<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 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.
EQUITY GROWTH PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Equity Growth Portfolio employs a growth-oriented investment strategy
seeking long-term capital appreciation. The Portfolio seeks to accomplish its
objective by investing primarily in equities of medium and large capitalization
companies exhibiting strong earnings growth.
For the three months ended March 31, 1998, the Portfolio had a total return of
16.78% for the Class A shares and 16.62% for the Class B shares, compared to a
total return of 13.95% for the S&P 500 Index (the "Index"). For the one year
ended March 31, 1998, the Portfolio had a total return of 50.82% for Class A
shares and 50.41% for Class B shares, compared to a total return of 47.99% for
the Index. For the five year period ended March 31, 1998, the average annual
total return of Class A was 25.78% compared to 22.40% for the Index. From
inception on April 2, 1991 through March 31, 1998, the average annual total
return of Class A was 20.99% compared to 19.31%
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------------------------------------
AVERAGE ANNUAL FIVE AVERAGE ANNUAL
YTD ONE YEAR YEARS SINCE INCEPTION
--------- ------------- ------------------- -----------------
<S> <C> <C> <C> <C>
PORTFOLIO--CLASS A... 16.78% 50.82% 25.78% 20.99%
PORTFOLIO--CLASS B... 16.62 50.41 N/A 35.76
INDEX--CLASS A....... 13.95 47.99 22.40 19.31
INDEX--CLASS B....... 13.95 47.99 N/A 31.68
</TABLE>
1. The S&P 500 Index is an unmanaged index of common stocks.
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.
for the Index. From inception on January 2, 1996 through March 31, 1998 the
average annual total return of Class B was 35.76% compared to 31.68% for the
Index.
The Portfolio tends to be broadly diversified by issue (we held 78 securities at
March 31) but we have the ability to invest up to 10% in a single security when
our conviction is very strong. At quarter end our largest position was Cendant,
which represented 8.7% of the Portfolio, and the ten largest holdings accounted
for 45.8% of the net assets.
First quarter outperformance was driven, in large part, by big moves in some of
our largest holdings. Our largest holding at December 31, 1997 was United
Technologies, representing 9.5% of the Portfolio's net assets. We have held
United Technologies for several years, and it had done very nicely. But in the
fourth quarter of last year, it suffered from guilt by association related to
the Asian economic meltdown. From a 1997 high of $89, United Technologies stock
reached a low of $66 and closed out 1997 at $73. Although the company does get
about 15% of its profits from Asia, our research indicated that overall profits
of the company would likely grow significantly and actually beat consensus
expectations in the fourth quarter of 1997 as well as full years 1998 and 1999.
In January when United Technologies reported above consensus profits for the
fourth quarter of 1997, the stock surged and our heavy concentration was
rewarded. The stock gained a hefty 27% in the first quarter of 1998. We still
like United Technologies stock, but have taken some profits and cut our position
down to 4.9% of the Portfolio's net assets.
Lockheed Martin represented 7.2% of the Portfolio's net assets at December 31.
We had loaded up on the stock when various investor concerns had taken it from a
1997 high of $114 down to $99 at year-end. The primary concern was silly, in our
view. Because the company had the opportunity to buy back 10% of its shares
outstanding from General Electric, Lockheed was required to change from pooling
to purchase accounting on its pending
2
<PAGE>
acquisition of Northrop Grumman. This resulted in earnings per share dilution
from the amortization of goodwill. As earnings per share estimates were lowered
and momentum investors crushed the stock, we saw the opportunity to buy the
stock at a discount to the price paid by Lockheed for 10% of the company. We
subsequently took profits, ending the quarter with no Lockheed and a 2.5%
position in Northrop Grumman. The latter fell late in the quarter as the
Department of Justice questioned the merger, and we bought it on the basis of
fundamentals.
