<PAGE>
------------------------------------------------------------------
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
------------------------------------------------------------------
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
---------------------------------------------------------
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.
EUROPEAN EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1997
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the European Equity Portfolio is to seek long-term
capital appreciation 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
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE
INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------
AVERAGE ANNUAL
YTD SINCE INCEPTION
----- -----------------
<S> <C> <C>
PORTFOLIO-CLASS A........................... 5.63% 19.94%
PORTFOLIO-CLASS B(3)........................ 5.64 21.62
INDEX....................................... 4.88 17.69
</TABLE>
1. The MSCI Europe Index is an unmanaged market value weighted index of common
stocks listed on the stock exchanges of countries in Europe (includes
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.
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.
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 three month period ended March 31, 1997, the Portfolio had a total
return of 5.63% for the Class A shares and 5.64% for the Class B shares as
compared to a total return of 4.88% for the Morgan Stanley Capital International
(MSCI) Europe Index. The average annual total return for the period from
inception on April 2, 1993 through March 31, 1997 was 19.94% for the Class A
shares as compared to 17.69% for the Index.
During the first quarter of 1997 the European market continued to perform
strongly. In local currency terms the market was up 12.17%. This performance was
achieved despite weakness in the U.S. market which was down 4.5% in March and up
only 2.7% on the MSCI Index for the quarter. The top performing European market
during the quarter was Germany up over 11% in U.S. dollar terms helped by the
strong performance of cyclical stocks particularly industrials. Switzerland also
showed strong returns driven by the pharmaceutical stocks, the largest sector
weighting in the Index. The two poorest performing countries were Spain and
Austria. Spain's decline was partly due to profits being taken following a
strong run in 1996, when the market was up over 40%.
The dominant feature of economic activity in Europe in the first quarter has
been the significant strength of the U.S. dollar against the European
currencies. In most cases the dollar has appreciated by 8-10 percent with the
exception being sterling which has been stronger due to the market expectation
of higher interest rates in the UK. Throughout continental Europe the economies
continue to show slow growth partly held back by the tight fiscal and monetary
policies introduced by authorities looking to meet the criteria stipulated by
the Maastrict Treaty.
2
<PAGE>
Growth in Europe is largely being driven by the export sector as weaker
currencies are making European goods more competitive on the global stage. Both
the UK and the Netherlands, however, are showing good levels of domestic growth.
During the quarter we have continued to add new stocks to the Portfolio. We have
increased the weighting in the UK, primarily adding to companies with a strong
franchise that have been held back by sterling strength.
Baloise is a life and non-life Swiss insurer with a strong market share in its
domestic market and a good position in Germany, Austria and the Benelux. In the
late 1980s and early 1990s it embarked on an acquisition strategy that earned it
a number of loss-making foreign businesses and a market value at a significant
discount to its NAV. Management is now divesting underperforming businesses to
realize their goal of doubling the group's return on equity by 1998. In the
context of a generally poor environment for European insurers, Baloise's very
undemanding valuation together with the extent of its restructuring makes it an
attractive buy.
Burmah Castrol is an international manufacturer and marketer of specialized
lubricants and chemicals, with strong free cash flow and good defensive
qualities. Burmah Castrol is the world's leading lubricant brand marketed in
over 150 countries, where growth will be driven by its very strong position in
Asia Pacific. In the maturer Western markets of the U.S. and Continental Europe,
slower growth will be offset by scope to trade up to more expensive products.
Profit growth in specialist chemicals division is expected to be driven by cost
cutting.
Radex Heraklith is in effect two companies, Radex making refractories and
Heraklith making building insulation materials. Refractories has, over recent
years, been a ghastly business, having as its main customer the European steel
industry which is in structural overcapacity, being in a very fragmented market,
and having to deal with a structural decline in demand arising from
technological changes in the steel industry. The group has margin targets to
meet, largely to be realized through cost reductions, and a shift in product mix
of refractories towards higher margin product. The insulation side of the
business has a strong franchise in Germany and Austria, and while experiencing
organic growth in the market, it is nevertheless exposed to residential
construction activity in that region.
When Viag was privatized in 1986, it consisted of a 39% stake in Bayenwerk, 100%
of VAW, the national Aluminium producer, and 100% of SKW, a basic chemicals
producer of middling size. Since that time, the structure of the group has
changed drastically, chiefly through a high level of M&A activity. The message
from management is that the nature and direction of the group has changed. Its
nature has changed because it now has full access to Bayenwerk's prodigious cash
generation; this having occurred when the remainder of the company was bought in
1994. (Previously, expansion had to be financed by repeated rights issues). The
direction of the group has changed because the business portfolios of the main
subsidiaries have largely been transformed by way of acquisition from low margin
low growth areas to more attractive positions. In addition, the dawning of
liberalization in telecoms and electricity has, for the first time, created
opportunities for expansion in what were previously static monopolized sectors.
