<PAGE>
- ------------------------------------------------------------------
DIRECTORS OFFICERS
Barton M. Biggs Stephanie 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.
- ------------------------------------------------------------------
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.
HIGH YIELD PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<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.
PERFORMANCE COMPARED TO THE CS FIRST BOSTON HIGH YIELD INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------------------
AVERAGE
AVERAGE ANNUAL
ONE ANNUAL FIVE SINCE
YTD YEAR YEARS INCEPTION
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
PORTFOLIO--CLASS A....... 4.24% 19.28% 13.23% 13.68%
PORTFOLIO--CLASS B....... 4.12 18.93 N/A 15.25
INDEX--CLASS A........... 3.01 14.35 11.00 11.62
INDEX--CLASS B........... 3.01 14.35 N/A 12.51
</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.
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.
For the three months ended March 31, 1998, the Portfolio had a total return of
4.24% for the Class A shares and 4.12% for the Class B shares compared to a
total return of 3.01% for the CS First Boston High Yield Index (the "Index").
For the one year ended March 31, 1998, the Portfolio had a total return of
19.28% for the Class A shares and 18.93% for the Class B shares, compared to
14.35% for the Index. For the five year period ended March 31, 1998, the average
annual total return of Class A was 13.23% compared to 11.00% for the Index. From
inception on September 28, 1992 through March 31, 1998, the average annual total
return of Class A was 13.68% compared to 11.62% for the Index. From inception on
January 2, 1996 through March 31, 1998, the average annual total return of Class
B was 15.25% compared to 12.51% for the Index. As of March 31, 1998, the
Portfolio had an SEC 30-day yield of 7.90% for the Class A shares and 7.66% for
the Class B shares.
U.S. high-yield bonds outperformed high quality bonds in the first quarter of
1998, against the backdrop of fairly stable U.S. Treasury yields and a strong
U.S. stock market.
For the first quarter the Portfolio outperformed the Index. This outperformance
was primarily due to superior performance in the communications sector and in
non-U.S. corporates, led by Korea.
Within our commitment to the communications sector we benefited from additional
merger and acquisition activity. Brooks Fiber, a competitive local exchange
carrier whose bonds we had owned for some time, was recently acquired by
WorldCom. This acquisition resulted in the February announcement of a tender
offer for the Brooks Fiber bonds at a favorable price to the investor. Also,
late in the quarter, Qwest Communications agreed to acquire LCI International in
a stock swap; this transaction was viewed favorably by investors and caused
Qwest's bond prices to rise. The combined company should have a very strong
competitive position in the U.S. market for long-distance voice and
2
<PAGE>
data transmissions. New investments made in the quarter included NEXTLINK,
another competitive local exchange carrier, and RSL Communications, a company
focused on the European telephone business, which is undergoing significant
deregulation following similar developments in the U.S.
The current popularity of REIT structures in the U.S. capital markets has
favorably affected the Portfolio. Early in 1998, one of our gaming companies,
Station Casinos, was acquired by a REIT; now Vencor, a healthcare company,
announced plans to spin-off a REIT which would hold all of their real estate
assets. Because of covenants in the indenture of the bonds this transaction
resulted in an attractive tender offer for our position. A new position in the
healthcare sector was Columbia/HCA Corporation, which was purchased following
its downgrade to below-investment grade by Moody's Investor Service. We believe
the market price of the bonds declined more than warranted given our assessment
of the prospects for stabilization and recovery in the company's credit profile.
In the international sector we maintained the larger weighting in the Portfolio
which we built in the fourth quarter as yield spreads widened following the
Asian crisis. Additions to our international exposure in the first quarter
included U.S. dollar-denominated securities from some of the largest Japanese
banks. These banks issued securities to bolster their capital ratios prior to
the recent end of the Japanese fiscal year on March 31.
The profitability of these banks has been under pressure and asset quality
continues to be a concern. However, despite these problems the largest banks
have investment-grade ratings and should maintain the support of the government.
To entice investors the yields on their new issues had to exceed the yields
available on even the lowest rated U.S. high-yield bonds (350-400 basis points
over U.S. Treasuries bonds).
There were no significant changes in sector weightings. We continue to see value
in the communication industry as well as selected non-U.S. issuers. We believe
the U.S. economic and financial environment continues to be favorable for the
credit quality of high-yield issuers. Yield spreads remain historically narrow,
and we continue to emphasize above-average credit quality in the portfolio.
