<PAGE>
- ------------------------------------------------------------------
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 Asset VICE PRESIDENT
Management Limited; Managing Director, Joseph P. Stadler
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.
- ------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ------------------------------------------------------------------
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
- ------------------------------------------------------------------
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, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- -------
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
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE
INDEX(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- ----------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A............ 18.37% 32.11% 22.28%
PORTFOLIO--CLASS B............ 18.34 31.89 26.09
INDEX--CLASS A................ 20.30 42.01 21.99
INDEX--CLASS B................ 20.30 42.01 29.70
</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.
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.
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 three months ended March 31, 1998, the Portfolio had a total return of
18.37% for the Class A shares and 18.34% for the Class B shares compared to a
total return of 20.30% for the Morgan Stanley Capital International (MSCI)
Europe Index (the "Index"). For the one year ended March 31, 1998, the Portfolio
had a total return of 32.11% for the Class A shares and 31.89% for the Class B
shares, compared to a total return of 42.01% for the MSCI Europe Index. From
inception on April 2, 1993 to March 31, 1998, the average annual total return of
Class A was 22.28% compared to 21.99% for the Index. From inception on January
2, 1996 to March 31, 1998, the average annual total return of Class B was 26.09%
compared to 29.70% for the Index.
Underperformance was largely due to weak relative performance from basic
industry and manufacturing stocks in Finland, Spain, and Germany. This was
offset somewhat by strong stock performance from Switzerland and the
Netherlands.
The first quarter ended on a positive note as the Portfolio outperformed its
benchmark in March, largely due to strong relative performance from holdings in
Switzerland, the U.K., France, and Germany. Looking at the quarter as a whole,
however, the Portfolio underperformed the benchmark, with returns being impacted
by weak relative performance from some basic industry/ manufacturing stocks in
Finland, Spain, and Germany. Names such as Rautaruukki (steels), Kone
(elevators), and Metra (diesel engines and ceramics) in Finland; Viag
(energy/chemicals) in Germany; and Uralita (building
2
<PAGE>
materials) and Iberdrola (electric utility) in Spain. In Denmark, bank stocks
were relatively weak. This underperformance was offset to some extent by
holdings in Switzerland, with Forbo up 35%, and Ascom up 62%. Strong stock
selection in the Netherlands was also a positive contributor.
Given the strong rise in stock markets across Europe, it is becoming
increasingly difficult to find value investment opportunities. Our attention is
focused on the U.K., particularly small and medium sized companies, where we are
currently finding the best value in the European region. Key attractions to this
market are the quality of business franchises, the focus of management on
creating genuine shareholder value and the clarity of accounting.
The MSCI Europe Index ended the first quarter 20.3% higher in U.S. dollars and
22.2% in local-currency terms, supported by high levels of liquidity, heightened
merger and acquisition activity, and improving economic sentiment across the
region. The rapid approach of Monetary Union was also a contributing factor.
With the exception of Norway (which trailed its neighbors due to its
concentration of oil stocks) all European markets posted double-digit returns.
Italy, Spain, and Finland led the field with returns in the mid- to high
thirties in U.S. dollar terms, followed by France and Ireland with returns in
the mid-twenties (in U.S. dollar terms). Top-performing sectors included autos
(led by Volkswagon and Bavarian Motor Works), telecommunications (driven largely
by demand for mobiles and the liberalization of the sector across the region),
and consumer staples. In contrast, media, oils and chemicals were among the
quarter's worst performers. The MSCI U.K. Index rose 18.1% in U.S. dollar terms
and 16% in sterling over the quarter on the back of merger speculation, despite
the implications for exporters as Sterling rose to a nine-year high against the
Deutschemark on speculation of a further base-rate rise following the
Chancellor's "job creation" budget, which saw a slight easing in fiscal policy.
