Bond 1/18/95 1/02/96 31,869 168 10.16 10.16
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 -- 1,062,384 -- 1.00 --
Municipal Money Market 2/10/89 -- 770,065 -- 1.00 --
</TABLE>

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* Cumulative (unannualized) total return since inception of the Portfolio.
** The Portfolios began offering Class B Shares on January 2, 1996, except
International Magnum, which began offering Class B Shares on March 15, 1996.

<TABLE>
<CAPTION>
YIELD INFORMATION AS OF JUNE 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
30 DAY
CURRENT YIELD++ 7 DAY 7 DAY 30 DAY 30 DAY
---------------------- CURRENT EFFECTIVE CURRENT COMPARABLE
CLASS A CLASS B YIELD+ YIELD+ YIELD++ YIELD
---------- ---------- ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolios: Money Market Portfolios:
Emerging Markets Debt 12.65% 12.64% Money Market 4.89% 5.00% 4.89% 4.76% (20)
Fixed Income 6.59 6.44 Municipal Money Market 3.10 3.15 3.06 2.87 (20)
Global Fixed Income 5.78 5.63
High Yield 9.86 9.61
Municipal Bond 4.66 4.42
</TABLE>

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+ The 7 day current yield and 7 day effective yield assume an annualization of
the current yield at June 30, 1996 with all dividends reinvested. As with
all money market portfolios, yields fluctuate as market conditions change
and the 7 day yields are not necessarily indicative of future performance.

++ The current 30 day yield reflects the net investment income generated by the
Portfolio over a specified 30-day period expressed as an annual percentage.
Expenses accrued for the 30-day period include any fees charged to all
shareholders. Yields will fluctuate as market conditions change and are not
necessarily indicative of future performance.

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2
<PAGE>
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<TABLE>
<CAPTION>
AVERAGE ANNUAL FIVE YEAR AVERAGE ANNUAL TOTAL
RETURN SINCE
SIX MONTHS TOTAL RETURN ONE YEAR TOTAL RETURN TOTAL RETURN INCEPTION
- ----------------------------------------- --------------------------- --------------------------- ---------------------
COMPARABLE COMPARABLE COMPARABLE COMPARABLE
CLASS A CLASS B** INDICES CLASS A INDICES CLASS A INDICES CLASS A INDICES
- ----------- ----------- --------------- ------------ ------------ ------------ ------------ ------- -----------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
8.17% 7.80% 4.52% (1) 21.81% 13.28%(1) -- -- 9.39% 9.96%(1)
5.75 5.32 8.36 (2) 5.58 8.17(2) -- -- 20.82 18.60(2)
20.32 19.17 13.45 (3) 13.41 8.44(3) -- -- 16.93 15.99(3)
11.85 10.75 6.43 (4) 12.61 14.69(4) -- -- 19.66 15.73(4)
13.42 12.88 7.08 (5) 20.05 18.44(5) -- -- 19.48 13.35(5)
28.07 24.18 3.16 (6) 34.92 3.81(6) -- -- 12.44 -3.77(6)
11.35 10.56 4.52 (1) 18.67 13.28(1) 16.39% 9.99%(1) 11.72 3.95(1)
4.40* 4.20* 3.73 (1) -- --(1) -- -- -- --(1)
15.66 -- 4.52 (1) 16.31 13.28(1) -- -- 18.63 15.33(1)
7.77 7.78 1.13 (7) 24.63 11.08(7) -- -- 0.95 1.93(7)
34.55 28.92 17.49 (8) 39.62 17.44(8) -- -- 15.27 5.48(8)

22.63 21.75 10.25 (9) 46.39 23.21(9) -- -- 51.85 28.24(9)
7.07 7.03 12.63 (10) 26.15 26.95(10) 11.44 20.02(10) 13.46 15.42(10)
16.64 15.91 10.09 (11) 37.47 25.98(11) 16.84 15.71(11) 16.25 15.06(11)
9.76 9.31 10.28 (12) 18.81 24.16(12) -- -- 12.83 16.75(12)
11.10 10.15 6.90 (13) 24.20 16.16(13) -- -- 24.60 16.15(13)
8.55 7.48 10.09 (11) 21.53 25.98(11) 15.35 15.71(11) 12.31 15.05(11)

3.92 3.40 5.41 (14) 12.44 15.57(14) 11.26 11.68(14) 10.13 11.15(14)

18.39 16.94 13.38 (15) 36.37 32.39(15) -- -- 11.64 6.95(15)
-0.92 -1.02 -1.22 (16) 5.86 5.01(16) 8.24 7.96(16) 8.06 8.15(16)
0.20 0.02 -1.16 (17) 6.23 2.05(17) 8.67 10.31(17) 8.10 9.68(17)
4.47 3.89 3.75 (18) 12.62 9.95(18) -- -- 11.86 10.54(18)
-0.09 -0.10 0.09 (19) 4.30 5.54(19) -- -- 5.93 8.22(19)

2.46 -- -- -- -- -- -- -- --
1.51 -- -- -- -- -- -- -- --
</TABLE>

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<TABLE>
<C> <S>
INDICES:
(1) MSCI EAFE (Europe, Australia, and Far East)
(2) MSCI Combined Far East Free ex-Japan
(3) IFC Global Total Return Composite
(4) MSCI Europe
(5) MSCI World
(6) Philadelphia Gold and Silver
(7) MSCI Japan
(8) MSCI Emerging Markets Global Latin America
(9) Lipper Capital Appreciation
(10) NASDAQ Composite

(11) S&P 500
(12) Russell 2500
(13) NAREIT ex-healthcare
(14) Indata Balanced-Median
(15) J.P. Morgan Emerging Markets Bond
(16) Lehman Aggregate Bond
(17) J.P. Morgan Traded Global Bond
(18) CS First Boston High Yield
(19) Lehman 7 Yr. Municipal Bond
(20) Donaghue's Money Fund Report
</TABLE>

Past performance should not be construed as a guarantee of future performance.
Investment return and principal value will fluctuate so that investor's shares,
when redeemed, may be worth more or less than their original cost. Investments
in the Money Market and Municipal Money Market Portfolios are neither insured
nor guaranteed by the U.S. Government. There is no assurance that the Money
Market and Municipal Money Market Portfolios will be able to maintain a stable
net asset value of $1.00 per share. Please read the Portfolio's prospectus
carefully before you invest or send money.

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3
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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OVERVIEW
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THE ACTIVE COUNTRY ALLOCATION PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australia 2.1%
Austria 0.5%
Brazil 1.5%
France 6.7%
Germany 9.8%
Hong Kong 6.8%
Indonesia 1.8%
Italy 6.9%
Japan 38.2%
Malaysia 0.1%
Netherlands 3.2%
Singapore 3.3%
Spain 3.8%
Switzerland 2.8%
Thailand 2.2%
United Kingdom 7.9%
Other 2.4%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
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<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 8.17% 21.81% 9.39%
PORTFOLIO -- CLASS
B(3).................... 7.80 N/A N/A
INDEX................... 4.52 13.28 9.96

<FN>

1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends reinvested net of
withholding taxes).

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE INDEX AND 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.

The Active Country Allocation Portfolio invests in international equity markets,
with emphasis placed upon countries, rather than stock selection. This approach
reflects our belief that a diversified selection of securities representing
exposure to countries that we find attractive provides an effective way to
maximize the return and minimize the risk associated with global investing.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 8.17% for the Class A shares and 7.80% for the Class B shares, as compared to
a total return of 4.52% for the Morgan Stanley Capital International (MSCI) EAFE
Index. The average annual total return for the twelve months ended June 30, 1996
and the period from inception on January 17, 1992 through June 30, 1996 was
21.81% and 9.39%, respectively, for the Class A shares, as compared to 13.28%
and 9.96%, respectively, for the Index.

World equity markets continued to move higher in the second quarter, with the
exception of the Pacific ex-Japan. In U.S. dollar terms, as measured by the
Morgan Stanley Capital International (MSCI) indices, regional returns for the
second quarter were: United States 4.3%, Europe 2.1%, Japan 0.6%, Pacific Ex-
Japan -0.7%, and the Emerging Markets 3.4%.

In local currency terms, the second quarter regional returns were: Europe 3.2%,
Japan 3.4%, Pacific Ex-Japan -0.1%, and the Emerging Markets 5.5%.

Year to date, in U.S. dollar terms, regional returns were United States 10.5%,
Europe 6.4%, Japan 1.1%, Pacific Ex-Japan 9.5%, and the Emerging Markets 3.1%.

Year to date, in local currency terms, regional returns were: Europe 10.1%,
Japan 7.5%, Pacific Ex-Japan 7.3%, and the Emerging Markets 7.8%.

For the second quarter, the Portfolio's outperformance relative to the MSCI
Europe, Australia and the Far East (EAFE) benchmark was driven by our
underweight (and country selection) in Europe and by our decision to maintain
the Japanese Yen and Deutschemark bloc currency hedges. On the negative side,
the Portfolio experienced a partial reversal of the first quarter gains
attributable to our overweight position in Asia.

During the quarter we maintained our neutral stance in Japan, made a few minor
adjustments to our country weights in Europe [i.e. brought the French weight to
neutral (+2%) and sold our position in Austria (-1%)], and lowered our exposure
to Singapore and Hong Kong, by a few percentage points

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Active Country Allocation Portfolio

4
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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OVERVIEW
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THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
each, in late April. In early July, Singapore and, to a lesser extent, Hong Kong
began to look oversold in our valuation models, so we rotated out of Indonesia
and Malaysia and back into Hong Kong and Singapore (by 2% each.)

Going forward, our regional target weights relative to the EAFE benchmark remain
underweight Europe (42% vs. 50%), neutral in Japan (40%), and overweight Asia
(17% versus 10%) with 1% in cash.

Within Europe, the Portfolio is overweight the major markets of Germany, Italy,
and Spain and underweight the U.K., Switzerland, the Netherlands, and Sweden.
Issues that most concern investors about Europe are short-term interest rates,
economic recovery and the impact of a pullback in U.S. equities. With the
exception of the high yielding markets of Italy, Spain and Sweden, we think most
of the European interest rate cuts are behind us. In Germany, the economy is
strengthening (recent production and orders data are trending up) and the money
markets are discounting a tightening of German short rates. French rates (like
the French economy) are closely tied to Germany, and both the Netherlands and
Switzerland have already raised rates slightly. European monetary policy has
been very loose for some time however, which, in addition to weak currencies,
should have a positive lagged effect on economic growth.

With regard to U.S. equities, we believe their direction will be down, but a
sharp crack would have a more negative impact on the European bourses than a
slow downward grind. Historically, European markets have risen in five out of
the last eleven U.S. corrections and currently these markets have several
advantages vis a vis the U.S. European valuations are not as overextended as
their U.S. counterparts, they have more restructuring and shareholder value
potential ahead of them, and they are much earlier in the profit and economic
cycles than the U.S. In addition, their economies should benefit from the
stronger dollar and the stronger U.S. and Japanese economies.

For the quarter, Italy was a stellar performer (+13.4%) and it remains one of
the Portfolio's major overweights. The recent compromise on the Italian
supplementary budget package and the three-year budget plan was disappointing
and has dampened investor enthusiasm for the Italian financial markets. We agree
that the worker compensation compromise was disappointing and reduces hopes of
accelerating the disinflation process, but one could not assume that the vital
support of the far-left would come at no cost. Further, the government's budget
accomplishments in just two months remain noteworthy. The case for lower
interest rates is still intact, as are the attractiveness of Italian valuations.
Hence, we remain positive on the medium-term outlook for Italian equities,
although the recent budget wrangling and the bad press they've received may lead
to some underperformance in the near term.

The other large European overweight in the Portfolio is Germany. We continue to
like Germany based on a depreciating deutschemark boosting exports and economic
growth and a very positive backdrop of corporate restructuring, stock buybacks
and a new focus on shareholder value.

Asian equities cause us the most concern at this stage in the U.S. market cycle.
As noted above, we believe the U.S. market is headed for a decline and historic
correlations would tell us that this portends poorly for the Asian markets. On
the other hand, the weak yen has dampened inflationary pressures in these
markets and improving growth prospects in the U.S., Europe, and Japan are
boosting corporate earnings potential. We remain overweight in Asia, albeit a
few percentage points under our first quarter weight. Additionally, at the end
of June we rotated our Asian country weightings, selling the more fully valued
markets of Indonesia and Malaysia, and adding to Singapore -- as an oversold,
high quality market (the Switzerland of Asia) -- and to Hong Kong -- as a play
on an easing of the austerity program in China. In both Singapore and Hong Kong,
property issues make up large proportions of the market. In Hong Kong the
residential market has recovered strongly with prices rising by 10%-15% and we
expect commercial property values to recover as mainland Chinese set up business
locations in Hong Kong. In Singapore, government anti-speculation measures
announced in May resulted in heavy selling of residential property stocks and
banks, but we believe the market is oversold, and valuations of banks and office
property stocks are attractive.

During the quarter the Japanese market was very sensitive to speculation that
the Bank of Japan (BOJ) would raise interest rates. Over the past year,
liquidity has powered both the Japanese equity market's 50% plus rise and the
Japanese economic rebound. Recent focus by BOJ policy makers on a
"self-sustaining recovery" indicates that they clearly realize the importance of
these artificial fiscal and monetary boosts and we believe any tightening will
be either fiscal or monetary, but not both. If the BOJ does not tighten by
September, we doubt they will tighten until

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Active Country Allocation Portfolio

5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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OVERVIEW
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THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
mid-1997, as the fiscal package runs out at the end of this year and the
consumption tax will rise in April 1997 from 3% to 5%. The BOJ will not want to
give the economy a double punch. With regard to earnings and economic growth, on
which the next market leg up depends, we think earnings will be two to three
times the 6% consensus forecasts and that economic growth will be aided both by
the BOJ staying off the brakes and by strong private sector demand. Imports have
been up for the past six to nine months and car sales are strong. While we think
the abnormally high equity returns are behind us, we foresee a moderate uptrend
in the Japanese market, driven primarily by local investors.

With regard to currency hedging, we still believe in the long-term secular
strength of the dollar, but we allowed one third of both our deutschemark and
Japanese yen edges to roll off in early July. The dollar has made a big move in
the past twelve months and U.S. stock market weakness and the relative monetary
positions of the Fed, the BOJ and the Bundesbank may cloud the issues.
Specifically, with a German rate cut looking less likely and sporadic rumors of
a BOJ rate hike, the U.S. Fed's hesitation to raise U.S. rates in early July may
dampen U.S. dollar sentiment over the near term.

Going forward, we expect greater market volatility as earnings and interest
rates replace liquidity as the key market drivers and as we continue to see
rotation out of the U.S. market into Japan, Asia and the Emerging Markets.

Francine J. Bovich
PORTFOLIO MANAGER

Ann D. Thivierge
PORTFOLIO MANAGER

July 1996

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Active Country Allocation Portfolio

6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
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THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (95.8%)
AUSTRALIA (1.9%)
16,300 Amcor Ltd..................................... $ 111
20,600 Australian National Industries Ltd............ 17
26,100 Boral Ltd. (Bonus Shares Plan)................ 68
6,500 Brambles Industries Ltd....................... 90
45,800 Broken Hill Proprietary Co., Ltd.............. 632
14,300 Burns, Philp & Co., Ltd....................... 27
12,100 Coca-Cola Amatil Ltd.......................... 134
32,900 Coles Myer Ltd................................ 119
7,700 CRA Ltd....................................... 118
26,300 CSR Ltd....................................... 93
59,100 Fosters Brewing Corp.......................... 102
11,800 Gio Australia Holdings Ltd.................... 29
31,100 Gold Mines of Kalgoorlie Ltd.................. 34
32,700 Goodman Fielder Ltd........................... 33
8,337 Highlands Gold Ltd............................ 4
8,400 ICI Australia Ltd............................. 74
6,900 Lend Lease Corp., Ltd......................... 106
40,700 MIM Holdings Ltd.............................. 52
33,700 National Australia Bank Ltd................... 311
7,900 Newcrest Mining Ltd........................... 32
46,800 News Corp., Ltd............................... 265
17,800 Normandy Mining Ltd........................... 28
18,500 North Ltd..................................... 53
26,700 Pacific Dunlop Ltd............................ 60
25,300 Pioneer International Ltd..................... 74
5,700 Renison Goldfields Consolidated Ltd........... 28
16,100 Santos Ltd.................................... 56
3,500 Sons of Gwalia Ltd............................ 25
19,300 Southcorp Holdings Ltd........................ 48
10,500 TABCORP Holdings Ltd.......................... 47
(a)8,600 TNT Ltd....................................... 10
25,700 Western Mining Corp. Holdings Ltd............. 184
46,000 Westpac Banking Corp.......................... 204
----------
3,268
----------
AUSTRIA (0.5%)
80 Austria Mikro Systeme International AG........ 7
(a)110 Austrian Airlines AG.......................... 17
1,626 Bank Austria AG............................... 131
380 Bank Austria AG-Participation
Certitificates.............................. 13
230 BAU Holding AG................................ 14
350 Boehler-Uddeholm AG........................... 27
80 BWT AG........................................ 10
1,120 Creditanstalt-Bankverein...................... 74
440 Ea-Generali AG................................ 131
440 Flughafen Wien AG............................. 30
130 Lenzing AG.................................... 8
(a)500 Mayr-Melnhof Karton AG........................ 22
1,310 Oest Elektrizatswirts AG, Class A............. 100
510 OMV AG........................................ 52
840 Radex-Heraklith Industriebetelligungs AG...... 26
(a)110 Universale Bau AG............................. 5

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
760 Va Technologie AG............................. $ 93
200 Wienerberger Baustoff AG...................... 40
----------
800
----------
BRAZIL (0.4%)
(a)495,000 Cia Paulista de Forca E Luz................... 45
1,624,000 Cia Siderurgica Nacional...................... 41
1,783,000 Eletrobras.................................... 480
(d)425,000 Light......................................... 30
354,000 Light-Servicos de Eletricidade S.A............ 95
----------
691
----------
FRANCE (6.6%)
1,050 Accor S.A..................................... 147
4,650 Alcatel Alsthom............................... 406
6,192 AXA S.A....................................... 339
6,250 Banque Nationale de Paris..................... 220
1,150 BIC Corp...................................... 163
1,125 Bouygues...................................... 126
800 Canal Plus.................................... 196
1,250 Carrefour S.A................................. 701
3,100 Casino........................................ 128
(a)200 Chargeurs S.A................................. 9
811 Cie Bancaire S.A.............................. 92
3,150 Cie de Saint Gobain........................... 422
5,600 Cie de Suez, S.A.............................. 205
3,411 Cie Financiere de Paribas S.A., Class A....... 202
3,600 Cie Generale des Eaux......................... 403
9,400 Elf Aquitaine................................. 693
1,250 Eridania Beghin-Say S.A....................... 196
2,600 Groupe Danone................................. 394
2,100 Havas S.A..................................... 172
3,715 Lafarge S.A................................... 225
2,350 L'Air Liquide................................. 416
980 Legrand....................................... 175
2,350 L'Oreal....................................... 782
3,150 LVMH.......................................... 748
2,525 Lyonnaise des Eaux............................ 242
5,350 Michelin CGDE, Class B........................ 262
(a)200 Pathe S.A..................................... 47
2,150 Pernod Ricard................................. 138
1,950 Peugeot S.A................................... 261
780 Pinault-Printemps S.A......................... 273
670 Promodes...................................... 193
11,397 Rhone-Poulenc S.A., Class A................... 300
130 SAGEM......................................... 78
360 Saint Louis................................... 96
3,415 Sanofi........................................ 256
4,900 Schneider S.A................................. 257
(a)62 Simco S.A..................................... 5
(a)1,113 Simco S.A. (RFD).............................. 103
150 Societe Eurafrance S.A........................ 58
2,620 Societe Generale.............................. 289
250 Sodexho S.A................................... 111
4,500 Thomson CSF................................... 127
7,750 Total S.A., Class B........................... 576
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Active Country Allocation Portfolio

7
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
</TABLE>

FRANCE (CONT.)
<TABLE>
<C> <S> <C>
10,750 Union des Assurances de Paris................. $ 219
(a)9,750 Usinor Sacilor................................ 141
----------
11,592
----------
GERMANY (9.5%)
1,900 AGIV AG....................................... 36
1,050 Allianz AG.................................... 1,828
(a)200 AMB Aachener & Muenchener Beteiligungs AG..... 145
150 Asko Deutsche Kaufhaus AG..................... 111
2,850 BASF AG....................................... 813
32,000 Bayer AG...................................... 1,127
10,150 Bayerische Hypotheken Bank AG................. 247
10,950 Bayerische Vereinsbank AG..................... 307
(a)200 Beiersdorf AG................................. 197
(a)200 Bilfinger & Berger AG......................... 84
250 Brau Und Brunnen AG........................... 26
(a)800 Bremer Vulkan Verbund AG...................... 3
100 CKAG Colonia Konz AG.......................... 80
5,000 Continental AG................................ 81
(a)2,450 Daimler-Benz AG............................... 1,316
450 Degussa AG.................................... 153
23,300 Deutsche Bank AG.............................. 1,105
20,650 Dresdner Bank AG.............................. 519
250 Heidelberger Zement AG........................ 172
400 Hochtief AG................................... 179
550 Karstadt AG................................... 219
400 Kaufhof Holding AG............................ 151
(a)2,550 Kloeckner-Humboldt-Deutz AG................... 9
500 Linde AG...................................... 325
(a)150 Linotype-Hell AG.............................. 7
1,600 Lufthansa AG.................................. 227
500 MAN AG........................................ 125
1,700 Mannesmann AG................................. 586
8,350 Merck KGAA.................................... 316
359 Muenchener Rueck AG (Registered).............. 734
900 Preussag AG................................... 227
15,500 RWE AG........................................ 604
2,900 SAP AG........................................ 428
3,500 Schering AG................................... 254
28,000 Siemens AG.................................... 1,503
(a)100 STRABAG AG.................................... 9
1,650 Thyssen AG.................................... 302
22,850 VEBA AG....................................... 1,216
(a)1,306 Viag AG....................................... 521
1,300 Volkswagen AG................................. 485
----------
16,777
----------
HONG KONG (6.8%)
(a)48,000 Applied International Holdings................ 4
54,633 Bank of East Asia Ltd......................... 200
205,000 Cathay Pacific Airways Ltd.................... 376
154,000 Cheung Kong Holdings Ltd...................... 1,109
138,500 China Light & Power Co., Ltd.................. 628
112,000 Chinese Estates Holdings...................... 100
55,000 Dickson Concepts International Ltd............ 70
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
44,000 Giordano Holdings Ltd......................... $ 43
87,000 Hang Lung Development Co...................... 164
133,900 Hang Seng Bank Ltd............................ 1,349
13,200 Hong Kong Aircraft Engineering Co., Ltd....... 40
135,400 Hong Kong & China Gas Co., Ltd................ 216
89,500 Hong Kong & Shanghai Hotel Ltd................ 153
755,687 Hong Kong Telecommunications Ltd.............. 1,357
305,198 Hopewell Holdings Ltd......................... 166
246,000 Hutchison Whampoa Ltd......................... 1,548
76,000 Hysan Development Co., Ltd.................... 233
28,000 Johnson Electric Holdings Ltd................. 63
3,700 Melco International Development Ltd........... 1
41,000 Miramar Hotel & Investment Ltd................ 91
107,301 New World Development Co., Ltd................ 498
99,000 Oriental Press Group Ltd...................... 53
27,500 Peregrine Investments Ltd..................... 40
76,340 Shangri-La Asia Ltd........................... 107
114,000 Shun Tak Holdings Ltd......................... 70
130,000 South China Morning Post Holdings............. 89
72,000 Stelux Holdings Ltd........................... 16
160,000 Sun Hung Kai Properties Ltd................... 1,617
109,500 Swire Pacific Ltd., Class A................... 937
30,000 Television Broadcasts Ltd..................... 113
152,000 Wharf Holdings Ltd............................ 544
10,660 Wing Lung Bank Ltd............................ 62
24,000 Winsor Industrial Corp........................ 20
----------
12,077
----------
INDONESIA (1.8%)
(d)127,832 Bank Dagang Nasional (Foreign)................ 107
(d)475,556 Barito Pacific Timber (Foreign)............... 312
(d)315,754 Gadjah Tunggal (Foreign)...................... 156
(d)201,954 Hanajaya Mandala Sampoerna (Foreign).......... 2,299
(d)157,285 Jakarta International Hotel & Development
(Foreign)................................... 135
(a,d)21,242 Matahari Putra Prima (Foreign)................ 39
48,365 Sinar Mas Agro (Foreign)...................... 35
(d)52,934 United Tractors (Foreign)..................... 84
----------
3,167
----------
ITALY (6.8%)
57,420 Assicurazioni Generali S.p.A.................. 1,326
116,700 Banca Commerciale............................. 235
38,300 Banco Ambrosiano Ven.......................... 103
17,100 Benetton S.p.A................................ 221
11,500 Cartiere Burgo................................ 63
141,000 Credito Italiano.............................. 165
52,000 Edison S.p.A.................................. 314
581,000 ENI S.p.A..................................... 2,902
(a)7,000 Falck......................................... 26
244,500 Fiat S.p.A.................................... 820
60,800 Fiat S.p.A. Di Risp (NCS)..................... 104
(a)34,500 Fidis......................................... 95
(a)21,500 Impregilo S.p.A............................... 23
44,200 Instituto Mobiliare Italiano.................. 370
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Active Country Allocation Portfolio

8
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

ITALY (CONT.)
<TABLE>
<C> <S> <C>
61,500 Istituto Bancario San Paolo................... $ 398
301,900 Istituto Nazionale delle Assicurazioni........ 451
11,300 Italcementi................................... 36
20,350 Italcementi Di Risp........................... 164
48,800 Italgas....................................... 183
33,900 Magneti Marelli S.p.A......................... 48
37,500 Mediobanca S.p.A.............................. 238
(a)325,100 Montedison S.p.A.............................. 189
(a)76,900 Montedison S.p.A. Di Risp (NCS)............... 46
(a)270,750 Olivetti S.p.A................................ 146
(a)64,100 Parmalat Finanziaria S.p.A.................... 86
133,000 Pirelli S.p.A................................. 223
22,015 R.A.S. S.p.A.................................. 228
19,000 Rinascente.................................... 136
(a)2,200 Saffa S.p.A................................... 5
9,400 SAI........................................... 90
10,900 Sasib......................................... 44
21,000 Sirti S.p.A................................... 135
48,000 SNIA BPD S.p.A................................ 54
483,900 Telecom Italia Mobile S.p.A................... 1,083
478,000 Telecom Italia S.p.A.......................... 1,029
125,500 Telecom Italia S.p.A. Di Risp (NCS)........... 217
----------
11,996
----------
JAPAN (38.2%)
4,400 Advantest Corp................................ 175
48,000 Ajinomoto Co.................................. 575
(a)24,000 Aoki Corp..................................... 89
2,000 Aoyama Trading Co............................. 53
78,000 Asahi Bank Ltd................................ 906
24,000 Asahi Breweries Ltd........................... 281
73,000 Asahi Chemical Industry Co., Ltd.............. 522
69,000 Asahi Glass Co., Ltd.......................... 827
(a)148,000 Bank of Tokyo-Mitsubishi...................... 3,439
24,000 Bridgestone Co................................ 459
36,000 Canon, Inc.................................... 751
15,000 Casio Computer Co............................. 144
39,000 Chiba Bank.................................... 345
10,000 Chiyoda Corp.................................. 119
24,000 Chugai Pharmaceuticals Co..................... 235
48,000 Dai Nippon Printing Co., Ltd.................. 931
33,000 Daiei, Inc.................................... 398
24,000 Daikin Industries Ltd......................... 263
24,000 Daiwa House Industry.......................... 373
48,000 Daiwa Securities Co., Ltd..................... 619
16,000 Ebara Corp.................................... 256
10,300 Fanuc......................................... 411
92,000 Fuji Bank..................................... 1,986
24,000 Fuji Photo Film Ltd........................... 760
78,000 Fujitsu Ltd................................... 713
39,000 Furukawa Electric Co.......................... 234
(a)48,000 Hankyu Corp................................... 282
24,000 Hazama Corp................................... 105
121,000 Hitachi Ltd................................... 1,129
38,000 Honda Motor Co................................ 987
76,000 Industrial Bank of Japan...................... 1,891
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
16,000 Ito-Yokado Co., Ltd........................... $ 967
(a)97,000 Japan Airlines Co............................. 787
61,000 Japan Energy Corp............................. 227
26,000 Joyo Bank..................................... 198
19,000 Jusco Co., Ltd................................ 624
48,000 Kajima Corp................................... 496
25,800 Kansai Electric Power Co...................... 592
44,000 Kao Corp...................................... 596
124,000 Kawasaki Steel Corp........................... 448
72,220 Kinki Nippon Railway.......................... 521
48,000 Kirin Brewery Co., Ltd........................ 588
48,000 Komatsu Ltd................................... 474
73,000 Kubota Corp................................... 483
48,000 Kumagai Gumi Co............................... 193
24,000 Kyowa Hakko Kogyo............................. 231
73,000 Marubeni Corp................................. 401
15,000 Marui Co., Ltd................................ 333
73,000 Matsushita Electric Industries Ltd............ 1,362
73,000 Mitsubishi Chemical Corp...................... 338
67,000 Mitsubishi Corp............................... 883
85,000 Mitsubishi Electric Corp...................... 594
52,000 Mitsubishi Estate Co., Ltd.................... 718
132,000 Mitsubishi Heavy Industries Ltd............... 1,151
49,000 Mitsubishi Materials Corp..................... 267
43,000 Mitsubishi Trust & Banking Co................. 728
73,000 Mitsui & Co................................... 663
(a)48,000 Mitsui Engineering & Shipbuilding............. 147
39,000 Mitsui Fudosan Co............................. 528
27,000 Mitsukoshi Ltd................................ 289
10,000 Murata Manufacturing Co., Ltd................. 380
58,000 NEC Corp...................................... 631
48,000 New Oji Paper Co., Ltd........................ 415
24,000 NGK Insulators................................ 270
24,000 Nippon Denso Co., Ltd......................... 522
47,000 Nippon Express Co., Ltd....................... 460
24,000 Nippon Fire & Marine Insurance Co............. 157
23,000 Nippon Light Metal............................ 131
24,000 Nippon Meat Packers, Inc...................... 342
73,000 Nippon Oil Co................................. 496
270,000 Nippon Steel Co............................... 929
73,000 Nippon Yusen.................................. 423
92,000 Nissan Motor Co............................... 819
(a)141,000 NKK Corp...................................... 428
73,000 Nomura Securities Co., Ltd.................... 1,429
48,470 Odakyu Electric Railway Corp.................. 327
107,000 Osaka Gas Co.................................. 392
24,000 Penta-Ocean Construction...................... 162
8,000 Pioneer Electric Corp......................... 191
4,000 Rohm Co....................................... 265
120,000 Sakura Bank................................... 1,339
24,000 Sankyo Co., Ltd............................... 623
73,000 Sanyo Electric Co., Ltd....................... 447
5,000 Secom Co., Ltd................................ 331
3,500 Sega Enterprises.............................. 164
24,000 Sekisui House Co., Ltd........................ 274
48,000 Sharp Corp.................................... 843
7,000 Shimano, Inc.................................. 125
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Active Country Allocation Portfolio

9
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

JAPAN (CONT.)
<TABLE>
<C> <S> <C>
34,000 Shimizu Corp.................................. $ 376
10,550 Shin-Etsu Chemical Co......................... 203
11,000 Shiseido Co., Ltd............................. 141
33,000 Shizuoka Bank................................. 426
(a)48,000 Showa Denko................................... 148
11,000 Sony Corp..................................... 725
114,000 Sumitomo Bank................................. 2,211
25,000 Sumitomo Osaka Cement......................... 122
97,000 Sumitomo Chemical Co.......................... 464
48,000 Sumitomo Corp................................. 428
32,000 Sumitomo Electric............................. 460
10,000 Sumitomo Forestry Co., Ltd.................... 149
23,000 Sumitomo Metal & Mining....................... 200
170,000 Sumitomo Metal Industries..................... 522
48,000 Taisei Corp., Ltd............................. 341
48,000 Takeda Chemical............................... 852
48,000 Teijin Ltd.................................... 261
48,000 Tobu Railway Co............................... 316
17,400 Tohoku Electric Power......................... 390
75,000 Tokai Bank.................................... 974
73,000 Tokio Marine & Fire Insurance Co.............. 975
11,000 Tokyo Dome Corp............................... 222
44,900 Tokyo Electric Power Co....................... 1,142
7,000 Tokyo Electron Ltd............................ 204
70,000 Tokyo Gas Co.................................. 256
48,000 Tokyu Corp.................................... 367
33,000 Toppan Printing Co., Ltd...................... 483
73,000 Toray Industries, Inc......................... 505
24,000 Toto Ltd...................................... 362
48,000 Toyoba Co..................................... 180
112,000 Toyota Motor Corp............................. 2,807
48,000 Ube Industries Ltd............................ 183
48,000 Yamaichi Securities Co........................ 330
48,000 Yasuda Trust & Banking Co..................... 304
----------
67,429
----------
MALAYSIA (0.1%)
6,000 Commerce Asset Holding Bhd.................... 37
4,000 Hong Leong Industries Bhd..................... 19
12,000 Land & General Bhd............................ 30
6,000 Malaysian Mining Corp. Bhd.................... 6
3,000 Malaysian Oxygen Bhd.......................... 16
26,000 Metroplex Bhd................................. 28
16,500 YTL Corp., Bhd................................ 86
----------
222
----------
NETHERLANDS (3.2%)
7,648 ABN Amro Holdings N.V......................... 411
1,850 Akzo Nobel N.V................................ 222
15,600 Elsevier N.V.................................. 237
950 Heineken N.V.................................. 213
16,595 ING Groep N.V................................. 496
2,082 KLM Royal Dutch Airlines N.V.................. 67
3,135 Koninklijke Ahold N.V......................... 170
750 Koninklijke Hoogovens N.V..................... 28
2,500 Koninklijke KNP BT N.V........................ 60
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
21,194 Koninklijke PTT Nederland N.V................. $ 803
550 Nedlloyd Groep N.V............................ 13
7,900 Philips Electronics N.V....................... 257
12,700 Royal Dutch Petroleum Co...................... 1,964
721 Stork N.V..................................... 21
3,800 Unilever N.V.................................. 551
1,668 Wolters Kluwer N.V............................ 190
----------
5,703
----------
SINGAPORE (3.3%)
24,000 Amcol Holdings Ltd............................ 53
(a)60,000 City Developments Ltd......................... 468
14,000 Cycle & Carriage Ltd.......................... 150
72,000 DBS Land Ltd.................................. 247
39,000 Development Bank of Singapore Ltd.
(Foreign)................................... 486
18,000 First Capital Corp., Ltd...................... 45
23,800 Fraser & Neave Ltd............................ 246
24,000 Hai Sun Hup Group Ltd......................... 18
(a)22,000 Hotel Properties Ltd.......................... 39
9,000 Inchcape Bhd.................................. 29
10,000 Jurong Shipyard Ltd........................... 51
41,000 Keppel Corp., Ltd............................. 343
31,000 Natsteel Ltd.................................. 62
37,000 Neptune Orient Lines Ltd. (Foreign)........... 39
55,000 Oversea-Chinese Banking Corp. (Foreign)....... 643
10,000 Overseas Union Enterprise Ltd................. 55
24,000 Parkway Holdings Ltd.......................... 71
3,000 Robinson & Co., Ltd........................... 13
9,000 Shangri-La Hotel Ltd.......................... 32
43,000 Singapore Airlines Ltd. (Foreign)............. 454
21,800 Singapore Press Holdings (Foreign)............ 428
39,000 Singapore Technologies Industrial Corp........ 103
464,000 Singapore Telecommunications.................. 1,236
20,000 Straits Trading Co., Ltd...................... 52
103,000 United Industrial Corp. Ltd................... 105
35,000 United Overseas Bank Ltd. (Foreign)........... 335
----------
5,803
----------
SPAIN (3.8%)
735 Acerinox S.A.................................. 77
7,900 Argentaria S.A................................ 345
12,733 Autopistas (ACESA)............................ 148
14,100 Banco Bilbao Vizcaya S.A...................... 572
10,300 Banco Central Hispano Americano S.A........... 210
10,000 Banco Santander S.A........................... 467
1,000 Corporacion Financiera Alba................... 83
3,600 Dragados y Construccion S.A................... 48
3,050 Ebro Agricolas S.A............................ 35
1,350 ENCE S.A...................................... 19
16,000 Endesa S.A.................................... 999
(a)10,600 Ercros S.A.................................... 6
(a)4,900 Ercros S.A. (New)............................. 3
1,100 FASA Renault S.A.............................. 24
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Active Country Allocation Portfolio

10
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

SPAIN (CONT.)
<TABLE>
<C> <S> <C>
950 Fomento Construction y Contractas S.A......... $ 79
2,350 Gas Natural SDG S.A........................... 494
2,700 General de Aguas de Barcelona S.A............. 100
58,300 Iberdrola S.A................................. 599
1,700 Mapfre Corporacion............................ 87
145 Mapfre Corporacion............................ 6
1,400 Metro Vacesa.................................. 48
500 Portland Valderrivas S.A...................... 33
18,800 Repsol S.A.................................... 655
2,300 Tabacalera S.A., Class A...................... 116
58,900 Telefonica de Espana S.A...................... 1,087
18,300 Union Electrica Fenosa S.A.................... 118
3,250 Uralita S.A................................... 30
2,700 Vallehermoso S.A.............................. 53
1,450 Viscofan Envolturas Celulosicas S.A........... 23
540 Zardoya Otis S.A.............................. 52
----------
6,616
----------
SWITZERLAND (2.8%)
100 Adia S.A. (Bearer)............................ 25
25 Alusuisse-Lonza Holdings Ltd. (Bearer)........ 21
100 Alusuisse-Lonza Holdings Ltd. (Registered).... 83
140 BBC Brown Boveri AG (Bearer).................. 173
70 Ciba-Geigy AG (Bearer)........................ 85
400 Ciba-Geigy AG (Registered).................... 488
2,945 CS Holding AG (Registered).................... 280
10 Georg Fischer AG (Bearer)..................... 12
99 Holderbank AG (Bearer)........................ 79
90 Merkur Holding AG (Registered)................ 19
653 Nestle S.A. (Registered)...................... 747
26 Roche Holding AG (Bearer)..................... 324
112 Roche Holding AG (Registered)................. 856
395 Sandoz AG (Registered)........................ 452
31 SGS Surveillance (Bearer)..................... 74
(a)60 SMH AG (Bearer)............................... 42
(a)250 SMH AG (Registered)........................... 39
30 Sulzer AG (Registered)........................ 19
(a)50 SwissAir (Registered)......................... 48
1,280 Swiss Bank Corp. (Registered)................. 253
200 Swiss Reinsurance (Registered)................ 205
340 Union Bank of Switzerland (Bearer)............ 333
362 Union Bank of Switzerland (Registered)........ 77
750 Zuerich Versicherung (Registered)............. 205
----------
4,939
----------
THAILAND (2.2%)
21,500 Advanced Information Services PCL (Foreign)... 318
(d)32,400 Bangchak Petroleum Co., Ltd. (Foreign)........ 42
(d)126,809 Bangkok Metropolitan Bank Ltd................. 90
11,900 Bank of Ayudhya Ltd. (Foreign)................ 66
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
11,800 CMIC Finance & Securities Co., Ltd............ $ 37
3,600 CP Feedmill Co., Ltd. (Foreign)............... 21
23,200 Dhana Siam Finance & Securities Co., Ltd...... 129
27,400 General Finance & Securities Co., Ltd.
(Foreign)................................... 99
(d)22,900 Italian Thai Development Co., Ltd............. 213
(d)20,700 Jasmine International Co., Ltd. (Foreign)..... 74
127,500 Krung Thai Bank Ltd. (Foreign)................ 598
(a)19,600 National Finance & Securities Co., Ltd........ 87
(d)19,200 National Petrochemical........................ 28
(d)9,900 One Holding Co., Ltd. (Foreign)............... 23
16,900 Phatra Thanakit Co., Ltd. (Foreign)........... 118
28,400 PTT Exploration & Production Co., Ltd
(Foreign)................................... 416
(d)23,000 Quality House Public Co., Ltd................. 48
(a)46,900 Sahaviriya Steel Industry (Foreign)........... 30
12,700 Shinawatra Computer Co., Ltd (Foreign)........ 275
(d)21,700 Shinawatra Satellite Co., Ltd. (Foreign)...... 39
3,600 Siam Cement Co., Ltd. (Foreign)............... 177
74,600 Siam City Bank Ltd. (Foreign)................. 80
3,500 Siam City Cement Co., Ltd. (Foreign).......... 44
(a,d)204,100 TelecomAsia Corp., Ltd. (Foreign)............. 434
(d)41,600 Thai Airways International Co., Ltd.
(Foreign)................................... 88
26,500 Thai Military Bank Ltd. (Foreign)............. 104
(d)21,500 United Communications Industry (Foreign)...... 288
----------
3,966
----------
UNITED KINGDOM (7.9%)
23,100 Abbey National plc............................ 194
24,600 Argyll Group plc.............................. 133
17,700 Arjo Wiggins Appleton plc..................... 48
8,400 Associated British Foods plc.................. 51
28,274 Barclays plc.................................. 340
17,800 Bass plc...................................... 224
52,700 BAT Industries plc............................ 410
11,300 BICC plc...................................... 54
21,346 Blue Circle Industries plc.................... 119
10,200 BOC Group plc................................. 146
20,900 Boots Co. plc................................. 188
14,000 BPB Industries plc............................ 69
8,367 British Aerospace plc......................... 127
19,500 British Airways plc........................... 168
69,300 British Gas plc............................... 194
94,353 British Petroleum Co. plc..................... 827
26,100 British Sky Broadcasting plc.................. 178
36,000 British Steel plc............................. 91
91,400 British Telecommunications plc................ 491
72,505 BTR plc....................................... 286
4,846 Burmah Castrol plc............................ 77
42,300 Cable & Wireless plc.......................... 280
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Active Country Allocation Portfolio

11
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
19,394 Cadbury Schweppes plc......................... $ 153
13,100 Caradon plc................................... 44
14,300 Coats Viyella plc............................. 38
8,592 Commercial Union plc.......................... 77
8,300 Courtaulds plc................................ 55
2,900 De La Rue Co. plc............................. 27
8,400 General Accident plc.......................... 85
49,300 General Electric plc.......................... 266
54,300 Glaxo Wellcome plc............................ 731
9,032 GKN plc....................................... 139
11,455 Granada Group plc............................. 153
45,900 Grand Metropolitan plc........................ 304
20,300 Great Universal Stores plc.................... 206
27,600 Guardian Royal Exchange plc................... 106
34,600 Guinness plc.................................. 252
99,395 Hanson plc.................................... 279
20,300 Harrisons & Crosfields plc.................... 43
33,945 HSBC Holdings plc............................. 520
14,100 Imperial Chemical Industries plc.............. 172
27,383 Ladbroke Group plc............................ 77
12,500 Land Securities plc........................... 121
12,900 Lasmo plc..................................... 35
87,500 Lloyds TSB Group plc.......................... 428
14,616 Lonrho plc.................................... 42
57,800 Marks and Spencer plc......................... 422
9,500 MEPC plc...................................... 60
23,000 National Power plc............................ 186
12,300 Peninsular & Oriental Steam Navigation Co..... 92
23,900 Pilkington plc................................ 67
43,021 Prudential Corp. plc.......................... 271
15,400 Rank Organization plc......................... 119
13,427 Redland plc................................... 84
11,200 Reed International plc........................ 187
30,300 Reuters Holdings plc.......................... 367
9,500 Rexam plc..................................... 50
5,400 RMC Group plc................................. 85
8,400 Royal Bank of Scotland Group plc.............. 64
14,085 Royal Insurance Holdings plc.................. 87
20,299 RTZ Corp. plc................................. 301
24,446 Sainsbury (J) plc............................. 144
4,000 Schroders plc................................. 84
15,000 Scottish Power plc............................ 71
31,000 Sears plc..................................... 48
4,700 Sedgwick Group plc............................ 10
7,100 Slough Estates plc............................ 24
40,710 SmithKline Beecham plc, Class A............... 435
4,750 Southern Electric plc......................... 53
22,497 Tarmac plc.................................... 39
11,900 Taylor Woodrow plc............................ 29
32,160 Tesco plc..................................... 147
11,300 Thames Water plc.............................. 100
9,050 THORN EMI plc................................. 252
8,340 TI Group plc.................................. 70
12,100 Unilever plc.................................. 241
10,700 United Utilities plc.......................... 90
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
59,900 Vodafone Group plc............................ $ 223
14,500 Zeneca Group plc.............................. 321
----------
13,871
----------
TOTAL COMMON STOCKS (Cost $158,375)........................... 168,917
----------
PREFERRED STOCKS (1.6%)
AUSTRALIA (0.1%)
23,000 News Corp., Ltd............................... 112
----------
BRAZIL (1.1%)
22,666 Aracruz Celelose S.A., Class B................ 42
19,179,873 Banco Bradesco S.A............................ 157
1,922,000 Banco do Brasil............................... 15
1,118,000 Banco do Estado Sao Paulo..................... 4
165,663 Brahma........................................ 99
847,000 Ceval Alimentos S.A........................... 9
1,064,000 Cia Brasileira de Petroleo Ipiranga........... 15
2,861,500 Cia Energetica de Minas Gerais................ 76
71,000 Cia Energetica de Sao Paulo................... 2
1,818,000 Cia Siderurgica de Tubarao.................... 29
1,020,000 Eletrobras, Class B........................... 292
21,500 Industrias Klabin de Papel e Celulose S.A..... 27
222,000 Itaubanco..................................... 90
81,000 Itausa Investimentos Itau S.A................. 62
2,044,000 Petrobras..................................... 252
20,000 Sadia Concordia............................... 14
7,618,000 Telebras...................................... 532
665,342 Telesp........................................ 142
42,268,000 Usiminas...................................... 45
8,136 Vale Do Rio Doce.............................. 158
----------
2,062
----------
GERMANY (0.3%)
8,750 RWE AG........................................ 269
1,900 SAP AG........................................ 283
----------
552
----------
ITALY (0.1%)
78,000 Fiat S.p.A.................................... 137
----------
TOTAL PREFERRED STOCKS (Cost $2,432).......................... 2,863
----------
<CAPTION>
NO. OF
RIGHTS
- -------------
<C> <S> <C>
RIGHTS (0.1%)
BRAZIL (0.0%)
(a,d)284,465 Telebras...................................... --
----------
FRANCE (0.1%)
(a,d)500 Carrefour S.A., expiring 7/02/96.............. 140
(a)3,100 Casino........................................ --
----------
140
----------
GERMANY (0.0%)
(a,d)2,450 Daimler-Benz AG............................... --
----------
INDONESIA (0.0%)
(a,d)372,000 Jakarta International Hotel & Development
(Foreign)................................... 84
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Active Country Allocation Portfolio

12
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- ------------------------------------------------------------
<C> <S> <C>
MALAYSIA (0.0%)
(a,d)9,000 Malaysian Mining Corp. Bhd.................... $ 2
(a,d)4,333 Metroplex Bhd................................. --
----------
2
----------
SINGAPORE (0.0%)
(a,d)2,300 Oversea-Chinese Banking Corp., expiring
7/12/96..................................... 18
----------
SPAIN (0.0%)
(a)540 Zardoya Otis S.A.............................. --
----------
THAILAND (0.0%)
(a,d)2,975 Bank of Ayudha Ltd. (Foreign), expiring
7/04/96..................................... 9
----------
TOTAL RIGHTS (Cost $170)...................................... 253
----------
<CAPTION>
NO. OF
WARRANTS
- -------------
<C> <S> <C>
WARRANTS (0.0%)
HONG KONG (0.0%)
(a)4,400 Applied International Holdings, expiring
12/30/99.................................... --
(a)13,700 Hong Kong & China Gas Co., expiring 9/30/97... 1
(a,d)2,300 Hysan Development Co., expiring 4/30/98....... --
(a,d)1,750 Peregrine Investment Holdings, expiring
5/15/98..................................... --
----------
1
----------
ITALY (0.0%)
(a)2,950 R.A.S. S.p.A, expiring 12/31/97............... 11
(a)1,550 R.A.S. S.p.A. Savings Shares, expiring
12/31/97.................................... 3
(a,d)5,250 Rinascente, expiring 12/31/99................. --
----------
14
----------
MALAYSIA (0.0%)
(a)2,400 Hong Leong Properties, expiring 10/00......... 1
(a)7,000 IOI Corp., expiring 4/30/00................... 3
----------
4
----------
SINGAPORE (0.0%)
(a)11,750 Straits Steamship, expiring 12/12/00.......... 14
----------
SWITZERLAND (0.0%)
(a,c)138 Roche Holdings, expiring 5/5/98............... 4
(a,d)150 Swiss Bank Corp............................... --
----------
4
----------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- ------------------------------------------------------------
<C> <S> <C>
THAILAND (0.0%)
(a,d)6,349 National Finance & Securities Co., Ltd.,
expiring 11/15/99........................... $ 14
----------
UNITED KINGDOM (0.0%)
(a)534 British Aerospace, expiring 11/15/00.......... 4
----------
TOTAL WARRANTS (Cost $12)..................................... 55
----------
<CAPTION>
NO. OF
UNITS
- -------------
<C> <S> <C>
UNITS (0.1%)
AUSTRALIA (0.1%)
20,821 General Property Trust........................ 36
24,200 Westfield Trust............................... 44
1,058 Westfield Trust-New Units..................... 2
----------
TOTAL UNITS (Cost $78)........................................ 82
----------
<CAPTION>
FACE
AMOUNT
(000)
- -------------
<C> <S> <C>
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 60 Sanofi 4.00%, 1/01/00 (Cost $38).............. 51
----------
TOTAL FOREIGN SECURITIES (97.6%) (Cost $161,105).............. 172,221
----------
FOREIGN CURRENCY (0.5%)
AUD 1 Australian Dollar............................. 1
ATS 216 Austrian Schilling............................ 20
BEF 500 Belgian Franc................................. 16
BRC 20 Brazilian Real................................ 20
GBP 33 British Pound................................. 51
DEM 14 Deutsche Mark................................. 10
FRF 454 French Franc.................................. 88
IDR 7,993 Indonesian Rupiah............................. 3
HKD 3,674 Hong Kong Dollar.............................. 475
ITL 6,292 Italian Lira.................................. 4
JPY 2,587 Japanese Yen.................................. 24
MYR 55 Malaysian Ringgit............................. 22
NLG 20 Netherlands Guilder........................... 12
PTE 140 Portuguese Escudo............................. 1
SGD 5 Singapore Dollar.............................. 4
ESP 4,233 Spanish Peseta................................ 33
CHF 34 Swiss Franc................................... 27
----------
TOTAL FOREIGN CURRENCY (Cost $810)............................ 811
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Active Country Allocation Portfolio

13
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------
TOTAL INVESTMENTS (98.1%) (Cost $161,915)..................... $173,032
--------
OTHER ASSETS (28.1%)
Securities, at Value, Held as Collateral for
Securities Lending............................. $ 39,595
Receivable for Investments Sold................. 4,448
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................. 4,017
Receivable for Portfolio Shares Sold............ 678
Dividends Receivable............................ 644
Foreign Withholding Tax Reclaim Receivable...... 132
Security Lending Income Receivable.............. 10
Other........................................... 18 49,542
----------
LIABILITIES (-26.2%)
Collateral on Securities Loaned, at Value....... (39,595)
Payable for Investments Purchased............... (3,247)
Bank Overdraft.................................. (3,019)
Investment Advisory Fees Payable................ (138)
Custodian Fees Payable.......................... (85)
Administrative Fees Payable..................... (29)
Security Lending Fees Payable................... (7)
Payable for Portfolio Shares Redeemed........... (3)
Directors' Fees and Expenses Payable............ (3)
Sub-Administrative Fees Payable................. (1)
Other Liabilities............................... (49) (46,176)
---------- --------
NET ASSETS (100%)............................................. $176,398
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $149,056
Accumulated Net Investment Loss............................... (6,378)
Accumulated Net Realized Gain................................. 18,592
Unrealized Appreciation on Investments and Foreign Currency
Translations (Net of accrual for foreign tax of $4 on
unrealized appreciation on investments)..................... 15,128
--------
NET ASSETS.................................................... $176,398
--------
--------
CLASS A:
NET ASSETS.................................................... $175,678
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,962,198 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $12.58
--------
--------
CLASS B:
NET ASSETS.................................................... $720
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 57,285 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $12.57
--------
--------

- ------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open
at June 30, 1996, the Portfolio is obligated to deliver or is to
receive foreign currency in exchange for U.S. dollars or foreign
currency as indicated below:
</TABLE>

<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- --------------- ------- ---------- --------------- ------- -----------
<S> <C> <C> <C> <C> <C>
MYR 7,235 $ 2,900 7/02/96 U.S.$ 2,900 $ 2,900 $ --
U.S.$ 16 16 7/03/96 MYR 40 16 --
U.S.$ 8 8 7/03/96 THB 193 8 --
DEM 24,812 16,340 7/15/96 U.S.$ 16,259 16,259 (81)
JPY 1,238,053 11,352 7/15/96 U.S.$ 11,730 11,730 378
ATS 17,426 1,632 7/31/96 U.S.$ 1,625 1,625 (7)
CHF 5,745 4,610 7/31/96 U.S.$ 4,667 4,667 57
JPY 1,238,053 11,379 7/31/96 U.S.$ 11,754 11,754 375
NLG 13,733 8,077 7/31/96 U.S.$ 8,897 8,897 820
U.S.$ 2,850 2,850 7/31/96 NLG 4,661 2,741 (109)
U.S.$ 170 170 7/31/96 CHF 212 170 --
FRF 56,074 10,936 8/14/96 U.S.$ 10,897 10,897 (39)
JPY 2,466,861 22,720 8/14/96 U.S.$ 24,683 24,683 1,963
JPY 310,447 2,865 8/30/96 U.S.$ 3,525 3,525 660
------- ------- -----------
$95,855 $99,872 $4,017
------- ------- -----------
------- ------- -----------
</TABLE>

- ------------------------------------------------------------

(a) -- Non-income producing security
(c) -- Security valued at cost -- See note A-1
to financial statements
(d) -- Security valued at fair value -- See
note A-1 to financial statements
NCS -- Non Convertible Shares
PCL -- Public Company Limited
RFD -- Ranked for Dividend
THB -- Thai Baht

- ------------------------------------------------

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment....................... $ 21,786 12.4%
Consumer Goods.......................... 30,693 17.4
Energy.................................. 16,858 9.6
Finance................................. 47,339 26.8
Gold Mines.............................. 102 0.0
Materials............................... 22,118 12.5
Multi-Industry.......................... 6,658 3.8
Services................................ 26,667 15.1
-------- ---
$172,221 97.6%
-------- ---
-------- ---
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Active Country Allocation Portfolio

14
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE ASIAN EQUITY PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
China 0.6%
Hong Kong 27.0%
India 0.6%
Indonesia 7.6%
Korea 3.9%
Malaysia 21.4%
Philippines 5.4%
Singapore 13.1%
Taiwan 5.0%
Thailand 11.4%
Other 4.0%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) COMBINED FAR EAST
FREE EX-JAPAN INDEX(1)
- -------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------- ------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A... 5.75% 5.58% 20.82%
PORTFOLIO -- CLASS
B(3)................... 5.32 N/A N/A
INDEX.................. 8.36 8.17 18.60

<FN>

1. The MSCI Combined Far East Free ex-Japan Index is an unmanaged index of
common stocks and includes Indonesia, Hong Kong, Malaysia, the Philippines,
Korea, Singapore, Taiwan and Thailand (assumes dividends reinvested).

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
COMBINED FAR EAST FREE EX-JAPAN INDEX AND 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.

The investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities which are
traded on recognized exchanges of Hong Kong, Singapore, Malaysia, Thailand,
Indonesia and the Philippines. The Portfolio may also invest in equity
securities traded on markets in Taiwan, South Korea, India, Pakistan, Sri Lanka
and other Asian developing markets which are open for foreign investment. The
Portfolio does not intend to invest in securities which are principally traded
in Japan or in companies organized under the laws of Japan.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 5.75% for the Class A shares and 5.32% for the Class B shares, as compared to
a total return of 8.36% for the Morgan Stanley Capital International (MSCI)
combined Far East Free ex-Japan Index. The average annual total return for the
twelve months ended June 30, 1996 and for the period from inception on July 1,
1991 through June 30, 1996 was 5.58% and 20.82%, respectively, for the Class A
shares, as compared with 8.17% and 18.60%, respectively, for the Index.

REVIEW

Sentiment on Hong Kong continued to be weighed down by fears of rising interest
rates in the U.S. and by uncertainties associated with the return of the
territory to China next year. With 1997 approaching, the stepping up of Chinese
interests in Hong Kong becomes increasingly evident. This was manifested in the
restructuring of shareholdings in Dragonair and Cathay Pacific with China
National Aviation Corporation (CNAC) becoming the single largest shareholder in
Dragonair and Citic Pacific stepping up its interest in Cathay Pacific. The
residential market recovered strongly with prices rising by 10-15%, helped by
lower mortgage rates. Capital values and rents of office properties also
appeared to have bottomed out. Hong Kong Telecom faced heavy selling pressure
due to uncertainties over possible regulatory changes and a more competitive
operating environment in the future.

In Malaysia, the surprise return of Tengku Razaleigh (former opposition rival to
the Prime Minister) to UMNO has fortified Mahathir's stronghold on the dominant
political party and reassured him of an unassailable position in the upcoming
party elections at the end of the year. On the economic front, trade statistics
through the year to April 1996 appear to indicate a bottoming out of the current
account deficit. However, a more convincing reduction in the current account
from the present 8% of GDP is only expected in 1998. Loan growth remained
alarmingly

- --------------------------------------------------------------------------------
Asian Equity Portfolio

15
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)

high at above 30% which prompted the Central Bank to raise the Statutory Reserve
Ratio twice this year to 13.5% (+2%). In addition, rising interest rates, a
crunch in margin financing for speculative shares combined with an impending
dilution in weighting in the rebalanced benchmark MSCI indices caused weakness
in share prices in June. In Singapore, the Government's announcement of
anti-speculation measures in May to cool the residential property market
resulted in heavy selling of residential property stocks. Meanwhile, stocks
which were recently included in the MSCI indices came under the spotlight, with
Singapore Telecom and STIC rising strongly before profit-taking pared their
gains. Share price performance of banks remained lackluster due to concerns over
slow earnings growth, while news from the marine sector was still bleak.

The Thailand market fell 2.4% in the second quarter of 1996 and remained one of
the worst performing markets in Asia. Rumors about bad debts in finance
companies and banks sparked panic selling. There was also talk of property
companies not being able to service their debt. On the macroeconomics front, the
trade deficit improved in May but loan growth, exports and FDI continued to
slow. Fears that the slowdown in the economy may accelerate, prompted the
central bank to allow some commercial banks to lower lending rates. Lastly,
there were major downward earnings revisions in sectors like banks, finance
companies and telecommunications.

In Indonesia, political unrest coupled with a reduction in the country weighting
within the rebalanced MSCI indices sparked heavy institutional selling in the
Indonesian market in June. Rioting in the streets in support of the ousted
Megawati Sukarno, former chairperson of PDI (effectively the only opposition
party), ignited fears among investors of a potential blow-up of
anti-establishment sentiment in the run-up to the Presidential elections next
year. As for the market, continued weak performance in exports which led to an
upward revision in the current account deficit for 1996 and a widening of the
Rupiah band to accelerate the currency depreciation were factors that sapped
investors' enthusiasm towards the market. This, together with increased cash
calls and anticipation of a second tranche placement of PT Telkom's shares
weighed down investors' sentiment in the market.

The Korean market was plagued by concerns over trade and current account
deficits, which arose from lower growth of such major exports as semiconductors,
textiles and automobiles. The government's planned W2.5 trillion new equity
supply in the third quarter of 1996 also discouraged stock investment. The
persistent weakness of the market was also attributable to the liquidation of
close to W1 trillion of outstanding margin positions.

The Philippines market ended the quarter strongly with a 16.1% gain. An upward
earnings revision continued in the second quarter, making it the market with the
strongest earnings momentum in Asia. On the economic front, first quarter of
1996 grew at 6.2% versus 5.7% in the fourth quarter of 1996 and interest rates
inched up slightly on the T-bill auction. Moreover, index-linked buying helped
the market, led by Petron which rose 33% this quarter. Mid-cap and small-cap
stocks took a breather from the heady rally over the last few months.

In Taiwan, the Central Bank continued to ease monetary policy. Money supply
growth began to pick up after a period of contraction. The market rebounded
sharply in April following the easing of cross-strait tensions and on news that
MSCI was proposing to include Taiwan in its indices. The market saw moderate
profit-taking in May, before another wave of buying in June sent the index up
another 13% when Taiwan's weighting in the MSCI indices turned out to be higher
than what most investors had expected.

In India, the market rallied, encouraged by Prime Minister Gowda's plans to
continue with liberalization and reforms. The market was lifted further by
strong corporate results.

In China, earnings for 1995 were below analysts' expectations and austerity
measures were blamed for the earnings shortfall. Since then, the authorities
have selected 300 companies which will be given priority loans in the second
half of 1996, signifying a fiscal stimulus. In addition, news that the Guangdong
government wanted to revive the stock market led to further buying frenzy. The
MSCI China Free Index ended the quarter virtually unchanged, while the Shenzhen
and Shanghai Stock Indices rose 21% and 5%, respectively.

OUTLOOK

Fears of rising U.S. interest rates and trade issues remain the major concerns
among equity investors, but these may have already been reflected in the stock
prices.

Demand for Hong Kong equities may be affected slightly by its reduced weight in
the MSCI indices.

- --------------------------------------------------------------------------------
Asian Equity Portfolio

16
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)

A turnaround in the Hong Kong property market and the Chinese economy should
help corporate earnings and provide firm support for share prices.

Barring any sharp downturn in the U.S. market in the medium term, the Malaysian
market is expected to record its traditional August rally ahead of the interim
announcement season and the October Budget. The Central Bank is expected to
continue its policy of gradually tightening credit in the system to reduce the
level of loan expansion. Administrative controls may also be selectively
introduced in order to deter unproductive expenditures.

Based on the current valuation of 20x prospective 1996 price earnings ratio,
which is close to the average of the last 5 years, downside risk is not
substantial.

The Singapore market appears to be out of favor with institutional investors
because of high foreign premia and the lack of earnings growth momentum.

Stocks with high exposure to the residential sector are likely to continue to
mark time as sales of private leasehold residential properties will likely slow
with the advent of competitively priced government executive condominiums.

Valuations of banks and office property stocks are attractive and should
outperform the market.

The Thailand market is expected to languish at current levels for a while as
investors await second quarter earnings. Reported earnings are likely to be weak
and may prompt further selling.

The depth of the correction is masked by the fact that several blue-chip stocks
are holding up the Index. In reality the prices of many sector/stocks have
corrected sharply year-to-date. This presents a good opportunity for investors
to start accumulating.

While the market may not take off from here, unless the economy or the currency
goes into a tailspin, the downside risk on the market would seem limited.

Investors are expected to demand a higher risk premium on the Indonesian market
in view of the recent political developments.

Further agitations on the political front are expected to undermine both direct
investments and portfolio investments leading to a deterioration in economic
outlook.

External accounts are not expected to show a significant improvement in the
short term and monetary policy will remain tight.

Strong earnings growth and reasonable market valuation, however, are expected to
limit downside risk to the market in the short term.

The Korean market is likely to recover strongly in the second half of the year
on the back of improving trade and current account numbers, declining interest
rates and a recovery in export earnings.

The W 1 trillion margin liquidation is expected to end in July, thereby reducing
further retail selling pressure.

The recent underperformance of the export-oriented sectors and blue-chips (e.g.
Samsung Electronics) may be coming to an end.

Values in the banking and non-life insurance sectors look compelling given an
improving operating environment and the prospect of a turnaround in earnings.

In the Philippines, earnings growth is expected to remain strong although there
are creeping signs of excessive optimism in the share prices.

Inflation stabilized at 10.4% in May from 11.6% in the first quarter of 1996.
This would imply little room for monetary easing in the short term. This may cap
the market's rise. The market should continue to hold up relatively well,
although profit-taking may pare some of the gains this year.

The small but rapidly growing over-the-counter market in Taiwan has attracted
strong interest from investors. The stock market rally has become more broadly
base with rotational buying. Stock prices should be supported by easier monetary
policy and the gradual recovery of the real estate market.

The finance sector should benefit from the recovery of the real estate market,
while the eventual establishment of direct shipping links between Taiwan and
China should help earnings of shipping companies.

Performance of electronics stocks in the near term is likely to remain
lacklustre due to uncertainties over near term earnings outlook.

Plastics and textile stocks are still affected by excess supply and weak demand,
but stock prices appear to have moved ahead of fundamentals.

The overall market is supported by strong domestic liquidity and the continued
building of portfolio positions by foreign investors.

- --------------------------------------------------------------------------------
Asian Equity Portfolio

17
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)

Investors in India are waiting for the coalition government to announce its
budget which will provide concrete evidence of its intention and ability to
continue with reforms.

The market could be dampened as inflation is expected to increase. In addition,
many Indian companies are raising money via GDRs thus soaking liquidity from the
system.

Liquidity should improve because of an expected cut in CRR and increased FDIs
and FIIs.

Rumors about interest rate cuts, anticipated to be in July, drew more buyers
into the Chinese market. Several companies announced share placements. Sizable
listings of China-infrastructure related companies dampened liquidity slightly.

The interest rate cut, if it came about, could add another boost to the market.
The sharp rise in the market cannot be sustained, and the market will probably
stabilize over the next one or two months.

Investors will also have to contend with cash calls and dilution as more new
issues in the form of IPOs and rights issues are expected over the course of the
year. This may soak liquidity from the system.

The Australian market ended the quarter almost unchanged.

Stronger than expected GDP growth of 1.8% in the first quarter of 1996 saw
economists revise upward the economic forecasts from 2.5% to 3% for the year to
June 1997.

A mini price war on mortgages sparked selling in the banking sector. They
however recovered towards the end of the month. Resource stocks fell sharply on
the back of the panic over copper prices after the Sumitomo incident. Weak steel
prices took its toll on BHP, a steel producer.

Strong economic growth may eventually filter through to corporate earnings.
Industrials are likely to do well from here after a period of depressed
performance. Fears over rising U.S. interest rates may dampen investor interest.
Anticipation of rising labor costs that will hurt companies' margins may prevent
the strong economic growth from filtering down to corporate earnings. Selling
prices are also under pressure.

Selected stocks however offer good value especially in the industrial sector.

Ean Wah Chin
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Asian Equity Portfolio

18
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (95.6%)
CHINA (0.6%)
428,440 China Merchants Shekou Port Services, Class B..... $ 188
2,511,000 Harbin Power Equipment Co., Ltd., Class H......... 377
4,800 Jilin Chemical Co., Ltd., ADR..................... 88
1,512,775 Shanghai Jinqiao, Class B......................... 590
(a)742,300 Shenzen North Jainshe Motorcycle Co., Ltd., Class
B............................................... 259
4,401,000 Yizheng Chemical Fibre Co., Class H............... 972
----------
2,474
----------
HONG KONG (27.0%)
(a)231,000 Asia Satellite Telecommunications Holdings Ltd.... 685
2,411,000 Cheung Kong Holdings Ltd.......................... 17,364
704,500 China Light & Power Co., Ltd...................... 3,195
1,557,500 Citic Pacific Ltd................................. 6,298
3,516,000 C.P. Pokphand Co., Ltd............................ 1,397
4,662,000 Guangdong Investments Ltd......................... 2,951
(a)24,000 Guangshen Railway Co., Ltd., ADR.................. 459
811,000 Hang Seng Bank Ltd................................ 8,172
868,420 Hong Kong & Shanghai Bank Holdings plc............ 13,126
611,500 Hong Kong Electric Holdings Ltd................... 1,864
6,645,000 Hong Kong Telecommunications Ltd.................. 11,932
2,218,000 Hopewell Holdings Ltd............................. 1,204
2,406,000 Hutchison Whampoa Ltd............................. 15,137
1,860,000 New World Development Co., Ltd.................... 8,626
1,033,100 Sun Hung Kai Properties Ltd....................... 10,444
1,208,060 Swire Pacific Ltd., Class A....................... 10,339
1,034,000 Varitronix International Ltd...................... 2,157
1,115,000 Wharf Holdings Ltd................................ 3,990
----------
119,340
----------
INDIA (0.6%)
38,000 Grasim Industries Ltd., GDR....................... 703
(a,e)51,000 Hindalco Industries Ltd., GDR..................... 1,925
----------
2,628
----------
INDONESIA (7.6%)
1,407,500 Astra International (Foreign)..................... 2,041
(d)483,000 Bank International Indonesia (Foreign)............ 2,386
(d)1,256,000 Barito Pacific Timber (Foreign)................... 823
(d)774,500 Bimantara Citra (Foreign)......................... 973
(d)1,549,000 Gudang Garam (Foreign)............................ 6,639
(d)374,600 Hanajaya Mandala Sampoerna (Foreign).............. 4,265
(d)3,072,500 Indah Kiat Pulp & Paper Corp. (Foreign)........... 3,003
(d)330,000 Indocement Tunggal (Foreign)...................... 1,134
(d)351,600 Kalbe Farma (Foreign)............................. 786
(d)364,000 Semen Gresik (Foreign)............................ 1,060

<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
(d)277,333 Sorini Corp. (Foreign)............................ $ 1,525
(d)210,500 Suba Indah (Foreign).............................. 163
(d)5,756,500 Telekomunikasi Indonesia (Foreign)................ 8,718
----------
33,516
----------
KOREA (3.9%)
(a,d)18,022 Chosun Brewery Co., Ltd........................... 616
(a,d)53,450 Housing & Commercial Bank......................... 1,469
(d)53,900 Korea Electric Power (Foreign).................... 2,177
(a)60,000 Korea Mobile Telecom ADR.......................... 1,027
(d)1,694 Korea Mobile Telecom (Foreign).................... 2,005
61,600 Pohang Iron & Steel Co., Ltd., ADR................ 1,502
23,778 Samsung Electronics (Foreign)..................... 1,996
(a,e)7,833 Samsung Electronics GDR (New)..................... 405
(a)27,595 Samsung Electronics (RFD)......................... 2,317
(d)1,524 Samsung Fire & Marine Insurance Co................ 1,099
(d)122,761 Shinhan Bank (Foreign)............................ 2,867
----------
17,480
----------
MALAYSIA (21.3%)
227,800 AMMB Holdings Bhd................................. 3,196
474,000 Edaran Otomobil Nasional Bhd...................... 4,542
1,494,700 Genting Bhd....................................... 11,684
1,481,000 IOI Corp. Bhd..................................... 2,054
75,000 Konsortium Perkapalan Bhd......................... 451
793,000 Leader Universal Holdings Bhd..................... 2,241
638,000 Magnum Corp. Bhd.................................. 1,079
1,131,500 Malayan Banking Bhd............................... 10,886
1,400,316 Malaysian International Shipping Bhd. (Foreign)... 4,351
1,986,000 Petronas Gas Bhd.................................. 8,519
777,000 Public Bank Bhd................................... 2,149
3,325,000 Renong Bhd........................................ 5,305
1,583,000 Resorts World Bhd................................. 9,075
799,000 Sime Darby Bhd.................................... 2,210
1,378,000 TA Enterprise Bhd................................. 2,154
295,000 Tan Chong Motor Holdings Bhd...................... 431
1,277,000 Telekom Malaysia Bhd.............................. 11,365
1,888,000 Tenaga Nasional Bhd............................... 7,947
636,757 United Engineers Ltd. (Malaysia).................. 4,416
----------
94,055
----------
PHILIPPINES (5.4%)
710,400 Ayala Corp., Class B.............................. 1,342
824,525 Ayala Land, Inc., Class B......................... 1,479
2,719,800 C&P Homes, Inc.................................... 2,362
(a)1,865,100 DMCI Holdings, Inc................................ 1,335
13,893,500 JG Summit Holding, Class B........................ 5,197
335,050 Manila Electric Co., Class B...................... 3,517
6,309,075 Petron Corp....................................... 2,890
18,125 Philippine Long Distance Telephone Co., ADR....... 1,053
42,250 Philippine Long Distance Telephone Co., Class B... 2,516
62,900 San Miguel Corp., Class B......................... 217
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Asian Equity Portfolio

19
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
</TABLE>

PHILIPPINES (CONT.)
<TABLE>
<C> <S> <C>
8,288,400 SM Prime Holdings, Inc., Class B.................. $ 2,151
----------
24,059
----------
SINGAPORE (12.8%)
84,080 City Developments Ltd............................. 655
2,216,000 Comfort Group Ltd................................. 2,199
966,000 CSA Holding Ltd................................... 952
252,000 DBS Land Ltd...................................... 864
535,500 Development Bank of Singapore Ltd. (Foreign)...... 6,680
178,560 Fraser & Neave Ltd................................ 1,848
2,145,000 Kay Hian James Capel Holdings Ltd. (Foreign)...... 2,265
837,000 Keppel Corp., Ltd................................. 7,000
623,166 Oversea-Chinese Banking Corp. (Foreign)........... 7,287
282,000 Sembawang Corp.................................... 1,399
420,000 Singapore Airlines Ltd. (Foreign)................. 4,435
124,400 Singapore Press Holdings (Foreign)................ 2,442
1,486,000 Singapore Technologies Industrial Corp............ 3,939
846,000 Straits Steamship Land Ltd........................ 2,830
477,000 Straits Trading Co., Ltd.......................... 1,251
1,275,000 Sunright Ltd...................................... 1,310
739,200 United Overseas Bank Ltd. (Foreign)............... 7,072
(a)903,000 Want Want Holdings................................ 2,429
----------
56,857
----------
TAIWAN (5.0%)
921,000 Cathay Life Insurance Co., Ltd.................... 6,493
3,908,000 China Steel Corp.................................. 4,090
444,000 Hua Nan Commercial Bank........................... 2,339
(a)1,566,600 Taiwan Semiconductor Manufacturing Co............. 3,273
905,650 United Micro Electronics Corp., Ltd............... 1,343
2,977,000 Yang Ming Marine Transport........................ 4,392
----------
21,930
----------
THAILAND (11.4%)
120,000 Advanced Information Service PCL (Foreign)........ 1,777
677,800 Bangkok Bank Ltd. (Foreign)....................... 9,185
864,000 Finance One Co., Ltd. (Foreign)................... 5,582
915,800 National Finance & Securities Co., Ltd.
(Foreign)....................................... 4,077
266,600 Phatra Thanakit Co., Ltd. (Foreign)............... 1,859
89,100 Shinawatra Computer Co., Ltd (Foreign)............ 1,931
41,000 Siam Cement Co., Ltd. (Foreign)................... 2,012
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
611,400 Siam Commercial Bank (Foreign).................... $ 8,863
(a,d)2,012,300 TelecomAsia Corp. PCL (Foreign)................... 4,281
778,070 Thai Farmers Bank, Ltd. (Foreign)................. 8,521
(d)176,600 United Communications Industry (Foreign).......... 2,365
----------
50,453
----------
TOTAL COMMON STOCKS (Cost $375,861)............................. 422,792
----------
<CAPTION>

NO. OF
RIGHTS
- ------------
<C> <S> <C>
RIGHTS (0.1%)
SINGAPORE (0.1%)
(a,d)62,317 Oversea-Chinese Banking Corp., expiring 7/12/96
(Cost $0)....................................... 501
----------
<CAPTION>

NO. OF
WARRANTS
- ------------
<C> <S> <C>
WARRANTS (0.2%)
SINGAPORE (0.2%)
(a)428,125 Renong Bhd, expiring 11/21/00..................... 194
(a)607,750 Straits Steamship Land Ltd., expiring 12/20/00.... 762
----------
TOTAL WARRANTS (Cost $897)...................................... 956
----------
<CAPTION>
FACE
AMOUNT
(000)
- ------------
<C> <S> <C>
FIXED INCOME SECURITIES (0.1%)
MALAYSIA (0.1%)
MYR 685 Renong Bhd 4.00%, 5/21/01
(Cost $275)..................................... 258
----------
TOTAL FOREIGN SECURITIES (96.0%) (Cost $377,033)................ 424,507
----------
SHORT-TERM INVESTMENT (2.9%)
REPURCHASE AGREEMENT (2.9%)
$ 12,957 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $12,963,
collateralized by $12,730 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $13,014 (Cost
$12,957)........................................ 12,957
----------
</TABLE>

<TABLE>
<C> <S> <C>
FOREIGN CURRENCY (0.9%)
HKD 3,255 Hong Kong Dollar...................................... 420
IDR 639,299 Indonesian Rupiah..................................... 275
KRW 42,451 Korean Won............................................ 52
MYR 1,783 Malaysian Ringgit..................................... 715
PHP 10,610 Philippine Peso....................................... 405
TWD 64,420 Taiwan Dollar......................................... 2,341
------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL FOREIGN CURRENCY (Cost $4,199).......................... 4,208
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Asian Equity Portfolio

20
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS (99.8%) (Cost $394,189)..................... $441,672
----------
OTHER ASSETS (1.2%)
Receivable for Investments Sold................. $ 4,077
Dividends Receivable............................ 806
Receivable for Portfolio Shares Sold............ 295
Foreign Withholding Tax Reclaim Receivable...... 33
Interest Receivable............................. 6
Other........................................... 24 5,241
------------
LIABILITIES (-1.0%)
Payable for Portfolio Shares Redeemed........... (2,001)
Payable for Investments Purchased............... (967)
Investment Advisory Fees Payable................ (572)
Bank Overdraft.................................. (419)
Custodian Fees Payable.......................... (252)
Deferred Foreign Taxes Payable.................. (149)
Administrative Fees Payable..................... (55)
Distribution Fees Payable....................... (8)
Directors' Fees and Expenses Payable............ (7)
Other Liabilities............................... (89) (4,519)
------------ ----------
NET ASSETS (100%)............................................. $442,394
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 378,362
Undistributed Net Investment Income........................... 2,106
Accumulated Net Realized Gain................................. 14,594
Unrealized Appreciation on Investments and Foreign Currency
Translations (Net of accrual for foreign tax of $149 on
unrealized appreciation on investments)..................... 47,332
----------
NET ASSETS.................................................... $ 442,394
----------
----------
CLASS A:
NET ASSETS.................................................... $ 428,915
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 20,816,967 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $20.60
----------
----------
CLASS B:
NET ASSETS.................................................... $13,479
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 654,488 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $20.59
----------
----------
</TABLE>

- ------------------------------------------------------------

(a) -- Non-income producing security
(d) -- Securities (totaling $48,855 or 11.0% of
net assets at June 30, 1996) valued at
fair value -- See note A-1 to financial
statements
(e) -- 144A Security -- Certain conditions for
public sale may exist
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
PCL -- Public Company Limited
RFD -- Ranked for Dividend

- ------------------------------------------------------------

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Capital Equipment....................... $ 24,603 5.6%
Consumer Goods.......................... 23,263 5.3
Energy.................................. 30,108 6.8
Finance................................. 185,902 42.0
Materials............................... 21,608 4.9
Multi-Industry.......................... 33,527 7.6
Services................................ 105,496 23.8
-------- -----
$424,507 96.0%
-------- -----
-------- -----
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Asian Equity Portfolio

21
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE EMERGING MARKETS PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Argentina 1.6%
Brazil 14.0%
Chile 0.1%
China 0.5%
Colombia 0.8%
Egypt 0.4%
Greece 1.2%
Hong Kong 6.3%
Hungary 0.1%
India 11.4%
Indonesia 5.7%
Israel 2.5%
Korea 2.7%
Mexico 9.4%
Morocco 1.3%
Pakistan 2.7%
Philippines 3.5%
Poland 1.2%
Portugal 0.1%
Russia 7.2%
Singapore 0.3%
South Africa 3.8%
Taiwan 5.5%
Thailand 4.3%
Turkey 5.1%
United Kingdom 0.2%
Zimbabwe 0.2%
Other 7.9%
</TABLE>

PERFORMANCE COMPARED TO THE IFC GLOBAL TOTAL
RETURN COMPOSITE INDEX(1)
- ------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------- ----------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 20.32% 13.41% 16.93%
PORTFOLIO -- CLASS
B(3).................. 19.17 N/A N/A
INDEX................. 13.45 8.44 15.99

<FN>

1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (assumes dividends reinvested).