Additionally, we intend to maintain interest rate sensitivity which is no longer
than that of the benchmark.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
April 1998
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
CORPORATE BONDS AND NOTES (77.4%)
BANKING (0.5%)
$ 970 Korea Development Bank, 7.375%,
9/17/04 $ 880
---------
BROADCAST-RADIO & TELEVISION (12.8%)
2,360 CSC Holdings, Inc., 9.875%,
5/15/06 2,578
1,670 CSC Holdings, Inc., 7.875%,
12/15/07 1,720
1,545 Fox/Liberty Networks LLC, (Step
Bond), 0.00%, 8/15/07 1,051
825 Fox/Liberty Networks LLC, 8.875%,
8/15/07 856
990 Lenfest Communications, Inc.,
Series 144A, 7.625%, 2/15/08 992
2,390 Lenfest Communications, Inc.,
8.375%, 11/01/05 2,492
1,150 Multicanal, 10.50%, 2/01/07 1,228
1,850 Paramount Communications, Inc.,
8.25%, 8/01/22 1,903
1,600 RBS Participacoes, Series 144A,
11.00%, 4/01/07 1,618
475 Rogers Cablesystems Ltd., Series
B, 10.00%, 3/15/05 532
200 Rogers Cablesystems of America,
10.125%, 9/01/12 220
2,850 Rogers Cantel, Inc., 8.30%,
10/01/07 2,864
1,440 Rogers Communications, Inc.,
9.125%, 1/15/06 1,472
1,015 Sinclair Broadcast Group, Inc.,
9.00%, 7/15/07 1,058
1,770 TV Azteca, 10.50%, 2/15/07 1,898
---------
22,482
---------
BUILDING MATERIALS & COMPONENTS (2.2%)
1,255 American Standard, Cos., Inc.,
7.375%, 2/01/08 1,234
2,505 Outdoor Systems, Inc., 8.875%,
6/15/07 2,630
---------
3,864
---------
CHEMICALS (1.6%)
2,620 ISP Holdings, Inc., Series B,
9.00%, 10/15/03 2,754
---------
COMPUTERS (2.5%)
2,605 Advanced Micro Devices, Inc.,
11.00%, 8/01/03 2,787
630 Concentric Network Corp., Series
144A, 12.75%, 12/15/07 743
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
$ 1,400 WAM!NET, Inc., Series 144A, (Step
Bond), 0.00%, 3/01/05 $ 844
---------
4,374
---------
DRUGS (0.5%)
800 Pharmerica, Inc., Series 144A,
8.375%, 4/01/08 804
---------
ELECTRONICS (0.6%)
1,060 Hyundai Semiconductor, Series
144A, 8.625%, 5/15/07 846
200 Samsung Electronics Co., Series
144A, 7.45%, 10/01/02 179
---------
1,025
---------
ENERGY (2.7%)
400 Korea Electric Power, 7.75%,
4/01/13 340
1,000 Nuevo Energy Co., 9.50%, 4/15/06 1,065
1,500 Quezon Power Ltd., 8.86%, 6/15/17 1,313
1,960 Snyder Oil Corp., 8.75%, 6/15/07 2,014
---------
4,732
---------
ENVIRONMENTAL CONTROLS (1.9%)
2,900 Norcal Waste Systems, Inc., Series
B, (Step Bond), 13.25%, 11/15/05 3,364
---------
FINANCIAL SERVICES (4.9%)
500 Criimi Mae, Inc., 9.125%, 12/01/02 505
1,200 Fuji JGB Investments, LLC, Series
144A, 9.87%, 12/31/49 1,188
805 IBJ Preferred Capital Co., LLC,
Series 144A, 8.79%, 12/29/49 775
800 Indah Kiat Financial Mauritius,
Series 144A, 10.00%, 7/01/07 664
1,115 Navistar Financial Corp., 9.00%,
6/01/02 1,172
2,485 PTC International Finance BV,
(Step Bond), 0.00%, 7/01/07 1,740
500 Pindo Deli Financial Mauritius,
Series 144A, 10.75%, 10/01/07 410
2,185 Western Financial Bank, 8.875%,
8/01/07 2,109
---------
8,563
---------
FOOD SERVICE & LODGING (0.8%)
550 AmeriServ Food Co., 10.125%,
7/15/07 591
875 Smithfield Foods, Inc., Series
144A, 7.625%, 2/15/08 871
---------
1,462
---------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
FOREST PRODUCTS & PAPER (1.0%)
$ 2,020 APP Fin II Mauritius Ltd., (Step
Bond), 12.00%, 2/15/04 $ 1,677
---------
GAMING & LODGING (3.0%)
2,540 Grand Casinos, Inc., 10.125%,
12/01/03 2,769
496 Louisiana Casino Cruises, Inc.,
11.50%, 12/01/98 496
1,690 Station Casinos, Inc., 10.125%,
3/15/06 1,897
---------
5,162
---------
HEALTH CARE SUPPLIES & SERVICES (7.2%)
6,380 Colombia/HCA Healthcare, 6.91%,
6/15/05 5,999
