<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08346
---------------------------------------------
MORGAN STANLEY EASTERN EUROPE FUND, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1221 AVENUE OF THE AMERICAS 22ND FLOOR NEW YORK, NY 10020
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
RONALD E. ROBISON
1221 AVENUE OF THE AMERICAS 34TH FLOOR NEW YORK, NY 10020
- -------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 1-800-221-6726
----------------------------
Date of fiscal year end: 12/31
--------------------------
Date of reporting period: 6/30/04
-------------------------
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. Section 3507.
<Page>
ITEM 1. REPORTS TO STOCKHOLDERS.
The Fund's semi-annual report transmitted to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 is as follows:
<Page>
SEMI-ANNUAL REPORT
MORGAN STANLEY EASTERN EUROPE FUND, INC.
JUNE 30, 2004
DIRECTORS
CHARLES A. FIUMEFREDDO JOSEPH J. MCALINDEN
MICHAEL BOZIC VICE PRESIDENT
EDWIN J. GARN
WAYNE E. HEDIEN BARRY FINK
JAMES F. HIGGINS VICE PRESIDENT
DR. MANUEL H. JOHNSON
JOSEPH J. KEARNS STEFANIE V. CHANG
MICHAEL NUGENT VICE PRESIDENT
FERGUS REID
AMY R. DOBERMAN
VICE PRESIDENT
JAMES W. GARRETT
TREASURER AND CHIEF
FINANCIAL OFFICER [MORGAN STANLEY LOGO]
OFFICERS MICHAEL J. LEARY
CHARLES A. FIUMEFREDDO ASSISTANT TREASURER MORGAN STANLEY
CHAIRMAN OF THE BOARD EASTERN EUROPE FUND, INC.
MARY E. MULLIN
MITCHELL M. MERIN SECRETARY
PRESIDENT
RONALD E. ROBISON
EXECUTIVE VICE PRESIDENT
AND PRINCIPAL EXECUTIVE
OFFICER
INVESTMENT ADVISER
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
ADMINISTRATOR
JPMORGAN INVESTOR SERVICES COMPANY
73 TREMONT STREET
BOSTON, MASSACHUSETTS 02108
CUSTODIAN
JPMORGAN CHASE BANK
270 PARK AVENUE
NEW YORK, NEW YORK 10017
STOCKHOLDER SERVICING AGENT
AMERICAN STOCK TRANSFER & TRUST COMPANY
59 MAIDEN LANE
NEW YORK, NEW YORK 10030
1 (800) 278-4353
LEGAL COUNSEL
CLIFFORD CHANCE US LLP
31 WEST 52ND STREET
NEW YORK, NEW YORK 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
FOR ADDITIONAL FUND INFORMATION,
INCLUDING THE FUND'S NET ASSET VALUE PER
SHARE AND INFORMATION REGARDING THE
INVESTMENTS COMPRISING THE FUND'S
PORTFOLIO, PLEASE CALL 1-800-221-6726 OR
VISIT OUR WEBSITE AT MORGAN STANLEY
www.morganstanley.com/im. INVESTMENT MANAGEMENT INC.
(C) 2004 MORGAN STANLEY INVESTMENT ADVISER
<Page>
MORGAN STANLEY EASTERN EUROPE FUND, INC.
LETTER TO STOCKHOLDERS Overview
PERFORMANCE
For the six months ended June 30, 2004, the Morgan Stanley Eastern Europe Fund,
Inc. (the "Fund") had a total return, based on net asset value per share of
10.12%, compared to 7.80% for the Morgan Stanley Capital International (MSCI)
Emerging Markets Eastern Europe Index (the "Index"), a composite index comprised
of the market capitalization weighted MSCI local indices for Russia, Poland, the
Czech Republic and Hungary. On June 30, 2004, the closing price of the Fund's
shares on the New York Stock Exchange was $28.40, representing a 6.4% discount
to the Fund's net asset value per share.
FACTORS AFFECTING PERFORMANCE
- In the six months ending June 30, 2004, the Eastern European region
gained 7.8% outperforming the Emerging Markets.
- Eastern Europe finished the second quarter down 13.3% (Index return), the
region's worst quarterly performance since the third quarter of 2001, on
the back of fears over future U.S. interest rate hikes, China's economic
slowdown and political problems with Yukos, Russia's largest oil
exporter. In 2003, the asset class gained 56.7% and 24.4% in the first
three months of 2004.