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
COUNTRY OR REGIONAL INDICES 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.

The investment objective of the Emerging Markets Portfolio is to provide
long-term capital appreciation by investing in equity securities of emerging
country issuers.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 20.32% for the Class A shares and 19.17% for the Class B shares, as compared
to a total return of 13.45% for the IFC Global Total Return Composite Index. The
average annual total return for the twelve months ended June 30, 1996 and for
the period from inception on September 25, 1992 through June 30, 1996 was 13.41%
and 16.93%, respectively, for the Class A shares, as compared to 8.44% and
15.99%, respectively, for the Index.

Politics have been the dominant theme of the second quarter of 1996. Within the
emerging market universe major elections have been held in Russia, the Czech
Republic, India, Israel and South Korea. In addition, Taiwan held presidential
elections in late March which also had a marked impact on quarterly performance.

Overweight positions in India, Taiwan, Russia, Mexico and Brazil and underweight
positions in Thailand, Malaysia and South Africa all contributed positively.

Arguably, the most important election for the Portfolio was held in Russia. The
voters had a stark choice in their first democratic election since the fall of
communism. On one side there was Boris Yeltsin and a continuation of the reform
process. On the other side there was Zyuganov and a return to old style
communism with the potential reversal of the reform process coupled with a mass
exodus by foreign investors from the embryonic stock market. The Russian people
voted decisively for Yeltsin, reform and democracy. The stock market rose over
140% during the quarter and dollar denominated Russian debt also appreciated
strongly.

Nobody who visits Russia can miss the raw potential of the country or the
problems which have to be tackled. The economy is close to the bottom, asset
values are attractive and the stock market will be underwritten by the
increasing foreign access to Russian securities over the coming months. Progress
has been made on inflation, which is now 60% per annum compared to 110% in 1995.

Concern remains, however, over Yeltsin's health although he is assembling a
strong team around him. The return of the reform-minded Chubais as chief-of-
staff is particularly positive. The well known and

- --------------------------------------------------------------------------------
Emerging Markets Portfolio

22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
highly respected Prime Minister Chernomyrdin would temporarily succeed as
President in the event of Yeltsin's demise.

Although the IMF profess satisfaction that Russia has not exceeded the ceiling
on the budget deficit, tax collection has fallen dramatically and the complex
tax system cries out for simplification. In sum, we believe these and other
problems will be addressed and we remain enthusiastic about the potential of
Russia.

The election in India was less in danger of producing a complete change of
policy but nonetheless there was uncertainty due to the widely expected defeat
of the ruling Congress party. The new government formed by Mr. Deve Gowda's
National Front-Left Front coalition is foreign investor-friendly and has no
ambition to produce changes in economic policy.

The real economy in India continues to perform well. GDP growth is 7% per annum
with corporate earnings rising in excess of 25%. The July 22nd budget will be
critical in determining the direction of the stock market in the short run. We
anticipate that the domestic investor will return to the market as interest
rates continue to fall. India is currently trading at the cheap end of its
valuation range and we remain overweight.

Unlike Russia and India which had run-ups prior to their elections, Taiwan has
been one of the strongest performers in the last 3 months following the election
of President Lee and the easing of tensions with mainland China. The market is
supported by strong domestic liquidity and will receive a boost on its inclusion
in the MSCI indices in September.

The election in Israel was a breathtakingly close race between the previous
Prime Minister Shimon Peres and the Likud candidate Benjamin Netanyahu. The
election of Prime Minister Netanyahu has heralded a 20% decline in the local
Mishtanim Index due to domestic, not foreign, selling. Netanyahu is focusing on
economic reform and interest rates are moving higher to deal with above-target
inflation of 14%. Time will reveal whether concerns are justified that the
Middle East peace process will stall under the new leadership.

With the exception of Taiwan, Asia had a disappointing quarter. Contagion from
potential interest rate rises in the U.S. have negatively impacted Hong Kong and
Malaysia while Thailand has fallen on fears of earnings disappointment from the
financial stocks which dominate the stock market. In Indonesia, rioting in the
streets in support of President Suharto's opposition ignited fears of social
unrest in the months before the 1997 Presidential election. Korean investors
were concerned over trade and current account deficits and a slowdown in the
textile, semiconductor and auto sectors.

Latin America had an upbeat quarter, free from any election angst. Interest
rates are falling in Brazil, privatization is progressing, albeit slowly, and
the monopoly Telecommunications supplier Telebras had outstanding results.
Brazil continues to be the largest holding in the Portfolio. Mexico is facing
growing political and business scandals on one hand and seeing economic
recovery, lower interest rates and inflation and a stable currency on the other.
We are marginally overweight in Mexico to take advantage of the strong earnings
recovery now in evidence.

We have initiated a position in Egypt where the market sells on 8x 1996 earnings
estimated and, unusual, for an emerging market, has a 9% plus yield. Economic
growth is 4% in real terms and inflation is around 9%.

The second half of 1996 could prove a testing period for global financial
markets as interest rates move upwards in the U.S. on stronger than expected
economic growth. We are entering the third quarter with a focus on markets not
highly correlated with the U.S. such as Russia, India and Taiwan, cheap markets
with strong potential earnings growth such as Brazil, Mexico and Pakistan and
the smaller stock markets such as Peru, Chile, Egypt, Hungary and Poland.
Whatever the path of U.S. interest rates, the emerging markets should continue
to have upward momentum from here based on their relatively attractive
valuations and growth prospects.

Madhav Dhar
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Emerging Markets Portfolio

23
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EMERGING MARKETS PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (83.4%)
ARGENTINA (1.6%)
(a)6 Acindar Industrial S.A., Class B................ $ --
293,038 Quilmes Industrial S.A.......................... 3,004
159,058 Telecom Argentina S.A. ADR...................... 7,456
375,030 Telefonica de Argentina S.A. ADR................ 11,064
----------
21,524
----------
BRAZIL (6.5%)
(e)85,057 Cia Energetica de Minas Gerais ADR.............. 2,276
52,235,000 Eletrobras...................................... 14,048
1,542,000 Itausa Investimentos Itau S.A................... 1,183
(d)9,268,000 Light........................................... 646
33,680,000 Pao de Acucar................................... 557
189,349 Pao de Acucar ADR............................... 3,136
131,414,000 Telebras........................................ 7,723
(e)812,689 Telebras ADR.................................... 56,584
(a)8,853,162 Telecom de Sao Paulo............................ 1,561
----------
87,714
----------
CHILE (0.1%)
52,565 Santa Isabel S.A. ADR........................... 1,439
----------
CHINA (0.5%)
534,540 China Merchants Shekou Port Services, Class B... 235
3,720,000 Harbin Power Equipment Co. Ltd., Class H........ 558
86,500 Jilin Chemical Co. Ltd., ADR.................... 1,589
(a)4,171,000 Shenzen North Jainshe Motorcycle Co., Ltd.,
Class B....................................... 1,455
13,658,000 Yizheng Chemical Fibre Co., Class H............. 3,017
----------
6,854
----------
COLOMBIA (0.4%)
12,728,000 Banco de Colombia............................... 4,831
----------
EGYPT (0.4%)
47,000 Ameriyah Cement Co.............................. 638
15,984 Commercial International Bank................... 1,974
82,310 Eastern Tobacco................................. 896
49,350 Egyptian Finance & Industrial................... 521
71,000 Hewlan Cement................................... 667
10,000 Madinet Nasr Housing & Development.............. 264
21,655 North Cairo Flour Mills......................... 509
25,800 Torah Portland Cement........................... 338
----------
5,807
----------
GREECE (1.2%)
(a)405,969 Aegek Ltd....................................... 2,701
11,666 Alpha Credit Bank of Athens (RFD)............... 616
216,575 Delta Dairy..................................... 2,648
108,000 Ergo Bank....................................... 5,951

<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
142,000 Hellenic Bottling Co............................ $ 4,718
----------
16,634
----------
HONG KONG (6.3%)
1,613,000 Cheung Kong Holdings Ltd........................ 11,617
5,085,600 China International Marine Container, Class B... 4,402
2,145,000 Citic Pacific Ltd............................... 8,673
9,561,000 C.P. Pokphand Co., Ltd.......................... 3,798
(a)2,468,000 Great Wall Electronics International............ 179
9,331,000 Guangdong Investments Ltd....................... 5,907
(a)60,000 Guangshen Railway Co., Ltd., ADR................ 1,148
3,005,000 Hong Kong Telecommunications Ltd................ 5,396
116,000 Hopewell Holdings Ltd........................... 63
1,779,000 Hutchison Whampoa Ltd........................... 11,192
1,404,000 New World Development Co., Ltd.................. 6,511
162,400 Shandong Huaneng Power Co., Ltd., ADR........... 1,340
601,000 Sun Hung Kai Properties Ltd..................... 6,075
1,167,000 Swire Pacific Ltd., Class A..................... 9,988
(a)10,502,000 Tingyi (Cayman Islands) Holding Co.............. 2,883
1,608,000 Varitronix International Ltd.................... 3,355
7,998,000 Zhenhai Refining & Chemical Co., Ltd., Class
H............................................. 2,273
----------
84,800
----------
HUNGARY (0.1%)
(a)16,100 Cofinec S.A. GDR (Registered)................... 769
----------
INDIA (11.0%)
188,400 Andhra Valley Power Supply Co., Ltd............. 766
230,000 American Dry Fruits............................. 103
450,100 Apollo Tyres Ltd................................ 2,316
100,000 AP Rayon Ltd., Class B.......................... 241
67,200 Aruna Sugars & Enterprises...................... 43
124,328 Associated Cement Companies Ltd................. 8,520
891,500 Balaji Foods & Feeds............................ 196
165,984 Bharat Forge Co., Ltd., Class A................. 839
33,571 Bharat Forge Co., Ltd. (New).................... 170
3,473,500 Bharat Heavy Electricals........................ 17,698
(a)374,600 Bharat Pipes & Fittings Ltd., Class B........... 43
(a)125,000 Bharat Pipes & Fittings Ltd. (New).............. 14
86,400 BPL Ltd......................................... 150
141,642 Carrier Aircon Ltd.............................. 1,019
(a)200,500 Ceat Ltd........................................ 541
8,780 Century Textiles and Industries Ltd............. 1,352
858,400 Container Corp. of India Ltd.................... 5,117
86,000 Cosmo Films Ltd................................. 296
380,100 Crompton Greaves................................ 2,705
42,000 Dabur India Ltd................................. 281
257,900 DCL Polyesters Ltd.............................. 121
77,000 DCM Shriram Industries Ltd...................... 82
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Markets Portfolio

24
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

INDIA (CONT.)
<TABLE>
<C> <S> <C>
38,800 Delta Industries Ltd............................ $ 38
185,000 Esab India Ltd.................................. 464
50,000 Essel Packagings Ltd............................ 244
(a)98,700 Federal Bank Ltd................................ 568
5,950 Federal Bank Ltd. (New)......................... 34
15,586 Flex Industries Ltd., Class B................... 65
4,900 Fuller Kep...................................... 21
200,300 Garware Plastics & Polyester.................... 1,112
376,700 Garware Plastics & Polyester, Class A........... 2,090
712,500 Godrej Soaps Ltd................................ 1,062
2,803,300 Great Eastern Shipping Co....................... 4,018
349,900 Gujarat Ambuja Cements, Ltd..................... 3,715
75,100 Gujurat Narmada Valley Fertilizers Co., Ltd..... 83
254,000 Hero Honda, Class B............................. 2,028
817,500 Hindustan Development Corp. Ltd................. 566
126,206 Housing Development Finance Corp................ 10,525
122,750 ICI India Ltd................................... 718
155,100 ITC Agrotech Ltd., Class B...................... 194
500,913 ITC Bhadrachalam (New).......................... 1,507
191,750 ITC Bhadrachalam Paperboards, Ltd............... 577
158,400 ITC Ltd......................................... 1,402
(a,f,g)78,000 India Magnum Fund, Ltd., (The) Class A (acquired
11/25/92-3/1/94, Cost $3,872)................. 4,056
(a,g)55,194 India Magnum Fund, Ltd., (The) Class B.......... 2,870
644,625 India Organic Chemical Ltd...................... 375
1,000,000 Indian Petrochemicals Corp. Ltd................. 4,421
(a)40,000 Indian Seamless Steel & Alloys.................. 9
571,047 Indo Rama Synthetics............................ 697
171,154 Indo Rama Synthetics (New)...................... 209
911,800 Industrial Finance Corp. of India............... 1,203
100,000 Infosys Technology Ltd.......................... 2,030
5,292 JCT Ltd. GDR.................................... 21
(a)1,500,277 JK Synthetics Ltd............................... 926
440,000 KEC International Ltd........................... 1,642
110,200 Kirloskar Oil Engines Ltd., Class B............. 282
75 Lakme Ltd., Class B............................. 1
150,000 Lakshmi Precision Screws........................ 236
(a)145,000 Laser Lamp Ltd.................................. 136
1,760 Madras Cement Ltd............................... 615
798,800 Mahanagar Telephone Nigam....................... 5,753
106,484 Mahavir Spinning Mills Ltd...................... 272
(a)300,700 Maikaal Fibres.................................. 68
26,500 Mardia Chemicals Ltd............................ 30
10,000 Modi Xerox Ltd.................................. 41
(a,g)19,782,100 Morgan Stanley Growth Fund...................... 3,875
(a,g)19,389 Morgan Stanley India Investment Fund, Inc....... 216
73,581 MRF Ltd., Class B............................... 7,367
25,000 OM Sindoori Hotels Ltd.......................... 59
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
350,000 Patheja Forgings & Auto Parts, Class B.......... $ 785
318,523 PCS Data Products Ltd., Class B................. 82
218,500 Philips India Ltd............................... 802
(a)135,500 Polar Latex..................................... 37
(a)232,700 Priyadarshini Cement Ltd., Class B.............. 180
(a)350,000 PVD Plastic Mouldings Inds. Ltd., Class B....... 137
129 Ranbaxy Laboratories Ltd., Class B.............. 2
209,750 Raymond Ltd..................................... 2,017
(a,e)3,770 Reliance Industries Ltd. GDS.................... 49
73,581 Reliance Industries Ltd. GDS (New).............. 957
(d)84,500 Rossell Industries Ltd.......................... 89
(d)25,350 Rossell Tea Ltd................................. --
1,021,700 Sanghi Polyesters Ltd........................... 505
200 SCICI Ltd. (Bonus Shares)....................... --
400 SCICI Ltd., Class B............................. 1
135,400 Shanti Gears Ltd................................ 904
(a)73,200 Sharp Industries Ltd............................ 32
697,500 Shipping Corp. of India......................... 733
150,636 Shree Vindhya Paper Mills....................... 235
115 S.K.F. Bearings Ltd............................. 10
45,000 Sri Venkatesa Mills Ltd......................... 141
1,455,150 State Bank of India............................. 12,402
37,250 Sudarshan Chemical Industries Ltd............... 148
725,950 Super Forgings & Steels......................... 278
406,212 Tata Engineering & Locomotive, Class A.......... 5,996
117,200 Tata Hydro Electric Power....................... 476
176,600 Tata Iron & Steel Co., Ltd...................... 1,214
1,330 Tata Power Co., Ltd............................. 7
12,800 Thiru Arooran Sugars Ltd........................ 47
75,000 Titagarh Steels Ltd............................. 49
196,100 Tube Investments of India....................... 675
1,676 United Phosphorus Ltd. GDR...................... 20
783,000 Uttam Steels Ltd., Class A...................... 440
783,000 Uttam Steels Ltd. (New)......................... 440
300 Videocon International Ltd., Class A............ 1
182,600 Videsh Sanchar Nigam Ltd........................ 6,997
710,040 VXL Ltd......................................... 474
89,600 Wartsila Diesel Ltd............................. 924
----------
149,340
----------
INDONESIA (5.7%)
1,107,500 Bank Internasional Indonesia (Foreign).......... 5,472
(d)2,770,500 Barito Pacific Timber (Foreign)................. 1,815
(d)3,189,000 Bimantara Citra (Foreign)....................... 4,008
(d)305,598 Charoen Pokphand (Foreign)...................... 591
(a,d)2,982,000 Gudang Garam (Foreign).......................... 12,780
(d)772,500 Hanajaya Mandala Sampoerna (Foreign)............ 8,795
(d)6,067,500 Indah Kiat Pulp & Paper Corp. (Foreign)......... 5,931
(d)817,500 Indocement Tunggal (Foreign).................... 2,810
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Markets Portfolio

25
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

INDONESIA (CONT.)
<TABLE>
<C> <S> <C>
(d)988,000 Indosat (Foreign)............................... $ 3,322
(d)1,017,200 Kalbe Farma (Foreign)........................... 2,273
(a,d)729,500 Semen Gresik (Foreign).......................... 2,123
(d)813,000 Sorini Corp. (Foreign).......................... 4,471
(d)14,781,000 Telekomunikasi Indonesia (Foreign).............. 22,386
(d)373,000 United Tractors (Foreign)....................... 589
----------
77,366
----------
ISRAEL (2.5%)
114,145 ELBIT........................................... 6,801
5,250 First International Bank of Israel, Class 1..... 549
32,557 First International Bank of Israel, Class 5..... 3,632
(a)542,350 Israel Land Development Co...................... 1,332
107,925 Koor Industries Ltd............................. 9,147
761,177 Osem Investment Ltd............................. 4,481
(a)80,000 PEC Israel Economic Corp........................ 1,450
54,397 Scitex Corp..................................... 938
207,140 Super Sol Ltd., Class B......................... 4,406
20,000 Teva Pharmaceutical Industries Ltd., ADR........ 758
----------
33,494
----------
KOREA (2.7%)
(a,d)8,410 Chosun Brewery Co., Ltd......................... 287
286,590 Housing & Commercial Bank, Korea................ 7,879
145,780 Korea Electric Power (Foreign).................. 5,887
(a)208,000 Korea Mobile Telecommunications ADR............. 3,562
(d)2,150 Korea Mobile Telecommunications (Foreign)....... 2,544
(d)7,890 Pohang Iron & Steel (Foreign)................... 644
15,170 Samsung Electronics GDS (New)................... 785
79,670 Samsung Electronics (Foreign)................... 6,688
24,011 Samsung Electronics (RFD)....................... 2,016
(d)193,289 Shinhan Bank (Foreign).......................... 4,514
63,000 Yukong Ltd. (Foreign)........................... 1,848
----------
36,654
----------
MEXICO (9.4%)
1,112,132 Alfa S.A. de C.V., Class A...................... 4,994
616,212 Apasco S.A., Class A............................ 3,401
(a)5,730,000 Banacci, Class B................................ 11,910
(a)966,104 Banacci, Class L................................ 1,835
(a,e)922,357 Cemex S.A. de C.V. CPO ADR...................... 6,377
2,871,970 Cemex S.A. de C.V., Class A..................... 10,189
(a)1,398,360 Cifra S.A. de C.V., Class B..................... 2,018
(a)3,588,750 Cifra S.A. de C.V., Class C..................... 5,121
(a)255,019 Empresas ICA S.A. ADR........................... 3,538
6,403,210 FEMSA, Class B.................................. 18,156
(a,e)295,750 Grupo Carso S.A. ADR............................ 4,191
(a,e)1,503,890 Grupo Financiero Bancomer ADR................... 12,971
(a)13,217,475 Grupo Financiero Bancomer, Class B.............. 5,752
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
(a)265,725 Grupo Televisa S.A. ADR......................... $ 8,171
161,828 Panamerican Beverages, Inc., Class A............ 7,201
641,915 Telefonos de Mexico S.A. ADR, Class L........... 21,504
----------
127,329
----------
MOROCCO (1.3%)
20,000 BMCE............................................ 894
5,714 BMCE (Bonus Shares) (RFD)....................... 255
55,123 Groupe Ona...................................... 2,528
164,500 SNI Maroc, Series 'V' (Bearer).................. 10,372
58,221 Wafabank........................................ 2,710
----------
16,759
----------
PAKISTAN (2.7%)
41,816 Adamjee Insurance Co., Ltd...................... 166
(a)142,649 Cherat Cement Ltd............................... 104
1,814 Crescent Investment Bank........................ 1
6,741 Cresent Textile Mills Ltd....................... 3
2,288,000 D.G. Khan Cement Ltd............................ 909
803,700 Dewan Salman Fibre.............................. 961
3,827,200 Fauji Fertilizer Co., Ltd....................... 9,840
(a)2,068,660 Karachi Electric Supply Corp.................... 2,172
(a)113,127 Muslim Commercial Bank Ltd...................... 121
(a)1,256,519 Nishat Mills Ltd................................ 503
358,020 Pakistan State Oil Co., Ltd..................... 4,224
(a)101,550 Pakistan Telecommunications..................... 11,604
(a)27,900 Pakistan Telecommunications GDR................. 3,292
(a)2,694,960 Sui Northern Gas................................ 3,080
(a)298,000 Zahur Textile Mills............................. 11
----------
36,991
----------
PERU (0.0%)
42 Cementos Lima S.A............................... --
----------
PHILIPPINES (3.5%)
2,134,562 Ayala Land, Inc., Class B....................... 3,829
7,016,700 C&P Homes, Inc.................................. 6,093
(a)5,688,300 DMCI Holdings, Inc.............................. 4,071
20,878,830 JG Summit Holding, Class B...................... 7,810
696,078 Manila Electric Co., Class B.................... 7,306
11,690,670 Petron Corp..................................... 5,355
131,385 Philippine Long Distance Telephone Co., Class
B............................................. 7,823
22,700 San Miguel Corp., Class B....................... 78
18,505,041 SM Prime Holdings, Inc., Class B................ 4,803
----------
47,168
----------
POLAND (1.2%)
68,000 BRE Bank S.A.................................... 1,777
(a)85,960 Debica.......................................... 2,088
33,400 Eastbridge N.V.................................. 2,245
506,000 Elektrim........................................ 4,153
(a)17,314 Exbud S.A....................................... 185
(a)2,085,038 International UNP Holdings...................... 764
373,740 Mostostal Exports S.A........................... 1,279
(a)191,000 Polifarb Wroclaw S.A............................ 963
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Markets Portfolio

26
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

POLAND (CONT.)
<TABLE>
<C> <S> <C>
(a)56,500 Rafako S.A...................................... $ 335
11,125 Wedel S.A....................................... 500
22,135 Zywiec.......................................... 1,711
----------
16,000
----------
PORTUGAL (0.1%)
(a)120,000 Lusomundo SGPS S.A.............................. 745
----------
RUSSIA (6.9%)
592,359 Alliance Cellulose Ltd.......................... 12,511
(a)400,000 Global Tele-Systems Group, Inc. (Registered).... 5,400
(a)54,315,000 Irkutskenergo................................... 6,301
80,000 LUKoil Co. ADR.................................. 3,420
(a)710,100 LUKoil Holding.................................. 7,811
(a,e)275,730 LUKoil Holding GDR.............................. 11,787
16,490,000 Mosenergo....................................... 14,676
317,851 Russian Telecom Development Corp................ 3,179
(a)3,528,500 Rostelecom...................................... 8,468
990 Storyfirst Communications, Inc., Class C........ 660
2,640 Storyfirst Communications, Inc., Class D........ 1,980
3,250 Storyfirst Communications, Inc., Class E........ 3,250
1,331 Storyfirst Communications, Inc., Class F........ 3,328
(a)112,039,000 United Energy System............................ 10,531
----------
93,302
----------
SINGAPORE (0.3%)
(a)1,576,000 Want Want Holdings.............................. 4,239
----------
SOUTH AFRICA (3.8%)
825,000 Amalgamated Banks of South Africa............... 4,570
81,050 Anglo American Industrial Corp.................. 3,255
835,000 Barlow Rand Ltd................................. 8,720
704,480 Bidvest......................................... 4,211
155,500 Dreifontein Consolidated Ltd.................... 2,082
500,000 Gencor.......................................... 1,846
240,000 Metro Cash and Carry............................ 928
(g)224,490 Morgan Stanley Africa Investment Fund, Inc...... 2,806
800,000 Spur Holdings................................... 1,662
915,000 Sage Group Ltd.................................. 4,392
1,584,146 Sasol Ltd....................................... 17,183
----------
51,655
----------
TAIWAN (5.5%)
(a)2,622,200 Acer, Inc....................................... 3,907
2,170,000 Cathay Life Insurance Co., Ltd.................. 15,297
10,492,000 China Steel Corp................................ 10,980
109,000 Far East Textiles............................... 127
2,669,000 Hua Nan Commercial Bank......................... 14,063
(a)1,900,576 Mosel Vitelic Ltd............................... 2,673
(a)5,007,240 Taiwan Semiconductor Manufacturing Co........... 10,462
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
4,196,262 United Micro Electronics Corp., Ltd............. $ 6,221
7,187,000 Yang Ming Marine Transport...................... 10,603
----------
74,333
----------
THAILAND (4.3%)
298,550 Advanced Information Services PCL (Foreign)..... 4,422
826,700 Bangkok Bank Ltd. (Foreign)..................... 11,203
1,914,500 Finance One Co., Ltd. (Foreign)................. 12,369
516,000 National Finance & Securities Co., Ltd.
(Foreign)..................................... 2,297
210,600 Shinawatra Computer Co., Ltd. (Foreign)......... 4,563
922,100 Siam Commercial Bank (Foreign).................. 13,367
941,300 Thai Farmers Bank, Ltd. (Foreign)............... 10,309
----------
58,530
----------
TURKEY (5.0%)
11,523,826 Aksa............................................ 2,421
7,127,500 Arcelik......................................... 660
2,868,000 Bagfas.......................................... 777
20,954,000 Borusan......................................... 1,736
21,272,000 Bossa........................................... 2,151
10,830,000 Demirbank....................................... 369
33,495,180 Ege Biracilik................................... 15,299
(a)27,600,000 Ege Seramik..................................... 1,109
6,002,000 Erciyas Biracilik............................... 3,399
90,315,000 Eregli Demir Celik.............................. 10,011
1,929,000 Guney Biracilik Ve Malt Sanayii................. 446
4,498,200 Migros (Registered)............................. 3,945
85,761,000 Sabah........................................... 2,376
17,140,000 Sarkuysan....................................... 1,294
11,582,377 Tat Konserve Sanayii............................ 2,716
60,166,750 Tofas Turk Otomobil Fabrikasi................... 2,895
872,004 Tofas Turk Otomobil Fabrikasi GDS (Euro)........ 296
75,413,051 Trakya Cam Sanayii.............................. 4,133
784,075 Turcas Petroculuk A.S........................... 229
(e)496,085 Turkiye Garanti Bankasi ADR..................... 3,381
(e)20,220,000 Garanti Bankasi................................. 1,379
25,275,000 Garanti Bankasi (RFD)........................... 1,598
105,732,000 Yapi Ve Kredi Bankasi A.S....................... 2,994
84,777,000 Yapi Ve Kredi Bankasi (New)..................... 2,194
----------
67,808
----------
UNITED KINGDOM (0.2%)
923,406 Lonrho plc...................................... 2,645
----------
ZIMBABWE (0.2%)
(e)1,980,000 Trans Zambezi Industries Ltd.................... 2,970
35,281 Trans Zambezi Industries Ltd. (Registered)...... 53
----------
3,023
----------
TOTAL COMMON STOCKS (Cost $1,030,690)............................ 1,127,753
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Markets Portfolio

27
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS (7.5%)
BRAZIL (NON-VOTING STOCKS) (7.5%)
2,681,989,448 Banco Bradesco S.A.............................. $ 21,906
(d)295,998,880 Banco Nacional S.A.............................. 15
(d)45,404,030 Brahma.......................................... 27,090
620,000 Brasmotor S.A................................... 194
113,996,103 Cia Energetica de Minas Gerais.................. 3,032
16,920,850 Eletrobras, Class B............................. 4,837
31,539,800 Itaubanco....................................... 12,817
85,278,333 Petrobras....................................... 10,490
12,500 Sadia Concordia................................. 9
(d)258,769,000 Telebras........................................ 18,068
7,058,615 Telecom de Sao Paulo............................ 1,512
(e)526,000,000 Usiminas........................................ 555
----------
100,525
----------
GREECE (0.0%)
(a)69,738 Aegek........................................... 361
----------
INDIA (0.0%)
2,700 Fabworth (India) Ltd............................ 1
----------
PORTUGAL (0.0%)
35,340 Lusomundo SGPS.................................. 283
----------
TOTAL PREFERRED STOCKS (Cost $81,333)............................ 101,170
----------
<CAPTION>
NO. OF
RIGHTS
- ---------------
<C> <S> <C>
RIGHTS (0.1%)
BRAZIL (0.0%)
(a)2,659,295 Brahma.......................................... --
(a)105,758 Lojas Americanas S.A. (Bonus Shares Plan)....... --
----------
--
----------
INDIA (0.0%)
(a,d)9,610 Baroda Rayon Corp.,............................. --
(a)204 Indo Rama Synthetics............................ --
(a,d)155,100 ITC Agrotech Ltd................................ --
----------
--
----------
POLAND (0.0%)
(a)373,740 Mostostal Exports, expiring 8/14/96............. 23
----------
TURKEY (0.1%)
(a)8,687,000 Tat Konserve, expiring 7/24/96.................. 1,287
----------
TOTAL RIGHTS (Cost $9)........................................... 1,310
----------
<CAPTION>

NO. OF
WARRANTS
- ---------------
<C> <S> <C>
WARRANTS (0.1%)
INDIA (0.1%)
(a,d)86,414 Apollo Tyres Ltd................................ 185
(a,d)27,383 Flex Industries Ltd., expiring 11/23/97......... 103
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- ------------------------------------------------------------
<C> <S> <C>
(a,d)44,639 Garware Plastics & Polyesters, expiring
4/04/98....................................... $ 359
----------
TOTAL WARRANTS (Cost $163)....................................... 647
----------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
CONVERTIBLE DEBENTURES (0.5%)
COLOMBIA (0.4%)
U.S.$ (e)5,615 Banco de Colombia 5.20%, 2/01/99................ 5,019
----------
INDIA (0.1%)
INR (d)33,574 DCM Shriram Industries Ltd. 15.00%, 3/02/02..... 397
1,650 Indian Seamless Steel & Alloys 10.00%,
7/13/96....................................... 30
(d)1,467 Mahavir Spinning Mills Ltd., Series A 15.40%,
3/22/00....................................... 35
(d)50,000 Raymond Ltd. 16.00%, 12/31/99................... 1,262
U.S.$ 130 Tata Iron & Steel Co., Ltd. 2.25%, 4/01/99...... 124
----------
1,848
----------
TOTAL CONVERTIBLE DEBENTURES (Cost $7,788)....................... 6,867
----------
NON-CONVERTIBLE DEBENTURES (0.2%)
INDIA (0.2%)
INR (d)3,357 Bharat Forge Co., Ltd. 14.50%, 4/18/02.......... 38
(d)34,055 DCM Shriram Industries Ltd., 9.90%, 2/21/01..... 532
(d)4,470 Garware Plastics & Polyester 16.00%, 4/04/98.... 113
(d)70,000 Saurashtra Cement & Chemicals Ltd. 18.00%,
11/27/98...................................... 1,987
----------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $3,426)................... 2,670
----------
LOAN AGREEMENTS (0.3%)
POLAND (0.0%)
U.S.$ (e)54 Republic of Poland Interest Arrears PDI Bonds,
(Floating Rate), 3.75%, 10/27/14.............. 41
----------
RUSSIA (0.3%)
CHF (b)11,910 Bank for Foreign Economic Affairs (Floating
Rate)......................................... 4,504
----------
TOTAL LOAN AGREEMENTS (Cost $3,270).............................. 4,545
----------
TOTAL FOREIGN SECURITIES (92.1%) (Cost $1,126,679)............... 1,244,962
----------
SHORT-TERM INVESTMENTS (7.1%)
U.S. GOVERNMENT & AGENCY OBLIGATION (2.2%)
U.S.$ 30,000 Federal Home Loan Mortgage Corp., Discount Note,
8/19/96....................................... 29,782
----------
REPURCHASE AGREEMENT (4.9%)
66,747 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $66,776,
collateralized by $65,570 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $67,035 (Cost
$66,747)...................................... 66,747
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $96,533)...................... 96,529
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Markets Portfolio

28
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FOREIGN CURRENCY (1.8%)
ARP 4 Argentine Peso.................................. $ 4
BRC 204 Brazilian Real.................................. 203
COP 32,754 Colombian Peso.................................. 31
EGP 356 Egyptian Pound.................................. 356
HKD 5,608 Hong Kong Dollar................................ 725
HUF 59,707 Hungarian Forint................................ 398
INR 139,945 Indian Rupee.................................... 3,972
IDR 4,646,445 Indonesian Rupiah............................... 1,996
ISS 2,034 Israeli Shekel.................................. 1
KRW 99,338 Korean Won...................................... 122
MYR 1 Malaysian Ringgit............................... --
MXP 21 Mexican Peso.................................... 3
MAD 2,736 Morrocan Dhiram................................. 314
PKR 96,546 Pakistan Rupee.................................. 2,758
PSS 8 Peruvian Sol.................................... 4
PHP 9 Philippine Peso................................. --
PLZ 280 Poland Zloty.................................... 103
ZAR 1,957 South African Rand.............................. 452
TWD 353,530 Taiwan Dollar................................... 12,846
TRL 9,750,389 Turkish Lira.................................... 119
----------
TOTAL FOREIGN CURRENCY (Cost $24,632)............................ 24,407
----------
TOTAL INVESTMENTS (101.0%) (Cost $1,247,844)..................... 1,365,898
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.3%)
Receivable for Investments Sold................. $ 10,773
Dividends Receivable............................ 5,643
Receivable for Portfolio Shares Sold............ 607
Interest Receivable............................. 357
Foreign Withholding Tax Reclaim Receivable...... 79
Net Unrealized Gain on Forward Foreign Currency 1
Exchange Contracts.............................
Other........................................... 305 17,765
--------
LIABILITIES (-2.3%)
Payable for Investments Purchased............... (19,937)
Deferred India Taxes Payable.................... (4,394)
Investment Advisory Fees Payable................ (3,850)
Bank Overdraft.................................. (1,810)
Custodian Fees Payable.......................... (743)
Administrative Fees Payable..................... (164)
Payable for Portfolio Shares Redeemed........... (121)
Payable for India Stamp Duty Tax................ (65)
Payable for India Taxes......................... (35)
Sub-Administrative Fees Payable................. (30)
Directors' Fees and Expenses Payable............ (18)
Distribution Fees Payable....................... (8)
Other Liabilities............................... (372) (31,547)
-------- ----------
NET ASSETS (100%)........................................... $1,352,116
----------
----------

AMOUNT
(000)
- ------------------------------------------------------------
<S> <C> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................. $1,237,524
Undistributed Net Investment Income......................... 9,679
Accumulated Net Realized Loss............................... (8,774)
Unrealized Appreciation on Investments and Foreign Currency 113,687
Translations (Net of accrual for India tax of $4,394 on
unrealized appreciation on investments)...................
----------
NET ASSETS.................................................. $1,352,116
----------
----------
<CAPTION>

CLASS A:
- --------------------------------------------------
<S> <C> <C>
NET ASSETS.................................................. $1,337,315
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 84,598,024 outstanding $0.001 par value $15.81
shares (authorized 500,000,000 shares)....................
-----
-----
<CAPTION>

CLASS B:
- --------------------------------------------------
<S> <C> <C>
NET ASSETS.................................................. $14,801
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 937,158 outstanding $0.001 par value shares $15.79
(authorized 500,000,000 shares)...........................
-----
-----
- ------------------------------------------------------------
</TABLE>

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at June
30, 1996, the Portfolio is obligated to deliver or is to receive foreign
currency in exchange for U.S. dollars or foreign currency as indicated below:

<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- ----- ----------- ----------- ----- ---------------
<S> <C> <C> <C> <C> <C>
U.S.$ 189 $ 189 7/01/96 ISS 608 $ 190 $ 1
U.S.$ 753 753 7/03/96 THB 19,116 753 --
----- ----- -----
$ 942 $ 943 $ 1
----- ----- -----
----- ----- -----
</TABLE>
<TABLE>
<S> <C> <C>
- ------------------------------------------------
(a) -- Non-income producing security
(b) -- Non-income producing security -- in
default
(d) -- Securities (totaling $130,802 or 9.7% of
net assets at June 30, 1996) valued at
fair value -- See note A-1 to financial
statements
(e) -- 144A Security -- Certain conditions for
public sale may exist
(f) -- Restricted as to public resale. Total
value of restricted securities at June
30, 1996 was $4,056 or 0.30% of net
assets. (Total cost $3,872)
(g) -- The fund is advised by an affiliate
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
CPO -- Ordinary Participating Certificates (no
voting rights)
PCL -- Public Company Limited
PDI -- Past Due Interest
RFD -- Ranked for Dividend
THB -- Thai Baht

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Markets Portfolio

29
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
<S> <C> <C>
- -------------------------------------------------------------
Capital Equipment....................... $ 94,789 7.0%
Consumer Goods.......................... 178,215 13.2
Energy.................................. 116,923 8.6
Finance................................. 305,545 22.6
Gold Mines.............................. 2,081 0.2
Loan Agreements......................... 4,545 0.3
Materials............................... 127,875 9.5
Multi-Industry.......................... 147,360 10.9
Services................................ 267,629 19.8
---------- -------
$1,244,962 92.1%
---------- -------
---------- -------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Markets Portfolio

30
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE EUROPEAN EQUITY PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Austria 0.5%
Belgium 1.9%
Denmark 1.8%
Finland 2.8%
France 12.4%
Germany 12.9%
Italy 7.5%
Netherlands 9.6%
Norway 2.3%
Spain 7.5%
Sweden 4.4%
Switzerland 13.6%
United Kingdom 14.3%
Other 8.5%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
- -----------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 11.85% 12.61% 19.66%
PORTFOLIO -- CLASS
B(3).................. 10.75 N/A N/A
INDEX................. 6.43 14.69 15.73

<FN>

1. The MSCI Europe Index is an unmanaged market value weighted index of common
stocks listed on the stock exchanges of countries in Europe (assumes
dividends are reinvested).

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE MEASURED BY THE MSCI
EUROPE INDEX AND 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.

The investment objective of the European Equity Portfolio is to seek long-term
capital growth through investment in equity securities of European issuers.
Equity securities for this purpose include stocks and stock equivalents such as
securities convertible into common and preferred stocks and securities having
equity characteristics, such as rights and warrants to purchase common stock.

The approach taken in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of European databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Once stocks have
been selected from this screening process, they are put through detailed
fundamental analysis. Important areas covered during this in-depth study include
the companies' balance sheets and cash flow, franchise, products, management and
the strategic value of the assets.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 11.85% for the Class A shares and 10.75% for the Class B shares, as compared
to a total return of 6.43% for the Morgan Stanley Capital International (MSCI)
Europe Index. The average annual total return for the twelve months ended June
30, 1996 and for the period from inception on April 2, 1993 through June 30,
1996 was 12.61% and 19.66%, respectively, for the Class A shares, as compared to
14.69% and 15.73%, respectively, for the Index.

In the first six months of 1996 we have witnessed a change in the European
investment environment from that seen in 1995. One of the most prominent changes
has been the weakness of most European currencies against the U.S. dollar
following an extended period of strength. The weakest currency in Europe has
been the Swiss franc losing more than 8% against the dollar. Most of the
'deutschemark bloc' currencies have lost between 5% and 6% in the first six
months. There have been exceptions; the Italian lira has gained 3.5% against the
dollar to make the Italian equity market one of the top performers, for U.S.
investors, during the year. This currency weakness has enabled European
companies to be more competitive in international markets and has led to
earnings upgrades in several stocks. Another noticeable trend has been the
strength in smaller cap stocks relative to large cap. Smaller companies have
underperformed the index for quite some time and the better returns this year
reflect a revaluation of these businesses.

- --------------------------------------------------------------------------------
European Equity Portfolio

31
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)

In general, the European economy continues to be fairly sluggish but an
environment that is positive for equity investors. Inflationary pressures
continue to be subdued and although we have seen interest rate cuts in the first
half of the year, further cuts are possible later in the year. Despite the
economic pick up in Europe, unemployment remains a concern as companies continue
to restructure and rationalize their business.

Following a disappointing year for value investors in Europe in 1995, the first
half of 1996 has been far more positive. Cyclical stocks and retailers, two of
last years underperformers, have recovered well. The Portfolio is overweight in
both of these areas. We have benefited from our overweight positions in Spain
and Italy, with utilities performing particularly well. We have substantial
exposure to telecommunication stocks in both markets, as well as to the
electrical utilities in Spain. Other markets in which we are overweight include
the Netherlands and Germany. In both countries, exports stocks have performed
particularly well, helped by the relative weakness of each currency. We have
benefited from the rebound in small stocks in these and other markets. The
Portfolio currently has approximately 30% of its positions with a market cap of
less than one billion dollars.

In recent months we have added the following stocks to the Portfolio:

Lafarge Coppee is the second largest cement company in the world, and one of the
most geographically diversified. As is the case for the other main European
producers, Lafarge is in the position of having a cash generative yet declining
home market and is in the process of using its free cashflows to diversify away
from this. Diversification is in two areas; namely other forms of building
materials in the mature markets and cement production in growth markets, all of
it by acquisition.

Sparbenken is a focused Swedish retail bank with strong savings bank roots.
Although it should experience flat loan growth at best in the years ahead, in
line with the rest of the Swedish banking sector, it has aggressive cost cutting
targets and is well positioned in the growing market for long term personal
savings in Sweden. It has the ability to generate impressive returns on equity
that are not currently reflected in its price/net book value ratio.

Holderbank is the largest cement manufacturer in the world. Ninety percent (90%)
of sales are outside Switzerland with the U.S. being the most important market
accounting for 40% of turnover. Other products include concrete, lime,
aggregates and clinker. The group is currently restructuring and has acquired
lower cost plants including Ideals Basic's new plant in Mexico. They have also
taken management control (with an option to buy) of the Box Crow plant in
Dallas. We believe Holderbank will emerge from the current economic slowdown
well positioned to compete in the global market.

Railtrack is the monopoly owner of the U.K.'s rail infrastructure, which
comprises track, signaling, bridges and, selected stations which it rents out to
Train Operating Companies (TOCs) who provide the train service. An added
attraction is its high dividend yield.

BAT Industries is a leading international tobacco and financial services
conglomerate. Its tobacco business has over 10% of the global market, with
principal brands including Benson and Hedges, Players, Lucky Strike and Kent.
Its financial services operations include Farmers' Group, the fourth largest
U.S. property and casualty insurer; Eagle Star, a major U.K. composite; and
Allied Dunbar, selling unit linked policies. BAT's share price has been impacted
by the periodic investor focus on U.S.-based potential tobacco liabilities,
crystalized by Liggett's proposed deal with the U.S. Attorney General. BAT is
confident that they can continue their historic defensive tactics on this
exposure; BAT's strong position in emerging markets has restored growth to its
tobacco operations which will provide the cash flow to continue to pay a
progressive dividend through the downcycle in insurance. This earnings backdrop
should make BAT look cheap relative to other U.K. insurance companies at the
bottom of their cycles and should reawaken investor interest, combined with
periodic receding fears of U.S. tobacco exposure.

Robert Sargent
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
European Equity Portfolio

32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EUROPEAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (87.3%)
AUSTRIA (0.5%)
9,000 Boehler-Uddeholm AG............................... $ 699
--------
BELGIUM (1.9%)
(a)12,500 Arbed S.A......................................... 1,432
13,000 Delhaize Freres et Cie, 'Le Lion' S.A............. 650
12,000 G.I.B. Holdings Ltd............................... 539
3,055 G.I.B. Holdings Ltd. VVPR (New)................... 136
--------
2,757
--------
DENMARK (1.8%)
6,300 Jyske Bank A/S.................................... 397
45,200 Unidanmark A/S, Class A (Registered).............. 2,100
--------
2,497
--------
FINLAND (2.8%)
90,000 Amer-Yhtymae Oy, Class A.......................... 1,517
50,000 Huhtamaki Oy, Series 1............................ 1,674
20,000 Nokia AB Oy, Series A............................. 739
--------
3,930
--------
FRANCE (12.4%)
44,370 Banque Nationale de Paris......................... 1,560
3,074 Bongrain S.A...................................... 1,490
14,000 Cie de Saint Gobain............................... 1,877
(a)10,000 Credit Lyonnaise CDI.............................. 234
33,000 Elf Aquitaine..................................... 2,431
10,500 Eridania Beghin-Say S.A........................... 1,647
6,000 Groupe Danone..................................... 910
1,140 Labinal S.A....................................... 167
28,000 Lafarge Coppee S.A................................ 1,697
(a)21,405 Legris Industries S.A............................. 983
12,500 Peugeot S.A....................................... 1,676
45,452 Thomson CSF....................................... 1,280
22,100 Total S.A., Class B............................... 1,642
--------
17,594
--------
GERMANY (8.7%)
10,000 BASF AG........................................... 2,852
60,000 Bayer AG.......................................... 2,114
5,275 Gerresheimer Glas AG.............................. 1,126
4,500 Karstadt AG....................................... 1,794
2,850 Mannesmann AG..................................... 982
(a)5,000 Varta AG.......................................... 1,072
25,000 Veba AG........................................... 1,331
3,000 Volkswagen AG..................................... 1,118
--------
12,389
--------
ITALY (7.5%)
(a)518,000 Editoriale L'Expresso S.p.A....................... 1,447
(a)712,996 Impregilo S.p.A................................... 759
(a)2,538,000 Olivetti S.p.A.................................... 1,371
475,000 Sogefi S.p.A...................................... 987
640,000 Stet Di Risp (NCS)................................ 1,683
811,000 Telecom Italia S.p.A.............................. 1,746
700,000 Telecom Italia S.p.A. Di Risp (NCS)............... 1,209
323,000 Unicem Di Risp (NCS).............................. 1,053

<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
(a)45,000 Unicem S.p.A...................................... $ 329
--------
10,584
--------
NETHERLANDS (9.6%)
30,319 ABN Amro Holdings N.V............................. 1,629
14,800 Akzo Nobel N.V.................................... 1,776
2,950 DSM N.V........................................... 293
8,957 Hollandsche Beton Groep N.V....................... 1,718
51,710 ING Groep N.V..................................... 1,544
18,200 Koninklijke Bijenkorf Beheer N.V.................. 1,540
34,468 Koninklijke PTT Nederland N.V..................... 1,306
40,000 Koninklijke Van Ommeren N.V....................... 1,577
70,000 Philips Electronics N.V........................... 2,279
--------
13,662
--------
NORWAY (2.3%)
568,000 Den Norske Bank A/S, Class A...................... 1,725
111,600 Saga Petroleum A/S, Class B....................... 1,514
--------
3,239
--------
SPAIN (7.5%)
(a)80,905 Asturiana del Zinc S.A............................ 607
11,518 Bodegas y Bebidas S.A............................. 280
(a)200,000 Grupo Duro Felguera S.A........................... 865
138,300 Iberdrola S.A..................................... 1,422
46,000 Repsol S.A. (Bearer).............................. 1,602
174,000 Sevillana de Electricidad S.A..................... 1,605
142,500 Telefonica Nacional de Espana S.A................. 2,629
177,700 Uralita S.A....................................... 1,667
--------
10,677
--------
SWEDEN (4.4%)
11,000 Electrolux AB, Series B........................... 555
111,000 Nordbanken AS..................................... 2,148
48,400 Skandia Forsakrings AB............................ 1,284
67,000 S.K.F. AB, Class B................................ 1,595
54,900 Sparbenken Sverige AB, Class A.................... 714
--------
6,296
--------
SWITZERLAND (13.6%)
2,150 Ascom Holdings AG (Bearer)........................ 2,168
1,000 Bobst AG (Bearer)................................. 1,445
700 Ciba-Geigy AG (Bearer)............................ 850
950 Ciba-Geigy AG (Registered)........................ 1,159
5,560 Forbo Holding AG (Registered)..................... 2,358
1,030 Hero Lenzburg AG (Bearer)......................... 453
1,800 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 1,441
4,000 Magazine Globus (Participating Certificates)...... 2,337
2,000 Nestle S.A. (Registered).......................... 2,287
(a)18,300 Oerlikon-Buehrle Holding AG (Registered).......... 1,904
1,360 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 1,578
1,800 Sulzer AG (Participating Certificates)............ 1,080
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
European Equity Portfolio

33
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
</TABLE>

SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
270 Sulzer AG (Registered)............................ $ 174
--------
19,234
--------
UNITED KINGDOM (14.3%)
207,000 Associated British Foods plc...................... 1,244
20,000 Bass plc.......................................... 251
300,000 BAT Industries plc................................ 2,335
70,000 BSM Group plc..................................... 201
104,600 Calor Group plc................................... 395
450,000 Christian Salvesen plc............................ 1,800
250,000 Courtaulds Textiles plc........................... 1,406
188,491 John Mowlem & Co. plc............................. 264
143,700 Kwik Save Group plc............................... 1,011
(a)98,100 Railtrack Group plc, PP........................... 332
202,058 Reckitt & Colman plc.............................. 2,122
298,566 Rolls-Royce plc................................... 1,039
275,483 Royal Insurance Holdings plc...................... 1,703
280,000 Tate & Lyle plc................................... 1,992
162,800 Unilever plc...................................... 3,237
300,000 WPP Group plc..................................... 1,002
--------
20,334
--------
TOTAL COMMON STOCKS (Cost $112,066)........................... 123,892
--------
PREFERRED STOCKS (4.2%)
GERMANY (4.2%)
5,540 Dyckerhoff AG..................................... 1,450
15,430 Hornbach Holding AG............................... 1,330
45,000 RWE AG............................................ 1,384
3,000 Spar Handels AG................................... 837
3,200 Volkswagen AG..................................... 878
--------
TOTAL PREFERRED STOCKS (Cost $4,954).......................... 5,879
--------
TOTAL FOREIGN SECURITIES (91.5%) (Cost $117,020).............. 129,771
--------
<CAPTION>

FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (4.1%)
REPURCHASE AGREEMENT (4.1%)
$ 5,842 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $5,845,
collateralized by $5,740 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $5,868 (Cost
$5,842)......................................... 5,842
--------
FOREIGN CURRENCY (7.4%)
GBP 2 British Pound..................................... 2
DEM 15,463 Deutsche Mark..................................... 10,173
FRF 718 French Franc...................................... 140
ITL 381 Italian Lira...................................... --
NOK 1 Norwegian Krone................................... --
ESP 18,266 Spanish Peseta.................................... 143
--------
TOTAL FOREIGN CURRENCY (Cost $10,379)......................... 10,458
--------
<CAPTION>

VALUE
(000)
------------------------------------------------------------
<C> <S> <C>
TOTAL INVESTMENTS (103.0%) (Cost $133,241).................... $146,071
--------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (0.4%)
Cash............................................ $ 1
Dividends Receivable............................ 293
Foreign Withholding Tax Reclaim Receivable...... 174
Receivable for Investments Sold................. 92
Receivable for Portfolio Shares Sold............ 38
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................. 24
Interest Receivable............................. 2
Other........................................... 7 631
-------
LIABILITIES (-3.4%)
Payable for Investments Purchased............... (4,584 )
Investment Advisory Fees Payable................ (182 )
Custodian Fees Payable.......................... (25 )
Administrative Fees Payable..................... (19 )
Payable for Portfolio Shares Redeemed........... (2 )
Distribution Fees Payable....................... (1 )
Other Liabilities............................... (44 ) (4,857)
------- --------
NET ASSETS (100%).......................................... $141,845
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital............................................ $127,228
Undistributed Net Investment Income........................ 1,683
Accumulated Net Realized Gain.............................. 79
Unrealized Appreciation on Investments and Foreign Currency
Translations............................................. 12,855
--------
NET ASSETS................................................. $141,845
--------
--------
CLASS A:
NET ASSETS................................................. $139,785
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 8,976,407 outstanding $0.001 par value
shares (authorized 500,000,000 shares)................... $15.57
--------
--------
CLASS B:
$2,060
NET ASSETS.................................................
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 132,410 outstanding $0.001 par value shares
(authorized 500,000,000 shares).......................... $15.56
--------
--------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
European Equity Portfolio

34
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open
at June 30, 1996, the Portfolio is obligated to deliver or is to
receive foreign currency in exchange for U.S. dollars as indicated
below:
</TABLE>

<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ---------- ----- ----------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C>
U.S.$ 23 $ 23 7/02/96 ITL 34,617 $ 23 $ --
DEM 400 264 8/09/96 U.S.$ 288 288 24
----- ----- ---
$ 287 $ 311 $ 24
----- ----- ---
----- ----- ---
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
NCS -- Non Convertible Shares
CDI -- Certificate of Investment
PP -- Partially paid
</TABLE>

- ------------------------------------------------------------

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
VALUE PERCENTAGE OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment.................. $ 21,443 15.1%
Consumer Goods..................... 25,291 17.8
Energy............................. 11,904 8.4
Finance............................ 15,798 11.1
Gold Mines......................... 606 0.5
Materials.......................... 29,713 21.0
Multi-Industry..................... 4,285 3.0
Services........................... 20,731 14.6
--------- ---
$ 129,771 91.5%
--------- ---
--------- ---
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
European Equity Portfolio

35
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE GLOBAL EQUITY PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australia 1.7%
Canada 0.4%
France 4.3%
Germany 7.5%
Hong Kong 0.9%
Ireland 3.6%
Italy 3.1%
Japan 11.3%
Netherlands 5.6%
Spain 4.0%
Sweden 0.7%
Switzerland 6.6%
United Kingdom 6.8%
United States 39.3%
Other 4.2%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
- -----------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 13.42% 20.05% 19.48%
PORTFOLIO -- CLASS
B(3).................. 12.88 N/A N/A
INDEX................. 7.08 18.44 13.35

<FN>

1. The MSCI World Index is an unmanaged index of common stocks and includes
securities listed on the stock exchanges of the U.S., Europe, Canada,
Australia, New Zealand and the Far East (assumes dividends reinvested).

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

THE COUNTRY SPECIFIC 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.

The Global Equity Portfolio is managed with the objective of obtaining a high
total return by investing in markets worldwide, including the United States.
Investments may also be made with discretion in smaller companies or emerging
markets.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 13.42% for the Class A shares and 12.88% for the Class B shares, as compared
to a total return of 7.08% for the Morgan Stanley Capital International (MSCI)
World Index. The average annual total return for the twelve months ended June
30, 1996 and for the period from inception on July 15, 1992 through June 30,
1996 was 20.05% and 19.48%, respectively for the Class A shares, as compared to
18.44% and 13.35%, respectively for the Index.

The outperformance relative to the benchmark over the first half of 1996 was due
primarily to the positive share price performance of individual stock holdings
in the U.S., Japan, Germany and Switzerland. In addition, our overweight
position in the Swiss market coupled with our underweighting of the Japanese
market also proved beneficial.

Individual stocks making a positive contribution in the U.S. included Addington
Resources (which was subject to a takeover bid), Comsat, Egghead, (which sold a
loss making division) and GenRad. In Japan, TDK and Toyo Seikan Kaisha performed
well. In Germany, BASF was a strong performer as were Telefonica in Spain,
Avonmore Foods and Green Property in Ireland. In Switzerland strong performers
included Ciba-Geigy (which announced a merger with Sandoz in March) and SIG.

The U.S. market's strong performance (MSCI USA Index up 10.6%) was principally
due to record mutual fund inflows of $140 billion over the first six months, in
itself higher than the aggregate total for 1995. Continuing merger activity and
a subdued inflation outlook also provided support for equities. This advance, in
the face of a 120 basis point rise in long bond rates following stronger than
anticipated employment growth, suggests however that by many benchmarks, the
U.S. aggregate market now appears fully priced.

In Japan, clear signals of a sustainable economic recovery helped the MSCI Japan
Index to rise 7.5%, although dollar strength reduced this to 1.1% in U.S. dollar
terms. Continued loose monetary policy, gradual progress in resolving the
banking crisis, strong first quarter real GDP growth (12.7% on an annualized
basis) and foreign investor interest all provided market impetus. Nonetheless,
with cash flow valuations

- --------------------------------------------------------------------------------
Global Equity Portfolio

36
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
remaining high by historical standards and the budget deficit now representing
7% of GNP, the Bank of Japan will inevitably be forced to raise interest rates
later this year.

European markets generally performed strongly, particularly in local currency
terms, with Ireland (16.5%), Sweden (14.7%), Spain (13.9%), Italy (12.8%) and
the Netherlands (11.5%) all producing strong gains in U.S. dollar terms. Despite
weak domestic economies, support came from historically low short term interest
rates, improving fiscal governance in the run up to European Monetary Union and
a very subdued inflation outlook.

The outlook for stronger U.S. economic growth in the second half and by
implication, the prospect of higher interest rates, combined with a subdued
earnings outlook suggests the need to focus on stockpicking is paramount. After
a decade of cost cutting, much of corporate America has already been "right
sized", and this is being demonstrated by increasing pressure on margins.
Subdued inflation data, which since January has led the Federal Reserve Board to
leave interest rates unchanged, may now be superseded by this year's
consistently above-trend non-farm payroll growth. In Japan, we expect to
maintain our underweight position as value stocks remain difficult to find with
many blue-chip companies already trading at historically high multiples. This
underweight position remains a risk however and could prove detrimental in the
short term, should the Japanese market experience a momentum-driven period of
outperformance. In Europe, we remain overweight on grounds of relative value and
in anticipation of an upswing in economic activity driven by a benign interest
rate and inflation environment.

The long term return from global equities is typically 6% per annum above
consumer price inflation. Given the scale of returns in 1995, and with global
inflation of between 2-3% likely for 1996, an increase of between 8-10% in the
MSCI World Index remains a reasonable estimate.

Francis Campion
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Global Equity Portfolio

37
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (94.7%)
AUSTRALIA (1.7%)
50,000 Brambles Industries Ltd........................... $ 695
189,160 Coles Myer Ltd.................................... 687
--------
1,382
--------
CANADA (0.4%)
22,900 Hudson's Bay Co................................... 347
--------
FRANCE (4.3%)
22,200 Banque Nationale de Paris......................... 781
2,310 Bongrain S.A...................................... 1,119
(a)12,000 Credit Lyonnaise CDI.............................. 281
9,266 Elf Aquitaine..................................... 683
11,965 Valeo S.A......................................... 641
--------
3,505
--------
GERMANY (6.5%)
3,000 BASF AG........................................... 856
38,220 Bayer AG.......................................... 1,346
2,500 Karstadt AG....................................... 997
3,000 Mannesmann AG..................................... 1,034
2,764 Sinn AG........................................... 455
(a)2,225 Varta AG.......................................... 477
260 Volkswagen AG..................................... 97
--------
5,262
--------
HONG KONG (0.9%)
220,000 Jardine Strategic Holdings, Inc................... 704
--------
IRELAND (3.5%)
757,742 Anglo Irish Bank Corp. plc........................ 744
470,000 Avonmore Foods plc, Class A....................... 1,276
229,312 Green Property plc................................ 843
--------
2,863
--------
ITALY (3.1%)
500,000 Stet Di Risp (NCS)................................ 1,315
700,000 Telecom Italia S.p.A. Di Risp (NCS)............... 1,209
--------
2,524
--------
JAPAN (11.3%)
160 East Japan Railway Co............................. 842
65,000 Fuji Photo Film Ltd............................... 2,057
24,000 Hitachi Ltd....................................... 224
110,000 Kao Corp.......................................... 1,489
162,750 Nichido Fire & Marine Insurance Co................ 1,261
11,000 Sony Corp......................................... 725
100,000 Sumitomo Rubber Industries........................ 868
5,000 TDK Corp.......................................... 299
40,000 Toyo Seikan Kaisha Ltd............................ 1,398
--------
9,163
--------
NETHERLANDS (5.6%)
23,608 ABN Amro Holdings N.V............................. 1,269
2,188 Hollandsche Beton Groep N.V....................... 420
40,398 ING Groep N.V..................................... 1,206
24,000 Koninklijke Van Ommeren N.V....................... 946

<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
20,000 Philips Electronics N.V........................... $ 651
--------
4,492
--------
SPAIN (4.0%)
59,500 Iberdrola S.A..................................... 612
16,000 Repsol S.A........................................ 557
112,300 Telefonica Nacional de Espana S.A................. 2,072
--------
3,241
--------
SWEDEN (0.7%)
16,600 Skandia Forsakrings AB............................ 441
7,700 Sparbenken Sverige AB, Class A.................... 100
(a)770 Tornet Fastighets AB.............................. 6
--------
547
--------
SWITZERLAND (6.6%)
500 Ascom Holdings AG (Bearer)........................ 504
430 Bobst AG (Bearer)................................. 621
1,400 Ciba-Geigy AG (Registered)........................ 1,709
1,400 Forbo Holding AG (Registered)..................... 594
1,400 Magazine Globus (Participating Certificates)...... 818
900 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 1,044
--------
5,290
--------
UNITED KINGDOM (6.8%)
28,500 Calor Group plc................................... 107
298,700 Christian Salvesen plc............................ 1,195
102,325 John Mowlem & Co. plc............................. 143
150,000 Kwik Save Group plc............................... 1,056
280,000 Matthews (Bernard) plc............................ 439
(a,d)653,333 Pentos plc........................................ --
(a)61,700 Railtrack Group plc, PP........................... 209
68,060 Reckitt & Colman plc.............................. 715
73,902 Rolls-Royce plc................................... 257
46,400 Unilever plc...................................... 923
132,000 WPP Group plc..................................... 441
--------
5,485
--------
UNITED STATES (39.3%)
(a)33,850 Addington Resources, Inc.......................... 846
20,550 Aluminum Company of America....................... 1,179
12,500 American Telephone & Telegraph Corp............... 775
(a)15,400 AMR Corp.......................................... 1,401
32,100 Bank of New York Co., Inc......................... 1,645
(a)30,500 Beazer Homes USA, Inc............................. 488
27,600 Browning-Ferris Industries, Inc................... 800
(a)128,000 Cadiz Land Co., Inc............................... 752
(a,f)22,000 Cadiz Land Co., Inc. (acquired 1/04/94, Cost
$88)............................................ 129
87,500 Comsat Corp....................................... 2,275
(a)8,802 Cray Research, Inc................................ 212
(a)80,000 Data General Corp................................. 1,040
(a)126,500 Egghead, Inc...................................... 1,407
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Global Equity Portfolio

38
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
</TABLE>

UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
50,000 Enhance Financial Services Group, Inc............. $ 1,400
38,000 Finova Group, Inc................................. 1,853
(a)129,200 GenRad, Inc....................................... 2,132
2,000 General Motors Corp............................... 105
16,000 Georgia Pacific Corp.............................. 1,136
22,100 Houghton Mifflin Co............................... 1,100
24,300 Lukens, Inc....................................... 580
13,000 MBIA, Inc......................................... 1,012
61,400 MCI Communications Corp........................... 1,573
14,300 Mellon Bank Corp.................................. 815
(a)21,300 Nexthealth, Inc................................... 51
22,600 Penncorp Financial Group, Inc..................... 718
18,600 Philip Morris Cos., Inc........................... 1,934
12,000 Prime Retail, Inc................................. 136
11,750 Reebok International Ltd.......................... 395
13,100 Tecumseh Products Co., Class A.................... 704
17,000 United Asset Management, Inc...................... 417
27,000 UST Corp.......................................... 402
(a)55,000 Waban, Inc........................................ 1,313
(a)157,000 WorldCorp., Inc................................... 1,060
--------
31,785
--------
TOTAL COMMON STOCKS (Cost $62,887)............................. 76,590
--------
PREFERRED STOCKS (1.0%)
GERMANY (1.0%)
3,000 Volkswagen AG (Cost $647)......................... 823
--------
CONVERTIBLE PREFERRED SECURITY (0.0%)
HONG KONG (0.0%)
21,000 Jardine Strategic Holdings, Inc., IDR 7.50%,
5/07/97 (Cost $21).............................. 23
--------
<CAPTION>
NO. OF
RIGHTS
- -----------
<C> <S> <C>
RIGHTS (0.1%)
IRELAND (0.1%)
(a,d)76,437 Green Property plc, expiring 7/02/96 (Cost $0).... 37
--------
TOTAL FOREIGN & U.S. SECURITIES (95.8%) (Cost $63,555)......... 77,473
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.9%)
REPURCHASE AGREEMENT (3.9%)
$3,166 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96 to be repurchased at $3,167,
collateralized by $3,115 U.S. Treasury Notes,
7.125%, 9/30/99, valued at $3,185 (Cost
$3,166)......................................... 3,166
--------

<CAPTION>
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FOREIGN CURRENCY (0.0%)
ITL 264 Italian Lira...................................... $ --
ESP 520 Spanish Peseta.................................... 4
--------
TOTAL FOREIGN CURRENCY (Cost $4)............................... 4
--------
TOTAL INVESTMENTS (99.7%) (Cost $66,725)....................... 80,643
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.0%)
Receivable for Investments Sold........................ $ 344
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts................................... 219
Dividends Receivable................................... 180
Foreign Withholding Tax Reclaim Receivable............. 73
Interest Receivable.................................... 1
Other.................................................. 11 828
-----
LIABILITIES (-0.7%)
Payable for Investments Purchased...................... (430)
Investment Advisory Fees Payable....................... (121)
Administrative Fees Payable............................ (11)
Custodian Fees Payable................................. (11)
Directors' Fees and Expenses Payable................... (1)
Distribution Fees Payable.............................. (1)
Other Liabilities...................................... (28) (603)
----- -------
NET ASSETS (100%)............................................... $80,868
-------
-------
NET ASSETS CONSIST OF:
Paid in Capital................................................. $62,094
Undistributed Net Investment Income............................. 611
Accumulated Net Realized Gain................................... 4,025
Unrealized Appreciation on Investments and Foreign Currency
Translations................................................... 14,138
-------
NET ASSETS...................................................... $80,868
-------
-------

<CAPTION>
CLASS A:
- ---------------------------------------------------------
<S> <C> <C>
NET ASSETS...................................................... $78,960
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,864,183 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $16.23
-------
-------
<CAPTION>
CLASS B:
- ---------------------------------------------------------
<S> <C> <C>
NET ASSETS...................................................... $1,908
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 117,728 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $16.21
-------
-------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Global Equity Portfolio

39
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
June 30, 1996, the Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars as indicated below:
</TABLE>

<TABLE>
<CAPTION>
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- --------- ----------- ---------- --------- ---------------
<C> <C> <C> <S> <C> <C>
U.S.$ 244 $ 244 7/02/96 IEP 153 $ 244 $ --
NLG 6,900 4,065 8/23/96 U.S.$4,284 4,284 219
--------- --------- -----
$ 4,309 $ 4,528 $ 219
--------- --------- -----
--------- --------- -----
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to
financial statements
(f) -- Restricted as to public resale. Total value of
restricted securities at June 30, 1996 was $129 or
0.2% of net assets. (Total cost $88)
CDI -- Certificate of Investment
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
PP -- Partially Paid
IEP -- Irish Punt
NLG -- Netherland Guilder
</TABLE>

- ------------------------------------------------------------

SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Capital Equipment........................ $ 15,009 18.5%
Consumer Goods........................... 13,959 17.3
Energy................................... 3,840 4.7
Finance.................................. 14,849 18.4
Materials................................ 7,904 9.8
Multi-Industry........................... 4,217 5.2
Services................................. 17,695 21.9
--------- ---
$ 77,473 95.8%
--------- ---
--------- ---
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Global Equity Portfolio

40
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE GOLD PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Africa 3.1%
Australia 24.8%
Canada 17.0%
South Africa 30.3%
United States 15.9%
Other 8.9%
</TABLE>

PERFORMANCE COMPARED TO THE PHILADELPHIA
GOLD AND SILVER INDEX(1)
- --------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------- ------------ ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 28.07% 34.92% 12.44%
PORTFOLIO -- CLASS
B(3)................. 24.18 N/A N/A
INDEX................. 3.16 3.81 -3.77

<FN>

1. The Philadelphia Gold and Silver Index is an unmanaged index comprised of the
leading companies involved in the mining of gold and silver.

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.
</TABLE>

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. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.

The Gold Portfolio seeks to provide long-term capital appreciation by investing
primarily in the equity securities of foreign and domestic issuers engaged in
gold-related activities.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 28.07% for the Class A shares and 24.18% for the Class B shares as compared
to 3.16% for the Philadelphia Gold and Silver Index. The average annual total
return for the Portfolio for the twelve months ended June 30, 1996 and for the
period from inception on February 1, 1994 through June 30, 1996 was 34.92% and
12.44%, respectively, for the Class A shares compared to 3.81% and -3.77%,
respectively, for the Philadelphia Gold and Silver (XAU) Index.

During the first quarter, the Portfolio benefited from strong performance in the
overall gold share market and large gains from Bre-X Minerals (BXM-TSE) and
Greenstone Resources (GRE-TSE). At quarter end, gold shares continued to hold
gains made in response to gold's January rise above $400, despite gold's
correction late in the quarter. In making portfolio allocations, we continue to
find value among selected Australian gold shares, in contrast to large
capitalization North American gold shares which remain overvalued.

For the first time since the Portfolio's inception, a substantial allocation was
directed towards South African gold shares which now constitute 30.3% of the
Portfolio. As a result of weakness in the South African rand, the relative
attractiveness of South African gold shares significantly increased. Rand
weakness translates into a higher rand gold price and higher operating margins
viewed in local currency. Although the weak rand hurts share values in the
translation back to US dollars, the relationship is not 1 to 1. So far during
1996, the 20% rand devaluation has increased earnings by approximately 80% even
after considering the currency conversion. These impacts on valuation have not
yet been fully discounted in share pricing, affording the Portfolio an
attractive investment opportunity.

