<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.
FIXED INCOME PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
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The Fixed Income Portfolio invests primarily in a diversified portfolio of U.S.
Government securities, corporate bonds (including competitively priced
Eurodollar bonds), mortgage-backed securities and other fixed income securities.
Targeted rates of return for the Portfolio are based on current and projected
market and economic conditions and on a conservative investment management
approach.
For the three months ended March 31, 1998, the Portfolio had a total return of
1.53% for the Class A shares and 1.51% for the Class B shares as compared to a
total return of 1.56% for the Lehman Aggregate Bond Index
PERFORMANCE COMPARED TO THE LEHMAN AGGREGATE BOND INDEX(1)
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<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE
AVERAGE ANNUAL
ONE ANNUAL SINCE
YTD YEAR FIVE YEARS INCEPTION
----- --------- ----------- -------------
<S> <C> <C> <C> <C>
PORTFOLIO--CLASS A............ 1.53% 11.76% 7.03% 8.45%
PORTFOLIO--CLASS B............ 1.51 11.61 N/A 6.82
INDEX--CLASS A................ 1.56 11.99 6.94 8.44
INDEX--CLASS B................ 1.56 11.99 N/A 6.60
</TABLE>
1. The Lehman Aggregate Bond Index is an unmanaged index comprised of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.
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.
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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.
(the "Index"). For the one year ended March 31, 1998, the Portfolio had a total
return of 11.76% for Class A shares and 11.61% for Class B shares compared to
11.99% for the Index. For the five year period ended March 31, 1998, the average
annual total return of Class A was 7.03% compared to 6.94% for the Index. From
inception on May 15, 1991 through March 31, 1998, the average annual total
return of Class A was 8.45% compared to 8.44% for the Index. From inception on
January 2, 1996 through March 31, 1998, the average annual total return of Class
B was 6.82% compared to 6.60% for the Index. As of March 31, 1998, the Portfolio
had an SEC 30-day yield of 5.63% for the Class A shares and 5.48% for the Class
B shares.
The fixed income markets provided respectable, if unspectacular, quarterly
returns to start 1998. With U.S. Treasury yields falling marginally across most
of the yield curve during the quarter, the Lehman Aggregate Bond Index returned
1.56% and the Lehman Government Corporate Index returned 1.52% for the quarter.
Given that first quarter returns were negative in three of the prior four years,
these returns represent a very reasonable start to the year.
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 system. 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
2
<PAGE>
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 back towards the levels at which
they started the year, then fluctuated in a narrow range for the remainder of
the quarter.
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.
From a sector standpoint, following a weak performance in January, in general,
non-Treasury sectors modestly outperformed comparable duration Treasuries over
the quarter. Corporate bonds, which have historically performed very well in
January, failed to do so this year as heavy issuance and the Asian crisis
pressured spreads. Nevertheless, as equity markets recovered, corporate spreads
responded to end the quarter roughly unchanged, outperforming Treasuries because
of their yield advantage. Mortgage pass-throughs, which had outperformed
Treasuries in 1997 despite rallying markets, finally cheapened in January as
prepayment fears surged. However, the subsequent backup in rates reduced these
concerns and, supported by a reduction in volatility, the sector managed a small
outperformance for the quarter.
We began the quarter slightly long in duration to our benchmarks based on the
favorable interest rate trend and reasonable, although not compelling, bond
valuation. In February, the favorable interest rate trend appeared to have ended
and we brought duration back to neutral. With the exception of mortgage pass-
throughs, we held an overweighting of yield advantaged sectors as long-term
valuations were favorable despite the near-term spread volatility that these
sectors had witnessed. Among these sectors, we continued to hold a substantial
overweighting in commercial mortgage-backed and asset-backed securities as good
substitutes for both corporate bonds and mortgage pass-throughs. Most of our
focus was on opportunistically adjusting holdings within sectors, rather than
broad-based sector changes.
After holding a long duration position for most of the past year, we begin the
second quarter neutral in duration to our benchmarks. Such a position is now
appropriate, with market valuation in terms of real yields representing fair
value and no clear interest rate trend. We are, however, still overweight in
yield advantaged sectors and anticipate remaining so over the quarter. The
strength in equity markets suggests corporate credit fundamentals are healthy
and the corporate sector should perform well. The commercial mortgage-backed and
asset-backed sectors continue to hold appeal as a high quality substitute for
corporate bonds and high convexity substitute for mortgage pass-throughs.
Mortgage pass-throughs remain an exception to our sector overweightings and we
await better valuations before adding to this sector.