Robert Sargent
PORTFOLIO MANAGER
April 1998
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (93.2%)
AUSTRIA (0.7%)
30,590 Boehler-Uddeholm AG $ 2,074
---------
BELGIUM (1.0%)
59,000 G.I.B. Group 2,955
55 G.I.B. Group VVPR (New) 3
---------
2,958
---------
DENMARK (1.8%)
44,300 BG Bank A/S 2,702
34,500 Unidanmark A/S, Class A
(Registered) 2,740
---------
5,442
---------
FINLAND (5.0%)
53,200 Huhtamaki Oyj, Series 1 2,891
1,500 KCI Konecranes International 69
16,445 Kone Oyj, Class B 2,227
328,700 Merita Ltd., Class A 1,980
103,250 Metra Oyj, Class B 2,521
334,200 Rautaruukki Oyj 2,781
7,500 The Rauma Group 139
146,850 Valmet Oyj 2,355
---------
14,963
---------
FRANCE (12.0%)
11,900 Alcatel Alsthom 2,234
24,717 Cie de Saint Gobain 4,070
37,100 Elf Aquitaine 4,864
52,600 France Telecom 2,775
19,100 Groupe Danone 4,613
38,311 Lafarge 3,260
58,700 Legris Industries 2,559
35,000 SGS-Thompson Microelectronics N.V. 2,751
5,800 Scor 332
34,100 Total, Class B 4,096
5,600 Union des Assurances Federales 920
202,200 Usinor Sacilor 3,382
---------
35,856
---------
GERMANY (10.9%)
102,400 BASF AG 4,530
68,550 Bayer AG 3,119
22,900 Bayerische Vereinsbank AG 1,636
6,950 Buderus AG 3,146
92,800 Gerresheimer Glas AG 1,229
31,020 Metro AG 1,369
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
8,670 Philipp Holzmann AG $ 2,016
12,043 Plettac AG 1,896
6,395 Suedzucker AG 3,220
41,100 VEBA AG 2,930
6,160 Viag AG 3,388
5,200 Volkswagen AG 4,072
---------
32,551
---------
ITALY (7.1%)
744,200 Magneti Marelli S.p.A. 2,307
296,700 Marzotto (Gaetano) & Figli S.p.A. 4,541
355,350 Mediaset S.p.A. 2,248
1,105,600 Sogefi S.p.A. 4,903
438,300 Telecom Italia S.p.A. 3,454
652,255 Telecom Italia S.p.A. Di Risp
(NCS) 3,997
---------
21,450
---------
NETHERLANDS (8.8%)
112,200 ABN Amro Holding N.V. 2,589
22,400 Akzo Nobel N.V. 4,550
103,570 Hollandsche Beton Groep N.V. 2,022
94,600 ING Groep N.V. 5,368
35,000 Koninklijke Bijenkorf Beheer N.V. 2,460
151,580 Koninklijke KNP BT N.V. 3,984
38,950 Koninklijke Van Ommeren N.V. 1,646
52,150 Philips Electronics N.V. 3,827
---------
26,446
---------
NORWAY (1.1%)
142,620 Saga Petroleum A/S, Class B 2,282
29,950 Sparebanken 931
---------
3,213
---------
SPAIN (3.3%)
8,963 Bodegas y Bebidas 411
223,500 Iberdrola 3,397
63,200 Telefonica de Espana 2,787
241,000 Uralita 3,241
---------
9,836
---------
SWEDEN (6.3%)
130,400 Esselte AB, Class B 2,977
55,400 ForeningsSparbanken AB 1,826
730,900 Nordbanken Holding AB 4,846
32,800 PLM AB 552
67,500 Pharmacia & Upjohn, Inc. 2,913
34,300 S.K.F. AB, Class B 813
59,200 Spectra-Physics AB, Class A 1,185
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
SWEDEN (CONTINUED)
36,700 Svedala Industri AB $ 739
68,500 Svenska Handelsbanken, Class A 3,171
---------
19,022
---------
SWITZERLAND (10.4%)
960 Ascom Holdings AG (Bearer) 2,006
1,910 Bobst AG (Bearer) 3,647
1,017 Cie Financiere Richemont AG, Class
A 1,368
6,500 Forbo Holding AG (Registered) 3,587
4,250 Holderbank Financiere Glarus AG,
Class B (Bearer) 4,462
3,600 Nestle (Registered) 6,881
1,960 SIG - Schweizerische Industrie-
Gesellschaft Holdings AG
(Registered) 3,061
