<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: 811-06044
Morgan Stanley European Equity Fund Inc.
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: October 31, 2004
Date of reporting period: October 31, 2004
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY
EUROPEAN EQUITY FUND INC. PERFORMED DURING THE ANNUAL PERIOD. WE WILL PROVIDE AN
OVERVIEW OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED
PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE
FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO
PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE.
THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES
OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND.
<Page>
FUND REPORT
For the year ended October 31, 2004
TOTAL RETURN FOR THE 12-MONTHS ENDED OCTOBER 31, 2004
<Table>
<Caption>
MORGAN
STANLEY
CAPITAL LIPPER
INTERNATIONAL EUROPEAN
(MSCI) REGION
EUROPE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
13.51% 13.73% 12.72% 13.86% 21.89% 21.71%
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. INVESTMENT RETURNS ON PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. SEE
PERFORMANCE SUMMARY FOR ADDITIONAL PERFORMANCE INFORMATION AND INDEX
INFORMATION.
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF
ALL DISTRIBUTIONS, BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES
CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE.
MARKET CONDITIONS
The European equity markets performed well in the 12 months ended October 31,
2004. Investor optimism about corporate earnings supported the generally strong
market performance early in the period. However, concerns over slowing economic
growth in the U.S. and its sustainability both there and in Europe moderated the
market's performance for the period as a whole. Although strong job reports in
April and May did bolster the market briefly, concerns over possible tightening
of interest rates by the Federal Reserve Open Market Committee curtailed this
momentum. Investors' apprehension about moves by the Chinese government to
restrain growth there by restricting credit and limiting investment also
undermined investors' confidence.
This period saw the entrance of several new countries into the European Union.
This larger membership further expanded the market base for many companies and
made available a new labor force. Although this development offers many
companies an opportunity to improve their profitability, it has also fostered
concerns over job security and weakened consumer confidence. Business confidence
also suffered, thanks to rising oil prices and the appreciation of the euro
against the dollar. Despite these headwinds, European corporations grew their
earnings as a result of steady expansion in the global economy.
Market performance varied by sector in this period. As a result of high oil
prices the energy sector was one of the strongest performers, and utilities
stocks also made especially strong gains. Semiconductor stocks underperformed
considerably, however, due to overcapacity and slowing growth within the
industry. The health-care equipment, real estate and telecommunication
industries also suffered.
PERFORMANCE ANALYSIS
Morgan Stanley European Equity Fund underperformed the MSCI Europe Index and the
Lipper European Region Funds Index for the 12 months ended October 31, 2004. A
number of investment decisions in several sectors contributed to the Fund's
underperformance. Stock selection within the hotels, restaurants and leisure
sector was one detractor. Among the companies in this sector that did not meet
investor expectations, Compass Group faced operational difficulties and issued a
profit warning that greatly concerned investors. An underweighted position in
the energy sector (relative to
2
<Page>
the MSCI Europe Index) taken to benefit the Fund from an expected decline in oil
prices, also hindered performance when this decline did not occur. Stock
selection in media companies also hampered the Fund's performance. Within this
sector, BSkyB suffered when investors reacted adversely to company moves to add
subscribers at the expense of its near-term margins.
Although these positions hurt the Fund's performance relative to its primary
benchmark, the MSCI Europe Index, other holdings were beneficial and contributed
strongly to the Fund's positive returns for the period. Stock selection in the
food and staples retail sector helped the Fund, due in part to the solid
performance of companies such as Tesco. This retail business has become the
dominant player of its kind in the UK and has also seen excellent growth in
Eastern Europe and Asia. Stock selection in the materials sector also boosted
returns. Syngenta, a fertilizer and pesticides producer, made gains as investors
reacted favorably to the return of capital to investors, while copper miner and
producer Vedanta was helped by the improving demand for copper. Stock selection
in the telecommunications sector provided further gains for the Fund. During the
period, France Telecom benefited from aggressive restructuring and balance sheet
adjustments that led to improved cash generation, moves which were viewed
favorably by the market.
THERE IS NO GUARANTEE THAT ANY SECURITIES MENTIONED WILL CONTINUE TO PERFORM
WELL OR BE HELD BY THE FUND IN THE FUTURE.