- The asset class continued to re-rate given a recovery in global growth,
strong and improving domestic economies, rising corporate earnings and
attractive valuations.
- The region, however, did not escape the period in review without renewed
volatility. After a long period of tranquility, volatility in Eastern
Europe spiked in the second quarter with the asset class coming under
selling pressure in April and May before stabilizing in June.
- Russia, given strong economic fundamentals, weathered a sell-off in the
second quarter to return 3.1%. Russia has recently underperformed given
the political problems with Yukos.
- Central European countries (Hungary, the Czech Republic and Poland),
after lagging in 2003, witnessed a significant run in the last few months
as sentiment improved leading up to European Union (EU) accession in May
of 2004. The Central European countries are now members of the EU, and
each equity market's path of 'conversion' is winding down. While members
of the political union, each country is now in the process of negotiating
entry into the European Monetary System, the economic component of the
EU.
MANAGEMENT STRATEGIES
- We remain positive on Eastern Europe, as valuations and fundamentals
remain attractive. We believe that Russia, despite expected near-term
volatility, remains an attractive top down growth story with a strong
current account balance, high foreign exchange reserve levels and still
strong liquidity. The favorable outcome of the Duma elections held in
December 2003, a new streamlined government and the re-election of
President Putin in March are expected to boost reform momentum in the
country.
- We remain bullish on Turkey, and expect the declining trend in real
interest rates to continue, spurring above-consensus growth in 2004.
Meanwhile, the Eastern European convergence to the EU bloc, ahead of
European Monetary Union accession in 2008-9, will likely drive further
foreign direct investment inflows and keep interest rates low, thus
spurring development and productivity-led growth.
Sincerely,
/s/ Ronald E. Robison
Ronald E. Robison
Executive Vice President--
Principal Executive Officer
July 2004
2
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MORGAN STANLEY EASTERN EUROPE FUND, INC.
STATEMENT OF NET ASSETS June 30, 2004 (unaudited)
<Table>
<Caption>
SHARES VALUE
(000)
- ----------------------------------------------------------------------------------------
COMMON STOCKS (102.8%)
(UNLESS OTHERWISE NOTED)
CROATIA (2.0%)
PHARMACEUTICALS
Pliva d.d. (Registered) GDR 147,429 $ 2,190
========================================================================================
CZECH REPUBLIC (2.3%)
HEALTH CARE EQUIPMENT & SUPPLIES
Zentiva NV (a)130,000 2,470
========================================================================================
GERMANY (0.5%)
OIL & GAS
PetroKazakhstan, Inc., Class A 21,500 585
========================================================================================
HUNGARY (2.8%)
DIVERSIFIED TELECOMMUNICATION SERVICES
Matav Rt 527,800 2,117
Matav Rt. ADR 45,229 918
- ----------------------------------------------------------------------------------------
3,035
========================================================================================
POLAND (8.5%)
DIVERSIFIED TELECOMMUNICATION SERVICES
Telekomunikacja Polska SA 400,000 1,657
Telekomunikacja Polska SA
GDR 1,878,100 7,625
- ----------------------------------------------------------------------------------------
9,282
========================================================================================
RUSSIA (74.5%)
BEVERAGES
Baltika Brewery 357,364 4,753
- ----------------------------------------------------------------------------------------
COMMERCIAL BANKS
Sberbank RF 19,500 7,917
- ----------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Uralsvyazinform ADR 230,300 1,773
- ----------------------------------------------------------------------------------------
INTEGRATED OIL & GAS
LUKOIL 253,100 6,656
LUKOIL ADR 19,400 2,041
OAO Gazprom (Registered) ADR 279,400 8,019
Yukos ADR 312,360 9,941
- ----------------------------------------------------------------------------------------
26,657
- ----------------------------------------------------------------------------------------
METALS & MINING
MMC Norilsk Nickel ADR 106,365 5,903
Peter Hambro Mining plc (a)71,705 543
- ----------------------------------------------------------------------------------------
6,446
- ----------------------------------------------------------------------------------------
OIL & GAS EXPLORATION & PRODUCTION
Surgutneftegaz (Preferred) ADR 430,800 18,524
Surgutneftegaz ADR 209,444 6,849
- ----------------------------------------------------------------------------------------
25,373
- ----------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES
Mobile Telesystems ADR 53,800 6,564
Volga Telecom ADR (a)300,000 $ 1,680
- ----------------------------------------------------------------------------------------
8,244