MARKET REVIEW

As we indicated in the 1995 Annual Report, elevated gold lease rates signaled
that high levels of producer selling were unsustainable. We also projected that
once producer selling abated -- effectively removing a temporary source of
supply from the market -- that gold prices would move sharply higher. January's
gold rise of $19.2, or 5.0%, represented the gold market's attempt to reach a
higher equilibrium on the heels of unsustainable levels of producer hedging.

- --------------------------------------------------------------------------------
Gold Portfolio

41
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO (CONT.)

What we did not anticipate was that reduced temporary sources of gold supply
from North American producers (which support gold's fundamentals) would be more
than offset by official selling and rumored producer hedging among South African
mining firms. Belgium's sale of 203 tonnes helped mute the ascent of January's
rally. Once the rand currency began to stablize during the second quarter,
rumors of continued hedging by South African mining firms appeared viable, as
each gold rally was met by aggressive selling. Higher lease rates, which confirm
the demand for borrowed gold which facilitate forward sales programs, also
provided credence to the South African hedging rumors.

From a long-term investment perspective, great similarities exist between
today's gold market and the state of the market at major lows in early 1993 and
1995. So far in 1996, producer and official selling have once again provided
temporary sources of supply which effectively clear gold's supply/demand
deficit. Also, as in January 1995, large speculators are once again short gold
futures, according to the Commitment of Traders Report supplied by the Commodity
Futures Trading Commission. In addition, measures of investor sentiment are
consistent with levels observed at intermediate lows in the price of gold
bullion.

Although these technical indicators do not guarantee a rise in the gold price,
history demonstrates that gold rallies often begin when fundamental changes
affecting the price of gold catch investors off-guard and out of position. In
1993, it was the combination of positive supply/demand factors and low real
interest rates which generated a substantial gold rally. In early 1995, it was a
plunging dollar/yen to postwar levels which caught speculators off-guard and
fueled a signficant gold rally. In the current market envrionment, fundamental
changes could involve any aspect of gold: (1) gold as a portfolio diversifer
against financial market risk, (2) gold as a hedge against currency volatility,
(3) gold as a hedge against monetary instability: inflation/deflation, (4) gold
as a commodity in supply/demand deficit. Predicting which fundamental will move
the gold price is not important: proper investment positioning at attractive
levels is the proper area of focus for long-term investors.

Gold's hedge against the effects of unexpected inflation was recently
highlighted by Barton Biggs, Morgan Stanley's Chief Global Strategist. On May 6,
Biggs changed Morgan Stanley's model portfolio to include a 3% gold weighting.
Reasons included the potential of inflation concerns to unseat the U.S. stock
market which is "dramatically overpriced." With so much capital invested in the
financial markets relative to the precious metals arena, it may take only small
relative shifts among portfolio allocations for gold to react favorably.

We will continue to monitor changing influences on gold's fundamentals and look
forward to presenting the Portfolio's results over the next six months.

Peter F. Palmedo
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Gold Portfolio

42
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE GOLD PORTFOLIO

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (91.1%)
AFRICA (3.1%)
58,600 Ashanti Goldfields Co., GDR....................... $ 1,157
--------
AUSTRALIA (24.8%)
(a)354,000 Delta Gold N.L.................................... 904
(a)415,000 Great Central Mines N.L........................... 1,135
(a)373,000 Lihir Gold Ltd.................................... 598
811,899 Newcrest Mining Ltd............................... 3,254
373,900 Plutonic Resources Ltd............................ 1,910
358,600 Poseidon Gold Ltd................................. 882
(a)500,000 Wiluna Mines Ltd.................................. 432
--------
9,115
--------
CANADA (17.0%)
(a)80,000 Bema Gold Corp.................................... 310
(a)118,000 Bre-X Minerals Ltd................................ 1,972
(a)206,000 Dakota Mining Corp................................ 425
25,000 Glamis Gold Ltd................................... 178
48,000 Placer Dome, Inc.................................. 1,146
(a)478,900 Royal Oak Mines, Inc.............................. 1,766
(a)58,000 TVX Gold, Inc..................................... 425
--------
6,222
--------
SOUTH AFRICA (30.3%)
47,000 Driefontein Consolidated Ltd., ADR................ 617
163,600 Free State Consolidated Gold Mines Ltd., ADR...... 1,513
24,000 Gold Fields of South Africa Ltd., ADR............. 726
120,000 Harmony Gold Mining Co., Ltd., ADR................ 1,147
162,900 JCI Co., Ltd...................................... 1,598
1,500 JCI Co., Ltd., ADR................................ 15
100,000 Kloof Gold Mining Co., Ltd........................ 946
116,200 Kloof Gold Mining Co., Ltd., ADR.................. 1,126
182,000 Vaal Reefs Exploration & Mining Co., Ltd., ADR.... 1,456
(a)82,100 Western Area Gold Mining ADR...................... 1,280
19,000 Western Deep Levels Ltd., ADR..................... 689
--------
11,113
--------
UNITED STATES (15.9%)
(a)107,000 Gold Reserve Corp................................. 816
103,000 Homestake Mining Co............................... 1,764
(a)131,300 Pegasus Gold, Inc................................. 1,608
60,300 Santa Fe Pacific Gold Corp........................ 852
(a)33,800 Stillwater Mining Co.............................. 799
--------
5,839
--------
TOTAL COMMON STOCKS (Cost $35,483)............................. 33,446
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- -----------
<C> <S> <C>
WARRANTS (0.0%)
UNITED STATES (0.0%)
(a)25,000 Gold Reserve Corp., expiring 9/15/96 (Cost $0).... 11
--------
TOTAL FOREIGN & U.S. SECURITIES (91.1%) (Cost $35,483)......... 33,457
--------

FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENT (8.6%)
REPURCHASE AGREEMENT (8.6%)
$ 3,159 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $3,160,
collateralized by $3,105, U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $3,174 (Cost
$3,159)......................................... $ 3,159
--------
TOTAL INVESTMENTS (99.7%) (Cost $38,642)....................... 36,616
--------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (0.5%)
Cash............................................ $ 1
Receivable for Investments Sold................. 136
Dividends Receivable............................ 26
Interest Receivable............................. 1
Other........................................... 19 183
---------
LIABILITIES (-0.2%)
Investment Sub-Advisory Fees Payable............ (30)
Professional Fees Payable....................... (15)
Filing and Registration Fees Payable............ (12)
Investment Advisory Fees Payable................ (9)
Custodian Fees Payable.......................... (7)
Administrative Fees Payable..................... (6)
Payable for Portfolio Shares Redeemed........... (1)
Other Liabilities............................... (4) (84)
--------- ---------
NET ASSETS (100%)............................................ $36,715
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital.............................................. $37,622
Undistributed Net Investment Income.......................... 27
Accumulated Net Realized Gain................................ 1,092
Unrealized Depreciation on Investments and Foreign Currency
Translations............................................... (2,026)
---------
NET ASSETS................................................... $36,715
---------
---------
CLASS A:
NET ASSETS................................................... $35,688
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,258,481 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................ $10.95
---------
---------
CLASS B:
NET ASSETS................................................... $1,027
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 93,856 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................ $10.94
---------
---------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Gold Portfolio

43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE GOLD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
June 30, 1996, the Portfolio is obligated to deliver foreign currency
in exchange for U.S. dollars as indicated below:
</TABLE>

<TABLE>
<CAPTION>
IN
CURRENCY TO EXCHANGE NET UNREALIZED
DELIVER SETTLEMENT FOR GAIN (LOSS)
(000) VALUE (000) DATE (000) VALUE (000) (000)
- --------------- ----- ----------- ---------- ----- ---------------
<S> <C> <C> <C> <C> <C>
AUD 173 $ 136 7/03/96 U.S.$136 $ 136 $ --
----- ----- -----
----- ----- -----
</TABLE>

- ------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
AUD -- Australian Dollar
</TABLE>

- ------------------------------------------------

SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Gold Mines............................... $ 33,457 91.1%
--------- ---
--------- ---
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Gold Portfolio

44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE INTERNATIONAL EQUITY PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australia 4.9%
Belgium 0.8%
Denmark 2.0%
Finland 1.1%
France 9.1%
Germany 10.5%
Hong Kong 2.8%
Italy 3.0%
Japan 21.9%
Netherlands 9.1%
New Zealand 0.3%
Norway 1.2%
Singapore 0.2%
Spain 4.5%
Sweden 4.6%
Switzerland 6.7%
United Kingdom 10.1%
Other 7.2%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------------
AVERAGE
AVERAGE ANNUAL
ANNUAL SINCE
YTD ONE YEAR FIVE YEARS INCEPTION
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A... 11.35% 18.67% 16.39% 11.72%
PORTFOLIO -- CLASS
B(3)................... 10.56 N/A N/A N/A
INDEX.................. 4.52 13.28 9.99 3.95

<FN>

1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends reinvested net of
withholding taxes).

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

THE COUNTRY SPECIFIC 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.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.

The investment objective of the International Equity Portfolio is long-term
capital appreciation through investment primarily in equity securities of
non-U.S. issuers. Equity securities for this purpose include common stocks and
equivalents, such as securities convertible into common stocks, and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 11.35% for the Class A shares and 10.56% for the Class B shares, as compared
to a total return of 4.52% for the Morgan Stanley Capital International (MSCI)
EAFE Index. The average annual total return for the twelve month and five year
periods ended June 30, 1996 and for the period from inception on August 4, 1989
through June 30, 1996 were 18.67%, 16.39% and 11.72%, respectively, for the
Class A shares, as compared to 13.28%, 9.99% and 3.95%, respectively, for the
Index.

The strong absolute and relative showing of the Portfolio during the first half
was principally attributable to strong stock selection in the markets of Japan,
Germany, Italy and Sweden, while France alone produced notably submarket
returns. The Portfolio suffered from its underweighting in British sterling but
this was made up for by its underweight position in yen and the substantial
hedges out of the deutschmark bloc. Returns for the period were not achieved in
an environment where cyclical stocks were particularly strong. Indeed growth
stocks have consistently outperformed value and local indices during the first
six months of the year.

Unfortunately the inevitable consequence of outperformance is that the value
perceived to be within the Portfolio must have achieved some degree of
recognition by the market. It must be said that this is the case across a broad
range of value investments including Japanese and German blue chips, Dutch
financials and Swiss cyclicals. The simultaneous upward movement in these
stocks, notwithstanding investor preference for growth stocks, has left pockets
of value to be investigated but no rich geographic concentration of value.

This leaves the value investor with this imponderable: Does one persevere with
quality when that quality has become well recognized by the market even if the
resultant pricing levels are reasonable rather than cheap, or does one seek a
new set of disagreements when markets are already extended and stocks that are
cheap tend to be cheap for a good reason? As ever, the correct course is the
middle course: new

- --------------------------------------------------------------------------------
International Equity Portfolio

45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
disagreements must be sought with the market but with the caution that is
required at this stage of the cycle.

Portfolio activity during the period was moderate and highly specific,
reflecting our belief that no particular markets, or indeed industries, are
markedly undervalued.

GERMANY

The Morgan Stanley Capital International Germany Index fell by 0.29% in U.S.
dollar terms but increased by 2.81% in local currency terms in the second
quarter of the year. As these returns illustrate, the deutschemark has continued
its weaker trend against the U.S. dollar during this period. The large chemical
groups have continued their strong performance from the first quarter
outperforming the local market. The strongest performers this quarter have been
the retail stocks and food retailers, showing particularly good returns. This is
an area which has been out of favor but is now benefiting from the pick-up in
consumer sentiment. The financial stocks continue to show poor relative returns.
The German economy continues to be sluggish and this has led to market
commentators speculating about further interest rate cuts. Inflationary
pressures are still subdued and unemployment is likely to stay about 10% as
German industry continues to restructure. In this environment we are seeing
substantially lower wage deals with the unions. Germany continues to be an
attractive market for the value investor with value being realized in large and
small companies as the market continues to restructure.

FRANCE

During the second quarter of 1996 the Morgan Stanley Capital International
France Index increased by 2.49% in U.S. dollar terms and by 4.79% in local
currency terms. Following a poor year in 1995, France is one of the top
performing markets in Europe in 1996. Like Germany the retail stocks have
performed well in the first half of the year along with healthcare companies. In
the second quarter, we have seen improved performance from the large integrated
oil companies. The sluggish economic growth rate and relative strength of the
franc encouraged the Banque de France to cut its key interest rate on April 11th
to 3.7%. By the end of April a historic time was reached when French long term
interest rates fell below those in Germany. The French government's restrictive
budgetary policy seems to be working. There was a negative surprise in both
March and April with an increase in inflation, taking the current annual rate to
2.3%. The French authorities were quick to argue that this was a temporary
phenomenon. Although the French market continues to look expensive relative to
some other markets it is one in which the stock picker can continue to find good
quality cheap investment opportunities.

SWITZERLAND

The Morgan Stanley Capital International Switzerland Index fell by 2.53% in U.S.
dollar terms but increased by 2.48% in Swiss Franc terms in the second quarter
of the year. The performance of the Swiss equity market varied throughout the
quarter. The return in May was poor but in June the market returned 5.0%, in
U.S. dollar terms. During the quarter the industrial stocks showed strong
relative performance with electronic and engineering stocks showing particularly
good returns. Following a good run the pharmaceutical stocks lost some ground
during the month while the financial sectors continued to underperform.
Following an extended run, the Swiss franc has been the weakest major currency
this year. This has helped the competitive position of many export related
companies and led to consistent upgrading by the market of these companies'
earnings. Economic growth in Switzerland has been slow but this has enabled
inflation rates to remain low despite the introduction of VAT. Despite the weak
currency, inflation levels should remain low and this could allow the
authorities to keep interest rates at low levels. This is a good environment for
the equity investor and it remains a market in which we are overweight.

NETHERLANDS

In the second quarter of 1996 the Morgan Stanley Capital International
Netherlands Index increased by 5.33% in U.S. dollar terms and by 8.8% in local
currency terms. During the quarter retail stocks have been the top performers
showing particularly good returns in June. The banks also continued their good
run at a time when financials have generally been weak in the European market. A
sector that was particularly weak was electronics, with Philips declining over
concerns for the semi-conductor industry. In 1995 the Dutch economy was one of
the strongest in Europe although towards the end of the year exports started to
slow down due to the strength of the guilder and weak demand from their main
trade partners. In the first half of this year the weaker Dutch currency has led
again to a pick-up in exports. The most recent numbers show that there has been
a small pick-up in inflation but on the positive side there has been a small
fall in unemployment. The Netherlands remains a good market for the value
investor offering good quality cheap companies.

- --------------------------------------------------------------------------------
International Equity Portfolio

46
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)

SPAIN

During the second quarter of 1996 the Morgan Stanley Capital International Spain
Index rose by 7.39% in U.S. dollar terms and by 10.94% in local currency terms.
These returns make Spain the top performing European market during the quarter.
Following the disappointment of the Spanish general election failing to produce
a clear winner and the subsequent fall of the market in March this has been a
strong recovery. The best performing sectors have been the utilities, with
Telefonica and the electrical utilities showing particularly strong returns. The
food retailers also showed good relative gains. The financial sectors,
particularly the insurers, continued to underperform, however. The most recent
economic data to come out of Spain has been fairly poor. Between January and
March both nominal imports and exports declined by some 5% compared with rates
about 20% the year before. A reduction in investment growth has led to lower GDP
growth of 1.9% year-on-year in the first quarter. Unemployment remains the main
problem in Spain, however, with the rate still above 22%.

ITALY

The Morgan Stanley Capital International Italy Index increased by 13.42% in U.S.
dollar terms during the second quarter and by 10.77% in Italian lira terms.
These make it the top performing developed market in the world during this
period, in U.S. dollar terms, helped by the strength of the lira. The best
performing sectors have been the utilities with both telecommunications and the
electricity businesses showing strong relative returns. The food production
companies also showed good returns during this period. The financials continued
to underperform while media and retail stocks also showed relative poor returns.
Although the Italian economy has been weaker recently it continues to offer some
of the best growth in Europe. The environment for the equity investor remains
good with inflation expected to soon be below 4% giving the central bank the
opportunity to cut interest rates. Despite the pick-up in economic activity in
recent months, the unemployment rate continues to edge up. In April it reached
12.3%, up from 12% a year ago.

U.K.

In the second quarter of 1996 the Morgan Stanley Capital International U.K.
Index rose by 2.54% in U.S. dollar terms and by 0.74% in local currency terms.
Quarterly economic data continued to illustrate a sluggish U.K. economy in a
generally benign inflationary environment. Recent inflation figures were better
than expected, with inflation rising 2.8% year-on-year in May 1996 following 3
months each with respective year-on-year increases of 2.9%. This, in conjunction
with subdued producer price inflation, helped explain an unexpected base rate
cut from 6.0% to 5.75% on June 6, 1996. The manufacturing output backdrop
continued to be subdued, with a rise of only 0.3% year-on-year in April 1996,
reflecting the slowdown in previously healthy export growth, continued sluggish
domestic demand and consequent stock usage. A continuing positive trend for
retail sales increasingly suggests the possible emergence of a traditional U.K.
consumer boom, with the housing market continuing to strengthen.

The quarter has reflected various rotational trends in the market. Cyclicals and
export-oriented stocks (in particular ICI, British Steel, Pilkington and Rexam)
have been hit, driven partly by a 5% appreciation in the quarter of sterling
against the DM bloc. This has been mirrored by recent interest in defensives,
particularly those with global earnings and growth characteristics such as
pharmaceuticals and health care. Domestically, this was expressed through
sustained interest in anything consumer expenditure related, with general
retailers, food retailers, breweries/pubs and leisure and hotels as some of the
top performing sectors in the quarter - valuations here, bar food retailers, are
looking very stretched. This was also driven by increasing political worries by
U.K. institutions, in part due to perceived risks of a Labour government and
partly due to recent regulatory action. Consequently, utilities was one of the
worst performing sectors in the quarter, in spite of some bid interest buoying
up water. In particular, gas distribution was clobbered following the swinging
review by Ofgas of British Gas, the worst performing stock in the quarter. Close
behind British Gas was BTR, the diverse conglomerate which plummeted on fears of
a possible dividend cut, making diverse industries the second worst performing
U.K. sector in the quarter. Small capitalization stocks significantly
outperformed large stocks in the quarter, although underperformed in the last
month.

Value continues to be scarce in the U.K. market, despite underperformance
compared to European markets. Stock selection remains of key importance.

JAPAN

The moderate local currency gain in the Japanese stock market during the second
quarter was substantially offset by currency weakness, the Morgan Stanley
Capital International Japan Index appreciating a meager 0.77% in U.S. dollars
against a 3.50% gain in Japanese yen.

- --------------------------------------------------------------------------------
International Equity Portfolio

47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)

The singular event of the quarter was the GNP figure for the first quarter which
implied annualized economic growth of 12% year-on-year, a stunning figure. The
Bank of Japan, however, was quick to point out that within these figures were an
exceptional acceleration in public spending and an upward blip in housing
relating to the expiry of cheap mortgage financings. Be that as it may, the
figure still confirmed that private capital expenditure and consumption are on a
firm recovery trend. It is therefore a little surprising that the Bank of Japan
was so careful to signal to markets that its overtly easy monetary policy will
continue. This means that the Japanese stock market valuations have a somewhat
promising backdrop. Short and long term interest rates are low, the weakening
yen is bolstering corporate profits and the economic recovery is being driven
along by government expenditure while fiscal and monetary policies remain
exceptionally low. If it was possible to extrapolate this set of circumstances
beyond the remainder of this year, value or no value, this market could only go
upwards especially since domestic institutions are so underweight equities.

With the budget deficit, however, reaching 7% of GNP this year and wholesale
price inflation already moving up towards 1.5% year-on-year, some fiscal and
monetary tightening will eventuate by year end. If it does not, the bond market
is likely to exhibit sufficient weakness to cap the upside of the stockmarket.
In the meantime, it must be stressed that quality Japanese companies are selling
at extended valuations on an absolute and relative basis. Irrespective of their
impressive recovery prospects, double figure cash flow multiples for Honda and
Toyota appear exceptionally demanding and the same can be said for the
electrical majors except those confronting the dire consequences of a collapse
in semiconductor memory prices.

Therefore, we conclude that quality beneficiaries of yen weakness already
discount a full earnings recovery and that any wholesale return of domestic
investors to the stock market will bring a change of leadership to sectors of
little interest to the value investor.

HONG KONG

During the second quarter of 1996 the Hong Kong stock market marked time at high
levels, the Morgan Stanley Capital International Hong Kong Index appreciated
0.84% in U.S. dollars and 0.95% in Hong Kong dollars. This was a creditable
performance given that U.S. interest rates gave little relief to a market that
was at recovery high levels at the beginning of the quarter. China has made it
abundantly clear that the colony will come under its control in June 1997 in
buoyant economic conditions and therefore one should be confident that political
fears will be allayed in the next year. Given a gradual recovery in the mainland
economy and a continued recovery of the local property market, both residential
and commercial, it is easy to be optimistic as to the fundamental outlook for
this market.

In our view, however, at its current level the market discounts a full-bloodied
economic recovery with the exception of commercial property stocks which offer
limited upside if the expected moderate improvement in rentals occurs.

Probably the best value in Hong Kong, however, is the Hong Kong Bank, listed in
London.

AUSTRALIA

The Australian stock market was becalmed in the second quarter, the Morgan
Stanley Capital International Australia Index appreciated 0.05% in Australian
dollars and 0.66% in U.S. dollars.

Though the Australian dollar remained firm during the quarter, it was a period
of softening for commodity prices, and resource stocks consequently weakened.
Meanwhile, in the banking sector competitive pressures and a bottoming out of
the loan loss cycle led to an abrupt end to this sector's relative strength. The
industrial sector was resilient but this was after a period of relative
weakness.

We still believe the resources sector to be fundamentally overvalued with
international investors tolerating high valuations out of respect for the
quality of Australia's mining houses.

Meanwhile, we believe the banking sector's earnings cycle has peaked though
takeover possibilities abound. The industrial sector is fairly valued but
earnings growth will continue to disappoint, the outlook for housing being
particularly weak in the short term.

Dominic Caldecott
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
International Equity Portfolio

48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE INTERNATIONAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (89.4%)
AUSTRALIA (4.9%)
3,200,000 Australia & New Zealand Banking Group Ltd......... $ 15,140
3,470,000 Brambles Industries Ltd........................... 48,218
4,410,000 Coles Myer Ltd.................................... 16,013
5,500,000 CSR Ltd........................................... 19,409
----------
98,780
----------
BELGIUM (0.8%)
(a)52,500 Arbed S.A......................................... 6,013
243,350 G.I.B. Holdings Ltd............................... 10,931
2,156 G.I.B. Holdings Ltd. VVPR (New)................... 96
----------
17,040
----------
DENMARK (2.0%)
120,100 Den Danske Bank................................... 8,061
111,250 Novo-Nordisk A/S, Class B......................... 15,769
352,500 Unidanmark A/S, Class A (Registered).............. 16,374
----------
40,204
----------
FINLAND (1.1%)
350,000 Huhtamaki Oy, Series 1............................ 11,720
(a)168,467 Merita Ltd., Class A.............................. 353
280,000 Nokia AB Oy, Series A............................. 10,343
----------
22,416
----------
FRANCE (9.1%)
204,640 Assurances Generales de France.................... 5,551
576,350 Banque Nationale de Paris......................... 20,266
15,510 Bongrain S.A...................................... 7,515
174,827 Cie de Saint Gobain............................... 23,440
(a)153,050 Credit Lyonnaise CDI.............................. 3,589
350,000 Elf Aquitaine..................................... 25,785
94,400 Groupe Danone..................................... 14,310
240,600 Lafarge Coppee S.A................................ 14,584
175,000 PSA Peugeot Citroen S.A........................... 23,463
355,700 Thomson CSF S.A................................... 10,015
255,000 Total S.A., Class B............................... 18,945
346,980 Valeo S.A......................................... 18,601
----------
186,064
----------
GERMANY (7.2%)
75,000 BASF AG........................................... 21,390
1,050,000 Bayer AG.......................................... 36,992
50,000 Commerzbank AG.................................... 10,355
287,500 Hoechst AG........................................ 9,722
90,500 Karstadt AG....................................... 36,081
36,425 Mannesmann AG..................................... 12,557
(a)24,900 Varta AG.......................................... 5,340
245,700 Veba AG........................................... 13,077
5,250 Volkswagen AG..................................... 1,957
----------
147,471
----------
HONG KONG (2.7%)
(d)90,600 China Light & Power Co., Ltd...................... 410
7,000,000 Hong Kong Land Holdings Ltd....................... 15,750
12,000,000 Jardine Strategic Holdings, Inc................... 38,400
----------
54,560
----------

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------

ITALY (3.0%)
(a)14,000,000 Olivetti Di Risp.................................. $ 7,563
(a)2,560,500 Olivetti Di Risp (NCS)............................ 1,265
11,000,000 Stet Di Risp (NCS)................................ 28,922
5,300,000 Telecom Italia S.p.A.............................. 11,408
6,800,000 Telecom Italia S.p.A. Di Risp (NCS)............... 11,749
90,000 TIM S.p.A......................................... 201
----------
61,108
----------
JAPAN (21.9%)
1,050,000 Aisin Seiki Co., Ltd.............................. 15,847
1,000,000 Canon, Inc........................................ 20,855
123,000 Chudenko Corp..................................... 4,478
1,500,000 Daibiru Corp...................................... 20,032
1,600,000 Daicel Chemical Industry Ltd...................... 9,879
660,000 Daikin Industries Ltd............................. 7,244
1,037,000 Dainippon Ink & Chemical, Inc..................... 5,331
4,000 East Japan Railway Co............................. 21,038
2,150,000 Fuji Photo Film Ltd............................... 68,045
2,700,000 Hitachi Ltd....................................... 25,191
2,250,000 Kao Corp.......................................... 30,460
650,000 Kirin Brewery Co., Ltd............................ 7,967
1,633,000 Matsushita Electric Industries Ltd................ 30,472
81,000 Murata Manufacturing Co., Ltd..................... 3,075
3,427,200 Nichido Fire & Marine Insurance Co., Ltd.......... 26,552
2,711 Nippon Telegraph & Telephone Corp................. 20,136
221,000 Ryosan Co......................................... 5,721
350,000 Sony Corp......................................... 23,082
2,100,000 Sumitomo Marine & Fire Insurance Co............... 18,344
3,000,000 Sumitomo Rubber Industries........................ 26,042
350,000 TDK Corp.......................................... 20,938
1,010,000 Toyo Seikan Kaisha Ltd............................ 35,291
----------
446,020
----------
NETHERLANDS (9.1%)
812,517 ABN Amro Holdings N.V............................. 43,665
230,000 Akzo Nobel N.V.................................... 27,594
84,436 Hollandsche Beton Groep N.V....................... 16,199
1,425,000 ING Groep N.V..................................... 42,553
258,500 Koninklijke Bijenkorf Beheer N.V.................. 21,869
153,050 Nedlloyd Groep N.V................................ 3,529
892,300 Philips Electronics N.V........................... 29,054
----------
184,463
----------
NEW ZEALAND (0.3%)
2,144,627 Fisher & Paykel Industries Ltd.................... 6,905
(a,d)392,500 Smith City Group Ltd.............................. --
----------
6,905
----------
NORWAY (1.2%)
3,500,000 Den Norske Bank A/S............................... 10,630
393,600 Hafslund Nycomed, Class B......................... 2,488
(a)650,000 Nycomed ASA, Class A.............................. 9,369
(a)93,850 Nycomed ASA, Class B.............................. 1,302
----------
23,789
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

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International Equity Portfolio

49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SINGAPORE (0.2%)
3,265,000 Neptune Orient Lines Ltd. (Foreign)............... $ 3,425
----------
SPAIN (4.5%)
(a)89,300 Grupo Duro Felguera S.A........................... 386
2,745,000 Iberdrola S.A..................................... 28,219
590,000 Repsol S.A........................................ 20,548
2,261,150 Telefonica Nacional de Espana S.A................. 41,718
----------
90,871
----------
SWEDEN (4.6%)
198,070 Electrolux AB, Series B........................... 9,986
429,300 Nordbanken AB..................................... 8,307
592,600 Skandia Forsakrings AB............................ 15,722
1,418,500 Skandinaviska Enskilda Banken, Class A............ 11,365
899,100 S.K.F. AB, Class B................................ 21,408
364,600 Sparbenken Sverige AB, Class A.................... 4,740
1,014,000 Svenska Cellulosa AB, Class B..................... 20,924
(a)36,460 Tornet Fastighets AB.............................. 298
----------
92,750
----------
SWITZERLAND (6.7%)
2,605 Ascom Holdings AG (Bearer)........................ 2,627
160 Ciba-Geigy AG (Bearer)............................ 194
35,000 Ciba-Geigy AG (Registered)........................ 42,717
20,000 Forbo Holding AG (Registered)..................... 8,483
10,800 Holderbank Financiere Glaris AG (Bearer).......... 8,644
36,085 Nestle S.A. (Registered).......................... 41,269
9,560 Schindler Holding AG (Participating
Certificates)................................... 10,176
15,550 Sulzer AG (Participating Certificates)............ 9,334
18,450 Sulzer AG (Registered)............................ 11,872
----------
135,316
----------
UNITED KINGDOM (10.1%)
1,260,000 Associated British Foods plc...................... 7,575
(a)1,360,104 Automated Security Holdings plc................... 782
2,625,900 BAT Industries plc................................ 20,437
4,905,000 Christian Salvesen plc............................ 19,621
2,309,300 English China Clays plc........................... 9,292
3,521,546 Grand Metropolitan plc............................ 23,360
4,951,389 John Mowlem & Co. plc............................. 6,923
2,400,000 Kwik Save Group plc............................... 16,890
843,000 McAlpine (Alfred) plc............................. 1,977
2,221,958 Reckitt & Colman plc.............................. 23,334
2,032,700 Rolls-Royce plc................................... 7,073
1,982,857 Royal Insurance Holdings plc...................... 12,260
258,000 Tate & Lyle plc................................... 1,836
2,252,100 Unilever plc...................................... 44,782
2,975,000 WPP Group plc..................................... 9,937
----------
206,079
----------
TOTAL COMMON STOCKS (Cost $1,453,696)............................ 1,817,261
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------

PREFERRED STOCKS (3.3%)
GERMANY (3.3%)
762,600 RWE AG............................................ $ 23,455
29,525 Spar Handels AG................................... 8,236
125,000 Volkswagen AG..................................... 34,293
----------
TOTAL PREFERRED STOCKS (Cost $46,222)............................ 65,984
----------
CONVERTIBLE PREFERRED STOCKS (0.1%)
HONG KONG (0.1%)
1,863,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/97......................................... 2,026
----------
NETHERLANDS (0.0%)
1,506 ABN Amro Holdings N.V............................. 6
2,196 ING Groep N.V..................................... 11
----------
17
----------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,923)................. 2,043
----------
<CAPTION>

NO. OF
WARRANTS
- -------------
<C> <S> <C>
WARRANTS (0.0%)
SWITZERLAND (0.0%)
(a)5,235 Schindler Holding AG, expiring 12/16/96 (Cost
$0)............................................. 10
----------
TOTAL FOREIGN SECURITIES (92.8%) (Cost $1,501,841)............... 1,885,298
----------
<CAPTION>

FACE
AMOUNT
(000)
- -------------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.6%)
REPURCHASE AGREEMENT (1.6%)
$ 32,796 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $32,810,
collateralized by $32,220 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $32,940 (Cost
$32,796)........................................ 32,796
----------
FOREIGN CURRENCY (6.5%)
BEF 7,030 Belgian Franc..................................... 225
GBP 31,709 British Pound..................................... 49,260
DKK 20 Danish Krone...................................... 3
DEM 66,567 Deutsche Mark..................................... 43,794
ITL 9,779 Italian Lira...................................... 6
JPY 3,985,925 Japanese Yen...................................... 36,459
NLG 20 Netherlands Guilder............................... 12
NOK 4 Norwegian Krone................................... 1
SGD 1,670 Singapore Dollar.................................. 1,184
ESP 10,542 Spanish Peseta.................................... 82
SEK 1,376 Swedish Krona..................................... 208
CHF 705 Swiss Franc....................................... 564
----------
TOTAL FOREIGN CURRENCY (Cost $131,550)........................... 131,798
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

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50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------
TOTAL INVESTMENTS (100.9%) (Cost $1,666,187)................... $2,049,892
----------
OTHER ASSETS (15.6%)
Securities, at Value, Held as Collateral for
Securities Loaned.............................. $ 286,019
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................ 22,149
Dividends Receivable............................ 6,142
Foreign Withholding Tax Reclaim Receivable...... 1,581
Receivable for Investments Sold................. 854
Receivable for Portfolio Shares Sold............ 346
Security Lending Income Receivable.............. 57
Interest Receivable............................. 14
Other........................................... 82 317,244
-----------
LIABILITIES (-16.5%)
Collateral on Securities Loaned, at Value....... (286,019)
Payable for Investments Purchased............... (34,453)
Bank Overdraft.................................. (9,140)
Investment Advisory Fees Payable................ (3,755)
Payable for Portfolio Shares Redeemed........... (1,053)
Administrative Fees Payable..................... (252)
Custodian Fees Payable.......................... (154)
Security Lending Fees Payable................... (37)
Directors' Fees and Expenses Payable............ (31)
Net Receivable for Closed Forward Foreign
Currency Exchange Contracts.................... (16)
Dividends Payable............................... (4)
Distribution Fees Payable....................... (3)
Other Liabilities............................... (222) (335,139)
----------- ----------
NET ASSETS (100%).............................................. $2,031,997
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital................................................ $1,545,435
Undistributed Net Investment Income............................ 35,264
Accumulated Net Realized Gain.................................. 45,541
Unrealized Appreciation on Investments and Foreign Currency
Translations................................................. 405,757
----------
NET ASSETS..................................................... $2,031,997
----------
----------
CLASS A:
NET ASSETS..................................................... $2,027,199
</TABLE>

<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 120,136,109 outstanding $0.001 par value
shares (authorized 500,000,000 shares)....................... $16.87
----------
----------
CLASS B:
NET ASSETS..................................................... $4,798
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 284,733 outstanding $0.001 par value shares
(authorized 500,000,000 shares).............................. $16.85
----------
----------

- ------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
June 30, 1996, the Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars or foreign currency as
indicated below:
</TABLE>

<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------- -------- ---------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
DEM 391 $ 257 7/01/96 NOK 1,667 $ 257 $ --
DEM 4,600 3,027 7/02/96 AUD 3,830 3,010 (17)
DEM 905 595 7/02/96 ITL 910,984 595 --
DEM 153,000 100,919 8/09/96 U.S.$106,895 106,895 5,976
SEK 240,000 36,266 9/16/96 U.S.$ 35,021 35,021 (1,245)
FRF 153,000 29,919 10/11/96 U.S.$ 30,551 30,551 632
JPY 5,801,100 53,871 10/11/96 U.S.$ 61,000 61,000 7,129
NLG 118,000 69,923 11/14/96 U.S.$ 76,106 76,106 6,183
ESP 5,400,000 41,937 12/02/96 U.S.$ 42,584 42,584 647
JPY 3,100,000 29,106 12/24/96 U.S.$ 31,950 31,950 2,844
-------- -------- -----------
$365,820 $387,969 $22,149
-------- -------- -----------
-------- -------- -----------
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1
to financial statements
CDI -- Certificate of Investment
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
AUD -- Australian Dollar
FRF -- French Franc
</TABLE>

- ------------------------------------------------------------

SUMMARY OF FOREIGN SECURITES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 335,888 16.5%
Consumer Goods......................... 498,094 24.5
Energy................................. 109,891 5.4
Finance................................ 307,535 15.2
Materials.............................. 314,967 15.5
Multi-Industry......................... 80,563 4.0
Services............................... 238,360 11.7
--------- ---
$1,885,298 92.8%
--------- ---
--------- ---
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

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51
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE INTERNATIONAL MAGNUM PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australia 2.9%
Austria 0.5%
Belgium 0.9%
Denmark 0.6%
Finland 1.4%
France 5.0%
Germany 4.8%
Hong Kong 6.8%
Italy 3.0%
Japan 38.3%
Malaysia 2.7%
Netherlands 5.0%
Norway 0.9%
Singapore 2.0%
Spain 3.2%
Sweden 1.8%
Switzerland 5.8%
United Kingdom 6.0%
Other 8.4%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------
YTD
-----------------
<S> <C>
PORTFOLIO -- CLASS A(3)..................... 4.40%
PORTFOLIO -- CLASS B(3)..................... 4.20
INDEX....................................... 3.73

<FN>

1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends reinvested net of
withholding taxes).

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. Commencement of operations March 15, 1996.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The investment objective of the International Magnum Portfolio is long-term
capital appreciation by investing primarily in equity securities of non-U.S.
issuers in accordance with the EAFE country weightings determined by the
Adviser. The EAFE countries in which the Portfolio will invest are those
comprising the Morgan Stanley Capital International (MSCI) EAFE Index, which
includes Australia, Japan, New Zealand, most nations located in Western Europe,
and certain developed countries in Asia.

For the period from inception on March 15, 1996 through June 30, 1996, the
Portfolio had a total return of 4.40% for the Class A shares and 4.20% for the
Class B shares, as compared to a total return of 3.73% for the MSCI EAFE Index.

The International Magnum Portfolio was launched on March 15, 1996 at a NAV of
$10.00 per share. Launched into a rallying international equity market, the
Portfolio got off to a strong start. Although cash was invested quickly,
securities could not be bought fast enough to catch up to the surging Index.
With a mere two weeks of performance before quarter-end, it is not meaningful to
provide much more in terms of analysis of first quarter results. As a result,
the balance of this report will focus on the second quarter of 1996.

During the second quarter of 1996, world markets were volatile as investors'
concerns about inflation and rising interest rates waxed and waned. The EAFE
markets performed well overall in April (+2.9%), with Japan, Italy and Malaysia
all putting in strong performances in U.S. dollar terms. Several key markets
including Japan and southeast Asia declined during May as signs of inflation
grew threatening and investors feared tightening monetary policy. However,
during June, economic data suggested that moderate growth and low inflation
were, in fact, more dominant than previously thought, helping the equity markets
to recover somewhat. Europe is still struggling with Maastricht criteria, while
Japan, which had seemed to be depressed, surprised the market with strong GDP
data for the first quarter. Asia continues to grow, but remains at risk from
rising U.S. interest rates.

For the period ended March 31, 1996, the Portfolio had a total return of 0.90%
for the Class A shares and 0.90% for the Class B shares as compared with 2.11%
for the Index. Performance was enhanced by strong stock selection in Europe and
Japan as well as by our currency hedges, which helped us to capture much of the
strength of the local markets.

During the quarter, the U.S. dollar continued to strengthen following the trends
of the first quarter.

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52
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
The yen, despite some mid-quarter volatility, depreciated over 2.5% to nearly
110 Y/$, while the Deutschemark fell over 3.0% to 1.52 DM/$. Our long-standing
policy of hedging the yen 75% and the Deutschemark block currencies by 95%
helped the portfolio's performance as these currencies continued to weaken
versus the dollar during the quarter. Looking ahead, we have reduced our hedges
to 50% of our yen exposure and 65% of the Deutschemark block. We still believe
in the secular strength of the U.S. dollar, but the dollar has made a big move
in the past twelve months and U.S. stock market weakness as well as the relative
monetary policy stance of the Fed, the Bank of Japan and the Bundesbank may
cloud the issues in the near term. Specifically, with a German rate cut looking
less likely and sporadic rumors of a BoJ rate hike, the U.S. Fed's hesitation to
raise U.S. interest rates in early July may dampen U.S. dollar sentiment over
the near term.

Despite economic stagnation in much of Europe, several European markets were
among the strongest performers (in U.S. dollar terms) within EAFE for the
quarter. Specifically, Italy's market appreciated by 13%, Ireland's by 8% and
Norway's by 7.1% to lead the EAFE countries. Overall, the MSCI Europe Index rose
2.6% for the quarter in dollar terms and 3.8% in local currency terms. European
economies appear to be reaching a bottom, with the potential for future monetary
easing coming to an end. We expect to see growth pick up in the second half of
this year. Restructurings of many companies have been a drag on earnings growth
in the short term, but should benefit earnings in the long run as these
companies become more competitive -- just as we have seen in the U.S. The
European sector of our portfolio continues to be positioned approximately 25% in
small capitalization stocks, which have performed well this year. It has become
increasingly difficult to find value in the stocks of larger European companies.
In terms of markets, we see opportunity in Germany and Italy, and to a lesser
extent in Spain, Switzerland and France. We have started to purchase retailing
stocks in anticipation of an improvement in consumer sentiment, as well as
banks, which have responded well to the low interest rate environment.

The Asian region performed relatively poorly during the quarter (down 0.25%),
with Singapore (down 8%) the weakest performer in EAFE for the quarter. The
Singapore market, which includes a number of large companies with exposure to
property development, was hurt by the implementation of surprisingly severe
government regulations to curb residential property speculation. Hong Kong was
also volatile in response to fluctuations in U.S. interest rates. Property
prices in Hong Kong rebounded in June, after several months in a slump, thereby
helping property stocks and the market overall. In Malaysia, following strong
performance during the first four months of 1996 (+20.2%) due to surging foreign
investment and corporate earnings growth, the market fell 4.1% during May on
profit-taking, rising interest rates and political discord in the ruling
political party. The market recovered a bit in June to end the first half of the
year up 16.3%, the strongest performer in developed Asia year-to-date. The
government's fiscal and monetary tightening policies have finally begun to show
signs of slowing down the economy, although inflation remains a risk. We have
increased our exposure to Australia as the market there is prime for a recovery.
GDP growth is strong and should trickle through to corporate earnings,
especially if U.S. interest rates do not spike.

Following consolidation in May, the Japanese market improved in June as the
Nikkei closed the quarter at the highest levels since 1992. The MSCI Japan index
was up 3.5% in yen terms, but only 0.8% in U.S. dollar terms due to continued
depreciation of the yen. The weak yen is greatly benefiting Japan's recovery,
boosting both corporate profits and GDP. In addition, indications from the Bank
of Japan that interest rates will remain at current low levels to help the
recovery become "self sustaining" has also helped the market. Domestic sentiment
appears to be improving, and we expect to see increased domestic investment as
underfunded public and private pension funds increase their allocation to the
equity market in search of higher returns. As long as the yen and interest rates
remain at or near current levels, the outlook for the Japanese economy and the
Japanese market is promising. Despite recent volatility in U.S. technology
stocks, we continue to be positioned in the Japanese electronics sector, as
valuations are very attractive, fundamentals solid, and the probability for
upside earnings surprises is good. We also have purchased some cyclical stocks
including chemicals and own several real estate-related companies as Japan
continues to build due to increased demand for prime commercial real estate,
ramifications of the Kobe earthquake, and government spending on infrastructure
projects.

The lofty valuations of the U.S. markets combined with the threat of rising
domestic interest rates have increased the risk of a correction in the U.S.
markets. If the U.S. markets were to decline quickly and sharply, we would
expect to see major repercussions and increased volatility around the world. On
the

- --------------------------------------------------------------------------------
International Magnum Portfolio

53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
other hand, a slow, steady decline would enable the international markets to
decouple from the U.S. markets. Nonetheless, we believe that any reaction in the
international markets would likely be temporary, as many other countries are
currently experiencing a combination of economic expansion, declining interest
rates and depreciating currencies, which combined create a favorable environment
for stock market performance. Under these circumstances, we would expect to see
a rotation from the U.S. market to the international markets. Our target
regional allocation currently stands at 42% Europe, 40% Japan and 18% Asia.

Francine J. Bovich
PORTFOLIO MANAGER
July 1996

- --------------------------------------------------------------------------------
International Magnum Portfolio

54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (90.4%)
AUSTRALIA (2.9%)
30,812 Broken Hill Proprietary Co., Ltd.................. $ 425
23,800 Lend Lease Corp., Ltd............................. 365
44,490 National Australia Bank Ltd....................... 411
33,200 News Corp., Ltd................................... 188
60,660 Western Mining Corp. Holdings Ltd................. 434
----------
1,823
----------
AUSTRIA (0.5%)
4,400 Boehler-Uddeholm AG............................... 341
----------
BELGIUM (0.9%)
(a)2,980 Arbed S.A......................................... 341
2,260 Delhaize Freres et Cie, 'Le Lion' S.A............. 113
2,420 G.I.B. Holdings Ltd. NPV.......................... 109
480 G.I.B. Holdings Ltd. VVPR (New)................... 22
----------
585
----------
DENMARK (0.6%)
1,200 Jyske Bank A/S (Registered)....................... 76
6,700 Unidanmark A/S, Class A (Registered).............. 311
----------
387
----------
FINLAND (1.4%)
18,000 Amer-Yhtymae Oy, Class A.......................... 303
8,880 Huhtamaki Oy, Series 1............................ 298
7,390 Nokia AB Oy, Series A............................. 273
----------
874
----------
FRANCE (5.0%)
11,000 Banque Nationale de Paris......................... 387
667 Bongrain S.A...................................... 323
2,550 Cie de Saint Gobain............................... 342
6,140 Elf Aquitaine S.A................................. 452
2,300 Eridania Beghin-Say S.A........................... 361
(a)5,980 Legris Industries S.A............................. 275
3,120 Peugeot S.A....................................... 418
10,090 Thomson CSF....................................... 284
4,370 Total S.A., Class B............................... 325
----------
3,167
----------
GERMANY (3.6%)
1,730 BASF AG........................................... 494
12,000 Bayer AG.......................................... 423
1,040 Gerresheimer Glas AG.............................. 222
690 Karstadt AG....................................... 275
650 Mannesmann AG..................................... 224
4,710 Veba AG........................................... 251
1,130 Volkswagen AG..................................... 421
----------
2,310
----------
HONG KONG (6.8%)
(a)5,000 Asia Satellite Telecommunications Holdings Ltd.... 15
113,000 Cheung Kong Holdings Ltd.......................... 814
22,000 China Light & Power Co., Ltd...................... 100
28,000 Citic Pacific Ltd................................. 113
25,000 Hang Seng Bank Ltd................................ 252

<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
15,000 Henderson Land Development Co., Ltd............... $ 112
22,000 Hong Kong Electric Holdings Ltd................... 67
36,400 Hong Kong & Shanghai Bank Holdings plc............ 550
190,800 Hong Kong Telecommunications Ltd.................. 343
116,000 Hutchison Whampoa Ltd............................. 730
58,000 New World Development Co., Ltd.................... 269
48,000 Sun Hung Kai Properties Ltd....................... 485
41,000 Swire Pacific Ltd., Class A....................... 351
38,000 Wharf Holdings Ltd................................ 136
----------
4,337
----------
ITALY (3.0%)
(a)92,900 Editoriale L'Expresso S.p.A....................... 260
(a)280,200 Impregilo S.p.A................................... 298
(a)533,500 Olivetti.......................................... 288
105,000 Stet Di Risp (NCS)................................ 276
300,000 Telecom Italia S.p.A. Di Risp (NCS)............... 518
(a)34,100 Unicem S.p.A...................................... 250
----------
1,890
----------
JAPAN (38.3%)
44,000 Amada Co., Ltd.................................... 475
25,000 Asahi Tec Corp.................................... 181
26,000 Canon, Inc........................................ 542
17,000 Daibiru Corp...................................... 227
71,000 Daicel Chemical Industry Ltd...................... 438
21,000 Daifuku Co., Ltd.................................. 323
41,000 Daikin Industries Ltd............................. 450
26,000 Dai Nippon Printing Co., Ltd...................... 504
45,000 Daiwa Securities Co., Ltd......................... 580
12,200 FamilyMart........................................ 544
20,000 Fuji Machine Manufacturing Co..................... 565
15,000 Fuji Photo Film Ltd............................... 475
12,000 Hitachi Credit Corp............................... 213
82,000 Hitachi Ltd....................................... 765
45,000 Inabata & Co...................................... 340
33,000 Kaneka Corp....................................... 222
17,000 Kurita Water Industries........................... 415
8,000 Kyocera Ltd....................................... 567
29,000 Kyudenko Co., Ltd................................. 390
24,000 Matsushita Communication Industries............... 626
42,000 Matsushita Electric Industries Ltd................ 784
112,000 Mitsubishi Chemical Corp.......................... 518
42,000 Mitsubishi Estate Co., Ltd........................ 580
78,000 Mitsubishi Heavy Industries Ltd................... 680
24,000 Mitsumi Electric Co., Ltd......................... 382
13,000 Murata Manufacturing Co., Ltd..................... 493
70,000 NEC Corp.......................................... 762
28,000 Nifco, Inc........................................ 361
6,000 Nintendo Corp., Ltd............................... 448
24,000 Nippon Pillar Packing............................. 270
75 Nippon Telegraph & Telephone Corp................. 557
53,000 Nissan Motor Co................................... 472
31,000 Nomura Securities Co.............................. 607
55,000 Obayashi Corp..................................... 499
21,000 Okura Industrial Co., Ltd......................... 151
45,000 Ricoh Co., Ltd.................................... 477
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)
- --------------------------------------------------------------------------------
International Magnum Portfolio

55
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
</TABLE>

JAPAN (CONT.)
<TABLE>
<C> <S> <C>
8,000 Sangetsu Co., Ltd................................. $ 215
19,000 Sankyo Co., Ltd................................... 494
43,000 Sanwa Shutter..................................... 405
7,000 Secom Co., Ltd.................................... 464
34,000 Sekisui Chemical Co............................... 417
13,600 Sony Corp......................................... 897
6,700 Square Company Ltd................................ 394
31,000 Stanley Electric Co............................... 216
46,000 Sumitomo Marine & Fire Insurance Co............... 402
36,000 Suzuki Motor Co., Ltd............................. 474
70,000 Taisei Corp., Ltd................................. 498
9,000 TDK Corp.......................................... 539
15,000 Tokyo Electron Ltd................................ 438
89,000 Toshiba Corp...................................... 635
67,000 Tsubakimoto Chain................................. 458
20,000 Yamanouchi Pharmaceutical Co...................... 435
----------
24,264
----------
MALAYSIA (2.7%)
2,600 AMMB Holdings Bhd................................. 36
30,000 Genting Bhd....................................... 235
23,000 IOI Corp. Bhd..................................... 32
11,000 Leader Universal Holdings Bhd..................... 31
11,000 Magnum Corp. Bhd.................................. 19
28,000 Malayan Banking Bhd............................... 269
23,000 Malaysian International Shipping Bhd (Foreign).... 71
39,000 Petronas Gas Bhd.................................. 167
13,000 Public Bank Bhd (Foreign)......................... 36
45,000 Renong Bhd........................................ 72
24,000 Resorts World Bhd................................. 138
13,000 Sime Darby Bhd.................................... 36
21,000 TA Enterprise Bhd................................. 33
27,000 Telekom Malaysia Bhd.............................. 240
44,000 Tenaga Nasional Bhd............................... 185
(a)10,000 United Engineers Ltd. (Malaysia).................. 70
----------
1,670
----------
NETHERLANDS (5.0%)
9,150 ABN Amro Holdings N.V............................. 492
3,060 Akzo Nobel N.V.................................... 367
800 DSM N.V........................................... 80
1,512 Hollandsche Benton Groep N.V...................... 290
14,750 ING Groep N.V..................................... 440
4,875 Konin Nijverdal -- Ten Carte N.V.................. 226
9,140 Koninklijke PTT Nederland N.V..................... 346
9,720 Koninklijke Van Ommeren N.V....................... 383
16,660 Philips Electronics N.V........................... 542
----------
3,166
----------
NORWAY (0.9%)
94,700 Den Norske Bank A/S............................... 288
18,100 Saga Petroleum A/S, Class B....................... 246
----------
534
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>

SINGAPORE (2.0%)
29,000 DBS Land Ltd...................................... $ 99
11,000 Development Bank of Singapore Ltd. (Foreign)...... 137
3,000 Fraser & Neave Ltd................................ 31
16,000 Keppel Corp., Ltd................................. 134
17,000 Oversea-Chinese Banking Corp. (Foreign)........... 199
4,000 Singapore Airlines Ltd. (Foreign)................. 42
3,000 Singapore Press Holdings (Foreign)................ 59
82,000 Singapore Technologies Industrial Corp............ 217
31,000 Straits Steamship Land Ltd........................ 104
22,000 United Overseas Bank Ltd. (Foreign)............... 210
27,000 Wing Tai Holdings Ltd............................. 57
----------
1,289
----------
SPAIN (3.2%)
(a)13,460 Asturiana de Zinc S.A............................. 101
(a)57,000 Grupo Duro Felguera S.A........................... 246
35,000 Iberdrola S.A..................................... 360
7,800 Repsol S.A........................................ 272
29,000 Sevillana de Electricidad S.A..................... 268
27,400 Telefonica de Espana S.A.......................... 506
31,200 Uralita S.A....................................... 293
----------
2,046
----------
SWEDEN (1.8%)
2,370 Electrolux AB, Series B........................... 119
14,390 Nordbanken AS..................................... 278
8,300 Skandia Forsakrings AB............................ 220
14,670 S.K.F. AB, Class B................................ 349
12,800 Sparbanken Sverige AB, Class A.................... 166
----------
1,132
----------
SWITZERLAND (5.8%)
370 Ascom Holdings AG (Bearer)........................ 373
200 Bobst AG (Bearer)................................. 289
330 Ciba-Geigy AG (Registered)........................ 403
870 Forbo Holding AG (Registered)..................... 369
450 Hero AG (Bearer).................................. 198
400 Holderbank Financiere Glaris AG (Bearer).......... 320
380 Magazine Globus (Participating Certificates)...... 222
95 Magazine Globus (Registered)...................... 58
480 Nestle S.A. (Registered).......................... 549
(a)2,390 Oerlikon-Buehrle Holding AG (Registered).......... 249
290 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 336
450 Sulzer AG (Registered)............................ 290
----------
3,656
----------
UNITED KINGDOM (6.0%)
27,200 Associated British Foods plc...................... 164
16,900 Bass plc.......................................... 212
75,000 BAT Industries plc................................ 584
35,000 Calor Group plc................................... 132
</TABLE>

56
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
117,500 Christian Salvesen plc............................ $ 470
60,000 Courtaulds Textiles plc........................... 337
95,800 John Mowlem & Co. plc............................. 134
28,100 Kwik Save Group plc............................... 198
(a)18,700 Railtrack Group plc, PP........................... 63
40,037 Reckitt & Colman plc.............................. 420
28,200 Royal Insurance Holdings plc...................... 174
43,000 Tate & Lyle plc................................... 306
31,700 Unilever plc...................................... 630
----------
3,824
----------
TOTAL COMMON STOCKS (Cost $56,421).............................. 57,295
----------
PREFERRED STOCKS (1.2%)
GERMANY (1.2%)
1,060 Dyckerhoff AG..................................... 278
2,570 Hornbach Holding AG............................... 221
8,200 RWE AG............................................ 252
----------
TOTAL PREFERRED STOCKS (Cost $679).............................. 751
----------
<CAPTION>
NO. OF
RIGHTS
- ------------
<C> <S> <C>
RIGHTS (0.0%)
SINGAPORE (0.0%)
(a)1,700 Oversea-Chinese Banking Corp., expiring 7/12/96
(Cost $0)....................................... 14
----------
TOTAL FOREIGN SECURITIES (91.6%) (Cost $57,100)................. 58,060
----------
<CAPTION>
FACE AMOUNT
(000)
- ------------
<C> <S> <C>
SHORT-TERM INVESTMENT (9.4%)
REPURCHASE AGREEMENT (9.4%)
$ 5,925 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $5,928,
collateralized by $5,825 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $5,955 (Cost
$5,925)......................................... 5,925
----------
FOREIGN CURRENCY (0.4%)
DEM 5 Deutsche Mark..................................... 3
FIM 247 Finnish Markka.................................... 53
HKD 31 Hong Kong Dollar.................................. 4
ITL 30 Italian Lira...................................... --
JPY 72 Japanese Yen...................................... 1
MYR 122 Malaysian Ringgit................................. 49
NOK 161 Norwegian Krone................................... 25
SGD 65 Singapore Dollar.................................. 46
ESP 7,276 Spanish Peseta.................................... 57
CHF 3 Swiss Franc....................................... 2
----------
TOTAL FOREIGN CURRENCY (Cost $240).............................. 240
----------
</TABLE>

<TABLE>
<CAPTION>
VALUE
(000)
- -----------
<S> <C> <C>
TOTAL INVESTMENTS (101.4%) (Cost $63,265)..................... $64,225
----------
OTHER ASSETS (0.9%)
Cash............................................ $ 1
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................. 241
Receivable for Investments Sold................. 199
Dividends Receivable............................ 57
Receivable due from Investment Adviser.......... 18
Foreign Withholding Tax Reclaim Receivable...... 14
Interest Receivable............................. 3
Other........................................... 80 613
----------
LIABILITIES (-2.3%)
Payable for Investments Purchased............... (1,398)
Custodian Fees Payable.......................... (28)
Administrative Fees Payable..................... (8)
Distribution Fees Payable....................... (1)
Other Liabilities............................... (35) (1,470)
---------- ----------
NET ASSETS (100%)............................................. $63,368
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 62,032
Undistributed Net Investment Income........................... 151
Accumulated Net Realized Loss................................. (15)
Unrealized Appreciation on Investments and Foreign Currency
Translations................................................ 1,200
----------
NET ASSETS.................................................... $ 63,368
----------
----------
CLASS A:
NET ASSETS.................................................... $61,738
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,916,237 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $10.44
----------
----------
CLASS B:
NET ASSETS.................................................... $1,630
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 156,421 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $10.42
----------
----------
</TABLE>

57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
June 30, 1996, the Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars as indicated below:
</TABLE>

- ------------------------------------------------------------

<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------- --------- ----------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C>
U.S.$ 9 $ 9 7/02/96 ITL 13,665 $ 9 $ --
BEF 16,574 530 7/12/96 U.S.$525 525 (5)
CHF 626 501 7/12/96 U.S.$510 510 9
DEM 705 464 7/12/96 U.S.$465 465 (1)
FRF 2,058 401 7/12/96 U.S.$400 400 1
JPY 270,628 2,480 7/12/96 U.S.$2,530 2,530 50
NLG 710 417 7/12/96 U.S.$420 420 3
DEM 398 262 7/15/96 U.S.$261 261 (1)
DEM 2,922 1,922 7/16/96 U.S.$1,898 1,898 (24)
CHF 3,599 2,886 7/31/96 U.S.$2,860 2,860 (26)
NLG 4,292 2,518 7/31/96 U.S.$2,499 2,499 (19)
FRF 11,518 2,242 8/14/96 U.S.$2,217 2,217 (25)
JPY 951,570 8,704 8/14/96 U.S.$8,923 8,923 219
JPY 489,836 4,540 9/27/96 U.S.$4,600 4,600 60
--------- --------- -----
$ 27,876 $ 28,117 $ 241
--------- --------- -----
--------- --------- -----
</TABLE>

- ------------------------------------------------------------

(a) -- Non-income producing security
NCS -- Non Convertible Shares
PP -- Partially Paid
BEF -- Belgian Franc
FRF -- French Franc
NLG -- Netherlands Guilder

- ------------------------------------------------------------

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Capital Equipment...................... $ 18,597 29.3%
Consumer Goods......................... 11,555 18.2
Energy................................. 2,882 4.5
Finance................................ 9,775 15.4
Gold Mines............................. 101 0.2
Materials.............................. 6,134 9.7
Multi-Industry......................... 1,365 2.2
Services............................... 7,651 12.1
--------- ---
$ 58,060 91.6%
--------- ---
--------- ---
</TABLE>

58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE INTERNATIONAL SMALL CAP PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australia 9.1%
Denmark 1.4%
Finland 4.3%
France 10.7%
Germany 9.5%
Hong Kong 2.3%
Ireland 2.4%
Italy 3.9%
Japan 13.5%
Netherlands 7.8%
New Zealand 0.9%
Norway 1.5%
Spain 3.7%
Sweden 1.0%
Switzerland 10.2%
United Kingdom 15.7%
Other 2.1%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------

<FN>

1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends reinvested net of
withholding taxes).

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------

THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE INDEX AND ARE FOR INFOMATIONAL 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.

The International Small Cap Portfolio seeks long-term capital appreciation by
investing primarily in the equity securities of non-U.S. issuers. The Portfolio
applies a disciplined bottom-up value approach to identify and invest in small
capitalization companies which are both attractive businesses and available at
cheap prices. A market capitalization cut-off of U.S. $1 billion is used as our
definition of "small."

For the six month period ended June 30, 1996, the Portfolio had a total return
of 15.66%, as compared to a total return of 4.52% for the Morgan Stanley Capital
International (MSCI) EAFE Index. The average annual total return for the twelve
months ended June 30, 1996 and for the period from inception on December 15,
1992 through June 30, 1996 was 16.31% and 18.63%, respectively, as compared to
13.28% and 15.33%, respectively, for the Index.

The Portfolio's significant outperformance during the first six months of the
year reflected a strong recovery in the relative performance of small caps
versus large caps together with the Portfolio's underweighting of the relatively
weak Japanese market and currency. Stock selection proved particularly strong in
Japan, the U.K., France, Germany, Finland and Australia. Although the major
European currencies were weak relative to the U.S. dollar, the Portfolio's
hedges alleviated the pain while the strong Australian dollar contributed
positively to performance.

Given the very strong performances of a number of the Portfolio's holdings over
the first half, portfolio activity was high. Turnover in the first six months
reached 16.8%. Profits were top sliced in the U.K., Switzerland, Germany,
Finland and Australia and proceeds from these sales were invested in building a
number of positions in Germany, Spain, Sweden, Norway and Finland. The most
recent additions to the Portfolio have been Ricardo (U.K.) and Europeenne
d'Extincteurs (France).

Tamro is the leading pharmaceutical wholesaler in Finland, Sweden, and the
Baltic states with dominant market positions and high rates of organic growth.
Acquired on 9x cash flow and 11x free cash flow this valuation does not fully
reflect the strength of its franchise, or its growth prospects.

Ricardo is a global automotive consulting company providing highly valued
engineering services to virtually all the world's major car companies. On 7x
cash flow and a yield of 6.2%, the stock represents attractive value.

Europeenne d'Extincteurs is France's second largest manufacturer and distributor
of fire extinguishers and

- --------------------------------------------------------------------------------
International Small Cap Portfolio

59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
is also the market leader in Italy and Portugal. Purchased on 12x earnings and
11x free cash flow these valuations do not reflect the high level of recurrent
income nor a number of initiatives which are likely to drive strong growth.

Looking forward we do not anticipate any major change in the Portfolio's
geographic mix. The more cautious tone to the markets in recent weeks has
reflected patchy economic news and, in particular, a focus on the next likely
move in interest rates. In Japan corporate results were mixed and accompanied by
generally cautious comments although a surprisingly strong GNP number suggests
private capital expenditure and consumption are recovering. We remain cautious
on the speed and magnitude of economic recovery in Japan and certainly believe
that share prices more than discount our own expectations. Signs of bubble-style
market shenanigans do concern us, however, and the risk that the local Japanese
investor becomes increasingly active is worrysome.

In Europe weaker currencies, with the exception of the Italian lira, have been
positive for the export sector but high unemployment levels have kept
consumption severely depressed in Germany, Switzerland and France. The U.K. and
the Netherlands, in contrast, provide more positive signs of consumer recovery.
The recent actions of the Bank of Japan and Fed to maintain rather than raise
rates are likely to provide a short term reprieve but the spectre of higher
rates in these economies by the end of the year is unlikely to vanish. Our own
perspective remains one of a slow but gradual recovery in Europe and Japan
dampened by structurally high levels of unemployment and poor public sector
finances. We see no real danger of a pick up in inflation in the international
markets outside Japan and corporate profitability in general will continue to be
driven by restructuring rather than top line growth.

Despite this cautious outlook we continue to find attractive value in the small
cap sector given the relatively poor coverage of these companies. Increasing
interest in the sector is continuing to drive small cap outperformance but the
sheer number of companies in our universe leaves no shortage of inefficiently
priced, high quality businesses still to be discovered. Given our earlier
comments regarding Japan, we do not anticipate any change in our underweight
position in this market while we continue to find attractive value in
Continental Europe and Australia.

Margaret Naylor
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
International Small Cap Portfolio

60
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE INTERNATIONAL SMALL CAP PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (92.2%)
AUSTRALIA (9.1%)
112,001 Arnotts Ltd....................................... $ 749
564,678 Auspine Ltd....................................... 1,420
(a)990,079 Bains Harding Ltd................................. 288
1,618,844 BRL Hardy Ltd..................................... 2,952
1,100,000 Burswood Property Trust........................... 1,496
2,351,732 Country Road Ltd.................................. 3,068
2,576,334 E.R.G. Ltd........................................ 3,381
(a)763,000 E.R.G. Ltd. (New)................................. 1,001
318,100 Morgan & Banks Ltd................................ 888
5,862,355 Parbury Ltd....................................... 2,534
70,132 Rothmans Holdings Ltd............................. 391
1,721,500 Solution 6 Holdings Ltd........................... 1,935
(a)546,000 W.D. & H.O. Wills Holdings Ltd.................... 966
----------
21,069
----------
DENMARK (1.4%)
107,000 SYD-Sonderjylland Holdings........................ 3,198
----------
FINLAND (4.3%)
16,300 Aamulehti Yhtymae Oy, Series II................... 440
125,000 Amer-Yhtymae Oy, Class A.......................... 2,106
106,810 Hartwall Oy, Class A.............................. 2,619
(a)71,850 KCI Konecranes International...................... 1,770
11,400 Kone Oy, Class B.................................. 1,273
308,900 OY Tamro AB....................................... 1,855
----------
10,063
----------
FRANCE (10.7%)
72,000 Dauphin O.T.A..................................... 4,203
(a)67,650 De Dietrich et Compagnie S.A...................... 3,423
31,150 Europeenne de Propulsion S.A...................... 3,607
(a)49,200 Europeenne d'Extincteurs.......................... 2,489
8,100 Galeries Lafayette................................ 2,768
6,296 Labinal S.A....................................... 921
(a)79,434 Legris Industries S.A............................. 3,648
91,756 Sediver S.A....................................... 3,749
----------
24,808
----------
GERMANY (4.4%)
(a)8,900 Duerr Beteiligungs AG............................. 3,367
440 Gerresheimer Glas AG.............................. 94
10,688 Sinn AG........................................... 1,758
(a)20,000 Varta AG.......................................... 4,290
2,210 Vossloh AG........................................ 776
----------
10,285
----------
HONG KONG (2.3%)
1,282,000 Chen Hsong Holdings............................... 687
1,097,000 Jardine International Motor Holdings Ltd.......... 1,346
5,200,000 Pico Far East Holdings Ltd........................ 1,209
5,862,000 Vitasoy International Holdings Ltd................ 2,140
----------
5,382
----------

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------

IRELAND (2.4%)
1,070,000 Avonmore Foods plc, Class A....................... $ 2,906
692,472 Green Property plc................................ 2,544
----------
5,450
----------
ITALY (3.3%)
(a)1,172,800 Editoriale L'Expresso S.p.A....................... 3,275
506,000 Sogefi S.p.A...................................... 1,051
787,000 Unicem Di Risp (NCS).............................. 2,565
81,000 Vincenzo Zucchi S.p.A............................. 386
212,500 Vincenzo Zucchi S.p.A. (NCS)...................... 486
----------
7,763
----------
JAPAN (13.5%)
15,000 Exedy Corp........................................ 277
231,000 Foster Electric Co., Ltd.......................... 1,376
337,000 Hankyu Realty..................................... 3,607
742,350 Japan Oil Transportation.......................... 4,482
213,000 Japan Vilene Co., Ltd............................. 1,461
134,000 Kansei Corp....................................... 1,250
328,000 Kirin Beverage Corp............................... 4,830
136,400 Nifco, Inc........................................ 1,759
425,000 Nissan Fire & Insurance Co........................ 3,087
45,000 Sangetsu Co., Ltd................................. 1,206
549,000 Toc Co............................................ 6,528
170,000 Toyoda Gosei Co................................... 1,547
----------
31,410
----------
NETHERLANDS (7.8%)
64,530 Ahrend Groep N.V.................................. 2,896
41,900 Apothekers Cooperatie OPG C.V..................... 1,123
27,916 Hollandsche Beton Groep N.V....................... 5,356
28,885 Industriemij Welna N.V............................ 744
141,000 Koninklijke Van Ommeren N.V....................... 5,559
37,125 Konin Nijverdal -- Ten Carte N.V.................. 1,718
8,802 Polynorm N.V...................................... 775
----------
18,171
----------
NEW ZEALAND (0.9%)
659,729 Fisher & Paykel Industries Ltd.................... 2,124
----------
NORWAY (1.5%)
73,850 Adelsten, Class B................................. 1,013
65,450 Kverneland AS..................................... 1,614
(a)228,020 Oceanor........................................... 809
----------
3,436
----------
SPAIN (3.7%)
(a)101,258 Asturiana del Zinc S.A............................ 759
80,000 Bodegas y Bebidas S.A............................. 1,942
47,750 Empressa Nacional Hidroelectrica del Ribagorzana
S.A., Class B................................... 997
87,250 Gas y Electricidad S.A............................ 4,843
----------
8,541
----------
SWEDEN (1.0%)
94,000 Marieberg Tidnings AB............................. 2,359
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
International Small Cap Portfolio

61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SWITZERLAND (10.2%)
1,940 Bobst AG (Bearer)................................. $ 2,802
4,965 Bucher Holdings AG (Bearer)....................... 3,874
9,800 Edipresse S.A. (Bearer)........................... 2,353
3,400 Hero AG (Bearer).................................. 1,497
530 Kouni Reisen Holdings, Class B (Registered)....... 1,217
2,750 LEM Holdings AG................................... 806
8,500 Magazine Globus (Participating Certificates)...... 4,966
5,850 Porst Holding AG (Bearer)......................... 581
1,800 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 2,089
(a)910 Von Moos Holding AG (Bearer)...................... 67
3,850 Zellweger Luwa AG (Bearer)........................ 3,543
----------
23,795
----------
UNITED KINGDOM (15.7%)
4,000,000 Anglo Irish Bank Corp. plc (British Pound
Shares)......................................... 4,039
530,000 Blagden Industries plc............................ 1,301
1,094,900 Bluebird Toys plc................................. 3,963
1,266,800 BSM Group plc..................................... 3,641
80,700 Church & Co. plc.................................. 602
1,080,600 Corporate Services Group plc...................... 3,038
(a,d)2,540,850 Donelon Tyson plc................................. --
63,500 Eurocamp plc...................................... 216
1,025,000 GEI International plc............................. 2,309
212,000 Hadleigh Industries Group plc..................... 764
(a)282,000 Hornby Group plc.................................. 852
223,000 International Business Communications (Holdings)
plc............................................. 1,088
1,030,000 John Mowlem & Co. plc............................. 1,440
(a)35,365,100 Kendell plc....................................... 412
206,335 Mallett plc....................................... 244
2,682,000 Matthews (Bernard) plc............................ 4,208
60,200 McBride plc....................................... 121
569,400 Oriflame International S.A........................ 4,467
(a,d)2,659,393 Pentos plc........................................ --
323,526 Perry Group plc................................... 960
450,000 Ricardo Group plc................................. 944
(a)1,895,000 Tandem Group plc.................................. 371
251,400 The 600 Group plc................................. 1,078
541,700 Waterman Partnership Holdings plc................. 303
----------
36,361
----------
TOTAL COMMON STOCKS (Cost $196,648)............................... 214,215
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
PREFERRED STOCKS (5.5%)
GERMANY (5.1%)
40,800 Berentzen-Gruppe AG............................... $ 1,694
9,100 Dyckerhoff AG..................................... 2,383
32,400 Hornbach Holding AG............................... 2,792
10,550 Spar Handels AG................................... 2,943
10,900 Wuerttembergische Metallwarenfabrik AG............ 1,972
----------
11,784
----------
ITALY (0.4%)
237,250 Unipol S.p.A...................................... 1,026
----------
TOTAL PREFERRED STOCKS (Cost $11,279)............................. 12,810
----------
<CAPTION>
NO. OF
RIGHTS
- --------------
<C> <S> <C>
RIGHTS (0.0%)
IRELAND (0.0%)
(a,d)230,824 Green Property plc, expiring 7/02/96 (Cost $0).... 111
----------
<CAPTION>
NO. OF
WARRANTS
- --------------
<C> <S> <C>
WARRANTS (0.0%)
SWITZERLAND (0.0%)
(a)4,600 Zellweger Luwa AG, expiring 5/21/97 (Cost $0)..... 36
----------
<CAPTION>
FACE
AMOUNT
(000)
- --------------
<C> <S> <C>
CONVERTIBLE DEBENTURE (0.2%)
ITALY (0.2%)
ITL 518,000 Mediobanca S.p.A. 5.50%, 1/01/00
(Cost $328)..................................... 328
----------
TOTAL FOREIGN SECURITIES (97.9%) (Cost $208,255).................. 227,500
----------
SHORT-TERM INVESTMENT (0.8%)
REPURCHASE AGREEMENT (0.8%)
$ 1,786 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $1,787,
collateralized by $1,755 U.S. Treasury Notes,
7.125%, 9/30/99, valued at $1,794 (Cost
$1,786)......................................... 1,786
----------
FOREIGN CURRENCY (1.9%)
GBP 325 British Pound..................................... 506
DKK 43 Danish Krone...................................... 7
DEM 5,527 Deutsche Mark..................................... 3,636
FIM 1 Finnish Markka.................................... --
ITL 143 Italian Lira...................................... --
JPY 33,672 Japanese Yen...................................... 308
ESP 12,650 Spanish Peseta.................................... 99
SEK 1 Swedish Krona..................................... --
----------
TOTAL FOREIGN CURRENCY (Cost $4,539).............................. 4,556
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
International Small Cap Portfolio

62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
- ------------------------------------------------------------
<C> <S> <C>
TOTAL INVESTMENTS (100.6%) (Cost $214,580)........................ $233,842
----------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (0.5%)
Cash............................................ $ 1
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................ 343
Dividends Receivable............................ 307
Receivable for Investments Sold................. 306
Foreign Withholding Tax Reclaim Receivable...... 184
Receivable for Portfolio Shares Sold............ 18
Interest Receivable............................. 9
Other........................................... 9 1,177
------------
LIABILITIES (-1.1%)
Payable for Investments Purchased............... (1,972)
Investment Advisory Fees Payable................ (480)
Custodian Fees Payable.......................... (31)
Administrative Fees Payable..................... (30)
Directors' Fees and Expenses Payable............ (4)
Other Liabilities............................... (39) (2,556)
------------ ----------
NET ASSETS (100%)............................................... $232,463
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital................................................. $ 208,307
Undistributed Net Investment Income............................. 2,209
Accumulated Net Realized Gain................................... 2,345
Unrealized Appreciation on Investments and Foreign Currency
Translations.................................................. 19,602
----------
NET ASSETS...................................................... $ 232,463
----------
----------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,450,988 outstanding $0.001 par value shares
(authorized 1,000,000,000 shares)............................. $17.28
----------
----------
</TABLE>

<TABLE>
<S> <C> <C>
- ------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
June 30, 1996, the Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars or foreign currency as
indicated below:
</TABLE>

<TABLE>
<CAPTION>
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- --------- ---------- ------------ --------- -------------
<C> <C> <C> <S> <C> <C>
DEM 304 $ 200 7/01/96 FIM 927 $ 200 $ --
NLG 6 3 7/01/96 DEM 5 3 --
DEM 1,119 737 7/02/96 IEP 462 738 1
DEM 3,000 1,983 9/12/96 U.S.$ 2,049 2,049 66
FRF 20,000 3,906 9/12/96 U.S.$ 3,964 3,964 58
NLG 10,000 5,899 9/12/96 U.S.$ 6,105 6,105 206
JPY 798,840 7,418 10/11/96 U.S.$ 8,400 8,400 982
U.S.$ 8,400 8,400 10/11/96 JPY 800,100 7,430 (970)
--------- --------- -----
$ 28,546 $ 28,889 $ 343
--------- --------- -----
--------- --------- -----
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
(d) -- Security valued at fair value -- See note A-1 to
financial statements
NCS -- Non Convertible Shares
FRF -- French Franc
IEP -- Irish Punt
NLG -- Netherland Guilder
</TABLE>

- ------------------------------------------------------------

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Capital Equipment....................... $ 46,857 20.2%
Consumer Goods.......................... 58,324 25.1
Energy.................................. 6,599 2.8
Finance................................. 26,977 11.6
Materials............................... 23,805 10.3
Multi-Industry.......................... 6,554 2.8
Services................................ 58,384 25.1
--------- ---
$ 227,500 97.9%
--------- ---
--------- ---
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
International Small Cap Portfolio

63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE JAPANESE EQUITY PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Capital Equipment 16.3%
Consumer Goods 16.1%
Electrical & Electronics 16.9%
Finance 6.4%
Machinery & Engineering 12.7%
Materials 8.9%
Multi-Industry 1.6%
Services 9.6%
Other 11.5%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) JAPAN INDEX(1)
- -----------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A... 7.77% 24.63% 0.95%
PORTFOLIO -- CLASS
B(3)................... 7.78 N/A N/A
INDEX.................. 1.13 11.08 1.93

<FN>

1. The MSCI Japan Index is an unmanaged index of common stocks (assumes
dividends reinvested).

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
JAPAN INDEX AND 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.

