<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.
INTERNATIONAL EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the International Equity Portfolio is long-term
capital appreciation through investment primarily in equity securities of
non-U.S. issuers. Equity securities for this purpose include common stocks and
equivalents, such as securities convertible into common stocks, and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks.
For the three months ended March 31, 1998, the Portfolio had a total return of
16.49% for the Class A shares and 16.46% for the Class B shares as compared to
14.71% for the Morgan Stanley Capital International (MSCI) EAFE Index (the
"Index"). For the one year ended March 31,
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
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....... 16.49% 27.01% 20.76% 13.81%
PORTFOLIO--CLASS B....... 16.46 26.66 N/A 22.21
INDEX--CLASS A........... 14.71 18.61 11.93 5.39
INDEX--CLASS B........... 14.71 18.61 N/A 9.96
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends net of withholding
taxes).
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 COUNTRY SPECIFIC 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.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
1998, the Portfolio had a total return of 27.01% for Class A shares and 26.66%
for Class B shares compared to 18.61% for the Index. For the five-year period
ended March 31, 1998, the average annual total return of Class A shares was
20.76% compared to 11.93% for the Index. From inception on August 4, 1989 to
March 31, 1998, the average annual total return of Class A shares was 13.81%
compared to 5.39% for the Index. From inception on January 2, 1996 to March 31,
1998, the average annual total return of Class B shares was 22.21% compared to
9.96% for the Index.
During the period, the Portfolio's exposure to Japanese blue chips was reduced
through the final sale of TDK and a reduction in the substantial holding in Fuji
Photo Film while an initial position was established in the defensive and highly
cash generative Central Japan Railway.
With the strong recent performance of our global franchise stocks, there is no
clear area of value combined with quality in international stock markets.
Indeed, the substantial rally in South East Asian markets from their mid-January
lows means that the stocks there are fair value rather than cheap while
significant macro risk remains. This means that the only cheap stocks reside in
Japan and they are all concentrated in the domestic sectors of the economy which
are beset by oversupply and complete indifference to returns on capital. It is
essential for Japan's economic health that these sectors are no longer cosseted
by regulatory protection and that returns on capital employed are improved
through a more efficient use of labor. This is easily said but less easy to
achieve in a society where lifetime employment is embedded in an unwritten and
unspoken social contract. It is difficult to exaggerate the challenges Japan's
politicians face in restructuring their economy not the least because the
overwhelmingly dominant political party has its power base deeply entrenched in
the old system. Indeed the absurdly ineffective public works programs of recent
years have been encouraged by politicians as the awarding of public works
contracts is an
2
<PAGE>
essential element of a political patronage system revolving around the grossly
inefficient construction industry. To think that politicians mired in this pork
barrel culture will have the resolve to overhaul Japan's entire economic system
is asking alot. However, for Japan's cheap stocks to constitute value requires
just such a transformation as it is not going to happen at the corporate level
if our recent numerous interviews with Japanese management remotely reflect the
reality of contemporary management philosophy.
With risks in Asia still high and share prices substantially recovered from the
lows, with U.K. macro risk rising and its corporate quality well recognized, and
with Europe's healthy economic recovery fully discounted, there is little to do
but await developments in Japan while constantly visiting companies there to
discern change at the corporate level.
This strategy implies that we do not have substantial disagreement with world
stock markets on the pricing of many individual equities. Unfortunately, that is
the fate of the value investor at the very late stages of a bull market. To have
become an involuntary momentum investor is neither comforting nor intellectually
rewarding. Fortunately, year-to-date, it has been moderately materially
rewarding for our clients. On a more positive note, the real yields of around 3%
in the major bond markets of the world continue to be supportive of equity
valuations in the absence of any acceleration in core inflation.