Warren Ackerman, III
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>
FIXED INCOME SECURITIES (95.7%)
US GOVERNMENT AND AGENCY OBLIGATIONS (62.5%)
US TREASURY BONDS (2.3%)
$ 4,250 6.25%, 8/15/23 $ 4,381
----------
US TREASURY NOTES (38.5%)
5,000 3.625%, 7/15/02 (Inflation
Indexed) 4,950
10,000 6.00%, 7/31/02 10,123
30,000 7.25%, 8/15/04 32,452
25,000 6.50%, 8/15/05 26,129
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73,654
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.0%)
8 13.00%, 9/01/10 10
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (14.4%)
3,759 6.00%, 9/01/10 3,718
4,957 6.00%, 2/01/11 4,887
3,121 8.00%, 2/01/12 3,220
7,500 6.00%, 4/01/13 7,380
8,267 6.50%, 4/01/24 8,211
----------
27,416
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (7.3%)
6,837 7.50%, 8/15/26 7,012
1,829 7.00%, 2/15/28 1,848
5,130 7.00%, 2/15/28 5,183
----------
14,043
----------
TOTAL US GOVERNMENT AND AGENCY OBLIGATIONS 119,504
----------
CORPORATE BONDS AND NOTES (24.5%)
CONSUMER STAPLES (1.3%)
2,500 Philip Morris (Floating Rate),
6.15%, 3/15/00 2,495
----------
ELECTRONICS (2.8%)
3,000 Sony Corp., 6.125%, 3/04/03 2,993
2,000 Telefonica de Argentina, (Yankee
Bond) 11.875%, 11/01/04 2,300
----------
5,293
----------
FINANCE (17.7%)
2,500 American General Institutional
Capital, Series A, Series 144A,
7.57%, 12/01/45 2,566
2,000 BankAmerica, Series 144A, 7.70%,
12/31/26 2,059
1,500 BT Capital Trust, Series B1,
Series 144A, 7.90%, 1/15/27 1,531
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ----------
<C> <S> <C>
$ 2,000 First Chicago Corp., Series 144A,
7.75%, 12/01/26 $ 2,029
3,381 First Union-Lehman Brothers
Commercial Mortgage, Series
97-C2A1, 6.479%, 3/18/04 3,406
2,500 General Motors Acceptance Corp.,
7.375%, 6/22/00 2,568
3,000 Goldman Sachs Group, 6.25%,
2/01/03 3,014
2,500 Hutchison Whampoa Ltd., Class B,
Series 144A, 7.45%, 8/01/17 2,288
1,300 Lehman Brothers Holdings, Inc.,
7.375%, 5/15/04 1,354
4,112 Lehman Brothers Large Loan, Series
97-LLI A1, 6.79%, 6/12/04 4,215
1,500 Liberty Mutual Insurance Co.,
Series 144A, 7.697%, 10/15/2097 1,556
1,500 Lumbermens Mutual Casualty Co.,
Series 144A, 9.15%, 7/01/26 1,734
4,000 Merrill Lynch & Co., 6.00%,2/12/03 3,970
1,500 Simon Debartolo Group Series MTN,
7.125%, 9/20/07 1,535
----------
33,825
----------
HEALTH CARE SUPPLIES & SERVICES (0.6%)
1,100 Columbia/HCA Healthcare, Series
MTN, 8.85% , 1/01/07 1,126
----------
MANUFACTURING (1.0%)
2,000 Ford Motor Co., 6.625%, 2/15/28 1,940
----------
RETAIL-GENERAL (1.1%)
2,250 Nordstrom Inc., 6.95%, 3/15/28 2,252
----------
TOTAL CORPORATE BONDS AND NOTES 46,931
----------
ASSET BACKED SECURITIES (8.7%)
6 Federal National Mortgage
Association, REMIC, Series
92-59F, (Floating Rate), 6.15%,
8/25/06 6
1,500 First Plus Home Loan Trust Series
1997-4, Class A4, 6.57%, 4/10/13 1,505
3,000 Merrill Lynch Mortgage Investors,
Inc., Series 1998-C2, Class A1,
6.22%, 2/15/30 3,005
2,892 Mid-State Trust, Series IV A,
8.33%, 4/01/30 3,153
1,845 Resolution Trust Corp., Series
91-M5, Class A, 9.00%, 3/25/17 1,846
4,000 Standard Credit Card Trust, 6.75%,
6/07/00 4,006
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ----------
<C> <S> <C>
$ 3,000 Team Fleet Financing Corp., Series
144A, 7.35%, 5/15/03 $ 3,091
----------
TOTAL ASSET BACKED SECURITIES 16,612
----------
TOTAL FIXED INCOME SECURITIES (Cost $180,756) 183,047
----------
SHORT-TERM INVESTMENT (4.2%)
REPURCHASE AGREEMENT (4.2%)
8,037 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/01/98, to be
repurchased at $8,038,
collateralized by U.S. Treasury
Notes, 6.625%, due 3/31/02,
valued at $8,208 (Cost $8,037) 8,037
----------
TOTAL INVESTMENTS (99.9%) (Cost $188,793) 191,084
----------
OTHER ASSETS AND LIABILITIES (0.1%)
Other Assets 1,847
Liabilities (1,732)
----------
115
----------
NET ASSETS (100%) $ 191,199
----------
----------
CLASS A:
NET ASSETS $186,824
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 17,062,101 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $10.95
----------
----------
CLASS B:
NET ASSETS $4,375
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 399,353 outstanding $0.001 par value
shares (authorized 500,000,000 shares) $10.96
----------
----------
</TABLE>
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Floating Rate Security -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown were those in effect on
March 31, 1998.
Inflation Index Security -- Security includes principal adjustment feature in
which par amount adjusts with the Consumer Price Index to insulate bonds from
the effects of inflation. The face amount shown is that in effect on March 31,
1998.
REMIC -- Real Estate Mortgage Investment Conduit
5