The investment objective of the Japanese Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Japanese
issuers. Equity securities are defined as common and preferred stocks, debt
securities convertible into common stock and common stock purchase warrants.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 7.77% for the Class A shares and 7.78% for the Class B shares, as compared to
a total return of 1.13% for the Morgan Stanley Capital International (MSCI)
Japan Index. The average annual total return for the twelve months ended June
30, 1996 and for the period from inception on April 25, 1994 through June 30,
1996 was 24.63% and 0.95%, respectively, for the Class A shares, as compared to
11.08% and 1.93%, respectively, for the Index.

During the first half of 1996 macro conditions regarding the Japanese economy
showed evidence of a meaningful recovery underway, supported by a weakening yen,
economic stimulus packages and record low interest rates.

Interest rate differentials between the U.S. and Japan continued to widen while
the G-7 supported further strength for the dollar stating the "dollar rise is
positive and promising" during the Lyon summit. With comment, it appears
unanimous support for Japan sustaining a solid economic recovery remains a top
priority by G-7.

A low interest rate weaker yen environment coupled with a 14 trillion yen
stimulus package announced in September 1995 had a very profound impact on GDP,
corporate profits and business sentiment during the first half of 1996. In fact,
GDP rose to 12.7% annualized for the quarter January to March 1996 (highest on
record for the past 23 years), the BOJ May "Tankan" reported significant
business confidence improvement, while corporate earnings for 1,057 listed
non-financial companies rose 98% year over year on a consolidated basis. With
such robust gains, concerns about monetary policy began to also rise. In
February, finance minister Kubo hinted a possible rate hike to help pensioners;
also BOJ Governor Matsushita commented he was also considering a rate hike "in
the future." While these comments only served to cool financial markets, in
reality there was no change in policy. We believe any interest rate rises in
Japan will be modest. There is no evidence to date that real demand for money
has yet occurred, suggesting further stimulus to the economy is necessary for a
sustainable recovery. Moreover, monetary policy comments by the authorities seem
to

- --------------------------------------------------------------------------------
Japanese Equity Portfolio

64
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO (CONT.)
be timed with overheating markets -- and are more geared to securing a long term
gradual recovery -- than slowing a fragile economy just emerging from 5 straight
years of decline.

The solid fundamental improvements during the first half of 1996 propelled
equities to the highest closing levels since 1992. While some profit taking and
consolidation occurred during May as the market entered a transition from a
macro driven environment to more earnings driven market, we believe the trend is
in place for the bull market to resume. Supply and demand is improving as local
pension funds have begun shifting assets from fixed income to equity, prompted
by the lowering of guaranteed return by life insurance companies from 4.5 to
2.5% during the last quarter. Evidence of an earnings driven market is also
suggested by the all-time highs for Honda and Canon, among others. On the other
hand weak DRAM prices have put pressure on semi-conductor issues, which was also
one of the best relative performance sectors over the last 12 months.

OUTLOOK

We believe we will not see drastic changes in monetary policy for the
foreseeable future. During the Lyon G-7 summit, finance minister Kubo promised
U.S. Treasury Secretary Rubin a continuation of economic reforms. Altough there
were no official announcements we believe Mr. Kubo also promised an additional
economic stimulus package to be announced in September and a continuation of
flexible monetary policy, both of which will have real impact on further growth
for the economy.

The cornerstone of a bull market -- low rates, economic stimulus packages,
weaker yen -- are still intact. Corporate earnings will likely be revised upward
again in September. However, uncertainty regarding interest rate policies will
likely also continue to appear as it has during the last six months, although
likely already discounted. Correlation with the U.S. markets does exist but it
appears the cycle in Japan is different without major impact from any minor
policy changes in the U.S. Of critical importance, we believe, is not only the
sustainability of the economic recovery but equally important sincerity and
determination by Japan to continue implementing structural reforms including
more deregulation to reduce the trade surplus. The effects of a weak yen we hope
will not lull Japan into slowing structural reforms. We believe the MOF, BOJ and
the Japanese authorities recognize the consequences of slowing such change and
the possibility of a surging yen again should structural reforms and confirmed
deregulation be abandoned.

We will maintain overweight positions in economic sensitive sectors which
represent value and show earnings momentum. Although semiconductor related
issues have consolidated due to DRAM pricing uncertainty, we believe these are
at the bottom of the cycle and patience will be rewarded as prices firm and
investors realize the business cycle for these companies significantly lag the
U.S. by several years.

Dominic Caldecott
PORTFOLIO MANAGER

Kunihiko Sugio
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Japanese Equity Portfolio

65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE JAPANESE EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (88.5%)
APPLIANCES & HOUSEHOLD DURABLES (5.1%)
312,000 Matsushita Electric Industries Ltd................ $ 5,822
91,000 Sony Corp......................................... 6,001
--------
11,823
--------
BANKING (5.7%)
336,000 Daiwa Securities Co., Ltd......................... 4,334
107,000 Hitachi Credit Corp............................... 1,899
298,000 Inabata & Co...................................... 2,252
232,000 Nomura Securities Co.............................. 4,541
(a)35,000 Sumitomo Corp. Leasing Ltd........................ 213
--------
13,239
--------
BUSINESS & PUBLIC SERVICES (2.7%)
218,000 Dai Nippon Printing Co., Ltd...................... 4,227
76,000 Sangetsu Co., Ltd................................. 2,037
--------
6,264
--------
CAPITAL EQUIPMENT (6.6%)
206,000 Kyudenko Co., Ltd................................. 2,770
60,000 Matsui Construction............................... 481
143,000 Matsushita Communication Industries............... 3,728
70,000 Murata Manufacturing Co., Ltd..................... 2,657
49,600 Rinnai Corp....................................... 1,179
610,000 Taisei Corp., Ltd................................. 4,341
--------
15,156
--------
CHEMICALS (1.6%)
166,000 Yamanouchi Pharmaceutical Co...................... 3,614
--------
CONSTRUCTION & HOUSING (1.7%)
445,000 Obayashi Corp..................................... 4,034
--------
CONSUMER GOODS (9.9%)
122,000 Fuji Photo Film Ltd............................... 3,861
164,000 Japan Vilene Co., Ltd............................. 1,125
54,000 Nintendo Corp., Ltd............................... 4,031
558,000 Nissan Motor Co................................... 4,966
184,000 Sankyo Co., Ltd................................... 4,780
317,000 Suzuki Motor Co., Ltd............................. 4,175
--------
22,938
--------
DATA PROCESSING & REPRODUCTION (2.2%)
244,000 Canon, Inc........................................ 5,089
--------
ELECTRICAL COMPONENTS & INSTRUMENTS (5.7%)
64,000 Kyocera Ltd....................................... 4,537
79,000 TDK Corp.......................................... 4,726
132,000 Tokyo Electron Ltd................................ 3,852
--------
13,115
--------
ELECTRICAL & ELECTRONICS (11.3%)
627,000 Hitachi Ltd....................................... 5,850
205,000 Mitsumi Electric Co., Ltd......................... 3,263
542,000 NEC Corp.......................................... 5,900
61,000 Square Company Ltd................................ 3,588
291,000 Stanley Electric Co............................... 2,023

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
788,000 Toshiba Corp...................................... $ 5,622
--------
26,246
--------
FINANCE (1.6%)
52,500 Nichido Fire & Marine Insurance Co., Ltd.......... 407
381,000 Sumitomo Marine & Fire Insurance Co............... 3,328
--------
3,735
--------
INDUSTRIAL COMPONENTS (0.2%)
50,000 Kansei Corp....................................... 466
--------
MACHINERY & ENGINEERING (9.8%)
355,000 Amada Co., Ltd.................................... 3,832
280,000 Daikin Industries Ltd............................. 3,073
149,000 Kurita Water Industries........................... 3,639
593,000 Mitsubishi Heavy Industries Ltd................... 5,169
364,000 Ricoh Co., Ltd.................................... 3,862
457,000 Tsubakimoto Chain................................. 3,123
--------
22,698
--------
MATERIALS (6.3%)
498,000 Daicel Chemical Industry Ltd...................... 3,075
310,000 Kaneka Corp....................................... 2,090
823,000 Mitsubishi Chemical Corp.......................... 3,809
195,000 Okura Industrial Co., Ltd......................... 1,400
347,000 Sekisui Chemical Co............................... 4,253
--------
14,627
--------
MERCHANDISING (2.7%)
350,000 Asahi Tec Corp.................................... 2,542
82,200 FamilyMart........................................ 3,669
--------
6,211
--------
METALS-NON FERROUS (1.3%)
329,000 Sanwa Shutter..................................... 3,100
--------
METALS-STEEL (4.5%)
230,000 Daifuku Co., Ltd.................................. 3,534
163,000 Fuji Machine Manufacturing Co..................... 4,607
212,000 Nippon Pillar Packing............................. 2,385
--------
10,526
--------
REAL ESTATE (3.3%)
150,000 Daibiru Corp...................................... 2,003
167,000 Keihanshin Real Estate............................ 1,454
297,000 Mitsubishi Estate Co., Ltd........................ 4,102
--------
7,559
--------
RECREATION, OTHER CONSUMER GOODS (0.9%)
159,700 Nifco, Inc........................................ 2,060
--------
SERVICES (4.5%)
100,000 Nippon Konpo Unyu Soko............................ 910
516 Nippon Telegraph & Telephone Corp................. 3,833
50,000 Nishio Rent All Co................................ 1,198
66,000 Secom Co., Ltd.................................... 4,371
--------
10,312
--------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Japanese Equity Portfolio

66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE JAPANESE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
TEXTILES & APPAREL (0.9%)
45,000 Shimamura Co., Ltd................................ $ 1,984
--------
TOTAL COMMON STOCKS (Cost $198,966).................................. 204,796
--------
<CAPTION>

FACE
AMOUNT
(000)
- ----------------
<C> <S> <C>
SHORT-TERM INVESTMENT (8.9%)
REPURCHASE AGREEMENT (8.9%)
$ 20,553 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $20,562,
collateralized by $20,190 U.S. Treasury Notes,
7.125%, 9/30/99, valued at $20,641 (Cost
$20,553)........................................ 20,553
--------
FOREIGN CURRENCY (0.5%)
JPY 139,571 Japanese Yen (Cost $1,281)........................ 1,277
--------
TOTAL INVESTMENTS (97.9%) (Cost $220,800)............................ 226,626
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.3%)
Cash................................. $ 1
Net Unrealized Gain on Forward
Foreign Currency Exchange
Contracts........................... 7,031
Dividends Receivable................. 575
Receivable for Portfolio Shares
Sold................................ 44
Interest Receivable.................. 9
Other................................ 48 7,708
---------
LIABILITIES (-1.2%)
Payable for Investments Purchased.... (2,347)
Investment Advisory Fees Payable..... (426)
Administrative Fees Payable.......... (28)
Custodian Fees Payable............... (14)
Distribution Fees Payable............ (3)
Payable for Portfolio Shares
Redeemed............................ (3)
Other Liabilities.................... (59) (2,880)
--------- ---------
NET ASSETS (100%)................................. $231,454
---------
---------

<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital................................... $ 217,212
Accumulated Net Investment Loss................... (2,586)
Accumulated Net Realized Gain..................... 3,987
Unrealized Appreciation on Investments and Foreign
Currency Translations............................. 12,841
---------
NET ASSETS........................................ $231,454
---------
---------
CLASS A
NET ASSETS........................................ $ 225,965
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 22,608,284 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $ 9.99
---------
---------
CLASS B
NET ASSETS........................................ $5,489
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 550,750 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $ 9.97
---------
---------
- ------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange
contracts open at June 30, 1996, the Portfolio is obligated
to deliver foreign currency in exchange for U.S. dollars as
indicated below:
</TABLE>

<TABLE>
<CAPTION>
NET
CURRENCY TO UNREALIZED
DELIVER VALUE SETTLEMENT IN EXCHANGE VALUE GAIN (LOSS)
(000) (000) DATE FOR (000) (000) (000)
- ------------- --------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
JPY 3,234,140 $ 29,630 7/09/96 U.S.$31,500 $ 31,500 $ 1,870
JPY 5,752,672 52,921 8/06/96 U.S.$55,800 55,800 2,879
JPY 6,001,148 55,593 9/25/96 U.S.$57,500 57,500 1,907
JPY 2,528,280 23,625 11/22/96 U.S.$24,000 24,000 375
--------- --------- ------
$ 161,769 $ 168,800 $ 7,031
--------- --------- ------
--------- --------- ------
</TABLE>

- ------------------------------------------------------------
(a) -- Non-income producing security

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Japanese Equity Portfolio

67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE LATIN AMERICAN PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Argentina 9.1%
Brazil 45.2%
Chile 7.7%
Colombia 5.5%
Mexico 27.7%
Peru 1.0%
Venezuela 2.6%
Other 1.2%
</TABLE>

PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS GLOBAL LATIN AMERICA INDEX(1)
- -------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 34.55% 39.62% 15.27%
PORTFOLIO -- CLASS
B(3).................... 28.92 N/A N/A
INDEX................... 17.49 17.44 5.48

<FN>

1. The MSCI Emerging Markets Global Latin America Index is a broad based market
cap weighted composite index covering at least 60% of markets in Mexico,
Argentina, Brazil, Chile, Colombia, Peru and Venezuela (assumes dividends
reinvested).

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The investment objective of the Latin American Portfolio is long-term capital
appreciation through investment primarily in equity securities of Latin American
issuers. The Portfolio may also invest in debt securities issued or guaranteed
by a Latin American government or governmental entity.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 34.55% for the Class A shares and 28.92% for the Class B shares, as compared
to a total return of 17.49% for the Morgan Stanley Capital International (MSCI)
Emerging Markets Global Latin America Index. The average annual total return for
the twelve months ended June 30, 1996 and for the period from inception on
January 18, 1995 through June 30, 1996 was 39.62% and 15.27%, respectively, for
the Class A shares, as compared to 17.44% and 5.48%, respectively, for the
Index.

The table below presents the percentage change in the Morgan Stanley Capital
International indices for each respective country, in U.S. dollar terms, as of
June 30, 1996, for the period presented:

<TABLE>
<CAPTION>
3 MONTHS 6 MONTHS 12 MONTHS
------------- ------------- -------------
<S> <C> <C> <C>
Argentina................ 15.3% 14.8% 36.2%
Brazil................... 15.4 28.4 31.2
Chile.................... 11.2 1.7 (13.6)
Colombia................. 7.5 2.9 (17.2)
Mexico................... 4.8 15.6 19.7
Peru..................... 9.1 8.8 19.6
Venezuela................ 40.0 56.4 31.3
</TABLE>

- ---------------
courtesy: FAME/Randall-Helms

ARGENTINA

The rally in the Argentine stock market was due primarily to signs of economic
recovery after the strong recession in 1995. Liquidity in the local financial
system is very high and local short term rates are low. The market had two
successful IPOs in the second quarter and inflation is almost nonexistent.
Nevertheless, we are somewhat cautious on the market due to the absence of
strong earnings growth at the corporate level and the potential for rising rates
in the U.S. to spill over into Argentina. The lingering unemployment (17%) is
also acting to restrain somewhat economic growth and complicating fiscal
accounts which are highly dependent on domestic economic activity. On the
positive side, Argentine trade accounts are benefiting enormously from the sharp
rise in agricultural commodity prices.

BRAZIL

In spite of an absence of tangible political progress on the economic reform
front, the stock market had a robust performance. What we have seen, and we
expect to continue to see unfolding for the remainder

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- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
of the year, is an increased emphasis on company fundamentals and economic
variables and a decreased emphasis on the political process. This is not to say
that the political process is unimportant nor that it is incapable of delivering
either positive or negative surprises, but rather that, as a stock market
factor, it has receded in importance. We view this process as a healthy sign of
the "maturation" of the market and a symptom of Brazil's emergence as a
relatively stable economy and marketplace. The Real Plan now has two years under
its belt, inflation is benign if not yet slayed, the trade accounts are
balanced, and interest rates are continuing to fall. In short, the Brazilian
turnaround is becoming increasingly entrenched, and the financial markets are
recognizing this relative stability.

Nevertheless, there remains much work to be done, to be sure. The fiscal
accounts are still in deficit at the operational level (though improving), the
state's finances are still problematic, the social security fund will soon be
bankrupt, tax levels are too high, and so on. The important thing, though, is
that the government has proven itself to be adept at managing the components of
the economy over which it has direct control, even while showing itself to be
somewhat less adept at quickly maneuvering legislation through congress. The
areas that we are particularly encouraged by are those sectors in which the
government owns the monopolies -- i.e. oil and gas, mining, telecommunications,
and electric generation. In each of these extremely important sectors, the
government will either liberalize or privatize the state-run companies that
currently exist. These sectors -- together with ports and railroads, which will
likewise be privatized or liberalized -- form the backbone of economic
development and in Brazil's case will help propel the dramatic economic
restructuring and growth unfolding before our eyes. So even if congress slows
down the reform process to a snail's pace, we are increasingly of the opinion
that the economy can still grow at a reasonable pace.

The telecommunications industry, through monopoly provider Telebras and its
operating subsidiaries, has witnessed a dramatic turnaround in profitability due
to tariff reform implemented by the government. Further, draft legislation is
circulating which will create a regulatory framework for the sector as well as
provide the basis for free competition in the cellular telephone business.
Eventually, we are increasingly of the opinion that the government will
privatize the entire sector, via Telebras.

Electric generation, while slightly more cumbersome to reorganize than
telecommunications, is likewise witnessing positive change. After much delay,
the government successfully privatized Rio-based electric distributor Light.
Profitability is improving, if not robust, due to tariff reform. A regulatory
framework is being established, and steps are being taken to prepare pieces of
the sector for privatization. The timing of a dramatic restructuring of the
industry, however, will likely be more drawn out than with telecommunications.

We expect interest rates to find a bottom sometime in the second half of the
year, as the economy picks up steam and municipal election-related spending
kicks into gear. Corporate profits, while spotty in the private sector and
strong in the tariff-reform led public sector, should gather momentum in the
latter part of the year together with the economy. We expect inflation to
continue benign, the currency to move with inflation differentials, the trade
accounts to remain roughly in balance or slightly deteriorate as the economy
picks up, and the fiscal deficit to persist but improve.

CHILE

After a long period of underperformance the Chilean market has rallied recently.
Expectations are that interest rate tightening is coming to an end as the torrid
pace of economic growth begins to weaken. We are positioned in a couple of fast
growing consumer stocks which are benefiting from strong demand and who are
taking their management skills and setting up operations in neighboring
countries. Andina is a Coca-Cola bottler and Santa Isabel is a supermarket
chain. We are less excited about the growth prospects of the rest of the stock
market.

COLOMBIA

The Colombian market is still in the grips of the political crisis over the
tenure of President Samper. Hopes that he would resign were dashed when the
Colombian Congress found him innocent of knowingly accepting drug money to fund
his 1994 Presidential campaign. The U.S. government has threatened sanctions in
response.

The Central Bank's fight against inflation continues to keep real interest rates
at high levels, though concern over the slowing of the economy prompted a slight
temporary easing in the second quarter. GDP growth has slowed down from prior
years' levels and will likely fall in the 3% to 4% range for the entire year. We
remain optimistic about our holdings in the

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- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
financial sector, which are experiencing improving profitability due to good
interest rate spreads, cost-cutting and improved asset quality.

MEXICO

The market rise has been driven by expectations of a strong economic recovery
during the second half of 1996, lower inflation and interest rates, and a
strengthening peso in real terms. Holding the market back somewhat has been a
series of political and business scandals. Year-to-date, domestic stocks have
clearly outperformed exporters as signs of an economic recovery begin to emerge.
Unemployment has fallen from 6.4% in January to 5.4% in May, and GDP growth
consensus estimates have risen to 3.7% for 1996. Furthermore, the Mexican
government has returned to international capital markets and has raised $6.5
billion, refinancing outstanding debts at more attractive rates. Macroeconomic
fundamentals continue to move in a positive direction as inflation for the first
six months of 1996 is at 15.3% versus 32.9% during the first 6 months of 1995.
The trade surplus continues to grow albeit at a slower pace at $3.3 billion for
the first five months of 1996. Foreign exchange reserves remain at $15 billion,
about the same level at which they finished 1995.

The market continues to look attractive as domestically driven companies should
show strong growth in the second half of 1996. Nevertheless, as democratic
opening occurs, the possibility of corruption scandals continue to lurk in the
background. Domestic growth will pick up in the second half as inflation
continues to decline, interest rates remain stable and the peso continues to
strengthen. Under this scenario the Portfolio is emphasizing interest rate
sensitive banks, consumer companies, and cement stocks. Bancomer should continue
to benefit from falling interest rates, economic recovery, and reduced risk in
the banking system. Femsa holds undervalued assets in the beer, packaging and
retail sectors. Cemex is participating in the recovery of cement prices and
cement demand in Mexico.

PERU

The Peruvian market has recently begun to rebound on waning concerns about the
economy and renewed interest in the market on the back of a successful July
placement of over US$1 billion of Telefonica del Peru stock in local and
international markets.

Investors modified their overly pessimistic outlook for the economy, which
recorded negative growth figures for the first quarter, but began turning around
in subsequent months. Visibility into future performance increased with the
signing of an IMF agreement during the second quarter which outlined
conservative economic targets, including a 1% primary fiscal surplus and a
shrinking current account deficit over the next few years. The soft landing
engineered by the government to transition the country into a period of
sustained growth around the 4.5% level appears to have been successful at the
expense of an expected 2% to 3% growth performance for 1996. The government
continues its firm commitment to privatization, currently targeting the oil and
mining sectors, and President Fujimori's popularity remains strong.

Our position in Telefonica del Peru (which increased on July 1) anticipates 20%
net income growth each year until 1998, after more than doubling earnings in
1995.

VENEZUELA

The introduction of a free-market economic stabilization plan under IMF auspices
propelled the stock and bond markets. Capital and price controls were abolished
and the currency and interest rates allowed to float freely, marking the end of
a two-year closed-economy experiment that brought about high rates of inflation
and poor economic performance. While we are optimistic about long term prospects
in Venezuela, we recognize that the economy must undergo a lengthy adjustment
process in order for the government to successfully control inflation, allow for
positive real interest rates, set a rational trading range for the currency and
privatize inefficient state enterprises. We are therefore maintaining our
position in Venezuelan fixed income, which we feel will more immediately benefit
from the country's improved ability and willingness to service debt, while
providing an attractive yield.

Overall we are excited about the growth prospects of our companies and the
recovery of the Latin American economies. The markets should continue to perform
well assuming a relatively benign U.S. environment.

Robert L. Meyer
PORTFOLIO MANAGER

July 1996

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70
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- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE LATIN AMERICAN PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (66.6%)
ARGENTINA (9.1%)
(a)22,885 Banco del Sud, Class B............................ $ 268
69,842 Banco del Suquia, Class B......................... 132
(a)18,515 Disco S.A. ADR.................................... 410
11,429 Quilmes Industrial S.A............................ 117
(a)55,710 Siderar S.A., Class A............................. 143
(a,e)6,370 Siderar S.A. ADR.................................. 130
5,898 Telecom Argentina S.A. ADR........................ 276
26,578 Telefonica de Argentina S.A. ADR.................. 787
12,149 YPF S.A. ADR...................................... 272
-------
2,535
-------
BRAZIL (16.7%)
4,424 Cia Energetica de Minas Gerais ADR................ 126
(a,e)1,792 Cia Energetica de Minas Gerais ADR................ 48
779,000 Electricidade de Sao Paulo S.A.................... 81
3,301,000 Eletrobras........................................ 888
(a,e)23,185 Eletrobras ADR.................................... 312
(a,d)515,000 Light............................................. 36
15,233 Pao de Acucar ADR................................. 252
2,150 Pao de Acucar GDR................................. 36
11,066,000 Telebras.......................................... 650
29,230 Telebras ADR...................................... 2,035
(a)1,055,663 Telesp............................................ 186
-------
4,650
-------
CHILE (7.7%)
21,375 Embotelladora Andina S.A. ADR..................... 785
6,970 Empresa Nacional Electricidad S.A. ADR............ 150
2,845 Enersis S.A. ADR.................................. 88
40,610 Santa Isabel S.A. ADR............................. 1,127
-------
2,150
-------
COLOMBIA (4.4%)
1,750 Banco Ganadero S.A. ADR........................... 42
2,601,726 Banco de Colombia................................. 988
(e)23,225 Banco de Colombia GDR............................. 203
-------
1,233
-------
MEXICO (27.7%)
69,301 Alfa S.A. de C.V., Class A........................ 311
71,170 Apasco S.A., Class A.............................. 393
(a)200,575 Banacci, Class B.................................. 417
(a)78,246 Banacci, Class L.................................. 149
(e)23,950 Cemex CPO ADR..................................... 166
209,960 Cemex CPO S.A., Class A........................... 745
(a)288,580 Cifra S.A. de C.V., Class B....................... 416
(a)58,875 Cifra S.A. de C.V., Class C....................... 84
(a)107,520 Comerci, Series B................................. 100
(a)16,120 Empresas ICA S.A. ADR............................. 224
98,460 Farmacia Benevides S.A. de C.V., Class B.......... 191
333,390 FEMSA, Class B.................................... 945
(a)27,150 Gruma S.A., Class B............................... 126
(a,e)6,850 Grupo Carso S.A. ADR.............................. 97

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
44,360 Grupo Cementos de Chihuahua S.A. de C.V., Class
B............................................... $ 45
(a,e)90,222 Grupo Financiero Bancomer, Class B, ADR........... 778
(a)246,710 Grupo Financiero Bancomer, Class B................ 107
(a)16,985 Grupo Televisa S.A. GDR........................... 522
13,900 Kimberly Clark de Mexico S.A. de C.V., Class A.... 253
7,500 Panamerican Beverages, Inc., Class A.............. 334
(a)74,220 Sears Roebuck de Mexico S.A. de C.V., Class B1.... 195
33,105 Telefonos de Mexico S.A. ADR, Class L............. 1,109
-------
7,707
-------
PERU (1.0%)
135,380 Telefonica del Peru S.A., Class B................. 273
-------
TOTAL COMMON STOCKS (Cost $16,267)................................... 18,548
-------
PREFERRED (29.0%)
BRAZIL (NON-VOTING STOCKS) (28.5%)
141,307,771 Banco Bradesco S.A................................ 1,154
(d)11,847,000 Banco Nacional S.A................................ 1
2,431,173 Brahma............................................ 1,451
2,785,000 Casa Anglo Brasileira S.A......................... 153
8,914,000 Cia Energetica de Minas Gerais.................... 237
(a)9,951,000 Cia Paulista de Forca E Luz....................... 654
12,435 Cia Vale Do Rio Doce.............................. 241
559,000 Coteminas......................................... 220
152,211 Dixie Toga S.A.................................... 147
756,000 Eletrobras, Class B............................... 216
1,681,400 Itaubanco......................................... 683
180,000 Itausa Investimentos Itau S.A..................... 138
21,739,000 Lojas Renner...................................... 1,148
4,627,000 Petrobras......................................... 569
13,302,000 Telebras.......................................... 929
-------
7,941
-------
COLOMBIA (0.5%)
302,576 Banco Ganadero.................................... 60
4,500 Banco Ganadero S.A. ADR........................... 88
-------
148
-------
TOTAL PREFERRED (Cost $6,268)........................................ 8,089
-------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------
<C> <S> <C>
FIXED INCOME SECURITIES (3.2%)
COLOMBIA (0.6%)
$ (e)190 Banco de Colombia 5.20%, 2/01/99.................. 170
-------
VENEZUELA (2.6%)
1,000 Republic of Venezuela Debt Conversion Bonds,
Series DL, (Floating Rate), 6.625%, 12/18/07.... 707
-------
TOTAL FIXED INCOME SECURITIES (Cost $725)............................ 877
-------
TOTAL FOREIGN SECURITIES (98.8%) (Cost $23,260)...................... 27,514
-------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

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- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE LATIN AMERICAN PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
FOREIGN CURRENCY (0.2%)
ARP 3 Argentine Peso.................................... $ 3
BRC 10 Brazilian Real.................................... 10
MXP 9 Mexican Peso...................................... 1
PSS 129 Peruvian New Sol.................................. 53
-------
TOTAL FOREIGN CURRENCY (Cost $67).................................... 67
-------
TOTAL INVESTMENTS (99.0%) (Cost $23,327)............................. 27,581
-------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (3.9%)
Receivable for Investments Sold........ $ 904
Dividends Receivable................... 160
Interest Receivable.................... 7
Receivable for Portfolio Shares Sold... 4
Other.................................. 6 1,081
---------
LIABILITIES (-2.9%)
Payable for Investments Purchased...... (471)
Bank Overdraft......................... (220)
Investment Advisory Fees Payable....... (38)
Custodian Fees Payable................. (28)
Administrative Fees Payable............ (4)
Payable for Portfolio Shares
Redeemed.............................. (1)
Sub-Administrative Fees Payable........ (1)
Other Liabilities...................... (27) (790)
--------- ---------
NET ASSETS (100%)................................... $27,872
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital..................................... $ 21,994
Undistributed Net Investment Income................. 281
Accumulated Net Realized Gain....................... 1,345
Unrealized Appreciation on Investments and Foreign
Currency Translations............................. 4,252
---------
NET ASSETS.......................................... $27,872
---------
---------
CLASS A:
NET ASSETS.......................................... $ 27,055
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,220,291 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $12.19
---------
---------
CLASS B:
NET ASSETS.......................................... $817
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 67,158 outstanding $0.001 par value
shares (authorized 500,000,000 shares)............ $12.17
---------
---------
</TABLE>

- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities valued at fair value -- See note A-1 to financial statements
(e) -- 144A Security -- Certain conditions for public sale may exist
ADR -- American Depositary Receipt
CPO -- Ordinary Participating Certificates (no voting rights)
GDR -- Global Depositary Receipt
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect on June 30, 1996.
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Capital Equipment...................... $ 366 1.3%
Consumer Goods......................... 6,489 23.3
Energy................................. 3,677 13.2
Finance................................ 5,377 19.3
Government............................. 708 2.6
Materials.............................. 2,291 8.2
Multi-Industry......................... 1,643 5.9
Services............................... 6,963 25.0
--------- ---
$ 27,514 98.8%
--------- ---
--------- ---
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

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OVERVIEW
- --------------------------------------------------------------------------------

THE AGGRESSIVE EQUITY PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Capital Goods-Construction 9.5%
Consumer-Cyclical 22.2%
Consumer-Staples 25.7%
Diversified 6.0%
Finance 22.8%
Materials 1.9%
Technology 1.0%
Other 10.9%
</TABLE>

PERFORMANCE COMPARED TO THE LIPPER CAPITAL
APPRECIATION INDEX AND THE S&P 500 INDEX(1)
- ----------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 22.63% 46.39% 51.85%
PORTFOLIO -- CLASS
B(3).................... 21.75 N/A N/A
LIPPER CAPITAL
APPRECIATION INDEX...... 10.25 23.21 28.24
S&P 500 INDEX........... 10.09 25.98 31.47

<FN>

1. The Lipper Capital Appreciation Index is a composite of mutual funds managed
for maximum capital gains. The S&P 500 is an unmanaged index of common
stocks.

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The Aggressive Equity Portfolio seeks long-term capital appreciation through a
concentrated, non-diversified portfolio of U.S. equity securities. Short sales
and options can be used to enhance performance, although this strategy was not
being utilized at June 30. It is anticipated that the Portfolio will hold thirty
names or less, although it may hold more from time to time.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 22.63% for the Class A shares and 21.75% for the Class B shares, as compared
to a total return of 10.25% for the Lipper Capital Appreciation Index and 10.09%
for the S&P 500 Index for the same period. The average annual total return for
the twelve months ended June 30, 1996 and for the period from inception on March
8, 1995 through June 30, 1996 was 46.39% and 51.85%, respectively, for the Class
A shares, as compared to 23.21% and 28.24%, respectively, for the Lipper Capital
Appreciation Index and 25.98% and 31.47%, respectively, for the S&P 500 Index.

Cash accounted for approximately 11% of Portfolio assets at June 30. We do not
attempt to time the market, nor do we attempt to project economic trends. The
cash at quarter end had built up as a residual of our normal investment
activity, as some of our large positions had moved up significantly and we
elected to reduce our exposure to them.

The top twelve holdings represented 65.4% of the Portfolio net assets at June
30, underscoring the high degree of concentration employed. The largest position
was Philip Morris, at 10.5% of net assets. Philip Morris has been the largest
position since the Portfolio's inception in March 1995. But when the tobacco
group sold off in March and April of this year on investor concerns over
political and legal issues, and Philip Morris traded down into the mid-$80s, we
took advantage of our ability to concentrate and went to as much as 22% of net
assets in the stock. To us, the risk/reward at that point was overwhelming
because: business trends were great; EPS estimates were rising; the company was
taking advantage of weakness to accelerate share repurchases; and non-tobacco
consumer staple growth stocks were rising, making the relative valuation of
Philip Morris extremely compelling. From the low point in April, the stock
rallied 25%, and we subsequently cut our bet almost in half. This 25% move began
to look particularly rewarding in June, when many high flying and widely owned
growth stocks were crushed.

Unlike Philip Morris, which we still like a lot, we actually added to our RJR
Nabisco bet throughout

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OVERVIEW
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO (CONT.)
the June quarter. We hope RJR is Philip Morris two years ago: unloved,
underowned and a powerful cash generator with improving business trends.
Statistically, RJR, a 9.7% holding at June 30, looks incredible. At $30 1/4, the
price to estimated 1996 free cash flow per share of $4.10 is 7.4 times, and the
dividend yield is 6.1%. We expect RJR to raise the dividend significantly in
March of 1997 and again in March of 1998. Finally, another potential kicker to
ignite performance would be the spin-off of the food assets.

Other large holdings include United Technologies, mortgage insurer CMAC
Investment, HFS and Loews Corp.

Kurt Feuerman
PORTFOLIO MANAGER

July 1996

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74
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE AGGRESSIVE EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (89.1%)
CAPITAL GOODS-CONSTRUCTION (9.5%)
AEROSPACE & DEFENSE (9.3%)
4,000 General Dynamics Corp............................. $ 248
14,400 McDonnell Douglas Corp............................ 698
30,800 United Technologies Corp.......................... 3,542
----------
4,488
----------
BUILDING & CONSTRUCTION (0.2%)
5,500 AMRE, Inc......................................... 120
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 4,608
----------
CONSUMER-CYCLICAL (22.2%)
BROADCAST-RADIO & TELEVISION (1.1%)
(a)17,600 Heftel Broadcasting Corp., Class A................ 521
----------
ENTERTAINMENT & LEISURE (3.5%)
(a)56,800 GTECH Holdings Corp............................... 1,683
----------
FOOD SERVICE & LODGING (13.2%)
(a)68,300 Boston Chicken, Inc............................... 2,220
(a)8,400 Foodmaker, Inc.................................... 72
(a)21,200 HFS, Inc.......................................... 1,484
(a)22,600 ITT Corp. (New)................................... 1,497
33,600 La Quinta Inns, Inc............................... 1,126
----------
6,399
----------
LEISURE RELATED (0.6%)
18,100 International Game Technology..................... 305
----------
PHOTOGRAPHY & OPTICAL (1.1%)
31,000 PCA International, Inc............................ 519
----------
PUBLISHING (1.9%)
(a)60,200 K-III Communications Corp......................... 753
5,200 New York Times Co., Class A....................... 170
----------
923
----------
RETAIL-GENERAL (0.8%)
(a)8,100 PetSmart, Inc..................................... 387
----------
TOTAL CONSUMER-CYCLICAL..................................... 10,737
----------
CONSUMER-STAPLES (25.7%)
BEVERAGES (2.5%)
34,700 Coca Cola Enterprises, Inc........................ 1,202
----------
FOOD (3.0%)
19,900 Kellogg Co........................................ 1,458
----------
TOBACCO (20.2%)
49,000 Philip Morris Cos., Inc........................... 5,096
150,700 RJR Nabisco Holdings Corp......................... 4,672
----------
9,768
----------
TOTAL CONSUMER-STAPLES...................................... 12,428
----------

<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>

DIVERSIFIED (6.0%)
8,400 AlliedSignal, Inc................................. $ 480
30,300 Loews Corp........................................ 2,390
----------
TOTAL DIVERSIFIED........................................... 2,870
----------
FINANCE (22.8%)
BANKING (5.7%)
8,400 Citicorp.......................................... 694
8,600 Wells Fargo & Co.................................. 2,054
----------
2,748
----------
FINANCIAL SERVICES (7.4%)
48,500 American Express Co............................... 2,164
6,100 CIGNA Corp........................................ 719
9,800 Student Loan Marketing Association................ 725
----------
3,608
----------
INSURANCE (9.2%)
9,000 Ace Ltd........................................... 423
58,400 CMAC Investment Corp.............................. 3,358
7,100 PartnerRe Ltd..................................... 212
10,400 PMI Group (The), Inc.............................. 442
----------
4,435
----------
REAL ESTATE (0.5%)
(a)8,300 Insignia Financial Group, Inc., Class A........... 225
----------
TOTAL FINANCE............................................... 11,016
----------
MATERIALS (1.9%)
CHEMICALS (1.9%)
6,100 IMC Global, Inc................................... 230
4,800 Olin Corp......................................... 428
3,800 Potash Corp. of Saskatchewan, Inc................. 252
----------
TOTAL MATERIALS............................................. 910
----------
TECHNOLOGY (1.0%)
ELECTRONICS (1.0%)
6,300 Intel Corp........................................ 463
----------
TOTAL COMMON STOCKS (Cost $40,475)............................ 43,032
----------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (11.0%)
REPURCHASE AGREEMENT (11.0%)
$ 5,331 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $5,333,
collateralized by $5,240, U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $5,357 (Cost
$5,331)......................................... 5,331
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Aggressive Equity Portfolio

75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------
TOTAL INVESTMENTS (100.1%) (Cost $45,806)..................... $48,363
----------
OTHER ASSETS (4.0%)
Cash............................................ $ 1
Receivable for Investments Sold................. 1,795
Dividends Receivable............................ 128
Interest Receivable............................. 2
Receivable for Portfolio Shares Sold............ 1
Other........................................... 6 1,933
----------
LIABILITIES (-4.1%)
Payable for Investments Purchased............... (1,865)
Investment Advisory Fees Payable................ (62)
Administrative Fees Payable..................... (7)
Custodian Fees Payable.......................... (5)
Distribution Fees Payable....................... (3)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (22) (1,965 )
---------- ----------
NET ASSETS (100%)............................................. $48,331
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 38,417
Undistributed Net Investment Income........................... 159
Accumulated Net Realized Gain................................. 7,198
Unrealized Appreciation on Investments........................ 2,557
----------
NET ASSETS.................................................... $48,331
----------
----------
</TABLE>
<TABLE>
<CAPTION>
CLASS A:
- ---------------------------------------------------
<S> <C>
NET ASSETS......................................... $ 42,760
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,874,684 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $14.87
---------
---------

<CAPTION>
CLASS B:
- ---------------------------------------------------
<S> <C>
NET ASSETS......................................... $5,571
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 374,812 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $14.86
---------
---------
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Aggressive Equity Portfolio

76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE EMERGING GROWTH PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Capital Goods-Construction 1.1%
Consumer Cyclical 23.3%
Consumer Staples 29.0%
Finance 2.4%
Services 33.3%
Technology 7.9%
Other 3.0%
</TABLE>

PERFORMANCE COMPARED TO THE NASDAQ
COMPOSITE INDEX(1)
- -----------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------------
AVERAGE
AVERAGE ANNUAL
ANNUAL SINCE
YTD ONE YEAR FIVE YEARS INCEPTION
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A... 7.07% 26.15% 11.44% 13.46%
PORTFOLIO -- CLASS
B(3)................... 7.03 N/A N/A N/A
INDEX.................. 12.63 26.95 20.02 15.42

<FN>

1. The NASDAQ Composite Index is an unmanaged index of common stocks.

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The Emerging Growth Portfolio invests primarily in growth-oriented equity
securities of small-to-medium sized domestic corporations and, to a limited
extent, foreign corporations. Such companies generally have gross revenues
ranging from $10 million to $750 million.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 7.07% for the Class A shares and 7.03% for the Class B shares, as compared to
a total return of 12.63% for the NASDAQ Composite Index. The average annual
total return for the twelve month and five year periods ended June 30, 1996 and
for the period from inception on November 1, 1989 through June 30, 1996 was
26.15%, 11.44% and 13.46%, respectively, for the Class A shares, as compared to
26.95%, 20.02% and 15.42%, respectively, for the Index.

The first half of 1996 saw increased volatility in the small growth company
sector of the market. The year started with a sharp decline in January, followed
by a speculation driven rebound in April and May. The second quarter and first
half finished with a meaningful decline in the month of June. Overall, the
Portfolio and the broader market indices recorded positive returns in the second
quarter and first half of 1996. The June quarter was the eighth consecutive
quarter of positive gains in net asset value in the Portfolio, a significantly
long string of increases. The U. S. equity market in general has had a two year
period of uninterrupted stock price appreciation. We hope everyone enjoyed the
steady rise because it is more the exception than the rule in the markets.

We believe that looking back, the April - May 1996 period will be seen as a
speculative top for small growth stocks -- at least for a while. It is not
unusual for long periods of rising stock prices to be capped by a speculative
frenzy where investor greed completely overwhelms any fear. All of the classic
signs of a speculative top were present in April and May including:

- - A disregard for individual stock valuations with many leading stocks selling
for an extremely high 20x to 30x times reported revenues and 50x to 100x times
next year's estimated earnings per share.

- - A red-hot market for initial public offerings (IPOs) with the speculative
focus this time centered on anything related to the Internet. Last time (1991)
the IPO excesses were in biotechnology.

- --------------------------------------------------------------------------------
Emerging Growth Portfolio

77
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)

- - Unprecedented purchases of equity mutual funds with aggressive growth funds
getting a disproportionate share of the new money inflows in the first half of
1996.

- - Pervasive anecdotal evidence of a top with intense media coverage of the
market and mutual fund comings and goings.

It appears to us that the equity market will be more difficult during the next
six-to-twelve months than it has been for the past two years. While economic
growth is quite strong and expected to remain so well into 1997, there are
important signals that inflation and interest rates have bottomed and that the
next series of moves by the Federal Reserve will be to raise interest rates. We
believe that such an environment is likely to halt the market's rise and produce
the first meaningful correction in U.S. stock prices since the bottom in 1990.
There are already indications that the speculative excesses of the Spring months
are being reined-in and we expect the healthy correction in small growth stocks
will continue and bring more investment rationality back to the overvalued
sectors within the small growth company universe.

The Emerging Growth Portfolio has been structured relatively conservatively
during the first half of 1996 by minimizing holdings in the extremely high P/E
small growth stocks and avoiding such speculative areas as many Internet-related
companies. The result was the Portfolio significantly outperformed the small
capitalization benchmarks in the down market months of January and June, but
underperformed during the speculative frenzy in the months of April and May. We
believe the Portfolio is positioned to outperform on a relative basis in the
more difficult market environment we see ahead for the next several months. Cash
levels in the Portfolio have not been raised beyond normal levels, but the
holdings are focused on more risk-adverse companies that should perform
relatively well in a less buoyant market. The Portfolio is currently
underweighted in technology and overweighted in relatively stable
business/consumer service companies. While a meaningful correction is overdue,
we remain positive on the longer term opportunities in emerging growth stocks.

During the second quarter of 1996, the Portfolio acquired new positions in 25
stocks and eliminated holdings in four companies. A large weighting in several
semiconductor stocks was eliminated in the first half of the year, which
substantially reduced the Portfolio's technology sector exposure. Some of the
new investments include:

ADC TELECOMMUNICATIONS -- manufactures transmission, networking and broadband
connectivity products for the telecommunications industry.

BOSTON SCIENTIFIC -- manufactures and markets medical devices used by physicians
for less invasive medical procedures.

HCIA -- develops and markets integrated clinical and financial information to
health care providers, payors, and suppliers.

LA QUINTA INNS -- owns and operates moderately priced inns in 29 states
concentrated in the western and southern regions of the country.

MSC INDUSTRIAL DIRECT -- distributes a broad range of industrial products to
small and mid-sized businesses.

MAY & SPEH -- provides computer-based information management services for
clients with significant direct marketing activities.

ROBERT HALF INTERNATIONAL -- is a leading provider of personnel services for
accounting, information technology, and administrative support throughout the
United States.

STERLING COMMERCE -- develops and markets electronic commerce software and
provides electronic data interchange (EDI) network services.

USCS INTERNATIONAL -- provides customer software and billing services to the
cable TV and telecommunications industries.

UNITED WASTE SYSTEMS -- provides integrated solid waste management services and
landfill operations for commercial and industrial customers in several states.

WHITTMAN HART -- provides information technology services including systems
integration, strategic IT planning, software development, and business process
reengineering for medium-size companies.

At June 30, the Portfolio was diversified among 70 stocks with the top ten
holdings representing 33.4% of net assets.

- --------------------------------------------------------------------------------
Emerging Growth Portfolio

78
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)

TOP TEN HOLDINGS

<TABLE>
<CAPTION>
% OF
COMPANY ASSETS
- --------------------------------------------------- -----------
<S> <C>
SunGard Data System................................ 3.9%
First Data Corp.................................... 3.9
Cintas Corp........................................ 3.6
HealthSouth Rehabilitation......................... 3.5
CUC International.................................. 3.5
Vivra Inc.......................................... 3.2
Concord EFS........................................ 3.1
Viking Office Products............................. 3.1
Health Management Systems.......................... 2.8
G&K Services....................................... 2.8
---
Total.............................................. 33.4%
---
---
</TABLE>

Dennis G. Sherva
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Emerging Growth Portfolio

79
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EMERGING GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (97.0%)
CAPITAL GOODS-CONSTRUCTION (1.1%)
ENVIRONMENTAL CONTROLS (1.1%)
(a)5,100 Sanifill, Inc..................................... $ 251
(a)25,400 United Waste Systems, Inc......................... 819
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 1,070
----------
CONSUMER-CYCLICAL (23.3%)
ENTERTAINMENT & LEISURE (0.2%)
(a)20,700 Moovies, Inc...................................... 163
----------
FOOD SERVICE & LODGING (9.2%)
(a)33,900 Boston Chicken, Inc............................... 1,102
(a)40,000 HFS, Inc.......................................... 2,800
38,500 La Quinta Inns, Inc............................... 1,290
(a)500 Papa John's International, Inc.................... 24
(a)65,000 Promus Hotel Corp................................. 1,926
(a)90,000 Sonic Corp........................................ 2,182
----------
9,324
----------
PRINTING & PUBLISHING (2.0%)
32,500 Lee Enterprises, Inc.............................. 768
(a)20,000 Scholastic Corp................................... 1,240
----------
2,008
----------
RETAIL-GENERAL (11.6%)
(a)90,000 Bed, Bath & Beyond, Inc........................... 2,374
(a)25,900 Central Tractor Farm & Country, Inc............... 317
(a)50,000 General Nutrition Cos., Inc....................... 875
(a)60,000 Kohl's Corp....................................... 2,198
70,000 OfficeMax, Inc.................................... 1,671
(a)19,900 Petco Animal Supplies, Inc........................ 572
(a)35,000 PetSmart, Inc..................................... 1,654
(a)88,000 Sunglass Hut International, Inc................... 2,134
----------
11,795
----------
TEXTILES & APPAREL (0.3%)
8,300 Mossimo, Inc...................................... 331
----------
TOTAL CONSUMER-CYCLICAL..................................... 23,621
----------
CONSUMER-STAPLES (29.0%)
DRUGS (3.8%)
(a)60,000 Forest Laboratories, Inc.......................... 2,317
(a)20,100 Genzyme Corp.-General Division.................... 1,010
(a)13,000 Scherer (R.P.) Corp............................... 590
----------
3,917
----------
HEALTH CARE SUPPLIES & SERVICES (20.0%)
(a)60,000 American Oncology Resources, Inc.................. 1,305
30,000 Arrow International, Inc.......................... 810
5,900 Arterial Vascular Engineering, Inc................ 214
55,000 Ballard Medical Products.......................... 1,052
(a)50,000 Biomet, Inc....................................... 706
(a)31,500 Boston Scientific Corp............................ 1,418
(a)90,000 Health Management Systems, Inc.................... 2,858
(a)90,000 Healthsource, Inc................................. 1,575

<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
(a)100,000 HEALTHSOUTH Rehabilitation Corp................... $ 3,600
(a)6,400 Mariner Health Group, Inc......................... 118
(a)31,300 OccuSystems, Inc.................................. 1,170
(a)75,000 Research Medical, Inc............................. 1,659
(a)12,100 Target Therapeutics, Inc.......................... 496
(a)100,000 Vivra, Inc........................................ 3,287
----------
20,268
----------
MISCELLANEOUS (5.2%)
(a)50,000 IDEXX Laboratories, Inc........................... 1,963
(a)8,400 Mail Boxes Etc.................................... 192
(a)100,000 Viking Office Products, Inc....................... 3,125
----------
5,280
----------
TOTAL CONSUMER-STAPLES...................................... 29,465
----------
FINANCE (2.4%)
INSURANCE (2.4%)
9,700 Meadowbrook Insurance Group, Inc.................. 298
50,000 Mutual Risk Management Ltd........................ 1,562
17,200 NAC Re Corp....................................... 576
----------
TOTAL FINANCE............................................... 2,436
----------
SERVICES (33.3%)
BUSINESS SERVICES (15.4%)
(a)55,000 BISYS Group, Inc.................................. 2,076
(a)90,000 Concord EFS, Inc.................................. 3,195
50,000 First Data Corp................................... 3,981
11,500 First USA Paymentech, Inc......................... 460
69,100 May & Speh, Inc................................... 1,088
2,850 Paychex, Inc...................................... 137
(a)100,000 SunGard Data Systems, Inc......................... 4,000
19,000 Whittman-Hart, Inc................................ 684
----------
15,621
----------
PROFESSIONAL SERVICES (17.9%)
(a)44,900 American Medical Response, Inc.................... 1,583
70,000 Cintas Corp....................................... 3,693
(a)50,000 CRA Managed Care, Inc............................. 2,238
(a)100,000 CUC International, Inc............................ 3,550
100,000 G & K Services, Inc., Class A..................... 2,850
(a)34,300 MSC Industrial Direct Co., Inc., Class A.......... 1,106
(a)5,600 NFO Research, Inc................................. 132
(a)45,000 Robert Half International, Inc.................... 1,254
(a)27,000 Sitel Corp........................................ 1,121
26,000 Wilmar Industries, Inc............................ 650
----------
18,177
----------
TOTAL SERVICES.............................................. 33,798
----------
TECHNOLOGY (7.9%)
ELECTRONICS (1.2%)
(a)10,000 Fusion Systems Corp............................... 247
35,000 Molex, Inc., Class A.............................. 1,028
----------
1,275
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Growth Portfolio

80
<PAGE>
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
</TABLE>

TECHNOLOGY (CONT.)
<TABLE>
<C> <S> <C>
SOFTWARE SERVICES (4.4%)
(a)10,600 HCIA, Inc......................................... $ 668
(a)69,500 Informix Corp..................................... 1,564
44,000 Sterling Commerce, Inc............................ 1,634
(a)1,000 Transaction Systems Architects, Inc., Class A..... 67
(a)25,700 USCS International, Inc........................... 495
----------
4,428
----------
TELECOMMUNICATIONS (2.3%)
(a)29,900 ADC Telecommunications, Inc....................... 1,345
(a)68,000 Mobile Telecommunications Technologies Corp....... 986
----------
2,331
----------
TOTAL TECHNOLOGY............................................ 8,034
----------
TOTAL COMMON STOCKS (Cost $58,032)............................ 98,424
----------
<CAPTION>

FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.6%)
REPURCHASE AGREEMENT (3.6%)
$ 3,635 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $3,637,
collateralized by $3,575 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $3,655 (Cost
$3,635)......................................... 3,635
----------
<CAPTION>
VALUE
(000)
<C> <S> <C>
- ------------------------------------------------------------

TOTAL INVESTMENTS (100.6%) (Cost $61,667)..................... $102,059
----------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (0.6%)
Receivable for Investments Sold................. $ 607
Dividends Receivable............................ 7
Interest Receivable............................. 2
Other........................................... 13 629
-----
LIABILITIES (-1.2%)
Payable for Investments Purchased............... (804)
Investment Advisory Fees Payable................ (261)
Payable for Portfolio Shares Redeemed........... (67)
Administrative Fees Payable..................... (15)
Custodian Fees Payable.......................... (7)
Distribution Fees Payable....................... (3)
Directors' Fees and Expenses Payable............ (2)
Other Liabilities............................... (33) (1,192)
----- ----------
NET ASSETS (100%)............................................. $101,496
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 40,641
Accumulated Net Investment Loss............................... (522)
Accumulated Net Realized Gain................................. 20,985
Unrealized Appreciation on Investments........................ 40,392
----------
NET ASSETS.................................................... $101,496
----------
----------
</TABLE>

<TABLE>
<C> <S> <C>
CLASS A:
NET ASSETS.................................................... $96,512
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,194,648 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $23.01
----------
----------
CLASS B:
NET ASSETS.................................................... $4,984
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 216,867 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $22.98
----------
----------
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Growth Portfolio

81
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE EQUITY GROWTH PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Capital Goods-Construction 9.0%
Consumer-Cyclical 23.9%
Consumer-Staples 22.5%
Diversified 4.0%
Energy 0.7%
Finance 19.8%
Materials 3.2%
Services 2.6%
Technology 6.8%
Other 7.5%
</TABLE>

PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- -----------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
AVERAGE
ANNUAL FIVE AVERAGE ANNUAL
YTD ONE YEAR YEARS SINCE INCEPTION
---------- ------------ ------------- -----------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A................... 16.64% 37.47% 16.84% 16.25%
PORTFOLIO -- CLASS
B(3)................ 15.91 N/A N/A N/A
S&P 500............. 10.09 25.98 15.71 15.06

<FN>

1. The S&P 500 Index is an unmanaged index of common stocks.

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The Equity Growth Portfolio employs a growth-oriented investment strategy
seeking long-term capital appreciation. The Portfolio seeks to accomplish its
objective by investing primarily in equities of medium and large capitalization
companies exhibiting sustainable earnings growth.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 16.64% for the Class A shares and 15.91% for the Class B shares, as compared
to a total return of 10.09% for the S&P 500 Index. The average annual total
return for the twelve month and five year periods ended June 30, 1996 and for
the period from inception on April 2, 1991 through June 30, 1996 was 37.47%,
16.84% and 16.25%, respectively, for the Class A shares, as compared to 25.98%,
15.71% and 15.06%, respectively, for the Index.

The Portfolio uses an investment strategy that stresses intensive analysis of
business and company trends. Through exhaustive research and communication with
Wall Street sources and company contacts, the Equity Growth team identifies
stocks of generally high quality companies that have strong prospects and may
produce positive surprises vis-a-vis consensus expectations. The companies we
own fall into one of three categories: blue chip, high quality growth companies;
higher beta stocks of companies where we believe the chances for positive
surprise are substantial; and stocks that have declined due to investor concerns
that we believe are unfounded.

A crucial principal of our investment approach is to concentrate positions
opportunistically. The Portfolio may put as much as 10% of assets in one
position. At June 30, the largest holding (Philip Morris) accounted for about 7%
of net assets. Twice during 1996 to date, though, the Portfolio had up to 10% in
a position. Both times we felt very strongly that the market was undervaluing
the stock of a company that we knew well. First, back in January, the market was
punishing banks and other financial stocks on fears of rising consumer loan
delinquencies. Wells Fargo, which started the year at around $216, was being
doubly punished on fears that the company would overpay in its battle with First
Bank System to acquire First Interstate. We had owned Wells Fargo for several
years, had done very well with the stock, and we were convinced management was
very shareholder oriented and was unlikely to overpay. At one point, with the
overall market up, Wells Fargo got down close to $200. We did more work as the
stock went down and put close to 10% of net assets in a combination of the
stocks of Wells Fargo and First Interstate (as an arbitrage). Wells Fargo stock
surged to a high of $267

- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
in April. We subsequently cut the position to about 4% of net assets, still a
big holding but not the huge bet we had made before.

We also took Philip Morris up to 10% earlier in the year and kept it there until
June, when we took some profits. Philip Morris has actually been our largest
holding for much of the past 2 1/2 years. As with Wells Fargo, we know Philip
Morris extremely well, and the stock has treated us well. In 1995, for example,
Philip Morris stock was up 57%, and dividends added about 4% to returns. But the
stock still looked extremely attractive to us as 1996 began, trading at only
11.8 times forward projected earnings, yielding more than double the S&P 500 and
growing 15-20% annually. Business at Philip Morris is outstanding, but in April
the stock got knocked down into the mid-80s, on the usual round of investor
concerns over legal and political issues. We feel those concerns are old news
and more than priced into the stock. For example, Philip Morris trades at less
than half of Coca Cola's P/E multiple, with more or less the same growth rate.
In any event, we loaded up south of $90 and cut back a bit near the June peak of
$107.

Most professional investors believe in diversification; and we do as well. But
on those occasions when conviction is very high, it can be costly not to
concentrate and take advantage of market opportunities.

As we have cut back on our largest holding, the proceeds have gone into another
tobacco stock, RJR Nabisco. Whereas Philip Morris stock has doubled since the
beginning of 1994, RJR stock has been a tremendous underperformer, down about
3.5% over the same period against an S&P 500 rise of about 39.4%. In 1994 and
1995, the stock price weakness made sense to us, reflecting weak business trends
and declining consensus earnings estimates. But trends have improved, and
estimates actually rose after the company reported March quarter results. Yet
the stock remains in the dog house. It is flat this year despite the improving
trends and despite a 23% dividend hike in March. The dividend yield is now 6.1%
and we expect the dividend to rise another 15-20% next March. Moreover, free
cash flow per share is a whopping $4.20 and this should grow at a double-digit
annual rate. Finally, when you buy RJR at $30.50 per share, you get $22 per
share of Nabisco, which trades publicly and of which RJR owns 213 million
shares. A spin-off of RJR's Nabisco stake is a potential kicker, but in our view
not necessary for the stock to be a big performer.

As we ended the June quarter, we had approximately 7% of net assets in cash and
we brought this down in the difficult market environment of July. Barring a
sharp rise in interest rates, we believe the environment for growth stocks
remains favorable. In particular, we are beginning to see some very good value
in higher beta growth stocks, which as a group have been very weak since the
beginning of June. Some of the largest high-beta positions in the portfolio
include HFS, Boston Chicken, ITT, GTech, Heftel Broadcasting, and PetSmart.

Two groups that continue to represent a big part of the Portfolio are financial
services and multi-industry conglomerates. In our view, many financial service
companies look like stable growers, yet investors continue to sell the stocks
when rates rise or when consumer debt delinquencies rise. In addition to Wells
Fargo, we own sizable positions in American Express, Sallie Mae, Citicorp, CMAC,
Cigna and Ace. American Express, for example, trades at only 12 times estimated
earnings with a growth rate, we believe, of 14-16%. CMAC, a private mortgage
insurer, trades at 11 times with an 18-20% growth rate.

United Technologies remains our largest multi-industry holding and is our third
largest holding overall at June 30. This stock has done very well for us in 1995
and 1996, yet we think it still looks compelling. Big surplus cash flow
generation has allowed the company to make value added acquisitions, joint
ventures and share repurchases. We also own Allied Signal where the divestiture
of the underperforming brake business improves the likelihood of the company
generating consistent growth and funds cost cutting initiatives elsewhere.

Kurt Feuerman
PORTFOLIO MANAGER
July 1996

- --------------------------------------------------------------------------------
Equity Growth Portfolio

83
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EQUITY GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (92.5%)
CAPITAL GOODS-CONSTRUCTION (9.0%)
AEROSPACE & DEFENSE (7.7%)
19,600 Boeing Co......................................... $ 1,708
18,100 General Dynamics Corp............................. 1,122
42,700 McDonnell Douglas Corp............................ 2,071
22,800 Rockwell International Corp....................... 1,305
(a)20,400 Rohr, Inc......................................... 426
70,700 United Technologies Corp.......................... 8,131
----------
14,763
----------
BUILDING & CONSTRUCTION (0.4%)
(a)35,900 AMRE, Inc......................................... 785
----------
ELECTRICAL EQUIPMENT (0.5%)
11,200 Emerson Electric Co............................... 1,012
----------
ENVIRONMENTAL CONTROLS (0.4%)
22,200 WMX Technologies, Inc............................. 727
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 17,287
----------
CONSUMER-CYCLICAL (23.9%)
AUTOMOTIVE (0.8%)
31,400 Goodyear Tire & Rubber Co......................... 1,515
----------
BROADCAST-RADIO & TELEVISION (2.0%)
(a)48,700 Heftel Broadcasting Corp., Class A................ 1,443
(a)31,900 Infinity Broadcasting, Class A.................... 957
(a)49,200 New World Communications Group, Inc............... 719
(a)20,700 Viacom, Inc., Class B............................. 805
----------
3,924
----------
ENTERTAINMENT & LEISURE (2.9%)
(a)34,400 AMC Entertainment, Inc............................ 959
(a)103,000 GTECH Holdings Corp............................... 3,051
25,800 Walt Disney Co.................................... 1,622
----------
5,632
----------
FOOD SERVICE (3.5%)
(a)153,700 Boston Chicken, Inc............................... 4,995
(a)45,500 Brinker International, Inc........................ 682
(a)54,100 Foodmaker, Inc.................................... 467
(a)19,300 Planet Hollywood International, Inc., Class A..... 521
----------
6,665
----------
GAMING & LODGING (7.3%)
(a)82,600 HFS, Inc.......................................... 5,782
12,900 Hilton Hotels Corp................................ 1,451
41,800 International Game Technology..................... 705
(a)54,500 ITT Corp.......................................... 3,611
71,800 La Quinta Inns, Inc............................... 2,405
----------
13,954
----------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.5%)
(a)14,100 American Standard Cos............................. 465
8,000 Premark International, Inc........................ 148
(a)8,000 Tupperware Corp................................... 338
----------
951
----------

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
PHOTOGRAPHY & OPTICAL (1.1%)
25,700 Eastman Kodak Co.................................. $ 1,998
7,100 PCA International, Inc............................ 119
----------
2,117
----------
PUBLISHING (3.3%)
14,300 Gannett Co., Inc. 1,012
(a)233,600 K-III Communications Corp......................... 2,920
65,400 News Corp. Ltd., ADR.............................. 1,537
19,600 New York Times Co., Class A....................... 639
(a)13,600 Valassis Communications, Inc...................... 252
----------
6,360
----------
RETAIL-GENERAL (2.5%)
(a)39,800 AutoZone, Inc..................................... 1,383
(a)39,300 General Nutrition Cos., Inc....................... 688
22,800 Harcourt General, Inc............................. 1,140
(a)33,300 PetSmart, Inc..................................... 1,590
----------
4,801
----------
TOTAL CONSUMER-CYCLICAL..................................... 45,919
----------
CONSUMER-STAPLES (22.5%)
BEVERAGES (2.5%)
82,300 Coca Cola Enterprises, Inc........................ 2,850
55,600 PepsiCo, Inc...................................... 1,967
----------
4,817
----------
DRUGS (3.2%)
34,000 American Home Products Corp....................... 2,044
(a)9,700 Amgen, Inc........................................ 524
15,300 Pfizer, Inc....................................... 1,092
39,300 Schering-Plough Corp.............................. 2,466
----------
6,126
----------
FOOD (1.9%)
37,900 Interstate Bakeries Corp.......................... 1,014
23,100 Kellogg Co........................................ 1,692
15,400 Ralston Purina Group.............................. 988
----------
3,694
----------
HEALTH CARE SUPPLIES & SERVICES (2.2%)
19,000 Aetna Life & Casualty Co.......................... 1,359
23,800 Columbia/HCA Healthcare Corp...................... 1,270
(a)10,400 PacifiCare Health Systems, Inc., Class B.......... 705
17,900 United Healthcare Corp............................ 904
----------
4,238
----------
HOSPITAL SUPPLIES & SERVICES (0.6%)
14,000 Becton Dickinson & Co............................. 1,124
----------
TOBACCO (12.1%)
132,800 Philip Morris Cos., Inc........................... 13,811
301,800 RJR Nabisco Holdings Corp......................... 9,356
----------
23,167
----------
TOTAL CONSUMER-STAPLES...................................... 43,166
----------
DIVERSIFIED (4.0%)
36,100 AlliedSignal, Inc................................. 2,062
71,100 Loews Corp........................................ 5,608
----------
TOTAL DIVERSIFIED........................................... 7,670
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Equity Growth Portfolio

84
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
ENERGY (0.7%)
COAL, GAS, & OIL (0.7%)
11,900 Baker Hughes, Inc................................. $ 391
11,200 Schlumberger Ltd.................................. 944
----------
TOTAL ENERGY................................................ 1,335
----------
FINANCE (19.8%)
BANKING (6.5%)
23,568 Chase Manhattan Corp.............................. 1,664
19,600 Citicorp.......................................... 1,619
15,500 Morgan (J.P.) & Co., Inc.......................... 1,312
33,033 Wells Fargo & Co.................................. 7,891
----------
12,486
----------
FINANCIAL SERVICES (7.1%)
119,500 American Express Co............................... 5,333
(a)12,800 Associates First Capital Corp..................... 482
22,600 CIGNA Corp........................................ 2,664
21,200 Dean Witter Discover & Co......................... 1,214
28,100 Franklin Resources, Inc........................... 1,714
28,000 Student Loan Marketing Association................ 2,072
----------
13,479
----------
INSURANCE (5.8%)
38,700 Ace Ltd........................................... 1,819
87,100 CMAC Investment Corp.............................. 5,008
16,300 Exel Ltd.......................................... 1,149
6,700 MGIC Investment Corp.............................. 376
28,800 PartnerRe Ltd..................................... 860
37,100 PMI Group (The), Inc.............................. 1,577
9,800 RenaissanceRe Holdings............................ 301
----------
11,090
----------
REAL ESTATE (0.4%)
(a)29,500 Insignia Financial Group, Inc., Class A........... 800
----------
TOTAL FINANCE............................................... 37,855
----------
MATERIALS (3.2%)
CHEMICALS (3.2%)
23,800 Hercules, Inc..................................... 1,315
18,000 IMC Global, Inc................................... 677
50,400 Monsanto Co....................................... 1,638
17,100 Olin Corp......................................... 1,526
15,400 Potash Corp. of Saskatchewan, Inc................. 1,020
----------
TOTAL MATERIALS............................................. 6,176
----------
SERVICES (2.6%)
PROFESSIONAL SERVICES (2.1%)
(a)17,100 Bell & Howell Holding Co.......................... 558
(a)42,850 CUC International, Inc............................ 1,521
(a)900 Catalina Marketing Corp........................... 82
2,280 First Data Corp................................... 1,815
----------
3,976
----------
TRANSPORTATION (0.5%)
(a)10,600 AMR Corp.......................................... 965
----------
TOTAL SERVICES.............................................. 4,941
----------
TECHNOLOGY (6.8%)
COMPUTERS (0.5%)
(a)18,500 Cisco Systems, Inc................................ 1,048
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
ELECTRONICS (1.4%)
(a)17,500 Applied Materials, Inc............................ $ 534
25,900 Intel Corp........................................ 1,902
10,500 Watkins-Johnson Co................................ 287
----------
2,723
----------
OFFICE EQUIPMENT (1.1%)
10,600 Hewlett Packard Co................................ 1,056
11,200 International Business Machines Corp.............. 1,109
----------
2,165
----------
SOFTWARE SERVICES (1.9%)
(a)1,100 America Online, Inc............................... 48
(a)18,300 Microsoft Corp.................................... 2,198
(a)23,500 Oracle System Corp................................ 927
(a)22,750 USCS International, Inc........................... 438
----------
3,611
----------
TELECOMMUNICATIONS (1.9%)
(a)28,800 AirTouch Communications, Inc...................... 814
18,400 American Telephone & Telegraph Corp............... 1,141
(a)50,500 Teleport Communications Group, Inc., Class A...... 966
(a)7,300 U.S. Robotics Corp................................ 624
----------
3,545
----------
TOTAL TECHNOLOGY............................................ 13,092
----------
TOTAL COMMON STOCKS (Cost $157,468)........................... 177,441
----------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (7.5%)
REPURCHASE AGREEMENT (7.5%)
$ 14,395 Goldman Sachs, 5.375%, dated 6/28/96, due 7/01/96,
to be repurchased at $14,401, collateralized by
$14,020 U.S. Treasury Bonds, 7.50%, due
11/15/16, valued at $14,693 (Cost $14,395)...... 14,395
----------
TOTAL INVESTMENTS (100.0%) (Cost $171,863).................... 191,836
----------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (2.0%)
Cash............................................ $ 1
Receivable for Investments Sold................. 3,472
Dividends Receivable............................ 370
Interest Receivable............................. 6
Other........................................... 12 3,861
----------
LIABILITIES (-2.0%)
Payable for Investments Purchased............... (3,630)
Investment Advisory Fees Payable................ (230)
Administrative Fees Payable..................... (24)
Custodian Fees Payable.......................... (15)
Payable for Portfolio Shares Redeemed........... (4)
Distribution Fees Payable....................... (3)
Directors' Fees and Expenses Payable............ (3)
Other Liabilities............................... (37) (3,946)
---------- ----------
NET ASSETS (100%)............................................. $191,751
----------
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Equity Growth Portfolio

85
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ------------------------------------------------------------
<S> <C> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 139,965
Undistributed Net Investment Income........................... 578
Accumulated Net Realized Gain................................. 31,235
Unrealized Appreciation on Investments........................ 19,973
----------
NET ASSETS.................................................... $191,751
----------
----------
</TABLE>

<TABLE>
<C> <S> <C>
CLASS A:
NET ASSETS.................................................... $186,848
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 11,362,865 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $16.44
----------
----------
CLASS B:
NET ASSETS.................................................... $4,903
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 298,399 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $16.43
----------
----------
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
ADR -- American Depositary Receipt

</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Equity Growth Portfolio

86
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE SMALL CAP VALUE EQUITY PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Aerospace 1.9%
Banking 11.4%
Building 3.0%
Capital Goods 4.5%
Chemicals 4.3%
Communications 0.4%
Consumer - Durables 4.2%
Consumer - Retail 5.3%
Consumer - Staples 3.7%
Energy 3.5%
Financial -
Diversified 5.5%
Health Care 6.6%
Industrial 4.4%
Insurance 6.3%
Metals 2.3%
Paper & Packaging 2.1%
Services 10.4%
Technology 8.9%
Transportation 2.2%
Utilities 7.3%
Other 1.8%
</TABLE>

PERFORMANCE COMPARED TO THE RUSSELL 2500
AND S&P 500 INDICES(1)
- --------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 9.76% 18.81% 12.83%
PORTFOLIO -- CLASS
B(3).................... 9.31 N/A N/A
RUSSELL 2500............ 10.28 24.16 16.75
S&P 500................. 10.09 25.98 16.05
<FN>

1. The Russell 2500 Index and the S&P 500 Index 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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

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.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 9.76% for the Class A shares and 9.31% for the Class B shares, as compared to
a total return of 10.28% and 10.09% for the Russell 2500 Index and S&P 500
Index, respectively. The average annual total return for the twelve months ended
June 30, 1996 and for the period from inception on December 17, 1992 through
June 30, 1996 was 18.81% and 12.83%, respectively for the Class A shares, as
compared to 24.16% and 16.75%, respectively, for the Russell 2500 Index and
25.98% and 16.05%, respectively, for the S&P 500 Index.

PERFORMANCE REVIEW

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 too
conservative as economic data -- despite severe winter weather in large parts of
the country -- indicated a more vigorous U.S. economy. Particularly, strong
employment data and consistently high levels of consumer confidence have pointed
to a stronger economy. Ever fearing a tight labor market and accelerating
inflation, the bond market responded with rising interest rates. The impact on
the Portfolio was mixed.

Reflecting stronger consumer confidence, and after being shunned for a long
time, the retail industry staged a strong turnaround and produced excellent
returns for the Portfolio. We took advantage of the high volatility in this
sector and increased turnover in consumer retail stocks. 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

- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio

87
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- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)

products through independent representatives. We expect the company to grow its
earnings substantially in 1996 based on turnaround performance in its direct
marketing division. Other trades in the retail sector include the sale of DEB
Shops and the purchase of 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 Portfolio's deeply cyclical companies fundamental earnings outlook improved
significantly in anticipation of stronger economic growth. Paper companies
witnessed some rebound in paper prices and the steel industry showed a modest
recovery from late last year's slowdown. In addition to an accelerating domestic
economic environment, small cap cyclical companies continue to benefit from an
inexpensive U.S. currency and strong product demand from Asia. Although the
fundamental outlook for cyclical companies has improved significantly during the
past six months relative valuations for these companies have become more
attractive. This opened up bargains for the Portfolio's value oriented stock
selection strategy such as Commercial Intertech Corp., an Ohio manufacturer of
hydraulic equipment, water purification products, and metal buildings. We
purchased the company in May at an attractive price of 10 times this year's
expected earnings. In June Commercial Intertech received an unsolicited cash
tender offer by Canadian United Dominion. Following our sell discipline the
Portfolio sold its holding in the company as the price moved up to 15 times
estimated earnings in response to the buyout offer.