TOP 10 HOLDINGS
<Table>
Novartis AG (Registered Shares) 3.8%
HSBC Holdings PLC 3.8
Vodafone Group PLC 3.2
Total S.A. 3.2
GlaxoSmithKline PLC 3.0
UBS AG (Registered Shares) 2.9
BP PLC 2.9
Royal Bank of Scotland Group PLC 2.9
France Telecom S.A. 2.8
Royal Dutch Petroleum Co. 2.5
</Table>
TOP FIVE COUNTRIES
<Table>
United Kingdom 31.2%
Netherlands 15.0
France 13.3
Germany 11.7
Italy 6.8
</Table>
DATA AS OF OCTOBER 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP
TEN HOLDINGS AND TOP FIVE COUNTRIES ARE AS A PERCENTAGE OF NET ASSETS. THESE
DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A
RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A
FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE
ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL
ADVISORY SERVICES.
3
<Page>
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN SECURITIES
ISSUED BY ISSUERS LOCATED IN EUROPEAN COUNTRIES. A COMPANY IS CONSIDERED TO BE
LOCATED IN EUROPE IF (i) IT IS ORGANIZED UNDER THE LAWS OF A EUROPEAN COUNTRY
AND HAS A PRINCIPAL OFFICE IN A EUROPEAN COUNTRY; (ii) IT DERIVES AT LEAST 50
PERCENT OF ITS TOTAL REVENUES FROM BUSINESSES IN EUROPE; OR (iii) ITS EQUITY
SECURITIES ARE TRADED PRINCIPALLY ON A STOCK EXCHANGE IN EUROPE. THE PRINCIPAL
COUNTRIES IN WHICH THE FUND INVESTS ARE THE UNITED KINGDOM, THE NETHERLANDS,
FRANCE, GERMANY, ITALY, SPAIN, SWEDEN AND SWITZERLAND.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO
REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC.
INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S
E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION
OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL
QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 869-NEWS.
PROXY VOTING POLICIES AND PROCEDURES
A DESCRIPTION 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
12-MONTH PERIOD ENDED OCTOBER 31, 2004, IS AVAILABLE WITHOUT CHARGE, UPON
REQUEST, BY CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR
WEB SITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE
SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov.
ANNUAL HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
FUND NAME CHANGE
EFFECTIVE DECEMBER 30, 2004, THE BOARD OF TRUSTEES OF MORGAN STANLEY EUROPEAN
GROWTH FUND INC. APPROVED CHANGING THE NAME OF THE FUND TO "MORGAN STANLEY
EUROPEAN EQUITY FUND INC." ALL REFERENCES TO "MORGAN STANLEY EUROPEAN GROWTH
FUND INC." IN THE PROSPECTUS ARE HEREBY REPLACED WITH "MORGAN STANLEY EUROPEAN
EQUITY FUND INC."
4
<Page>
(This page has been left blank intentionally.)
5
<Page>
PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF A $10,000 INVESTMENT--CLASS B
($ IN THOUSANDS)
<Table>
<Caption>
CLASS B~ MSCI EUROPE(1) LIPPER(2)
October 31, 1994 $ 10,000 $ 10,000 $ 10,000
October 31, 1995 $ 11,683 $ 11,321 $ 10,922
October 31, 1996 $ 14,285 $ 13,298 $ 12,892
October 31, 1997 $ 17,057 $ 16,754 $ 15,839
October 31, 1998 $ 19,730 $ 20,617 $ 18,266
October 31, 1999 $ 22,856 $ 23,198 $ 21,332
October 31, 2000 $ 25,153 $ 23,417 $ 24,668
October 31, 2001 $ 19,700 $ 18,067 $ 18,217
October 31, 2002 $ 17,117 $ 15,560 $ 15,890
October 31, 2003 $ 19,687 $ 19,319 $ 19,802
October 31, 2004 $ 22,389 $ 23,549 $ 24,101
</Table>
ENDING VALUE
<Table>
<Caption>
CLASS B~ MSCI EUROPE(1) LIPPER(2)
- --------- -------------- ---------
$ 22,389 $ 23,549 $ 24,101
</Table>
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED OCTOBER 31, 2004
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 07/28/97) (SINCE 06/01/90) (SINCE 07/28/97) (SINCE 07/28/97)
SYMBOL EUGAX EUGBX EUGCX EUGDX
1 YEAR 13.51%(3) 13.73%(3) 12.72%(3) 13.86%(3)
7.55(4) 8.73(4) 11.72(4) --
5 YEARS 0.12(3) (0.41)(3) (0.63)(3) 0.35(3)
(0.96)(4) (0.70)(4) (0.63)(4) --
10 YEARS -- 8.39(3) -- --
-- 8.39(4) -- --
SINCE INCEPTION 4.27(3) 8.58(3) 3.49(3) 4.67(3)
3.50(4) 8.58(4) 3.49(4) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND
PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE
DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE
REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS
D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX MEASURES THE
PERFORMANCE FOR A DIVERSE RANGE OF GLOBAL STOCK MARKETS WITHIN AUSTRIA,
BELGIUM, DENMARK, FINLAND, FRANCE, GERMANY, GREECE, ITALY, THE NETHERLANDS,
NORWAY, SPAIN, SWEDEN, SWITZERLAND, IRELAND, PORTUGAL, AND THE UNITED
KINGDOM. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES
REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN
DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN
COUNTRIES REPRESENTED IN THE INDEX. INDEXES ARE UNMANAGED AND THEIR RETURNS
DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER EUROPEAN REGION FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE
INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER
EUROPEAN REGION FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR
CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD
NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED
IN THIS INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
~ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON OCTOBER 31, 2004.
