<PAGE>
------------------------------------------------------------------
<TABLE>
<S> <C>
DIRECTORS OFFICERS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Management Inc. and Michael F. Klein
Morgan Stanley Asset Management Limited; Managing Director, Morgan VICE PRESIDENT
Stanley & Co. Incorporated; Director, Morgan Stanley Group Inc. Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
DIRECTOR AND PRESIDENT Joseph P. Stadler
Principal, Morgan Stanley Asset Management Inc. and Morgan Stanley & VICE PRESIDENT
Co. Incorporated Valerie Y. Lewis
John D. Barrett II SECRETARY
Chairman and Director, Karl O. Hartmann
Barrett Associates, Inc. ASSISTANT SECRETARY
Gerard E. Jones James R. Rooney
Partner, Richards & O'Neil LLP TREASURER
Andrew McNally IV Joanna M. Haigney
Chairman and Chief Executive Officer, Rand McNally ASSISTANT TREASURER
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
</TABLE>
------------------------------------------------------------------
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.
HIGH YIELD PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1997
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The High Yield Portfolio seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a yield
above that generally available on debt securities in the four highest rating
categories.
For the three months ended March 31, 1997, the Portfolio had a total return of
1.27% for the Class A shares and 1.10% for the Class B shares, as compared to a
total return of 1.48% for the CS First Boston High Yield Index. The average
annual total return for the one year ended March 31, 1997 and for the period
from inception on September 28, 1992 through March 31, 1997 was 12.92% and
12.47%, respectively, for the Class A shares, as compared to 11.64% and 11.01%,
respectively, for the Index. As of March 31, 1997, the Portfolio had an SEC
30-day yield of 8.33% for the Class A shares and 8.08% for the Class B shares.
PERFORMANCE COMPARED TO THE CS FIRST BOSTON HIGH YIELD INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- --------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A................ 1.27% 12.92% 12.47%
PORTFOLIO--CLASS B(3)............. 1.10 12.63 12.38
INDEX............................. 1.48 11.64 11.01
</TABLE>
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.
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The U.S. high yield bond market performed well in the first quarter of 1997,
with a return that compared favorably with other U.S. asset classes. The quarter
was divided into an extremely strong performance in January and February
followed by a correction in March associated with the impact of the Federal
Reserve's decision to raise interest rates.
Securities which performed particularly well included K-Mart, which continued to
post favorable results. Our holdings in Echostar, a satellite television
service, performed strongly on the news that a division of News Corporation
planned to purchase 50% of the company. The only notable
underperforming-position was Paging Network Inc. While PageNet is the leader in
the U.S. paging industry, it has recently suffered from investor skepticism
regarding the success of its new enhanced voice-messaging service.
In terms of sector exposure, we added to our telecommunications and our emerging
market positions on weakness late in the quarter. In contrast, we reduced our
cable television exposure in the first quarter. We had added to our cable
holdings in 1996 when the sector underperformed the broader high-yield market,
and then were able to take profits as prices rebounded early in the first
quarter.