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
suffered from their perceived excess interest rate sensitivity. While the
Russell 2000 Small Company Index advanced almost ten percent during the first
six months of 1996, utility companies trading at the NYSE stood at a standstill
advancing by only 0.5%, and the NASDAQ's insurance index advanced by only 1.6%.
In addition to improving relative valuations we continue to believe in a very
favorable fundamental business outlook for financial companies. Steady loan
growth, favorable net interest margins, continued high asset quality, and
improved efficiencies drive our optimism for that sector. During the second
quarter, we added Susquehanna Bancshares and Astoria Financial Corp. to the
Portfolio's bank holdings. 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 Astoria Financial Corp.,
a New York thrift institution, at book value and 9.1 times this year's expected
cash earnings. While Astoria is extremely attractive on valuation alone, we
expect a favorable supervisory goodwill ruling to provide extra upside momentum
for the stock.

Domestic small company markets saw extraordinary gains at the beginning of the
second quarter. The driving force behind this strength has been the market's
unquestioned affection for technology stocks. Two months into the second
quarter, growth-oriented small cap issues were leading value-oriented small cap
companies by almost 800 basis points as measured by the Russell 2000 Growth and
Value Indices. June brought a steep reversal of that trend as the small cap
growth advantage shrunk to 160 basis points. The market's fondness for the
technology sector has been put to the test by lower than expected sales and
ensuing inventory overhang, particularly for semiconductors and related
products. Since we believe the sector has been valued fairly richly the
Portfolio was underweight in technology issues and avoided much of the
volatility.

As we have stated in the past the Portfolio is designed to outperform small cap
indices in the long term, as well as do so with lower return volatility. In
times of sharp -- almost speculative -- market advances such as we have
witnessed in the first five months of 1996, the Portfolio is expected to provide
strong absolute returns but may not participate fully in speculative rallies.
However, we expect the Portfolio's undervalued, under-researched and dividend
paying companies to outperform small company indices in difficult market
environments.

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.

Gary D. Haubold
PORTFOLIO MANAGER

William B. Gerlach
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------

Christian Stadlinger, the portfolio manager of the Portfolio resigned from
Morgan Stanley Asset Management Inc. in August 1996. Gary D. Haubold and William
B. Gerlach have replaced Mr. Stadlinger and now have primary responsibility for
managing the assets of the Portfolio.

- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio

88
<PAGE>
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE SMALL CAP VALUE EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (98.2%)
AEROSPACE (1.9%)
19,000 AAR Corp.......................................... $ 387
13,000 Thiokol Corp...................................... 513
300 United Industrial Corp............................ 2
----------
902
----------
BANKING (11.4%)
17,000 Astoria Financial Corp............................ 461
17,175 First Security Corp. (Delaware)................... 412
20,000 Greenpoint Financial Corp......................... 565
17,600 Onbancorp, Inc.................................... 576
28,000 Peoples Heritage Financial Group, Inc............. 571
16,000 Standard Federal Bank............................. 616
20,000 Susquehanna Bancshares, Inc....................... 535
27,000 Trustmark Corp.................................... 567
20,000 Union Planters Corp............................... 608
21,000 Washington Mutual, Inc............................ 627
----------
5,538
----------
BUILDING (3.0%)
13,300 Ameron International Corp. (Delaware)............. 525
38,800 Gilbert Associates, Inc., Class A................. 495
29,000 Ryland Group, Inc................................. 435
----------
1,455
----------
CAPITAL GOODS (4.5%)
19,403 Binks Manufacturing Co............................ 529
33,200 Cascade Corp...................................... 444
21,600 Starret (L.S.) Co., Class A....................... 562
11,700 Tecumseh Products Co., Class A.................... 629
----------
2,164
----------
CHEMICALS (4.3%)
33,792 Aceto Corp........................................ 532
19,400 Dexter Corp....................................... 577
9,400 Learonal, Inc..................................... 235
19,800 Quaker Chemical Corp.............................. 253
14,000 Witco Corp........................................ 481
----------
2,078
----------
COMMUNICATIONS (0.4%)
8,200 Comsat Corp....................................... 213
----------
CONSUMER-DURABLES (4.2%)
21,200 Arvin Industries, Inc............................. 472
23,998 Knape & Vogt Manufacturing Co..................... 378
31,300 Oneida Ltd........................................ 587
23,100 Smith (A.O.) Corp., Class B....................... 577
----------
2,014
----------
CONSUMER-RETAIL (5.3%)
29,800 CPI Corp.......................................... 492
20,700 Guilford Mills, Inc............................... 517
40,000 Lillian Vernon Corp............................... 510
10,100 Springs Industries, Inc., Class A................. 510
20,000 Stanhome, Inc..................................... 530
----------
2,559
----------

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
CONSUMER-STAPLES (3.7%)
15,246 Block Drug Co., Inc., Class A..................... $ 640
25,400 Coors (Adolph), Inc., Class B..................... 454
14,900 International Multifoods Corp..................... 272
26,400 Nash Finch Co..................................... 423
----------
1,789
----------
ENERGY (3.5%)
24,600 Ashland Coal, Inc................................. 640
17,000 Diamond Shamrock, Inc............................. 491
18,500 Ultramar Corp..................................... 536
----------
1,667
----------
FINANCIAL-DIVERSIFIED (5.5%)
11,900 Finova Group, Inc................................. 580
12,100 GATX Corp......................................... 584
28,000 Manufactured Home Communities, Inc. REIT.......... 539
35,000 South West Property Trust REIT.................... 468
21,000 Wellsford Residential Property Trust REIT......... 472
----------
2,643
----------
HEALTH CARE (6.6%)
25,000 Analogic Corp..................................... 669
14,500 Beckman Instruments, Inc.......................... 551
19,400 Bergen Brunswig Corp., Class A.................... 538
35,500 Bindley Western Industries, Inc................... 595
22,700 Kinetic Concepts, Inc............................. 352
19,000 United Wisconsin Services, Inc.................... 494
----------
3,199
----------
INDUSTRIAL (4.4%)
17,200 American Filtrona Corp............................ 550
9,400 Barnes Group, Inc................................. 481
7,200 Commercial Intertech Corp......................... 185
34,700 GenCorp, Inc...................................... 525
38,500 Kaman Corp., Class A.............................. 390
----------
2,131
----------
INSURANCE (6.3%)
16,200 Argonaut Group, Inc............................... 506
24,000 Enhance Financial Services Group, Inc............. 672
15,500 Provident Companies, Inc.......................... 574
18,900 Selective Insurance Group, Inc.................... 614
19,950 USLife Corp....................................... 656
----------
3,022
----------
METALS (2.3%)
33,000 Birmingham Steel Corp............................. 540
14,100 Cleveland-Cliffs, Inc............................. 552
----------
1,092
----------
PAPER & PACKAGING (2.1%)
16,500 Ball Corp......................................... 474
13,900 Potlatch Corp..................................... 544
----------
1,018
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio

89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SERVICES (10.4%)
21,200 Angelica Corp..................................... $ 501
29,000 Bowne & Co........................................ 598
25,700 Cross (A.T.) Co., Class A......................... 456
40,000 Jackpot Enterprises, Inc.......................... 510
25,900 New England Business Services, Inc................ 505
24,400 Ogden Corp........................................ 442
55,400 Piccadilly Cafeterias, Inc........................ 582
29,500 Russ Berrie & Co., Inc............................ 542
20,000 Sbarro, Inc....................................... 502
16,300 True North Communications, Inc.................... 363
----------
5,001
----------
TECHNOLOGY (8.9%)
30,000 Augat, Inc........................................ 574
35,000 Core Industries, Inc.............................. 503
15,800 Cubic Corp........................................ 515
29,000 Dallas Semiconductor Corp......................... 526
33,700 Gerber Scientific, Inc............................ 543
26,400 MTS Systems Corp.................................. 554
22,500 National Computer Systems, Inc.................... 481
5,000 Park Electrochemical Corp......................... 100
28,000 Scitex Ltd........................................ 483
----------
4,279
----------
TRANSPORTATION (2.2%)
21,000 Airborne Freight Corp............................. 546
3,800 Overseas Shipholding Group, Inc................... 69
25,000 SkyWest, Inc...................................... 466
----------
1,081
----------
UTILITIES (7.3%)
19,700 Central Hudson Gas & Electric..................... 616
19,600 Commonwealth Energy Systems Cos................... 505
12,000 Eastern Enterprises............................... 399
18,900 Oneok, Inc........................................ 472
13,700 Orange & Rockland Utilities, Inc.................. 503
13,700 SJW Corp.......................................... 456
31,500 Washington Water Power Co......................... 587
----------
3,538
----------
TOTAL COMMON STOCKS (Cost $41,033)............................ 47,383
----------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENT (1.0%)
REPURCHASE AGREEMENT (1.0%)
$ 465 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $465,
collateralized by $460 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $470 (Cost
$465)........................................... $ 465
----------
TOTAL INVESTMENTS (99.2%) (Cost $41,498)...................... 47,848
----------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (1.3%)
Cash............................................ $ 1
Receivable for Investments Sold................. 516
Dividends Receivable............................ 101
Other........................................... 9 627
----------
LIABILITIES (-0.5%)
Payable for Investments Purchased............... (101)
Investment Advisory Fees Payable................ (80)
Professional Fees Payable....................... (12)
Administrative Fees Payable..................... (8)
Custodian Fees Payable.......................... (5)
Distribution Fees Payable....................... (1)
Payable for Portfolio Shares Redeemed........... (1)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (9) (218)
---------- ----------
NET ASSETS (100%)............................................. $48,257
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 38,164
Undistributed Net Investment Income........................... 295
Accumulated Net Realized Gain................................. 3,448
Unrealized Appreciation on Investments........................ 6,350
----------
NET ASSETS.................................................... $48,257
----------
----------
CLASS A:
NET ASSETS.................................................... $46,746
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,594,590 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $13.00
----------
----------
CLASS B:
NET ASSETS.................................................... $1,511
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 116,308 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $12.99
----------
----------
</TABLE>

- ------------------------------------------------------------
REIT -- Real Estate Investment Trust

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio

90
<PAGE>
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE U.S. REAL ESTATE PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Apartment 20.3%
Land 3.0%
Lodging/Leisure 10.5%
Manufactured Home 7.1%
Office and
Industrial 35.4%
Retail 13.7%
Self Storage 4.4%
Other 5.6%
</TABLE>

PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION
OF REAL ESTATE INVESTMENT TRUSTS (NAREIT) INDEX(1)
- ---------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.......... 11.10% 24.20% 24.60%
PORTFOLIO -- CLASS B(3)....... 10.15 N/A N/A
INDEX......................... 6.90 16.16 16.15

<FN>

1. The NAREIT Index is an unmanaged market weighted index of tax qualified REITs
(excluding healthcare REITs) listed on the New York Stock Exchange, American
Stock Exchange and the NASDAQ National Market System, including dividends.

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The U.S. Real Estate Portfolio seeks to provide above average current income and
long-term capital appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real estate investment
trusts.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 11.10% for the Class A shares and 10.15% for the Class B shares, as compared
to a total return of 6.90% for the National Association of Real Estate
Investment Trusts (NAREIT) Index. The average annual total return for the twelve
months ended June 30, 1996 and for the period from inception on February 24,
1995 through June 30, 1996 was 24.20% and 24.60%, respectively, for the Class A
shares, as compared to 16.16% and 16.15%, respectively, for the Index.

The continued gradual appreciation in the Index together with average dividend
yields for the companies comprising the Index are consistent with our view of a
commercial real estate market in the United States that is making a transition
from recovery to overall equilibrium. Net absorption of all types of real estate
continued in the second quarter to be positive, and there are even some
indications of a pick-up in spatial demand commensurate with an increase this
year in the overall level of economic activity. As occupancy rates have
continued to rise, rental growth has become generally more widespread, and many
property types are registering not only nominal, but positive REAL growth as
well for the preceding twelve months.

With the growth in rental rates and occupancy, new construction of real estate
has now become economically feasible for the first time in over five years.
While providers of capital (including the public REIT market) are generally
skeptical of speculative development, new projects which are well-supported by
pre-leasing and which are conservatively financed are being developed in today's
environment. In those markets which have reached equilibrium, that is, where new
construction is taking place, we can expect rental growth to begin to moderate.
Clearly, our focus in the coming quarters will be to monitor market conditions
to identify which markets, if any, are subject to potential overbuilding which
could lead to a deterioration in operating results. With the exception of a
handful of apartment markets, new development, where it is taking place, does
not appear excessive in comparison to tenant demand.

The real estate capital markets have continued to become more liquid. We believe
that this phenomenon is a function of three key factors: first, the gradual

- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO (CONT.)
recovery in the markets has reduced perceived risk and therefore enticed
investors to re-enter the market; second, the withdrawal of traditional capital
providers and the resumption of selective development has created a substantial
need for new capital in the industry, and third, concern about potential risk in
the equity and fixed income markets has led to a search for defensive
investments such as real estate that provide low or negative correlations with
the primary asset classes.

We continue to manage the Portfolio on the basis of establishing an overall
asset allocation framework defined by target exposures to each property type and
region based upon our analysis of underlying property supply and demand
fundamentals. We then select individual securities based upon our analysis of
underlying property value. Using this methodology, the overall shape and
composition of the Portfolio continued to evolve over the course of the second
quarter.

To begin with, we continued our policy of gradually under-weighting the
apartment sector, where our overall exposure fell from 23.8% as of March 31,
1996 to 20.3% as of June 30. By contrast, the weighting for the Index is 26%. As
noted in previous reports and as alluded to above, the apartment markets today
are generally in equilibrium, and new construction has led to a leveling-off in
rental growth in most markets. While apartments continue to serve as a
relatively low volatility core to our Portfolio, we continue to find more
attractive total return investment opportunities in other sectors. Consistent
with previous quarters, we continue to focus our investments in regions (e.g.,
the Pacific Coast) or sub-markets (e.g., Class "B" apartments in the sun-belt)
where rental growth continues to exceed the inflation rate.

Manufactured Housing continues to be over-weighted in our Portfolio with a 7.1%
position. While dividend and property yields in this sector are relatively
modest, we believe that the combination of modest new construction, minimal
capital requirements and low volatility make this an attractive anchor to the
Portfolio. We continue to underweight the retail sector, and in fact our overall
weighting fell again last quarter, to 13.7%, compared to an Index weighting of
36%. While share prices in the retail sector recovered in May and June after a
significant fall during the first four months of the year, we believe that the
secular bear market in retail continues unabated and that the sector offers no
better than fair value relative to an increasing level of operating risk. To put
our view in some perspective, the overall level of new retail construction is
now at levels not seen since the height of the real estate development boom in
1986. At the same time, the fundamentals of tenant demand and credit risk remain
shaky at best. Increasingly today retail landlords are being asked to take what
are in effect venture capital risks in sponsoring new retail tenants in their
malls and yet are being compensated with fixed income type returns. We do not
believe that this disequilibrium between risk and reward will be alleviated
until the retail market undergoes the kind of wash-out that occurred in the
office, apartment and hotel sectors. Of course, that wash-out was characterized
by 7 years of no construction, tremendous vacancy rates, a precipitous fall in
nominal rents and a huge erosion in operating margins. Under these
circumstances, we have concentrated our retail holdings in names with the
highest quality malls that will best withstand the downturn in capital values
and in companies with a regional focus that provides the best protection against
new competition.

At the end of the previous quarter we spoke of our intention to remain
overweight in the office and industrial sectors but to rigorously review our
commitments with a view towards finding attractive underlying asset value. We
felt that this strategy was necessitated by a sector which boasted the most
attractive fundamentals in the industry but where share prices exceeded
intrinsic value by a widening margin. Today, our exposure to the sector is
approximately 35.4% versus 18% for the Index, and we have continued to identify
and add to positions which offer discounts to underlying asset value. During the
quarter we added substantially to our holdings in Bedford Properties, Pacific
Gulf and East Group Properties, three companies with significant exposure to the
office or industrial markets in California and in other selective sun-belt
locations. All three trade at attractive levels relative to underlying assets
and are capitalized to grow through acquisitions and new development. We also
established a position this quarter in The Parkway Company, a company engaged in
the office business in Texas and the Southeast. These four companies, together
with Meridian Industrial, Duke Realty and Liberty Property Trust, form the
backbone of our overweighting in the office and industrial sectors today.
Finally, we have reserved a modest level of cash for an investment in a company
focusing on suburban office buildings in the Midwest which will close in the
third quarter.

Lastly, we remain overweighted in the lodging sector, with a 10.5% exposure vs.
6% for the Index, in large part because of the continuing attractive operating
fundamentals in the full-service components of the sector. Shareholders will
note, however, that our

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- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO (CONT.)
exposure has been reduced significantly from the previous quarter, largely as a
result of what we believe are now excessive valuation levels prevailing
throughout the sector. One measure of this emerging over-valuation is the
substantial number of IPO in the hotel business. Furthermore, a re-emergence of
new construction in the limited service sector has pushed new construction to
the level of 1986, the preceding peak in the lodging business. While we remain
convinced that full service hotels can deliver attractive capital appreciation
in the coming year, we are becoming increasingly selective in our picks in this
sector and will have a bias towards lightening our exposure should share prices
continue their rapid rise.

Russell C. Platt
PORTFOLIO MANAGER

Theodore R. Bigman
PORTFOLIO MANAGER

July 1996

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U.S. Real Estate Portfolio

93
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (94.0%)
APARTMENT (20.3%)
162,800 Amli Residential Properties Trust REIT............ $ 3,358
41,000 Apartment Investment & Management Co., Class A,
REIT............................................ 769
233,300 Avalon Properties, Inc., REIT..................... 5,074
23,000 Columbus Realty Trust REIT........................ 446
132,700 Essex Property Trust, Inc., REIT.................. 2,853
27,800 Evans Withycombe Residential, Inc................. 580
234,000 Irvine Apartment Communities, Inc., REIT .... 4,709
99,600 Oasis Residental, Inc., REIT...................... 2,179
124,500 Paragon Group, Inc., REIT......................... 2,039
220,300 South West Property Trust REIT.................... 2,946
16,100 Summit Properties, Inc............................ 316
----------
25,269
----------
LAND (3.0%)
(a)245,700 Atlantic Gulf Communities Corp.................... 1,474
(a)252,800 Catellus Development Corp......................... 2,307
----------
3,781
----------
LODGING/LEISURE (10.5%)
59,900 Felcor Suite Hotels, Inc., REIT................... 1,827
(a)255,000 Host Marriott Corp................................ 3,347
(a)16,100 Interstate Hotels Co.............................. 358
(a)306,200 John Q Hammons Hotels, Inc........................ 3,330
9,100 National Golf Properties, Inc..................... 221
(a)258,100 Servico, Inc...................................... 3,936
8,400 Winston Hotels, Inc., REIT........................ 97
----------
13,116
----------
MANUFACTURED HOME (7.1%)
367,850 ROC Communities, Inc., REIT....................... 8,782
----------
OFFICE AND INDUSTRIAL (35.0%)
INDUSTRIAL (16.8%)
57,800 CenterPoint Properties Corp., REIT................ 1,402
201,000 East Group Properties REIT........................ 4,372
464,984 Meridian Industrial Trust, Inc., REIT............. 8,544
11,100 Meridian Point Realty Trust '83 REIT.............. 22
353,300 Pacific Gulf Properties, Inc., REIT............... 5,918
38,800 Security Capital Industrial Trust REIT............ 684
----------
20,942
----------
OFFICE (6.8%)
255,600 Crocker Realty Trust, Inc., REIT.................. 2,939
323,000 Parkway Co........................................ 4,926
(a)67,900 Trizec Corp., Ltd., REIT.......................... 518
----------
8,383
----------

<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
OFFICE AND INDUSTRIAL (11.4%)
397,300 Bedford Property Investors, Inc., REIT............ $ 5,363
33,600 Brandywine Realty Trust REIT...................... 189
160,200 Duke Realty Investments, Inc., REIT............... 4,846
191,500 Liberty Property Trust REIT....................... 3,806
----------
14,204
----------
TOTAL OFFICE AND INDUSTRIAL................................. 43,529
----------
RETAIL (13.7%)
FACTORY OUTLET CENTER (1.0%)
131,200 Factory Stores of America, Inc., REIT............. 1,197
2,000 Horizon Group, Inc., REIT......................... 41
----------
1,238
----------
REGIONAL MALL (7.5%)
170,700 Crown American Realty Trust REIT.................. 1,323
254,100 DeBartolo Realty Corp., REIT...................... 4,097
37,900 Glimcher Realty Trust REIT........................ 640
139,100 Urban Shopping Centers, Inc., REIT................ 3,304
----------
9,364
----------
SHOPPING CENTER (5.2%)
277,500 Alexander Haagen Properties, Inc., REIT........... 3,538
254,000 Burnham Pacific Property Trust REIT............... 2,953
----------
6,491
----------
TOTAL RETAIL................................................ 17,093
----------
SELF STORAGE (4.4%)
11,900 Public Storage, Inc., REIT........................ 245
132,300 Shurgard Storage Centers, Inc., Series A, REIT.... 3,341
92,300 Storage Trust Realty REIT......................... 1,892
----------
TOTAL SELF STORAGE.......................................... 5,478
----------
TOTAL COMMON STOCKS (Cost $110,912)........................... 117,048
----------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
WARRANTS
(000)
- ----------
<C> <S> <C>
WARRANTS (0.4%)
INDUSTRIAL (0.4%)
(a)29,470 Meridian Industrial Trust, Inc., REIT, expiring
2/23/99......................................... 78
(a)184,843 Meridian Industrial Trust, Inc., REIT, expiring
2/23/99......................................... 485
----------
TOTAL WARRANTS (Cost $409).................................... 563
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

U.S. REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (6.2%)
REPURCHASE AGREEMENT (6.2%)
$ 7,703 Chase Securities, Inc., 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $7,706,
collateralized by $7,570 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $7,739 (Cost
$7,703)......................................... $ 7,703
----------
TOTAL INVESTMENTS (100.6%) (Cost $119,024).................... 125,314
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (5.2%)
Receivable for Investments Sold................. $ 5,571
Dividends Receivable............................ 823
Interest Receivable............................. 3
Other........................................... 6 6,403
----------
LIABILITIES (-5.8%)
Payable for Investments Purchased............... (6,906)
Investment Advisory Fees Payable................ (188)
Bank Overdraft.................................. (38)
Administrative Fees Payable..................... (15)
Custodian Fees Payable.......................... (13)
Payable for Portfolio Shares Redeemed........... (2)
Distribution Fees Payable....................... (2)
Directors' Fees and Expenses Payable............ (2)
Other Liabilities............................... (39) (7,205)
---------- ----------
NET ASSETS (100%)............................................. $124,512
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 110,144
Undistributed Net Investment Income........................... 548
Accumulated Net Realized Gain................................. 7,530
Unrealized Appreciation on Investments........................ 6,290
----------
NET ASSETS.................................................... $ 124,512
----------
----------

<CAPTION>
CLASS A:
- --------------------------------------------------
<S> <C> <C>
NET ASSETS.................................................... $119,709
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,548,747 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $12.54
----------
----------
<CAPTION>
CLASS B:
- --------------------------------------------------
<S> <C> <C>
NET ASSETS.................................................... $4,803
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 383,754 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $12.52
----------
----------
</TABLE>

- ------------------------------------------------------------
(a) -- Non-income producing security
REIT -- Real Estate Investment Trust

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio

95
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE VALUE EQUITY PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Aerospace 2.4%
Banking 11.9%
Capital Goods 2.1%
Chemicals 4.1%
Communications 5.0%
Consumer-Durables 4.6%
Consumer-Retail 6.5%
Consumer-Service & Growth 3.0%
Consumer-Staples 8.0%
Energy 6.9%
Financial-Diversified 2.4%
Health Care 3.8%
Industrial 4.0%
Insurance 6.4%
Metals 2.2%
Paper & Packaging 5.4%
Technology 4.5%
Transportation 3.9%
Utilities 9.1%
Other 3.8%
</TABLE>

PERFORMANCE COMPARED TO THE S&P 500
AND THE INDATA EQUITY-MEDIAN INDICES(1)
- ----------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A... 8.55% 21.53% 15.35% 12.31%
PORTFOLIO -- CLASS
B(3).................. 7.48 N/A N/A N/A
S&P 500................ 10.09 25.98 15.71 15.05
INDATA EQUITY-MEDIAN... 9.53 23.96 14.95 14.31

<FN>

1. The Indata Equity-Median Index and the S&P 500 Index are unmanaged indices of
common stocks. The Indata Equity-Median Index includes an average asset
allocation of 5% cash and 95% equity based on $30.6 billion in assets among
562 portfolios for the six month period ended June 30, 1996.

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

Our value investment philosophy for the Value Equity Portfolio is based on the
premise that a diversified portfolio of undervalued securities will outperform
the market over the long-term, and can be expected to preserve principal in a
difficult market environment.

Key aspects of our philosophy are as follows:

Reversion to mean valuation levels (return to the long term average) is the
most consistent and powerful force in investing.

We buy companies selling at less than our research measures to be their true
worth.

Our Portfolio is characterized by a distinctly below average price-to-earnings
ratio, price-to-book ratio, and a high dividend yield.

We limit our universe of investments to larger, liquid stocks. This is a list
similar to the S&P 500.

Investment decisions are based on research undertaken by the Morgan Stanley
Asset Management/ Chicago investment team.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 8.55% for the Class A shares and 7.48% for the Class B shares, as compared to
a total return of 10.09% for the S&P 500 Index and 9.53% for the Indata
Equity-Median Index. The average annual total return for the twelve month and
five year periods ended June 30, 1996 and for the period from inception on
January 31, 1990 through June 30, 1996 were 21.53%, 15.35% and 12.31%,
respectively, for the Class A shares, as compared to 25.98%, 15.71% and 15.05%
for the S&P 500 Index and 23.96%, 14.95% and 14.31%, respectively for the Indata
Equity-Median Index.

The Portfolio holds undervalued companies with a wide valuation gap as compared
to the characteristics of the S&P 500:

<TABLE>
<CAPTION>
P/E P/B
--------- ---------
<S> <C> <C>
Value Equity Portfolio...................... 14.9x 2.4x
S&P 500..................................... 18.3x 4.3x
</TABLE>

Performance in the first half of 1996 was driven primarily by investment style
as growth significantly outperformed value in both large and small cap stock
segments. Year-to-date, the S&P/Barra Value Index returned 8.65% and the
S&P/Barra Growth Index
returned 11.80%. The small cap Russell 2000 Value Index increased 8.86% in the
first half while the Russell 2000 Growth Index returned 11.94%. The market was
extremely volatile, particularly near the end of June, as it deteriorated on
fears of an overheating economy, rising inflation and interest rate

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OVERVIEW
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
increases along with corporate earnings uncertainty, which caused investors to
sell banking and cyclical stocks in favor of consumer and technology stocks. The
market continued to rise however, as historically strong mutual fund inflows
persisted during the first six months of 1996.

The best performing sectors in the Portfolio during the first half of 1996 were
retail, up 57%, and transportation, up 23%. The underperforming sectors for the
first half were consumer non-durables, which declined 3% and paper & forest
products, which returned 0.11%. Year-to-date, the best performing stocks were TJ
Maxx, up 80%, Woolworth, up 73%, Monsanto, up 34%, and Sprint, up 26%. Stocks
providing the biggest disappointment in the first half included Apple Computer,
down 34%, and Fleming Companies, down 29%.

During the first six months of 1996, we initiated positions in the tobacco
industry, purchasing both Philip Morris and RJR Nabisco. Due to the overhang of
litigation and possible government regulation, we found the sector to offer high
yields and attractive valuations. We also adjusted the exposure to the energy
sector through sales of Royal Dutch and Texaco, but have been adding to the
Exxon position to maintain a market weighting in the sector.

We continue to find the current valuations in finance and cyclicals attractive
and are overweighted in these sectors. The Portfolio is underweighted in health
care, consumer-staples, technology and communications.

Stephen C. Sexauer
PORTFOLIO MANAGER

Alford E. Zick, Jr.
PORTFOLIO MANAGER

July 1996

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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE VALUE EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (96.2%)
AEROSPACE (2.4%)
27,900 United Technologies Corp.......................... $ 3,208
----------
BANKING (11.9%)
35,650 BankAmerica Corp.................................. 2,700
35,800 Bankers Trust (New York) Corp..................... 2,645
44,400 Chase Manhattan Corp.............................. 3,136
60,000 First of America Bank Corp........................ 2,685
47,650 Mellon Bank Corp.................................. 2,716
80,600 PNC Bank Corp..................................... 2,398
----------
16,280
----------
CAPITAL GOODS (2.1%)
70,500 Deere & Co........................................ 2,820
----------
CHEMICALS (4.1%)
43,475 Eastman Chemical Co............................... 2,647
91,300 Monsanto Co....................................... 2,967
----------
5,614
----------
COMMUNICATIONS (5.0%)
48,600 NYNEX Corp........................................ 2,308
33,400 SBC Communications, Inc........................... 1,645
68,300 Sprint Corp....................................... 2,869
----------
6,822
----------
CONSUMER-DURABLES (4.6%)
28,800 Chrysler Corp..................................... 1,786
70,500 Ford Motor Co..................................... 2,282
41,700 General Motors Corp............................... 2,184
----------
6,252
----------
CONSUMER-RETAIL (6.5%)
50,500 J.C. Penney Co., Inc.............................. 2,651
78,400 TJX Companies, Inc................................ 2,646
(a)158,200 Woolworth Corp.................................... 3,559
----------
8,856
----------
CONSUMER-SERVICE & GROWTH (3.0%)
26,900 Eastman Kodak Co.................................. 2,091
111,500 Ogden Corp........................................ 2,021
----------
4,112
----------
CONSUMER-STAPLES (8.0%)
55,500 American Brands, Inc.............................. 2,518
145,200 Fleming Cos., Inc................................. 2,087
32,400 Philip Morris Cos., Inc........................... 3,370
91,400 RJR Nabisco Holdings Corp......................... 2,833
----------
10,808
----------
ENERGY (6.9%)
69,800 Ashland, Inc...................................... 2,766
26,800 Atlantic Richfield Co............................. 3,176
40,100 Exxon Corp........................................ 3,484
----------
9,426
----------
FINANCIAL-DIVERSIFIED (2.4%)
43,450 Student Loan Marketing Association................ 3,215
----------

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
HEALTH CARE (3.8%)
67,100 Bausch & Lomb, Inc................................ $ 2,852
48,900 Baxter International, Inc......................... 2,311
----------
5,163
----------
INDUSTRIAL (4.0%)
133,900 Hanson plc ADR.................................... 1,908
62,100 Rockwell International Corp....................... 3,555
----------
5,463
----------
INSURANCE (6.4%)
84,800 American General Corp............................. 3,085
72,500 Lincoln National Corp............................. 3,353
43,300 St. Paul Cos., Inc................................ 2,317
----------
8,755
----------
METALS (2.2%)
48,400 Phelps Dodge Corp................................. 3,019
----------
PAPER & PACKAGING (5.4%)
99,400 Louisiana-Pacific Corp............................ 2,199
53,300 Weyerhauser Co.................................... 2,265
48,000 Willamette Industries, Inc........................ 2,844
----------
7,308
----------
TECHNOLOGY (4.5%)
63,100 Apple Computer, Inc............................... 1,317
51,400 Harris Corp....................................... 3,135
34,700 Texas Instruments, Inc............................ 1,731
----------
6,183
----------
TRANSPORTATION (3.9%)
(a)26,600 AMR Corp.......................................... 2,421
103,500 Ryder System, Inc................................. 2,911
----------
5,332
----------
UTILITIES (9.1%)
86,000 General Public Utilities Corp..................... 3,031
75,200 NIPSCO Industries, Inc............................ 3,027
111,200 Pinnacle West Capital Corp........................ 3,378
69,700 Texas Utilities Co................................ 2,980
----------
12,416
----------
TOTAL COMMON STOCKS (Cost $113,174)........................... 131,052
----------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.5%)
REPURCHASE AGREEMENT (3.5%)
$ 4,864 Chase Securities, Inc., 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $4,866,
collateralized by $4,860 U.S.Treasury Notes,
7.125%, due 9/30/99, valued at $4,969 (Cost
$4,864)......................................... 4,864
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Value Equity Portfolio

98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------
TOTAL INVESTMENTS (99.7%) (Cost $118,038)..................... $135,916
----------
OTHER ASSETS (0.4%)
Cash............................................ $ 1
Dividends Receivable............................ 331
Receivable for Investments Sold................. 122
Receivable for Portfolio Shares Sold............ 117
Interest Receivable............................. 2
Other........................................... 10 583
----------
LIABILITIES (-0.1%)
Investment Advisory Fees Payable................ (163)
Administrative Fees Payable..................... (18)
Professional Fees Payable....................... (13)
Custodian Fees Payable.......................... (7)
Payable for Portfolio Shares Redeemed........... (5)
Directors' Fees and Expenses Payable............ (3)
Distribution Fees Payable....................... (1)
Other Liabilities............................... (19) (229)
----------
----------
NET ASSETS (100%)............................................. $136,270
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 103,944
Undistributed Net Investment Income........................... 1,001
Accumulated Net Realized Gain................................. 13,447
Unrealized Appreciation on Investments........................ 17,878
----------
NET ASSETS.................................................... $136,270
----------
----------
</TABLE>

<TABLE>
<C> <S> <C>
CLASS A:
NET ASSETS.................................................... $134,316
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 8,933,461 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $15.04
----------
----------
CLASS B:
NET ASSETS.................................................... $1,954
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 130,101 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $15.02
----------
----------
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
ADR -- American Depositary Receipt
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Value Equity Portfolio

99
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE BALANCED PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Aerospace 1.1%
Banking 6.2%
Capital Goods 0.9%
Chemicals 2.1%
Communications 2.8%
Consumer - Durables 2.3%
Consumer - Retail 3.4%
Consumer - Service & Growth 1.5%
Consumer - Staples 3.7%
Energy 3.4%
Financial -Diversified 1.1%
Health Care 1.9%
Industrial 2.0%
Insurance 3.0%
Metals 1.2%
Paper & Packaging 3.0%
Technology 2.7%
Transportation 1.9%
Utilities 4.7%
U.S. Treasury Notes 43.0%
Other 8.1%
</TABLE>

PERFORMANCE COMPARED TO INDATA
BALANCED-MEDIAN INDEX(1)
- -----------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------
AVERAGE
AVERAGE ANNUAL
ANNUAL SINCE
YTD ONE YEAR FIVE YEARS INCEPTION
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A..... 3.92% 12.44% 11.26% 10.13%
PORTFOLIO -- CLASS
B(3)..................... 3.40 N/A N/A N/A
INDEX.................... 5.41 15.57 11.68 11.15

<FN>

1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 7% cash, 39% bonds and 54% equity based on $37.8 billion in
assets among 538 portfolios for the six month period ended June 30, 1996
(assumes dividends reinvested). The index returns are gross of management
fees; the Portfolio returns are net of management fees and expenses.

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The Balanced Portfolio's value investment philosophy is based on the premise
that a diversified portfolio of undervalued equity securities and fixed income
securities will outperform the market over the long-term and can be expected to
preserve principal in a difficult market environment.

The Balanced Portfolio's asset allocation strategy between equities, fixed
income and cash is based upon our estimate of the portfolio's risk. Since
equities are the highest risk asset class, we have maintained a below average
equity exposure during past periods of high market valuation. Typically, our
equity exposure will range between 35% and 65% with an expected long term
average of 55%.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 3.92% for the Class A shares and 3.40% for the Class B shares, as compared to
a total return of 5.41% for the Indata Balanced-Median Index. The average annual
total return for the twelve month and five year periods ended June 30, 1996, and
for the period from inception on February 20, 1990 through June 30, 1996 for the
Class A shares was 12.44%, 11.26% and 10.13%, respectively, as compared to
15.57%, 11.68% and 11.15%, respectively, for the Index.

Our asset allocation, based on market value at June 30, 1996, is as follows:

<TABLE>
<S> <C>
Equities................................ 49.3%
Fixed Income............................ 43.4
Cash.................................... 7.3
-----
100.0%
-----
-----
</TABLE>

EQUITIES

For the quarter ended June 30, 1996, the equity component of the Portfolio had a
gross return of 3.21% and for the six months ended June 30, 1996, returned
9.33%. The S&P 500 returned 4.51% for the quarter ended June 30, 1996 and 10.20%
for the first half of 1996.

Performance in the first half of 1996 was driven primarily by investment style
as growth significantly outperformed value in both large and small cap stock
segments. Year-to-date, the S&P/Barra Value Index returned 8.65% and the
S&P/Barra Growth Index returned 11.80%. The small cap Russell 2000 Value Index
increased 8.86% in the first half while the Russell 2000 Growth Index returned
11.94%. The market was extremely volatile, particularly near the

- --------------------------------------------------------------------------------
Balanced Portfolio

100
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)

end of June, as it deteriorated on fears of an overheating economy, rising
inflation and interest rate increases along with corporate earnings uncertainty,
which caused investors to sell banking and cyclical stocks in favor of consumer
and technology stocks. The market continued to rise however, as historically
strong mutual fund inflows persisted during the first six months of 1996.

The equity component of the Balanced Portfolio holds the same undervalued
companies that are held in the Value Equity Portfolio. The equity portion of the
Portfolio has a wide valuation gap as compared to the characteristics of the S&P
500.

<TABLE>
<CAPTION>
PORTFOLIO EQUITY PORTION P/E P/B
- --------------------------------------------- --------- ---------
<S> <C> <C>
Value Equity Portfolio....................... 14.9x 2.4x
S&P 500...................................... 18.3x 4.3x
</TABLE>

The best performing sectors in the Portfolio during the first half of 1996 were
retail, up 57%, and transportation, up 23%. The underperforming sectors for the
first half were consumer non-durables which declined 3% and paper & forest
products, which returned 0.11%. Year-to-date, the best performing stocks were TJ
Maxx, up 80%, Woolworth, up 73%, Monsanto, up 34%, and Sprint, up 26%. Stocks
providing the biggest disappointment in the first half included Apple Computer,
down 34%, and Fleming Companies, down 29%.

FIXED INCOME

The fixed income component of the Balanced Portfolio continues to maintain 100%
exposure to intermediate-term U.S. Government securities. For the six months
ended June 30, 1996, the fixed income portion of the Portfolio had total return
of (-0.02%) compared to a return of (-0.21%) for the Lehman Intermediate-
Government/Corporate Index (MSAM/Chicago's fixed-income benchmark).

The fixed income component of the Portfolio began the year at a weighted average
maturity of 3.1 years. During the first half of 1996, interest rates rose across
all maturity spectrums, with the largest increase occurring in the longer term
maturities. This upward shift in the yield curve hurt the performance of the
Portfolio. With inflation at approximately the 3% level, and intermediate yields
(5 year maturity) at the 6.5% level, we are comfortable with our current
position, which is less than the benchmark.

Stephen C. Sexauer
PORTFOLIO MANAGER

Alford E. Zick, Jr.
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Balanced Portfolio

101
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE BALANCED PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (48.9%)
AEROSPACE (1.1%)
1,425 United Technologies Corp.......................... $ 164
----------
BANKING (6.2%)
2,250 BankAmerica Corp.................................. 170
2,050 Bankers Trust (New York) Corp..................... 152
2,550 Chase Manhattan Corp.............................. 180
3,500 First of America Bank Corp........................ 157
2,800 Mellon Bank Corp.................................. 160
4,550 PNC Bank Corp..................................... 135
----------
954
----------
CAPITAL GOODS (0.9%)
3,500 Deere & Co........................................ 140
----------
CHEMICALS (2.1%)
2,225 Eastman Chemical Co............................... 135
6,000 Monsanto Co....................................... 195
----------
330
----------
COMMUNICATIONS (2.8%)
3,500 NYNEX Corp........................................ 166
1,925 SBC Communications, Inc........................... 95
4,150 Sprint Corp....................................... 174
----------
435
----------
CONSUMER-DURABLES (2.3%)
1,475 Chrysler Corp..................................... 91
4,225 Ford Motor Co..................................... 137
2,550 General Motors Corp............................... 134
----------
362
----------
CONSUMER-RETAIL (3.4%)
2,950 J.C. Penney Co., Inc.............................. 155
4,550 TJX Companies, Inc................................ 154
(a)9,800 Woolworth Corp.................................... 220
----------
529
----------
CONSUMER-SERVICE & GROWTH (1.5%)
1,500 Eastman Kodak Co.................................. 117
6,150 Ogden Corp........................................ 111
----------
228
----------
CONSUMER-STAPLES (3.7%)
3,150 American Brands, Inc.............................. 143
9,600 Fleming Cos., Inc................................. 138
1,475 Philip Morris Cos., Inc........................... 153
4,200 RJR Nabisco Holdings Corp......................... 130
----------
564
----------
ENERGY (3.4%)
3,800 Ashland, Inc...................................... 150
1,550 Atlantic Richfield Co............................. 184
2,275 Exxon Corp........................................ 198
----------
532
----------

<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
FINANCIAL-DIVERSIFIED (1.1%)
2,250 Student Loan Marketing Association................ $ 167
----------
HEALTH CARE (1.9%)
3,850 Bausch & Lomb, Inc................................ 164
2,800 Baxter International, Inc......................... 132
----------
296
----------
INDUSTRIAL (2.0%)
7,950 Hanson plc ADR.................................... 114
3,550 Rockwell International Corp....................... 203
----------
317
----------
INSURANCE (3.0%)
4,650 American General Corp............................. 169
3,650 Lincoln National Corp............................. 169
2,500 St. Paul Cos., Inc................................ 134
----------
472
----------
METALS (1.2%)
3,050 Phelps Dodge Corp................................. 190
----------
PAPER & PACKAGING (3.0%)
5,700 Louisiana-Pacific Corp............................ 126
3,200 Weyerhauser Co.................................... 136
3,500 Willamette Industries, Inc........................ 207
----------
469
----------
TECHNOLOGY (2.7%)
4,000 Apple Computer, Inc............................... 83
3,225 Harris Corp....................................... 197
2,800 Texas Instruments, Inc............................ 140
----------
420
----------
TRANSPORTATION (1.9%)
(a)1,600 AMR Corp.......................................... 145
5,150 Ryder System, Inc................................. 145
----------
290
----------
UTILITIES (4.7%)
5,550 General Public Utilities Corp..................... 196
4,300 NIPSCO Industries, Inc............................ 173
5,700 Pinnacle West Capital Corp........................ 173
4,350 Texas Utilities Co................................ 186
----------
728
----------
TOTAL COMMON STOCKS (Cost $6,206)............................. 7,587
----------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
FIXED INCOME SECURITIES (43.0%)
U.S. TREASURY NOTES (43.0%)
$ 2,875 8.25%, 7/15/98.................................... 2,989
3,803 5.50%, 4/15/00.................................... 3,689
----------
TOTAL FIXED INCOME SECURITIES (Cost $6,681)................... 6,678
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Balanced Portfolio

102
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE BALANCED PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (7.2%)
REPURCHASE AGREEMENT (7.2%)
$ 1,121 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $1,121,
collateralized by $1,105 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $1,130 (Cost
$1,121)......................................... $ 1,121
----------
TOTAL INVESTMENTS (99.1%) (Cost $14,008)...................... 15,386
----------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (1.2%)
Interest Receivable............................. $ 154
Dividends Receivable............................ 20
Receivable due from Investment Adviser.......... 1
Other........................................... 6 181
-----
LIABILITIES (-0.3%)
Professional Fees Payable....................... (12)
Bank Overdraft.................................. (11)
Custodian Fees Payable.......................... (4)
Shareholder Reporting Fees Payable.............. (4)
Administrative Fees Payable..................... (3)
Distribution Fees Payable....................... (2)
Other Liabilities............................... (2) (38)
----- ----------
NET ASSETS (100%)............................................. $15,529
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 12,381
Undistributed Net Investment Income........................... 185
Accumulated Net Realized Gain................................. 1,585
Unrealized Appreciation on Investments........................ 1,378
----------
NET ASSETS.................................................... $15,529
----------
----------
</TABLE>

<TABLE>
<C> <S> <C>
CLASS A:
NET ASSETS.................................................... $13,173
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,282,063 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $10.27
----------
----------
CLASS B:
NET ASSETS.................................................... $2,356
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 229,653 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $10.26
----------
----------
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
ADR -- American Depositary Receipt
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Balanced Portfolio

103
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE EMERGING MARKETS DEBT PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Argentina 10.9%
Brazil 21.2%
Ecuador 5.2%
Mexico 14.4%
Morocco 3.7%
Panama 5.1%
Peru 3.2%
Poland 1.0%
Russia 19.6%
South Africa 3.6%
Turkey 1.2%
Venezuela 11.4%
United States 4.1%
Other -4.6%
</TABLE>

PERFORMANCE COMPARED TO THE JP MORGAN EMERGING MARKETS BOND INDEX(1)
- ----------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 18.39% 36.37% 11.64%
PORTFOLIO -- CLASS
B(3).................... 16.94 N/A N/A
INDEX................... 13.38 32.39 6.95

<FN>

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.
</TABLE>

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 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 six month period ended June 30, 1996, the Portfolio had a total return
of 18.39% for the Class A shares and 16.94% for the Class B shares, as compared
to a total return of 13.38% for the J.P. Morgan Emerging Markets Bond Index. The
average annual total return for the twelve months ended June 30, 1996 and for
the period from inception on February 1, 1994 through June 30, 1996 was 36.37%
and 11.64%, respectively, for the Class A shares, as compared to 32.39% and
6.95%, respectively, for the Index. As of June 30, 1996, the Portfolio had an
SEC 30-day yield of 12.65% for the Class A shares and 12.64% for the Class B
shares.

For the three months ended June 30, 1996 the Portfolio had a total return of
12.75% for the Class A shares and 12.53% for the Class B shares as compared to a
total return of 9.28% for the Index.

Emerging markets debt de-coupled from the U.S. bond market during the second
quarter of 1996. Improving credit stories in emerging market countries
successively counteracted the negative influence of rising interest rates. The
U.S. bond market was repeatedly buffeted by signs of strength in the U.S.
economy during the last three months. The long end of the market tested the lows
on each occasion that the non-farm payroll data was released in the quarter.
Yields of 7.20% and above were attractive to aggressive fixed income investors.
High real rates and the prospect that the economy would fail to retain the
momentum of faster growth prompted rates to rally from their highs. We believe
that the global economy is likely to witness a synchronized global pick up in
aggregate demand within the next twelve months and any sign that the Federal
Reserve is behind the curve in terms of managing inflation could result in a
severe reaction in the bond market. Emerging market debt should continue to
outperform other fixed income markets as long as credit fundamentals remain on
an improving trend, with floating rate non-collateralized bonds continuing to be
the preferred sector in the market.

The Portfolio outperformed over the quarter due to its overweight positions in
Russia, Venezuela and Panama and underweight position for the major Latin
American countries: Argentina, Brazil and Mexico. During the quarter, Russia,
Panama, Venezuela, Peru, Philippines and Ecuador outperformed the market and
Argentina, Brazil and Mexico underperformed the overall market.

- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio

104
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)

Russian loans were the outperformers of the quarter as incumbent President
Yeltsin won the second round election by a wide margin. We reduced our positions
in Russian loans gradually during the last month of the quarter. The sharp
post-election rally surprised even the believers. We believe the loans will
trade in a tight range for some time as post-election reality sets in. Economic
problems such as a wide fiscal deficit, banking sector restructurings, tight
domestic liquidity conditions, a gradual uptick in inflation and Kremlin
politics will keep a lid on prices. Valuations of the loans, based on the terms
of the restructuring, suggest that they continue to be the cheapest assets in
the emerging fixed income markets.

Mexican external debt trailed the market after the run-up in prices on the back
of its exchange offer to substitute collateralized Brady debt with a non-
collateralized, current coupon bond with a bullet maturity of 30 years.
Lingering concerns over the fragile economic recovery in the domestic
non-tradeable sector and the need for an adjustment in the nominal value of the
exchange rate made investors shy away from Mexican bonds. The local currency
denominated treasury bills continued to be the best performing sector. We
increased our allocation to Mexico towards the end of the quarter as we believed
investor skepticism to have peaked. The domestic political situation continues
to warrant a close watch as the investigation of various financial scandals
could unearth all kinds of skeletons in the cupboards of the ruling elites.

Argentina continued to underperform the market, despite signs that an economic
recovery was underway. Tax receipts continued to stagnate and the fiscal targets
agreed to with the IMF continue to look ambitious. High unemployment and low
consumer confidence continue to prove to be a drag on the recovery. Despite
abundant liquidity in the banking system, a consumption and trade led economic
recovery is taking a long time to take hold. Unless a durable and sustained
recovery becomes a reality in the second half, Argentina faces a difficult
economic future in the months ahead. Rising U.S. interest rates and a firm
dollar will prove to be a considerable headwind for the Convertibility Plan to
weather. We do not anticipate making any changes to our allocation to Argentina
in the immediate future.

Brazil came under closer scrutiny as a leading academic questioned the
sustainability of the Real plan. Questions related to its burgeoning internal
debt and overvalued exchange rates led some to draw parallels with Mexico's
situation in 1994. We do not believe that Brazil and Mexico should be put in the
same basket. Brazil's performance is far less dependent on external capital, (
in fact it could be argued that a withdrawal of short term capital will probably
be of benefit) and the overvaluation of its currency less significant, for any
comparisons to Mexico to setoff any alarm bells at this juncture. There is no
doubt that the long run sustainability of the Real plan requires a fiscal
adjustment. Political wrangling should not be allowed to derail the process of
stabilization. Progress towards implementing a fiscal adjustment remains one of
the elements that we would be watching for to justify maintaining our allocation
to Brazil. We increased our allocations towards the end of the quarter as the
administration sought to counteract market pressure related to the stagnation of
its various reform proposals in the legislature by becoming more ambitious in
the fields of privatization and de-regulation of the economy.

Venezuela continued to make slow and steady progress towards implementing an
orthodox stabilization program. We reduced our allocation to the country as its
bonds moved up in price, discounting the positive news of an IMF stabilization
plan.

Other high yielding markets of Ecuador and Bulgaria witnessed volatility as
Ecuador braced for the second round of its Presidential elections and Bulgaria
coped with economic distress after swallowing the bitter pill of an IMF program.

Despite a negative U.S. rate environment in the first half, emerging debt has
performed well. Improvement in economic fortunes of most of the countries
included in the universe has delivered handsome returns. What is underway is the
dramatic re-rating of this asset class, a process that was interrupted by the
Mexican crisis of 1994. Barring changes in the economic outlook of the various
countries, this process has not yet been finished. If the headwind of rising
interest rates becomes stronger in the second half, there may be some
retracement in prices, as liquidity alone cannot sustain the run-up in prices.

Paul Ghaffari
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio

105
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
DEBT INSTRUMENTS (91.3%)
ARGENTINA (10.9%)
BONDS (10.9%)
$ 2,000 Republic of Argentina BOCON, Series 2, (Floating
Rate), PIK, 3.359%, 9/01/02..................... $ 1,538
5,000 Republic of Argentina Discount Bonds, (Floating
Rate), 6.438%, 3/31/23.......................... 3,500
(s)20,790 Republic of Argentina, Series L, "Euro", (Floating
Rate) 6.313%, 3/31/05........................... 16,242
--------
21,280
--------
BRAZIL (21.2%)
BONDS (21.2%)
13,500 Federative Republic of Brazil Discount Bond,
Series Z-L, (Floating Rate), 6.50%, 4/15/24..... 9,593
14,500 Federative Republic of Brazil Debt Conversion
Bond, Series Z-L, (Floating Rate), 6.563%,
4/15/12......................................... 9,932
35,406 Federative Republic of Brazil, Series C, "Euro",
(Floating Rate), PIK, 8.00%, 4/15/14............ 21,908
--------
41,433
--------
ECUADOR (5.2%)
BOND (5.2%)
(e)21,867 Republic of Ecuador PDI Bond, (Floating Rate),
PIK, 6.063%, 2/27/15............................ 9,963
--------
MEXICO (8.1%)
BONDS (8.1%)
2,000 Banamex Convertible Bond, 7.00%, 12/15/99......... 1,850
MXP 19,092 Banamex Pagare Discount Bond, 4/03/97............. 1,987
32,143 Banamex Pagare Discount Bond, 10/09/97............ 2,927
$ 1,000 Grupo Mexicano de Desarrollo, 8.25%, 2/17/01...... 520
ZAR 8,000 Nacional Financiera SNC 17.00%, 2/26/99........... 1,800
$ 6,000 United Mexican States, 11.50%, 5/15/26............ 5,490
1,500 Mexican Discount Bond, Series A, (Floating Rate),
6.398%, 12/31/19 (Value Recovery Rights
Attached)....................................... 1,181
--------
15,755
--------
MOROCCO (3.7%)
LOAN AGREEMENTS (3.7%)
(l)10,000 Kingdom of Morocco Restructuring and Consolidating
Agreement, Tranche A, 6.4381%, (Floating Rate),
1/01/09 (Participation: J.P. Morgan)............ 7,212
--------

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
PANAMA (5.1%)
LOAN AGREEMENTS (5.1%)
$ (b,d,k)10,113 Republic of Panama Loans.......................... $ 9,961
--------
PERU (3.2%)
BOND (3.2%)
(b,k)9,699 Peru Working Capital Lines, 1/01/99 (Floating
Rate)........................................... 6,183
--------
POLAND (1.0%)
NOTE (1.0%)
*2,224 Republic of Poland Note, Zero Coupon, 1/08/97..... 2,003
--------
RUSSIA (17.9%)
LOAN AGREEMENTS (11.2%)
CHF (b,k)15,000 Bank for Foreign Economic Affairs, (Floating
Rate)........................................... 5,672
DEM (b,k)46,000 Bank for Foreign Economic Affairs, (Floating
Rate)........................................... 16,248
--------
21,920
--------
BONDS (6.7%)
$ 3,000 Ministry of Finance Tranche III, 3.00%, 5/14/99... 2,153
25,450 Ministry of Finance Tranche IV, 3.00%, 5/14/03.... 10,880
--------
13,033
--------
34,953
--------
SOUTH AFRICA (3.6%)
BONDS (3.6%)
ZAR 3,500 Republic of South Africa, Series 147, 11.50%,
5/30/00......................................... 744
18,340 Republic of South Africa, Series 153, 13.00%,
8/31/10......................................... 3,737
8,120 Republic of South Africa, Series 162, 12.50%,
1/15/02......................................... 1,733
2,800 Republic of South Africa, Series 175, 9.00%,
10/15/02........................................ 492
2,100 Republic of South Africa, Series 177, 9.50%,
5/15/07......................................... 341
--------
7,047
--------
VENEZUELA (11.4%)
BONDS (11.4%)
$ 5,250 Republic of Venezuela Front Loaded Interest
Reduction Bond, Series A, 6.375%, 3/31/07....... 3,800
26,000 Republic of Venezuela Debt Conversion Bonds,
Series DL, (Floating Rate), 6.625%, 12/18/07.... 18,395
--------
22,195
--------
TOTAL DEBT INSTRUMENTS (Cost $167,058)............................... 177,985
--------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio

106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NO. OF VALUE
CONTRACTS (000)
<C> <S> <C>
- ------------------------------------------------------------
PURCHASED OPTIONS (1.7%)
POLAND (0.0%)
(a)120,000 Poland Past Due Loan Put Option, expiring 7/29/96,
strike price U.S.$73.19, (Cost U.S.$84)......... $ 16
--------------
RUSSIA (1.7%)
(a)10,500 Russian Vnesh Call, expiring 7/22/96, strike price
DEM45.13, (Cost U.S.$254)....................... 618
(a)31,000 Russian Vnesh Loans, expiring 7/22/96, strike
price U.S.$41.31, (Cost U.S.$1,070)............. 2,710
--------------
3,328
--------------
TOTAL PURCHASED OPTIONS (Cost $1,408).............................. 3,344
--------------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
STRUCTURED SECURITY (4.1%)
UNITED STATES
NOTE (4.1%)
$ (s)8,000 Salomon Brothers Short-Term Structured Note,
10.125%, 4/02/97
(Principal is composed of National Treasury
Notes, issued by the National Treasury of
Brazil, valued at approximately U.S. $8,000.)
(Cost $8,000)................................... 8,020
----------
SHORT-TERM INVESTMENTS (12.2%)
MEXICO (6.3%)
BILLS (6.3%)
MXP 19,994 Mexican Cetes, Zero Coupon, 7/18/96............... 2,593
41,820 Mexican Cetes, Zero Coupon, 8/08/96............... 5,330
35,000 Mexican Cetes, Zero Coupon, 9/26/96............... 4,274
----------
12,197
----------
TURKEY (1.2%)
BILLS (1.2%)
TRL 204,000,000 Turkish T-Bill, Zero Coupon, 7/10/96.............. 2,414
----------
UNITED STATES (4.7%)
REPURCHASE AGREEMENT (4.7%)
$ 9,246 Chase Securities, Inc., 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $9,250,
collateralized by $9,085 U.S. Treasury Notes,
7.125%, due 9/30/99, valued at $9,288 (Cost
$9,246)......................................... 9,246
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $26,715)........................ 23,857
----------
FOREIGN CURRENCY (1.9%)
TRL 298,720,000 Turkish Lira (Cost $3,652)........................ 3,638
----------
</TABLE>

<TABLE>
<CAPTION>
VALUE
(000)

- ------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS (111.2%) (Cost $206,833)..................... $216,844
-----------
OTHER ASSETS (19.9%)
Cash............................................ $ 2,865
Collateral on Deposit with Broker............... 16,010
Receivable for Investments Sold................. 12,878
Receivable due from Broker...................... 3,450
Interest Receivable............................. 3,179
Receivable for Portfolio Shares Sold............ 540
Other........................................... 14 38,936
-----------
LIABILITIES (-31.1%)
Payable for Investments Purchased............... (21,868)
Securities Sold Short, at Value (20,736)
(Proceeds $19,510).............................
Payable for Reverse Repurchase Agreement........ (16,465)
Investment Advisory Fees Payable................ (447)
Payable for Portfolio Shares Redeemed........... (62)
Custodian Fees Payable.......................... (59)
Administrative Fees Payable..................... (25)
Interest Payable on Securities Sold Short....... (25)
Net Unrealized Loss on Forward Foreign Currency (5)
Exchange Contracts.............................
Directors' Fees and Expenses Payable............ (3)
Other Liabilities............................... (1,035) (60,730)
----------- -----------
NET ASSETS (100%).............................................. $195,050
-----------
-----------
NET ASSETS CONSIST OF:
Paid in Capital................................................ $ 158,343
Undistributed Net Investment Income............................ 10,230
Accumulated Net Realized Gain.................................. 17,843
Unrealized Appreciation on Investments, Foreign Currency 8,634
Translations and Securities Sold Short.......................
-----------
NET ASSETS..................................................... $195,050
-----------
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio

107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ------------------------------------------------------------
<S> <C> <C>
CLASS A:
NET ASSETS..................................................... $191,976
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 18,885,791 outstanding $0.001 par value
shares (authorized 500,000,000 shares)....................... $10.17
-----------
-----------
CLASS B:
NET ASSETS..................................................... $3,074
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 302,828 outstanding $0.001 par value
shares (authorized 500,000,000 shares)....................... $10.15
-----------
-----------
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
(b) -- Non-income producing security -- in default
(d) -- Security (Totaling $9,961 or 5.1% of net assets at
June 30, 1996) valued at fair value -- See note A-1
to financial statements
(e) -- 144A security -- Certain conditions for public sale
may exist
(k) -- Under restructuring at June 30, 1996 -- See note A-7
to financial statements
(l) -- Participation interests were acquired through the
financial institutions listed parenthetically.
(s) -- Denotes all or a portion of securities subject to
repurchase under Reverse Repurchase Agreements as of
June 30, 1996 -- See note A-4 to financial
statements
* -- Security's redemption value is linked to the
Republic of Poland Treasury Bill maturing 1/01/97
and to the value of the Polish Zloty and Deutsche
Mark at maturity.
Q -- Securities are expected to be received in connection
with the restructuring of the issuing country's loan
agreements owned by the Portfolio.
PDI -- Past Due Interest
PIK -- Payment-In-Kind. Income may be paid in additional
securities or cash at the discretion of the issuer.
CHF -- Swiss Franc
DEM -- Deutsche Mark
MXP -- Mexican Peso
ZAR -- South African Rand
Floating Rate -- Interest rate changes on these instruments are based on
changes in a designated base rate. The rates shown are those
in effect on June 30, 1996.
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
MEXICO
BOND
$ 5,000 United Mexican States Discount Bond, Series D,
(Floating Rate) 6.453%, 12/31/19 (Value Recovery
Rights Attached) (Proceeds $3,500).............. $ 3,937
----------
PANAMA
BONDS
Q(b)10,650 Republic of Panama Interest Reduction Bond,
(Floating Rate), 12/29/49 (Proceeds $5,077)..... 5,937
Q(b)3,000 Republic of Panama Past Due Interest Bond, Zero
Coupon, 12/29/49 (Proceeds $1,860).............. 1,840
----------
7,777
----------
RUSSIA
LOAN AGREEMENTS
(b)7,900 Bank for Foreign Economic Affairs
(Proceeds $3,811)............................... 3,842
----------
NOTES
Q(b)7,000 Interest Arrears Note, 12/31/99
(Proceeds $3,844)............................... 3,745
Q(b)4,000 Principal Notes, 12/31/99
(Proceeds $1,418)............................... 1,435
----------
5,180
----------
9,022
----------
TOTAL SECURITIES SOLD SHORT (Proceeds $19,510)................ $20,736
----------
----------
</TABLE>

- ------------------------------------------------

<TABLE>
<C> <S> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
June 30, 1996, the Portfolio is obligated to deliver foreign currency in
exchange for U.S. dollars as indicated below:
</TABLE>

<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE NET UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ --------- ----------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C>
TRL 298,720 $3,639 7/01/96 U.S.$ 3,634 $ 3,634 $ (5 )
--
--
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio

108
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE FIXED INCOME PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
U.S. Government & Agency Obligations 63.2%
Foreign Government & Agency Obligations 7.5%
Corporate Bonds & Notes 21.5%
Asset Backed Securities 5.7%
Other 2.1%
</TABLE>

PERFORMANCE COMPARED TO THE LEHMAN AGGREGATE
BOND INDEX(1)
- -------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------------
AVERAGE
AVERAGE ANNUAL
ANNUAL FIVE SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A..... -0.92% 5.86% 8.24% 8.06%
PORTFOLIO -- CLASS
B(3)..................... -1.02 N/A N/A N/A
INDEX.................... -1.22 5.01 7.96 8.15

<FN>

1. The Lehman Aggregate Bond Index is an unmanaged index made up of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The Fixed Income Portfolio invests primarily in a diversified portfolio of U.S.
Government securities, corporate bonds (including competitively priced
Eurodollar bonds), mortgage-backed securities and other fixed income securities.
Targeted rates of return for the Portfolio are based on current and projected
market and economic conditions and on a conservative investment management
approach.

For the six month period ended June 30, 1996, the Portfolio had a total return
of -0.92% for the Class A shares and -1.02% for the Class B shares, as compared
to a total return of -1.22% for the Lehman Aggregate Bond Index. The average
annual total return for the twelve months and five years ended June 30, 1996 and
for the period from inception on May 15, 1991 through June 30, 1996 was 5.86%,
8.24%, and 8.06% respectively, for the Class A shares, as compared to 5.01%,
7.96% and 8.15%, respectively, for the Index. As of June 30, 1996, the Portfolio
had an SEC 30-day yield of 6.59% for the Class A shares and 6.44% for the Class
B shares.

Although bond market returns for the second quarter of 1996 improved relative to
those of the first quarter, the fixed income markets nonetheless continued to
disappoint investors. Bond yields maintained their upward trend over the first
half, rising by almost 1 percent for long U.S. Treasury issues. As a result, the
Lehman Aggregate Bond Index returned -1.22% and the Lehman Government/Corporate
Index returned -1.88% for the first half of 1996.

The ongoing backup in bond yields was a straightforward response to economic
considerations. Over the course of the first half, the markets received multiple
signals that the economy was growing strongly. While the signs of a growth
pick-up in the first quarter were sometimes attributed to one-time factors or
dismissed by the markets as unsustainable, the evidence of strong economic
momentum in the second quarter was consistent and powerful.

The monthly employment reports drew the most attention from the markets. The
three reports released during the second quarter not only showed job growth
continuing at much higher levels than had been the case for most of 1995, but
each report showed gains above consensus expectations. As a result, each release
of the employment report was followed by a sharp rise in yields. Cumulatively,
10-year Treasury yields rose 40 basis points on the three days that the
employment reports were released during the second quarter.

In addition to the employment data, other economic indicators also showed
strength. Housing and autos,

- --------------------------------------------------------------------------------
Fixed Income Portfolio

109
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO (CONT.)
the two-sectors of the economy thought to be most cyclical and therefore most
likely to slow in response to rising interest rates, were particularly strong.
The manufacturing sector also appeared to have bottomed and began to recover
during the second quarter.

As the strength in the economy became evident, yield levels increasingly began
to reflect expectations of a Federal Reserve tightening. Short rates rose more
than long rates over the second quarter, with the yield curve flattening by 15
basis points between two years and thirty years. From its steepest point in mid-
February, the yield curve has flattened almost 60 basis points through the end
of June. While two-year yields were almost 50 basis points below the Federal
Funds rate earlier in the year, they finished the first half almost 90 basis
points above the Fed Funds rate, reflecting concerns that the Fed would need to
tighten to slow economic growth.

Despite the strength in the economy, not all market participants are convinced
the Fed will tighten. Those who argue against a tightening point out that the
economic strength has not translated into higher inflation. Moreover, they
expect that increases in market interest rates to date may be sufficient on
their own to slow the economy. On the other hand, with the economy arguably at
full employment and growing well above trend, the risks of an increase in
inflation may be sufficiently high that the Fed simply cannot wait to see
whether the economy loses momentum on its own, but rather is forced to tighten.

From a sector standpoint, the major non-Treasury sectors performed reasonably
well over the first half. Despite some quarter end selling pressure, corporate
spreads generally tightened over the six month period, reflecting both favorable
credit trends and market technicals. Mortgage-backed securities also tightened
in spread. As the vast majority of the mortgage sector came to trade at a
discount dollar price, an increasing number of investors came to focus on the
value represented by this sector relative to the tight spreads in the corporate
market. The asset-backed sector also outperformed comparable duration Treasuries
despite concerns over rising delinquencies on credit card receivables.

Foreign bond markets continued to outperform the U.S. bond market. For example,
10-year German yields only rose about 37 basis points during the first half of
1996 compared with an increase of over 110 basis points for 10-year U.S.
Treasury issues. Other foreign bond markets provided even better results, with
yields on most European markets actually declining over the second quarter of
1996.

FIRST HALF STRATEGY REVIEW

During the first half, we maintained a neutral duration in the Portfolio
relative to our benchmark. While the market trend and economic data might have
suggested a shorter duration posture, market valuations suggested that the risks
associated with taking such a position were high. Instead we focused on sector
allocation, which we felt presented a better risk/ reward tradeoff. In
particular, we saw good value in discount mortgage-backed securities and
increased exposure to this sector. Within the mortgage sector, we also focused
extensively on maturity selection as fine-tuning of maturities can have
significant impact on value within the sector. Our corporate weightings were
fairly stable over the first half as generally tight spreads limited
opportunities to find attractive values within this sector. Finally, we
continued to maintain an exposure to hedged German bonds. Although German bonds
have substantially outperformed U.S. bonds year-to-date and our exposure is
therefore lower than it was at the start of the year, we believe fundamentals
continue to favor German bonds over U.S. bonds.

THIRD QUARTER OUTLOOK

Our Portfolio begins the third quarter with neutral duration relative to our
benchmark. Although rates have risen significantly and currently price in an
expectation of roughly 50 basis points of Fed tightening, we do not anticipate
increasing duration in the near-term. Unless clear evidence emerges that
economic growth is returning to a below trend path, we see limited scope for the
market to sustain a rally. We will continue to focus on sector opportunities,
particularly in the mortgage-backed area, to add value to our Portfolio.
Discount mortgages offer attractive yield spreads relative to corporate bonds
and their low dollar prices greatly reduce the convexity concerns traditionally
associated with the sector. We expect this sector to perform well over the
quarter.

Warren Ackerman, III
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Fixed Income Portfolio

110
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FIXED INCOME SECURITIES (97.9%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (63.2%)
U.S. TREASURY NOTES (28.0%)
$ 13,000 8.25%, 7/15/98.................................... $ 13,514
19,500 6.25%, 5/31/00.................................... 19,375
11,000 7.25%, 8/15/04.................................... 11,394
----------
44,283
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.8%)
349 9.50%, 2/01/03.................................... 364
628 8.00%, 6/01/06.................................... 641
85 8.00%, 1/01/09.................................... 87
84 9.00%, 11/01/09................................... 88
91 8.00%, 8/01/10.................................... 94
13 13.00%, 9/01/10................................... 14
----------
1,288
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (16.9%)
4,807 6.00%, 9/01/10.................................... 4,545
5,813 6.00%, 2/01/11.................................... 5,497
1,700 6.00%, 5/01/11.................................... 1,608
2,320 6.00%, 5/01/11.................................... 2,194
(d)12 14.75%, 10/01/12.................................. 13
4,000 7.00%, 7/01/16.................................... 3,946
9,625 6.50%, 4/01/24.................................... 9,002
----------
26,805
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (17.5%)
205 7.00%, 7/15/08.................................... 204
348 7.00%, 12/15/08................................... 344
9 11.00%, 12/15/15.................................. 10
14 10.00%, 5/15/19................................... 16
611 9.50%, 8/15/19.................................... 656
7,703 6.00%, 2/15/24.................................... 7,012
9,267 7.00%, 5/15/24.................................... 8,922
7,970 7.00%, 3/15/26.................................... 7,641
3,015 7.50%, 5/15/26.................................... 2,972
----------
27,777
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS................ 100,153
----------
FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS (7.5%)
13,500 Treuhandanstalt 6.75%, 5/13/04.................... 9,066
3,000 Quebec Province (Yankee) 7.50%, 7/15/23........... 2,871
----------
TOTAL FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS............. 11,937
----------

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>

CORPORATE BONDS AND NOTES (21.5%)
FINANCE (20.6%)
$ 2,000 Capital One Bank 6.73%, 6/04/98................... $ 2,003
(e)7,500 Farmers Insurance 8.625%, 5/01/24................. 7,134
5,000 Ford Motor Credit Co. 6.25%, 11/08/00............. 4,877
5,000 General Motors Acceptance Corp. 7.375%, 6/22/00... 5,100
5,000 Goldman Sachs Group 6.25%, 2/01/03................ 4,725
3,215 Lehman Brothers Holdings, Inc. 5.75%, 2/15/98..... 3,172
3,000 Lehman Brothers Holdings, Inc. 7.25%, 4/15/03..... 2,971
(e)2,500 Lumbermens Mutual Casualty Co., Series AI, 9.15%,
7/01/26......................................... 2,584
----------
32,566
----------
TELECOMMUNICATIONS (0.9%)
1,500 Tele-Communications, Inc. 8.25%, 1/15/03.......... 1,516
----------
TOTAL CORPORATE BONDS AND NOTES............................. 34,082
----------
ASSET BACKED SECURITIES (5.7%)
18 Federal Home Loan Mortgage Corp., REMIC 16-B,
10.00%, 10/15/19................................ 18
15 Federal National Mortgage Association, REMIC
92-59F, (Floating Rate), 5.862%, 8/25/06........ 15
100 Ford Credit Auto Loan Master Trust, 92-1A, 6.875%,
1/15/99......................................... 101
63 ML Asset Backed Corporation, Series 1993-1, Class
A2, 5.125%, 7/15/98............................. 63
3,648 Resolution Trust Corp., Series 1991-M5,
Class A, 9.00%, 3/25/17......................... 3,718
5,000 Standard Credit Card Trust 6.75%, 6/07/00......... 5,031
----------
TOTAL ASSET BACKED SECURITIES............................... 8,946
----------
TOTAL FIXED INCOME SECURITIES (97.9%)(Cost $155,325).......... 155,118
----------
SHORT-TERM INVESTMENT (3.5%)
REPURCHASE AGREEMENT (3.5%)
5,507 Goldman Sachs & Co., 5.375%, dated 6/28/96, due
7/01/96, to be repurchased at $5,509,
collateralized by $5,365 U.S. Treasury Bonds,
7.50%, due 11/15/16, valued at $5,623 (Cost
$5,507)......................................... 5,507
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Fixed Income Portfolio

111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------
TOTAL INVESTMENTS (101.4%) (Cost $160,832).................... $160,625
----------
OTHER ASSETS (1.2%)
Cash............................................ $ 1
Interest Receivable............................. 2,019
Other........................................... 18 2,038
----------
LIABILITIES (-2.6%)
Payable for Investments Purchased............... (3,930)
Payable for Portfolio Shares Redeemed........... (200)
Investment Advisory Fees Payable................ (78)
Net Unrealized Loss on Forward Foreign Currency (26)
Exchange Contracts.............................
Administrative Fees Payable..................... (21)
Custodian Fees Payable.......................... (6)
Directors' Fees and Expenses Payable............ (3)
Distribution Fees Payable....................... (1)
Other Liabilities............................... (29) (4,294)
---------- ----------
NET ASSETS (100%)............................................. $158,369
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 163,665
Undistributed Net Investment Income........................... 1,550
Accumulated Net Realized Loss................................. (6,613)
Unrealized Depreciation on Investments and Foreign Currency (233)
Translations................................................
----------
NET ASSETS.................................................... $158,369
----------
----------
CLASS A:
NET ASSETS.................................................... $157,098
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,986,137 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $10.48
----------
----------
CLASS B:
NET ASSETS.................................................... $1,271
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 121,359 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $10.47
----------
----------
</TABLE>

- ------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at June
30, 1996, the Portfolio is obligated to deliver foreign currency in exchange
for U.S. dollars as indicated below:

<TABLE>
<CAPTION>
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- --------- ---------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C>
DEM 940 $ 621 9/09/96 U.S.$ 642 $ 642 $ 21
DEM 8,050 5,348 11/29/96 U.S.$ 5,314 5,314 (34)
DEM 5,400 3,587 11/29/96 U.S.$ 3,574 3,574 (13)
--------- --------- ---
$ 9,556 $ 9,530 $ (26)
--------- --------- ---
--------- --------- ---
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(d) -- Security valued at fair value -- See note A-1 to
financial statements
(e) -- 144A Security -- Certain conditions for public
sale may exist
REMIC -- Real Estate Mortgage Investment Conduit
Floating Rate -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are
those in effect on June 30, 1996.
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Fixed Income Portfolio

112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE GLOBAL FIXED INCOME PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australian Dollar 2.7%
British Pound 7.0%
Canadian Dollar 2.8%
Danish Krone 6.2%
Deutsche Mark 14.8%
French Franc 3.1%
Italian Lira 5.8%
Japanese Yen 7.9%
Netherlands Guilder 3.5%
Spanish Peseta 1.0%
Swedish Krona 7.7%
United States Dollar 22.6%
Other 14.9%
</TABLE>

PERFORMANCE COMPARED TO THE J.P. MORGAN TRADED
GLOBAL BOND INDEX(1)
- --------------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------------
AVERAGE
AVERAGE ANNUAL
ANNUAL SINCE
YTD ONE YEAR FIVE YEARS INCEPTION
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 0.20% 6.23% 8.67% 8.10%
PORTFOLIO -- CLASS
B(3).................. 0.02 N/A N/A N/A
INDEX................. -1.16 2.05 10.31 9.68

<FN>

1. The J.P. Morgan Traded Global Bond Index is an unmanaged index of securities
and includes Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, The Netherlands, Spain, Sweden, the United Kingdom and the United
States.

