<PAGE>
- ------------------------------------------------------------------
<TABLE>
<S> <C>
DIRECTORS OFFICERS
Barton M. Biggs Stefanie V. Chang
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Harold J. Schaaff,
Management Inc. and Morgan Stanley Asset Jr.
Management Limited; Managing Director, VICE PRESIDENT
Morgan Stanley & Co. Incorporated Joseph P. Stadler
Michael F. Klein VICE PRESIDENT
DIRECTOR AND PRESIDENT Valerie Y. Lewis
Principal, Morgan Stanley Asset Management SECRETARY
Inc. and Morgan Stanley & Karl O. Hartmann
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.
</TABLE>
- ------------------------------------------------------------------
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.
SMALL CAP VALUE EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Small Cap Value Equity Portfolio invests in equity securities of small to
medium-sized companies that our research indicates are undervalued relative to
the market in general at the time of purchase. The Portfolio's disciplined value
approach seeks to outperform the Russell 2500 Small Company Index in the longer
term. We believe our emphasis on high quality companies should help the
Portfolio perform particularly well in difficult markets.
The Small Cap Value Equity Portfolio selects companies that can be purchased at
bargain prices. Bargains mostly arise as a result of public overreactions to
temporary problems associated with an otherwise healthy company, or because a
company is neglected and currently out-of-the limelight of investors' interest.
Often, these
PERFORMANCE COMPARED TO THE RUSSELL 2500 INDEX AND S&P 500 INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------------------------------
ONE AVERAGE ANNUAL AVERAGE ANNUAL
YTD YEAR FIVE YEARS SINCE INCEPTION
----------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C>
PORTFOLIO--CLASS A... 11.92% 51.58% 19.54% 20.06%
PORTFOLIO--CLASS B... 11.86 51.18 N/A 32.11
RUSSELL 2500--CLASS
A................... 10.25 41.87 18.80 19.43
RUSSELL 2500--CLASS
B................... 10.25 41.87 N/A 24.24
S&P 500--CLASS A..... 13.95 47.99 22.40 22.09
S&P 500--CLASS B..... 13.95 47.99 N/A 31.68
</TABLE>
1. The Russell 2500 Index and the S&P 500 Index are unmanaged indices of common
stock.
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.
companies operate as major players in very focused markets and are not widely
followed by the investment community.
The Portfolio invests in all economic sectors of the market, and our strategy of
maintaining a well-diversified portfolio is intended to produce consistent and
reliable results over time. Our investment approach combines quantitative and
fundamental research, and is based on the premise that the prices of stocks move
more frequently, and in greater magnitude, than do the fundamentals of the
underlying companies. This discrepancy creates an opportunity for disciplined,
value-oriented investors. Our value approach importantly includes quality and
growth standards which are carefully designed to help avoid "value-traps", where
cheap stocks sometimes remain cheap (or become cheaper) because the company is
run by bad managers or is mired in a hopelessly difficult business environment.
The end result should be a portfolio with below-market valuation and an overall
growth rate as similar as possible to the Russell 2500 benchmark.
For the three months ended March 31, 1998, the Portfolio had a total return of
11.92% for the Class A shares and 11.86% for the Class B shares, compared to a
total return of 10.25% and 13.95% for the Russell 2500 Index and the S&P 500
Index, respectively. For the one year ended March 31, 1998, the Portfolio had a
total return of 51.58% for the Class A shares and 51.18% for the Class B shares,
compared to a total return of 41.87% and 47.99% for the Russell 2500 Index and
the S&P 500 Index, respectively. For the five year period ended March 31, 1998,
the average annual total return of Class A was 19.54% compared to 18.80% for the
Russell 2500 Index and 22.40% for the S&P 500 Index. From inception on December
17, 1992 through March 31, 1998, the average annual total return of Class A was
20.06% compared to 19.43% for the Russell 2500 Index and 22.09% for the S&P 500
Index. From inception on January 2, 1996 through March 31, 1998, the
2
<PAGE>
average annual total return of Class B was 32.11% compared to 24.24% for the
Russell 2500 Index and 31.68% for the S&P 500 Index.
The overall market shook off a variety of concerns to post the best first
quarter results since 1991. As stock prices were rising, earnings estimates were
falling boosting valuations to a record high. Meanwhile domestic wages and labor
costs continued to trend higher creating a potential bind for most companies.