- ----------------------------------------------------------------------------------------
81,163
========================================================================================
TURKEY (10.4%)
COMMERCIAL SERVICES & SUPPLIES
Efes Sinai Yatirim Holding AS,
Class B (a)903,051,800 2,462
- ----------------------------------------------------------------------------------------
CONTAINERS & PACKAGING
Anadolu Cam Sanayii AS 940,513,000 2,153
- ----------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES
Enka Insaat ve Sanayi AS 326,194,472 6,697
- ----------------------------------------------------------------------------------------
11,312
========================================================================================
UKRAINE (1.8%)
CHEMICALS
Stirol Concern ADR (a)22,250 651
- ----------------------------------------------------------------------------------------
OIL & GAS
Ukrnafta Oil Co. ADR (a)15,900 1,280
- ----------------------------------------------------------------------------------------
1,931
========================================================================================
TOTAL COMMON STOCKS
(Cost $94,564) 111,968
========================================================================================
<Caption>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------
CORPORATE BOND (1.2%)
RUSSIA (1.2%)
DIVERSIFIED TELECOMMUNICATION SERVICES
MCSI Holding Ltd. (Secured Notes)
9.00%, 4/15/07
(Cost $1,279) $ (b)1,486 1,263
========================================================================================
SHORT-TERM INVESTMENT (1.7%)
UNITED STATES (1.7%)
REPURCHASE AGREEMENT
J.P. Morgan Securities, Inc., 1.25%,
dated 6/30/04, due 7/1/04,
repurchase price $1,846
(Cost $1,846) (c)1,846 1,846
========================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 3
<Page>
MORGAN STANLEY EASTERN EUROPE FUND, INC.
STATEMENT OF NET ASSETS (CONT'D) June 30, 2004 (unaudited)
<Table>
<Caption>
VALUE
(000)
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (105.7%)
(Cost $97,689) $115,077
========================================================================================
<Caption>
AMOUNT
(000)
- ----------------------------------------------------------------------------------------
OTHER ASSETS (1.0%)
Dividends Receivable $ 816
Receivable for Investments
Sold 203
Foreign Currency (Cost $70) 71
Tax Reclaim Receivable 22
Other 10 1,122
========================================================================================
LIABILITIES (-6.7%)
Payable For:
Dividends Declared (7,040)
Investment Advisory Fees (151)
Directors' Fees and
Expenses (22)
Custodian Fees (12)
Administrative Fees (8)
Other Liabilities (79) (7,312)
========================================================================================
NET ASSETS (100%)
Applicable to 3,589,845 issued and outstanding
$ 0.01 par value shares (100,000,000 shares
authorized) $108,887
========================================================================================
NET ASSET VALUE PER SHARE $ 30.33
========================================================================================
AT JUNE 30, 2004, NET ASSETS CONSISTED OF:
Common Stock $ 36
Paid-in Capital 75,321
Undistributed Net Investment Income
(Accumulated Net Investment Loss) 445
Accumulated Net Realized Gain (Loss) 15,684
Unrealized Appreciation (Depreciation) on
Investments and Foreign Currency Translations 17,401
========================================================================================
TOTAL NET ASSETS $108,887
========================================================================================
</Table>
(a) Non-income producing.
(b) Security was valued at fair value -- At June 30, 2004, the Fund held
$1,263,000 of fair valued securities, representing 1.2% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of this statement of
net assets. The investment in the repurchase agreement is through
participation in a joint account with affiliated funds.
ADR American Depositary Receipt
GDR Global Depositary Receipt
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION - JUNE 30, 2004
<Table>
<Caption>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- -------------------------------------------------------------------------------
Integrated Oil & Gas $26,657 24.5%
Oil & Gas Exploration &
Production 25,373 23.3
Diversified Telecommunication
Services 15,353 14.1
Wireless Telecommunication
Services 8,244 7.5
Commercial Banks 7,917 7.3
Industrial Conglomerates 6,697 6.1
Metals & Mining 6,446 5.9
Beverages 4,753 4.4
Health Care Equipment & Supplies 2,470 2.3
Commercial Services & Supplies 2,462 2.3
Pharmaceuticals 2,190 2.0
Containers & Packaging 2,153 2.0
Oil & Gas 1,865 1.7
Other 2,497 2.3
- -------------------------------------------------------------------------------
$115,077 105.7%
===============================================================================
</Table>
4 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
MORGAN STANLEY EASTERN EUROPE FUND, INC.