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The Global Fixed Income Portfolio aims to produce an attractive rate of return
by investing in fixed income securities issued by governments, agencies,
supranational entities and corporations with varying maturities in various
currencies.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 0.20% for the Class A shares and 0.02% for the Class B shares, as compared to
a total return of -1.16% for the J.P. Morgan Traded Global Bond Index. The
average annual total return for the twelve month and five year periods ended
June 30, 1996 and for the period from inception on May 1, 1991 through June 30,
1996 was 6.23%, 8.67% and 8.10%, respectively, for the Class A shares, as
compared to 2.05%, 10.31% and 9.68%, respectively, for the Index. As of June 30,
1996, the Portfolio had an SEC 30-day yield of 5.78% for the Class A shares and
5.63% for the Class B shares.

FIXED INCOME MARKETS

Global fixed income markets produced generally mediocre returns in the first
half of 1996, with only a few exceptions. More specifically, European bonds did
best, followed by Japan with the dollar bloc markets pulling up the rear; in
local currency terms, returns ranged from -2.4% in New Zealand to 11.2% in
Italy. First quarter returns were significantly weaker than in the second as
upward pressure on yields (which rose substantially in the first quarter)
moderated in the second quarter, although yields still rose in most countries.
Markets remain worried about strong economic growth, rising inflation and
tighter monetary policy; economic activity indicators released in the second
quarter have showed growth picking up in all major regions. And, if the United
States, German and Japanese economies are truly once again growing in
synchronized fashion, there is a much higher chance that central banks will have
to respond with higher interest rates to choke off incipient inflationary
pressures.

U.S. Treasury bonds were the second worst performing bond market in the world,
returning a desultory -1.4%. Ten-year yields rose approximately 75 basis points
in the first quarter and another 38 basis points in the second. All maturity
classes underperformed cash with a steeper yield curve further hurting the
performance of longer dated bonds. Corporate bonds and mortgage backed
securities outperformed Treasuries: corporate bond spreads remain tight but show
no signs of widening; mortgages had a good second quarter as volatility in the
bond market declined. The key 30-year bond traded in a yield range of 6.6% to
7.2% with a weakening bias.

- --------------------------------------------------------------------------------
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113
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)

U.S. bonds started the year well. Economic activity was perceived to be weak and
the Fed was still cutting interest rates. Indeed, the Fed cut rates for the
third time in January by 25 basis points, bringing the Federal funds rate down
to 5.25%. However, the economic data flow changed dramatically after January.
Employment growth in particular was notable, showing a clear accelerating trend.
Activity indicators such as industrial production, auto sales and housing starts
also began to show an economy rebounding quite smartly from its end of 1995
depressed levels. As such, second quarter GDP growth is expected to be well over
4%. This rebound has fueled speculation that the Federal Reserve Bank would have
to raise interest rates before too long, especially once the unemployment rate
fell below 5.7%. Some comfort was taken by the benign inflation background,
although there was some disquiet as labor cost indicators began to show an
acceleration from 1995 levels (not something unexpected given the low level of
unemployment).

The U.S. market will continue to assess the strength of the economy, looking for
signs of moderation in the second half of the year. If the economy shows no
signs of returning to trend growth of 2.5%, the market's expectations of
monetary tightening will grow further and yields will correspondingly rise.
However, there is every prospect that the market driven tightening in yields
will begin to slow the interest rate sensitive sectors of the economy and
prevent the need for a dramatic tightening by the Fed.

The Portfolio has been underweight U.S. bonds throughout the first half of the
year with a duration position slightly short to neutral of the market. Mortgage
backed securities have also been overweighted. On the other hand, the Portfolio
has been overweight Canadian and Australian bonds which have outperformed their
U.S. counterparts. The bellwether 10-year Canadian/U.S. 10-year yield spread
narrowed below 100 basis points in the second quarter with money market yields
in Canada moving decidedly below those in the U.S. for the first time in over a
decade. The Canadian economy has surprisingly been much weaker than the U.S.
economy and inflation very subdued, allowing the Canadian central bank to lower
interest rates substantially. A much improved fiscal situation has also helped.
Canadian bonds had a first half total return of 1.3% (an outperformance over
U.S. Treasuries of 2.7%). Further outperformance of Canadian bonds should be a
much lower order of magnitude as the scope for further yield convergence is
limited. However, the added yield, steeper yield curve continue to make this
market attractive. Australian bond yield spreads to U.S. Treasuries also
narrowed. Australian bonds have been bolstered by the strength in the currency,
prospective fiscal tightening, a favorable inflation trend and their substantial
yield. At the end of the second quarter 10-year Australian government bonds
yielded 200 basis points more than 10-year U.S. Treasuries. Hampered by the
world's only inverted yield curve (3-month rates higher than 10-year yields),
political risk and rising inflation, New Zealand turned in the world's worst
bond market performance in local currency terms, returning -2.4%. With money
market rates in the neighborhood of 10% it will be difficult for New Zealand
bonds to do well.

Japanese bond returns continue to be constrained by their low yield and low
capital gains prospects. While the total return in local currency terms was only
0.9% in the first half of the year, 10-year yields rose only 16 basis points,
avoiding much of the sell off that occurred in the rest of the world. As in all
markets, the second quarter produced better returns than the first. Ten-year
yields did reach a high of 3.5% at the end of February when the Finance Minister
made comments that implied that savers were suffering from the Bank of Japan's
low interest rate policy. This was unwound in fairly short order following a
weaker than expected business expectations survey. Generally speaking, the
market was supported by domestic investors who were attracted to longer maturity
bonds due to the steepness of the yield curve, perceived weakness in the economy
and expectations that short rates would remain low, and by a lack of selling
from the international investment community who were substantially underweight
yen bonds.

While Japanese yields have not risen much compared to what occurred in the rest
of the world, they are at risk to move higher. The economy is benefiting from
significant economic stimulus resulting from low interest rates and loose fiscal
policy. Signs of this flowing through was indicated in the first quarter GDP
report which was much stronger than anticipated as was the latest June business
expectations survey. Looking forward, the stronger growth profile has elevated
Bank of Japan tightening risk. We believe yields will rise in anticipation of a
tightening and that the market remains vulnerable to stronger economic data.
However, on the positive side, inflation is very low and given the continued
problems in the financial system with regard to bad loan write-off's, it is
possible that short rates do not go up until late this year or early next year
which will likely put a lid on how high

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114
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- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
longer maturity bond yields can rise. The Portfolio has maintained an
underweight position in yen bonds throughout the first half of the year. Two
adjustments were made in this underweight position during this period. One was
to increase exposure after the February sell off and the second was to reduce
exposure after Japanese bonds put in a strong performance in May.

European bonds have been the stellar performers on a relative and absolute
basis. The fundamental backdrop for bonds has remained friendly throughout the
first half of the year, although clouds are beginning to gather on the horizon.
European bond market performance can be segmented into four groups: (1) Germany
and the Netherlands; (2) France, Belgium and Denmark; (3) Italy, Spain and
Sweden; and (4) the United Kingdom. Yield convergence has been the dominant
theme in Europe as yield spreads compressed down towards German levels.
Expectations that European monetary union will occur in some form has bolstered
the non-Germanic markets. The best performers have been the highest yielding
markets, Italy, Spain and Sweden. They returned 11.2%, 9.1% and 6.61%,
respectively, in local currency terms for the first half of the year.

Italian bonds have rallied in response to fiscal tightening, weakening economic
conditions, new found political stability, a strong currency, falling inflation
and unwinding of the risk premiums built up since the lira was ejected from the
ERM in September 1992. However, with 10-year yield spreads to German bonds below
300 basis points, scope for further outperformance is much more limited. Spanish
bonds have benefited from similar factors. In Spain, the market has been further
bolstered by a more significant deceleration in inflation allowing the central
bank to ease monetary policy aggressively. A new conservative government is also
helping market confidence. As in Italy, Spanish yield spreads to Germany have
narrowed considerably. With the 10-year yield spread to Germany below 250 basis
points it will be difficult for Spanish bonds to perform better than German ones
unless the inflation differential to Germany narrows appreciably. The Swedish
market has, in our opinion, the best fundamentals. Inflation is down to 1% and
is still falling; the central bank has cut interest rates over 200 basis points
year-to-date and more is likely; and fiscal policy is the tightest in the world.
There is more scope for Swedish outperformance, especially with respect to the
Italian and Spanish markets. The Portfolio has been overweight this sector of
its European portfolio all year with some rotation among the higher yielding
markets. We have reduced our overweights in Italy and Spain and transferred them
to Sweden as Italy and Spain have outperformed in the last two months.

The French, Danish and Belgian markets have also continued to perform relatively
well, returning 4.4%, 3.2% and 3.3%, respecitvely, in local currency terms. They
have benefited from the same factors as the higher yielding European markets. As
such, French yield differentials with Germany have evaporated in the longer
maturities. Belgian yield spreads have also fallen to historical lows. High
confidence that both the French and Belgian francs will participate in monetary
union with the Deutschemark and continued support of domestic investors will
keep the yield spread to German bonds narrow. However, it is very difficult to
imagine French and Belgian yields trading much lower relative to Germany. Danish
bonds have lagged a bit despite their higher yields due to uncertainty over the
Danish krone's status. Denmark has opted out of monetary union and is being
penalized for it. We view the risk premium as too high and prefer it to France
and Belgium. The portfolio is underweight, as a group, these three countries
given the narrowness of their respective yield spreads to German bonds.

The British bond market had been the laggard among the Europeans until late in
the second quarter. Overall, the bond market returned 1.25% in local currency
terms, outpacing Germany modestly. However, this was a big recovery. The first
quarter return was -2.2%, the worst performance in the world. The gilt market
suffered in the first quarter from the government's precarious parliamentary
circumstances, the more advanced economic position relative to the continent
(e.g., faster growth, higher inflation risk) and the possible consequences of
the BSE beef scare. During the second quarter, sterling rebounded, the BSE scare
turned out to be a tempest in a teapot, at least macroeconomically, inflation
surprised on the low side, short rates were cut and UK manufacturing weakened
much more than expected. With investors -- domestic and international -- lightly
invested, there was plenty of room for outperformance. Looking forward, we see
the gilt market as an average performer. The Portfolio has been neutral on the
gilt market year-to-date.

The German and its close substitute the Netherlands markets have been the worst
performers in Europe, returning 0.97% and 1.15% in local currency terms
respectively. These markets have been hit the hardest by the sell off in the
U.S. Treasury market. Despite the better inflation picture (inflation is at
least 1.5%

- --------------------------------------------------------------------------------
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115
<PAGE>
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
lower in Germany than in the U.S.) and weaker economic environment, it has been
difficult for longer maturity German bonds to decouple from the U.S. market.
Germany did continue to cut interest rates in the first half of the year with
the discount rate falling another 50 basis points to a historic low of 2.5%.
Market rates fell by a similar amount.

The German bond's travails have not all been foreign in origin. Some homegrown
problems include an unexpected surge in monetary growth and stronger than
expected economic data. With the Bundesbank explicitly targeting M3 growth,
faster growth has put a damper on hopes for further monetary ease. In addition,
after a very poor first quarter when German GDP went negative for the second
quarter in a row, second quarter economic statistics turned much more robust,
implying that earlier weakness was exaggerated. Lastly, increased confidence
that monetary union will occur, implying that the Deutschemark will be replaced
by the Euro, has led to a higher risk premium on longer dated German securities.
The next move in German official rates is probably up but it will most likely
not occur until 1997. In the meantime, the steepness of the yield curve,
reasonably high real interest rates and moderate economic growth will prevent
yields from rising too much even if the U.S. bond market continues to sell off.
The Portfolio has been overweight German bonds to compensate for the underweight
U.S. bond position.

The current economic environment is rather uninspiring for fixed income. Global
economic growth has accelerated and shows no signs of fading in the second half.
Interest rates and inflation have bottomed in the major economies. However,
further sharp losses are unlikely from present yield levels. Yield curves are
steep, real yields, particularly in Europe, are attractive and some monetary
tightening is already factored into yield curves (unlike in January). In
addition, fiscal austerity is a theme across the OECD and promises to dampen
growth prospects. Inflation and interest rate trends continue to favor European
markets over the U.S. and Japan.

CURRENCIES

On the foreign exchange front, the U.S. dollar maintained its positive tone from
the first quarter. After rising 3% against the Deutschemark in the first
quarter, it rose another 3% in the second quarter; against the Japanese yen, it
rose only 2.6% in the second quarter following a 3.4% rise in the first. The
dollar traded in a DM/$1.48 - 1.55 range in the second quarter while moving
between Y/$105 - 110. Low volumes and volatilities characterized the latter part
of the second quarter.

The source of dollar strength has not changed much of the course of the first
half of the year. Cyclical factors regarding growth and interest rate
expectations continue to be dollar positive while official rhetoric was broadly
encouraging of further dollar strength. With demand conditions most robust and
inflationary risk the highest in the United States it makes good macroeconomic
sense to "redistribute" some of that strength to Europe and Japan through dollar
appreciation. In addition, soft monetary conditions abroad have offered
investors attractive hedging premiums to be in dollars while making it expensive
to bet against it. The yen did experience bouts of strength against both the
dollar and Deutschemark on the back of occasional fears that an interest rate
hike was nearby. But, with the Japanese current account shrinking rapidly and
the Bank of Japan ready to buy dollars on weakness, it is difficult to see the
yen sustaining much strength in the second half of the year. The Deutschemark
was also hurt by growing confidence that European monetary union would happen
which made investors more willing to overweight the other higher yielding
European currencies at the Deutschemark's expense. The Portfolio has and
continues to maintain overweight positions in the dollar against both the
Deutschemark and the yen. This has aided performance while the forward premiums
earned on hedging has boosted overall yield.

Within Europe, the Deutschemark continued to weaken on the European crosses. Its
trade weighted exchange rate ended the quarter 7% down from the highs of early
1995. The Italian lira rose approximately 10% against the Deutschemark due to
improving political and economic fundamentals and speculation of its return to
the ERM fold by the end of the year. Sterling strengthened nicely in the second
quarter, appreciating over 4% against the Deutschemark, to end the first half of
the year up over 6% versus the mark. The stronger dollar and perceptions of a
more advanced economic recovery relative to continental Europe outweighed
political uncertainty and lower short-term interest rates. The prospect of a
Labour government was not seen as having a serious effect on the currency but a
deteriorating current account remained a familiar concern. The Swiss franc
depreciated almost 2% against the mark in the second quarter on the back of a
weak economy and low interest rates. The franc remains, in our opinion, the most
overvalued currency in the world.

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116
<PAGE>
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)

Among the other dollar bloc currencies both the Australian and New Zealand
dollars have done well although almost all of their rises versus the U.S. dollar
occurred in the first quarter. They rose 5.8% and 4.8%, respectively with over
80% of those moves occurring earlier in the year. The Australian dollar reached
a five year high in the beginning of the second quarter of USD/AUD 0.80 before
succumbing to profit taking. It was aided by global demand for its raw
materials, high nominal yields and capital inflows from Japan. It remains a
highly cyclical currency. The New Zealand dollar ended the second quarter little
changed after appreciating 4.2% in the first quarter. Political concerns and
controversy over the course of the economy and the appropriate stance of
monetary policy has hurt it. The Canadian dollar ended the first half of 1996
essentially unchanged. Two conflicting forces have essentially offset each
other. On the negative side, nominal interest rates are low; short-term rates in
Canada are over 50 basis points lower than in the U.S. On the positive side, the
currency is competitive; inflation is low (1.5%); deficits are falling; and the
current account deficit is shrinking.

Currency developments this year have had the effect of unwinding the dramatic
moves of the first half of 1995. The dollar has now risen back to levels last
seen in 1994, both against the yen and the Deutschemark. Similar patterns are
reflected in the European crossrates. Exchange rates have arguably moved closer
to fair value. Nonetheless, the dollar currently appears well underpinned by
relative growth differentials and the likelihood that monetary policy will turn
restrictive in the U.S. first. A relatively favorable budget position (the U.S.
has one of the smallest budget deficits as a percentage of GDP of any major
country) should help as well. The current international desire on the part of
global policymakers to avoid another round of dollar depreciation should also
not be ignored. The dollar could come under pressure later in the year if the
Fed does not tighten in response to strong economic data (falling "behind the
curve") or the U.S. economy slows precipitously. And, the dollar could succumb
if speculation increases that a Bundesbank or Bank of Japan tightening is
imminent, especially if combined with a weak-willed Fed or weak U.S. economy.

Michael J. Smith
PORTFOLIO MANAGER

Robert M. Smith
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Global Fixed Income Portfolio

117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FIXED INCOME SECURITIES (85.1%)
AUSTRALIAN DOLLAR (2.7%)
GOVERNMENT BONDS (2.7%)
AUD 2,200 Government of Australia 9.75%, 3/15/02............ $ 1,806
1,800 Government of Australia 9.00%, 9/15/04............ 1,429
-----------
3,235
-----------
BRITISH POUND (7.0%)
GOVERNMENT BONDS (7.0%)
GBP 2,350 United Kingdom Conversion Bond 9.50%, 4/18/05..... 4,014
700 United Kingdom Treasury GILT 10.00%, 2/26/01...... 1,199
1,750 United Kingdom Treasury GILT 9.75%, 8/27/02....... 3,008
-----------
8,221
-----------
CANADIAN DOLLAR (2.8%)
GOVERNMENT BONDS (2.8%)
CAD 1,800 Government of Canada 7.50%, 12/01/03.............. 1,324
1,250 Government of Canada 6.50%, 6/01/04............... 861
1,300 Government of Canada 9.75%, 6/01/21............... 1,118
-----------
3,303
-----------
DANISH KRONE (6.2%)
GOVERNMENT BONDS (6.2%)
DKK 23,500 Kingdom of Denmark 8.00%, 11/15/01................ 4,288
13,500 Kingdom of Denmark 7.00%, 12/15/04................ 2,281
4,000 Kingdom of Denmark 8.00%, 3/15/06................. 711
-----------
7,280
-----------
DEUTSCHE MARK (14.8%)
GOVERNMENT BONDS (14.8%)
DEM 11,700 German Unity Bond 8.00%, 1/21/02.................. 8,465
2,000 Government of Germany 6.25%, 1/04/24.............. 1,157
6,350 Treuhandanstalt 6.875%, 6/11/03................... 4,326
5,325 Treuhandanstalt 6.75%, 5/13/04.................... 3,576
-----------
17,524
-----------
FRENCH FRANC (3.1%)
GOVERNMENT BOND (3.1%)
FRF 17,200 French Treasury Bill 7.75%, 4/12/00............... 3,621
-----------
ITALIAN LIRA (5.8%)
GOVERNMENT BOND (5.8%)
ITL 9,890,000 Republic of Italy Treasury Bond 10.50%,
11/01/00........................................ 6,874
-----------
JAPANESE YEN (7.9%)
EUROBONDS (7.9%)
JPY 300,000 European Investment Bank 6.625%, 3/15/00.......... 3,186
200,000 Export-Import Bank of Japan 4.375%, 10/01/03...... 1,985

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>

JPY 245,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04..................... $ 2,517
145,000 Republic of Austria 6.25%, 10/16/03............... 1,605
-----------
9,293
-----------
NETHERLANDS GUILDER (3.5%)
GOVERNMENT BONDS (3.5%)
NLG 3,250 Netherlands Government 9.00%, 1/15/01............. 2,179
3,350 Netherlands Government 5.75%, 1/15/04............. 1,918
-----------
4,097
-----------
SPANISH PESETA (1.0%)
GOVERNMENT BONDS (1.0%)
ESP 70,000 Spanish Government 12.25%, 3/25/00................ 620
70,000 Spanish Government 11.30%, 1/15/02................ 615
-----------
1,235
-----------
SWEDISH KRONA (7.7%)
GOVERNMENT BOND (7.7%)
SEK 48,900 Swedish Government 13.00%, 6/15/01................ 9,039
-----------
UNITED STATES DOLLAR (22.6%)
CORPORATE BONDS AND NOTES (4.3%)
U.S.$ 992 Asset Securitization Corp. 7.10%, 8/13/29......... 971
(e)385 Goldman Sachs Group 6.25%, 2/01/03................ 364
892 LB Commercial Conduit Mortgage Trust 7.144%,
8/25/04......................................... 886
(e)300 Lumbermens Mutual Casualty Co., Series AI, 9.15%,
7/01/26......................................... 299
(e)600 Metropolitan Life Insurance 7.45%, 11/01/23....... 544
2,000 UCFC CMO, Series 1995-C1, Class A3, 6.775%,
9/10/17......................................... 1,962
-----------
5,026
-----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (17.7%)
U.S. TREASURY BONDS
800 7.50%, 11/15/16................................... 840
750 8.75%, 5/15/20.................................... 896
-----------
1,736
-----------
U.S. TREASURY NOTES
2,300 5.125%, 11/30/98.................................. 2,245
710 6.25%, 2/15/03.................................... 697
-----------
2,942
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
11,700 6.00%, 7/25/03.................................... 11,261
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
2,814 6.50%, 1/01/26.................................... 2,632
2,479 7.00%, 2/15/26.................................... 2,378
-----------
5,010
-----------
20,949
-----------
YANKEE BOND (0.6%)
700 Quebec Province 7.50%, 7/15/23.................... 671
-----------
TOTAL FIXED INCOME SECURITIES (85.1%) (Cost $100,890)................ 100,368
-----------
</TABLE>

118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (18.4%)
REPURCHASE AGREEMENT (18.4%)
$ 21,759 Chase Securities, Inc. 5.15%, dated 6/28/96, due
7/01/96, to be repurchased at $21,768,
collateralized by $21,375 U.S. Treasury Notes,
7.125%, 9/30/99, valued at $21,853 (Cost
$21,759)........................................ $ 21,759
-----------
FOREIGN CURRENCY (1.1%)
FRF 1 French Franc...................................... --
ITL 4,666 Italian Lira...................................... 3
JPY 137,377 Japanese Yen...................................... 1,257
SEK 3 Swedish Krona..................................... 1
-----------
TOTAL FOREIGN CURRENCY (Cost $1,259)................................. 1,261
-----------
TOTAL INVESTMENTS (104.6%) (Cost $123,908)........................... 123,388
-----------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (5.3%)
Receivable for Portfolio Shares Sold................. $ 4,566
Interest Receivable.................................. 1,674
Foreign Withholding Tax Reclaim Receivable........... 36
Other................................................ 14 6,290
-----------
LIABILITIES (-9.9%)
Payable for Investments Purchased.................... (11,248)
Net Unrealized Loss on Forward Foreign Currency
Exchange Contracts.................................. (265)
Bank Overdraft....................................... (59)
Investment Advisory Fees Payable..................... (42)
Administrative Fees Payable.......................... (15)
Custodian Fees Payable............................... (13)
Directors' Fees and Expenses Payable................. (2)
Distribution Fees Payable............................ (1)
Payable for Portfolio Shares Redeemed................ (1)
Other Liabilities.................................... (33) (11,679)
----------- -----------
NET ASSETS (100%)................................................... $117,999
-----------
-----------
NET ASSETS CONSIST OF:
Paid in Capital..................................................... $ 122,476
Undistributed Net Investment Income................................. 1,673
Accumulated Net Realized Loss....................................... (5,348)
Unrealized Depreciation on Investments and Foreign Currency
Translations...................................................... (802)
-----------
NET ASSETS.......................................................... $117,999
-----------
-----------
CLASS A:
- --------------------------------------------------------------------
NET ASSETS.......................................................... $116,382
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 10,520,411 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $11.06
-----------
-----------
CLASS B:
- --------------------------------------------------------------------
NET ASSETS.......................................................... $1,617
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 146,342 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $11.05
-----------
-----------

- ------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at June 30,
1996, the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:
</TABLE>

<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ --------- ----------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
CHF 3,500 $ 2,804 7/12/96 U.S.$ 2,787 $ 2,787 $ (17)
DEM 9,800 6,453 7/12/96 U.S.$ 6,420 6,420 (33)
DEM 1,795 1,182 7/12/96 FRF 6,080 1,184 2
DKK 5,000 854 7/12/96 U.S.$ 846 846 (8)
FRF 12,206 2,377 7/12/96 DEM 3,600 2,370 (7)
JPY 450,000 4,125 7/12/96 U.S.$ 4,138 4,138 13
NLG 3,000 1,762 7/12/96 U.S.$ 1,750 1,750 (12)
SEK 44,500 6,726 7/12/96 U.S.$ 6,616 6,616 (110)
U.S.$ 4,148 4,148 7/12/96 JPY 450,000 4,125 (23)
U.S.$ 861 861 7/12/96 DEM 1,300 856 (5)
U.S.$ 679 679 7/12/96 SEK 4,500 680 1
U.S.$ 295 295 7/12/96 NLG 500 294 (1)
U.S.$ 63 63 7/12/96 GBP 41 63 --
CAD 900 660 7/19/96 U.S.$ 659 659 (1)
DEM 8,770 5,777 7/19/96 U.S.$ 5,732 5,732 (45)
DKK18,000 3,077 7/19/96 U.S.$ 3,047 3,047 (30)
NLG 4,200 2,468 7/19/96 U.S.$ 2,454 2,454 (14)
U.S.$ 328 328 7/19/96 DEM 500 329 1
U.S.$ 366 366 7/19/96 CAD 500 367 1
U.S.$ 158 158 7/19/96 AUD 200 157 (1)
U.S.$ 4,486 4,486 7/26/96 ITL 6,900,000 4,495 9
U.S.$ 4,239 4,239 7/26/96 ESP 545,000 4,254 15
--------- --------- -----
$ 53,888 $ 53,623 $ (265)
--------- --------- -----
--------- --------- -----
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C> <C>
(e) -- 144A Security -- Certain conditions for public sale
may exist.
CMO -- Collateralized Mortgage Obligation
CHF -- Swiss Franc
</TABLE>

- ------------------------------------------------------------

SUMMARY OF FIXED INCOME SECURITIES BY INDUSTRY CLASSIFICATION

<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- --------------------------------------------------------------------
<S> <C> <C>
Finance........................................ $ 12,714 10.8%
Foreign Government and Agency Obligations...... 66,705 56.5
U.S. Government and Agency Obligations......... 20,949 17.8
--------- ---
$ 100,368 85.1%
--------- ---
--------- ---
</TABLE>

119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE HIGH YIELD PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Aerospace & Defense 1.6%
Automotive 0.2%
Banking 1.2%
Broadcast - Radio & Television 14.8%
Construction 1.4%
Electrical Equipment 0.5%
Energy 1.1%
Entertainment & Leisure 3.7%
Environmental Controls 1.4%
Financial Services 8.5%
Food 3.0%
Food Services & Lodging 2.2%
Gaming & Lodging 2.6%
Machinery 1.3%
Materials 4.0%
Metals 4.3%
Multi-Industry 2.2%
Packaging & Container 4.3%
Publishing 1.8%
Real Estate 1.7%
Retail - General 5.0%
Telecommunications 7.7%
Textiles & Apparel 2.0%
Transportation 1.5%
Utilities 3.0%
Foreign Government & Agency Obligations 8.6%
Other 10.4%
</TABLE>

PERFORMANCE COMPARED TO THE CS FIRST BOSTON
HIGH YIELD INDEX(1)
- -----------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 4.47% 12.62% 11.86%
PORTFOLIO -- CLASS
B(3).................... 3.89 N/A N/A
INDEX................... 3.75 9.95 10.54

<FN>

1. The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The High Yield Portfolio seeks to maximize total return by investing in a
diversified portfolio of fixed income securities that offer a higher yield than
that offered by debt securities in the three highest rating categories.

For the six month period ended June 30, 1996, the Portfolio had a total return
of 4.47% for the Class A shares and 3.89% for the Class B shares, as compared to
a total return of 3.75% for the CS First Boston High Yield Index. The average
annual total return for the twelve months ended June 30, 1996 and for the period
from inception on September 28, 1992 through June 30, 1996 was 12.62% and
11.86%, respectively, for the Class A shares, as compared to 9.95% and 10.54%,
respectively, for the Index. As of June 30, 1996, the Portfolio had an SEC
30-day yield of 9.86% for the Class A shares and 9.61% for the Class B shares.

For the three months ended June 30, 1996, the Portfolio had a total return of
1.29% for the Class A shares and 1.20% for the Class B shares as compared to
1.56% for the Index. Helping the Portfolio in the quarter were: our paper
industry overweighting, specific securities which performed particularly well
(including Marvel, Revlon and Six Flags) and our emerging markets investments.
Offsetting factors included the underperformance of our cable investments, where
spreads widened in the quarter, and specific securities which performed poorly,
including Home Holdings.

During the quarter, we made incremental changes to industry exposures. We added
to our cable holdings. We believe that cable television bonds represent the best
value in the higher quality sector of the high yield bond market, and think that
this overweighting will benefit future performance. We also added to diversified
media companies, including Viacom and Time Warner.

A new investment in the second quarter was ALPS 96-1. This is an airline lease
securitization where the aircraft and related leases were sold in securitized
form by GPA, the lessor. We purchased a BB-rated security in this transaction
where we thought the trade-off between portfolio collateralization levels and
expected return was the most attractive.

We also continued to maintain an exposure in U.S. dollar-denominated emerging
markets bonds. Increasingly, our investments take the form of non-U.S.
companies, rather than in emerging markets sovereign debt. For these corporate
credits, a combination of

- --------------------------------------------------------------------------------
High Yield Portfolio

120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
sovereign risk analysis and our traditional high yield credit work offers the
potential to uncover attractive values.

The high yield market has performed extremely well year-to-date compared to high
quality bonds. Credit spreads have tightened meaningfully, with strong economic
growth and favorable trends in credit quality making for an extremely supportive
environment. Looking ahead, we are being somewhat more cautious with regard to
overall credit quality. While we expect continued favorable returns from high
yield bonds, the market may be somewhat more vulnerable to signs of economic
weakness or to an equity market correction.

Robert Angevine
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
High Yield Portfolio

121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE HIGH YIELD PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES (71.8%)
AUTOMOTIVE (0.2%)
$ (e)255 Exide Corp., 2.90%,
12/15/05............. $ 139
---------
BANKING (0.9%)
(e)775 United Savings Texas,
8.55%, 5/15/98....... 777
---------
BROADCAST-RADIO & TELEVISION
(14.8%)
950 Cablevision Systems
Corp., 9.875%,
5/15/06.............. 914
500 Comcast Cellular Corp.,
Series A, Zero
Coupon, 3/05/00...... 344
1,350 Comcast Cellular Corp.,
Series B, Zero
Coupon, 3/05/00...... 928
925 Comcast Corp., 9.375%,
5/15/05.............. 893
1,235 Continental
Cablevision, Inc.,
9.50%, 8/01/13....... 1,340
2,425 Lenfest Communications,
8.375%, 11/01/05..... 2,219
(e)315 Lenfest Communications,
10.50%, 6/15/06...... 317
(n)2,400 Marcus Cable Co.,
0.00%, 12/15/05...... 1,482
(n)3,075 MFS Communications Co.,
Inc., 0.00%,
1/15/06.............. 1,872
1,350 Rogers Cablesystems
Ltd., 10.00%,
3/15/05.............. 1,337
2,000 Viacom Inc., 8.00%,
7/07/06.............. 1,830
---------
13,476
---------
CONSTRUCTION (1.4%)
(e,n)2,060 Echostar Satellite
Broadcast, 0.00%,
3/15/04.............. 1,277
---------
ENERGY (1.1%)
1,000 Nuevo Energy, 9.50%,
4/15/06.............. 987
---------
ENTERTAINMENT & LEISURE (1.9%)
(n)2,000 Six Flags Theme Park,
Inc., 0.00%,
6/15/05.............. 1,703
---------
ENVIRONMENTAL CONTROLS (1.4%)
(e,n)1,200 Norcal Waste Systems,
12.75%, 11/15/05..... 1,263
---------
FINANCIAL SERVICES (5.2%)
1,850 APP International
Finance, 11.75%,
10/01/05............. 1,910
2,360 Home Holdings, Inc.,
8.625%, 12/15/03..... 1,534
(e)400 Homeside, Inc., 11.25%,
5/15/03.............. 413
940 Reliance Group
Holdings, Inc.,
9.00%, 11/15/00...... 932
---------
4,789
---------
FOOD (3.0%)
315 Big V Supermarkets,
Inc., 11.00%,
2/15/04.............. 294
1,150 Pilgrim's Pride Corp.,
10.875%, 8/01/03..... 1,105
475 RJR Nabisco, Inc.,
8.75%, 8/15/05....... 475
900 Smith's Food & Drug,
11.25%, 5/15/07...... 911
---------
2,785
---------

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------
<C> <S> <C>
FOOD SERVICE & LODGING (2.1%)
$(e)1,475 Courtyard by Marriott,
10.75%, 2/01/08...... $ 1,442
435 La Quinta Inns, Inc.,
9.25%, 5/15/03....... 445
---------
1,887
---------
GAMING & LODGING (2.1%)
175 Grand Casinos Inc.,
10.125%, 12/01/03.... 179
522 Louisiana Casino
Cruises, 11.50%,
12/01/98............. 444
1,350 Trump Atlantic, 11.25%,
5/01/06.............. 1,353
---------
1,976
---------
MACHINERY (1.3%)
1,145 SD Warren Co., 12.00%,
12/15/04............. 1,211
---------
MATERIALS (4.0%)
(e,n)3,000 Brooks Fiber
Properties, 0.00%,
3/01/06.............. 1,590
500 IMC Global, Inc.,
9.25%, 10/01/00...... 512
1,500 IMC Global, Inc.,
9.45%, 12/15/11...... 1,530
---------
3,632
---------
METALS (3.3%)
750 Algoma Steel Inc.,
(Yankee Bond),
12.375%, 7/15/05..... 731
(e)525 Jet Equipment Trust,
Series 95-D, 11.44%,
11/01/14............. 576
(e)1,050 Jet Equipment Trust,
Series C1, 11.79%,
6/15/13.............. 1,179
650 Sheffield Steel Corp.,
12.00%, 11/01/01..... 572
---------
3,058
---------
MULTI-INDUSTRY (2.2%)
765 TLC Beatrice
International
Holdings, 11.50%,
10/01/05............. 776
(e)1,195 Unisys Corp., 12.00%,
4/15/03.............. 1,214
---------
1,990
---------
PACKAGING & CONTAINER (4.3%)
400 Gaylord Container
Corp., 11.50%,
5/15/01.............. 408
(n)425 Gaylord Container
Corp., 12.75%,
5/15/05.............. 448
1,060 G-I Holdings, Inc. Zero
Coupon, 10/01/98..... 851
825 Owens-Illinois, Inc.,
11.00%, 12/01/03..... 887
1,400 Stone Container Corp.,
10.75%, 10/01/02..... 1,414
---------
4,008
---------
PUBLISHING (1.8%)
1,365 Crown Paper Co.,
11.00%, 9/01/05...... 1,297
500 Marvel Parent Holdings,
Zero Coupon,
4/15/98.............. 396
---------
1,693
---------
REAL ESTATE (1.6%)
(e)1,250 HMC Acquisition
Properties, 9.00%,
12/15/07............. 1,144
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
High Yield Portfolio

122
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------
<C> <S> <C>
</TABLE>

REAL ESTATE (CONT.)
<TABLE>
<C> <S> <C>
$ 350 MDC Holdings, 11.125%,
12/15/03............. $ 337
---------
1,481
---------
RETAIL-GENERAL (5.0%)
1,400 Host Marriott Travel
Plaza, Series B,
9.50%, 5/15/05....... 1,342
2,171 Revlon Worldwide,
Series B, Zero
Coupon, 3/15/98...... 1,807
1,775 Southland Corp., 5.00%,
12/15/03............. 1,385
---------
4,534
---------
TELECOMMUNICATIONS (7.7%)
(n)3,000 Dial Call
Communications,
0.00%, 4/15/04....... 1,920
(n)2,250 Nextel Communications,
0.00%, 8/15/04....... 1,322
(e,n)2,200 Occidente y Caribe,
0.00%, 3/15/04....... 1,122
350 Philippines Long
Distance Telephone,
9.25%, 6/30/06....... 350
(n)1,700 Telewest plc, 0.00%,
10/01/07............. 1,007
1,500 TCI Communications,
Inc., 7.875%,
2/15/26.............. 1,311
---------
7,032
---------
TEXTILES & APPAREL (2.0%)
525 Collins & Aikman
Products, 11.50%,
4/15/06.............. 534
1,365 Westpoint Stevens,
Inc., 9.375%,
12/15/05............. 1,327
---------
1,861
---------
TRANSPORTATION (1.5%)
164 America West Airlines,
6.00%, 3/31/97....... 154
1,500 Venture Holdings,
9.75%, 4/01/04....... 1,238
---------
1,392
---------
UTILITIES (3.0%)
1,400 First PV Funding Corp.,
(Lease Obligation
Bond) Series 1986B,
10.15%, 1/15/16...... 1,418
212 Midland Cogeneration
Ventures, Series
C-91, 10.33%,
7/23/02.............. 221
374 Midland Cogeneration
Ventures, Series
C-94, 10.33%,
7/23/02.............. 394
650 Midland Funding II,
Series A, 11.75%,
7/23/05.............. 681
---------
2,714
---------
TOTAL CORPORATE BONDS AND NOTES
(Cost $66,556).................... 65,665
---------
ASSET BACKED SECURITIES (5.2%)
AEROSPACE & DEFENSE (1.6%)
(e)1,500 Aircraft Lease
Portfolio
Securitization Ltd.,
Series 1996-1, Class
D, 12.75%, 6/15/06... 1,500
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------
<C> <S> <C>
BANKING (0.3%)
$ 349 PNC Mortgage Securities
Corp., Series 1995-2,
Class B4, REMIC,
7.50%, 9/25/25....... $ 262
---------
FINANCIAL SERVICES (3.3%)
972 DR Securitized Lease
Trust, Series
1993-K1, Class A1,
6.66%, 8/15/10....... 735
1,374 DR Securitized Lease
Trust, Series
1994-K1, Class A1,
7.60%, 8/15/07....... 1,154
(e)311 GE Capital Mortgage
Services, Inc.,
Series 1995-12, Class
B3, REMIC, 7.88%,
8/25/25.............. 235
(e)350 Prudential Home
Mortgage Securities,
Inc., Series 1996-4,
Class B3, REMIC,
6.50%, 4/25/26....... 258
875 Prudential Home
Mortgage Securities
Inc., Series 1996-A
Class B1, 7.96%,
4/15/25.............. 582
---------
2,964
---------
TOTAL ASSET BACKED SECURITIES
(Cost $4,783)..................... 4,726
---------
FOREIGN GOVERNMENT BONDS (8.6%)
BONDS (8.6%)
5,310 Federative Republic of
Brazil, Par Bond,
Series Z-L, 5.00%,
4/15/24.............. 2,950
(n)1,250 Government of Venezuela
Front Loaded Interest
Reduction Bond,
Series A, 6.375%,
3/31/07.............. 905
1,485 Republic of Argentina,
Series L, "Euro"
(Floating Rate),
6.313%, 3/31/05...... 1,160
(n)3,160 Republic of Argentina
Series L, "Euro"
(Floating Rate),
5.25%, 3/31/23....... 1,734
1,750 United Mexican States,
Series B, 6.25%,
12/31/19............. 1,120
---------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $7,244)..................... 7,869
---------
</TABLE>

<TABLE>
<CAPTION>
SHARES
- --------------
<C> <S> <C>
COMMON STOCKS (0.1%)
FINANCIAL SERVICES (0.0%)
(a)1,268 WestFed Holdings, Inc., Class B.... --
---------
FOOD SERVICE & LODGING (0.1%)
(a)1,300 Motels of America, Inc............. 95
---------
TOTAL COMMON STOCKS (Cost $85)..................... 95
---------
PREFERRED STOCKS (1.8%)
ENTERTAINMENT & LEISURE (1.8%)
(e)1,700 Time Warner, Inc................... 1,666
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
High Yield Portfolio

123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (0.0%)
3 WestFed Holdings, Inc., Series A... $ --
---------
TOTAL PREFERRED STOCKS (Cost $1,771)............... 1,666
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
- --------------
<C> <S> <C>
RIGHTS (0.0%)
BROADCAST-RADIO & TELEVISION (0.0%)
(a)35,000 SpectraVision, Inc., expiring
10/08/97......................... 2
---------
FOREIGN GOVERNMENT (0.0%)
(a)1,750,000 United Mexican States, 6.25%
12/31/19......................... --
---------
TOTAL RIGHTS (Cost $133)........................... 2
---------

NO. OF
WARRANTS
- --------------
<C> <S> <C>
WARRANTS (0.6%)
AEROSPACE & DEFENSE (0.0%)
(a)500 Sabreliner Corp., expiring
4/15/03.......................... --
---------
ELECTRICAL EQUIPMENT (0.5%)
(a,e)28,000 Protection One Alarm, Inc.,
expiring 4/03/03................. 416
---------
GAMING & LODGING (0.0%)
(a)2,700 Casino Magic Corp., expiring
10/14/96......................... --
(a)1,725 Louisiana Casino Cruises, expiring
12/01/98......................... 9
---------
9
---------
INSURANCE (0.0%)
(a)500 Horace Mann Educators Corp.,
expiring 4/03/99................. 7
---------
METALS (0.0%)
(a)8,250 Sheffield Steel Corp., expiring
11/01/01......................... 25
---------
PACKAGING & CONTAINER (0.0%)
(a)1,000 Crown Packaging Holdings, expiring
11/01/03......................... 5
---------
REAL ESTATE (0.1%)
(a)1,000 Petro PSC Properties L.P., expiring
7/15/97.......................... 33
---------
TELECOMMUNICATIONS (0.0%)
(a,e)1,250 American Telecasting, expiring
8/10/00.......................... 30
(a,e)3,000 Nextel Communications, Inc.,
expiring 4/25/99................. --
---------
30
---------
TOTAL WARRANTS (Cost $260)......................... 525
---------
<CAPTION>

NO. OF VALUE
UNITS (000)
<C> <S> <C>
- ------------------------------------------------------------
UNITS (1.5%)
GAMING & LODGING (0.5%)
(b,e)2,207,906 Maritime Group, Series A, 13.50%,
2/15/97.......................... $ 487
---------
METALS (1.0%)
1,000,000 Sheffield Steel Corp. (1st Mortgage
Bond + 5 common stock warrants),
12.00%, 11/01/01................. 885
---------
TOTAL UNITS (Cost $3,426).......................... 1,372
---------
<CAPTION>
FACE
AMOUNT
(000)
- --------------
<C> <S> <C>
SHORT-TERM INVESTMENT (8.0%)
REPURCHASE AGREEMENT (8.0%)
$ 7,289 Chase Securities, Inc., 5.15%,
dated 6/28/96, due 7/01/96, to be
repurchased at $7,292,
collateralized by $7,165 U.S.
Treasury Notes, 7.125%, due
9/30/99, valued at $7,325 (Cost
$7,289).......................... 7,289
---------
TOTAL INVESTMENTS (97.6%) (Cost $91,547)........... 89,209
---------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (3.3%)
Receivable for Investments Sold......... $1,534
Interest Receivable..................... 1,406
Receivable for Portfolio Shares Sold.... 2
Other................................... 12 2,954
---------
LIABILITIES (-0.9%)
Payable for Investments Purchased....... (338)
Interest Claims Payable................. (289)
Investment Advisory Fees Payable........ (88)
Administrative Fees Payable............. (12)
Custodian Fees Payable.................. (4)
Distribution Fees Payable............... (2)
Directors' Fees and Expenses Payable.... (1)
Other Liabilities....................... (28) (762)
--------- ---------
</TABLE>

<TABLE>
<S> <C>
NET ASSETS (100.0%)................................ $ 91,401
-----------
-----------
NET ASSETS CONSIST OF:
Paid in Capital.................................. $ 96,640
Undistributed Net Investment Income.............. 730
Accumulated Net Realized Loss.................... (3,631)
Unrealized Depreciation on Investments........... (2,338)
-----------
NET ASSETS......................................... $ 91,401
-----------
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
High Yield Portfolio

124
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ------------------------------------------------------------
<S> <C>
CLASS A:
NET ASSETS......................................... $ 87,902
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 8,372,561 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $10.50
-----------
-----------
CLASS B:
NET ASSETS......................................... $3,499
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 334,052 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $10.47
-----------
-----------
</TABLE>

- ------------------------------------------------

<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
(b) -- Non-income producing security -- in default
(e) -- 144A Security -- Certain conditions for public sale
may exist
(n) -- Step Bond -- Coupon rate increases in increments to
maturity. Rate disclosed is as of June 30, 1996.
Maturity date disclosed is the ultimate maturity
date.
</TABLE>

REMIC -- Real Estate Mortgage Investment Conduit

Floating Rate Security -- The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those in effect
on June 30, 1996.

At June 30, 1996, approximately 99% of the Portfolio's net assets consisted 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.

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
High Yield Portfolio

125
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE MUNICIPAL BOND PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Daily Variable Rate Bonds 1.0%
Fixed Rate Instruments 96.3%
Other 2.7%
</TABLE>

PERFORMANCE COMPARED TO THE LEHMAN
7 YR. MUNICIPAL BOND INDEX(1)
- ----------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
--------- ---------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A..... -0.09% 4.30% 5.93%
PORTFOLIO -- CLASS
B(3)..................... -0.10 N/A N/A
INDEX.................... 0.09 5.54 8.22

<FN>

1. The Lehman 7-year Municipal Bond Index consists of investment grade bonds
with maturities between 6-8 years, rated BAA or better. All bonds have been
taken from issues of at least $50 million in size sold within the last five
years.

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.
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

- ------------------------------------------------------------

The Municipal Bond Portfolio seeks high current income consistent with
preservation of principal through investment in a portfolio consisting primarily
of intermediate and long-term investment grade municipal obligations, the
interest on which is exempt from Federal income tax.

For the six month period ended June 30, 1996, the Portfolio had a total return
of -0.09% for the Class A shares and -0.10% for the Class B shares, as compared
to a total return of 0.09% for the Lehman 7-Year Municipal Bond Index. The
average annual total return for the twelve months ended June 30, 1996 and for
the period from inception on January 18, 1995 through June 30, 1996 was 4.30%
and 5.93%, respectively for the Class A shares, as compared to 5.54% and 8.22%
for the Index. As of June 30, 1996, the Portfolio had an SEC 30-day yield of
4.66% for the Class A shares and 4.42% for the Class B shares.

The U.S. fixed income market has spent the first half of 1996 struggling to
determine the direction of Federal Reserve interest rate policy. The Federal
Reserve started off the year with a bias towards easing, and on January 31
decreased both the Federal Funds and Discount Rate by 25 basis points. Following
the easing, the Federal Reserve seemed to have mixed feelings about the strength
of the economy going forward, injecting into the market uncertainty about the
future direction of interest rate policy. Economic releases showing signs of
growth in the economy, including continued strength in home sales, a robust
employment picture and hints of inflationary pressure beginning to creep into
the labor market, all combined to put upward pressure on interest rates. The
markets were subject to day-to-day volatility caused by sharp movements in
commodity prices and a keen interest in the value of the U.S. dollar compared to
the Japanese yen and the German mark. Signs of strength in the economy and
rhetoric coming from Federal Reserve Bank Governors indicating the Federal
Reserve was concerned about the current level of inflation, specifically wage
pressures and their effect on the economy, put all thoughts of further Fed
easing on hold. Any attempts by the market to stage rallies were short-lived.
The market briefly rallied before the release of both the May and June
employment report; stronger than expected increases in these numbers sent the
market in a tailspin, as has been the scenario for much of this year. The first
half of the year ended with market participants anxiously anticipating what
action the Fed would or would not take at the July 2nd and 3rd FOMC meeting. The
meeting ended with no change in the Federal Funds or Discount Rate. Going into
the third quarter,

- --------------------------------------------------------------------------------
Municipal Bond Portfolio

126
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO (CONT.)
market sentiment seems to be not if, but when and by how much will the Federal
Reserve increase the Federal Funds and Discount Rate.

The municipal bond market year-to-date performed relatively well compared to the
U.S. Treasury market, outperforming comparable maturity Treasuries across the
yield curve. Individual investors continued to be good buyers as cash poured
into the market from the seasonal June and July increase in flows due to coupon
payments, calls and redemptions. Individuals looked to the municipal market as
yields became more attractive compared to recent levels and the stock market
began to make investors nervous with signs of topping out. Property and casualty
insurance companies were heavy participants in the new issue market and
tax-exempt mutual funds were active swappers, buying new issues and selling
older holdings to pay for new purchases.

The Portfolio is defensively structured, with over 30% of the Portfolio invested
in high quality premium coupon prerefunded bonds escrowed in U.S. Treasury
securities. The remainder of the Portfolio consists of premium coupon high
quality general obligation and revenue bonds. This structure provides some
cushion in a rising interest rate environment. We have not made any significant
changes to the Portfolio, with activity mainly limited to selling securities to
meet liquidity needs. Our average maturity is currently 6 years, slightly
shorter than the 7 year benchmark. We will continue to maintain a defensive bias
and will not look to extend the maturity of the Portfolio until we feel the
market has settled into a more stable trading range.

Lori A. Cohane
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Municipal Bond Portfolio

127
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE MUNICIPAL BOND PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
- ------------------------------------------------------
<C> <S> <C>
TAX EXEMPT INSTRUMENTS (97.3%)
DAILY VARIABLE RATE BONDS (1.0%)
$ (c)300 New York City, New York,
General Obligation Bonds,
Series B, 3.75%, 10/01/21
(Cost $300)................. $ 300
--------
FIXED RATE INSTRUMENTS (96.3%)
1,000 Connecticut State Special
Obligation, Tax Revenue
Bonds, Transportation,
6.50%, 7/01/09, Prerefunded
7/01/99 at 102.............. 1,073
1,000 De Kalb County, Georgia,
General Obligation Bonds,
7.30%, 1/01/00, Prerefunded
1/01/97 at 102.............. 1,038
1,000 De Kalb County, Georgia, Water
& Sewer Revenue Bonds,
7.00%, 10/01/06............. 1,054
1,000 Delaware Transportation
Authority, Transportation
System Revenue Bonds, 6.50%,
7/01/11, Prerefunded 7/01/01
at 102...................... 1,090
1,000 Fairfax County Virginia Water
Authority, Revenue Bonds,
6.00%, 4/01/22.............. 1,003
1,000 Georgia State, General
Obligation Bonds, Series E,
6.75%, 12/01/02............. 1,111
500 Georgia State, General
Obligation Bonds, Series F,
6.50%, 12/01/06............. 556
500 Hawaii State, General
Obligation Bonds, Series BS,
6.70%, 9/01/97.............. 516
1,000 Hawaii State, General
Obligation Bonds, Series CJ,
6.20%, 1/01/12.............. 1,037
1,500 Intermountain Power Agency,
Utah, Power Supply Revenue
Bonds, Series D, 8.375%,
7/01/12..................... 1,587
1,000 Kentucky State Housing Corp.,
Revenue Bonds, Series A,
6.00%, 7/01/10.............. 1,008
1,155 Maryland State Department of
Transportation, Construction
Revenue Bonds, Second Issue,
6.80%, 11/01/05, Prerefunded
11/01/99 at 102............. 1,255
1,000 Massachusetts State
Consolidated Loan, Series A,
7.50%, 3/01/03, Prerefunded
3/01/00 at 102.............. 1,112
500 Massachusetts State
Consolidated Loan, Series A,
7.63%, 6/01/08, Prerefunded
6/01/01 at 102.............. 571
1,625 Michigan State Housing
Development Authority,
Revenue Bonds, Series A,
6.75%, 12/01/14............. 1,689
1,590 Minnesota State Infrastructure
Development, General
Obligation Bonds, 6.80%,
8/01/03, Prerefunded 8/01/00
at 100...................... 1,712
1,400 Mississippi State, General
Obligation Bonds, 6.00%,
2/01/09..................... 1,455
1,475 Montana State, General
Obligation Bonds, Long Range
Building Program, Series C,
6.00%, 8/01/13.............. 1,516
1,000 New Castle County, Delaware,
General Obligation Bonds,
6.25%, 10/15/01............. 1,071

<CAPTION>
FACE AMOUNT VALUE
(000) (000)
- ------------------------------------------------------
<C> <S> <C>
$ 1,000 New York State Local
Government Assistance Corp.,
Revenue Bonds, Series B,
7.50%, 4/01/20, Prerefunded
4/01/01 at 102.............. $ 1,136
500 Ohio State, General Obligation
Bonds, 6.20%, 8/01/12....... 527
1,000 Ohio State Housing Finance
Agency, Residential Mortgage
Revenue Bonds, Series A-1,
6.20%, 9/01/14.............. 1,014
1,000 Reedy Creek Improvement
District, Florida, Utility
Revenue Bonds, Series 91-1,
6.50%, 10/01/16, Prerefunded
10/01/01 at 101............. 1,091
1,350 San Antonio, Texas, General
Obligation Bonds, 6.50%,
8/01/14..................... 1,415
1,000 Virginia Beach, Virginia,
General Obligation Bonds,
6.00%, 9/01/10.............. 1,038
500 Virginia State Housing
Development Authority,
Commonwealth Mortgage
Revenue Bonds, Series B,
6.60%, 1/01/12.............. 524
1,000 Virginia State Housing
Development Authority,
Commonwealth Mortgage
Revenue Bonds, Series B,
6.65%, 1/01/13.............. 1,048
1,000 Washington State, General
Obligation Bonds, Series B,
6.20%, 6/01/01.............. 1,061
500 Washington Suburban Sanitary
District, General Obligation
Revenue Bonds, 6.50%,
11/01/05, Prerefunded
11/01/01 at 102............. 548
--------
TOTAL FIXED RATE INSTRUMENTS (Cost
$30,287).................................... 30,856
--------
TOTAL TAX-EXEMPT INSTRUMENTS (97.3%) (Cost
$30,587).................................... 31,156
--------
TOTAL INVESTMENTS (97.3%) (Cost $30,587).... 31,156
--------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (2.8%)
Cash.................................... $ 67
Interest Receivable..................... 644
Receivable for Portfolio Shares Sold.... 195
Other................................... 7 913
---------
LIABILITIES (-0.1%)
Professional Fees Payable............... (11)
Investment Advisory Fees Payable........ (5)
Administrative Fees Payable............. (5)
Custodian Fees Payable.................. (2)
Directors' Fees and Expenses Payable.... (1)
Other Liabilities....................... (8) (32)
--------- ---------
NET ASSETS (100%).................................... $32,037
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital...................................... $31,428
Undistributed Net Investment Income.................. 140
Accumulated Net Realized Loss........................ (100)
Unrealized Appreciation on Investments............... 569
---------
NET ASSETS........................................... $32,037
---------
---------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Municipal Bond Portfolio

128
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE MUNICIPAL BOND PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ----------------------------------------------------
<S> <C> <C>
CLASS A:
NET ASSETS................................ $31,869
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 3,136,557 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.16
--------
--------
CLASS B:
$168
NET ASSETS................................
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 16,541 outstanding $0.001
par value shares (authorized
500,000,000 shares).................... $10.16
--------
--------
</TABLE>

- ------------------------------------------------
(c) -- Security is valued at cost -- See note A-1 to financial statements

Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand and are secured by a letter of credit or other support agreements.

Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are seven days or less.

Prerefunded Bonds. Outstanding bonds have been refunded to the first call date
(prerefunded date) by the issuance of new bonds. Principal and interest are paid
from monies escrowed in U.S. Treasury securities. Prerefunded bonds are
generally re-rated AAA due to the Treasury escrow.

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Municipal Bond Portfolio

129
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE MONEY MARKET PORTFOLIO

COMPOSITION OF NET ASSETS (JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Certificates of Deposit 18.9%
Commercial Paper 47.8%
Corporate Floating Rate Note 2.4%
U.S. Government Agency Discount Notes 6.5%
U.S. Government Agency Floating Rate
Notes 20.2%
U.S. Treasury Bill 1.8%
Other 2.4%
</TABLE>

COMPARATIVE MONTHLY AVERAGE YIELDS

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO DONOGHUE'S SEC
<S> <C> <C>
30-Day Yields 30-Day Yields
Jan. 5.11 5.05
Feb. 4.90 4.85
Mar. 4.82 4.76
Apr. 4.80 4.75
May 4.81 4.74
Jun. 4.89 4.76
</TABLE>

- ------------------------------------------------

INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.

The Money Market Portfolio's investment objectives are to maximize current
income and preserve capital while maintaining high levels of liquidity through
investing in high quality money market instruments which have effective
maturities of one year or less. The Portfolio's average maturity (on a
dollar-weighted basis) will not exceed 90 days. The Portfolio will purchase only
securities having a remaining maturity of one year or less. The Portfolio is
expected to maintain a net asset value of $1.00 per share. There can be no
assurance, however, that the Portfolio will be successful in maintaining a net
asset value of $1.00 per share.

The seven day yield and seven day effective yield (which assumes an
annualization of the current yield with all dividends reinvested) for the
Portfolio as of June 30, 1996 were 4.89% and 5.00%, respectively. As with all
money market portfolios, the seven day yields are not necessarily indicative of
future performance.

The Fed began the year by cutting interest rates (from 5.5% to 5.25% on the 31st
of January). But from that point on short term interest rates moved uniformly in
an upward direction. This came as a big surprise to most money market
participants because when the year began they believed that the economy was very
weak. In January leading economists were predicting that the Fed would be
required to ease interest rates dramatically to stimulate the economy. Calls for
a full percentage point cut were not uncommon. Instead, the U. S. economy showed
surprising strength, particularly in the housing and job creation categories.
These key components proved that the string of Fed easings, which had begun in
July of 1995, was beginning to show results. So great has been the strength of
the American economy that the Fed is now expected to hike interest rates this
summer in an effort to slow things down and avoid an increase in inflation.

At the beginning of each spring month the number of people on non-farm payrolls
presented a new shock that sent interest rates higher. March's report, which
revealed that a staggering 705,000 jobs had been created, was a particular
surprise. It led to some of the biggest one day losses in the bond market this
year. We chose to use these setbacks as buying opportunities and took advantage
of the higher yields available. At those times we bought longer dated securities
for the portfolio to extend its weighted average maturity. Not until summer did
the market finally seem comfortable with the conclusion that the strength
promised in the spring's employment reports had been real. Since that time
opportunities to extend at attractive levels have been rare. Gradually, since

- --------------------------------------------------------------------------------
Money Market Portfolio

130
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO (CONT.)
the first of the year we have increased the percentage of the Portfolio that is
devoted to highly-rated commercial paper. This came as we decreased our holdings
of agency discount notes. This was done to take advantage of the higher yields
available on commercial paper.

We are pleased to report that the Portfolio continues to meet its goal of
providing as high a level of interest income as is consistent with maintaining
liquidity and stability of principal, and that the Portfolio still holds only
high quality securities with over 90% of assets invested in securities rated
A1+/P1.

Gerald Barth
PORTFOLIO MANAGER

Abigail Jones Feder
PORTFOLIO MANAGER

Kenneth R. Holley
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Money Market Portfolio

131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE MONEY MARKET PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
MONEY MARKET INSTRUMENTS (97.6%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (28.5%)
AGENCY DISCOUNT NOTES (6.5%)
Federal Home Loan Bank
$ 20,000 4.93%, 8/30/96.................................... $ 19,836
Federal National Mortgage Corp.
20,000 4.95%, 9/5/96..................................... 19,818
30,000 5.16%, 9/20/96.................................... 29,652
----------
69,306
----------
AGENCY FLOATING RATE NOTES (20.2%)
Federal National Mortgage Association
20,000 5.34%, 8/16/96.................................... 19,999
20,000 5.39%, 10/11/96................................... 19,995
25,000 5.34%, 11/20/96................................... 24,993
25,000 5.29%, 4/11/97.................................... 24,992
65,000 5.42%, 9/2/97..................................... 65,000
13,000 5.54%, 7/26/99.................................... 12,957
----------
167,936
----------
Student Loan Marketing Association
46,000 5.53%, 10/30/97................................... 46,043
----------
213,979
----------
U.S. TREASURY BILL (1.8%)
20,000 5.05%, 3/6/97..................................... 19,304
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost $302,589)................................... 302,589
----------
COMMERCIAL PAPER (47.8%)
FINANCE (47.8%)
43,000 Abbey National North America 5.35%, 11/29/96...... 42,035
25,000 ABN-AMRO North America Finance, Inc. 5.30%,
7/11/96......................................... 24,963
20,000 ABN-AMRO North America Finance, Inc. 4.96%,
8/27/96......................................... 19,843
20,000 AT&T Capital Corp. 5.25%, 7/9/96.................. 19,977
20,000 Ameritech Capital Funding Corp. 5.25%, 7/2/96..... 19,997
10,000 Ameritech Capital Funding Corp. 5.27%, 7/19/96.... 9,974
30,000 Coca-Cola Co. 5.28%, 8/8/96....................... 29,833
25,000 Daimler-Benz North America Corp. 5.29%, 8/16/96... 24,831
30,000 Daimler-Benz North America Corp. 5.44%,
11/14/96........................................ 29,384
30,000 General Electric Capital Corp. 5.19%, 9/4/96...... 29,719
25,000 Harvard University 5.34%, 7/23/96................. 24,918
50,000 Koch Industries 5.30%, 7/15/96.................... 49,897
20,000 McDonald's Corp. 5.35%, 7/15/96................... 19,958
22,906 MetLife Funding, Inc. 5.27%, 7/26/96.............. 22,822
15,000 Sandoz Corp. 5.27%, 7/17/96....................... 14,965
20,000 SunTrust Banks, Inc. 5.29%, 7/1/96................ 20,000

<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 5,200 Toys 'R' Us, Inc. 5.27%, 7/2/96................... $ 5,199
50,000 UBS Finance 5.55%, 7/1/96......................... 50,000
7,000 Unilever Capital Corp. 5.33%, 12/13/96............ 6,829
9,295 Weyerhaeuser Co. 5.28%, 8/6/96.................... 9,246
15,300 Weyerhaeuser Co. 5.28%, 8/7/96.................... 15,217
18,000 Weyerhaeuser Co. 5.28%, 8/8/96.................... 17,900
----------
TOTAL COMMERCIAL PAPER (Cost $507,507)...................... 507,507
----------
CORPORATE FLOATING RATE NOTE (2.4%)
FINANCE (2.4%)
25,000 First Chicago Corp. 5.34%, 12/2/96
(Cost $24,996).................................. 24,996
----------
CERTIFICATES OF DEPOSIT (18.9%)
30,000 Commerzbank (Yankee) 5.33%, 9/25/96............... 29,995
20,000 Commerzbank (Yankee) 5.52%, 12/4/96............... 19,989
45,000 Deutsche Bank (Yankee) 5.37%, 7/10/96............. 45,000
32,000 National Westminster Bank plc (Yankee) 5.36%,
7/10/96......................................... 32,000
50,000 Royal Bank of Canada (Yankee) 6.05%, 6/11/97...... 50,000
24,000 Societe Generale Bank (Yankee) 5.33%, 7/8/96...... 24,000
----------
TOTAL CERTIFICATES OF DEPOSIT (Cost $200,984)............... 200,984
----------
TOTAL MONEY MARKET INSTRUMENTS (Cost $1,036,076).............. 1,036,076
----------
SHORT-TERM INVESTMENT (2.4%)
REPURCHASE AGREEMENT (2.4%)
26,082 Goldman Sachs & Co, 5.375%, dated 6/28/96, due
7/01/96, to be repurchased at $26,094,
collateralized by $23,920 U.S. Treasury Bonds,
8.75%, due 11/15/08, valued at $26,623 (Cost
$26,082)........................................ 26,082
----------
TOTAL INVESTMENTS (100.0%) (Cost $1,062,158).................. 1,062,158
----------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (0.3%)
Interest Receivable............................. $ 3,386
Other........................................... 41 3,427
-------
LIABILITIES (-0.3%)
Dividends Payable............................... (2,039)
Investment Advisory Fees Payable................ (837)
Administrative Fees Payable..................... (151)
Custodian Fees Payable.......................... (31)
Directors' Fees and Expenses Payable............ (18)
Other Liabilities............................... (125) (3,201)
------- ----------
NET ASSETS (100%).......................................... $1,062,384
----------
----------
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Money Market Portfolio

132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ------------------------------------------------------------
<S> <C> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................ $1,062,871
Accumulated Net Realized Loss.............................. (487)
----------
NET ASSETS................................................. $1,062,384
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 1,062,875,799 outstanding $0.001 par value
shares (authorized 4,000,000,000 shares)................. $1.00
----------
----------
</TABLE>

- ------------------------------------------------------------

Floating Rate -- The interest rate changes on these instruments are based on
changes in a designated base rate. The rates shown are those in effect at June
30, 1996.

Maturity dates disclosed for Floating Rate Instruments are the ultimate maturity
dates. The effective maturity dates for such securities are the next interest
reset dates.

Interest rates disclosed for Commercial Paper, Agency Discount Notes and the
Treasury Bill represent effective yields at June 30, 1996.

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Money Market Portfolio

133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------

THE MUNICIPAL MONEY MARKET PORTFOLIO

COMPOSITION OF NET ASSETS (AT JUNE 30, 1996)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Fixed Rate Instruments 37.6%
U.S. Government & Agency Obligations 3.9%
Variable/Floating Rate Instruments 59.3%
Other -0.8%
</TABLE>

COMPARATIVE MONTHLY AVERAGE YIELDS

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
MUNICIPAL MONEY
MARKET PORTFOLIO DONOGHUE'S SEC
30-DAY YIELDS 30-DAY YIELDS
<S> <C> <C>
Jan. 2.96 3.01
Feb. 2.94 2.86
Mar. 2.88 2.79
Apr. 3.01 2.96
May 3.25 3.19
Jun. 3.06 2.87
</TABLE>

- ------------------------------------------------

The Municipal Money Market Portfolio's investment objectives are to maximize
current income that is exempt from Federal income tax and preserve capital while
maintaining high levels of liquidity through investing in high quality municipal
money market instruments which earn interest exempt from Federal income tax in
the opinion of bond counsel for the issuer. The Portfolio will purchase only
securities having a remaining maturity of one year or less. Under normal
circumstances, the Portfolio will invest at least 80% of its assets in
tax-exempt municipal securities. Additionally, the Portfolio will not purchase
private activity bonds, the interest from which is subject to alternative
minimum tax. Interest on tax-exempt municipal securities may be subject to state
and local taxes. The Portfolio's average maturity (on a dollar-weighted basis)
will not exceed 90 days. The Portfolio is expected to maintain a net asset value
of $1.00 per share. There can be no assurance, however, that the Portfolio will
be successful in maintaining a net asset value of $1.00 per share.

The seven day yield and seven day effective yield (assumes an annualization of
the current yield with all dividends reinvested) for the Municipal Money Market
Portfolio as of June 30, 1996 were 3.10% and 3.15%, respectively. The seven day
taxable equivalent yield and the seven day taxable equivalent effective yield
for Municipal Money Market Portfolio at June 30, 1996, assuming Federal income
tax rate of 39.6% (maximum rate) were 5.15% and 5.22%, respectively. The seven
day yields are not necessarily indicative of future performance.

During the first half of the year, the taxable market experienced a dramatic
sell-off triggered by investors' concerns regarding the relative strength of the
economy and the potential for an increase in inflation. These events in the
economy and the taxable sectors of the market had little effect on the municipal
money market sector during the first half of 1996. Because the municipal money
market is driven by supply and demand, this sector typically functions
independently of the rest of the fixed income markets. The flat yield curve
shape that had characterized the municipal money market for much of 1995
continued throughout most of the first quarter. In March, rates in the overnight
to six month sectors increased approximately 20 basis points while the remainder
of the curve remained flat. The adjustment in the short end of the curve did
occur in response to the increase in rates in the taxable sector. As the Federal
tax deadline approached in mid-April, the market sold off as bond funds were
forced to sell short securities to meet redemptions. This increase in supply
caused the curve

- --------------------------------------------------------------------------------
Municipal Money Market Portfolio

134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
to shift to a positive slope which persisted for the balance of the second
quarter. Rates across the municipal money market curve increased during May
creating a parallel shift.

The Portfolio experienced tremendous growth during the first half of 1996 with
the net asset size increasing 71%. The portfolio finished June 1996 with net
assets of $770 million. Much of the growth occurred during April, which was
fortuitous as April represented a buying opportunity. Overall, the asset
allocation throughout the first half of the year remained consistent with
commercial paper ranging from 30-40%, tax-exempt notes ranged from 3-4%, and
daily and weekly variable rate puttable issues fluctuating between 50% and 60%
of the Portfolio. The weighted average maturity of the portfolio ranged from 15
to 40 days and ended June with a weighted average maturity of 31 days.