Dominic Caldecott
PORTFOLIO MANAGER
April 1998
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (89.6%)
AUSTRALIA (2.0%)
1,418,400 Brambles Industries Ltd. $ 29,506
1,646,600 CSR Ltd. 5,718
14,299,100 Fosters Brewing Group Ltd. 31,117
---------
66,341
---------
BELGIUM (0.4%)
243,350 G.I.B. Holdings Ltd. 12,189
2,156 G.I.B. Holdings Ltd. VVPR (New) 106
---------
12,295
---------
CANADA (3.3%)
291,680 Potash Corp. of Saskatchewan, Inc. 26,508
1,531,700 Renaissance Energy Ltd. 31,264
1,899,350 TELUS Corp. 55,574
---------
113,346
---------
DENMARK (1.2%)
145,500 Den Danske Bank A/S 19,013
269,908 Unidanmark A/S, Class A
(Registered) 21,436
---------
40,449
---------
FINLAND (0.6%)
350,000 Huhtamaki Oyj, Series 1 19,022
168,467 Merita Ltd., Class A 1,015
---------
20,037
---------
FRANCE (11.1%)
389,600 Alcatel Alsthom 73,153
14,010 Bongrain 7,148
167,850 Cie de Saint Gobain 27,641
419,300 Elf Aquitaine 54,968
809,100 France Telecom 42,689
270,300 Groupe Danone 65,284
279,000 Rhone-Poulenc, Class A 14,184
410,654 Schneider 31,625
264,750 Scor 15,174
255,000 Total, Class B 30,630
904,198 Usinor Sacilor 15,124
---------
377,620
---------
GERMANY (4.9%)
1,081,700 BASF AG 47,848
725,400 Bayer AG 33,009
138,700 Hoechst AG 5,404
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
37,750 Karstadt AG $ 14,698
24,900 Varta AG 4,632
364,000 VEBA AG 25,953
67,110 Viag AG 36,907
---------
168,451
---------
HONG KONG (2.1%)
8,096,855 Hong Kong Land Holdings Ltd. 13,927
5,034,000 Hysan Development Co., Ltd. 8,121
16,090,537 Jardine Strategic Holdings, Inc. 44,088
93,500 Swire Pacific Ltd., Class A 495
6,842,500 Swire Pacific Ltd., Class B 6,579
---------
73,210
---------
ITALY (4.3%)
5,971,300 Mediaset S.p.A. 37,783
17,948,487 Telecom Italia S.p.A. RNC 109,975
---------
147,758
---------
JAPAN (13.9%)
1,885,000 Aisin Seiki Co., Ltd. 19,507
694,600 Aoyama Trading Co., Ltd. 16,668
608,000 Canon, Inc. 13,724
1,020 Central Japan Railway Co. 3,281
348,000 Chudenko Corp. 8,769
1,640,000 Daibiru Corp. 11,991
2,952,000 Daicel Chemical Industries Ltd. 5,889
95,000 Daiwa House Industry Co. 695
1,049,000 Eisai Co., Ltd. 14,396
2,191,000 Fuji Photo Film Ltd. 81,495
778,000 Fujisawa Pharmaceutical Co., Ltd. 6,943
1,511,000 Hitachi Ltd. 10,991
4,640 Japan Tobacco, Inc. 34,656
3,214,000 Kao Corp. 42,178
1,461,000 Matsushita Electric Industrial
Co., Ltd. 23,446
909,000 NEC Corp. 9,134
7,750,000 NKK Corp. 6,974
3,626,000 Nichido Fire & Marine Insurance
Co., Ltd. 19,578
641,000 Ono Pharmaceutical Co., Ltd. 13,892
232,000 Ryosan Co. 3,984
2,018,000 Shionogi & Co., Ltd. 10,972
167,000 Sony Corp. 14,151
4,224,000 Sumitomo Marine & Fire Insurance
Co. 26,101
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
JAPAN (CONTINUED)
1,153,000 Sumitomo Rubber Industries $ 5,992
2,282,000 Toyo Seikan Kaisha Ltd. 34,226
1,470,000 Yamanouchi Pharmaceutical Co. 33,732
---------
473,365
---------
NETHERLANDS (6.4%)
726,800 ABN Amro Holding N.V. 16,769
244,500 Akzo Nobel N.V. 49,668
844,360 Hollandsche Beton Groep N.V. 16,484
823,783 ING Groep N.V. 46,746
271,100 Koninklijke Bijenkorf Beheer N.V. 19,051
642,340 Koninklijke KNP BT N.V. 16,885
713,700 Philips Electronics N.V. 52,379
---------
217,982
---------
NEW ZEALAND (0.7%)
2,232,479 Fisher & Paykel Industries Ltd. 6,725
6,322,500 Lion Nathan Ltd. 16,286
392,500 Smith City Group Ltd. --
---------
23,011
---------
PORTUGAL (0.5%)
501,650 Cimpor SGPS 17,682
---------
SINGAPORE (0.4%)
1,923,900 Development Bank of Singapore Ltd.