7
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including management
fees, distribution and service (12b-1) fees, and other Fund expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 05/01/04 - 10/31/04.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
05/01/04 -
05/01/04 10/31/04 10/31/04
------------- ------------- ---------------
CLASS A
Actual (3.59% return) $ 1,000.00 $ 1,035.90 $ 7.78
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,017.50 $ 7.71
CLASS B
Actual (3.65% return) $ 1,000.00 $ 1,036.50 $ 7.27
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.00 $ 7.20
CLASS C
Actual (3.24% return) $ 1,000.00 $ 1,032.40 $ 11.60
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,013.72 $ 11.49
CLASS D
Actual (3.76% return) $ 1,000.00 $ 1,037.60 $ 6.50
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.75 $ 6.44
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.52%,
1.42%, 2.27% AND 1.27% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT
VALUE OVER THE PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF
YEAR PERIOD).
8
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2004
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS AND RIGHTS (97.4%)
DENMARK (2.1%)
BEVERAGES: ALCOHOLIC
184,193 Carlsberg AS (Series B) $ 8,574,709
PHARMACEUTICALS: MAJOR ---------------
140,293 Novo Nordisk AS (Series B) 6,989,781
---------------
TOTAL DENMARK 15,564,490
---------------
FINLAND (3.5%)
INFORMATION TECHNOLOGY
SERVICES
168,394 TietoEnator Oyj 4,737,159
---------------
MULTI-LINE INSURANCE
704,282 Sampo Oyj (A Shares) 8,411,281
---------------
TELECOMMUNICATION EQUIPMENT
781,636 Nokia Oyj 12,083,688
---------------
TOTAL FINLAND 25,232,128
---------------
FRANCE (13.3%)
BROADCASTING
197,706 M6 Metropole Television 5,162,312
---------------
DATA PROCESSING SERVICES
123,048 Atos Origin S.A.* 7,711,306
---------------
ELECTRICAL PRODUCTS
160,038 Schneider Electric S.A. 10,620,847
---------------
INTEGRATED OIL
110,137 Total S.A. 22,955,646
---------------
MAJOR BANKS
219,654 BNP Paribas S.A. 14,984,498
---------------
MAJOR TELECOMMUNICATIONS
701,577 France Telecom S.A.* 20,131,070
---------------
MULTI-LINE INSURANCE
404,583 AXA 8,727,531
---------------
PHARMACEUTICALS: MAJOR
81,686 Sanofi-Aventis 5,985,093
---------------
TOTAL FRANCE 96,278,303
---------------
GERMANY (11.7%)
INDUSTRIAL CONGLOMERATES
191,401 Siemens AG 14,280,839
---------------
INVESTMENT BANKS/BROKERS
127,963 Deutsche Boerse AG $ 6,405,969
---------------
MAJOR BANKS
76,628 Deutsche Bank AG
(Registered Shares) 5,838,880
---------------
MAJOR TELECOMMUNICATIONS
689,866 Deutsche Telekom AG
(Registered Shares)* 13,249,617
---------------
MEDICAL/NURSING SERVICES
90,295 Fresenius Medical Care AG 6,927,613
---------------
MOTOR VEHICLES
231,441 Bayerische Motoren Werke
(BMW) AG 9,810,531
111,200 Volkswagen AG 4,951,106
---------------
14,761,637
---------------
MULTI-LINE INSURANCE
121,059 Allianz AG (Registered Shares) 12,907,069
---------------
PACKAGED SOFTWARE
63,923 SAP AG 10,914,521
---------------
TOTAL GERMANY 85,286,145
---------------
ITALY (6.8%)
INTEGRATED OIL
499,392 ENI SpA 11,366,591
---------------
MAJOR BANKS
939,915 SanPaolo IMI SpA 11,946,581
1,821,229 Unicredito Italiano SpA 9,804,271
---------------
21,750,852
---------------
MAJOR TELECOMMUNICATIONS
2,679,285 Telecom Italia SpA 8,941,865
---------------
WIRELESS TELECOMMUNICATIONS
1,250,193 Telecom Italia Mobile
SpA (T.I.M.) 7,385,633
---------------
TOTAL ITALY 49,444,941
---------------
NETHERLANDS (15.0%)
AIR FREIGHT/COURIERS
236,828 TPG NV 5,735,637
---------------
ELECTRONIC PRODUCTION EQUIPMENT
561,707 ASML Holding NV* 8,022,906