Zurich is a high quality insurance company involved primarily in non life
insurance and is one of the most global insurers in the world today. As a very
highly reserved mainly non life company, the return on the investment portfolio
is of primary importance to Zurich's earnings. This has been an underperforming
area of Zurich due to its policy of not taking on risk on the asset side of the
business. The catalyst for changing this to a strategy where asset management
becomes more of a profit center in its own right is the recent acquisition of
Kemper in the U.S. With the group internally managed (and management
compensated) on a return on equity basis, Zurich is one of the few financial
companies that is aligned with its shareholders' interests.
Rautaruukki is the smallest integrated carbon steel producer in Europe. It
consists principally of a blast furnace and hot rolling mill in northern
Finland, in addition to a number of finishing units spread around Scandinavia
and the Baltic Coast. It has an overwhelming position in
3
<PAGE>
the basic hot rolled flat product in its home market and its production
facilities outside Finland consist of higher value added activities: cold
rolling, galvanizing, coating, and various degrees of fabrication. Basic hot
rolled steel not sold domestically or internally to the downstream divisions is
used for "cherry-picking" or opportunistic orders in world spot markets. Since
the last peak of the steel cycle and right through the Finnish recession,
Rautaruukki has had a consistently higher profitability than the other main
suppliers to the Nordic area. This appears to derive from its strong position in
a consolidated Nordic market, the superior cost efficiency of its core blast
furnace and hot rolling facility in Finland, as well as its extensive downstream
integration.
The KNP BT group is the result of a three way merger in 1993 of packaging, paper
and distribution interests. The resultant group, born out of necessity for all
the participants, has subsequently lacked strategic direction, and general
estimation of the combined management has not been high. The company has plainly
stated that it wants to reduce its exposure to paper manufacturing and to
concentrate on its packaging and service divisions. This is important, because
these divisions produced returns on investment of around 15% over the last
cycle, versus 7% for the paper manufacturing operation, which has, in addition,
been the chief cause of cyclicality in group earnings.
Robert Sargent
PORTFOLIO MANAGER
April 1997
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (91.6%)
AUSTRIA (1.1%)
25,100 Boehler-Uddeholm AG $ 1,736
20,190 Radex-Heraklith Industriebet 788
---------
2,524
---------
BELGIUM (1.7%)
6,000 Arbed S.A. 661
14,900 Delhaize--Le Lion S.A. 832
52,300 G.I.B. Holdings Ltd. 2,402
55 G.I.B. Holdings Ltd. VVPR (New) 2
---------
3,897
---------
DENMARK (2.4%)
46,000 BG Bank A/S 2,172
7,200 Jyske Bank A/S (Registered) 576
52,700 Unidanmark A/S, Class A
(Registered) 2,828
---------
5,576
---------
FINLAND (3.0%)
78,000 Amer-Yhtymae Oy, Class A 1,622
58,100 Huhtamaki Oy, Series 1 2,851
4,050 Kone Oy, Class B 496
250,000 Merita Ltd., Class A 858
121,700 Rautaruukki Oy 1,118
---------
6,945
---------
FRANCE (11.8%)
44,904 Banque Nationale de Paris 2,000
4,900 Bongrain S.A. 1,950
22,000 Cie de Saint Gobain 3,338
23,300 Elf Aquitaine S.A. 2,395
14,990 Eridania Beghin-Say S.A. 2,363
17,400 Groupe Danone 2,764
48,511 Lafarge S.A. 3,368
53,600 Legris Industries S.A. 2,475
17,800 SGS-Thompson Microelectronics N.V. 1,252
30,500 Total S.A., Class B 2,645
140,000 Usinor Sacilor 2,294
---------
26,844
---------
GERMANY (9.5%)
48,900 BASF AG 1,873
69,700 Bayer AG 2,933
2,400 Buderus AG 1,191
100,400 Gerresheimer Glas AG 2,046
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
3,150 Karstadt AG $ 1,091
130,000 Lufthansa AG 1,878
2,300 Mannesmann AG 879
11,800 Metro AG 1,211
44,000 VEBA AG 2,527
4,090 Varta AG 705
5,500 Viag AG 2,608
5,000 Volkswagen AG 2,758
---------
21,700
---------
ITALY (6.5%)
605,000 Editoriale L'Expresso S.p.A. 2,085
331,500 Marzotto (Gaetano) & Figli S.p.A. 2,623
2,610,000 Olivetti S.p.A. 939
239,100 Pirelli S.p.A. 521
60,100 Seat S.p.A. 13
1,009,000 Sogefi S.p.A. 2,269
765,000 Stet Di Risp (NCS) 2,716
811,000 Telecom Italia S.p.A. 2,028
814,000 Telecom Italia S.p.A. Di Risp
(NCS) 1,736