Our overall portfolio structure continues to feature an average credit quality
somewhat higher than market benchmarks. Our duration and interest rate
sensitivity is moderately longer than that of market benchmarks. We believe the
value in the U.S. bond market as well as the opportunities we see in the high
yield sector continue to make this an appropriate position.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
April 1997
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- -------------
<C> <S> <C>
CORPORATE BONDS AND NOTES (72.4%)
BANKING (1.9%)
$ 775 Bank United Corp., (Floating Rate), 8.05%,
5/15/98 $ 789
450 First Nationwide Escrow, 10.625%, 10/01/03 481
965 First Nationwide Holdings, 9.125%, 1/15/03 984
-------------
2,254
-------------
BROADCAST-RADIO & TELEVISION (6.9%)
2,370 Cablevision Systems Corp., 9.875%, 5/15/06 2,346
500 Comcast Cellular Corp., Series A, Zero Coupon,
3/05/00 368
1,350 Comcast Cellular Corp., Series B, Zero Coupon,
3/05/00 992
1,925 Comcast Corp., 9.375%, 5/15/05 1,971
1,220 Marcus Cable Co., (Step Bond), 0.00%, 12/15/05 842
990 Rogers Cablesystems Ltd., Series B, 10.00%,
3/15/05 1,044
645 TV Azteca S.A., 10.50%, 2/15/07 635
-------------
8,198
-------------
CHEMICALS (2.2%)
2,670 ISP Holdings Inc., 9.00%, 10/15/03 2,693
-------------
COMPUTERS (2.0%)
1,600 Advanced Micro Devices, Inc., 11.00%, 8/01/03 1,760
650 Digital Equipment Corp., 8.625%, 11/01/12 634
-------------
2,394
-------------
CONSUMER -- STAPLES (1.5%)
1,815 RJR Nabisco, Inc., 8.75%, 4/15/04 1,812
-------------
ENERGY (2.4%)
1,000 Nuevo Energy Co., 9.50%, 4/15/06 1,028
1,950 Vintage Petroleum, Inc., 8.625%, 2/01/09 1,857
-------------
2,885
-------------
ENVIRONMENTAL CONTROLS (2.1%)
2,300 Norcal Waste Systems, (Step Bond), 13.00%,
11/15/05 2,553
-------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- -------------
<C> <S> <C>
FINANCIAL SERVICES (1.6%)
$ 1,530 Ameresco, Inc., Series 97-A, 10.00%, 3/15/04 $ 1,515
400 Homeside, Inc., 11.25%, 5/15/03 450
-------------
1,965
-------------
FOOD SERVICE & LODGING (1.2%)
1,475 Courtyard by Marriott, Series B, 10.75%, 2/01/08 1,537
-------------
FOREST PRODUCTS & PAPER (1.2%)
1,430 Asia Pulp & Paper, 12.00%, 12/29/49 1,384
-------------
GAMING & LODGING (3.8%)
1,435 Boyd Gaming Corp., 9.25%, 10/01/03 1,356
2,090 Grand Casinos, Inc., 10.125%, 12/01/03 2,077
496 Louisiana Casino Cruises, 11.50%, 12/01/98 501
580 Sun International Hotels, 9.00%, 3/15/07 557
-------------
4,491
-------------
HEALTH CARE SUPPLIES & SERVICES (1.1%)
1,380 Tenet Healthcare Corp., 8.625%, 1/15/07 1,361
-------------
INSURANCE (1.1%)
1,350 Anthem Insurance Cos., Inc., 9.00%, 4/01/27 1,331
-------------
MATERIALS (2.6%)
3,000 Brooks Fiber Properties, Inc., (Step Bond),
0.00%, 3/01/06 1,898
2,025 Brooks Fiber Properties, Inc., (Step Bond),
0.00%, 11/01/06 1,220
-------------
3,118
-------------
MULTI-INDUSTRY (1.4%)
1,575 TLC Beatrice International Holdings, 11.50%,
10/01/05 1,693
-------------
PACKAGING & CONTAINER (6.2%)
1,800 Gaylord Container Corp., 11.50%, 5/15/01 1,895
1,490 Gaylord Container Corp., 12.75%, 5/15/05 1,637
1,710 Owens-Illinois, Inc., 11.00%, 12/01/03 1,890
1,245 SD Warren Co., 12.00%, 12/15/04 1,382
510 Stone Container Corp., 11.50%, 8/15/06 502
-------------
7,306
-------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- -------------
<C> <S> <C>
REAL ESTATE (1.1%)
$ 1,250 HMC Acquisition Properties, 9.00%, 12/15/07 $ 1,263
-------------
RETAIL-GENERAL (4.0%)