With little or no pricing power how can businesses simultaneously raise wages
3-4% annually without reducing margins and profits? Cost cutting and
productivity gains must continue unabated for the majority of companies to meet
earnings estimates.
Sector and stock selection added to the portfolio's performance for Consumer
Durables, Financial Services, Retail and Energy sectors. Falling interest rates
led to overweights in Consumer Durables, Retail and Financial Services, while
falling oil prices prompted an underweighting in Energy stocks. As value
investors we continue to search for companies with low valuations and better
than average growth prospects.
Individual stocks which boosted performance included, Accustaff (+50%), Capital
One Financial (+45.7%), Atlas Air (+35.7%) and TJX Companies (+32.7%).
Underperforming stocks included DIMON (-35.8%), SCI Systems (-18.2%) and FPA
Medical (-17.1%).
We continue to find good opportunities in individual companies, while viewing
the market as generally overvalued. Nonetheless, in the absence of inflation we
will continue to be fully invested in interest and economically sensitive
stocks.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William Gerlach
PORTFOLIO MANAGER
April 1998
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (94.2%)
AEROSPACE (0.1%)
2,600 DONCASTERS plc ADR $ 68
---------
BANKING (9.0%)
2,000 Affiliated Community Bancorp, Inc. 79
6,300 City National Corp. 239
8,900 Colonial Bancgroup, Inc. 322
5,700 Comerica, Inc. 603
7,400 Community First Bankshares, Inc. 377
2,900 Compass Bancshares, Inc. 146
4,800 Crestar Financial Corp. 284
5,000 Cullen/Frost Bankers, Inc. 295
8,300 First Alliance Corp. 130
2,400 First American Corp.-Tenn. 118
10,300 Golden State Bancorp., Inc. 393
5,000 GreenPoint Financial Corp. 180
5,400 Mercantile Bankshares Corp. 195
4,300 North Fork Bancorp, Inc. 166
2,500 Silicon Valley Bancshares 153
11,700 Southtrust Corp. 490
7,440 Sovereign Bancorp, Inc. 135
7,200 Trans Financial, Inc. 311
2,500 Wilmington Trust Corp. 166
---------
4,782
---------
BUILDING (3.9%)
3,900 Centex Corp. 149
4,100 D.R. Horton, Inc. 87
3,450 Hughes Supply, Inc. 125
5,300 Kaufman & Broad Home Corp. 173
2,600 Lafarge Corp. 100
15,900 Martin Marietta Materials, Inc. 687
5,600 Southdown, Inc. 390
4,200 USG Corp. 228
1,100 Vulcan Materials Co. 120
---------
2,059
---------
CAPITAL GOODS (2.5%)
3,200 Analog Devices, Inc. 106
5,400 Case Corp. 368
1,600 Dril-Quip, Inc. 52
14,800 Essex International, Inc. 585
4,800 Herman Miller, Inc. 161
2,700 Stoneridge, Inc. 54
---------
1,326
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
CHEMICALS (2.0%)
18,600 Solutia, Inc. $ 553
11,700 USA Waste Services, Inc. 521
---------
1,074
---------
COMMUNICATIONS (4.5%)
5,200 ADC Telecommunications, Inc. 143
8,500 Journal Register Co. 177
10,300 Media General, Inc., Class A 507
1,700 New York Times Co., Class A 119
16,200 Nextel Communications, Inc., Class
A 547
14,000 Valassis Communications, Inc. 574
600 Washington Post Co., Class B 319
---------
2,386
---------
COMPUTERS (6.5%)
6,700 Altera Corp. 253
4,104 Avant! Corp. 86
7,700 BMC Software, Inc. 645
10,000 Cadence Design Systems, Inc. 346
7,300 CompUSA, Inc. 190
7,400 Computer Products, Inc. 173
6,400 Electronic Arts, Inc. 300
5,800 Fiserv, Inc. 368
7,100 HMT Technology Corp. 92
5,800 Networks Associates, Inc. 384
