<PAGE>
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DIRECTORS OFFICERS
Barton M. Biggs Stefanie V. Chang
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Management Harold J. Schaaff, Jr.
Inc. and Morgan Stanley VICE PRESIDENT
Asset Management Limited; Managing Joseph P. Stadler
Director, Morgan Stanley & Co. Incorporated VICE PRESIDENT
Michael F. Klein Valerie Y. Lewis
DIRECTOR AND PRESIDENT SECRETARY
Principal, Morgan Stanley Asset Management Inc. and Karl O. Hartmann
Morgan Stanley & Co. Incorporated ASSISTANT SECRETARY
John D. Barrett II Joanna M. Haigney
Chairman and Director, TREASURER
Barrett Associates, Inc. Rene J. Feuerman
Gerard E. Jones ASSISTANT TREASURER
Partner, Richards & O'Neil LLP
Andrew McNally IV
River Road Partners
Samuel T. Reeves
Chairman of the Board and Chief
Executive Officer,
Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite
Plastics Corporation
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin &
Boehm, P.C.
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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
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
- ---------------------------------------------------------
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.
EMERGING MARKETS DEBT PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the Emerging Markets Debt Portfolio is high total
return through investment primarily in debt securities of government,
government-related and corporate issuers located in emerging countries.
For the three months ended March 31, 1998, the Portfolio had a total return of
5.55% for the Class A shares and 5.55% for the Class B shares compared to a
total return of 5.21% for the J.P. Morgan Emerging Markets Bond Plus Index (the
"Index"). For the one year ended March 31,
PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING MARKETS BOND PLUS INDEX(1)
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<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- ----------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A............. 5.55% 19.47% 19.10%
PORTFOLIO--CLASS B............. 5.55 19.22 31.56
INDEX--CLASS A................. 5.21 17.98 13.74
INDEX--CLASS B................. 5.21 17.98 24.59
</TABLE>
1. The J.P. Morgan Emerging Markets Bond Plus Index is a market weighted index
composed of all Brady bonds, outstanding loans and Eurobonds, as well as
U.S. Dollar local market instruments of Argentina, Brazil, Bulgaria, Mexico,
Morocco, Russia, 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.
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. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
1998, the Portfolio had a total return of 19.47% for the Class A shares and
19.22% for the Class B shares compared to 17.98% for the Index. From inception
on February 1, 1994 through March 31, 1998, the average annual total return of
Class A was 19.10% compared to 13.74% for the Index. From inception on January
2, 1996, through March 31, 1998, the average annual total return of Class B was
31.56% compared to 24.59% for the Index. As of March 31, 1998, the Portfolio had
an SEC 30-day yield of 10.76% for the Class A shares and 10.49% for the Class B
shares.
The international backdrop to emerging market debt improved during the first
quarter of 1998, as U.S. interest rates stayed in a narrow range, investor
sentiment recovered and portfolio flows into emerging markets resumed.
Stabilization occurred as the South Koreans agreed on a bank debt rescheduling
and other emerging countries accelerated much needed structural reforms as a
means to avoid the "Asian Flu". Brazil and Russia allowed domestic interest
rates to rise dramatically in order to stabilize their currencies, while Mexico
and Venezuela announced fiscal spending cuts in an effort to offset the expected
decline in revenues and tax receipts resulting from lower oil prices. With the
exception of Indonesia, International Monetary Fund (IMF) and World Bank led
stabilization programs in most of the Asian countries significantly reduced the
risk for non-Asian emerging markets. By the end of the first quarter emerging
markets had passed the maximum point of danger and spreads, which had started
the year on a sour note, narrowed by 50 basis points.
During the latter part of the quarter, we reduced the Portfolio's exposure to
Russian debt. President Yeltsin's decision to sack his cabinet on March 23rd has
increased political uncertainty. At the same time plummeting oil prices and lack
of improvement in tax collection has prevented improvement in the fiscal
picture. We increased the Portfolio's exposure to Brazil, which should benefit
from privatization and direct investment
2
<PAGE>
flows in the coming months, as well as a relatively stable political
environment. We also increased the Portfolio's exposure to Asian debt, which was
trading at distressed levels at the beginning of the quarter. These bonds were
purchased in anticipation of and have benefited from continued IMF efforts in
the region, as well as Indonesia's gradual acceptance of the international
community's prescription for bolstering its ailing financial system.
The market's strong performance year-to-date is a cause for some concern as we
believe that investors may be overly optimistic in there analysis of the rebound
in the Asian economies. Continued economic weakness in Japan and the large
amount of debt to be issued by Asian governments in order to finance growing
fiscal deficits and banking sector bail-outs will keep volatility high.
The combination of lower commodity prices and a heavy election calendar in the
second half of 1998 should limit spread tightening. In addition, wider current
account deficits in non-Asian countries, caused by import contractions in Asia
coupled with increased low priced exports from Asia, should weigh heavy on the
market.
