<PAGE>
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DIRECTORS OFFICERS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Michael F. Klein
Stanley Asset Management Inc. and VICE PRESIDENT
Morgan Stanley Asset Management Harold J. Schaaff, Jr.
Limited; Managing Director, VICE PRESIDENT
Morgan Stanley & Co. Joseph P. Stadler
Incorporated; Director, Morgan VICE PRESIDENT
Stanley Group Inc. Valerie Y. Lewis
Warren J. Olsen SECRETARY
DIRECTOR AND PRESIDENT Karl O. Hartmann
Principal, Morgan Stanley Asset ASSISTANT SECRETARY
Management Inc. and Morgan James R. Rooney
Stanley & Co. Incorporated TREASURER
John D. Barrett II Joanna M. Haigney
Chairman and Director, ASSISTANT TREASURER
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 LLP
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INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
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CUSTODIANS
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
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LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only when preceded or accompanied by prospectuses of the Morgan
Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
JAPANESE EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1997
<PAGE>
LETTER TO SHAREHOLDERS
- -------
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 include common and preferred stocks, convertible
securities, and rights and warrants to purchase common stocks.
For three months ended March 31, 1997, the Portfolio had a total return of
- -1.76% for the Class A shares and -1.89% for the Class B shares as compared to a
total return of -11.80% for the Morgan Stanley Capital International (MSCI)
Japan Index. The average annual total return for the one year ended March 31,
1997 and for the period from inception on April 25, 1994 through March 31, 1997
was -5.58% and -2.89% for the Class A shares as compared to -25.73% and -8.59%
for the Index.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) JAPAN
INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- ----------- ---------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A.......... -1.76% -5.58% -2.89%
PORTFOLIO--CLASS B(3)....... -1.89 -5.97 -2.84
INDEX....................... -11.80 -25.73 -8.59
</TABLE>
1. The MSCI Japan Index is an unmanaged index of common stocks (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.
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.
During the first quarter of 1997, an anticipated economic slowdown and the
future of Japan's growth prospects depressed investor sentiment, resulting in
the TOPIX falling by more than 6% in local currency. This was mostly a result of
the consumption tax hike from 3% to 5%, termination of the special income tax
cuts and increases in social security premiums which all took effect in April
1997. Therefore, while the consensus believed an inevitable slowdown would occur
during the second quarter of 1997, the possibility of sluggish conditions during
the second half of 1997 also plagued investors due to this change in Japan's
fiscal policy.
Moreover, Japan's longer term role in the 21st century global economy came under
scrutiny. In order to meet these challenges Prime Minister Hashimoto announced a
Japanese style "Big Bang", including administrative restructuring, deregulation
of key industries and further financial reform. With the U.S. still showing
robust growth and the European Union about to begin in a few years, observers
felt these new announcements amounted to no more than a "Small Pop". Even the
new fiscal '97 budget smacked of "business as usual" without any radically new
measures to stimulate domestic demand.
At the same time, Japan's non-performing loans came yet again under fire with
the collapse of Hanwa and Hyogo Sogo Bank. The actual magnitude of the losses
stemming from real estate related loans totally eclipsed the original "official"
estimates by these banks. Thus, the credibility of Japanese bank's disclosure
was focused on by both domestic and foreigners and shares in bank stocks were
sold aggressively pushing the TOPIX into a vicious circle of accelerated
selling. With Japan's fiscal year ending in March, domestic institutions, in
order to raise cash for balance sheet requirements, further unloaded their
"cross holdings" in an already weak market.
Several bankruptcies and scandals also came to the fore during the first quarter
of 1997. Kyotaru Co., primarily a chain of "Sushi" restaurants and heavily
involved in
2
<PAGE>
real-estate and stock speculation went bankrupt; Izui Oil, Orange Kyosai,
Ajinomoto and Nomura Securities all announced various impropriety dealings,
helping to keep investor sentiment on the sidelines. As a result of a rapidly
declining equity market, interest rates on 10-year JGB hit a record low, as
domestic investors sought a safe haven in Government bonds.
On the other hand, international blue chips and globally competitive Japanese
companies such as pharmaceuticals and automobiles fared very well under the
sharp overall market decline of the first quarter. Companies such as TDK,
Cannon, Ricoh and Sankyo hit all-time highs. A very polarized "two tier" market,
which began in 1996, accelerated dramatically. Our Portfolio, heavily
concentrated in these sectors performed favorably versus our benchmark.