---------
14,930
---------
NETHERLANDS (10.5%)
35,791 ABN Amro Holdings N.V. 2,462
18,600 Akzo Nobel N.V. 2,672
10,357 Hollandsche Beton Groep N.V. 2,364
66,000 ING Groep N.V. 2,601
100,100 KLM Royal Dutch Airlines N.V. 2,989
35,000 Koninklijke Bijenkorf Beheer N.V. 2,641
97,600 Koninklijke KNP BT N.V. 2,076
41,900 Koninklijke Van Ommeren N.V. 1,832
91,000 Philips Electronics N.V. 4,246
---------
23,883
---------
NORWAY (2.2%)
440,800 Den Norske Bank ASA 1,911
59,100 Saga Petroleum A/S, Class B 923
333,900 Storebrand ASA 2,298
---------
5,132
---------
PORTUGAL (0.4%)
53,000 Banco Totta & Acores, S.A., Class
B (Registered) 799
---------
SPAIN (5.1%)
11,518 Bodegas y Bebidas S.A. 307
54,139 Grupo Duro Felguera S.A. 575
204,000 Iberdrola S.A. 2,253
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
SPAIN (CONTINUED)
34,000 Repsol S.A. $ 1,420
183,900 Telefonica de Espana S.A. 4,445
314,600 Uralita S.A. 2,561
---------
11,561
---------
SWEDEN (4.8%)
11,000 Electrolux AB, Series B 701
117,500 Nordbanken AB 4,057
77,500 S.K.F. AB, Class B 2,038
43,900 Skandia Forsakrings AB 1,385
63,400 Sparbanken Sverige AB, Class A 1,179
50,000 Svenska Handelsbanken, Class A 1,527
---------
10,887
---------
SWITZERLAND (12.8%)
2,440 Ascom Holdings AG (Bearer) 2,613
540 Baloise Holding Ltd. (Registered) 1,103
1,710 Bobst AG (Bearer) 2,525
1,919 Ciba Specialty Chemicals AG
(Registered) 159
7,550 Forbo Holding AG (Registered) 3,111
3,800 Holderbank Financiere Glarus AG,
Class B (Bearer) 2,915
4,000 Magazine Globus (Participating
Certificates) 1,751
3,100 Nestle S.A. (Registered) 3,629
746 Novartis AG (Bearer) 929
1,173 Novartis AG (Registered) 1,456
23,530 Oerlikon-Buehrle Holding AG
(Registered) 2,367
430 Schindler Holding AG (Registered) 502
600 Schindler Holding AG
(Participating Certificates) 720
1,760 Schweizerische Industrie-
Gesellschaft Holdings AG
(Registered) 2,177
1,800 Sulzer AG (Participating
Certificates) 1,187
1,230 Sulzer AG (Registered) 808
3,750 Zuerich Versicherung (Registered) 1,180
---------
29,132
---------
UNITED KINGDOM (19.8%)
262,700 Associated British Foods plc 2,368
170,000 Bass plc 2,278
402,392 BAT Industries plc 3,432
421,600 British Telecommunications plc 3,090
135,450 Burmah Castrol plc 2,267
462,134 Christian Salvesen plc 2,178
630,000 Courtaulds Textiles plc 2,928
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
430,400 Grand Metropolitan plc $ 3,476
371,500 Imperial Tobacco Group plc 2,551
902,552 John Mowlem & Co. plc 1,707
460,000 Kwik Save Group plc 2,334
219,700 Racal Electronic plc 1,046
258,000 Reckitt & Colman plc 3,461
346,822 Royal & Sun Alliance Insurance
Group plc 2,550
128,750 Scottish Hydro-Electric plc 765
163,753 Southern Electric plc 1,047
447,318 Tate & Lyle plc 3,194
120,000 Unilever plc 3,188
349,300 WPP Group plc 1,457
---------
45,317
---------
TOTAL COMMON STOCKS (Cost $177,130) 209,127
---------
PREFERRED STOCKS (3.2%)
GERMANY (3.2%)
8,263 Dyckerhoff AG 2,987
36,000 Hornbach Holding AG 2,363
41,300 Spar Handels AG 597
3,200 Volkswagen AG 1,389
---------
TOTAL PREFERRED STOCKS (Cost $5,372) 7,336
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (4.6%)
REPURCHASE AGREEMENT (4.6%)
$ 10,467 Chase Securities, Inc. 6.00%,
dated 3/31/97, due 4/01/97, to be
repurchased at $10,469,
collateralized by U.S. Treasury
Notes, 6.125%, due 8/31/98,
valued at $10,685 (Cost $10,467) 10,467
---------
FOREIGN CURRENCY (0.9%)
GBP 576 British Pound 948
DEM 1,334 Deutsche Mark 800
FIM 42 Finnish Markka 8
ITL 48,973 Italian Lira 30
NOK 468 Norwegian Krone 71
ESP 17,820 Spanish Peseta 126
---------
TOTAL FOREIGN CURRENCY (Cost $1,953) 1,983
---------
TOTAL INVESTMENTS (100.3%) (Cost $194,922) 228,913
---------
OTHER ASSETS AND LIABILITIES (-0.3%)
Other Assets 11,816
Liabilities (12,530)
---------
(714)
---------
NET ASSETS (100%) $ 228,199
---------
---------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
(000)
---------
<C> <S> <C>
CLASS A:
NET ASSETS $225,424
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 12,776,808 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $17.64
---------
---------
CLASS B:
NET ASSETS $2,775
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 157,611 outstanding $0.001 par value
shares (authorized 500,000,000 shares) $17.61
---------
---------
</TABLE>
- ----------------------------------
NCS -- Non Convertible Shares.
7