Financial Statements
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2004
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of $113 of foreign taxes withheld) $ 1,639
Interest 21
==========================================================================================================================
TOTAL INCOME 1,660
==========================================================================================================================
EXPENSES
Investment Advisory Fees 938
Custodian Fees 63
Professional Fees 48
Administrative Fees 32
Stockholder Reporting Expenses 16
Stockholder Servicing Fees 7
Directors' Fees and Expenses 4
Other Expenses 24
==========================================================================================================================
TOTAL EXPENSES 1,132
==========================================================================================================================
NET INVESTMENT INCOME (LOSS) 528
==========================================================================================================================
NET REALIZED GAIN (LOSS) ON:
Investments 15,853
Foreign Currency Transactions (126)
==========================================================================================================================
NET REALIZED GAIN (LOSS) 15,727
==========================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON:
Investments (6,147)
Foreign Currency Translations 1
==========================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (6,146)
==========================================================================================================================
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 9,581
==========================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 10,109
==========================================================================================================================
</Table>
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2004 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2003
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss) $ 528 $ (231)
Net Realized Gain (Loss) 15,727 27,053
Change in Unrealized Appreciation (Depreciation) (6,146) 24,626
==========================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 10,109 51,448
==========================================================================================================================
Distributions from and/or in excess of:
Net Realized Gains (7,040) (18,726)
==========================================================================================================================
Capital Share Transactions:
Repurchase of Shares (16,866 shares and 25,873 shares, respectively) (426) (576)
==========================================================================================================================
TOTAL INCREASE (DECREASE) 2,643 32,146
==========================================================================================================================
Net Assets:
Beginning of Period 106,244 74,098
==========================================================================================================================
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME (ACCUMULATED NET $108,887 $106,244
INVESTMENT LOSS) OF $445 AND $(83), RESPECTIVELY)
==========================================================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 5
<Page>
MORGAN STANLEY EASTERN EUROPE FUND, INC.
SELECTED PER SHARE DATA AND RATIOS Financial Highlights
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 ------------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 29.46 $ 20.40 $ 18.55 $ 15.80 $ 20.38 $ 12.65
- -------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.15+ (0.06)+ (0.15)+ (0.21) (0.32) (0.34)
Net Realized and Unrealized Gain (Loss) on Investments 2.65 14.28 2.45 2.71 (4.51) 7.91
- -------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.80 14.22 2.30 2.50 (4.83) 7.57
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from and/or in excess of:
Net Realized Gain (1.96) (5.19) (0.58) -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Anti-Dilutive Effect of Share Repurchase Program 0.03 0.03 0.13 0.25 0.25 0.16
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 30.33 $ 29.46 $ 20.40 $ 18.55 $ 15.80 $ 20.38
===============================================================================================================================
PER SHARE MARKET VALUE, END OF PERIOD $ 28.40 $ 25.49 $ 17.17 $ 15.93 $ 12.19 $ 16.88
===============================================================================================================================
TOTAL INVESTMENT RETURN:
Market Value 19.17% ** 76.64% 11.17% 30.71% (27.78)% 71.98%
Net Asset Value (1) 10.12% ** 71.84% 13.42% 17.41% (22.47)% 61.11%
===============================================================================================================================
RATIOS, SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) $108,887 $106,244 $ 74,098 $70,465 $65,700 $90,879
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.93% * 2.08% 2.22% 2.42% 2.25% 2.51%
Ratio of Net Investment Income
(Loss) to Average Net Assets 0.90% * (0.24)% (0.70)% (1.29)% (1.53)% (2.25)%
Portfolio Turnover Rate 74% ** 159% 155% 150% 123% 161%
- -------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. This percentage is not an indication of the performance of a
stockholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
+ Per share amount is based on average shares outstanding.
* Annualized
** Not Annualized
6 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
MORGAN STANLEY EASTERN EUROPE FUND, INC.