We did not only benefit in the quarter from stocks that fell sharply in late
1997. Two of our largest holdings at December 31--Cendant (7.8%) and Clear
Channel Communications (3.6%) had done very well last year, with Cendant up 38%
and Clear Channel up 119%. Cendant, the powerful consumer services giant formed
by the merger of HFS and CUC International, rose 15% in the first quarter of
1998. The stock remained a very large Portfolio holding at quarter-end.
Generally we do not add to positions after stocks surge, but in the first
quarter we did just that with Clear Channel Communications, a 4.6% holding at
quarter end. After more than doubling in 1997, the stock rose 23.5% in the first
quarter. What's going on? Well, a great growth story is getting even better.
Over the past few years, Clear Channel has experienced tremendous internal
growth in its radio and television broadcasting business, and has layered on top
of that an active acquisition program, buying up radio stations and billboard
companies. After-tax cash flow per share rose 61.8% in 1997, after rising 42.6%
in 1996 and 32.7% in 1995.
In March, Clear Channel Communications reinvented itself yet again by buying a
large Mexican radio broadcaster and a U.K.-based global outdoor furniture
advertising company. While Clear Channel had dabbled in international markets
before, these acquisitions catapult the company onto a new playing field. Clear
Channel is now the largest out of home media company in the world. This is one
of the very best managed companies we know. Clear Channel stock was the
best-performing New York Stock Exchange stock over the past ten years, as
management adeptly led the charge in consolidating the fragmented U.S. radio
industry. And management is not selling. Lowry Mays, founder and CEO, and his
two sons Mark and Randall, who are senior executives, have close to $2 billion
in Clear Channel stock. It is exhilarating to imagine the possibilities as this
management team now sets its sites on consolidating global markets for its
businesses.
And while Clear Channel stock has soared and the cash flow multiple has
expanded, the stock still looks amazingly attractive versus other large-cap
growth stocks. At $98, Clear Channel trades at 31 and 23-times our projected
after-tax cash flow per share estimates of $3.20 in 1998 and $4.20 in 1999.
Compare these multiples on 1998 earnings for Coca Cola (46 times) and for Pfizer
(43 times). We believe Clear Channel can deliver much faster growth than that
expected for either Coke or Pfizer.
During the March quarter, we invested very heavily in two supposedly cyclical
industries--airlines and autos. At March 31, our three airline positions
accounted for 9.7% of the Portfolio's net assets: Continental Airlines 7.7%, UAL
1.0% and US Airways 1.0%. General Motors represented a 6.5% position. That makes
a whopping 16.2% of the Portfolio's net assets in sectors known for cut-throat
pricing and tremendous economic sensitivity. But it is seven years into the
current economic cycle, making it one of the longest upcycles on record. Are we
masochists? No. For reasons we will try to explain below, the phrase "it is
different this time," which investors are supposed to avoid saying, seems to
apply.
Let's take the airlines first. After much red ink and turmoil in the early
1990's, the industry has prospered in recent years, generating tremendous
profits and cash flow. Conditions have been ideal: oil is cheap, the strong
global economy is powering big gains in travel and aircraft capacity growth has
been managed such that pricing has improved. These admittedly are factors that
could change. But some other very positive trends for the industry have
developed in recent years, and these we do not think will ever change.
First, major airlines seem to have learned how to coexist. Rather than going
after any and all routes, the majors have settled on each dominating certain
hubs, and then doing "code shares" with other airlines whereby frequent flyer
programs become exchangeable and traveler hook-ups are accommodated. In turn,
capacity growth
3
<PAGE>
has been restrained and all parties are prospering. In a sense, code shares
achieve many of the benefits of outright mergers, so the industry is essentially
consolidating. Second, after flirting with disaster in the last downcycle,
managements are incredibly focused on costs. As an example, Continental will go
from nine types of planes in its fleet to five over the next few years, reducing
training and maintenance expenses. Third, company balance sheets have improved
dramatically, lowering significantly the average cost of debt. Fourth, the
industry has used the long upcycle and positive structural change to upgrade
fleets, and this will continue over the next few years. Unlike before, however,
there is not likely to be the need to upgrade to new types of planes for many,
many years to come. This implies potentially huge free cash flow generation over
the next 5-10 years. When you put these factors together and add the likelihood
of near-term upward estimate revisions, we get pretty excited. But amazingly,
investors want to look back at prior downcycles and are paying only 9-10 times
1998 estimated earnings for these stocks, versus a market price earnings of well
over 20 times.