600 Schindler Holding AG
(Participating Certificates) 870
1,520 Schindler Holding AG (Registered) 2,244
1,380 Sulzer AG (Registered) 1,079
8,350 Valora Holding AG 2,098
---------
31,303
---------
UNITED KINGDOM (24.8%)
31,633 Aggreko plc 93
404,705 BG plc 2,103
209,798 Bank of Ireland 4,164
213,610 Bank of Scotland 2,529
147,200 Booker plc 627
350,400 British Telecommunications plc 3,817
360,100 Bunzl plc 1,666
241,250 Burmah Castrol plc 4,925
102,400 Capital Radio plc 1,219
276,800 Charter plc 3,196
329,533 Christian Salvesen plc 629
104,150 Commercial Union plc 2,035
89,000 Danka Business Systems plc 403
318,983 Diageo plc 3,758
336,300 Glynwed International plc 1,606
277,000 Great Universal Stores plc 3,442
537,100 Imperial Tobacco Group plc 3,952
916,654 John Mowlem & Co. plc 1,890
219,900 Lonrho plc 398
669,300 Medeva plc 1,873
202,000 Peninsular & Oriental Steam
Navigation Co. 3,030
223,600 Premier Farnell plc 1,437
2,978,700 Premier Oil plc 1,948
285,632 Reckitt & Colman plc 5,299
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
391,573 Royal & Sun Alliance Insurance
Group plc $ 4,994
748,600 Scapa Group plc 2,378
234,068 Tate & Lyle plc 2,044
247,000 Unilever plc 2,339
798,400 WPP Group plc 4,550
278,100 Westminster Health Care Holdings
plc 1,895
---------
74,239
---------
TOTAL COMMON STOCKS (Cost $207,450) 279,353
---------
PREFERRED STOCKS (2.0%)
GERMANY (2.0%)
7,200 Dyckerhoff AG 1,998
39,500 Hornbach Holding AG 3,055
1,520 Volkswagen AG 861
---------
TOTAL PREFERRED STOCKS (Cost $4,785) 5,914
---------
<CAPTION>
NO. OF
RIGHTS
- ---------------
<C> <S> <C>
RIGHTS (0.0%)
FRANCE (0.0%)
38,311 Lafarge, expiring 4/14/98 60
---------
GERMANY (0.0%)
6,420 Volkswagen AG, expiring 4/7/98 113
---------
TOTAL RIGHTS (Cost $0) 173
---------
TOTAL FOREIGN SECURITIES (95.2%) (Cost $212,235) 285,440
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (5.8%)
REPURCHASE AGREEMENT (5.8%)
$ 17,353 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/01/98, to be
repurchased at $17,356,
collateralized by U.S. Treasury
Notes, 7.875%, due 11/15/04,
valued at $17,731 (Cost $17,353) 17,353
---------
FOREIGN CURRENCY (0.3%)
BEF 1,633 Belgian Franc 43
GBP 412 British Pound 691
DKK 354 Danish Krone 50
FIM 512 Finnish Markka 91
FRF 34 French Franc 6
DEM 122 German Mark 66
ESP 1,303 Spanish Peseta 8
---------
TOTAL FOREIGN CURRENCY (Cost $961) 955
---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
(000)
---------
<C> <S> <C>
TOTAL INVESTMENTS (101.3%) (Cost $230,549) $ 303,748
---------
OTHER ASSETS AND LIABILITIES (-1.3%)
Other Assets 33,907
Liabilities (37,792)
---------
(3,885)
---------
NET ASSETS (100%) $ 299,863
---------
---------
CLASS A:
NET ASSETS
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 293,423
Applicable to 13,799,679 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $21.26
---------
---------
CLASS B:
NET ASSETS
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 6,440
Applicable to 303,390 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $21.23
---------
---------
</TABLE>
- ----------------------------------
NCS -- Non Convertible Shares
6