2,745 Integrated Health Services, Series
A, 9.50%, 9/15/07 2,917
1,720 Magellan Health Services, Series
144A, 9.00%, 2/15/08 1,733
1,930 Tenet Healthcare Corp., 8.625%,
1/15/07 2,012
---------
12,661
---------
HOSPITAL MANAGEMENT (1.1%)
630 Fresenius Medical Capital Trust
II, Series 144A, 7.875%, 2/01/08 630
1,200 Vencor, Inc., 8.625%, 7/15/07 1,352
---------
1,982
---------
MATERIALS (0.6%)
1,170 Brooks Fiber Properties, Inc.,
(Step Bond), 0.00%, 3/01/06 1,017
---------
METALS (1.9%)
1,655 Grupo Minero Mexico SA, Series A,
8.25%, 4/01/08 1,642
1,150 NSM Steel, Ltd., Series 144A,
12.25%, 2/01/08 1,104
745 Pohang Iron & Steel Co. Ltd.,
7.125%, 7/15/04 659
---------
3,405
---------
MULTI-INDUSTRY (4.5%)
1,455 Hermes Europe Railtel BV, 11.50%,
8/15/07 1,648
900 HYLSA S.A. de C.V., Series 144A,
9.25%, 9/15/07 900
2,155 Murrin Murrin Holdings, PTY,
Series 144A, 9.375%, 8/31/07 2,144
1,615 RG Receivables Ltd., Series 144A,
9.60%, 2/10/05 1,619
1,500 Revlon Worldwide Corp., Series
144A, 8.125%, 2/01/06 1,519
---------
7,830
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
PACKAGING & CONTAINER (0.8%)
$ 1,245 SD Warren Co., 12.00%, 12/15/04 $ 1,391
---------
PAPER (1.5%)
2,550 Norampac, Inc., Series 144A,
9.50%, 2/01/08 2,658
---------
REAL ESTATE (0.8%)
1,250 HMC Acquisition Properties, Series
B, 9.00%, 12/15/07 1,327
---------
RETAIL-GENERAL (2.8%)
1,605 Fleming Cos., Inc., 10.50%,
12/01/04 1,701
400 Kmart Corp., 8.80%, 7/01/10 413
3,285 Southland Corp., 5.00%, 12/15/03 2,874
---------
4,988
---------
TECHNOLOGY (0.8%)
1,465 AST Research, Inc., 7.45%,
10/01/02 1,314
---------
TELECOMMUNICATIONS (18.9%)
1,840 Comcast Cellular Corp., Series B,
9.50%, 5/01/07 1,950
2,175 Dial Call Communications, (Step
Bond), 0.00%, 4/15/04 2,175
650 Esprit Telecom Group plc, 11.50%,
12/15/07 712
565 Flag, Ltd., Series 144A, 8.25%,
1/30/08 581
600 Globalstar Capital Corp., 11.375%,
2/15/04 630
1,380 Globo Communicacoes e
Participacoes Ltd., Series 144A,
10.50%, 12/20/06 1,401
1,655 IXC Communications, Inc., Series
B, 12.50%, 10/01/05 1,969
2,340 Intermedia Communications, Series
B, (Step Bond), 0.00%, 7/15/07 1,761
605 Iridium LLC/Capital Corp., Series
A, 13.00%, 7/15/05 678
1,850 NEXTLINK Communications, Inc.,
Series 144A, (Step Bond), 0.00%,
4/15/08 1,170
5,980 Nextel Communications, Inc., (Step
Bond), 0.00%, 9/15/07 4,007
950 Nextel Communications, Inc.,
Series 144A, (Step Bond), 0.00%,
2/15/08 608
1,560 Nextel Communications, Inc., (Step
Bond), 0.00%, 8/15/04 1,502
2,275 Occidente y Caribe Cellular, (Step
Bond), 0.00%, 3/15/04 (Columbia) 2,002
1,085 Qwest Communications
International, Inc., Series 144A,
(Step Bond), 0.00%, 2/01/08 765
555 Qwest Communications
International, Inc., Series B,
10.875%, 4/01/07 644
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
TELECOMMUNICATIONS (CONTINUED)
$ 2,460 RCN Corp., Series 144A, (Step
Bond), 0.00%, 2/15/08 $ 1,538
80 RSL Communications, plc, 12.25%,
11/15/06 91
2,800 RSL Communications, plc, Series
144A, 9.125%, 3/01/08 2,828
955 Satelites Mexicanos SA, Series
144A, 10.125%, 11/01/04 987
1,945 TCI Satellite Entertainment, Inc.,
Series 144A, (Step Bond), 0.00%,
2/15/07 1,396
3,025 Teleport Communications Group,
Inc., (Step Bond), 0.00%, 7/01/07 2,602
1,855 Telesystem International Wireless,
Inc., (Step Bond), 0.00%,
11/01/07 1,173
---------
33,170
---------
UTILITIES (1.5%)
1,335 AES Corp., Series 144A, 8.50%,
11/01/07 1,385
490 Midland Cogeneration Ventures,
Series C-91, 10.33%, 7/23/02 534
650 Midland Funding II, Series A,
11.75%, 7/23/05 774
