<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
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CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
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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.
MUNICIPAL BOND PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
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The Municipal Bond Portfolio seeks high current income consistent with
preservation of principal through investment in a portfolio consisting primarily
of intermediate and long-term investment grade municipal obligations, the
interest on which is exempt from Federal income tax.
For the three months ended March 31, 1998, the Portfolio had a total return of
0.92% for Class A shares compared to a total return of 1.14% for the Lehman
7-Year Municipal Bond Index (the "Index"). For the one year ended March 31,
1998, the Portfolio had a total return of 8.40% for the Class A shares compared
to 9.02% for the Index. From inception on January 18, 1995 through March 31,
1998, the average annual total return of Class A was
PERFORMANCE COMPARED TO THE LEHMAN 7-YEAR MUNICIPAL BOND 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............. 0.92% 8.40% 6.43%
INDEX.......................... 1.14 9.02 7.85
</TABLE>
1. The Lehman 7-Year Municipal Bond Index consists of investment grade bonds
with maturities between 6-8 years, rated BAA or better. All bonds have been
taken from issues of at least $50 million in size sold within the last five
years.
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.
6.43% compared to 7.85% for the Index. As of March 31, 1998, the Portfolio had
an SEC 30-day yield of 4.16%.
During the first quarter, municipal bond yields were basically unchanged across
the yield curve, providing a respectable coupon return to start 1998. Given that
first quarter returns were negative in three of the prior four years, these
returns represent a very reasonable start to the year. During the quarter we
maintained an average maturity just over eight years, slightly longer than the
benchmark Lehman Index. The Portfolio is mainly comprised of AAA and AA-rated
defensively structured bonds, with a continuing emphasis on premium coupon
longer maturity noncallable securities. In this current low interest rate
environment, we have been focusing on maintaining a relatively high current
yield in the Portfolio.
At the start of the quarter, the markets remained primarily focused on the
events in Asia and the potential impact of these events on the global economy
and financial markets. With most Asian equity markets plummeting early in
January, the markets appeared ready to assume that the consequences of the Asian
turmoil for the global economy would be severe. U.S. Treasuries responded by
rallying sharply, particularly in shorter maturities, which are often seen as a
safe haven in times of crisis. Indeed, by the second week in January, two year
maturity Treasury yields were well below the Fed Funds rate, indicating strong
expectations of a Fed easing. This, however, proved to be the low point in
yields for the quarter.
In response to attractive valuation levels, equity markets globally began to
recover. The implementation of reform programs and easing of the short-term
liquidity crisis, particularly in Korea, helped take pressure off the markets.
Moreover, while Asian economies have slowed dramatically, the U.S. economy has
remained strong. With less fear of a near-term financial crisis, bond yields
rose
2
<PAGE>
back towards the levels at which they started the year, then fluctuated in a
narrow range for the remainder of the quarter.
Municipal bond volume surged during the first quarter, with an impressive 70%
increase over first quarter 1997 volume. The low interest rate environment
coupled with industry-wide restructurings in healthcare as well as special
project financings in transportation were behind the increased volume. The Bond
Buyer's 20-bond index of general obligation yields averaged 5.21% last month,
down more than half a percentage point from the 5.76% average in March 1997. The
market was able to absorb the heavy volume, albeit at attractive ratios to
comparable maturity Treasuries. Individual investors, still distracted by the
strong equity markets, showed interest in new issues when they were priced to
go. Long-term bond funds, after the past few years of muted subscription
activity, finally had new money to put to work during the quarter. Insurance
companies, while still active, held back slightly during the quarter while
Federal Budget negotiators proposed to diminish the desirability for property
and casualty insurance companies to hold municipal bonds. That proposal was
eventually taken off the table. Insurance companies, especially at these
attractive ratios to Treasuries, should remain active buyers for the remainder
of the year.
While the prospect of a widespread global financial markets crisis resulting
from the Asian problems may have passed, the situation introduces more
uncertainty into the outlook for the U.S. economy and thus remains a key focus
of the Federal Reserve. Expectations for a slowdown in the U.S. economy caused
by the Asian problems did not materialize in the first quarter, as weakness from
external sectors has been more than offset by domestic strength. Whether this
remains so in the future is unclear and the fragility observed recently in the
Japanese economy further adds to the uncertainty. The Asian weakness has,
however, contributed to a decline in global commodity prices, further
restraining what had already been the best sustained U.S. inflation statistics
in thirty years. Thus, at least for now, the U.S. economy has continued its
highly favorable pattern of strong economic growth and low inflation and until
the Fed has convincing information as to whether the Asian problem will alter
this pattern, they are unlikely to change monetary policy.