Paul Ghaffari
PORTFOLIO MANAGER
April 1998
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
DEBT INSTRUMENTS (97.4%)
ARGENTINA (15.6%)
BONDS (15.6%)
U.S.$ 1,900 Acindar Industria, Series 144A,
(Floating Rate), 11.656%,
11/12/98 $ 1,929
ARP 5,910 CIA International
Telecommunications, Series 144A,
10.375%, 8/01/04 5,423
U.S.$ 2,000 Republic of Argentina, Step Bond,
5.75%, 3/31/23 1,534
ARP 700 Republic of Argentina, 'Euro',
Series 144A, 11.75%, 2/12/07 729
1,500 Republic of Argentina, 'Euro',
11.75%, 2/12/07 1,562
6,200 Republic of Argentina, Global
Bond, Series BGL5, 11.375%,
1/30/17 7,023
U.S.$ 4,750 Republic of Argentina, Global
Bond, 9.75%, 9/19/27 4,708
4,133 Republic of Argentina, (Floating
Rate), (Bearer), 6.625%, 3/31/05 3,815
---------
26,723
---------
BRAZIL (25.8%)
BONDS (25.8%)
27,104 Federative Republic of Brazil,
Series C (Floating Rate),
(Registered) PIK, 8.00%, 4/15/14 22,818
11,074 Federative Republic of Brazil,
Series El-L, (Floating Rate),
6.688%, 4/15/06 10,001
11,270 Federative Republic of Brazil
Global Bond, 10.125%, 5/15/27 11,211
---------
44,030
---------
BULGARIA (1.8%)
BONDS (1.8%)
1,900 Republic of Bulgaria Front Loaded
Interest Reduction Bond, Series
A, 2.25%, 7/28/12 1,269
2,400 Republic of Bulgaria Interest
Arrears PDI Bond, (Floating
Rate), 6.563%, 7/28/11 1,881
---------
3,150
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
ECUADOR (1.8%)
BONDS (1.7%)
U.S.$ 1,500 Conecel, 14.00%, 5/01/02 $ 1,575
2,550 Republic of Ecuador Par Bond,
(Step Bond), PIK, 3.50%, 2/28/25 1,402
---------
2,977
---------
NOTES (0.1%)
100 Consorcio Ecuatorian Notes, Series
144A, 14.00%, 5/01/02 105
---------
3,082
---------
INDONESIA (4.9%)
BONDS (4.9%)
1,500 APP International Finance BV,
(Floating Rate), 8.742%, 9/15/99 1,275
1,000 APP International Finance BV,
10.25%, 10/01/00 956
1,050 Indah Kiat International Finance
BV, Series A, 11.375%, 6/15/99 987
1,450 Pindo Deli Financial (Mauritius),
Series 144A, 10.75%, 10/01/07 1,200
50 Pindo Deli Financial (Mauritius),
'Euro', 10.75%, 10/01/07 41
4,200 Tjiwi Kimia International BV,
13.25%, 8/01/01 3,854
---------
8,313
---------
IVORY COAST (0.8%)
BONDS (0.8%)
FRF 12,725 Republic of Ivory Coast Front
Loaded Interest Reduction Bond,
(Floating Rate), Series FRF,
2.00%, 3/29/18 770
8,350 Republic of Ivory Coast, PDI
Bonds, (Floating Rate), Series f
, 1.90%, 3/29/18 586
---------
1,356
---------
JAMAICA (2.2%)
BONDS (2.2%)
U.S.$ 4,000 Mechala Group, Jamaica, Series B,
Series 144A, 12.75%, 12/30/99 3,720
---------
KOREA (2.8%)
BONDS (2.8%)
4,900 Export-Import Bank of Korea,
6.50%, 10/06/99 4,713
---------
MEXICO (12.1%)
BONDS (11.1%)
3,000 Bufete Industrial, Series 144A,
11.375%, 7/15/99 2,925
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
MEXICO (CONTINUED)
U.S.$ 4,500 Empresas ICA Sociedad
Controladora, (Registered),
11.875%, 5/30/01 $ 4,883
850 United Mexican States Discount
Bond, Series A, (Floating Rate),
6.693%, 12/31/19 802
250 United Mexican States Discount
Bond, Series B, (Floating Rate),
6.617%, 12/31/19 236
1,100 United Mexican States Discount
Bond, Series D, (Floating Rate),
6.75%, 12/31/19 1,039
850 United Mexican States Global Bond,
9.875%, 1/15/07 916
1,100 United Mexican States Global Bond,
11.375%, 9/15/16 1,296
5,650 United Mexican States Global Bond,
11.50%, 5/15/26 6,886
---------
18,983
---------
NOTES (1.0%)
1,550 Innova S De R.L. Senior Notes,
Series 144A, 12.875%, 4/01/07 1,655
---------
20,638
---------
NIGERIA (0.7%)
UNIT (0.7%)
1,750 Central Bank of Nigeria with
warrants attached (Step Bond)
5.50%, 11/15/20 1,282
---------
PANAMA (0.1%)
BONDS (0.1%)
262 Republic of Panama PDI Bond,
(Floating Rate), PIK, 6.563%,