John R. Alkire
PORTFOLIO MANAGER
Kunihiko Sugio
PORTFOLIO MANAGER
April 1997
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (90.8%)
APPLIANCES & HOUSEHOLD DURABLES (6.3%)
253,000 Matsushita Electric Industries
Ltd. $ 3,949
117,400 Rinnai Corp. 2,004
62,000 Sony Corp. 4,338
---------
10,291
---------
AUTOMOBILES (3.4%)
458,000 Nissan Motor Co. 2,760
284,000 Suzuki Motor Co., Ltd. 2,756
---------
5,516
---------
BUSINESS & PUBLIC SERVICES (3.7%)
183,000 Dai Nippon Printing Co., Ltd. 3,064
52,000 Secom Co., Ltd. 2,923
---------
5,987
---------
CHEMICALS (6.6%)
461,000 Daicel Chemical Industry Ltd. 1,659
470,000 Kaneka Corp. 2,505
1,123,000 Mitsubishi Chemical Corp. 3,406
157,000 Okura Industrial Co., Ltd. 601
252,000 Sekisui Chemical Co. 2,487
---------
10,658
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CONSTRUCTION & HOUSING (4.9%)
186,000 Kyudenko Co., Ltd. 1,375
362,000 Obayashi Corp. 2,126
257,000 Sekisui House Ltd. 2,515
480,000 Taisei Corp., Ltd. 1,863
---------
7,879
---------
DATA PROCESSING & REPRODUCTION (2.7%)
202,000 Canon, Inc. 4,330
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ELECTRICAL & ELECTRONICS (13.3%)
385,000 Fujitsu Ltd. 3,924
517,000 Hitachi Ltd. 4,600
64,000 Matsushita Communication
Industries 1,491
135,000 Mitsumi Electric Co., Ltd. 2,479
391,000 NEC Corp. 4,427
191,000 Stanley Electric Co. 925
678,000 Toshiba Corp. 3,751
---------
21,597
---------
ELECTRONIC COMPONENTS & INSTRUMENTS (8.2%)
49,000 Kyocera Ltd. 2,782
80,000 Murata Manufacturing Co., Ltd. 2,873
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
55,000 TDK Corp. $ 3,782
117,700 Tokyo Electron Ltd. 3,903
---------
13,340
---------
HEALTH & PERSONAL CARE (4.1%)
133,000 Sankyo Co., Ltd. 3,668
144,000 Yamanouchi Pharmaceutical Co. 2,982
---------
6,650
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FINANCIAL SERVICES (3.1%)
236,000 Daiwa Securities Co., Ltd. 1,703
97,000 Hitachi Credit Corp. 1,428
177,000 Nomura Securities Co., Ltd. 1,961
---------
5,092
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INDUSTRIAL COMPONENTS (2.3%)
320,000 Asahi Tec Corp. 1,361
144,000 Nifco, Inc. 1,246
203,000 Nippon Pillar Packing 1,109
---------
3,716
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INSURANCE (1.4%)
366,000 Sumitomo Marine & Fire Insurance
Co. 2,220
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MACHINERY & ENGINEERING (15.0%)
373,000 Amada Co., Ltd. 2,700
235,000 Daifuku Co., Ltd. 2,566
252,000 Daikin Industries Ltd. 1,885
156,000 Fuji Machine Manufacturing Co. 4,050
139,000 Kurita Water Industries 2,698
598,000 Mitsubishi Heavy Industries Ltd. 3,894
350,000 Ricoh Co., Ltd. 3,992
437,000 Tsubakimoto Chain 2,556
---------
24,341
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MERCHANDISING (3.6%)
86,020 FamilyMart 3,249
223,000 Inabata & Co. 1,335
76,000 Sangetsu Co., Ltd. 1,322
---------
5,906
---------
METALS-NON-FERROUS (1.3%)
289,000 Sanwa Shutter 2,115
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REAL ESTATE (2.3%)
135,000 Daibiru Corp. 1,310
227,000 Mitsubishi Estate Co., Ltd. 2,424
---------
3,734
---------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
RECREATION, OTHER CONSUMER GOODS (4.5%)
100,000 Fuji Photo Film Ltd. $ 3,292
55,000 Nintendo Corp., Ltd. 3,950
---------
7,242
---------
TELECOMMUNICATIONS (2.4%)
550 Nippon Telegraph & Telephone Corp. 3,875
---------
TELECOMMUNICATIONS EQUIPMENT (0.7%)
250,000 Furukawa Electric Co. 1,108
---------
TEXTILES & APPAREL (1.0%)
55,000 Shimamura Co., Ltd. 1,593
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TOTAL COMMON STOCKS (Cost $171,149) 147,190
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (8.6%)
REPURCHASE AGREEMENT (8.6%)
$ 13,885 Chase Securities, Inc. 6.00%,
dated 3/31/97, due 4/01/97, to be
repurchased at $13,887,
collateralized by U.S. Treasury
Bonds, 11.25%, due 2/15/15,
valued at $14,029 (Cost $13,885) 13,885
---------
TOTAL INVESTMENTS (99.4%) (Cost $185,034) 161,075
---------
OTHER ASSETS AND LIABILITIES (0.6%)
Other Assets 92,815
Liabilities (91,894)
---------
921
---------
NET ASSETS (100%) $ 161,996
---------
---------
CLASS A:
NET ASSETS $160,031
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 20,465,399 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $7.82
---------
---------
CLASS B:
NET ASSETS $1,965
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 252,319 outstanding $0.001 par value
shares (authorized 500,000,000 shares) $7.79
---------
---------
</TABLE>
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