9,500 Platinum Technology, Inc. 245
3,400 Storage Technology Corp. 259
2,100 Stratus Computer, Inc. 93
---------
3,434
---------
CONSUMER-DURABLES (5.0%)
3,200 Arvin Industries, Inc. 131
7,800 Dan River, Inc., Class A 148
8,000 Datascope Corp. 208
7,900 Furniture Brands International,
Inc. 254
6,700 HEALTHSOUTH Corp. 188
8,900 Knoll, Inc. 343
2,900 Leggett & Platt, Inc. 149
12,400 Mylan Laboratories, Inc. 285
8,900 PSS World Medical, Inc. 209
23,326 Respironics, Inc. 675
2,000 Steelcase, Inc., Class A 73
---------
2,663
---------
CONSUMER-RETAIL (7.7%)
1,400 Barnes & Noble, Inc. 55
2,900 Best Buy Co., Inc. 193
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
CONSUMER-RETAIL (CONTINUED)
13,200 BJ's Wholesale Club, Inc. $ 515
6,800 Brylane, Inc. 381
900 Columbia Sportswear Co. 19
3,100 CVS Corp. 234
5,100 DIAL Corp. 122
22,600 Office Depot, Inc. 703
3,650 Pier 1 Imports, Inc. 99
14,100 Ross Stores, Inc. 622
3,000 ShopKo Stores, Inc. 95
16,000 TJX Cos., Inc. 724
10,500 Zale Corp. 303
---------
4,065
---------
CONSUMER-SERVICE & GROWTH (0.8%)
7,600 Danka Business Systems plc ADR 140
11,900 Select Appointments Holdings, plc
ADR 300
---------
440
---------
CONSUMER-STAPLES (4.2%)
7,950 Arbor Drugs, Inc. 187
4,900 Dean Foods Co. 247
4,400 ESG Re, Ltd. 114
19,600 Fresh Del Monte Produce, Inc. 301
9,200 Interstate Bakeries Corp. 297
3,500 Keebler Foods Co. 105
2,100 Lancaster Colony Corp. 89
1,800 Mack-Cali Realty Corp. REIT 70
13,900 Richfood Holdings, Inc. 445
5,100 Security Capital Group, Inc.,
Class B 157
7,400 Stirling Cooke Brown Holdings,
Ltd. 198
---------
2,210
---------
ELECTRIC (1.2%)
7,650 Black Hills Corp. 177
12,200 SCI Systems, Inc. 435
---------
612
---------
ENERGY (5.8%)
200 Arch Coal, Inc. 5
3,800 Columbia Energy Group 295
6,700 ENSCO International, Inc. 186
10,900 Global Industries, Ltd. 222
6,500 New Century Energies, Inc. 327
2,600 Noble Affiliates, Inc. 108
19,900 Noble Drilling Corp. 608
9,880 Ocean Energy, Inc. 233
2,400 Sun Co., Inc. 98
3,900 Tosco Corp. 138
11,900 Transocean Offshore, Inc. 612
4,000 Valero Energy Corp. 134
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
4,800 Vintage Petroleum, Inc. $ 101
---------
3,067
---------
ENTERTAINMENT (0.2%)
3,500 MGM Grand, Inc. 120
---------
FINANCIAL-DIVERSIFIED (8.0%)
13,200 Bear Stearns Cos., Inc. 678
5,800 Capital One Financial Corp. 457
9,400 CIT Group, Inc. (The), Class A 307
20,200 Crescent Real Estate Equities Co. 727
1,900 Investors Financial Services Corp. 105
5,800 Legg Mason, Inc. 344
2,400 Lehman Brothers Holdings, Inc. 180
5,600 National Commerce Bancorp 239
4,800 Providian Financial Corp. 276
3,000 Raymond James Financial, Inc. 131
12,300 Regions Financial Corp. 516
3,500 S&P Mid-Cap 400 Depositary
Receipts 250
725 Wellsford Real Properties, Inc. 11
---------
4,221
---------
HEALTH CARE (3.6%)
3,100 Bergen Brunswig Corp., Class A 132
5,900 Lincare Holdings, Inc. 417
4,200 Marquette Medical Systems, Class A 117
30,200 PharMerica, Inc. 449
17,200 Trigon Healthcare, Inc. 517
4,500 Universal Health Services, Inc.,
Class B 260
---------
1,892
---------
INDUSTRIAL (5.7%)
8,100 AGCO Corp. 240
2,700 CDI Corp. 116
2,900 Culp, Inc. 59
15,900 Franklin Resources, Inc. 843
8,200 Lear Corp. 462
3,200 Lone Star Industries, Inc. 222
7,600 National Steel Corp., Class B 130
3,700 Precision Drilling Corp. 78
7,200 Teradyne, Inc. 288