NOTES TO FINANCIAL STATEMENTS June 30, 2004 (unaudited)
Morgan Stanley Eastern Europe Fund, Inc. (the "Fund") was incorporated in
Maryland on February 3, 1994 and is registered as a non-diversified, closed-end
management investment company under the Investment Company Act of 1940 (the
"1940 Act"), as amended. The Fund's investment objective is long-term capital
appreciation through investments primarily in equity securities.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with accounting principles generally accepted in the United States.
Such policies are consistently followed by the Fund in the preparation of its
financial statements. Accounting principles generally accepted in the United
States may require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange are valued
at the latest quoted sales price on the valuation date. Equity securities
listed or traded on NASDAQ, for which market quotations are available, are
valued at the NASDAQ Official Closing Price. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued at the mean between the current bid and asked
prices obtained from reputable brokers. Debt securities purchased with
remaining maturities of 60 days or less are valued at amortized cost, if it
approximates value.
All other securities and investments for which market values are not
readily available, including restricted securities, and those securities
for which it is inappropriate to determine prices in accordance with the
aforementioned procedures, are valued at fair value as determined in good
faith under procedures adopted by the Board of Directors, although the
actual calculations may be done by others. Factors considered in making
this determination may include, but are not limited to, information
obtained by contacting the issuer, analysts, or the appropriate stock
exchange (for exchange-traded securities), analysis of the issuer's
financial statements or other available documents and, if necessary,
available information concerning other securities in similar circumstances.
Most foreign markets close before the New York Stock Exchange (NYSE).
Occasionally, developments that could affect the closing prices of
securities and other assets may occur between the times at which valuations
of such securities are determined (that is, close of the foreign market on
which the securities trade) and the close of business on the NYSE. If these
developments are expected to materially affect the value of the securities,
the valuations may be adjusted to reflect the estimated fair value as of
the close of the NYSE, as determined in good faith under procedures
established by the Board of Directors.
2. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements under
which the Fund lends excess cash and takes possession of securities with an
agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as custodian
for the Fund takes possession of the underlying securities (collateral),
with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that
any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy
of the collateral. In the event of default on the obligation to repurchase,
the Fund has the right to liquidate the collateral and apply the proceeds
in satisfaction of the obligation. In the event of default or bankruptcy by
the counterparty to the agreement, realization and/or retention of the
collateral or proceeds may be subject to legal proceedings.
The Fund, along with other affiliated investment companies, may utilize a
joint trading account for the purpose of entering into one or more
repurchase agreements.
3. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the mean of the bid and asked prices of such currencies
against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates
of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the
7
<Page>
MORGAN STANLEY EASTERN EUROPE FUND, INC.
June 30, 2004 (unaudited)
NOTES TO FINANCIAL STATEMENTS (CONT'D)
foreign exchange rates from the fluctuations arising from changes in the
market prices of the securities held at period end. Similarly, the Fund
does not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of securities sold
during the period. Accordingly, realized and unrealized foreign currency
gains (losses) due to securities transactions are included in the reported
net realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Net
Assets. The change in unrealized currency gains (losses) on foreign
currency translations for the period is reflected in the Statement of
Operations.
A significant portion of the Fund's net assets consist of securities of
issuers located in emerging markets or which are denominated in foreign
currencies. Changes in currency exchange rates will affect the value of and
investment income from such securities. Securities in emerging markets
involve certain considerations and risks not typically associated with
investments in the United States. In addition to smaller size, lesser
liquidity and greater volatility, certain securities' markets in which the
Fund may invest are less developed than the U.S. securities market and
there is often substantially less publicly available information about
these issuers. Further, emerging market issues may be subject to
substantial governmental involvement in the economy and greater social,
economic and political uncertainty. Accordingly, the price which the Fund
may realize upon sale of securities in such markets may not be equal to its
value as presented in the financial statements.
The Fund may use derivatives to achieve its investment objectives. The Fund may
engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in options, swaps and structured notes. Consistent with the
Fund's investment objectives and policies, the Fund may use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments that the Fund has utilized
and their associated risks:
4. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis. Dividend income is recorded on
the ex-dividend date (except certain dividends which may be recorded as
soon as the Fund is informed of such dividends) net of applicable
withholding taxes. Distributions to stockholders are recorded on the ex-
dividend date.
B. ADVISER: Morgan Stanley Investment Management Inc. (the "Adviser") provides
investment advisory services to the Fund under the terms of an Investment
Advisory Agreement (the "Agreement"). Under the Agreement, the Adviser is paid a
fee computed weekly and payable monthly at the annual rate of 1.60% of the
Fund's average weekly net assets.