1,900 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05 1,931
650 K-Mart Corp., 7.75%, 10/01/12 565
2,710 Southland Corp., 5.00%, 12/15/03 2,222
-------------
4,718
-------------
SERVICES (1.5%)
1,800 Borg-Warner Security Corp., 9.625%, 3/15/07 1,775
-------------
TELECOMMUNICATIONS (24.6%)
3,225 Dial Call Communications, (Step Bond), 0.00%,
4/15/04 2,411
290 Dial Call Communications, Series B, (Step Bond),
0.00%, 12/15/05 203
2,750 Echostar Satellite Broadcasting, 0.00%, 3/15/04 2,190
2,880 Globalstar, LP, 11.375%, 2/15/04 2,815
350 Globo Communicacoes e Participacoes Ltda.,
10.50%, 12/20/06 (Brazil) 355
1,780 IXC Communications, Inc., 12.50%, 10/01/05 1,976
3,385 Nextel Communications, Inc., (Step Bond), 0.00%,
8/15/04 2,335
1,075 Occidente y Caribe, (Step Bond), 0.00%, 3/15/04
(Colombia) 656
380 Paging Network, 10.125%, 8/01/07 354
1,125 Paging Network, 10.00%, 10/15/08 1,038
1,430 Qwest Communications International, 10.875%,
4/01/07 1,421
690 Rogers Communications, 9.125%, 1/15/06 683
4,250 TCI Communications, Inc., 8.00%, 7/07/06 3,995
4,900 TCI Satellite, (Step Bond), 0.00%, 2/15/07 2,254
3,750 Telecommunications, Inc., 9.25%, 1/15/23 3,604
4,525 Teleport Communications, (Step Bond), 0.00%,
7/01/07 3,066
-------------
29,356
-------------
UTILITIES (2.0%)
60 Cleveland Electric Illuminating Co., 8.375%,
12/01/11 59
188 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02 198
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- -------------
<C> <S> <C>
$ 1,288 Midland Cogeneration Ventures, Series C-94,
10.33%, 7/23/02 $ 1,370
650 Midland Funding II, Series A, 11.75%, 7/23/05 718
-------------
2,345
-------------
TOTAL CORPORATE BONDS AND NOTES (Cost $86,341) 86,432
-------------
ASSET BACKED SECURITIES (10.9%)
AEROSPACE & DEFENSE (1.7%)
1,949 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1 P1, Class D, 12.75%, 6/15/06 2,051
-------------
BANKING (0.2%)
346 PNC Mortgage Securities Corp., Series 1995-2,
Class B4, REMIC, 7.50%, 9/25/25 294
-------------
FINANCIAL (7.4%)
1,000 CA FM Lease Trust, 8.50%, 7/15/17 1,009
931 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10 798
2,621 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07 2,418
1,175 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 8.375%, 8/15/15 1,031
900 FMAC Series 1996-B, Class C, 7.929%, 11/01/18 747
309 GE Capital Mortgage Services, Inc., Series
1995-12, Class B3, REMIC, 7.911%, 8/25/25 272
875 Prudential Home Mortgage Securities, Inc., Series
1996-A, Class B1, REMIC, 7.963%, 4/15/25 616
1,900 Riggs Capital Trust II, 8.875%, 3/15/27 1,898
-------------
8,789
-------------
METALS (1.6%)
525 Jet Equipment Trust, Series 95-D, 11.44%,
11/01/14 619
1,050 Jet Equipment Trust, Series C1, 11.79%, 6/15/13 1,244
-------------
1,863
-------------
TOTAL ASSET BACKED SECURITIES (Cost $12,536) 12,997
-------------
FOREIGN GOVERNMENT BONDS (5.3%)
BONDS (5.3%)
1,225 Federative Republic of Brazil, Series L, 4.50%,
4/15/09 939
1,455 Republic of Argentina, Series L, 'Euro',
(Floating Rate), 6.75%, 3/31/05 1,302
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- -------------
<C> <S> <C>
BONDS (CONTINUED)
$ 1,250 Republic of Argentina Par, Series L, 'Euro',
(Floating Rate), (Step Bond), 5.25%, 3/31/23 $ 782
400 Republic of Colombia, 8.70%, 2/15/16 389
1,150 Republic of Panama, 7.875%, 2/13/02 1,114
1,900 Republic of Venezuela Par, Series A, 6.75%,
3/31/20 1,361
625 United Mexican States, Series A, 6.25%, 12/31/19 441