7/17/16 223
---------
PERU (0.9%)
BONDS (0.9%)
2,348 Republic of Peru Front Loaded
Interest Reduction Bond, Series
US, Series 144A, Step Bond,
3.25%, 3/07/17 1,480
200 Republic of Peru Front Loaded
Interest Reduction Bond, Step
Bond, 3.25%, 3/07/17 126
---------
1,606
---------
PHILIPPINES (0.6%)
BONDS (0.6%)
1,100 Bangko Sentral Philipinas, 8.60%,
6/15/27 1,005
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
RUSSIA (17.7%)
LOAN AGREEMENTS (7.7%)
U.S.$ 20,650 Russian Principal Loans, (Floating
Rate), 6.719%, 12/15/20 $ 13,152
---------
BONDS (6.5%)
11,300 Ministry of Finance Russia
Debentures, Series IV, 3.00%,
5/14/03 7,861
1,900 Ministry of Finance Russia,
10.00%, 6/26/07 1,818
600 UnExim International Finance BV,
9.875%, 8/01/00 558
1,000 UnExim International Finance BV,
Series 144A, 9.875%, 8/01/00 930
---------
11,167
---------
NOTES (3.5%)
1,650 Russian Interest Arrears Note,
(Floating Rate), 6.719%, 12/15/15 1,173
6,916 Russian Interest Arrears Note,
Series 19YR, (Floating Rate),
6.719%, 12/15/15 4,915
---------
6,088
---------
30,407
---------
SOUTH AFRICA (0.9%)
BONDS (0.9%)
ZAR 8,000 Nacional Financiera SNC, 'Euro',
17.00%, 2/26/99 1,597
---------
TURKEY (1.8%)
BONDS (1.8%)
US$ 3,150 Pera Financial Services Co.,
Series 144A, 9.375%, 10/15/02 2,973
---------
VENEZUELA (6.9%)
BONDS (6.9%)
6,190 Republic of Venezuela Debt
Conversion Bond, Series DL,
(Floating Rate), 6.813%, 12/18/07 5,639
6,682 Venezuela Global Bond, 9.25%,
9/15/27 6,087
---------
11,726
---------
TOTAL DEBT INSTRUMENTS (Cost $165,664) 166,544
---------
STRUCTURED INVESTMENTS (5.9%)
BRAZIL (4.3%)
7,500 Salomon Brothers Federative
Republic of Brazil Credit Linked
Enhanced Note, 9.00%, 1/05/99 7,305
---------
PHILIPPINES (1.6%)
2,600 ING Bank N.V. Libor or T-Bill
Linked Note, 8/14/98 2,672
---------
TOTAL STRUCTURED INVESTMENTS (Cost $10,194) 9,977
---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- --------------- ---------
RIGHTS (0.0%)
<C> <S> <C>
MEXICO (0.0%)
U.S.$ 4,539 United Mexican States, Value
Recovery Rights, expiring 6/30/03
(Cost $0) $ --
---------
<CAPTION>
NO. OF
WARRANTS
- ---------------
<C> <S> <C>
WARRANTS (0.0%)
NIGERIA (0.0%)
1,250 Central Bank of Nigeria, expiring
11/15/20 (Cost $0) --
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (3.3%)
NON-U.S. GOVERNMENT (3.3%)
TRL 861,050,000 Turkey T-Bill, 35.04%, 9/02/98 2,545
1,039,850,000 Turkey T-Bill, 92.71%, 8/19/98 3,148
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $5,755) 5,693
---------
FOREIGN CURRENCY (0.0%)
DEM 106 German Mark (Cost $58) 57
---------
<CAPTION>
AMOUNT
(000)
---------
<C> <S> <C>
TOTAL INVESTMENTS (106.6%) (Cost $181,671) $ 182,271
---------
OTHER ASSETS AND LIABILITIES (-6.6%)
Other Assets 22,189
Liabilities (33,470)
---------
(11,281)
---------
NET ASSETS (100%) 170,990
---------
---------
CLASS A:
NET ASSETS $166,120
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 27,273,968 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $6.09
---------
---------
CLASS B:
NET ASSETS $4,870
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 799,587 outstanding $0.001 par value
shares (authorized 500,000,000 shares) $6.09
---------
---------
</TABLE>
- ----------------------------------
Floating Rate Security -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are those in effect at
March 31, 1998.
PDI -- Past Due Interest
PIK -- Payment-In-Kind. Income may be paid in additional securities or cash at
the discretion of the issuer.
Step Bond -- Coupon rate increases in increments to maturity. Rate disclosed is
as of March 31, 1998. Maturity date disclosed is the ultimate maturity date.
6