8
<Page>
MORGAN STANLEY EASTERN EUROPE FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D) June 30, 2004 (unaudited)
C. ADMINISTRATOR: JPMorgan Chase Bank, through its corporate affiliate J.P.
Morgan Investor Services Co. (the "Administrator"), provides administrative
services to the Fund under an Administration Agreement. The Administrator is
paid a fee computed weekly and payable monthly at an annual rate of 0.02435% of
the Fund's average weekly net assets, plus $24,000 per annum. In addition, the
Fund is charged for certain out-of-pocket expenses incurred by the Administrator
on its behalf. An employee of the Administrator is an Officer of the Fund.
D. CUSTODIAN: JPMorgan Chase Bank serves as custodian for the Fund. The
Custodian holds cash, securities, and other assets of the Fund as required by
the 1940 Act. Custody fees are payable monthly based on assets held in custody,
investment purchases and sales activity and account maintenance fees, plus
reimbursement for certain out-of-pocket expenses.
E. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the financial
statements. Dividend income and distributions to stockholders are recorded on
the ex-dividend date.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income and/ or capital gains earned or repatriated.
Taxes are accrued and applied to net investment income, net realized gains and
net unrealized appreciation as such income and/or gains are earned.
The tax character of distributions paid may differ from the character of
distributions shown on the Statements of Changes in Net Assets due to short-term
capital gains being treated as ordinary income for tax purposes. The tax
character of distributions paid during 2003 and 2002 was as follows:
<Table>
<Caption>
2003 DISTRIBUTIONS 2002 DISTRIBUTIONS
PAID FROM: PAID FROM:
(000) (000)
- ---------------------------- --------------------------
LONG-TERM LONG-TERM
ORDINARY CAPITAL ORDINARY CAPITAL
INCOME GAIN INCOME GAIN
- ---------------------------------------------------------
$15,844 $2,882 $322 $1,774
</Table>
The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations, which
may differ from accounting principles generally accepted in the United States of
America. The book/tax differences are considered either temporary or permanent
in nature.
Temporary differences are attributable to differing book and tax treatments for
the timing of the recognition of gains and losses on certain investment
transactions and the timing of the deductibility of certain expenses.
Permanent book and tax basis differences may result in reclassifications among
undistributed (distributions in excess of) net investment income (or accumulated
net investment loss), accumulated net realized gain (loss) and paid-in capital.
At December 31, 2003, the components of distributable earnings on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY INCOME LONG-TERM CAPITAL GAIN
(000) (000)
- ---------------------------------------------------------
$4,334 $2,705
- ---------------------------------------------------------
</Table>
At June 30, 2004, the U.S. Federal income tax cost basis of investments was
$97,689,000 and, accordingly, net unrealized appreciation for U.S. Federal
income tax purposes was $17,388,000 of which $19,452,000 related to appreciated
securities and $2,064,000 related to depreciated securities.
Net capital and currency losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the year ended December 31, 2003, the Fund deferred to January
1, 2004, for U.S. Federal income tax purposes, post-October currency losses of
$61,000.
F. CONTRACTUAL OBLIGATIONS: The Fund enters into contracts that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
G. OTHER: During the six months ended June 30, 2004, the Fund made purchases and
sales totaling approximately $84,129,000 and $85,610,000, respectively, of
investment securities other than long-term U.S. Government securities and
short-term investments. There were no purchases or sales of long-term U.S.
Government securities.
Settlement and registration of securities transactions may be subject to
significant risks not normally associated with investments in the United States.
In certain markets, including Russia, ownership of shares is defined according
to entries in the issuer's share register. In Russia, there currently exists no
central registration system and the share registrars may not be subject to
effective state supervision. It is possible the Fund could lose its share
registration through fraud, negligence or even mere
9
<Page>
MORGAN STANLEY EASTERN EUROPE FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D) June 30, 2004 (unaudited)
oversight. In addition, shares being delivered for sales and cash being paid for
purchases may be delivered before the exchange is complete. This may subject the
Fund to further risk of loss in the the event of a failure to complete the
transaction by the and counterparty.