As the quarter ended, the municipal new issue supply engines remained in high
gear. With dealer inventories running high and a steady stream of new issues
showing up on the calendar, ratios may need to adjust even more for bonds to
clear the market. In the current interest rate environment, we will remain
defensive as far as our placement on the yield curve, and will continue to look
to purchase bonds which provide a high level of current income.
Lori A. Cohane
PORTFOLIO MANAGER
April 1998
3
<PAGE>
INVESTMENTS (UNAUDITED)
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MARCH 31, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
TAX-EXEMPT INSTRUMENTS (98.4%)
DAILY VARIABLE RATE BONDS (0.4%)
$ 100 New York City, New York, General
Obligation Bonds, Series 94B,
3.80%, 8/15/23 $ 100
100 North Carolina Medical Care
Community Hospital, Revenue
Bonds, 3.65%, 12/01/25 100
---------
TOTAL DAILY VARIABLE RATE BONDS (Cost $200) 200
---------
FIXED RATE INSTRUMENTS (98.0%)
1,500 Baltimore County, Maryland,
Consolidated Public Improvement,
General Obligation Bonds, 6.00%,
7/01/05, Prefunded 7/1/01 at 102 1,633
1,000 California State, Department of
Water Revenue Bonds, Series Q,
6.00%, 12/01/10 1,132
1,920 City of Dallas, Texas, General
Obligation Bonds, 6.00%, 2/15/06 2,125
100 Connecticut State, General
Obligation Bonds, Series A,
4.75%, 11/15/01 102
250 Connecticut State, General
Obligation Bonds, Series A,
9.875%, 3/01/01 290
250 Connecticut State, General
Obligation Bonds, Series C,
5.50%, 3/15/03 265
175 Connecticut State, General
Obligation Bonds, Series C,
6.15%, 11/15/03 189
1,500 Connecticut State, General
Obligation Bonds, Series E,
6.00%, 3/15/12 1,686
1,565 Connecticut State, Housing Finance
Authority, Revenue Bonds, Sub.
Series D-1, 6.20%, 5/15/17 1,647
1,000 Delaware Transportation Authority,
Transportation System Revenue
Bonds, 6.50%, 7/01/11,
Prerefunded 7/01/01 at 102 1,091
500 Fairfax County, Virginia, Water
Authority Revenue Bonds, 6.00%,
4/01/22 545
500 Fairfax County, Virginia, Water
Authority Revenue Bonds, 6.00%,
4/01/22, Prerefunded 4/01/07 at
102 564
1,500 Florida State Board of Education,
Capital Outlay, Public Education,
General Obligation Bonds, 6.40%,
6/01/19 1,620
500 Georgia State, General Obligation
Bonds, Series F, 6.50%, 12/01/06 577
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
$ 1,000 Gwinnett County, Georgia, General
Obligation Bonds, 6.00%, 1/01/11 $ 1,081
1,000 Hawaii State, General Obligation
Bonds, Series CJ, 6.20%, 1/01/12
Prerefunded 1/01/05 at 100 1,108
450 Houston, Texas, Water & Sewer
Systems, Revenue Bonds, Series B,
6.25%, 12/01/05 503
1,500 Illinois State, Sales Tax Revenue
Bonds, Series S, 5.25%, 6/15/13 1,521
1,000 Kentucky State Housing Corp.,
Revenue Bonds, Series A, 6.00%,
7/01/10 1,056
1,000 Maryland State Department of
Transportation, Construction
Revenue Bonds, Second Issue,
6.60%, 11/01/00 1,049
500 Massachusetts State Consolidated
Loan, Series A, 7.625%, 6/01/08,
Prerefunded 6/01/01 at 102 561
1,625 Michigan State Housing Development
Authority, Revenue Bonds, Series
A, 6.75%, 12/01/14 1,741
500 Milwaukee, Wisconsin, Metropolitan
Sewer District, General
Obligation Bonds, Series A,
6.00%, 10/01/05 551
1,400 Mississippi State, General
Obligation Bonds, 6.00%, 2/01/09,
Prerefunded 2/01/05 at 100 1,533
1,475 Montana State, General Obligation