4,700 Trinity Industries, Inc. 258
3,800 Triumph Group, Inc. 169
4,900 Varco International, Inc. 126
---------
2,991
---------
INSURANCE (3.1%)
4,600 Ambac Financial Group, Inc. 269
3,900 AmerUs Life Holdings, Inc., Class
A 126
4,600 Capital Re Corp. 296
4,700 CMAC Investment Corp. 314
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
INSURANCE (CONTINUED)
9,300 Nationwide Financial Services,
Inc., Class A $ 403
5,600 Old Republic International Corp. 248
---------
1,656
---------
METALS (1.0%)
4,700 General Cable Corp. 213
5,300 Precision Castparts Corp. 314
---------
527
---------
PAPER & PACKAGING (0.7%)
4,500 Bowater, Inc. 254
1,800 Central Newspapers, Inc., Class A 128
---------
382
---------
RESTAURANTS (0.8%)
4,500 Applebee's International, Inc. 104
7,000 Brinker International, Inc. 153
5,600 Michael Foods, Inc. 150
---------
407
---------
SERVICES (2.8%)
7,300 AccuStaff, Inc. 252
11,600 Interim Services, Inc. 392
4,600 Personnel Group of America, Inc. 105
26,100 Philip Service Corp. 272
10,000 Russ Berrie & Co., Inc. 303
6,200 Viad Corp. 150
---------
1,474
---------
TECHNOLOGY (3.2%)
7,900 Atmel Corp. 119
1,200 Inacom Corp. 33
5,700 Linear Technology Corp. 393
9,000 Micron Technology, Inc. 262
16,800 Symantec Corp. 453
3,300 Tektronix, Inc. 147
7,400 Watson Pharmaceuticals, Inc. 266
---------
1,673
---------
TOBACCO (0.1%)
3,900 DIMON, Inc. 65
---------
TRANSPORTATION (6.4%)
14,000 Air Express International Corp. 372
4,000 Airborne Freight Corp. 151
14,700 Atlas Air, Inc. 479
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
14,400 Budget Group, Inc., Class A $ 540
2,100 Canadian National Railway Co. 134
11,500 CNF Transportation, Inc. 413
4,200 Comair Holdings, Inc. 111
6,300 Dana Corp. 367
4,200 Ford Motor Co. 272
3,600 Hertz Corp., Class A 166
3,000 Lubrizol Corp. 116
6,300 Tower Automotive, Inc. 284
---------
3,405
---------
UTILITIES (5.4%)
12,900 Allegheny Energy, Inc. 433
4,600 CMS Energy Corp. 216
10,300 Florida Progress Corp. 429
7,500 Illinova Corp. 226
5,600 IPALCO Enterprises, Inc. 252
6,200 LG&E Energy Corp. 160
3,200 New York State Electric & Gas
Corp. 128
2,700 NICOR, Inc. 114
3,000 Oneok, Inc. 122
8,600 Pinnacle West Capital Corp. 382
13,900 TECO Energy, Inc. 393
1,000 Washington Gas Light Co. 27
---------
2,882
---------
TOTAL COMMON STOCKS (Cost $41,603) 49,881
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (5.1%)
REPURCHASE AGREEMENT (5.1%)
$ 2,719 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/01/98, to be
repurchased at $2,719,
collateralized by U.S. Treasury
Notes, 5.875%, due 9/30/02,
valued at $2,782 (Cost $2,719) 2,719
---------
TOTAL INVESTMENTS (99.3%) (Cost $44,322) 52,600
---------
OTHER ASSETS AND LIABILITIES (0.7%)
Other Assets 602
Liabilities (246)
---------
356
---------
NET ASSETS (100%) $ 52,956
---------
---------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
(000)
---------
<C> <S> <C>
CLASS A:
NET ASSETS $44,833
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,564,178 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $12.58
---------
---------
CLASS B:
NET ASSETS $8,123
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 647,652 outstanding $0.001 par value
shares (authorized 500,000,000 shares) $12.54
---------
---------
</TABLE>
- ----------------------------------
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
7