On September 15, 1998, the Fund commenced a share repurchase program for
purposes of enhancing stockholder value and reducing the discount at which the
Fund's shares traded from their net asset value. During the six months ended
June 30, 2004, the Fund repurchased 16,866 of its shares at an average discount
of 18.85% from net asset value per share. Since the inception of the program,
the Fund has repurchased 1,447,903 of its shares at an average discount of
16.89% from net asset value per share. The Fund expects to continue to
repurchase its outstanding shares at such time and in such amounts as it
believes will further the accomplishment of the foregoing objectives, subject to
review by the Board of Directors.
On June 21, 2004, the Officers of the Fund, pursuant to authority granted by the
Board of Directors declared a distribution of $1.9611 per share, derived from
net realized gains, payable on July 15, 2004, to stockholders of record on June
30, 2004.
H. SUPPLEMENTAL PROXY INFORMATION:
The Annual Meeting of the Stockholders of the Fund was held on June 22, 2004.
The following is a summary of the proposal presented and the total number of
shares voted:
PROPOSAL:
1. To elect the following Directors:
<Table>
<Caption>
VOTES IN VOTES
FAVOR OF AGAINST
- ------------------------------------------------------------
Wayne E. Hedien 2,613,105 350,709
James F. Higgins 2,613,105 350,709
Dr. Manuel H. Johnson 2,613,105 350,709
</Table>
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A copy of (1) the Fund's policies and procedures with respect to the voting of
proxies relating to the Fund's portfolio securities; and (2) how the Fund voted
proxies relating to portfolio securities during the most recent twelve-month
period ended June 30, 2004 is available without charge, upon request, by calling
1-800-548-7786 or by visiting our website at www.morganstanley.com/im. This
information is also available on the Securities and Exchange Commission's
website at www.sec.gov.
10
<Page>
MORGAN STANLEY EASTERN EUROPE FUND, INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each stockholder will be deemed to have elected, unless American Stock Transfer
& Trust Company (the "Plan Agent") is otherwise instructed by the stockholder in
writing, to have all distributions automatically reinvested in Fund shares.
Participants in the Plan have the option of making additional voluntary cash
payments to the Plan Agent, annually, in any amount from $100 to $3,000, for
investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
stockholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of stockholders, such as banks, brokers or nominees, that hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
stockholder as representing the total amount registered in the stockholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Stockholders who do not wish to have distributions automatically reinvested
should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and stockholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
Morgan Stanley Eastern Europe Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
59 Maiden Lane
New York, New York 10030
1-800-278-4353
11
<Page>
ITEM 2. CODE OF ETHICS. Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable for semi-annual
reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable for semi-annual
reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable for semi-annual
reports.
ITEM 6. [RESERVED.]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. Not applicable for semi-annual reports.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILATED PURCHASERS
MORGAN STANLEY CLOSED-END FUNDS SHARE REPURCHASE PROGRAM
Morgan Stanley Eastern Europe Fund, Inc.*
1/1/04-6/30/04
<Table>
<Caption>
Total Number of Shares Maximum Number of
Purchased as Part of Shares that May Yet Be
Total Number of Shares Average Price Paid Publicly Announced Plans Purchased Under the
Period Purchased per Share or Programs Plans or Programs
- -------------------------------------------------------------------------------------------------------------
January -- -- -- Unlimited
February -- -- -- Unlimited
March -- -- -- Unlimited
April -- -- -- Unlimited
May 16,866 $25.23 16,866 Unlimited
June -- -- -- Unlimited
</Table>
*The Share Repurchase Program commenced on 9/15/1998
**The Fund expects to continue to repurchase its outstanding shares at such
time and in such amounts as it believes will further the accomplishment of
the foregoing objectives, subject to review by the Board of Directors.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The Fund's principal executive officer and principal financial officer
have concluded that the Fund's disclosure controls and procedures are
sufficient to ensure that information required to be disclosed by the Fund in
this Form N-CSR was recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, based upon such officers' evaluation of these controls and procedures
as of a date within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 11. EXHIBITS.
(a) Code of Ethics - Not applicable for semi-annual reports.
(b) Certifications of Principal Executive Officer and Principal Financial
Officer attached hereto as part of EX-99.CERT.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Morgan Stanley Eastern Europe Fund, Inc.
By: /s/ Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2004
By: /s/ James W. Garrett
Name: James W. Garrett
Title: Principal Financial Officer
Date: August 19, 2004