Continental Airlines at 7.7% of net assets, is one of the largest holdings in
the Portfolio. We have already had a nice move in the stock, but it continues to
look compelling to us at $59. Consensus earnings per share estimates for 1998
and 1999 are $5.69 and $5.81, respectively. We believe Continental will earn $6+
this year and $7+ next year. And the company should have solid growth off the
1999 base. In our view, Continental could easily be a $100 stock looking out a
year.
General Motors appears to be another very compelling story. In this case,
however, industry fundamentals are not great. In fact, they are downright ugly.
The strong dollar has been a direct boost to the already competitive Japanese
auto manufacturer. Demand is decent in the United States, but pricing is soft as
incentives are extremely high. And labor costs are rising faster than net
pricing. But there is a quiet restructuring at GM, and we think that investors
will increasingly be forced to focus on some powerful positives.
First, management has shifted its strategy in the North American car market from
market share at any cost to expense reduction. This makes sense because having
the number one share in the business does not seem to create any advantage.
According to management, cost cutting opportunities are "limitless", and if GM
can move closer to the profit margins of its competitors, the leverage to
profits is enormous. Second, the company has embarked on one of the most
aggressive share repurchase programs we have ever witnessed. The company will
probably repurchase 8-10% of its shares in 1998, another 8% or so in 1999 and
then 5-7% annually thereafter. GM is able to do this because seven years of good
economic conditions have eliminated the company's huge pension liability and
created net cash on the balance sheet in excess of $10 billion. This is enough
to weather in management's view, any downturn, hence all discretionary cash flow
can be used to retire shares. Third, asset restructuring is expected to enhance
shareholder value over time. The company is likely to do a sub-IPO of
Delphi/Delco, its auto parts business in late 1998 or early 1999. This will
create more cash with which to buy back stock. Ultimately, GM's entire position
in Delphi/Delco could be spun off. And someday, GM will likely spin off its
interest in Hughes Electronics. The latter, after selling its defense contractor
unit, is a rapidly growing satellite and telecommunications company. The
publicly traded value currently equates to $21 per GM share. In other words,
when you buy a share of GM at $68, 31% of the value represents a play on one of
the fastest growing industries in the world. Yet, the price earnings of GM is
only 9 times.
Kurt Feuerman
PORTFOLIO MANAGER
Margaret K. Johnson
PORTFOLIO MANAGER
April 1998
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- --------
<C> <S> <C>
COMMON STOCKS (96.7%)
CAPITAL GOODS (15.3%)
AEROSPACE/DEFENSE (5.6%)
324,700 Gulfstream Aerospace Corp. $ 14,084
174,900 Howmet International, Inc. 3,126
180,600 Nothrop Grumman Corp. 19,403
148,100 Thiokol Corp. 7,155
--------
43,768