Gerald P. Barth
PORTFOLIO MANAGER

Abigail Jones Feder
PORTFOLIO MANAGER

July 1996

- --------------------------------------------------------------------------------
Municipal Money Market Portfolio

135
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE MUNICIPAL MONEY MARKET PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
TAX-EXEMPT INSTRUMENTS (96.9%)
FIXED RATE INSTRUMENTS (37.6%)
NOTES (6.0%)
$ 2,000 Broward County, Florida, General Obligation Bonds,
7.88%, 1/01/12, Prerefunded 7/01/96 at 102...... $ 2,061
1,000 City of San Antonio, Texas, Revenue Bonds, 7.90%,
5/01/14,
Prerefunded 5/01/97 at 101.5.................... 1,049
1,500 Delaware State, General Obligation Bonds, Series
A, 4.25%, 3/01/97............................... 1,506
2,445 Hawaii State, General Obligation Bonds, Series BK,
6.60%, 4/01/99,
Prerefunded 4/01/97 at 101.5.................... 2,531
5,000 Idaho State, 4.50%, 6/30/97, TANS................. 5,029
1,500 Los Angeles, California, Unified School District,
4.50%, 6/30/97, TRANS........................... 1,510
2,500 Maine State, 4.50%, 6/27/97, TANS................. 2,515
4,130 Massachusetts State, General Obligation Bonds,
Series A, 4.25%, 6/10/97........................ 4,146
1,000 Metropolitan Transportation Authority, New York,
Series F, 8.38%, 7/01/05,
Prerefunded 7/01/96 at 102...................... 1,020
9,000 Michigan State, General Obligation Bonds, 4.00%,
9/30/96......................................... 9,011
1,000 Orlando & Orange County, Florida, Expressway
Authority Revenue Bonds, 7.25%, 7/01/14,
Prerefunded 7/01/96 at 102...................... 1,020
2,000 Shelby County, Tennessee, General Obligation
Bonds, 6.40%, 8/01/96........................... 2,005
7,500 Texas State, Series 95A, 4.75%, 8/30/96, TRANS.... 7,511
2,000 Washington State, General Obligation Bonds, Series
R-94A, 3.70%, 8/01/96........................... 2,000
3,575 Wisconsin State, Series B, 7.25%, 5/01/08,
Prerefunded 5/01/97 at 101...................... 3,710
----------
46,624
----------
COMMERCIAL PAPER (31.6%)
10,000 Baltimore County, Maryland, 3.55%, 10/02/96....... 10,000
3,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light, Series
90, 3.15%, 8/09/96.............................. 3,000
350 Burke County, Georgia, Development Authority,
Oglethorpe, Series 92A, 3.35%, 7/09/96.......... 350
4,675 Burke County, Georgia, Development Authority,
Oglethorpe, Series 92A, 3.70%, 7/09/96.......... 4,675
6,000 Burlington, Kansas, Kansas City Power & Light Co.,
Series 89A, 3.70%, 8/14/96...................... 6,000
6,000 City & County of Honolulu, Hawaii, 3.55%,
9/12/96......................................... 6,000
3,500 City of Austin, Texas, Series A, 3.40%, 9/09/96... 3,500

<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 4,530 City of Dallas, Texas, Series A, 3.60%,
10/22/96........................................ $ 4,530
City of Mount Vernon, Indiana, General Electric,
Series 89A,
4,000 3.20%, 8/12/96.................................. 4,000
4,000 3.55%, 10/18/96................................. 4,000
City of San Antonio, Texas,
1,900 3.15%, 8/09/96.................................. 1,900
1,500 3.45%, 10/23/96................................. 1,500
3,000 3.70%, 10/23/96................................. 3,000
1,200 Converse County, Wyoming, Series 88, 3.60%,
8/14/96......................................... 1,200
Gainsville, Florida,
1,598 3.20%, 8/08/96.................................. 1,598
2,525 3.45%, 9/09/96, Series C........................ 2,525
4,000 Georgia Municipal Gas Authority, 3.65%,
10/16/96........................................ 4,000
Houston, Texas, Series A,
4,700 3.70%, 9/10/96.................................. 4,700
6,000 5.70%, 10/17/96................................. 6,000
2,000 Illinois Development Finance Authority, Series
93A, 3.60%, 10/23/96............................ 2,000
2,100 Illinois Health & Educational Facilities, Series
89A, 3.65%, 10/09/96............................ 2,100
4,000 Independence, Missouri, Water Utility Revenue,
3.70%, 7/10/96.................................. 4,000
Intermountain Power Agency, Utah, Series E,
2,400 3.80%, 7/01/96.................................. 2,400
200 3.85%, 7/01/96.................................. 200
2,900 3.55%, 11/13/96................................. 2,900
Jacksonville, Florida, Electric Authority,
3,100 3.55%, 9/18/96.................................. 3,100
7,700 3.60%, 10/23/96................................. 7,700
Jasper County, Indiana,
3,600 3.65%, 8/19/96, Series 88B...................... 3,600
2,000 3.65%, 8/19/96, Series 88C...................... 2,000
1,100 Lehigh County, Pennsylvania, Series A, 3.45%,
9/09/96......................................... 1,100
6,600 Massachusetts Health & Education Facilities
Authority, Harvard University, Series L, 3.55%,
10/22/96........................................ 6,600
10,000 Michigan State, Underground Storage Tank Financial
Assurance Authority, Series I, 3.45%, 8/15/96... 10,000
3,000 Montgomery County, Maryland, Series 95, 3.65%,
8/16/96......................................... 3,000
3,000 Montgomery County, Pennsylvania, 3.50%, 7/12/96... 3,000
6,020 Montgomery, Alabama, Industrial Development Board,
General Electric Series, 3.60%, 8/06/96......... 6,020
7,300 Nashville & Davidson County, Tennessee, 3.70%,
8/01/96......................................... 7,300
New York City, New York, Water Finance Authority,
800 3.75%, 8/08/96.................................. 800
6,900 3.60%, 9/10/96.................................. 6,900
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Municipal Money Market Portfolio

136
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
</TABLE>

FIXED RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 4,025 North Carolina Eastern Municipal Power, 3.60%,
7/09/96......................................... $ 4,025
300 Northeastern Pennsylvania Hospital Authority,
Series B, 3.60%, 10/18/96....................... 300
2,990 Omaha, Nebraska, Public Power District, 3.60%,
10/18/96........................................ 2,990
1,000 Peninsula Ports Authority, Virginia, Series 92,
3.55%, 8/20/96.................................. 1,000
3,000 Petersburg, Indiana, Indiana Power & Light, Series
91, 3.60%, 10/18/96............................. 3,000
2,200 Platte River Authority, Colorado, 3.10%,
8/13/96......................................... 2,200
8,000 Puerto Rico Industrial, Medical & Environmental
Pollution Control Authority Revenue Bonds,
3.55%, 10/10/96................................. 8,000
Rochester, Minnesota, Health Facilities, Mayo
Clinic,
1,000 3.65%, 10/24/96, Series B....................... 1,000
1,500 3.65%, 10/24/96, Series C....................... 1,500
1,065 3.65%, 10/24/96, Series E....................... 1,065
1,500 3.65%, 10/16/96, Series F....................... 1,500
2,800 Salt Lake City, Utah, 3.60%, 9/11/96.............. 2,800
Salt River, Arizona,
4,600 3.30%, 8/07/96.................................. 4,600
2,006 3.20%, 8/08/96.................................. 2,006
5,000 3.30%, 8/08/96.................................. 5,000
2,000 3.15%, 8/09/96.................................. 2,000
6,000 3.60%, 10/15/96................................. 6,000
5,750 State of Louisiana, General Obligation Bonds,
3.65%, 10/16/96................................. 5,750
Sunrise State, Florida, Government Finance
Authority,
4,470 3.45%, 10/08/96................................. 4,470
3,750 3.45%, 10/09/96................................. 3,750
Sunshine State, Florida, Government Finance
Authority, Series 86,
9,850 3.70%, 8/15/96.................................. 9,850
2,000 3.45%, 9/09/96.................................. 2,000
5,000 Sweetwater County, Wyoming, Series 88A, 3.70%,
8/15/96......................................... 5,000
2,000 Texas Municipal Power Agency, 3.55%, 10/22/96..... 2,000
Trimble County, Kentucky, Louisville Gas &
Electric Series,
5,000 3.25%, 8/07/96.................................. 5,000
1,000 3.60%, 10/18/96................................. 1,000
5,500 University of Minnesota, Series A, 3.60%,
10/22/96........................................ 5,500
2,500 Vanderbilt University, Tennessee, Series 89A,
3.55%, 10/22/96................................. 2,500
----------
243,004
----------
TOTAL FIXED RATE INSTRUMENTS................................ 289,628
----------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
VARIABLE/FLOATING RATE INSTRUMENTS (59.3%)
DAILY VARIABLE RATE BONDS (41.4%)
$ 1,500 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil Project, 3.60%,
9/01/23......................................... $ 1,500
2,400 Birmingham, Alabama, Medical Clinic Board Revenue
Bonds, University of Alabama Hospital Services
Fund, 3.80%, 12/01/26........................... 2,400
Burke County, Georgia, Development Authority,
5,500 3.60%, 7/01/24.................................. 5,500
7,300 3.70%, 4/01/25.................................. 7,300
5,500 3.75%, 7/01/24, Series 94....................... 5,500
California Pollution Control Financing Authority,
Southern Edison,
8,100 3.45%, 2/28/08, Series 86A...................... 8,100
2,000 3.45%, 2/28/08, Series 86B...................... 2,000
3,400 3.45%, 2/28/08, Series 86C...................... 3,400
4,735 3.45%, 2/28/08, Series 87D...................... 4,735
4,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue Bonds, Erlanger
Medical Center 3.80%, 10/01/17.................. 4,000
Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Inc. Project,
4,200 3.70%, 12/01/17, Series A....................... 4,200
4,200 3.70%, 12/01/17, Series B....................... 4,200
4,200 3.70%, 12/01/17, Series C....................... 4,200
4,200 3.70%, 12/01/17, Series D....................... 4,200
3,500 Dade County, Florida, Industrial Development
Authority, Florida Light & Power Co., 3.60%,
6/01/21......................................... 3,500
2,800 Delaware County, Pennsylvania, Industrial
Development Authority, Series 95, 3.70%,
12/01/09........................................ 2,800
1,700 Delta County, Michigan, Pollution Control Revenue
Bonds, Mead Corp., 3.60%, 12/01/23.............. 1,700
600 District of Columbia, Revenue Bonds, 3.65%,
10/01/22........................................ 600
4,200 East Baton Rouge Parish, Louisiana, Pollution
Control Revenue Bonds, Exxon Project, 3.60%,
11/01/19........................................ 4,200
4,900 Farmington, New Mexico, Pollution Control Revenue
Bonds, Series A, 3.60%, 5/01/24................. 4,900
1,400 Gulf Coast Waste Disposal Authority, Texas
Pollution Control Revenue Bonds, Exxon Project,
3.55%, 6/01/20.................................. 1,400
5,000 Hapeville, Georgia, Industrial Development
Authority, Series 85, 3.60%, 11/01/15........... 5,000
13,800 Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital, 3.70%,
12/01/25........................................ 13,800
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Municipal Money Market Portfolio

137
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
Harris County, Texas, Health Facilities
Development Corp., St. Lukes Episcopal Series,
$ 3,700 3.70%, 2/15/16.................................. $ 3,700
2,600 3.70%, 2/15/21.................................. 2,600
Harris County, Texas, Industrial Development,
Pollution Control Revenue Bonds, Exxon Project,
2,600 3.60%, 3/01/24, Series 84A...................... 2,600
2,600 3.60%, 3/01/24, Series 84B...................... 2,600
5,700 Hurley, New Mexico, Pollution Control Revenue
Bonds, 3.60%, 12/01/15.......................... 5,700
15,000 Jackson County, Mississippi, Port Facility,
Chevron Project, Series 93, 3.55%, 6/01/23...... 15,000
900 Kansas City, Kansas, Industrial Development
Authority, Revenue Bonds, PQ Corp., 3.70%,
8/01/15......................................... 900
2,000 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities, Series 84, 3.60%,
11/01/11........................................ 2,000
Lincoln County, Wyoming, Pollution Control Revenue
Bonds, Exxon Project,
2,000 3.60%, 11/01/14, Series 84A..................... 2,000
4,400 3.55%, 8/01/15, Series 84A...................... 4,400
2,500 3.60%, 11/01/14, Series 84B..................... 2,500
2,500 3.60%, 11/01/14, Series 84C..................... 2,500
2,500 3.60%, 11/01/14, Series 84D..................... 2,500
3,120 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel Series, 3.60%,
12/01/15........................................ 3,120
Maricopa County, Arizona, Pollution Control
Revenue Bonds, Arizona Public Service Co.,
4,500 3.55%, 5/01/29, Series B........................ 4,500
4,600 3.60%, 5/01/29, Series C........................ 4,600
3,500 3.60%, 5/01/29, Series E........................ 3,500
3,600 3.70%, 5/01/29, Series F........................ 3,600
1,000 Marshall County, West Virginia, Pollution Control
Revenue Bonds, Mountaineer Carbon Co., 3.70%,
12/01/20........................................ 1,000
Massachusetts Health & Education Facilities
Authority,
4,800 3.35%, 7/01/05, Series B........................ 4,800
6,100 3.35%, 7/01/05, Series C........................ 6,100
6,700 Michigan State Strategic Fund, Consumers Power,
Series 88A, 3.55%, 4/15/18...................... 6,700
Missouri State Health & Educational Facilities
Authority Revenue Bonds, Washington University,
2,000 3.60%, 9/01/30, Series A........................ 2,000
3,500 3.60%, 9/01/30, Series B........................ 3,500
Monroe County, Georgia, Pollution Control Revenue
Bonds, Georgia Power Co.,
4,500 3.70%, 7/01/25, Series 1........................ 4,500
3,700 3.75%, 7/01/25, Series 2........................ 3,700
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 4,100 New York City, New York, Cultural Resources,
3.45%, 12/01/15................................. $ 4,100
New York City, New York, General Obligation Bonds,
5,000 3.60%, 8/15/23, Series B, Subseries B4.......... 5,000
1,500 3.60%, 8/15/18, Series B, Subseries B7.......... 1,500
1,500 3.60%, 8/01/15, Subseries A-5................... 1,500
New York City, New York, Water Finance Authority,
Water & Sewer System Revenue Bonds,
11,000 3.60%, 6/15/23, Series 92C...................... 11,000
10,000 3.60%, 6/15/22, Series 94C...................... 10,000
6,000 New York State, Dormitory Authority Revenue Bonds,
Cornell University, Series B, 3.45%, 7/01/25.... 6,000
2,500 New York State, Thruway Authority Revenue Bonds,
3.50%, 1/01/24.................................. 2,500
1,000 Nueces River Authority, Texas, Pollution Control
Revenue Bonds, Series 85, 3.80%, 12/01/99....... 1,000
3,000 Ohio State Air Quality Development Authority
Revenue Bonds, Series 85A, 3.75%, 12/01/15...... 3,000
4,100 Ohio State Air Quality Development Authority
Revenue Bonds, Cincinnati Gas & Electric, Series
B, 3.55%, 9/01/30............................... 4,100
2,800 Parrish, Alabama, Industrial Development Board,
Pollution Control Revenue Bonds, Alabama Power
Co. Project, 3.70%, 6/01/15..................... 2,800
2,400 Peninsula Ports Authority, Virginia, Coal Revenue
Bonds, 3.60%, 7/01/16........................... 2,400
Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University,
4,300 3.70%, 11/01/27, Series 95B..................... 4,300
4,500 3.70%, 11/01/29, Series 95C..................... 4,500
5,700 3.70%, 11/01/30, Series 95D..................... 5,700
2,200 Philadelphia, Pennsylvania, Childrens Hospital,
Series 92B, 3.60%, 3/01/27...................... 2,200
7,700 Philadelphia, Pennsylvania, Hospitals & Higher
Educational Facilities Authority Revenue Bonds,
Children's Hospital Project, Series A, 3.70%,
3/01/27......................................... 7,700
Platte County, Wyoming, Pollution Control Revenue
Bonds,
3,800 3.70%, 7/01/14, Series A........................ 3,800
1,000 3.70%, 7/01/14, Series B........................ 1,000
Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.,
2,000 3.55%, 4/01/10, Series A........................ 2,000
1,600 3.55%, 6/01/10, Series B........................ 1,600
1,400 Saint Charles Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil Project, 3.55%,
10/01/22........................................ 1,400
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Municipal Money Market Portfolio

138
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 5,000 Salt Lake County, Utah, Pollution Control Revenue
Bonds, British Petroleum Co., 3.60%, 2/01/08.... $ 5,000
5,900 Salt Lake County, Utah, Pollution Control Revenue
Bonds, SVC Station Holdings, 3.70%, 8/01/07..... 5,900
4,900 Southwest, Texas, Higher Education Authority
Revenue Bonds, Southern Methodist University,
Series 85, 3.55%, 7/01/15....................... 4,900
1,200 Sublette County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project, 3.55%, 11/01/14... 1,200
1,100 Sweetwater County, Wyoming, Series 88B, 3.75%,
1/01/14......................................... 1,100
1,300 Texas State, Water Development Board Revenue
Bonds, Series A, 3.80%, 3/01/15................. 1,300
7,700 Valdez, Alaska, Marine Terminal Authority, Exxon
Project, Series 85, 3.55%, 10/01/25............. 7,700
3,000 West Side Calhoun County, Texas, Pollution Control
Revenue Bonds, 3.70%, 12/01/15.................. 3,000
----------
318,955
----------
WEEKLY VARIABLE RATE BONDS (17.9%)
1,000 Albuquerque, New Mexico, Revenue Bonds, Series A,
3.40%, 7/01/22.................................. 1,000
2,700 Allegheny County, Pennsylvania, Hospital
Development Authority, Series B, 3.25%,
9/01/20......................................... 2,700
Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light,
1,000 3.25%, 8/01/20, Series A........................ 1,000
1,000 3.25%, 8/01/09, Series B........................ 1,000
1,000 Brunswick & Glynn County, Georgia, Development
Authority, Series 85, 3.55%, 12/01/15........... 1,000
7,400 Burke County, Georgia, Development Authority,
Oglethorpe, Series 93A, 3.30%, 1/01/16.......... 7,400
400 California Health Facilities Authority, Series A,
3.15%, 1/01/16.................................. 400
5,800 Charlotte, North Carolina, Airport, Series 93A,
3.30%, 7/01/16.................................. 5,800
1,000 City of Baltimore, Maryland, Pollution Control
Revenue Bonds, General Motors Corp., 3.35%,
2/01/00......................................... 1,000
2,500 City of Columbia, Missouri, Special Revenue Bonds,
Series 88A, 3.40%, 6/01/08...................... 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 3.40%, 12/01/15...... 1,500
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
City of Forsyth, Montana, Pollution Control
Revenue Bonds,
$ 300 3.30%, 6/01/13, Series B........................ $ 300
700 3.30%, 6/01/13, Series D........................ 700
2,600 City of Midlothian, Texas, Industrial Development
Corp., Pollution Control Revenue Bonds, Box-Crow
Cement Co., 4.10%, 12/01/09..................... 2,600
1,000 City of Minnetonka, Minnesota, Multifamily, Cliffs
Ridgedale, 3.45%, 9/15/25....................... 1,000
1,600 City of San Antonio, Texas, Higher Education
Authority, Trinity University, 3.45%, 4/01/04... 1,600
Clark County, Nevada, Airport Revenue Bonds,
16,800 3.30%, 7/01/12, Series 93A...................... 16,800
2,700 3.30%, 7/01/25, Series 95-A1.................... 2,700
4,000 Clark County, Nevada, Industrial Development
Corp., Nevada Power Co., Series C, 3.15%,
10/01/30........................................ 4,000
3,900 Clarksville, Tennessee, Public Building Authority,
Revenue Bonds, 3.30%, 12/01/00.................. 3,900
180 Clear Creek County, Colorado, Revenue Bonds,
Colorado Finance Pool Program, 3.40%, 6/01/98... 180
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue Bonds, Series 91-C1, 3.30%,
8/01/00......................................... 600
5,700 Connecticut State, Special Tax Obligation Revenue
Bonds, Series 1, 3.20%, 12/01/10................ 5,700
1,800 Dade County, Florida, Health Facilities Authority
Revenue Bonds, Miami Children's Hospital
Project, 3.30%, 9/01/25......................... 1,800
16,800 Dade County, Florida, Water & Sewer Revenue Bonds,
3.30%, 10/05/22................................. 16,800
3,000 Foothill/Eastern California Toll Road Revenue
Bonds, Series 95C, 3.10%, 1/02/35............... 3,000
2,000 Franklin County, Ohio, Series 95, 3.20%,
6/01/16......................................... 2,000
Harris County, Texas,
5,000 3.35%, 8/01/20, Series 94G...................... 5,000
5,000 3.35%, 8/01/20, Series 94H...................... 5,000
2,200 Huntsville, Alabama, Health Care Facilities
Authority, Series B, 3.30%, 6/01/24............. 2,200
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing, Series 85, 3.30%,
12/01/05........................................ 300
4,000 Jefferson Parish, Louisiana, Hospital Service
District No. 001 Revenue Bonds, West Jefferson
Medical Center, 3.50%, 1/01/26.................. 4,000
</TABLE>

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Municipal Money Market Portfolio

139
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 1,000 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 3.55%, 12/01/15.................... $ 1,000
1,500 Louisiana Public Facilities Authority, Hospital
Revenue Bonds, Series 85, 3.10%, 12/01/00....... 1,500
1,800 Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington University
Project, 3.35%, 9/01/09......................... 1,800
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1, 3.00%, 1/01/19........... 1,000
3,900 Nueces County, Texas, Health Facilities, Driscoll
Children's Foundation, 3.15%, 7/01/15........... 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 3.25%, 11/01/19.......................... 1,500
Pinellas County, Florida, Health Facilities,
Bayfront Medical Center,
235 3.35%, 6/01/98.................................. 235
1,000 3.35%, 6/01/09.................................. 1,000
400 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 3.10%, 12/01/05.......... 400
800 Port Development Corporation Marine Terminal,
Texas, Series 89, 3.30%, 1/15/14................ 800
1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 3.55%, 9/01/14..... 1,500
600 Putnam County, Florida, Development Authority,
Seminole Electric, Series 84-H1, 3.15%,
3/15/14......................................... 600
1,000 Rapides Parish, Louisiana, Central Louisiana
Electric Series, 3.25%, 7/01/18................. 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Series, 3.55%, 8/01/14.......................... 700
4,500 Tennessee State, General Obligation Bonds, BANS,
Series C, 3.40%, 7/02/01........................ 4,500
4,490 Texas State, Veterans Housing Assistance-Fund I,
3.30%, 12/01/16................................. 4,490
1,100 University of North Carolina, Chapel Hill Fund,
Inc., Certificates of Participation, 3.05%,
10/01/09........................................ 1,100
Washington State Public Power Supply Revenue
Bonds,
2,000 3.25%, 7/01/17, Series 93-1A3................... 2,000
3,300 3.35%, 7/01/17, Series 1A-2..................... 3,300
----------
137,805
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................... 456,760
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $746,388).................. 746,388
----------
TAXABLE INSTRUMENTS (3.9%)
U.S. AGENCY OBLIGATIONS (3.9%)
Federal Farm Credit Bank Discount Notes
16,900 5.22%, 7/15/96.................................... 16,866
2,835 5.28%, 7/25/96.................................... 2,626
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 11,065 Federal Home Loan Bank Discount Notes 5.31%,
9/25/96......................................... $ 10,924
----------
TOTAL U.S. AGENCY OBLIGATIONS............................... 30,416
----------
TOTAL TAXABLE INSTRUMENTS (Cost $30,416)...................... 30,416
----------
TOTAL INVESTMENTS (100.8%) (Cost $776,804).................... 776,804
----------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (0.5%)
Cash............................................ $ 146
Interest Receivable............................. 3,653
Other........................................... 19 3,818
----------
LIABILITIES (-1.3%)
Payable for Investments Purchased............... (9,054)
Dividends Payable............................... (836)
Investment Advisory Fees Payable................ (474)
Administrative Fees Payable..................... (90)
Custodian Fees Payable.......................... (16)
Directors' Fees and Expenses Payable............ (9)
Other Liabilities............................... (78) (10,557)
---------- ----------
NET ASSETS (100%)............................................. $770,065
----------
----------
</TABLE>

<TABLE>
<S> <C> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 770,076
Accumulated Net Realized Loss................................. (11)
----------
NET ASSETS.................................................... $770,065
----------
----------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 770,050,538 outstanding $0.001 par value
shares (authorized 4,000,000,000 shares).................... $1.00
----------
----------
</TABLE>

- ------------------------------------------------------------

<TABLE>
<S> <C>
BANS -- Bond Anticipation Notes
TANS -- Tax Anticipation Notes
TRANS -- Tax & Revenue Anticipation Notes
</TABLE>

Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based on changes in a designated base rate. These instruments
are payable on demand and are secured by a letter of credit or other support
agreements.

Interest rates disclosed for U.S. Government & Agency Obligations represent
effective yields at June 30, 1996.

At June 30, 1996, approximately 13% of the net assets were invested in Texas
municipal securities. Economic changes affecting the state and certain of its
public bodies and municipalities may affect the ability of issuers to pay the
required principal and interest payments of the municipal securities.

The accompanying notes are an integral part of the financial statements. (Pages
182-188)

- --------------------------------------------------------------------------------
Municipal Money Market Portfolio

140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN EMERGING EUROPEAN GLOBAL
ALLOCATION EQUITY MARKETS EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE
30, 30, 30, 30, 30,
1996 1996 1996 1996 1996
(000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 2,067 $ 3,939 $ 18,462 $ 2,228 $ 1,041
Interest 317 624 2,200 255 45
Less: Foreign Taxes Withheld (257) (340) (1,129) (305) (96)
----------- ----------- ----------- ----------- ------
Total Income 2,127 4,223 19,533 2,178 990
----------- ----------- ----------- ----------- ------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 579 1,673 7,076 413 303
Less: Fees Waived (278) (491) -- (108) (71)
----------- ----------- ----------- ----------- ------
Investment Advisory Fees -- Net 301 1,182 7,076 305 232
Administrative Fees 180 328 884 89 65
Sub-Administrative Fees 3 -- 93 -- --
Custodian Fees 122 416 1,441 45 18
Filing and Registration Fees 32 87 137 45 23
Insurance 4 8 28 2 2
Directors' Fees and Expenses 4 9 47 2 2
Professional Fees 27 37 78 21 25
Shareholder Reports 35 18 67 6 6
Foreign Tax Expense -- 1 24 -- --
Distribution Fees on Class B Shares 1 11 11 1 2
Other Expenses 14 17 135 3 4
----------- ----------- ----------- ----------- ------
Total Expenses 723 2,114 10,021 519 379
----------- ----------- ----------- ----------- ------
NET INVESTMENT INCOME 1,404 2,109 9,512 1,659 611
----------- ----------- ----------- ----------- ------
NET REALIZED GAIN (LOSS):
Investments Sold 6,246 11,041 27,844* (285) 3,624
Foreign Currency Transactions 11,507 (185) (996) 81 (73)
----------- ----------- ----------- ----------- ------
Total Net Realized Gain (Loss) 17,753 10,856 26,848 (204) 3,551
----------- ----------- ----------- ----------- ------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION):
Investments 172 4,544 167,720 9,938 5,037
Foreign Currency Translations (5,406) (140) (3,919) 75 347
----------- ----------- ----------- ----------- ------
Total Net Change in Unrealized Appreciation
(Depreciation) (5,234) 4,404 163,801 10,013 5,384
----------- ----------- ----------- ----------- ------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 12,519 15,260 190,649 9,809 8,935
----------- ----------- ----------- ----------- ------
Net Increase in Net Assets Resulting from Operations $ 13,923 $ 17,369 $ 200,161 $ 11,468 $ 9,546
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
</TABLE>

- ---------------
*Net of foreign tax of $35,000 on net realized gains.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------

141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
JAPANESE
GOLD INTERNATIONAL INTERNATIONAL INTERNATIONAL EQUITY
PORTFOLIO EQUITY MAGNUM SMALL CAP PORTFOLIO
SIX MONTHS PORTFOLIO SIX PORTFOLIO MARCH PORTFOLIO SIX SIX MONTHS
ENDED JUNE MONTHS ENDED 15, 1996* TO MONTHS ENDED ENDED JUNE
30, 1996 JUNE 30, 1996 JUNE 30, 1996 JUNE 30, 1996 30, 1996
(000) (000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 60 $ 32,636 $ 190 $ 2,891 $ 754
Interest 101 2,815 59 183 421
Less: Foreign Taxes Withheld (1) (4,152) (25) (357) (113)
------------ ------------- ------ ------- ------------
Total Income 160 31,299 224 2,717 1,062
------------ ------------- ------ ------- ------------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 64 7,409 56 1,010 745
Basic Fees -- Sub Adviser 42 -- -- -- --
Less: Fees Waived -- Adviser (38) (340) (56) (97) (86)
Fees Waived -- Sub Adviser (25) -- -- -- --
------------ ------------- ------ ------- ------------
Investment Advisory Fees -- Net 43 7,069 -- 913 659
Administrative Fees 20 1,443 13 172 151
Sub-Administrative Fees -- -- -- -- --
Custodian Fees 13 303 34 64 25
Filing and Registration Fees 26 174 27 15 57
Insurance -- 42 -- 5 1
Directors' Fees and Expenses 1 38 -- 6 4
Professional Fees 18 92 8 33 22
Shareholder Reports 10 73 12 11 9
Distribution Fees on Class B Shares -- 3 1 -- 4
Other Expenses 2 17 2 4 6
Expenses Reimbursed by Adviser -- -- (24) -- --
------------ ------------- ------ ------- ------------
Total Expenses 133 9,254 73 1,223 938
------------ ------------- ------ ------- ------------
NET INVESTMENT INCOME 27 22,045 151 1,494 124
------------ ------------- ------ ------- ------------
NET REALIZED GAIN (LOSS):
Investments Sold 1,105 51,067 (4) 1,733 714
Foreign Currency Transactions 9 (3,391) (11) (610) 6,272
------------ ------------- ------ ------- ------------
Total Net Realized Gain (Loss) 1,114 47,676 (15) 1,123 6,986
------------ ------------- ------ ------- ------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (1,639) 110,114 959 26,712 3,682
Foreign Currency Translations (1) 18,827 241 1,243 3,440
------------ ------------- ------ ------- ------------
Total Net Change in Unrealized
Appreciation (Depreciation) (1,640) 128,941 1,200 27,955 7,122
------------ ------------- ------ ------- ------------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) (526) 176,617 1,185 29,078 14,108
------------ ------------- ------ ------- ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ (499) $ 198,662 $ 1,336 $ 30,572 $ 14,232
------------ ------------- ------ ------- ------------
------------ ------------- ------ ------- ------------

LATIN
AMERICAN
PORTFOLIO SIX
MONTHS ENDED
JUNE 30, 1996
(000)
- --------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends $ 404
Interest 83
Less: Foreign Taxes Withheld (16)
------
Total Income 471
------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 122
Basic Fees -- Sub Adviser --
Less: Fees Waived -- Adviser (49)
Fees Waived -- Sub Adviser --
------
Investment Advisory Fees -- Net 73
Administrative Fees 22
Sub-Administrative Fees 2
Custodian Fees 36
Filing and Registration Fees 26
Insurance --
Directors' Fees and Expenses 1
Professional Fees 24
Shareholder Reports 2
Distribution Fees on Class B Shares 1
Other Expenses 3
Expenses Reimbursed by Adviser --
------
Total Expenses 190
------
NET INVESTMENT INCOME 281
------
NET REALIZED GAIN (LOSS):
Investments Sold 1,886
Foreign Currency Transactions (11)
------
Total Net Realized Gain (Loss) 1,875
------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 4,045
Foreign Currency Translations (1)
------
Total Net Change in Unrealized
Appreciation (Depreciation) 4,044
------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 5,919
------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 6,200
------
------
</TABLE>

- ---------------
*Commencement of operations.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------

142
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SMALL CAP
AGGRESSIVE EMERGING EQUITY VALUE U.S. REAL VALUE
EQUITY GROWTH GROWTH EQUITY ESTATE EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE
30, 1996 30, 1996 30, 1996 30, 1996 30, 1996 30, 1996 30, 1996
(000) (000) (000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 430 $ 65 $ 1,504 $ 815 $ 1,877 $ 2,375 $ 165
Interest 87 117 338 54 203 127 288
----------- ----------- ----------- ----------- ----------- ----------- -----
Total Income 517 182 1,842 869 2,080 2,502 453
----------- ----------- ----------- ----------- ----------- ----------- -----
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 158 561 519 223 397 375 50
Less: Fees Waived (52) (29) (91) (59) (92) (51) (50)
----------- ----------- ----------- ----------- ----------- ----------- -----
Investment Advisory
Fees -- Net 106 532 428 164 305 324 --
Administrative Fees 33 90 138 45 79 120 20
Custodian Fees 11 14 34 10 30 13 10
Filing and Registration Fees 22 19 40 17 37 30 22
Insurance 1 4 4 1 2 4 1
Directors' Fees and Expenses 1 4 4 2 2 4 1
Professional Fees 15 16 19 14 15 16 12
Shareholder Reports 6 17 20 6 23 10 4
Distribution Fees on Class B
Shares 4 4 4 1 3 1 2
Other Expenses 7 4 4 3 3 4 3
Expenses Reimbursed by
Adviser -- -- -- -- -- -- (3)
----------- ----------- ----------- ----------- ----------- ----------- -----
Total Expenses 206 704 695 263 499 526 72
----------- ----------- ----------- ----------- ----------- ----------- -----
NET INVESTMENT INCOME (LOSS) 311 (522) 1,147 606 1,581 1,976 381
----------- ----------- ----------- ----------- ----------- ----------- -----
NET REALIZED GAIN:
Investments Sold 6,695 20,685 21,397 2,943 6,539 7,167 979
Securities Sold Short 81 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----
Total Net Realized Gain 6,776 20,685 21,397 2,943 6,539 7,167 979
----------- ----------- ----------- ----------- ----------- ----------- -----
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 697 (12,546) 3,533 1,396 2,394 3,057 (539)
----------- ----------- ----------- ----------- ----------- ----------- -----
TOTAL NET REALIZED GAIN AND
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 7,473 8,139 24,930 4,339 8,933 10,224 440
----------- ----------- ----------- ----------- ----------- ----------- -----
Net Increase in Net Assets
Resulting from Operations $ 7,784 $ 7,617 $ 26,077 $ 4,945 $ 10,514 $ 12,200 $ 821
----------- ----------- ----------- ----------- ----------- ----------- -----
----------- ----------- ----------- ----------- ----------- ----------- -----
</TABLE>

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------

143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
EMERGING
MARKETS
DEBT GLOBAL FIXED MUNICIPAL
PORTFOLIO FIXED INCOME INCOME HIGH YIELD BOND INCOME MONEY MARKET
SIX MONTHS PORTFOLIO SIX PORTFOLIO SIX PORTFOLIO SIX PORTFOLIO SIX PORTFOLIO SIX
ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1996 1996 1996 1996 1996
(000) (000) (000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ -- $ -- $ -- $ 3 $ -- $ --
Interest 14,292 5,501 3,304 3,979 1,075 28,137
Less: Foreign Taxes
Withheld -- -- (40) -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Total Income 14,292 5,501 3,264 3,982 1,075 28,137
------------- ------------- ------------- ------------- ------------- -------------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 903 286 208 193 72 1,561
Less: Fees Waived -- (136) (127) (38) (60) --
------------- ------------- ------------- ------------- ------------- -------------
Investment Advisory
Fees -- Net 903 150 81 155 12 1,561
Administrative Fees 145 134 84 64 36 804
Custodian Fees 119 14 27 8 3 54
Filing and Registration
Fees 30 28 31 29 17 112
Insurance 5 5 3 2 1 25
Interest Expense 1,090 -- -- -- -- --
Directors' Fees and
Expenses 27 4 3 2 2 20
Professional Fees 33 15 20 17 15 32
Shareholder Reports 14 10 7 6 3 17
Distribution Fees on Class
B Shares 2 1 2 2 -- --
Other Expenses 193 7 6 6 3 13
------------- ------------- ------------- ------------- ------------- -------------
Total Expenses 2,561 368 264 291 92 2,638
------------- ------------- ------------- ------------- ------------- -------------
NET INVESTMENT INCOME 11,731 5,133 3,000 3,691 983 25,499
------------- ------------- ------------- ------------- ------------- -------------
NET REALIZED GAIN (LOSS):
Investments Sold 21,337 1,276 1,030 1,095 (100) (474)
Foreign Currency
Transactions (2,108) 442 731 -- -- --
Securities Sold Short (1,595) -- -- -- -- --
Written Options (567) -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Total Net Realized Gain
(Loss) 17,067 1,718 1,761 1,095 (100) (474)
------------- ------------- ------------- ------------- ------------- -------------
CHANGE IN UNREALIZED
APPRECIATION
(DEPRECIATION):
Investments 2,333 (8,269) (3,908) (1,570) (1,066) --
Foreign Currency
Translations (78) (249) (423) -- -- --
Securities Sold Short 545 -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Total Net Change in
Unrealized Appreciation
(Depreciation) 2,800 (8,518) (4,331) (1,570) (1,066) --
------------- ------------- ------------- ------------- ------------- -------------
TOTAL NET REALIZED GAIN
(LOSS) AND CHANGE IN
UNREALIZED APPRECIATION
(DEPRECIATION) 19,867 (6,800) (2,570) (475) (1,166) (474)
------------- ------------- ------------- ------------- ------------- -------------
Net Increase (Decrease) in
Net Assets Resulting from
Operations $ 31,598 $ (1,667) $ 430 $ 3,216 $ (183) $ 25,025
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------

MUNICIPAL
MONEY MARKET
PORTFOLIO SIX
MONTHS ENDED
JUNE 30,
1996
(000)
- ----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends $ --
Interest 9,964
Less: Foreign Taxes
Withheld --
------
Total Income 9,964
------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 833
Less: Fees Waived --
------
Investment Advisory
Fees -- Net 833
Administrative Fees 441
Custodian Fees 34
Filing and Registration
Fees 77
Insurance 14
Interest Expense --
Directors' Fees and
Expenses 10
Professional Fees 22
Shareholder Reports 16
Distribution Fees on Class
B Shares --
Other Expenses 8
------
Total Expenses 1,455
------
NET INVESTMENT INCOME 8,509
------
NET REALIZED GAIN (LOSS):
Investments Sold (2)
Foreign Currency
Transactions --
Securities Sold Short --
Written Options --
------
Total Net Realized Gain
(Loss) (2)
------
CHANGE IN UNREALIZED
APPRECIATION
(DEPRECIATION):
Investments --
Foreign Currency
Translations --
Securities Sold Short --
------
Total Net Change in
Unrealized Appreciation
(Depreciation) --
------
TOTAL NET REALIZED GAIN
(LOSS) AND CHANGE IN
UNREALIZED APPRECIATION
(DEPRECIATION) (2)
------
Net Increase (Decrease) in
Net Assets Resulting from
Operations $ 8,507
------
------
</TABLE>

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------

144
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ACTIVE
COUNTRY ALLOCATION
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,404 $ 2,074
Net Realized Gain (Loss) 17,753 (1,123)
Change in Unrealized Appreciation (Depreciation) (5,234) 15,675
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 13,923 16,626
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (3,492)
In Excess of Net Investment Income -- (1,308)
Net Realized Gain -- (12,502)
- --------------------------------------------------------------------------------------------------
Total Distributions -- (17,302)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 39,413 88,081
Distributions Reinvested -- 15,283
Redeemed (48,271) (115,002)
CLASS B+:
Subscribed 862 --
Redeemed (192) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions (8,188) (11,638)
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 5,735 (12,314)
NET ASSETS:
Beginning of Period 170,663 182,977
- --------------------------------------------------------------------------------------------------
End of Period $ 176,398 $ 170,663
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed (overdistributed) net investment income $ (6,378) $ (7,782)
- --------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,258 7,883
Shares Issued on Distributions Reinvested -- 1,346
Shares Redeemed (3,969) (10,268)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (711) (1,039)
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 73 --
Shares Redeemed (16) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 57 --
- --------------------------------------------------------------------------------------------------

<CAPTION>
ASIAN
EQUITY
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,109 $ 2,796
Net Realized Gain (Loss) 10,856 12,459
Change in Unrealized Appreciation (Depreciation) 4,404 7,852
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 17,369 23,107
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (4,866)
In Excess of Net Investment Income -- (3)
Net Realized Gain -- (40,469)
- --------------------------------------------------------------------------------------------------
Total Distributions -- (45,338)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 204,101 472,587
Distributions Reinvested -- 41,003
Redeemed (107,354) (453,381)
CLASS B+:
Subscribed 16,888 --
Redeemed (3,494) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions 110,141 60,209
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 127,510 37,978
NET ASSETS:
Beginning of Period 314,884 276,906
- --------------------------------------------------------------------------------------------------
End of Period $ 442,394 $ 314,884
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed (overdistributed) net investment income $ 2,106 $ (3)
- --------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 9,844 24,613
Shares Issued on Distributions Reinvested -- 2,138
Shares Redeemed (5,193) (23,439)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 4,651 3,312
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 823 --
Shares Redeemed (169) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 654 --
- --------------------------------------------------------------------------------------------------
</TABLE>

+ Each Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

145
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
MARKETS
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 9,512 $ 5,513
Net Realized Gain (Loss) 26,848 (34,234)
Change in Unrealized Appreciation (Depreciation) 163,801 (97,017)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 200,161 (125,738)
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (3,978)
Net Realized Gain -- (66,711)
- --------------------------------------------------------------------------------------------------
Total Distributions -- (70,689)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 339,297 379,789
Distributions Reinvested -- 67,401
Redeemed (77,366) (303,810)
CLASS B+:
Subscribed 14,043 --
Redeemed (610) --
- --------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 275,364 143,380
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 475,525 (53,047)
NET ASSETS:
Beginning of Period 876,591 929,638
- --------------------------------------------------------------------------------------------------
End of Period $ 1,352,116 $ 876,591
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 9,679 $ 167
- --------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 23,234 27,709
Shares Issued on Distributions Reinvested -- 4,586
Shares Redeemed (5,352) (22,595)
- --------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 17,882 9,700
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 978 --
Shares Redeemed (41) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 937 --
- --------------------------------------------------------------------------------------------------

<CAPTION>
EUROPEAN
EQUITY
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,659 $ 714
Net Realized Gain (Loss) (204) 643
Change in Unrealized Appreciation (Depreciation) 10,013 3,042
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 11,468 4,399
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (738)
Net Realized Gain -- (3,017)
- --------------------------------------------------------------------------------------------------
Total Distributions -- (3,755)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 69,844 56,209
Distributions Reinvested -- 3,468
Redeemed (10,995) (18,372)
CLASS B+:
Subscribed 2,579 --
Redeemed (634) --
- --------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 60,794 41,305
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 72,262 41,949
NET ASSETS:
Beginning of Period 69,583 27,634
- --------------------------------------------------------------------------------------------------
End of Period $ 141,845 $ 69,583
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 1,683 $ 24
- --------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 4,724 4,104
Shares Issued on Distributions Reinvested -- 264
Shares Redeemed (748) (1,350)
- --------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 3,976 3,018
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 175 --
Shares Redeemed (43) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 132 --
- --------------------------------------------------------------------------------------------------
</TABLE>

+ Each Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

146
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GLOBAL
EQUITY
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 611 $ 960
Net Realized Gain 3,551 5,807
Change in Unrealized Appreciation (Depreciation) 5,384 7,195
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 9,546 13,962
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (1,202)
Net Realized Gain -- (7,032)
- --------------------------------------------------------------------------------------------------
Total Distributions -- (8,234)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 6,091 30,429
Distributions Reinvested -- 8,198
Redeemed (28,192) (31,615)
CLASS B+:
Subscribed 1,929 --
Redeemed (181) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions (20,353) 7,012
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (10,807) 12,740
NET ASSETS:
Beginning of Period 91,675 78,935
- --------------------------------------------------------------------------------------------------
End of Period $ 80,868 $ 91,675
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 611 $ --
- --------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 394 2,175
Shares Issued on Distributions Reinvested -- 583
Shares Redeemed (1,938) (2,239)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding (1,544) 519
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 130 --
Shares Redeemed (12) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 118 --
- --------------------------------------------------------------------------------------------------

GOLD
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 27 $ (57)
Net Realized Gain 1,114 876
Change in Unrealized Appreciation (Depreciation) (1,640) 2,423
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (499) 3,242
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (37)
Net Realized Gain -- (2,066)
- --------------------------------------------------------------------------------------------------
Total Distributions -- (2,103)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 37,853 21,820
Distributions Reinvested -- 1,913
Redeemed (9,173) (47,706)
CLASS B+:
Subscribed 1,231 --
Redeemed (106) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions 29,805 (23,973)
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 29,306 (22,834)
NET ASSETS:
Beginning of Period 7,409 30,243
- --------------------------------------------------------------------------------------------------
End of Period $ 36,715 $ 7,409
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 27 $ --
- --------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,161 2,403
Shares Issued on Distributions Reinvested -- 222
Shares Redeemed (769) (5,071)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 2,392 (2,446)
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 103 --
Shares Redeemed (9) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 94 --
- --------------------------------------------------------------------------------------------------
</TABLE>

+ Each Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

147
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY
PORTFOLIO INTERNATIONAL
MAGNUM
PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
PERIOD FROM
MARCH 15,
SIX MONTHS ENDED 1996* TO JUNE
JUNE 30, 1996 YEAR ENDED 30, 1996
(UNAUDITED) DECEMBER 31, 1995 (UNAUDITED)
(000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 22,045 $ 19,813 $ 151
Net Realized Gain (Loss) 47,676 88,470 (15)
Change in Unrealized Appreciation 128,941 50,978 1,200
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 198,662 159,261 1,336
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (5,969) --
Net Realized Gain -- (168,582) --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions -- (174,551) --
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 310,864 276,622 60,436
Distributions Reinvested 275 167,795 --
Redeemed (80,757) (135,367) --
CLASS B+:
Subscribed 4,590 -- 1,596
Redeemed (167) -- --
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 234,805 309,050 62,032
- ------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 433,467 293,760 63,368
NET ASSETS:
Beginning of Period 1,598,530 1,304,770 --
- ------------------------------------------------------------------------------------------------------------------
End of Period $ 2,031,997 $ 1,598,530 $ 63,368
- ------------------------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 35,264 $ 13,219 $ 151
- ------------------------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 19,546 18,165 5,916
Shares Issued on Distributions Reinvested 18 11,272 --
Shares Redeemed (4,975) (8,961) --
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 14,589 20,476 5,916
- ------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 295 -- 156
Shares Redeemed (10) -- --
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares Outstanding 285 -- 156
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of Operations.
+ The International Equity Portfolio began offering Class B shares on January
2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

148
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INTERNATIONAL
SMALL CAP
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,494 $ 3,256
Net Realized Gain (Loss) 1,123 7,677
Change in Unrealized Appreciation (Depreciation) 27,955 (6,811)
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 30,572 4,122
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (2,947)
In Excess of Net Investment Income -- --
Net Realized Gain -- (4,763)
- --------------------------------------------------------------------------------------------------
Total Distributions -- (7,710)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 19,581 59,699
Distributions Reinvested -- 6,777
Redeemed (16,359) (24,320)
CLASS B+:
Subscribed -- --
Redeemed -- --
- --------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 3,222 42,156
- --------------------------------------------------------------------------------------------------
Total Increase in Net Assets 33,794 38,568
NET ASSETS:
Beginning of Period 198,669 160,101
- --------------------------------------------------------------------------------------------------
End of Period $ 232,463 $ 198,669
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed (overdistributed) net investment income $ 2,209 $ 715
- --------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,188 3,865
Shares Issued on Distributions Reinvested -- 453
Shares Redeemed (1,037) (1,584)
- --------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 151 2,734
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- --
Shares Redeemed -- --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding -- --
- --------------------------------------------------------------------------------------------------

<CAPTION>
JAPANESE
EQUITY
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 124 $ 90
Net Realized Gain (Loss) 6,986 (2,999)
Change in Unrealized Appreciation (Depreciation) 7,122 5,934
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 14,232 3,025
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- --
In Excess of Net Investment Income -- (2,539)
Net Realized Gain -- --
- --------------------------------------------------------------------------------------------------
Total Distributions -- (2,539)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 106,327 132,973
Distributions Reinvested 1 2,277
Redeemed (13,586) (66,790)
CLASS B+:
Subscribed 6,710 --
Redeemed (1,508) --
- --------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 97,944 68,460
- --------------------------------------------------------------------------------------------------
Total Increase in Net Assets 112,176 68,946
NET ASSETS:
Beginning of Period 119,278 50,332
- --------------------------------------------------------------------------------------------------
End of Period $ 231,454 $ 119,278
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed (overdistributed) net investment income $ (2,586) $ (2,710)
- --------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 11,161 15,121
Shares Issued on Distributions Reinvested -- 245
Shares Redeemed (1,422) (7,618)
- --------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 9,739 7,748
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 706 --
Shares Redeemed (155) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 551 --
- --------------------------------------------------------------------------------------------------
</TABLE>

+ The Japanese Equity Portfolio began offering Class B shares on January 2,
1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

149
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN
AMERICAN
PORTFOLIO
- -----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD FROM
JUNE 30, 1996 JANUARY 18, 1995* TO
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 281 $ 82
Net Realized Gain (Loss) 1,875 (543)
Change in Unrealized Appreciation 4,044 208
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 6,200 (253)
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (74)
Net Realized Gain -- --
Return of Capital -- (49)
CLASS B:
Net Investment Income -- --
- -----------------------------------------------------------------------------------------------------
Total Distributions -- (123)
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 8,370 21,860
Distributions Reinvested -- 108
Redeemed (2,790) (6,216)
CLASS B+:
Subscribed 799 --
Distributions Reinvested -- --
Redeemed (83) --
- -----------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 6,296 15,752
- -----------------------------------------------------------------------------------------------------
Total Increase in Net Assets 12,496 15,376
NET ASSETS:
Beginning of Period 15,376 --
- -----------------------------------------------------------------------------------------------------
End of Period $ 27,872 $ 15,376
- -----------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 281 $ --
- -----------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 781 2,375
Shares Issued on Distributions Reinvested -- 12
Shares Redeemed (258) (690)
- -----------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 523 1,697
- -----------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 75 --
Shares Issued on Distributions Reinvested -- --
Shares Redeemed (8) --
- -----------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 67 --
- -----------------------------------------------------------------------------------------------------

<CAPTION>
AGGRESSIVE
EQUITY
PORTFOLIO
- -----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD FROM MARCH
JUNE 30, 1996 8, 1995* TO
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 311 $ 266
Net Realized Gain (Loss) 6,776 4,041
Change in Unrealized Appreciation 697 1,860
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 7,784 6,167
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (138) (268)
Net Realized Gain -- (3,617)
Return of Capital -- --
CLASS B:
Net Investment Income (14) --
- -----------------------------------------------------------------------------------------------------
Total Distributions (152) (3,885)
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 12,639 26,611
Distributions Reinvested 125 3,556
Redeemed (5,669) (3,901)
CLASS B+:
Subscribed 5,120 --
Distributions Reinvested 14 --
Redeemed (78) --
- -----------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 12,151 26,266
- -----------------------------------------------------------------------------------------------------
Total Increase in Net Assets 19,783 28,548
NET ASSETS:
Beginning of Period 28,548 --
- -----------------------------------------------------------------------------------------------------
End of Period $ 48,331 $ 28,548
- -----------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 159 $ --
- -----------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 941 2,360
Shares Issued on Distributions Reinvested 9 293
Shares Redeemed (420) (308)
- -----------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 530 2,345
- -----------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 379 --
Shares Issued on Distributions Reinvested 1 --
Shares Redeemed (5) --
- -----------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 375 --
- -----------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations.
+ Each Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

150
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
EMERGING
GROWTH
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (522) $ (1,009)
Net Realized Gain 20,685 11,225
Change in Unrealized Appreciation (Depreciation) (12,546) 27,942
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 7,617 38,158
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- --
Net Realized Gain -- --
CLASS B:
Net Investment Income -- --
- --------------------------------------------------------------------------------------------------
Total Distributions -- --
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 15,336 100,167
Distributions Reinvested -- --
Redeemed (45,647) (136,616)
CLASS B+:
Subscribed 5,398 --
Distributions Reinvested -- --
Redeemed (586) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions (25,499) (36,449)
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (17,882) 1,709
NET ASSETS:
Beginning of Period 119,378 117,669
- --------------------------------------------------------------------------------------------------
End of Period $ 101,496 $ 119,378
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed (overdistributed) net investment income $ (522) $ --
- --------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 695 5,737
Shares Issued on Distributions Reinvested -- --
Shares Redeemed (2,055) (7,483)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (1,360) (1,746)
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 243 --
Shares Issued on Distributions Reinvested -- --
Shares Redeemed (26) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 217 --
- --------------------------------------------------------------------------------------------------

<CAPTION>
EQUITY
GROWTH
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 1,147 $ 2,169
Net Realized Gain 21,397 32,477
Change in Unrealized Appreciation (Depreciation) 3,533 15,685
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 26,077 50,331
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (556) (2,636)
Net Realized Gain -- (26,092)
CLASS B:
Net Investment Income (13) --
- --------------------------------------------------------------------------------------------------
Total Distributions (569) (28,728)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 48,353 78,470
Distributions Reinvested 478 26,785
Redeemed (45,293) (66,005)
CLASS B+:
Subscribed 4,841 --
Distributions Reinvested 12 --
Redeemed (260) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions 8,131 39,250
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 33,639 60,853
NET ASSETS:
Beginning of Period 158,112 97,259
- --------------------------------------------------------------------------------------------------
End of Period $ 191,751 $ 158,112
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed (overdistributed) net investment income $ 578 $ --
- --------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,179 5,794
Shares Issued on Distributions Reinvested 34 1,955
Shares Redeemed (3,032) (4,657)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 181 3,092
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 314 --
Shares Issued on Distributions Reinvested 1 --
Shares Redeemed (17) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 298 --
- --------------------------------------------------------------------------------------------------
</TABLE>

+ Each Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

151
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SMALL CAP U.S.
VALUE REAL ESTATE
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED PERIOD FROM
JUNE 30, 1996 YEAR ENDED JUNE 30, 1996 FEBRUARY 24, 1995* TO
(UNAUDITED) DECEMBER 31, 1995 (UNAUDITED) DECEMBER 31, 1995
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 606 $ 1,223 $ 1,581 $ 1,526
Net Realized Gain 2,943 1,546 6,539 3,495
Change in Unrealized Appreciation 1,396 5,880 2,394 3,896
- --------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 4,945 8,649 10,514 8,917
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (305) (1,519) (1,121) (1,405)
Net Realized Gain -- (2,511) -- (2,504)
CLASS B:
Net Investment Income (6) -- (33) --
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (311) (4,030) (1,154) (3,909)
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 7,327 18,293 44,905 67,651
Distributions Reinvested 280 3,611 982 3,148
Redeemed (17,327) (14,637) (4,813) (6,298)
CLASS B+:
Subscribed 1,546 -- 5,310 --
Distributions Reinvested 6 -- 27 --
Redeemed (128) -- (768) --
- --------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions (8,296) 7,267 45,643 64,501
- --------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets (3,662) 11,886 55,003 69,509
NET ASSETS:
Beginning of Period 51,919 40,033 69,509 --
- --------------------------------------------------------------------------------------------------------------------------
End of Period $ 48,257 $ 51,919 $ 124,512 $ 69,509
- --------------------------------------------------------------------------------------------------------------------------
End of period net assets consisted of
accumulated undistributed net
investment income $ 295 $ -- $ 548 $ 121
- --------------------------------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 594 1,631 3,784 6,381
Shares Issued on Distributions Reinvested 22 324 83 279
Shares Redeemed (1,379) (1,304) (405) (573)
- --------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding (763) 651 3,462 6,087
- --------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 126 -- 444 --
Shares Issued on Distributions Reinvested -- -- 2 --
Shares Redeemed (10) (62) --
- --------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares
Outstanding 116 -- 384 --
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations.
+ Each Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

152
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
EQUITY
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,976 $ 3,434
Net Realized Gain 7,167 10,276
Change in Unrealized Appreciation (Depreciation) 3,057 17,116
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 12,200 30,826
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (972) (4,042)
Net Realized Gain -- (6,330)
CLASS B:
Net Investment Income (11) --
- --------------------------------------------------------------------------------------------------
Total Distributions (983) (10,372)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 25,552 70,393
Distributions Reinvested 859 9,289
Redeemed (50,616) (26,177)
CLASS B+:
Subscribed 2,079 --
Distributions Reinvested 11 --
Redeemed (197) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions (22,312) 53,505
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (11,095) 73,959
NET ASSETS:
Beginning of Period 147,365 73,406
- --------------------------------------------------------------------------------------------------
End of Period $ 136,270 $ 147,365
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 1,001 $ 8
- --------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,764 5,522
Shares Issued on Distributions Reinvested 58 731
Shares Redeemed (3,457) (2,068)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (1,635) 4,185
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 142 --
Shares Issued on Distributions Reinvested 1 --
Shares Redeemed (13) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 130 --
- --------------------------------------------------------------------------------------------------

BALANCED
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 381 $ 868
Net Realized Gain 979 1,158
Change in Unrealized Appreciation (Depreciation) (539) 2,413
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 821 4,439
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (173) (1,080)
Net Realized Gain -- (1,047)
CLASS B:
Net Investment Income (25) --
- --------------------------------------------------------------------------------------------------
Total Distributions (198) (2,127)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 1,179 3,530
Distributions Reinvested 128 1,695
Redeemed (11,355) (3,387)
CLASS B+:
Subscribed 2,573 --
Distributions Reinvested 24 --
Redeemed (285) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions (7,736) 1,838
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (7,113) 4,150
NET ASSETS:
Beginning of Period 22,642 18,492
- --------------------------------------------------------------------------------------------------
End of Period $ 15,529 $ 22,642
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 185 $ 2
- --------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 118 380
Shares Issued on Distributions Reinvested 13 182
Shares Redeemed (1,117) (358)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (986) 204
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 255 --
Shares Issued on Distributions Reinvested 2 --
Shares Redeemed (27) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 230 --
- --------------------------------------------------------------------------------------------------
</TABLE>

+ Each Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

153
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
MARKETS DEBT
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 11,731 $ 25,020
Net Realized Gain 17,067 9,187
Change in Unrealized Appreciation (Depreciation) 2,800 15,290
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 31,598 49,497
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (33,418)
Net Realized Gain -- (7,508)
CLASS B:
Net Investment Income -- --
- --------------------------------------------------------------------------------------------------
Total Distributions -- (40,926)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 34,758 147,278
Distributions Reinvested -- 29,155
Redeemed (55,920) (148,075)
CLASS B+:
Subscribed 2,795 --
Distributions Reinvested -- --
Redeemed (59) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions (18,426) 28,358
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 13,172 36,929
NET ASSETS:
Beginning of Period 181,878 144,949
- --------------------------------------------------------------------------------------------------
End of Period $ 195,050 $ 181,878
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed (overdistributed) net investment income $ 10,230 $ (1,501)
- --------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,834 18,475
Shares Issued on Distributions Reinvested -- 3,468
Shares Redeemed (6,121) (17,651)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (2,287) 4,292
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 309 --
Shares Issued on Distributions Reinvested -- --
Shares Redeemed (6) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 303 --
- --------------------------------------------------------------------------------------------------

<CAPTION>
FIXED
INCOME
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 5,133 $ 12,208
Net Realized Gain 1,718 5,921
Change in Unrealized Appreciation (Depreciation) (8,518) 13,125
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (1,667) 31,254
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (3,578) (13,570)
Net Realized Gain -- --
CLASS B:
Net Investment Income (15) --
- --------------------------------------------------------------------------------------------------
Total Distributions (3,593) (13,570)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 28,810 67,883
Distributions Reinvested 2,875 10,529
Redeemed (34,863) (139,900)
CLASS B+:
Subscribed 1,637 --
Distributions Reinvested 14 --
Redeemed (371) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions (1,898) (61,488)
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (7,158) (43,804)
NET ASSETS:
Beginning of Period 165,527 209,331
- --------------------------------------------------------------------------------------------------
End of Period $ 158,369 $ 165,527
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed (overdistributed) net investment income $ 1,550 $ 10
- --------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,737 6,668
Shares Issued on Distributions Reinvested 272 1,022
Shares Redeemed (3,329) (13,696)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (320) (6,006)
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 156 --
Shares Issued on Distributions Reinvested 1 --
Shares Redeemed (36) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 121 --
- --------------------------------------------------------------------------------------------------
</TABLE>

+ Each Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

154
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GLOBAL
FIXED INCOME
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 3,000 $ 6,508
Net Realized Gain (Loss) 1,761 15
Change in Unrealized Appreciation (Depreciation) (4,331) 10,191
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 430 16,714
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (1,606) (9,003)
CLASS B:
Net Investment Income (30) --
- --------------------------------------------------------------------------------------------------
Total Distributions (1,636) (9,003)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 40,076 36,622
Distributions Reinvested 1,439 7,887
Redeemed (26,783) (80,043)
CLASS B+:
Subscribed 2,001 --
Distributions Reinvested 26 --
Redeemed (406) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions 16,353 (35,534)
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 15,147 (27,823)
NET ASSETS:
Beginning of Period 102,852 130,675
- --------------------------------------------------------------------------------------------------
End of Period $ 117,999 $ 102,852
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 1,673 $ 309
- --------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,652 3,346
Shares Issued on Distributions Reinvested 132 737
Shares Redeemed (2,428) (7,623)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 1,356 (3,540)
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 181 --
Shares Issued on Distributions Reinvested 2 --
Shares Redeemed (37) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 146 --
- --------------------------------------------------------------------------------------------------

<CAPTION>
HIGH
YIELD
PORTFOLIO
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 3,691 $ 7,477
Net Realized Gain (Loss) 1,095 (3,145)
Change in Unrealized Appreciation (Depreciation) (1,570) 9,886
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 3,216 14,218
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (2,981) (8,122)
CLASS B:
Net Investment Income (66) --
- --------------------------------------------------------------------------------------------------
Total Distributions (3,047) (8,122)
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 36,286 59,247
Distributions Reinvested 2,270 6,088
Redeemed (13,083) (106,409)
CLASS B+:
Subscribed 4,907 --
Distributions Reinvested 50 --
Redeemed (1,443) --
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions 28,987 (41,074)
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 29,156 (34,978)
NET ASSETS:
Beginning of Period 62,245 97,223
- --------------------------------------------------------------------------------------------------
End of Period $ 91,401 $ 62,245
- --------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed net investment income $ 730 $ 86
- --------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,438 5,865
Shares Issued on Distributions Reinvested 214 609
Shares Redeemed (1,231) (10,704)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 2,421 (4,230)
- --------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 466 --
Shares Issued on Distributions Reinvested 5 --
Shares Redeemed (137) --
- --------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 334 --
- --------------------------------------------------------------------------------------------------
</TABLE>

+ Each Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

155
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MUNICIPAL
BOND
PORTFOLIO
- ------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD FROM
JUNE 30, 1996 JANUARY 18, 1995* TO
(UNAUDITED) DECEMBER 31, 1995
(000) (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 983 $ 1,963
Net Realized Gain (Loss) (100) 193
Change in Unrealized Appreciation (Depreciation) (1,066) 1,635
- ------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (183) 3,791
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (826) (1,963)
In Excess of Net Investment Income (15)
Net Realized Gain -- (193)
CLASS B:
Net Investment Income (2) --
- ------------------------------------------------------------------------------------------------------
Total Distributions (828) (2,171)
- ------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 8,809 61,800
Distributions Reinvested 777 2,060
Redeemed (22,576) (19,611)
CLASS B+:
Subscribed 171 --
Distributions Reinvested 2 --
Redeemed (4) --
- ------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions (12,821) 44,249
- ------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (13,832) 45,869
NET ASSETS:
Beginning of Period 45,869 --
- ------------------------------------------------------------------------------------------------------
End of Period $ 32,037 $ 45,869
- ------------------------------------------------------------------------------------------------------
End of period net assets consisted of accumulated
undistributed
(overdistributed) net investment income $ 140 $ (15)
- ------------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 854 6,134
Shares Issued on Distributions Reinvested 76 200
Shares Redeemed (2,215) (1,912)
- ------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (1,285) 4,422
- ------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 17 --
- ------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 17 --
- ------------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations.
+ The Portfolio began offering Class B Shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

156
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MUNICIPAL
MONEY MONEY
MARKET MARKET
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1996 DECEMBER 31, JUNE 30, 1996 YEAR ENDED
(UNAUDITED) 1995 (UNAUDITED) DECEMBER 31, 1995
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 25,499 $ 44,657 $ 8,509 $ 13,579
Net Realized Gain (Loss) (474) 79 (2) (1)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 25,025 44,736 8,507 13,578
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income (25,499) (44,657) (8,509) (13,579)
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 6,205,074 8,093,985 2,717,683 3,169,110
Distributions Reinvested 23,713 41,765 7,921 13,182
Redeemed (6,002,622) (7,989,639) (2,407,056) (3,090,216)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions 226,165 146,111 318,548 92,076
- -----------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 225,691 146,190 318,546 92,075
NET ASSETS:
Beginning of Period 836,693 690,503 451,519 359,444
- -----------------------------------------------------------------------------------------------------------------------
End of Period $ 1,062,384 $ 836,693 $ 770,065 $ 451,519
- -----------------------------------------------------------------------------------------------------------------------

(1) CAPITAL SHARE TRANSACTIONS:
Shares Subscribed 6,205,074 8,093,987 2,717,683 3,169,110
Shares Issued on Distributions
Reinvested 23,713 41,765 7,921 13,182
Shares Redeemed (6,002,622) (7,989,639) (2,407,056) (3,090,216)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase in Shares Outstanding 226,165 146,113 318,548 92,076
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------

157
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE ACTIVE COUNTRY ALLOCATION PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.63 $ 11.65 $ 12.21 $ 9.59
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.07 0.17 0.19 0.13
Net Realized and Unrealized Gain
(Loss) on Investments 0.88 1.00 (0.25) 2.75
------ ------ ------ ------
Total from Investment Operations 0.95 1.17 (0.06) 2.88
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.25) (0.14) (0.09)
In Excess of Net Investment Income -- (0.10) -- (0.08)
Net Realized Gain -- (0.84) (0.36) --
In Excess of Net Realized Gain -- -- -- (0.09)
------ ------ ------ ------
Total Distributions -- (1.19) (0.50) (0.26)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.58 $ 11.63 $ 11.65 $ 12.21
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 8.17% 10.57% (0.52)% 30.72%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $175,678 $170,663 $182,977 $150,854
Ratio of Expenses to Average Net Assets
(1) 0.80%** 0.80% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets (1) 1.58%** 1.26% 1.43% 1.29%
Portfolio Turnover Rate %34 %72 %51 %53
Average Commission Rate# $0.0021 N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment
income $0.01 $0.05 $0.03 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.12%** 1.18% 1.00% 1.33%
Net Investment Income to Average Net
Assets 1.26%** 0.88% 1.23% 0.76%
- -------------------------------------------------------------------------------------------------------------------

PERIOD FROM
TWO MONTHS JANUARY 17,
ENDED 1992* TO
DECEMBER 31, OCTOBER 31,
1992 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.37 $ 10.00
----- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.02 0.11
Net Realized and Unrealized Gain
(Loss) on Investments 0.20 (0.74)
----- ------
Total from Investment Operations 0.22 (0.63)
----- ------
DISTRIBUTIONS
Net Investment Income -- --
In Excess of Net Investment Income -- --
Net Realized Gain -- --
In Excess of Net Realized Gain -- --
----- ------
Total Distributions -- --
----- ------
NET ASSET VALUE, END OF PERIOD $ 9.59 $ 9.37
----- ------
----- ------
TOTAL RETURN 2.35% (6.30)%
----- ------
----- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $50,234 $47,534
Ratio of Expenses to Average Net Assets
(1) 0.80%** 0.88%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.22%** 2.32%**
Portfolio Turnover Rate % 2 %62
Average Commission Rate# N/A N/A
- -----------------
(1) Effect of voluntary expense limitati
Per share benefit to net investment
income $0.01 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.70%** 1.58%**
Net Investment Income to Average Net
Assets 0.32%** 1.62%**
- ---------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
CLASS B
----------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- -------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.66
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.07
Net Realized and Unrealized Gain (Loss) on Investments 0.84
------
Total from Investment Operations 0.91
------
NET ASSET VALUE, END OF PERIOD $ 12.57
------
------
TOTAL RETURN 7.80%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 720
Ratio of Expenses to Average Net Assets (2) 1.05%**
Ratio of Net Investment Income to Average Net Assets (2) 1.84%**
Portfolio Turnover Rate 34%
Average Commission Rate $0.0021
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.37%**
Net Investment Income to Average Net Assets 1.52%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.
#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
158
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED ENDED
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63
------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.10 0.18 0.11 0.10 0.01
Net Realized and Unrealized
Gain (Loss) on Investments 1.02 1.11 (4.15) 13.38 (0.53)
------ ------ ------ ------ ------
Total from Investment
Operations 1.12 1.29 (4.04) 13.48 (0.52)
------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.34) (0.09) (0.01) --
In Excess of Net Investment
Income -- (0.00)+ -- (0.13) --
Net Realized Gain -- (3.01) (0.53) (0.12) --
In Excess of Net Realized
Gain -- -- -- (0.13) --
------ ------ ------ ------ ------
Total Distributions -- (3.35) (0.62) (0.39) --
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 20.60 $ 19.48 $ 21.54 $ 26.20 $ 13.11
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 5.75% 6.87% (15.81)% 105.71% (3.82)%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $428,915 $314,884 $276,906 $287,136 $41,978
Ratio of Expenses to Average
Net Assets (1) 1.00%** 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.01%** 0.97% 0.52% 0.83% 0.61%**
Portfolio Turnover Rate %26 %42 %47 %18 %10
Average Commission Rate# $0.0117 N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 $0.03 $0.04 $0.05 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.24%** 1.18% 1.20% 1.38% 2.02%**
Net Investment Income
(Loss) to Average Net
Assets 0.77%** 0.79% 0.32% 0.45% (0.41)%**
- ------------------------------------------------------------------------------------------------------------------------

PERIOD FROM
JULY 1, 1991*
YEAR ENDED TO
OCTOBER 31, OCTOBER 31,
1992 1991
- ------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.67 $ 10.00
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.14 0.03
Net Realized and Unrealized
Gain (Loss) on Investments 3.86 (0.36)
------ ------
Total from Investment
Operations 4.00 (0.33)
------ ------
DISTRIBUTIONS
Net Investment Income (0.04) --
In Excess of Net Investment
Income -- --
Net Realized Gain -- --
In Excess of Net Realized
Gain -- --
------ ------
Total Distributions (0.04) --
------ ------
NET ASSET VALUE, END OF PERIOD $ 13.63 $ 9.67
------ ------
------ ------
TOTAL RETURN 41.50% (3.30)%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $41,017 $10,719
Ratio of Expenses to Average
Net Assets (1) 1.00% 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.53% 1.13%**
Portfolio Turnover Rate %33 % 2
Average Commission Rate# N/A N/A
- -----------------
(1) Effect of voluntary expens
Per share benefit to net
investment income $0.06 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.63% 2.52%**
Net Investment Income
(Loss) to Average Net
Assets 0.90% (0.39)%**
- ------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
CLASS B
-------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- --------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.55
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.08
Net Realized and Unrealized Gain (Loss) on
Investments 0.96
------
Total from Investment Operations 1.04
------
NET ASSET VALUE, END OF PERIOD $ 20.59
------
------
TOTAL RETURN 5.32%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $13,479
Ratio of Expenses to Average Net Assets (2) 1.25%**
Ratio of Net Investment Income to Average Net
Assets (2) 1.10%**
Portfolio Turnover Rate 26%
Average Commission Rate $0.0117
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.52%**
Net Investment Income to Average Net Assets 0.83%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.
**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

+Amount is less than $0.01 per share.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
159
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE EMERGING MARKETS PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------
SIX MONTHS TWO MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED
JUNE 30, 1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11
------ ------ ------ ------ -----
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.11 0.08 (0.04) (0.01) --
Net Realized and Unrealized Gain
(Loss) on Investments 2.56 (2.05) (1.69) 8.79 0.11
------ ------ ------ ------ -----
Total from Investment
Operations 2.67 (1.97) (1.73) 8.78 0.11
------ ------ ------ ------ -----
DISTRIBUTIONS
Net Investment Income -- (0.06) -- -- --
Net Realized Gain -- (1.13) (0.97) -- --
------ ------ ------ ------ -----
Total Distributions -- (1.19) (0.97) -- --
------ ------ ------ ------ -----
NET ASSET VALUE, END OF PERIOD $ 15.81 $ 13.14 $ 16.30 $ 19.00 $ 10.22
------ ------ ------ ------ -----
------ ------ ------ ------ -----
TOTAL RETURN 20.32% (12.77)% (9.63)% 85.91% 1.09%
------ ------ ------ ------ -----
------ ------ ------ ------ -----
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,337,315 $876,591 $929,638 $735,352 $74,219
Ratio of Expenses to Average Net
Assets (1) 1.75%** 1.72% 1.75% 1.75% 1.75%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (1) 1.68%** 0.60% (0.26)% (0.06)% (0.33)%**
Portfolio Turnover Rate %25 %54 %32 %52 % 2
Average Commision Rate# $0.0009 N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income N/A N/A N/A $0.01 $0.00
Ratios before expense
limitation:
Expenses to Average Net Assets N/A N/A N/A 1.79% 2.48%**
Net Investment Loss to Average
Net Assets N/A N/A N/A (0.10)% (1.06)%**
- ---------------------------------------------------------------------------------------------------------------------------

PERIOD FROM
SEPTEMBER 25,
1992*
TO OCTOBER 31,
1992
- ---------------------------------------------------------------------------------------------------------------------------

<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) --
Net Realized and Unrealized Gain
(Loss) on Investments 0.11
------
Total from Investment
Operations 0.11
------
DISTRIBUTIONS
Net Investment Income --
Net Realized Gain --
------
Total Distributions --
------
NET ASSET VALUE, END OF PERIOD $ 10.11
------
------
TOTAL RETURN 1.10%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $28,806
Ratio of Expenses to Average Net
Assets (1) 1.75%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (1) (0.53)%**
Portfolio Turnover Rate % 0
Average Commision Rate# N/A
- -----------------
(1) Effect of voluntary expense lim
Per share benefit to net
investment income $0.02
Ratios before expense
limitation:
Expenses to Average Net Assets 4.82%**
Net Investment Loss to Average
Net Assets (3.60)%**
- ---------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
CLASS B
------------
JANUARY 2,
1996***
TO JUNE 30,
1996
(UNAUDITED)
- -----------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.25
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.07
Net Realized and Unrealized Gain (Loss) on
Investments 2.47
------
Total from Investment Operations 2.54
------
NET ASSET VALUE, END OF PERIOD $ 15.79
------
------
TOTAL RETURN 19.17%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $14,801
Ratio of Expenses to Average Net Assets (2) 2.00%**
Ratio of Net Investment Income (Loss) to Average Net Assets
(2) 1.56%**
Portfolio Turnover Rate 25%
Average Commision Rate $0.0009
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income N/A
Ratios before expense limitation:
Expenses to Average Net Assets N/A
Net Investment Loss to Average Net Assets N/A
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
160
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE EUROPEAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------
SIX MONTHS
ENDED JUNE 30, YEAR ENDED YEAR ENDED
1996 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.92 $ 13.94 $ 12.91
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.18 0.14 0.08
Net Realized and Unrealized Gain on Investments 1.47 1.37 1.29
------ ------ ------
Total from Investment Operations 1.65 1.51 1.37
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.15) (0.09)
Net Realized Gain -- (1.38) (0.25)
------ ------ ------
Total Distributions -- (1.53) (0.34)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 15.57 $ 13.92 $ 13.94
------ ------ ------
------ ------ ------
TOTAL RETURN 11.85% 11.85% 10.88%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $139,785 $69,583 $27,634
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets (1) 3.19%** 1.37% 0.87%
Portfolio Turnover Rate % 8 %13 %79
Average Commission Rate# $0.0218 N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.01 $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.21%** 1.25% 1.62%
Net Investment Income (Loss) to Average Net Assets 2.98%** 1.12% 0.25%
- ---------------------------------------------------------------------------------------------------------------------

PERIOD FROM APRIL 2,
1993* TO DECEMBER
31, 1993
- ---------------------------------------------------------------------------------------------------------------------

<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.08
Net Realized and Unrealized Gain on Investments 2.83
------
Total from Investment Operations 2.91
------
DISTRIBUTIONS
Net Investment Income --
Net Realized Gain --
------
Total Distributions --
------
NET ASSET VALUE, END OF PERIOD $ 12.91
------
------
TOTAL RETURN 29.10%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $12,681
Ratio of Expenses to Average Net Assets (1) 1.00%**
Ratio of Net Investment Income to Average Net Assets (1) 1.23%**
Portfolio Turnover Rate %15
Average Commission Rate# N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.09
Ratios before expense limitation:
Expenses to Average Net Assets 2.43%**
Net Investment Income (Loss) to Average Net Assets (0.21)%**
- ---------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
CLASS B
-----------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- -----------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.05
-----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.15
Net Realized and Unrealized Gain on Investments 1.36
-----------
Total from Investment Operations 1.51
-----------
NET ASSET VALUE, END OF PERIOD $ 15.56
-----------
-----------
TOTAL RETURN 10.75%
-----------
-----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,060
Ratio of Expenses to Average Net Assets (2) 1.25%**
Ratio of Net Investment Income to Average Net Assets (2) 3.88%**
Portfolio Turnover Rate 8%
Average Commission Rate $0.0218
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.46%**
Net Investment Income (Loss) to Average Net Assets 3.67%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
161
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED TWO MONTHS PERIOD FROM
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED ENDED JULY 15, 1992*
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, TO OCTOBER 31,
(UNAUDITED) 1995 1994 1993 1992 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.12 0.18 0.08 0.08 0.01 0.02
Net Realized and
Unrealized Gain (Loss)
on Investments 1.80 2.26 0.79 4.18 0.39 (0.67)
------ ------ ------ ------ ------ ------
Total from Investment
Operations 1.92 2.44 0.87 4.26 0.40 (0.65)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.22) (0.12) (0.02) -- --
In Excess of Net
Investment Income -- -- -- (0.03) -- --
Net Realized Gain -- (1.31) (1.22) (0.09) -- --
------ ------ ------ ------ ------ ------
Total Distributions -- (1.53) (1.34) (0.14) -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 16.23 $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 13.42% 18.66% 6.95% 44.24% 4.28% (6.50)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIO AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $78,960 $91,675 $78,935 $19,918 $11,739 $11,257
Ratio of Expenses to
Average Net Assets (1) 1.00%** 1.00% 1.00% 1.00% 1.00%** 1.00%**
Ratio of Net Investment
Income to Average Net
Assets (1) 1.61%** 1.17% 0.87% 0.84% 0.69%** 1.00%**
Portfolio Turnover Rate 11% 28% 12% 42% 5% 10%
Average Commission Rate# $0.0382 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income $0.01 $0.02 $0.02 $0.01 $0.02 $0.08
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.19%** 1.13% 1.24% 1.66% 2.49%** 5.22%**
Net Investment Income
(Loss) to Average
Net Assets 1.42%** 1.04% 0.63% 0.18% (0.80)%** (3.22)%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
--------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- -----------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.36
------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(2) 0.10
Net Realized and
Unrealized Gain (Loss)
on Investments 1.75
------
Total from Investment
Operations 1.85
------
NET ASSET VALUE, END OF
PERIOD $ 16.21
------
------
TOTAL RETURN 12.88%
------
------
RATIO AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $1,908
Ratio of Expenses to
Average Net Assets (2) 1.25%**
Ratio of Net Investment
Income to Average Net
Assets (2) 1.94%**
Portfolio Turnover Rate 11%
Average Commission Rate $0.0382
- -----------------
(2) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income $0.01
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.43%**
Net Investment Income
to Average Net
Assets 1.76%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
162
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE GOLD PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
SIX MONTHS
ENDED PERIOD FROM
JUNE 30, YEAR ENDED FEBRUARY 1, 1994*
1996 DECEMBER 31, TO DECEMBER 31,
(UNAUDITED) 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.55 $ 9.13 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.01 (0.07) 0.03
Net Realized and Unrealized Gain (Loss) on
Investments++ 2.39 1.22 (0.88)
------ ------ ------
Total from Investment Operations 2.40 1.15 (0.85)
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.01) (0.02)
Net Realized Gain -- (1.72) --
------ ------ ------
Total Distributions -- (1.73) (0.02)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.95 $ 8.55 $ 9.13
------ ------ ------
------ ------ ------
TOTAL RETURN 28.07% 13.21% (8.49)%
------ ------ ------
------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $35,688 $7,409 $30,243
Ratio of Expenses to Average Net Assets (1) 1.25%** 1.25% 1.25%**
Ratio of Net Investment Income (Loss) to
Average Net Assets (1) 0.26%** (0.31)% 0.41%**
Portfolio Turnover Rate 21% 47% 56%
Average Commission Rate# $0.0241 N/A N/A
- -----------------
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income $0.02 $0.11 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.84%** 1.76% 1.72%**
Net Investment Loss to Average Net Assets (0.33)%** (0.82)% (0.06)%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
---------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- --------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.81
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) --
Net Realized and Unrealized Gain (Loss) on
Investments++ 2.13
------
Total from Investment Operations 2.13
------
NET ASSET VALUE, END OF PERIOD $ 10.94
------
------
TOTAL RETURN 24.18%
------
------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,027
Ratio of Expenses to Average Net Assets (2) 1.50%**
Ratio of Net Investment Income (Loss) to
Average Net Assets (2) (0.16)%**
Portfolio Turnover Rate 21%
Average Commission Rate $0.0241
- -----------------
(2) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 2.06%**
Net Investment Loss to Average Net Assets (0.72)%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