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
FINANCIAL CONGLOMERATES
490,234 ING Groep NV (Share Certificates) $ 13,007,391
---------------
FOOD RETAIL
1,242,031 Koninklijke Ahold NV* 8,639,727
---------------
FOOD: SPECIALTY/CANDY
396,100 Royal Numico NV* 13,381,547
---------------
INDUSTRIAL CONGLOMERATES
615,630 Koninklijke (Royal) Philips
Electronics NV 14,602,673
---------------
INTEGRATED OIL
336,991 Royal Dutch Petroleum Co. 18,352,474
---------------
PUBLISHING: BOOKS/MAGAZINES
252,098 VNU NV 6,901,679
683,992 Wolters Kluwer NV-CVA (Share Certificates) 12,498,328
---------------
19,400,007
---------------
SEMICONDUCTORS
403,199 STMicroelectronics NV 7,449,995
---------------
TOTAL NETHERLANDS 108,592,357
---------------
SPAIN (5.4%)
ENGINEERING & CONSTRUCTION
493,611 ACS Actividades de
Construccion y Servicios S.A. 9,587,630
---------------
MAJOR BANKS
751,653 Banco Bilbao Vizcaya
Argentaria, S.A. 11,822,006
418,221 Banco Santander Central
Hispano, S.A. 4,679,318
---------------
16,501,324
---------------
MAJOR TELECOMMUNICATIONS
772,321 Telefonica S.A. 12,779,115
---------------
TOTAL SPAIN 38,868,069
---------------
SWEDEN (1.7%)
METAL FABRICATIONS
319,261 SKF AB (B Shares) 12,402,426
---------------
SWITZERLAND (6.7%)
FINANCIAL CONGLOMERATES
292,305 UBS AG (Registered Shares) 21,114,859
---------------
PHARMACEUTICALS: MAJOR
576,062 Novartis AG (Registered Shares) $ 27,532,552
---------------
TOTAL SWITZERLAND 48,647,411
---------------
UNITED KINGDOM (31.2%)
ADVERTISING/MARKETING SERVICES
544,497 WPP Group PLC 5,466,317
---------------
CABLE/SATELLITE TV
1,589,870 British Sky Broadcasting
Group PLC 14,851,206
---------------
CHEMICALS: SPECIALTY
517,914 BOC Group PLC 8,343,848
---------------
ELECTRIC UTILITIES
1,895,256 International Power PLC* 5,596,648
---------------
FOOD RETAIL
1,257,922 Tesco PLC 6,632,004
---------------
FOOD: MAJOR DIVERSIFIED
570,849 Unilever PLC 4,813,302
---------------
HOTELS/RESORTS/CRUISELINES
137,703 Carnival PLC 7,290,319
---------------
INTEGRATED OIL
2,153,011 BP PLC 20,863,053
742,378 Shell Transport & Trading Co. PLC 5,847,071
---------------
26,710,124
---------------
INVESTMENT MANAGERS
1,376,065 Amvescap PLC 7,457,103
---------------
LIFE/HEALTH INSURANCE
1,499,594 Prudential PLC 11,032,790
219,592 Prudential PLC (Rights)* 371,119
---------------
11,403,909
---------------
MAJOR BANKS
1,110,168 Barclays PLC 10,849,494
1,697,516 HSBC Holdings PLC 27,425,773
703,735 Royal Bank of Scotland Group PLC 20,748,817
174,968 Standard Chartered PLC 3,128,987
---------------
62,153,071
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
MEDICAL SPECIALTIES
833,559 Smith & Nephew PLC $ 7,082,022
---------------
OTHER METALS/MINERALS
995,873 Vedanta Resources PLC 6,540,172
---------------
PHARMACEUTICALS: MAJOR
168,836 AstraZeneca PLC 6,922,587
1,050,959 GlaxoSmithKline PLC 22,144,116
---------------
29,066,703
---------------
WIRELESS TELECOMMUNICATIONS
9,199,400 Vodafone Group PLC 23,574,520
---------------
TOTAL UNITED KINGDOM 226,981,268
---------------
TOTAL COMMON STOCKS AND RIGHTS
(COST $573,251,088) 707,297,538
---------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ------------
SHORT TERM INVESTMENT (0.1%)
REPURCHASE AGREEMENT
$ 794 Joint repurchase agreement
account 1.82% due
11/01/04 (dated 10/29/04;
proceeds $794,120) (a)
(COST $794,000) 794,000
---------------
TOTAL INVESTMENTS
(COST $574,045,088) (b) 97.5% 708,091,538
OTHER ASSETS IN EXCESS OF
LIABILITIES 2.5 18,079,283
----- ---------------
NET ASSETS 100.0% $ 726,170,821
===== ===============
</Table>
- ----------
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $579,613,583.
THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $135,762,722 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION IS $7,284,767, RESULTING IN
NET UNREALIZED APPRECIATION OF $128,477,955.
FORWARD FOREIGN CURRENCY CONTRACT OPEN AT OCTOBER 31, 2004:
<Table>
<Caption>
CONTRACT IN EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE DEPRECIATION
- ---------------------------------------------------------
EUR 3,900,159 $ 4,972,733 11/01/04 $ (14,399)
</Table>
CURRENCY ABBREVIATION:
EUR Euro.
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
SUMMARY OF INVESTMENTS - OCTOBER 31, 2004
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- -------------------------------------------------------------------------------
Major Banks $ 121,228,625 16.7%
Integrated Oil 79,384,835 10.9
Pharmaceuticals: Major 69,574,129 9.6
Major Telecommunications 55,101,667 7.6
Financial Conglomerates 34,122,250 4.7
Wireless
Telecommunications 30,960,153 4.3
Multi-Line Insurance 30,045,881 4.1
Industrial Conglomerates 28,883,512 4.0
Publishing: Books/
Magazines 19,400,007 2.7
Food Retail 15,271,731 2.1
Cable/Satellite TV 14,851,206 2.0
Motor Vehicles 14,761,637 2.0
Food: Specialty/Candy 13,381,547 1.8
Metal Fabrications 12,402,426 1.7
Telecommunication
Equipment 12,083,688 1.7
Life/Health Insurance 11,403,909 1.6
Packaged Software 10,914,521 1.5
Electrical Products 10,620,847 1.5
Engineering & Construction 9,587,630 1.3
Beverages: Alcoholic 8,574,709 1.2
Chemicals: Specialty 8,343,848 1.1
Electronic Production
Equipment 8,022,906 1.1
Data Processing Services 7,711,306 1.1
Investment Managers 7,457,103 1.0
Semiconductors 7,449,995 1.0
Hotels/Resorts/Cruiselines 7,290,319 1.0
Medical Specialties 7,082,022 1.0
Medical/Nursing Services 6,927,613 1.0
Other Metals/Minerals 6,540,172 0.9
Investment Banks/Brokers 6,405,969 0.9
Air Freight/Couriers 5,735,637 0.8
Electric Utilities 5,596,648 0.8
Advertising/Marketing
Services 5,466,317 0.7
Broadcasting 5,162,312 0.7
Food: Major Diversified 4,813,302 0.7
Information Technology
Services $ 4,737,159 0.6%
Repurchase Agreement 794,000 0.1
------------- ----------
$ 708,091,538* 97.5%
============= ==========
TYPE OF INVESTMENT
Common Stocks $ 706,926,419 97.3%
Short-Term Investment 794,000 0.1
Rights 371,119 0.1
------------- ----------
$ 708,091,538* 97.5%
============= =========
</Table>
- ----------
* DOES NOT INCLUDE OUTSTANDING FORWARD FOREIGN CURRENCY CONTRACTS WITH
UNREALIZED DEPRECIATION OF $14,399.