--------
MANUFACTURING (DIVERSIFIED) (6.7%)
99,200 Textron, Inc. 7,638
128,100 Tyco International, Ltd. 6,998
415,800 United Technologies Corp. 38,384
--------
53,020
--------
OFFICE EQUIPMENT & SUPPLIES (3.0%)
189,200 Knoll, Inc. 7,296
88,500 Pitney Bowes, Inc. 4,442
51,300 Steelcase, Inc., Class A 1,872
96,400 Xerox Corp. 10,261
--------
23,871
--------
TOTAL CAPITAL GOODS 120,659
--------
COMMUNICATION SERVICES (2.2%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (0.5%)
58,000 Associated Group, Inc., Class A 2,233
49,900 Associated Group, Inc., Class B 1,834
--------
4,067
--------
TELECOMMUNICATIONS (LONG DISTANCE) (0.6%)
117,600 WorldCom, Inc. 5,064
--------
TELEPHONE (1.1%)
150,700 U.S. West Communications Group 8,251
--------
TOTAL COMMUNICATION SERVICES 17,382
--------
CONSUMER CYCLICALS (22.9%)
AUTO PARTS & EQUIPMENT (2.4%)
123,600 Borg-Warner Automotive, Inc. 7,926
291,200 ITT Industries, Inc. 11,084
--------
19,010
--------
AUTOMOBILES (6.5%)
763,500 General Motors Corp. 51,489
--------
GAMING, LOTTERY & PHARMACEUTICAL COMPANIES (0.6%)
202,700 International Game Technology 5,068
--------
HOUSEHOLD FURNISHINGS & APPLIANCES (1.2%)
220,100 Sunbeam Corp. 9,698
--------
<CAPTION>
VALUE
SHARES (000)
- --------------- --------
<C> <S> <C>
PUBLISHING (1.1%)
561,200 PRIMEDIA, Inc. $ 8,243
--------
PUBLISHING (NEWSPAPERS) (1.0%)
55,000 Gannett Co., Inc. 3,953
47,700 Pulitzer Publishing Co. 3,810
--------
7,763
--------
RETAIL (BUILDING SUPPLIES) (1.2%)
134,950 Home Depot, Inc. 9,101
--------
SERVICES (COMMERCIAL & CONSUMER) (8.9%)
1,722,356 Cendant Corp. 68,248
32,200 Service Corp. International 1,366
--------
69,614
--------
TOTAL CONSUMER CYCLICALS 179,986
--------
CONSUMER STAPLES (12.2%)
BEVERAGES (NON-ALCOHOLIC) (0.9%)
197,700 Coca Cola Enterprises, Inc. 7,253
--------
BROADCASTING (TV, RADIO, CABLE) (5.8%)
203,500 Chancellor Media Corp. 9,336
372,100 Clear Channel Communications, Inc. 36,466
--------
45,802
--------
ENTERTAINMENT (0.7%)
74,100 Time Warner, Inc. 5,335
--------
FOODS (1.2%)
70,400 Kellogg Co. 3,036
59,400 Ralston-Ralston Purina Group 6,296
--------
9,332
--------
RESTAURANTS (1.2%)
192,200 Brinker International, Inc. 4,204
127,800 Cracker Barrel Old Country Store,
Inc. 5,112
--------
9,316
--------
TOBACCO (2.4%)
448,200 Philip Morris Cos., Inc. 18,684
--------
TOTAL CONSUMER STAPLES 95,722
--------
ENERGY (1.1%)
OIL & GAS (DRILLING) (1.1%)
117,300 Diamond Offshore Drilling, Inc. 5,322
40,900 Schlumberger, Ltd. 3,098
--------
TOTAL ENERGY 8,420
--------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- --------
<C> <S> <C>
FINANCIAL (22.2%)
BANKS (MAJOR REGIONAL) (0.7%)
16,633 Wells Fargo & Co. $ 5,510
--------
BANKS (MONEY CENTER) (3.1%)
18,200 BankAmerica Corp. 1,504
61,468 Chase Manhattan Corp. 8,290
100,200 Citicorp 14,228
--------
24,022
--------
CONSUMER FINANCE (1.4%)
70,500 MBNA Corp. 2,525
200,600 SLM Holding Corp. 8,751
--------
11,276
--------
FINANCIAL (DIVERSIFIED) (2.9%)
249,500 American Express Co. 22,907
--------
INSURANCE (LIFE & HEALTH) (0.4%)
91,200 Provident Companies, Inc. 3,129
--------
INSURANCE (MULTI-LINE) (5.3%)