Bonds, Long Range Building
Program, Series C, 6.00%, 8/01/13 1,577
2,000 Municipal Assistance Corp. for
City of New York, NY, Revenue
Bonds, 6.00%, 7/01/04 2,186
1,000 New Jersey State, General
Obligation Bonds, Series E,
5.50%, 7/15/02 1,055
1,475 Ohio State, General Obligation
Bonds, 6.65%, 8/01/05 1,686
960 Ohio State, Housing Finance
Agency, Residential Mortgage
Revenue Bonds, Series A-1, 6.20%,
9/01/14 1,027
1,000 Orlando, Florida, Utilities
Commission Water & Electric,
Revenue Bonds, Series D, 6.75%,
10/01/17 1,216
500 Palm Beach County, Florida,
General Obligation Bonds, Series
B, 6.75%, 7/01/11 602
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
FIXED RATE INSTRUMENTS (CONTINUED)
$ 50 Puerto Rico Commonwealth Highway &
Transportation Authority, Revenue
Bonds, Series T, 6.50%, 7/01/22,
Prerefunded 7/01/02 at 101.50 $ 55
1,000 Reedy Creek Improvement District,
Florida, Utility, Revenue Bonds,
Series 91-1, 6.50%, 10/01/16,
Prerefunded 10/01/01 at 101 1,087
600 Salt Lake City, Utah, General
Obligation Bonds, 6.375%, 6/15/11 636
1,000 Shelby County, Tennessee, General
Obligation Bonds, Series A,
5.50%, 3/01/08 1,083
1,385 Shelby County, Tennessee, General
Obligation Bonds, Series B,
5.50%, 8/01/10 1,494
1,250 Texas A & M University, Revenue
Bonds, Series B, 6.00%, 7/01/11 1,327
1,500 Texas State, Public Finance
Authority, Series A, 5.95%,
10/01/15, Prefunded 4/1/05 at 100 1,641
1,500 Triborough Bridge & Tunnel
Authority, New York, Revenue
Bonds, Series Y, 6.00%, 1/01/12 1,681
1,000 Utah State, Housing Financing
Agency, Single Family Mortgage
Revenue Bonds, Series G-1, Class
I, 5.50%, 7/01/16 1,020
1,000 Virginia Beach, Virginia, General
Obligation Bonds, 6.00%, 9/01/10,
Prefunded 9/1/04 at 102 1,109
500 Virginia State Housing Development
Authority, Commonwealth Mortgage
Revenue Bonds, Series B, 6.60%,
1/01/12 544
1,000 Virginia State Housing Development
Authority, Commonwealth Mortgage
Revenue Bonds, Series B, 6.65%,
1/01/13 1,091
1,000 Washington State, General
Obligation Bonds, Series B,
6.40%, 6/01/17 1,172
1,440 Wisconsin State, Clean Water
Revenue Bonds, Series 1, 6.875%,
6/01/11 1,738
1,115 Wisconsin State, General
Obligation Bonds, Series 2,
5.125%, 11/01/11 1,161
---------
TOTAL FIXED RATE INSTRUMENTS (Cost $48,313) 50,358
---------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
---------
<C> <S> <C>
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $48,513) $ 50,558
---------
TOTAL INVESTMENTS (98.4%) (Cost $48,513) 50,558
---------
OTHER ASSETS AND LIABILITIES (1.6%)
Other Assets 1,623
Liabilities (791)
---------
832
---------
NET ASSETS (100%) $ 51,390
---------
---------
CLASS A:
NET ASSETS $ 51,390
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,880,390 outstanding $.001 par value
shares (authorized 500,000,000 shares)
$10.53
---------
---------
</TABLE>
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Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand and are secured by a letter of credit or other support agreements.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are seven days or less
Prerefunded Bonds. Outstanding bonds have been refunded to the first call date
(prerefunded date) by the issuance of new bonds. Principal and interest are paid
from monies escrowed in U.S. Treasury securities. Prerefunded bonds are
generally re-rated AAA due to the U.S Treasury escrow.
5