(Foreign) 14,059
---------
SPAIN (1.8%)
2,831,300 Iberdrola 43,032
434,300 Telefonica de Espana 19,152
---------
62,184
---------
SWEDEN (3.9%)
1,017,400 ForeningsSparbanken AB 33,536
3,259,900 Nordbanken Holding AB 21,613
690,400 Pharmacia & Upjohn, Inc., ADR 29,796
203,300 S.K.F. AB, Class B 4,819
229,600 Skandia Forsakrings AB 14,964
1,051,900 Svenska Cellulosa AB, Class B 28,949
---------
133,677
---------
SWITZERLAND (4.7%)
17,840 ABB AG 26,666
2,755 Cie Financiere Richemont AG, Class
A 3,706
23,040 Forbo Holding AG (Registered) 12,714
20,981 Holderbank Financiere Glarus AG,
Class B (Bearer) 22,027
38,400 Nestle (Registered) 73,398
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
13,814 Schindler Holding AG
(Participating Certificates) $ 20,032
---------
158,543
---------
UNITED KINGDOM (27.4%)
6,355,200 Aggreko plc 18,640
573,700 Associated British Foods plc 5,918
3,123,839 B.A.T. Industries plc 31,885
5,385,035 BG plc 27,978
8,707,231 BTR plc 28,603
2,729,867 Bank of Scotland 32,324
2,778,900 British Telecommunications plc 30,273
6,833,600 Bunzl plc 31,611
2,490,450 Burmah Castrol plc 50,839
6,355,200 Christian Salvesen plc 12,136
2,212,500 Commercial Union plc 43,237
1,240,900 Danka Business Systems plc 5,615
4,276,800 Diageo plc 50,390
3,645,128 English China Clays plc 14,662
2,910,000 Great Universal Stores plc 36,164
2,551,400 Imperial Tobacco Group plc 18,772
5,082,251 John Mowlem & Co. plc 10,477
2,783,500 Kwik Save Group plc 19,221
2,872,000 Lonrho plc 5,199
2,370,068 National Westminster Bank plc 43,417
2,903,520 Peninsular & Oriental Steam
Navigation Co. 43,553
2,839,900 Premier Farnell plc 18,253
1,541,200 RMC Group plc 25,056
3,509,500 Racal Electronic plc 19,998
4,238,002 Reckitt & Colman plc 78,629
2,649,268 Rolls-Royce plc 12,388
3,304,400 Royal & Sun Alliance Insurance
Group plc 42,145
1,756,750 Southern Electric plc 16,135
2,057,102 Tate & Lyle plc 17,963
6,610,300 Unilever plc 62,596
59,800 Wolseley plc 460
13,800,900 WPP Group plc 78,643
---------
933,180
---------
TOTAL COMMON STOCKS (Cost $2,203,312) 3,053,190
---------
PREFERRED STOCKS (1.6%)
GERMANY (1.6%)
97,050 Volkswagen AG (Cost $19,632) 55,000
---------
<CAPTION>
NO. OF
RIGHTS
- ---------------
<C> <S> <C>
RIGHTS (0.1%)
GERMANY (0.1%)
97,050 Volkswagen AG, expiring 4/7/98 1,704
---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- --------------- ---------
<C> <S> <C>
SINGAPORE (0.0%)
349,800 Development Bank of Singapore $ 251
---------
TOTAL RIGHTS (Cost $0) 1,955
---------
TOTAL FOREIGN SECURITIES (91.3%) 3,110,145
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (4.4%)
REPURCHASE AGREEMENT (4.4%)
$ 150,136 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/01/98, to be
repurchased at $150,159,
Collateralized by U.S. Treasury
Notes 5.50% due 3/31/03, Valued
at $153,334 (Cost $150,136) 150,136
---------
FOREIGN CURRENCY (4.2%)
AUD 5,106 Australian Dollar 3,377
GBP 427 British Pound 716
DEM 188,053 German Mark 101,691
DKK 10,027 Danish Krone 1,422
HKD 73 Hong Kong Dollar 9
JPY 4,557,034 Japanese Yen 34,173
ESP 81 Spanish Peseta 1
SEK 1,056 Swedish Krona 132
---------
TOTAL FOREIGN CURRENCY (Cost $145,796) 141,521
---------
<CAPTION>
AMOUNT
(000)
---------
<C> <S> <C>
TOTAL INVESTMENTS (99.9%) (Cost $2,518,876) $3,401,802
---------
OTHER ASSETS AND LIABILITIES (0.1%)
Other Assets 1,123,807
Liabilities (1,119,073)
---------
4,734
---------
NET ASSETS (100%) $3,406,536
---------
---------
CLASS A:
NET ASSETS $3,399,818
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 170,058,050 outstanding $.001 par
value shares (authorized 500,000,000 shares)
$19.99
---------
---------
CLASS B:
NET ASSETS $6,718
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 336,658 outstanding $.001 par value
shares (authorized 500,000,000 shares)
$19.95
---------
---------
</TABLE>
- ----------------------------------
ADR -- American Depositary Receipt
RNC -- Non Convertible Savings Shares
6