256,500 Loews Corp. 26,740
89,400 Nationwide Financial Services,
Inc., Class A 3,878
182,450 Travelers Group, Inc. 10,947
--------
41,565
--------
INSURANCE (PROPERTY-CASUALTY) (6.8%)
267,450 Ace Ltd. 10,080
102,500 Allstate Corp. 9,424
263 Berkshire Hathaway, Inc., Class A 17,674
76,200 CMAC Investment Corp. 5,086
22,200 Progressive Corp. 2,990
328,700 USF&G Corp. 8,197
--------
53,451
--------
INVESTMENT BANKING & BROKERAGE (1.2%)
198,700 Friedman, Billings, Ramsey Group,
Inc., Class A 3,328
77,800 Merrill Lynch & Co. 6,457
--------
9,785
--------
SAVINGS & LOANS (0.4%)
41,500 Washington Mutual, Inc. 2,976
--------
TOTAL FINANCIAL 174,621
--------
HEALTH CARE (2.1%)
HEALTH CARE (DIVERSIFIED) (0.4%)
36,300 American Home Products Corp. 3,462
--------
<CAPTION>
VALUE
SHARES (000)
- --------------- --------
<C> <S> <C>
HEALTH CARE (DRUGS-MAJOR PHARMS) (1.7%)
51,300 Eli Lilly & Co. $ 3,059
55,400 Merck & Co., Inc. 7,112
31,600 Pfizer, Inc. 3,150
--------
13,321
--------
TOTAL HEALTH CARE 16,783
--------
TECHNOLOGY (9.0%)
COMMUNICATION EQUIPMENT (0.3%)
31,000 Tellabs, Inc. 2,081
--------
COMPUTERS (HARDWARE) (1.5%)
71,200 Dell Computer Corp. 4,824
64,800 International Business Machines
Corp. 6,731
--------
11,555
--------
COMPUTERS (NETWORKING) (0.5%)
61,950 Cisco Systems, Inc. 4,236
--------
COMPUTERS (SOFTWARE & SERVICES) (3.0%)
73,800 America Online, Inc. 5,041
76,800 Computer Associates International,
Inc. 4,435
26,000 Mercury Computer Systems, Inc. 449
155,600 Microsoft Corp. 13,926
450 Oracle Corp. 14
--------
23,865
--------
ELECTRONICS (COMPONENT DISTRIBUTORS) (0.8%)
177,300 Ingram Micro, Inc., Class A 6,582
--------
ELECTRONICS (DEFENSE) (1.4%)
185,700 Litton Industries, Inc. 10,713
--------
ELECTRONICS (SEMICONDUCTORS) (1.5%)
52,300 Intel Corp. 4,083
79,700 Linear Technology Corp. 5,499
63,500 Maxim Integrated Products, Inc. 2,314
--------
11,896
--------
TOTAL TECHNOLOGY 70,928
--------
TRANSPORTATION (9.7%)
AIRLINES (9.7%)
1,029,700 Continental Airlines, Inc., Class
B 60,559
85,300 UAL Corp. 7,928
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- --------
<C> <S> <C>
AIRLINES (CONTINUED)
102,800 US Airways Group, Inc. $ 7,620
--------
TOTAL TRANSPORTATION 76,107
--------
TOTAL COMMON STOCKS (Cost $631,937) 760,608
--------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.3%)
REPURCHASE AGREEMENT (3.3%)
$ 26,260 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/01/98, to be
repurchased at $26,264,
collateralized by U.S. Treasury
Notes, 5.50%, due 3/31/03, valued
at $26,820
(Cost $26,260) 26,260
--------
TOTAL INVESTMENTS (100.0%) (Cost $658,197) 786,868
--------
OTHER ASSETS AND LIABILITIES (0.0%)
Other Assets 67,572
Liabilities (67,808)
--------
(236)
--------
NET ASSETS (100%) $786,632
--------
--------
CLASS A:
NET ASSETS $740,447
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 37,457,709 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $19.77
--------
--------
CLASS B:
NET ASSETS $46,185
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,341,487 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $19.72
--------
--------
</TABLE>
7