---------
2,693
---------
TOTAL CORPORATE BONDS AND NOTES (Cost $131,486) 135,579
---------
ASSET BACKED SECURITIES (8.7%)
AEROSPACE & DEFENSE (2.3%)
1,945 Aircraft Lease Portfolio
Securitization Ltd., Series
1996-1 P1, Class D, 12.75%,
6/15/06 1,947
525 Jet Equipment Trust, Series 95-D,
Series 144A, 11.44%, 11/01/14 702
1,050 Jet Equipment Trust, Series C-1,
Series 144A, 11.79%, 6/15/13 1,414
---------
4,063
---------
FINANCIAL SERVICES (6.4%)
1,700 CA FM Lease Trust, Series 144A,
8.50%, 7/15/17 1,780
1,246 DR Structured Finance,
Series 1993-K1, Class A1, 6.66%,
8/15/10 1,158
2,450 DR Structured Finance,
Series 1994-K1, Class A1, 7.60%,
8/15/07 2,412
1,175 DR Structured Finance,
Series 1994-K1, Class A2, 8.375%,
8/15/15 1,154
875 FMAC Loan Receivables Trust,
Series 1996-B, Class C, Series
144A, (Floating Rate), 7.929%,
11/01/18 783
2,011 Long Beach Auto,
Series 1997-1, Class B, Series
144A, 14.22%, 10/25/03 2,009
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
$ 1,197 Long Beach Auto,
Series 1997-2, Class A, Series
144A, 6.69%, 9/25/04 $ 1,199
780 SB Treasury Co. LLC, Series 144A,
9.40%, 12/29/49 806
---------
11,301
---------
TOTAL ASSET BACKED SECURITIES (Cost $14,397) 15,364
---------
FOREIGN GOVERNMENT BONDS (1.3%)
2,437 Republic of Argentina, Series L,
Euro, (Floating Rate), 6.625%,
3/31/05
(Cost $2,199) 2,250
---------
<CAPTION>
SHARES
- ---------------
<C> <S> <C>
UNITS (0.8%)
TELECOMMUNICATIONS (0.8%)
1,290 AMSC Acquisition, Co., Series
144A, 12.25%, 4/1/08 (Cost
$1,305) 1,335
---------
COMMON STOCK (0.0%)
FOOD SERVICE & LODGING (0.0%)
1,300 Motels of America, Inc. (Cost $84) 14
---------
PREFERRED STOCKS (4.0%)
ENTERTAINMENT & LEISURE (2.3%)
3,576 Time Warner Inc., Series M,
10.25%, 7/01/16 4,005
---------
FINANCIAL SERVICES (0.9%)
13,500 Sinclair Capital, 11.625%, 3/15/09 1,499
---------
TELECOMMUNICATIONS (0.8%)
1,192 IXC Communications, Inc., PIK,
12.50%, 8/15/09 1,454
---------
TOTAL PREFERRED STOCKS (Cost $6,346) 6,958
---------
<CAPTION>
NO. OF
WARRANTS
- ---------------
<C> <S> <C>
WARRANTS (0.1%)
GAMING & LODGING (0.0%)
1,725 Louisiana Casino Cruises, Inc.,
expiring 12/01/98 --
TELECOMMUNICATIONS (0.1%)
600 Globalstar Telecommunications
Ltd., Series 144A, expiring
2/15/04 90
605 Iridium World Communications,
Inc., Series 144A, expiring
7/15/05 145
3,000 Nextel Communications, Inc.,
expiring 4/25/99 --
9,100 Occidente y Caribe Cellular,
expiring 3/15/04 --
---------
TOTAL WARRANTS (Cost $11) 235
---------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (11.6%)
REPURCHASE AGREEMENT (11.6%)
$ 20,311 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/01/98, to be
repurchased at $20,314,
collateralized by U.S. Treasury
Notes, 5.875-6.625% due
4/30/02-9/30/02, valued at
$20,756 (Cost $20,311) $ 20,311
---------
TOTAL INVESTMENTS (103.9%) (Cost $176,139) 182,046
---------
OTHER ASSETS AND LIABILITIES (-3.9%)
Other Assets 30,088
Liabilities (36,916)
---------
(6,828)
---------
NET ASSETS (100.0%) $ 175,218
---------
---------
<CAPTION>
AMOUNT
(000)
---------
<C> <S> <C>
CLASS A:
NET ASSETS $166,343
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,956,714 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $11.92
---------
---------
CLASS B:
NET ASSETS $8,875
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 746,322 outstanding $0.001 par value
shares (authorized 500,000,000 shares) $11.89
---------
---------
</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,
1998.
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.
7