++The amount shown for the six months ended June 30, 1996 for a share
outstanding throughout the period does not agree with the amount of aggregate
net losses on investments because of the timing of sales and repurchases of
the Portfolio shares in relation to fluctuating market value of the
investments in the Portfolio.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
163
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE INTERNATIONAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED ENDED
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83
------ ------ ------ ------ -----
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.17 0.16 0.16 0.15 0.01
Net Realized and Unrealized Gain
(Loss) on Investments 1.55 1.55 1.54 4.36 0.14
------ ------ ------ ------ -----
Total from Investment Operations 1.72 1.71 1.70 4.51 0.15
------ ------ ------ ------ -----
DISTRIBUTIONS
Net Investment Income -- (0.06) (0.18) (0.01) --
In Excess of Net Investment Income -- -- -- (0.13) --
Net Realized Gain -- (1.84) (0.27) (0.26) --
------ ------ ------ ------ -----
Total Distributions -- (1.90) (0.45) (0.40) --
------ ------ ------ ------ -----
NET ASSET VALUE, END OF PERIOD $ 16.87 $ 15.15 $ 15.34 $ 14.09 $ 9.98
------ ------ ------ ------ -----
------ ------ ------ ------ -----
TOTAL RETURN 11.35% 11.77% 12.39% 46.50% 1.53%
------ ------ ------ ------ -----
------ ------ ------ ------ -----
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,027,199 $1,598,530 $1,304,770 $947,045 $510,727
Ratio of Expenses to Average Net Assets
(1) 1.00%** 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.38%** 1.38% 1.12% 1.25% 0.68%**
Portfolio Turnover Rate 9% 27% 16% 23% 5%
Average Commission Rate# $0.0225 N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment
income $0.00+ $0.003 $0.004 $0.01 $0.00
Ratios before expense limitation:
Expenses to Average Net Assets 1.04%** 1.03% 1.03% 1.06% 1.14%**
Net Investment Income to Average Net
Assets 2.34%** 1.35% 1.09% 1.19% 0.54%**

<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------

YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
1992 1991
- ----------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.52 $ 10.05
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.12 0.12
Net Realized and Unrealized Gain
(Loss) on Investments (0.59) 0.58
------ ------
Total from Investment Operations (0.47) 0.70
------ ------
DISTRIBUTIONS
Net Investment Income (0.17) (0.15)
In Excess of Net Investment Income -- --
Net Realized Gain (0.05) (0.08)
------ ------
Total Distributions (0.22) (0.23)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.83 $ 10.52
------ ------
------ ------
TOTAL RETURN (4.56)% 7.17%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $486,836 $283,776
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 1.46% 2.27%
Portfolio Turnover Rate 12% 22%
Average Commission Rate# N/A N/A
- -----------------
(1) Effect of voluntary expense limitati
the period:
Per share benefit to net investment
income $0.00 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.02% 1.09%
Net Investment Income to Average Net
Assets 1.44% 2.18%
- --------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
<S> <C>
CLASS B
---------------
JANUARY 2,
1996*** TO
JUNE 30, 1996
(UNAUDITED)
- ---------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $15.24
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.17
Net Realized and Unrealized Gain
(Loss) on Investments 1.44
------
Total from Investment Operations 1.61
------
NET ASSET VALUE, END OF PERIOD $ 16.85
------
TOTAL RETURN 10.56%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 4,798
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 3.32%**
Portfolio Turnover Rate 9%
Average Commission Rate $0.0225
- -----------------
(2) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment
income $0.00+
Ratios before expense limitation:
Expenses to Average Net Assets 1.28%**
Net Investment Income to Average Net
Assets 3.29%**
</TABLE>

- --------------------------------------------------------------------------------

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

+Amount is less than $0.01 per share.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
164
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------
PERIOD FROM
MARCH 15, 1996*
TO JUNE 30,
1996
(UNAUDITED)
- ----------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.02
Net Realized and Unrealized Gain on
Investments 0.42
------
Total from Investment Operations 0.44
------
NET ASSET VALUE, END OF PERIOD $ 10.44
------
------
TOTAL RETURN 4.40%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $61,738
Ratio of Expenses to Average Net Assets (1) 1.00%**
Ratio of Net Investment Income to Average Net
Assets (1) 2.07%**
Portfolio Turnover Rate 2%
Average Commission Rate $0.0425
- ---------------
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 2.09%**
Net Investment Income to Average Net
Assets 0.98%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
-----------------
PERIOD FROM
MARCH 15, 1996*
TO JUNE 30,
1996
(UNAUDITED)
- ----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.03
Net Realized and Unrealized Gain on
Investments 0.39
------
Total from Investment Operations 0.42
------
NET ASSET VALUE, END OF PERIOD $ 10.42
------
------
TOTAL RETURN 4.20%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,630
Ratio of Expenses to Average Net Assets (2) 1.25%**
Ratio of Net Investment Income to Average Net
Assets (2) 2.25%**
Portfolio Turnover Rate 2%
Average Commission Rate $0.0425
- ---------------
(2) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 2.84%**
Net Investment Income to Average Net
Assets 0.66%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
165
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE INTERNATIONAL SMALL CAP PORTFOLIO

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
ENDED DECEMBER 15,
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED 1992* TO
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1995 1994 1993++ 1992
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.94 $ 15.15 $ 14.64 $ 10.09 $ 10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.11 0.24 0.14 0.09 0.01
Net Realized and Unrealized Gain
on Investments (2) 2.23 0.15 0.62 4.48 0.08
------ ------ ------ ------ ------
Total from Investment
Operations 2.34 0.39 0.76 4.57 0.09
------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.23) (0.03) 0.00 --
In Excess of Net Investment
Income -- -- -- (0.02) --
Net Realized Gain -- (0.37) (0.22) -- --
------ ------ ------ ------ ------
Total Distributions -- (0.60) (0.25) (0.02) --
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 17.28 $ 14.94 $ 15.15 $ 14.64 $ 10.09
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 15.66% 2.60% 5.25% 45.34% 0.90%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $232,463 $198,669 $160,101 $52,834 $3,824
Ratio of Expenses to Average Net
Assets (1) 1.15%** 1.15% 1.15% 1.15% 1.15%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.40%** 1.72% 1.18% 0.66% 1.37%**
Portfolio Turnover Rate 19% 24% 8% 14% 0%
Average Commission Rate# $0.0145 N/A N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01 $0.02 $0.10 $0.16
Ratios before expense
limitation:
Expenses to Average Net Assets 1.24%** 1.24% 1.29% 1.86% 21.67%**
Net Investment Income (Loss) to
Average Net Assets 1.31%** 1.63% 1.04% (0.05)% (19.15)%**
(2) Includes a 1% transaction fee on purchases and redemptions of capital shares.
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

++Per share amounts for the year ended December 31, 1993 are based on average
outstanding shares.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
166
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE JAPANESE EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
SIX MONTHS
ENDED PERIOD FROM
JUNE 30, YEAR ENDED APRIL 25, 1994*
1996 DECEMBER 31, TO DECEMBER 31,
(UNAUDITED) 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.27 $ 9.83 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.10 0.04 (0.01)
Net Realized and Unrealized Gain (Loss) on
Investments++ 0.62 (0.40) (0.16)
------ ------ ------
Total from Investment Operations 0.72 (0.36) (0.17)
------ ------ ------
DISTRIBUTIONS
In Excess of Net Investment Income -- (0.20) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.99 $ 9.27 $ 9.83
------ ------ ------
------ ------ ------
TOTAL RETURN 7.77% (3.64)% (1.70)%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $225,965 $119,278 $50,332
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% 1.00%**
Ratio of Net Investment Income (Loss) to Average
Net Assets (1) 0.14%** 0.15% (0.10)%**
Portfolio Turnover Rate 4% 52% 1%
Average Commission Rate# $0.0599 N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $0.07 $0.06 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.09%** 1.20% 1.27%**
Net Investment Income (Loss) to Average Net
Assets 0.05%** (0.05)% (0.37)%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
-----------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.25
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) --
Net Realized and Unrealized Gain on Investments 0.72
------
Total from Investment Operations 0.72
------
NET ASSET VALUE, END OF PERIOD $ 9.97
------
------
TOTAL RETURN 7.78%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $5,489
Ratio of Expenses to Average Net Assets (2) 1.25%**
Ratio of Net Investment Loss to Average Net Assets
(2) (0.01)%**
Portfolio Turnover Rate 4%
Average Commission Rate $0.0599
- ---------------
(2) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $0.00+
Ratios before expense limitation:
Expenses to Average Net Assets 1.34%**
Net Investment Loss to Average Net Assets (0.10)%**
</TABLE>

- --------------------------------------------------------------------------------
*Commencement of operations.
**Annualized
***The Portfolio began offering Class B shares on January 2, 1996.
+Amount is less than $0.01 per share.
++The amount shown for the year ended December 31, 1995 for a share outstanding
throughout the period does not agree with the amount of aggregate net gains
on investments for the year because of the timing of sales and repurchases of
the Portfolio shares in relation to fluctuating market value of the
investments in the Portfolio.
#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
167
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE LATIN AMERICAN PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 18,
JUNE 30, 1995*
1996 TO DECEMBER 31,
(UNAUDITED) 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.06 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.12 0.05
Net Realized and Unrealized Gain (Loss) on
Investments 3.01 (0.92)
------ ------
Total from Investment Operations 3.13 (0.87)
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.04)
Return of Capital -- (0.03)
------ ------
Total Distributions -- (0.07)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.19 $ 9.06
------ ------
------ ------
TOTAL RETURN 34.55% (8.68)%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $27,055 $15,376
Ratio of Expenses to Average Net Assets (1) 1.70%** 1.70%**
Ratio of Net Investment Income to Average Net
Assets (1) 2.52%** 0.62%**
Portfolio Turnover Rate 67% 137%
Average Commission Rate# $0.0003 N/A
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $0.02 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets 2.14%** 3.13%**
Net Investment Income (Loss) to Average Net
Assets 2.08%** (0.48)%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
---------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.44
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.10
Net Realized and Unrealized Gain on Investments 2.63
------
Total from Investment Operations 2.73
------
NET ASSET VALUE, END OF PERIOD $ 12.17
------
------
TOTAL RETURN 28.92%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $817
Ratio of Expenses to Average Net Assets (2) 1.95%**
Ratio of Net Investment Income to Average Net
Assets (2) 2.80%**
Portfolio Turnover Rate 67%
Average Commission Rate $0.0003
- ---------------
(2) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 2.37%**
Net Investment Income to Average Net Assets 2.38%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
168
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE AGGRESSIVE EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------
SIX MONTHS PERIOD FROM
ENDED MARCH 8, 1995*
JUNE 30, TO
1996 DECEMBER 31,
(UNAUDITED) 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.17 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.10 0.15
Net Realized and Unrealized Gain on Investments 2.65 3.95
------- -------
Total from Investment Operations 2.75 4.10
------- -------
DISTRIBUTIONS
Net Investment Income (0.05) (0.15)
Net Realized Gain -- (1.78)
------- -------
Total Distributions (0.05) (1.93)
------- -------
NET ASSET VALUE, END OF PERIOD $ 14.87 $ 12.17
------- -------
------- -------
TOTAL RETURN 22.63% 41.25%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $42,760 $28,548
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00%**
Ratio of Net Investment Income to Average Net
Assets (1) 1.58%** 1.64%**
Portfolio Turnover Rate 211% 309%
Average Commission Rate# $0.0521 N/A
- -----------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $0.02 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.29%** 1.59%**
Net Investment Income to Average Net Assets 1.29%** 1.05%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
---------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.25
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.07
Net Realized and Unrealized Gain on Investments 2.59
-------
Total from Investment Operations 2.66
-------
DISTRIBUTIONS
Net Investment Income (0.05)
-------
NET ASSET VALUE, END OF PERIOD $ 14.86
-------
-------
TOTAL RETURN 21.75%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $5,571
Ratio of Expenses to Average Net Assets (2) 1.25%**
Ratio of Net Investment Income to Average Net
Assets (2) 1.51%**
Portfolio Turnover Rate 211%
Average Commission Rate $0.0521
- -----------------
(2) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.48%**
Net Investment Income to Average Net Assets 1.28%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
169
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE EMERGING GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1995 1994 1993 1992 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 21.49 $ 16.12 $ 16.22 $ 16.22 $ 14.97 $ 16.18
------ ------ ------ ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Loss (1) (0.12) (0.18) (0.09) (0.11) (0.01) (0.09)
Net Realized and
Unrealized Gain
(Loss) on
Investments 1.64 5.55 (0.01) 0.11 1.26 (1.12)
------ ------ ------ ------ ------ ------
Total from
Investment
Operations 1.52 5.37 (0.10) 0.00 1.25 (1.21)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment
Income -- -- -- -- -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD $ 23.01 $ 21.49 $ 16.12 $ 16.22 $ 16.22 $ 14.97
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 7.07% 33.31% (0.62)% 0.00% 8.35% (7.48)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period (Thousands) $96,512 $119,378 $117,669 $103,621 $94,161 $80,156
Ratio of Expenses to
Average Net Assets
(1) 1.25%** 1.25% 1.25% 1.25% 1.25%** 1.25%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets (1) (0.93)%** (0.76)% (0.61)% (0.77)% (0.68)%** (0.66)%
Portfolio Turnover
Rate 18% 25% 24% 25% 1% 17%
Average Commission
Rate# $0.0492 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the
period:
Per share
benefit to net
investment loss $0.01 $0.003 $0.002 $0.01 $0.00 $0.01
Ratios before
expense
limitation:
Expenses to
Average Net
Assets 1.30%** 1.26% 1.26% 1.31% 1.36%** 1.29%
Net Investment
Loss to Average
Net Assets (0.98)%** (0.77)% (0.62)% (0.83)% (0.79)%** (0.71)%

<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------

YEAR ENDED
OCTOBER 31,
1991++
- ---------------------------------------------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.03
------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Loss (1) --
Net Realized and
Unrealized Gain
(Loss) on
Investments 7.19
------
Total from
Investment
Operations 7.19
------
DISTRIBUTIONS
Net Investment
Income (0.04)
------
NET ASSET VALUE, END
OF PERIOD $ 16.18
------
------
TOTAL RETURN 79.84%
------
------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period (Thousands) $54,364
Ratio of Expenses to
Average Net Assets
(1) 1.25%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets (1) 0.00%
Portfolio Turnover
Rate 2%
Average Commission
Rate# N/A
- -----------------
(1) Effect of volunt
period:
Per share
benefit to net
investment loss $0.02
Ratios before
expense
limitation:
Expenses to
Average Net
Assets 1.39%
Net Investment
Loss to Average
Net Assets (0.14)%
- ------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
<S> <C>
CLASS B
-----------
JANUARY 2,
1996***
TO JUNE 30,
1996
(UNAUDITED)
- --------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 21.47
-----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (2) (0.09)
Net Realized and
Unrealized Gain (Loss)
on Investments 1.60
-----------
1.51
-----------
NET ASSET VALUE, END OF
PERIOD $ 22.98
-----------
-----------
TOTAL RETURN 7.03%
-----------
-----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $4,984
Ratio of Expenses to
Average Net Assets (2) 1.50%**
Ratio of Net Investment
Income (Loss) to Average
Net Assets (2) (1.13)%**
Portfolio Turnover Rate 18%
Average Commission Rate $0.0492
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to
net investment loss $0.00+
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.55%**
Net Investment Loss
to Average Net
Assets (1.18)%**
</TABLE>

- --------------------------------------------------------------------------------
**Annualized
***The Portfolio began offering Class B shares on January 2, 1996.
+Amount is less than $0.01 per share.
++Per share amounts for the year ended October 31, 1991 are based on average
outstanding shares.
#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
170
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE EQUITY GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED TWO MONTHS YEAR ENDED
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED DECEMBER OCTOBER 31,
(UNAUDITED) 1995 1994 1993 31, 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44 $ 10.66
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.10 0.22 0.17 0.22 0.03 0.16
Net Realized and
Unrealized Gain on
Investments 2.25 4.93 0.21 0.28 0.41 0.82
------ ------ ------ ------ ------ ------
Total from Investment
Operations 2.35 5.15 0.38 0.50 0.44 0.98
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.05) (0.28) (0.13) (0.23) -- (0.20)
In Excess of Net
Investment Income -- -- -- (0.01) -- --
Net Realized Gain -- (2.75) (0.37) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.05) (3.03) (0.50) (0.24) -- (0.20)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 16.44 $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 16.64% 45.02% 3.26% 4.33% 3.85% 9.26%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $186,848 $158,112 $97,259 $73,789 $45,985 $36,558
Ratio of Expenses to
Average Net Assets (1) 0.80%** 0.80% 0.80% 0.80% 0.80%** 0.80%
Ratio of Net Investment
Income to Average Net
Assets (1) 1.33%** 1.57% 1.44% 1.59% 1.93%** 1.73%
Portfolio Turnover Rate 119% 186% 146% 172% 1% 38%
Average Commission Rate# $0.0549 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to
net investment
income $0.01 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.90%** 0.88% 0.89% 0.93% 1.11%** 1.01%
Net Investment Income
to Average Net
Assets 1.23%** 1.49% 1.35% 1.46% 1.62%** 1.52%
- ---------------------------------------------------------------------------------------------------------------------------------

PERIOD FROM
APRIL 2, 1991*
TO OCTOBER 31,
1991
<S> <C>
- ---------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.05
Net Realized and
Unrealized Gain on
Investments 0.61
------
Total from Investment
Operations 0.66
------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net
Investment Income --
Net Realized Gain --
------
Total Distributions --
------
NET ASSET VALUE, END OF
PERIOD $ 10.66
------
------
TOTAL RETURN 6.60%
------
------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $18,139
Ratio of Expenses to
Average Net Assets (1) 0.80%**
Ratio of Net Investment
Income to Average Net
Assets (1) 2.34%**
Portfolio Turnover Rate 3%
Average Commission Rate# N/A
- -----------------
(1) Effect of voluntary e
Per share benefit to
net investment
income $0.03
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.37%**
Net Investment Income
to Average Net
Assets 1.77%**
- ------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
CLASS B
--------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- -----------------------------------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.22
------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(2) 0.07
Net Realized and
Unrealized Gain on
Investments 2.19
------
Total from Investment
Operations 2.26
------
DISTRIBUTIONS
Net Investment Income (0.05)
------
NET ASSET VALUE, END OF
PERIOD $ 16.43
------
------
TOTAL RETURN 15.91%
------
------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $4,903
Ratio of Expenses to
Average Net Assets (2) 1.05%**
Ratio of Net Investment
Income to Average Net
Assets (2) 1.35%**
Portfolio Turnover Rate 119%
Average Commission Rate $0.0549
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to
net investment
income $0.00+
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.14%**
Net Investment Income
to Average Net
Assets 1.26%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

+Amount is less than $0.01 per share.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
171
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE SMALL CAP VALUE EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
PERIOD FROM
SIX MONTHS DECEMBER 17,
ENDED JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED 1992* TO
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $11.91 $10.80 $11.10 $10.14 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.15 0.30 0.28 0.24 0.01
Net Realized and Unrealized Gain
(Loss) on Investments 1.01 1.82 (0.01) 0.90 0.13
------ ------ ------ ------ ------
Total from Investment
Operations 1.16 2.12 0.27 1.14 0.14
------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.07) (0.38) (0.27) (0.18) --
Net Realized Gain -- (0.63) (0.30) -- --
------ ------ ------ ------ ------
Total Distributions (0.07) (1.01) (0.57) (0.18) --
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 13.00 $ 11.91 $ 10.80 $ 11.10 $10.14
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 9.76% 20.63% 2.53% 11.33% 1.40%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $46,746 $51,919 $40,033 $26,775 $5,974
Ratio of Expenses to Average Net
Assets (1) 1.00%** 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.32%** 2.60% 2.67% 2.56% 1.64%**
Portfolio Turnover Rate 13% 36% 22% 29% 0%
Average Commission Rate # $0.0404 N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.02 $0.03 $0.06 $0.13
Ratios before expense
limitation:
Expenses to Average Net Assets 1.23%** 1.21% 1.26% 1.68% 23.14%**
Net Investment Income (Loss) to
Average Net Assets 2.09%** 2.39% 2.41% 1.88% (20.50)%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
--------------
JANUARY 2,
1996***
TO JUNE 30,
1996
(UNAUDITED)
- ---------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 11.95
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.09
Net Realized and Unrealized Gain
on Investments 1.02
------
Total from Investment
Operations 1.11
------
DISTRIBUTIONS
Net Investment Income (0.07)
------
NET ASSET VALUE, END OF PERIOD $ 12.99
------
------
TOTAL RETURN 9.31%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,511
Ratio of Expenses to Average Net
Assets (2) 1.25%**
Ratio of Net Investment Income to
Average
Net Assets (2) 2.16%**
Portfolio Turnover Rate 13%
Average Commission Rate $0.0404
- -----------------
(2) Effect of voluntary expense limitation during
the period:
Per share benefit to net
investment income $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets 1.49%**
Net Investment Income to
Average Net Assets 1.92%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
172
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------
PERIOD FROM
SIX MONTHS FEBRUARY 24,
ENDED JUNE 30, 1995* TO
1996 DECEMBER 31,
(UNAUDITED) 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.42 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.28 0.26
Net Realized and Unrealized Gain on Investments 0.98 1.84
------ ------
Total from Investment Operations 1.26 2.10
------ ------
DISTRIBUTIONS
Net Investment Income (0.14) (0.24)
Net Realized Gain -- (0.44)
------ ------
Total Distributions (0.14) (0.68)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.54 $ 11.42
------ ------
------ ------
TOTAL RETURN 11.10% 21.07%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $119,709 $69,509
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00%**
Ratio of Net Investment Income to Average Net
Assets (1) 5.21%** 4.04%**
Portfolio Turnover Rate 93% 158%
Average Commission Rate# $0.0564
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.19%** 1.33%**
Net Investment Income to Average Net Assets 5.02%** 3.71%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
-------------
JANUARY 2,
1996***
TO JUNE 30,
1996
(UNAUDITED)
- -----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.50
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.25
Net Realized and Unrealized Gain on Investments 0.91
------
Total from Investment Operations 1.16
------
DISTRIBUTIONS
Net Investment Income (0.14)
------
NET ASSET VALUE, END OF PERIOD $ 12.52
------
------
TOTAL RETURN 10.15%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $4,803
Ratio of Expenses to Average Net Assets (2) 1.25%**
Ratio of Net Investment Income to Average Net
Assets (2) 6.24%**
Portfolio Turnover Rate 93%
Average Commission Rate $0.0564
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.41%**
Net Investment Income to Average Net Assets 6.08%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
173
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE VALUE EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1995 1994 1993 1992 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71 $ 10.24
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.20 0.38 0.40 0.37 0.08 0.38
Net Realized and
Unrealized Gain (Loss)
on Investments 0.99 3.30 (0.55) 1.31 0.52 0.48
------ ------ ------ ------ ------ ------
Total from Investment
Operations 1.19 3.68 (0.15) 1.68 0.60 0.86
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.09) (0.47) (0.40) (0.36) -- (0.39)
Net Realized Gain -- (0.77) (0.58) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.09) (1.24) (0.98) (0.36) -- (0.39)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period $ 15.04 $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 8.55% 33.69% (1.29)% 15.14% 5.60% 8.51%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $134,316 $147,365 $73,406 $54,598 $27,541 $25,013
Ratio of Expenses to
Average Net Assets (1) 0.70%** 0.70% 0.70% 0.70% 0.70%** 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1) 2.64%** 3.01% 3.37% 3.23% 4.41%** 3.72%
Portfolio Turnover Rate 15% 43% 33% 51% 9% 56%
Average Commission Rate# $0.0458 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to
net investment
income $0.01 $0.01 $0.01 $0.03 $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.77%** 0.77% 0.80% 0.95% 1.20%** 0.84%
Net Investment Income
to Average Net
Assets 2.57%** 2.94% 3.27% 2.98% 3.91%** 3.58%

<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------

YEAR ENDED
OCTOBER 31,
1991
- ------------------------------------------------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.59
------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.46
Net Realized and
Unrealized Gain (Loss)
on Investments 1.67
------
Total from Investment
Operations 2.13
------
DISTRIBUTIONS
Net Investment Income (0.48)
Net Realized Gain --
------
Total Distributions (0.48)
------
Net Asset Value, End of
Period $ 10.24
------
------
TOTAL RETURN 25.34%
------
------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $16,304
Ratio of Expenses to
Average Net Assets (1) 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1) 4.57%
Portfolio Turnover Rate 90%
Average Commission Rate# N/A
- -----------------
(1) Effect of voluntary e
limitation during the
Per share benefit to
net investment
income $0.02
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.87%
Net Investment Income
to Average Net
Assets 4.40%
- --------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
<S> <C>
CLASS B
-------------
JANUARY 2,
1996*** TO
JUNE 30, 1996
(UNAUDITED)
- ----------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.06
------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(2) 0.10
Net Realized and
Unrealized Gain on
Investments 0.95
------
Total from Investment
Operations 1.05
------
DISTRIBUTIONS
Net Investment Income (0.09)
------
Net Asset Value, End of
Period $ 15.02
------
------
TOTAL RETURN 7.48%
------
------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $1,954
Ratio of Expenses to
Average Net Assets (2) 0.95%**
Ratio of Net Investment
Income to Average
Net Assets (2) 2.22%**
Portfolio Turnover Rate 15%
Average Commission Rate $0.0458
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to
net investment
income $0.00+
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.01%**
Net Investment Income
to Average Net
Assets 2.16%**
</TABLE>

- --------------------------------------------------------------------------------

**Annualized
***The Portfolio began offering Class B shares on January 2, 1996.
+Amount is less than $0.01.
#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
174
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE BALANCED PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED TWO MONTHS YEAR ENDED
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED DECEMBER OCTOBER 31,
(UNAUDITED) 1995 1994 1993 31, 1992 1992
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD $9.98 $8.96 $ 11.13 $ 11.31 $ 11.00 $ 10.61
------ ------ ------ ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net
Investment
Income (1) 0.24 0.39 0.42 0.44 0.10 0.58
Net Realized
and
Unrealized
Gain (Loss)
on
Investments 0.15 1.62 (0.64) 0.79 0.21 0.42
------ ------ ------ ------ ------ ------
Total from
Investment
Operations 0.39 2.01 (0.22) 1.23 0.31 1.00
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net
Investment
Income (0.10) (0.50) (0.49) (0.41) -- (0.58)
In Excess of
Net
Investment
Income -- -- -- (0.08) -- --
Net Realized
Gain -- (0.49) (1.46) (0.06) -- (0.03)
In Excess of
Net Realized
Gain -- -- -- (0.86) -- --
------ ------ ------ ------ ------ ------
Total
Distributions (0.10) (0.99) (1.95) (1.41) -- (0.61)
------ ------ ------ ------ ------ ------
NET ASSET
VALUE, END OF
PERIOD $ 10.27 $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 3.92% 23.63% (2.32)% 12.09% 2.82% 9.57%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND
SUPPLEMENTAL
DATA:
Net Assets, End
of Period
(Thousands) $13,173 $22,642 $18,492 $29,684 $39,984 $40,332
Ratio of
Expenses to
Average Net
Assets (1) 0.70%** 0.70% 0.70% 0.70% 0.70%** 0.70%
Ratio of Net
Investment
Income to
Average Net
Assets (1) 3.88%** 4.10% 4.13% 3.88% 5.29%** 5.21%
Portfolio
Turnover Rate 6% 26% 44% 136% 4% 40%
Average
Commission
Rate# $0.0385 N/A N/A N/A N/A N/A
- ---------------
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to
net
investment
income $0.03 $0.03 $0.03 $0.04 $0.01 $0.01
Ratios
before expense
limitation:
Expenses to
Average
Net Assets 1.24%** 1.02% 0.95% 1.02% 1.00%** 0.79%
Net
Investment
Income to
Average
Net Assets 3.34%** 3.78% 3.88% 3.56% 4.99%** 5.12%

<CAPTION>
- --------------------------------------------------------------------------------------------------------------------

YEAR ENDED
OCTOBER 31,
1991
- ----------------------------------------------------------------------------------
<S> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD $9.62
------
INCOME FROM
INVESTMENT
OPERATIONS
Net
Investment
Income (1) 0.59
Net Realized
and
Unrealized
Gain (Loss)
on
Investments 1.03
------
Total from
Investment
Operations 1.62
------
DISTRIBUTIONS
Net
Investment
Income (0.63)
In Excess of
Net
Investment
Income --
Net Realized
Gain --
In Excess of
Net Realized
Gain --
------
Total
Distributions (0.63)
------
NET ASSET
VALUE, END OF
PERIOD $ 10.61
------
------
TOTAL RETURN 17.31%
------
------
RATIOS AND
SUPPLEMENTAL
DATA:
Net Assets, End
of Period
(Thousands) $51,334
Ratio of
Expenses to
Average Net
Assets (1) 0.70%
Ratio of Net
Investment
Income to
Average Net
Assets (1) 5.99%
Portfolio
Turnover Rate 67%
Average
Commission
Rate# N/A
- ---------------
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to
net
investment
income $0.01
Ratios
before expense
limitation:
Expenses to
Average
Net Assets 0.78%
Net
Investment
Income to
Average
Net Assets 5.91%
- -------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
<S> <C>
CLASS B
-----------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- ----------------------------------
NET ASSET
VALUE,
BEGINNING OF
PERIOD $ 10.02
------
INCOME FROM
INVESTMENT
OPERATIONS
Net
Investment
Income (2) 0.12
Net Realized
and
Unrealized
Gain on
Investments 0.22
------
Total from
Investment
Operations 0.34
------
DISTRIBUTIONS
Net
Investment
Income (0.10)
------
NET ASSET
VALUE, END OF
PERIOD $ 10.26
------
------
TOTAL RETURN 3.40%
------
------
RATIOS AND
SUPPLEMENTAL
DATA:
Net Assets, End
of Period
(Thousands) $2,356
Ratio of
Expenses to
Average Net
Assets (2) 0.95%**
Ratio of Net
Investment
Income to
Average Net
Assets (2) 3.56%**
Portfolio
Turnover Rate 6%
Average
Commission
Rate $0.0385
- ---------------
(2) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to
net
investment
income $ 0.02
Ratios
before expense
limitation:
Expenses to
Average
Net Assets 1.48%**
Net
Investment
Income to
Average
Net Assets 3.03%**
</TABLE>

- --------------------------------------------------------------------------------

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
175
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
PERIOD FROM
SIX MONTHS FEBRUARY 1,
ENDED 1994*
JUNE 30, YEAR ENDED TO DECEMBER
1996 DECEMBER 31, 31,
(UNAUDITED) 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.59 $ 8.59 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.61 1.36 0.50
Net Realized and Unrealized Gain (Loss) on
Investments 0.97 0.91 (1.91)
------ ------ ------
Total from Investment Operations 1.58 2.27 (1.41)
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (1.86) --
Net Realized Gain -- (0.41) --
------ ------ ------
Total Distributions -- (2.27) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.17 $8.59 $8.59
------ ------ ------
------ ------ ------
TOTAL RETURN 18.39% 28.23% (14.10)%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $191,976 $181,878 $144,949
Ratio of Expenses to Average Net Assets 2.84%** 1.76% 1.49%**
Ratio of Net Investment Income to Average Net
Assets 12.99%** 14.70% 9.97%**
Portfolio Turnover Rate 316% 406% 273%
Ratio of Expenses to Average Net Assets
Excluding Dividend and Interest Expenses 1.49%** 1.75% N/A

<TABLE>
<CAPTION>
<S> <C>
CLASS B
---------------
JANUARY 2,
1996***
TO JUNE 30,
1996
(UNAUDITED)
- --------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.68
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.33
Net Realized and Unrealized Gain on
Investments 1.14
------
Total from Investment Operations 1.47
------
NET ASSET VALUE, END OF PERIOD $ 10.15
------
------
TOTAL RETURN 16.94%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $3,074
Ratio of Expenses to Average Net Assets 2.77%**
Ratio of Net Investment Income to Average Net
Assets 13.59%**
Portfolio Turnover Rate 316%
Ratio of Expenses to Average Net Assets
Excluding Dividend and Interest Expenses 1.74%**
</TABLE>

- --------------------------------------------------------------------------------
*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
176
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92 $ 10.55
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.33 0.72 0.59 0.54 0.10 0.69
Net Realized and
Unrealized Gain
(Loss) on Investments (0.43) 1.06 (0.92) 0.41 0.01 0.39
------ ------ ------ ------ ------ ------
Total from Investment
Operations (0.10) 1.78 (0.33) 0.95 0.11 1.08
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.23) (0.79) (0.53) (0.56) (0.10) (0.69)
In Excess of Net
Investment Income -- -- -- (0.01) -- --
Net Realized Gain -- -- (0.37) (0.26) -- (0.02)
In Excess of Net
Realized Gain -- -- (0.00)+ -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.23) (0.79) (0.90) (0.83) (0.10) (0.71)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 10.48 $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN (0.92)% 18.76% (3.10)% 9.07% 1.02% 10.61%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $157,098 $165,527 $209,331 $240,668 $154,210 $146,546
Ratio of Expenses to
Average Net Assets (1) 0.45%** 0.45% 0.45% 0.45% 0.45%** 0.45%
Ratio of Net Investment
Income to Average Net
Assets (1) 6.29%** 6.85% 5.73% 4.97% 5.56%** 6.59%
Portfolio Turnover Rate 122% 172% 388% 240% 15% 105%
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to
net investment
income $0.01 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.62%** 0.59% 0.58% 0.60% 0.75%** 0.59%
Net Investment Income
to Average Net
Assets 6.12%** 6.71% 5.60% 4.82% 5.26%** 6.45%
- ------------------------------------------------------------------------------------------------------------------------

PERIOD FROM
MAY 15, 1991*
TO OCTOBER
31, 1991
<S> <C>
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.22
Net Realized and
Unrealized Gain
(Loss) on Investments 0.49
------
Total from Investment
Operations 0.71
------
DISTRIBUTIONS
Net Investment Income (0.16)
In Excess of Net
Investment Income --
Net Realized Gain --
In Excess of Net
Realized Gain --
------
Total Distributions (0.16)
------
NET ASSET VALUE, END OF
PERIOD $ 10.55
------
------
TOTAL RETURN 7.12%
------
------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $72,326
Ratio of Expenses to
Average Net Assets (1) 0.45%**
Ratio of Net Investment
Income to Average Net
Assets (1) 7.29%**
Portfolio Turnover Rate 48%
- -----------------
(1) Effect of voluntary e
Per share benefit to
net investment
income $0.01
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.81%**
Net Investment Income
to Average Net
Assets 6.93%**
- ------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
CLASS B
-------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
<S> <C>
- ----------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.81
------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(2) 0.31
Net Realized and
Unrealized (Loss) on
Investments (0.42)
------
Total from Investment
Operations (0.11)
------
DISTRIBUTIONS
Net Investment Income (0.23)
------
NET ASSET VALUE, END OF
PERIOD $ 10.47
------
------
TOTAL RETURN (1.02)%
------
------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $1,271
Ratio of Expenses to
Average Net Assets (2) 0.60%**
Ratio of Net Investment
Income to Average Net
Assets (2) 6.19%**
Portfolio Turnover Rate 122%
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to
net investment
income $0.01
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.86%**
Net Investment Income
to Average Net
Assets 5.93%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized
***The Portfolio began offering Class B shares on January 2, 1996.
+Amount is less than $0.01 per share.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
177
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE GLOBAL FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED TWO MONTHS PERIOD FROM
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED MAY 1, 1991*
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, TO OCTOBER 31,
(UNAUDITED) 1995 1994 1993 1992 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $ 10.61 $ 10.00
------ ------ ------ ------ ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1) 0.31 0.76 0.70 0.69 0.14 0.53 0.16
Net Realized
and
Unrealized
Gain (Loss)
on
Investments (0.29) 1.15 (1.38) 0.90 (0.29) 0.55 0.45
------ ------ ------ ------ ------ ------ ------
Total from
Investment
Operations 0.02 1.91 (0.68) 1.59 (0.15) 1.08 0.61
------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment
Income (0.18) (0.98) (0.40) (0.79) -- (0.27) --
In Excess of
Net
Investment
Income -- -- -- (0.22) -- -- --
Net Realized
Gain -- -- (0.31) (0.16) -- (0.01) --
------ ------ ------ ------ ------ ------ ------
Total
Distributions (0.18) (0.98) (0.71) (1.17) -- (0.28) --
------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $ 11.06 $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $ 10.61
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
TOTAL RETURN 0.20% 19.32% (6.08)% 15.34% (1.31)% 10.29% 6.10%
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
RATIOS AND
SUPPLEMENTAL
DATA:
Net Assets, End
of Period
(Thousands) $116,382 $102,852 $130,675 $172,468 $92,897 $94,847 $28,236
Ratio of
Expenses to
Average Net
Assets (1) 0.50%** 0.50% 0.50% 0.50% 0.50%** 0.50% 0.50%**
Ratio of Net
Investment
Income to
Average Net
Assets (1) 5.75%** 6.79% 6.34% 5.99% 6.99%** 6.92% 7.24%**
Portfolio
Turnover Rate 158% 207% 171% 108% 9% 144% 20%
- ----------------
(1) Effect of voluntary expense limitation during the period:
Per share
benefit to
net
investment
income $0.01 $0.02 $0.02 $0.02 $0.01 $0.03 $0.02
Ratios before
expense
limitation:
Expenses to
Average Net
Assets 0.75%** 0.71% 0.66% 0.70% 0.90%** 0.86% 1.62%**
Net
Investment
Income to
Average Net
Assets 5.50%** 6.58% 6.18% 5.79% 6.59%** 6.56% 6.12%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
---------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- -------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.23
------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (2) 0.19
Net Realized and
Unrealized Loss
on Investments (0.19)
------
Total from
Investment
Operations --
------
DISTRIBUTIONS
Net Investment
Income (0.18)
------
NET ASSET VALUE, END
OF PERIOD $ 11.05
------
------
TOTAL RETURN 0.02%
------
------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period (Thousands) $1,617
Ratio of Expenses to
Average Net Assets
(2) 0.65%**
Ratio of Net
Investment Income
to Average Net
Assets (2) 5.55%**
Portfolio Turnover
Rate 158%
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share
benefit to net
investment
income $0.01
Ratios before
expense limitation:
Expenses to
Average Net
Assets 1.00%**
Net Investment
Income to
Average Net
Assets 5.20%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
178
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE HIGH YIELD PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED TWO MONTHS SEPTEMBER 28,
JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED ENDED 1992*
1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, TO OCTOBER 31,
(UNAUDITED) 1995 1994 1993 1992 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net
Investment
Income (1) 0.50 1.14 0.97 0.90 0.14 0.08
Net Realized
and
Unrealized
Gain (Loss)
on
Investments (0.03) 0.97 (1.40) 1.21 0.19 (0.31)
------ ------ ------ ------ ------ ------
Total from
Investment
Operations 0.47 2.11 (0.43) 2.11 0.33 (0.23)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net
Investment
Income (0.43) (1.20) (0.97) (0.90) (0.15) --
Net Realized
Gain -- -- (0.21) -- -- --
------ ------ ------ ------ ------ ------
Total
Distributions (0.43) (1.20) (1.18) (0.90) (0.15) --
------ ------ ------ ------ ------ ------
NET ASSET
VALUE, END OF
PERIOD $ 10.50 $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 4.47% 23.35% (4.18)% 22.11% 3.41% (2.30)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND
SUPPLEMENTAL
DATA:
Net Assets, End
of Period
(Thousands) $87,902 $62,245 $97,223 $74,500 $20,194 $16,950
Ratio of
Expenses to
Average Net
Assets (1) 0.75%** 0.75% 0.75% 0.75% 0.75%** 0.75%**
Ratio of Net
Investment
Income to
Average Net
Assets (1) 9.68%** 11.09% 9.42% 8.70% 8.96%** 9.89%**
Portfolio
Turnover Rate 63% 90% 74% 104% 24% 9%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share
benefit to
net
investment
income $0.00+ $0.01 $0.001 $0.02 $0.01 $0.01
Ratios before
expense
limitation:
Expenses to
Average
Net Assets 0.85%** 0.83% 0.76% 0.96% 1.62%** 1.23%**
Net
Investment
Income to
Average
Net Assets 9.58%** 11.01% 9.41% 8.49% 8.09%** 9.41%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
----------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- -------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.49
------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(2) 0.47
Net Realized and
Unrealized Loss on
Investments (0.06)
------
Total from Investment
Operations 0.41
------
DISTRIBUTIONS
Net Investment Income (0.43)
Net Realized Gain --
------
Total Distributions (0.43)
------
NET ASSET VALUE, END OF
PERIOD $ 10.47
------
------
TOTAL RETURN 3.89%
------
------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $3,499
Ratio of Expenses to
Average Net Assets (2) 1.00%**
Ratio of Net Investment
Income to Average Net
Assets (2) 9.27%**
Portfolio Turnover Rate 63%
- -----------------
(2) Effect of voluntary expense limitation
during the period:
Per share benefit to
net investment
income $0.00+
Ratios before expense limitation:
Expenses to Average
Net Assets 1.10%**
Net Investment Income
to Average Net
Assets 9.17%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

+Amount is less than $0.01 per share

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
179
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE MUNICIPAL BOND PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 18,
JUNE 30, 1995*
1996 TO DECEMBER 31,
(UNAUDITED) 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.37 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.25 0.44
Net Realized and Unrealized Gain (Loss) on
Investments (0.26) 0.42
------ ------
Total from Investment Operations (0.01) 0.86
------ ------
DISTRIBUTIONS
Net Investment Income (0.20) (0.45)
In Excess of Net Investment Income -- (0.00)+
Net Realized Gain -- (0.04)
------ ------
Total Distributions (0.20) (0.49)
------ ------
NET ASSET VALUE, END OF PERIOD $10.16 $10.37
------ ------
------ ------
TOTAL RETURN (0.09)% 8.80%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $31,869 $45,869
Ratio of Expenses to Average Net Assets (1) 0.45%** 0.45%**
Ratio of Net Investment Income to Average Net
Assets (1) 4.79%** 4.61%**
Portfolio Turnover Rate 38% 180%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.02 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.74%** 0.73%**
Net Investment Income to Average Net Assets 4.50%** 4.33%**

<TABLE>
<CAPTION>
<S> <C>
CLASS B
---------------
JANUARY 2,
1996*** TO
JUNE 30,
1996
(UNAUDITED)
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.37
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.22
Net Realized and Unrealized Loss on Investments (0.23)
------
Total from Investment Operations (0.01)
------
DISTRIBUTIONS
Net Investment Income (0.20)
------
NET ASSET VALUE, END OF PERIOD $ 10.16
------
------
TOTAL RETURN (0.10)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $168
Ratio of Expenses to Average Net Assets (2) 0.70%**
Ratio of Net Investment Income to Average Net
Assets (2) 4.63%**
Portfolio Turnover Rate 38%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.00%**
Net Investment Income to Average Net Assets 4.33%**
</TABLE>

- --------------------------------------------------------------------------------

*Commencement of operations.

**Annualized

***The Portfolio began offering Class B shares on January 2, 1996.

+Amount is less than $0.01 per share.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
180
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------

THE MONEY MARKET PORTFOLIO

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS TWO MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, OCTOBER 31,
(UNAUDITED) 1995 1994 1993 1992 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------------- ------------- ------------- ------------- ------------- ------------- -------------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1) 0.024 0.054 0.040 0.027 0.005 0.039 0.062
-------------- ------------- ------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment
Income (0.024) (0.054) (0.040) (0.027) (0.005) (0.039) (0.062)
In Excess of
Net Investment
Income -- -- -- 0.000+ -- -- --
-------------- ------------- ------------- ------------- ------------- ------------- -------------
Total
Distributions (0.024) (0.054) (0.040) (0.027) (0.005) (0.039) (0.062)
-------------- ------------- ------------- ------------- ------------- ------------- -------------
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------------- ------------- ------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- ------------- ------------- -------------
TOTAL RETURN 2.46% 5.51% 3.84% 2.76% 0.50% 3.77% 6.37%
-------------- ------------- ------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- ------------- ------------- -------------
RATIOS AND
SUPPLEMENTAL
DATA:
Net Assets, End
of Period
(Thousands) $ 1,062,384 $ 836,693 $ 690,503 $ 657,163 $ 599,172 $ 612,968 $ 607,087
Ratio of Expenses
to Average Net
Assets (1) 0.51%** 0.51% 0.49% 0.53% 0.55%** 0.52% 0.53%
Ratio of Net
Investment
Income to
Average
Net Assets (1) 4.89%** 5.37% 3.77% 2.71% 3.11%** 3.74% 6.11%
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share
benefit to
net
investment
income N/A N/A N/A $ 0.000+ $ 0.000+ N/A N/A
Ratios before
expense
limitation:
Expenses to
Average Net
Assets N/A N/A N/A 0.54% 0.59%** N/A N/A
Net
Investment
Income to
Average Net
Assets N/A N/A N/A 2.70% 3.07%** N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
**Annualized
+Amount is less than $0.001 per
share.
- ---------------------------------------------------------------------------------------------------------------------------------

THE MUNICIPAL MONEY MARKET PORTFOLIO

<CAPTION>
- -------------------------------------------------------------------------------------------
SIX MONTHS TWO MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, OCTOBER 31,
(UNAUDITED) 1995 1994 1993 1992 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------------- ------------- ------------- ------------- ------------- ------------- -------------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1) 0.015 0.034 0.020 0.019 0.004 0.026 0.043
-------------- ------------- ------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment
Income (0.015) (0.034) (0.020) (0.019) (0.004) (0.026) (0.043)
In Excess of
Net Investment
Income -- -- -- (0.000)+ -- -- --
-------------- ------------- ------------- ------------- ------------- ------------- -------------
Total
Distributions (0.015) (0.034) (0.020) (0.019) (0.004) (0.026) (0.043)
-------------- ------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE,
END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------------- ------------- ------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- ------------- ------------- -------------
TOTAL RETURN 1.51% 3.44% 2.44% 1.91% 0.37% 2.74% 4.35%
-------------- ------------- ------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- ------------- ------------- -------------
RATIOS AND
SUPPLEMENTAL
DATA:
Net Assets, End
of Period
(Thousands) $770,065 $451,519 $359,444 $266,524 $208,866 $206,691 $166,953
Ratio of Expenses
to Average Net
Assets (1) 0.52%** 0.52% 0.51% 0.54% 0.57%** 0.55% 0.56%
Ratio of Net
Investment
Income to
Average Net
Assets (1) 3.04%** 3.38% 2.42% 1.89% 2.31%** 2.66% 4.18%
- -----------------
(1)Effect of voluntary expense limitation during the period:
Per share
benefit to
net
investment
income N/A N/A N/A $ 0.000+ $ 0.000+ N/A N/A
Ratios before
expense
limitation:
Expenses to
Average Net
Assets N/A N/A N/A 0.56% 0.67%** N/A N/A
Net Investment Income to
Average Net Assets N/A N/A N/A 1.87% 2.21%** N/A N/A
</TABLE>

- --------------------------------------------------------------------------------
**Annualized
+Amount is less than $0.001 per share.

The accompanying notes are an integral part of the financial statements.

- --------------------------------------------------------------------------------
181
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
- --------------------------------------------------------------------------------

Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. As of June 30, 1996, the Fund was comprised of 25 separate active,
diversified and non-diversified portfolios (individually referred to as the
"Portfolio," collectively as the "Portfolios"). During the six months ended June
30, 1996, the International Magnum Portfolio commenced operations on March 15,
1996. On January 2, 1996, each Portfolio (with the exception of the
International Small Cap, Money Market and Municipal Money Market Portfolios)
began offering an additional class of shares -- Class B. All the shares of these
Portfolios outstanding prior to January 2, 1996, were redesignated Class A
shares on January 2, 1996. Both classes of shares have identical voting,
dividend, liquidation and other rights. Please refer to the manager's reports
included elsewhere in this report for a description of each Portfolio's
investment objectives.

A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of the financial
statements. Generally accepted accounting principles 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 and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. 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 which are based primarily on institutional size trading in similar
groups of securities. Debt securities purchased with remaining maturities of 60
days or less are valued at amortized cost, if it approximates market value.
Securities owned by the Money Market and Municipal Money Market Portfolios are
stated at amortized cost, which approximates market value. All other securities
and assets for which market values are not readily available, including
restricted securities, are valued at fair value as determined in good faith by
the Board of Directors, although the actual calculations may be done by others.

2. INCOME TAXES: It is each Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable and tax-exempt income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.

A Portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or 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 is earned.

3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, 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 counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.

4. REVERSE REPURCHASE AGREEMENTS: In order to leverage the Portfolio, the
Emerging Markets Debt Portfolio may enter into reverse repurchase agreements
with institutions that the Portfolio's investment adviser has determined are
creditworthy. Under a reverse repurchase agreement, the Portfolio 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 Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase. Securities subject to repurchase under reverse
repurchase agreements are designated as such in the Statement of Net Assets.

At June 30, 1996 the Emerging Markets Debt Portfolio had reverse repurchase
agreements outstanding as follows:

<TABLE>
<CAPTION>
MATURITY IN
30 TO 90
DAYS
------------
<S> <C>
Maturity Amount................................. $16,465,000
------------
Market Value of Assets Sold Under
Agreements..................................... 18,879,000
Weighted Average Interest Rate.................. 5.875%
------------
</TABLE>

- --------------------------------------------------------------------------------
182
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONT.)
JUNE 30, 1996
- --------------------------------------------------------------------------------

The average weekly balance of reverse repurchase agreements outstanding during
the six months ended June 30, 1996 was approximately $12,450,000, at a weighted
average interest rate of 6.065%.

5. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: 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) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions are
treated as ordinary income for U.S. Federal income tax purposes.

Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward 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 the
Statement of Net Assets. The change in net unrealized currency gains (losses)
for the period is reflected on 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.

Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investment in
domestic companies may be subject to limitation in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Statement of Net Assets) may be created and offered for investment. The
"local" and "foreign" shares' market values may differ.

6. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter
into forward foreign currency exchange contracts to attempt to protect
securities and related receivables and payables against changes in future
foreign currency exchange rates. A forward 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 using the
forward rate and the change in market value is recorded by the Portfolios as
unrealized gain or loss. The Portfolio 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
counterparties to meet the terms of their contracts and is generally limited to
the amount of the 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.

7. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days) after
the date of the transaction. Additionally, certain Portfolios may purchase
securities on a when-issued or delayed-delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed delivery basis, it establishes
a segregated account in which it maintains liquid assets in an amount at least
equal in value to the Portfolio's

- --------------------------------------------------------------------------------
183
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONT.)
JUNE 30, 1996
- --------------------------------------------------------------------------------
commitments to purchase such securities. Purchasing securities on a forward
commitment or when-issued or delayed-delivery basis may involve a risk that the
market price at the time of delivery may be lower than the agreed upon purchase
price, in which case there could be an unrealized loss at the time of delivery.

8. LOAN AGREEMENTS: Certain Portfolios may invest in fixed and floating rate
loans ("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions ("Lenders")
deemed to be creditworthy by the investment adviser. The Portfolio's investments
in Loans may be in the form of participations in Loans ("Participations") or
assignments of all or a portion of Loans ("Assignments") from third parties. The
Portfolio's investment in Participations typically results in the Portfolio
having a contractual relationship with only the Lender and not with the
borrower. The Portfolio has the right to receive payments of principal, interest
and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. The Portfolio generally has no right to enforce compliance by the
borrower with the terms of the loan agreement. As a result, the Portfolio may be
subject to the credit risk of both the borrower and the Lender that is selling
the Participation. When the Portfolio purchases Assignments from Lenders, it
acquires direct rights against the borrower on the Loan. Because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender.

9. SHORT SALES: The Aggressive Equity and Emerging Markets Debt Portfolios may
sell securities short. A short sale is a transaction in which the Portfolio
sells securities it may or may not own, but has borrowed, in anticipation of a
decline in the market price of the securities. The Portfolio is obligated to
replace the borrowed securities at the market price at the time of replacement.
The Portfolio may have to pay a premium to borrow the securities as well as pay
any dividends or interest payable on the securities until they are replaced. The
Portfolio's obligation to replace the securities borrowed in connection with a
short sale will generally be secured by collateral deposited with the broker
that consists of cash, U.S. government securities or other liquid, high grade
debt obligations. In addition, the Portfolio will place in a segregated account
with its Custodian an amount of cash, U.S. government securities or other liquid
high grade debt obligations equal to the difference, if any, between (1) the
market value of the securities sold at the time they were sold short and (2) any
cash, U.S. government securities or other liquid high grade debt obligations
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Short sales by the Portfolio involve
certain risks and special considerations. Possible losses from short sales
differ from losses that could be incurred from a purchase of a security, because
losses from short sales may be unlimited, whereas losses from purchases cannot
exceed the total amount invested.

10. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on their securities. Premiums are received and are recorded as
liabilities, and subsequently adjusted to the current value of the options
written. Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised or
are canceled in closing purchase transactions are offset against the proceeds or
amount paid on the transaction to determine the realized gain or loss. By
writing a covered call option, a Portfolio foregoes in exchange for the premium
the opportunity for capital appreciation above the exercise price should the
market price of the underlying security increase. By writing a covered put
option, a Portfolio, in exchange for the premium, accepts the risk of a decline
in the market value of the underlying security below the exercise price.

Certain Portfolios may purchase call and put options on their portfolio
securities. Each Portfolio may purchase call options to protect against an
increase in the price of the security it anticipates purchasing. Each Portfolio
may purchase put options on their securities to protect against a decline in the
value of the security or to close out covered written put positions. Possible
losses from purchased options cannot exceed the total amount invested.

11. SECURITY LENDING: Certain Portfolios may lend investment securities to
certain qualified institutional investors who borrow securities in order to
complete certain transactions. By lending investment securities, a Portfolio
attempts to increase its net investment income through the receipt of interest
on the loan. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the account of the
Portfolio. Risks of delay in recovery of the securities or even loss of rights
in the collateral may occur should the borrower of the securities fail
financially. Risks may also arise to the extent that the value of the collateral
decreases below the value of the securities loaned.

Portfolios that lend securities receive cash, securities issued or guaranteed by
the U.S. Government, or

- --------------------------------------------------------------------------------
184
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONT.)
JUNE 30, 1996
- --------------------------------------------------------------------------------
letters of credit as collateral in an amount equal to or exceeding 100% of the
current market value of the loaned securities. Any cash received as collateral
is invested in interest bearing repurchase agreements with approved
counterparties. A portion of the interest received on the repurchase agreements
is retained by the Portfolio and the remainder is rebated to the borrower of the
securities. The net amount of interest earned and interest rebated is included
in the Statement of Operations as interest income. The value of loaned
securities and related collateral outstanding at June 30, 1996 are as follows:

<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- -------------------------------- --------------- -----------
<S> <C> <C>
Active Country Allocation....... $ 33,704 $ 39,595
International Equity............ 223,355 286,019
</TABLE>

Morgan Stanley Trust Company administers the security lending program and has
earned fees for its services in the amount of $43,700 during the period ending
June 30, 1996.

12. STRUCTURED SECURITIES: The Emerging Markets Debt Portfolio may invest in
interests in entities organized and operated solely for the purpose of
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, invested in by the Emerging
Markets Debt Portfolio, generally will have credit risk equivalent to that of
the underlying instruments. 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.

13. 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. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends which
may be recorded as soon as the Fund is informed of such dividends). Interest
income is recognized on the accrual basis except where collection is in doubt.
Discounts and premiums on securities purchased (other than mortgage-backed
securities) are amortized according to the effective yield method over their
respective lives. Most expenses of the Fund can be directly attributed to a
particular Portfolio. Expenses which cannot be directly attributed are
apportioned among the Portfolios based upon relative average net assets. Income,
expenses (other than class specific expenses) and realized and unrealized gains
or losses are allocated to each class of shares based upon their relative net
assets. Dividends to the shareholders of the Money Market and the Municipal
Money Market Portfolios are accrued daily and are distributed on or about the
15th of each month. Distributions for the remaining Portfolios are recorded on
the ex-date.

The U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year is
estimated to be a return of capital and is recorded as a reduction of their
cost.

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 generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for the timing of the
recognition of gains or losses on securities and forward foreign currency
exchange contracts, the timing of the deductibility of certain foreign taxes and
dividends received from real estate investment trusts.

Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications among undistributed net investment income
(loss), accumulated net realized gain (loss) and paid in capital.

Permanent book-tax differences, if any, are not included in ending undistributed
(distributions in excess of) net investment income/accumulated net investment
loss for the purpose of calculating net investment income (loss) per share in
the Financial Highlights.

A transaction fee of one percent is charged on subscriptions and redemptions of
capital shares of the International Small Cap Portfolio. Such fees are paid to
or retained by the Portfolio and included in paid in capital. During the six
months ended June 30, 1996, such transaction fees totaled approximately
$343,000.

B. ADVISER: Morgan Stanley Asset Management Inc. (the "Adviser" or "MSAM")
provides investment advisory services to the Fund under the terms of an
Investment Advisory and Management Agreement (the "Agreement") at the annual
rates of average daily net assets indicated below. MSAM has agreed to reduce
fees payable to it and to reimburse the Portfolios, if

- --------------------------------------------------------------------------------
185
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONT.)
JUNE 30, 1996
- --------------------------------------------------------------------------------
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:

<TABLE>
<CAPTION>
MAXIMUM EXPENSE RATIO
ADVISORY --------------------------
PORTFOLIO FEE CLASS A CLASS B
------------ ------------ ------------
<S> <C> <C> <C>
Active Country Allocation...... .65% .80% 1.05%
Asian Equity................... .80 1.00 1.25
Emerging Markets............... 1.25 1.75 2.00
European Equity................ .80 1.00 1.25
Global Equity.................. .80 1.00 1.25
Gold........................... 1.00 1.25 1.50
International Equity........... .80 1.00 1.25
International Magnum........... .80 1.00 1.25
International Small Cap........ .95 1.15 N/A
Japanese Equity................ .80 1.00 1.25
Latin American................. 1.10 1.70 1.95
Aggressive Equity.............. .80 1.00 1.25
Emerging Growth................ 1.00 1.25 1.50
Equity Growth.................. .60 .80 1.05
Small Cap Value Equity......... .85 1.00 1.25
U.S. Real Estate............... .80 1.00 1.25
Value Equity................... .50 .70 .95
Balanced....................... .50 .70 .95
Emerging Markets Debt.......... 1.00 1.75 2.00
Fixed Income................... .35 .45 .60
Global Fixed Income............ .40 .50 .65
High Yield..................... .50 .75 1.00
Municipal Bond................. .35 .45 .70
Money Market................... .30 .55 N/A
Municipal Money Market......... .30 .57 N/A
</TABLE>

Sun Valley Gold Company is the sub-adviser ("Sub-Adviser") of the Gold
Portfolio. The Sub-Adviser is entitled to receive an annual sub-advisory fee in
an amount equal to .40% of the average daily net assets of the Portfolio. The
Sub-Adviser has agreed to a proportionate reduction in its fees if the Adviser
is required to waive its fees or to reimburse the Portfolio.

C. ADMINISTRATOR: MSAM also provides the Fund with administrative services
pursuant to an administrative agreement, for a monthly fee which on an annual
basis equals 0.15% of the average daily net assets of each Portfolio, plus
reimbursement of out-of-pocket expenses. Under an agreement between MSAM and The
Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company, provides certain administrative services to the Fund. For such
services, MSAM pays Chase a portion of the fee MSAM receives from the Fund.

D. DISTRIBUTOR: Morgan Stanley & Co., Incorporated (the "Distributor"), serves
as the Distributor of the Fund and provides all classes of each Portfolio with
distribution services pursuant to separate Distribution Plans (the "Plans") in
accordance with Rule 12b-1 under the Investment Company Act of 1940. Under the
Plans, the Distributor is entitled to receive from each Portfolio, except the
International Small Cap Portfolio, Money Market Portfolio and Municipal Money
Market Portfolio, a distribution fee, which is accrued daily and paid quarterly,
at an annual rate of 0.25% of the Class B shares' average daily net assets. The
Distributor may voluntarily waive from time to time all or any portion of its
distribution fee. The Distributor has agreed to reduce its fees to 0.15% of the
Class B shares' average daily net assets for the Fixed Income and Global Fixed
Income Portfolios.

E. CUSTODIAN: Morgan Stanley Trust Company ("MSTC") acts as custodian for the
Fund's assets held outside the United States in accordance with a custodian
agreement. Custodian fees are computed and payable monthly based on assets held,
investment purchases and sales activity, an account maintenance fee, plus
reimbursement for certain out-of-pocket expenses. MSTC, the Adviser and the
Distributor are wholly-owned subsidiaries of Morgan Stanley Group, Inc.

For the six months ended June 30, 1996, the following Portfolios incurred
custody fees and had amounts payable to MSTC at June 30, 1996:

<TABLE>
<CAPTION>
MSTC CUSTODY CUSTODY
FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
------------- -----------------
<S> <C> <C>
Active Country Allocation..... $ 118 $ 83
Asian Equity.................. 410 250
Emerging Markets.............. 1,352 670
European Equity............... 41 23
Global Equity................. 15 10
Gold.......................... 7 1
International Equity.......... 295 151
International Magnum.......... 33 28
International Small Cap....... 60 29
Japanese Equity............... 21 12
Latin American................ 32 26
Emerging Markets Debt......... 117 58
Global Fixed Income........... 21 11
</TABLE>

In addition, for the six months ended June 30, 1996, the following Portfolios
have earned interest income and incurred interest expense on balances with MSTC
as follows:

<TABLE>
<CAPTION>
INTEREST INCOME INTEREST EXPENSE
(000) (000)
------------------- -------------------
<S> <C> <C>
Active Country
Allocation................ $ 1 $ --
Asian Equity............... -- 3
Emerging Markets........... 10 74
European Equity............ 31 --
Global Equity.............. 1 --
International Magnum....... -- 1
Japanese Equity............ 1 --
Emerging Markets Debt...... 14 127
Global Fixed Income........ 19 2
</TABLE>

At June 30, 1996, the Emerging Markets Portfolio owned shares of affiliated
funds for which the Portfolio earned dividend income of approximately $60,000.

- --------------------------------------------------------------------------------
186
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONT.)
JUNE 30, 1996
- --------------------------------------------------------------------------------

F. PURCHASES AND SALES: During the six months ended June 30, 1996, purchases and
sales of investment securities other than long-term U.S. Government securities
and short-term investments were:

<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- ---------------------------------------- ----------- ---------
<S> <C> <C>
Active Country Allocation............... $ 65,346 $ 56,059
Asian Equity............................ 223,601 101,506
Emerging Markets........................ 452,594 264,829
European Equity......................... 59,633 7,550
Global Equity........................... 8,084 14,652
Gold.................................... 30,865 3,908
International Equity.................... 396,026 147,853
International Magnum.................... 57,482 378
International Small Cap................. 43,749 39,139
Japanese Equity......................... 99,029 5,855
Latin American.......................... 20,626 14,510
Aggressive Equity....................... 80,887 74,204
Emerging Growth......................... 19,898 45,817
Equity Growth........................... 196,244 192,645
Small Cap Value Equity.................. 6,816 13,440
U.S. Real Estate........................ 129,338 86,284
Value Equity............................ 21,464 45,281
Balanced................................ 1,063 8,630
Emerging Markets Debt................... 460,972 470,339
Fixed Income............................ 184,644 163,508
Global Fixed Income..................... 129,067 132,908
High Yield.............................. 63,351 42,703
Municipal Bond.......................... 15,338 27,811
</TABLE>

Purchases and sales during the six months ended June 30, 1996 of long-term U.S.
Government securities occurred in the Fixed Income and Global Fixed Income
Portfolios only and totaled:

<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- ----------------------------------------- ----------- ---------
<S> <C> <C>
Fixed Income............................. $ 21,888 $ 17,971
Global Fixed Income...................... 32,802 21,597
</TABLE>

During the six months ended June 30, 1996, the following Portfolios paid
brokerage commissions to Morgan Stanley & Co., Incorporated, an affiliated
broker/dealer, of approximately:

<TABLE>
<CAPTION>
BROKERAGE
COMMISSION
PORTFOLIO (000)
- ----------------------------------------------- ---------------
<S> <C>
Asian Equity................................... $ 112
Emerging Markets............................... 53
European Equity................................ 3
Global Equity.................................. 4
International Equity........................... 35
Japanese Equity................................ 67
Latin American................................. 2
</TABLE>

G. OTHER: At June 30, 1996, cost and unrealized appreciation (depreciation) for
U.S. Federal income tax purposes of the investments of each Portfolio were:

<TABLE>
<CAPTION>
NET
APPREC.
COST APPREC. DEPREC. (DEPREC.)
PORTFOLIO (000) (000) (000) (000)
- -------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Active Country
Allocation............... $ 161,105 $ 15,840 $ (4,724) $ 11,116
Asian Equity.............. 389,990 58,667 (11,193) 47,474
Emerging Markets.......... 1,223,212 222,519 (104,240) 118,279
European Equity........... 122,862 14,649 (1,898) 12,751
Global Equity............. 66,721 16,801 (2,883) 13,918
Gold...................... 38,642 1,812 (3,838) (2,026)
International Equity...... 1,534,637 418,152 (34,695) 383,457
International Magnum...... 63,025 1,628 (668) 960
International Small Cap... 210,041 32,291 (13,046) 19,245
Japanese Equity........... 219,519 12,598 (6,768) 5,830
Latin American............ 23,260 4,712 (458) 4,254
Aggressive Equity......... 45,806 2,903 (346) 2,557
Emerging Growth........... 61,667 41,300 (908) 40,392
Equity Growth............. 171,863 22,047 (2,074) 19,973
Small Cap Value Equity.... 41,498 7,255 (905) 6,350
U.S. Real Estate.......... 119,024 7,142 (852) 6,290
Value Equity.............. 118,038 22,667 (4,789) 17,878
Balanced.................. 14,008 1,682 (304) 1,378
Emerging Markets Debt..... 203,181 17,390 (7,365) 10,025
Fixed Income.............. 160,832 1,804 (2,011) (207)
Global Fixed Income....... 122,649 1,175 (1,697) (522)
High Yield................ 91,547 1,836 (4,174) (2,338)
Municipal Bond............ 30,587 668 (99) 569
Money Market.............. 1,062,158 -- -- --
Municipal Money Market.... 776,804 -- -- --
</TABLE>

At December 31, 1995, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulations, through the indicated expiration dates:

<TABLE>
<CAPTION>
EXPIRATION DATE
DECEMBER 31,
(000)
-------------------------------
PORTFOLIO 2001 2002 2003 TOTAL
- ------------------------------- --- --------- --------- ---------
<S> <C> <C> <C> <C>
Emerging Markets............... $ -- $ -- $ 33,313 $ 33,313
Japanese Equity................ -- -- 2,666 2,666
Latin American................. -- -- 224 224
Fixed Income................... -- 8,291 -- 8,291
Global Fixed Income............ -- 5,293 1,780 7,073
High Yield..................... -- 497 4,145 4,642
Money Market................... -- 13 -- 13
Municipal Money Market......... 1 7 1 9
</TABLE>

To the extent that capital loss carryovers are used to offset any future net
capital gains realized during the carryover period as provided by U.S. Federal
income tax regulations, no capital gains tax liability will be incurred by a
Portfolio for gains realized and not distributed. To the extent that capital
gains are offset, such gains will not be distributed to the shareholders.

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187
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONT.)
JUNE 30, 1996
- --------------------------------------------------------------------------------

Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1995 to December 31, 1995
certain Portfolios incurred and elected to defer until January 1, 1996 for U.S.
Federal income tax purposes net capital and net currency losses of
approximately:

<TABLE>
<CAPTION>
CAPITAL CURRENCY
LOSSES LOSSES
PORTFOLIO (000) (000)
- ------------------------------------------- ----------- -----------
<S> <C> <C>
Emerging Markets........................... $ -- $ 64
Global Equity.............................. -- 2
Latin American............................. 2 6
Emerging Markets Debt...................... 245 1,501
High Yield................................. 73 --
Municipal Money Market..................... 1 --
</TABLE>

During the six months ended June 30, 1996, the following Portfolio wrote covered
call options as follows:

COVERED CALL OPTIONS

<TABLE>
<CAPTION>
FACE AMOUNT PREMIUM
EMERGING MARKETS DEBT PORTFOLIO (000) (000)
- ----------------------------------- ------------- -----------
<S> <C> <C>
Options outstanding at December 31,
1995.............................. $ -- $ --
Options written during the
period............................ 48,647 721
Options expired during the
period............................ (32,530) (392)
Options exercised during the
period............................ (16,117) (329)
------------- -----------
Options outstanding at June 30,
1996.............................. $ -- $ --
------------- -----------
------------- -----------
</TABLE>

At June 30, 1996, the net assets of certain Portfolios were substantially
comprised of foreign denominated securities and currency. Changes in currency
exchange rates will affect the U.S. dollar value of and investment income from
such securities.

Assets and liabilities, including Portfolio securities and foreign currency
holdings were translated at the following exchange rates as of June 30, 1996:

<TABLE>
<S> <C> <C> <C>
Argentine Peso........................ 0.99963 = $ 1.00
Australian Dollar..................... 1.27235 = $ 1.00
Belgian Franc......................... 31.30000 = $ 1.00
Brazilian Real........................ 1.00395 = $ 1.00
British Pound......................... 0.64371 = $ 1.00
Canadian Dollar....................... 1.36455 = $ 1.00
Colombian Peso........................ 1,067.00000 = $ 1.00
Danish Krone.......................... 5.85550 = $ 1.00
Deutsche Mark......................... 1.52000 = $ 1.00
Finnish Markka........................ 4.62905 = $ 1.00
French Franc.......................... 5.13900 = $ 1.00
Greek Drachma......................... 240.47000 = $ 1.00
Hong Kong Dollar...................... 7.74075 = $ 1.00
Hungarian Forint...................... 150.03500 = $ 1.00
Indonesian Rupiah..................... 2,327.50000 = $ 1.00
Irish Pound........................... 0.62602 = $ 1.00
Italian Lira.......................... 1,530.84000 = $ 1.00
Japanese Yen.......................... 109.32500 = $ 1.00
Korean Won............................ 811.20000 = $ 1.00
Malaysian Ringgit..................... 2.49450 = $ 1.00
Mexican Peso.......................... 7.58250 = $ 1.00
Moroccan Dirham....................... 8.72285 = $ 1.00
Netherlands Guilder................... 1.70450 = $ 1.00
New Zealand Dollar.................... 1.45349 = $ 1.00
Norwegian Krone....................... 6.48655 = $ 1.00
Pakistani Rupee....................... 35.00500 = $ 1.00
Peruvian Sol.......................... 2.44300 = $ 1.00
Philippine Peso....................... 26.20000 = $ 1.00
Polish Zloty.......................... 2.71710 = $ 1.00
Portuguese Escudo..................... 156.30000 = $ 1.00
Singapore Dollar...................... 1.41100 = $ 1.00
Spanish Peseta........................ 127.91500 = $ 1.00
Sri Lanka Rupee....................... 55.60000 = $ 1.00
Swedish Krona......................... 6.61490 = $ 1.00
Swiss Franc........................... 1.24950 = $ 1.00
Taiwan Dollar......................... 27.52000 = $ 1.00
Thailand Baht......................... 25.38500 = $ 1.00
Turkish Lira.......................... 82,100.00000 = $ 1.00
</TABLE>

From time to time, certain Portfolios of the Fund have shareholders that hold a
significant portion of a Portfolio's outstanding shares. Investment activities
of these shareholders could have a material impact on those Portfolios.

- --------------------------------------------------------------------------------
188
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.

- -----------------------------------------------------------------------------

DIRECTORS

Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley
Asset Management Inc. and Morgan Stanley Asset
Management Limited; Managing Director,
Morgan Stanley & Co. Incorporated; Director,
Morgan Stanley Group Inc.

Frederick B. Whittemore
VICE-CHAIRMAN OF THE BOARD
Advisory Director, Morgan Stanley & Co.,
Incorporated

Warren J. Olsen
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated

John D. Barrett II
Chairman and Director, Barrett Associates, Inc.

Gerard E. Jones
Partner, Richards & O'Neil LLP

Andrew McNally IV
Chairman and Chief Executive Officer, Rand McNally

Samuel T. Reeves
Chairman of the Board and CEO, Pinacle L.L.C.

Fergus Reid
Chairman and Chief Executive Officer, LumeLite Corporation

Frederick O. Robertshaw
Of Counsel, Bryan, Cave

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
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

OFFICERS

James W. Grisham
VICE PRESIDENT

Michael F. Klein
VICE PRESIDENT

Harold J. Schaaff, Jr.
VICE PRESIDENT

Joseph P. Stadler
VICE PRESIDENT

Valerie Y. Lewis
SECRETARY

Karl O. Hartmann
ASSISTANT SECRETARY

James R. Rooney
TREASURER

Joanna M. Haigney
ASSISTANT TREASURER

FOR CURRENT PERFORMANCE, CURRENT NET ASSET VALUE, OR FOR ASSISTANCE WITH YOUR
ACCOUNT, PLEASE CONTACT THE FUND AT (800) 548-7786.

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189