-------------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $6,082) 6,328
-------------
<CAPTION>
SHARES
- ---------------
<C> <S> <C>
COMMON STOCKS (0.1%)
FINANCIAL SERVICES (0.0%)
1,268 WestFed Holdings, Inc., Class B --
-------------
FOOD SERVICE & LODGING (0.1%)
1,300 Motels of America, Inc. 63
-------------
TOTAL COMMON STOCKS (Cost $85) 63
-------------
PREFERRED STOCKS (4.6%)
ENTERTAINMENT & LEISURE (3.5%)
3,839 Time Warner Inc., Series M, 10.25%, 7/01/16 4,146
-------------
FINANCIAL SERVICES (1.1%)
13,500 Sinclair Capital, 11.625%, 3/15/09 1,343
3,239 WestFed Holdings, Inc., Series A, PIK, Zero
Coupon, 1/01/01 --
-------------
1,343
-------------
TOTAL PREFERRED STOCKS (Cost $5,311) 5,489
-------------
CONVERTIBLE PREFERRED STOCKS (1.6%)
TELECOMMUNICATIONS (1.6%)
20,765 TCI Pacific Communications, 5.00%, 7/31/06 (Cost
$1,897) 1,895
-------------
<CAPTION>
NO. OF
RIGHTS
- ---------------
<C> <S> <C>
RIGHTS (0.0%)
BROADCAST-RADIO & TELEVISION (0.0%)
35,000 SpectraVision, Inc., expiring 10/08/97 --
-------------
FOREIGN GOVERNMENT (0.0%)
9,500 Republic of Venezuela, expiring 3/31/20 --
625,000 United Mexican States, 6.25%, 12/31/19 --
-------------
--
-------------
TOTAL RIGHTS (Cost $133) --
-------------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- --------------- -------------
<C> <S> <C>
WARRANTS (0.2%)
AEROSPACE & DEFENSE (0.0%)
500 Sabreliner Corp., expiring 4/15/03 $ --
-------------
ELECTRICAL EQUIPMENT (0.2%)
28,000 Protection One Alarm, Inc., expiring 4/03/03 168
-------------
GAMING & LODGING (0.0%)
1,725 Louisiana Casino Cruises, expiring 12/01/98 11
-------------
INSURANCE (0.0%)
500 Horace Mann Educators Corp., expiring 4/03/99 7
-------------
PACKAGING & CONTAINER (0.0%)
1,000 Crown Packaging Holdings, expiring 11/01/03 --
-------------
TELECOMMUNICATIONS (0.0%)
3,000 Nextel Communications, Inc., expiring 4/25/99 --
7,300 Occidente y Caribe, expiring 3/15/04 --
-------------
--
-------------
TOTAL WARRANTS (Cost $154) 186
-------------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
FOREIGN LOAN AGREEMENTS (0.7%)
LOAN AGREEMENTS (0.7%)
$ 1,300 Russian Interest Arrears Note, Zero Coupon,
12/31/99 (Cost $933) 879
-------------
SHORT-TERM INVESTMENT (4.5%)
REPURCHASE AGREEMENT (4.5%)
5,400 Chase Securities, Inc. 6.00%, dated 3/31/97, due
4/01/97, to be repurchased at $5,401,
collateralized by U.S. Treasury Notes, 6.125%,
due 8/31/98, valued at $5,513 (Cost $5,400) 5,400
-------------
TOTAL INVESTMENTS (100.3%) (Cost $118,872) 119,669
-------------
OTHER ASSETS AND LIABILITIES (-0.3%)
Other Assets 11,079
Liabilities (11,468)
-------------
(389)
-------------
NET ASSETS (100%) $ 119,280
-------------
-------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
(000)
-------------
<C> <S> <C>
CLASS A:
NET ASSETS $114,702
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 10,526,659 outstanding $0.001 par value shares
(authorized 500,000,000 shares) $10.90
-------------
-------------
CLASS B:
NET ASSETS $4,578
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 420,665 outstanding $0.001 par value shares
(authorized 500,000,000 shares) $10.88
-------------
-------------
</TABLE>
- ----------------------------------
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 March 31,
1997.
REMIC -- Real Estate Mortgage Investment Conduit
Step Bond -- Coupon rate increases in increments to maturity. Rate disclosed is
as of March 31, 1997. Maturity date disclosed is the ultimate maturity date.
6