See Notes to Financial Statements
12
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2004
<Table>
ASSETS:
Investments in securities, at value (cost $574,045,088) $ 708,091,538
Cash 4,091,724
Receivable for:
Investments sold 22,456,551
Foreign withholding taxes reclaimed 1,045,425
Dividends 406,657
Capital stock sold 77,636
Prepaid expenses and other assets 32,188
Receivable from affiliate 509,258
--------------
TOTAL ASSETS 736,710,977
--------------
LIABILITIES:
Unrealized depreciation on open forward foreign currency contracts 14,399
Payable to bank 2,465,754
Payable for:
Investments purchased 5,710,228
Capital stock redeemed 976,001
Distribution fee 595,914
Investment management fee 571,332
Accrued expenses and other payables 206,528
--------------
TOTAL LIABILITIES 10,540,156
--------------
NET ASSETS $ 726,170,821
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 830,233,025
Net unrealized appreciation 134,254,111
Accumulated undistributed net investment income 6,548,399
Accumulated net realized loss (244,864,714)
--------------
NET ASSETS $ 726,170,821
==============
CLASS A SHARES:
Net Assets $ 15,264,872
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 1,018,036
NET ASSET VALUE PER SHARE $ 14.99
==============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 15.82
==============
CLASS B SHARES:
Net Assets $ 687,087,931
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 47,381,911
NET ASSET VALUE PER SHARE $ 14.50
==============
CLASS C SHARES:
Net Assets $ 16,921,623
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 1,179,340
NET ASSET VALUE PER SHARE $ 14.35
==============
CLASS D SHARES:
Net Assets $ 6,896,395
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 446,316
Net Asset Value Per Share $ 15.45
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $2,553,057 foreign withholding tax) $ 18,310,918
Interest 129,371
--------------
TOTAL INCOME 18,440,289
--------------
EXPENSES
Investment management fee 7,732,568
Distribution fee (Class A shares) 39,883
Distribution fee (Class B shares) 4,774,965
Distribution fee (Class C shares) 184,278
Transfer agent fees and expenses 1,499,500
Custodian fees 281,526
Shareholder reports and notices 137,420
Registration fees 91,210
Professional fees 80,099
Directors' fees and expenses 15,507
Other 44,376
--------------
TOTAL EXPENSES 14,881,332
Less: distribution fee rebate (Class B shares) (4,253,481)
--------------
NET EXPENSES 10,627,851
--------------
NET INVESTMENT INCOME 7,812,438
--------------
NET REALIZED AND UNREALIZED GAIN:
NET REALIZED GAIN/LOSS ON:
Investments 91,500,051
Foreign exchange transactions (1,113,672)
--------------
NET REALIZED GAIN 90,386,379
--------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 10,254,839
Translation of forward foreign currency contracts, other
assets and liabilities denominated in foreign currencies 117,606
--------------
NET APPRECIATION 10,372,445
--------------
NET GAIN 100,758,824
--------------
NET INCREASE $ 108,571,262
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2004 OCTOBER 31, 2003
---------------- ----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 7,812,438 $ 2,944,962
Net realized gain (loss) 90,386,379 (35,065,578)
Net change in unrealized appreciation 10,372,445 152,054,048
---------------- ----------------
NET INCREASE 108,571,262 119,933,432
---------------- ----------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (125,548) --
Class B shares (2,575,184) --
Class C shares (13,766) --
Class D shares (445,988) --
---------------- ----------------
TOTAL DIVIDENDS (3,160,486) --
---------------- ----------------
Net decrease from capital stock transactions (234,452,558) (213,539,916)
---------------- ----------------
NET DECREASE (129,041,782) (93,606,484)
NET ASSETS:
Beginning of period 855,212,603 948,819,087
---------------- ----------------
END OF PERIOD
(Including accumulated undistributed net investment income of
$6,548,399 and $3,010,119, respectively) $ 726,170,821 $ 855,212,603
================ ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2004
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley European Equity Fund Inc. (the "Fund"), formerly Morgan Stanley
European Growth Fund Inc. (the Fund's name changed effective December 30, 2004),
is registered under the Investment Company Act of 1940, as amended (the "Act"),
as a diversified, open-end management investment company. The Fund's investment
objective is to maximize the capital appreciation of its investments. The Fund
was incorporated in Maryland on February 13, 1990 and commenced operations on
June 1, 1990. On July 28, 1997, the Fund converted to a multiple class share
structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) when market quotations are not
readily available or Morgan Stanley Investment Advisors Inc. (the "Investment
Manager") or Morgan Stanley Investment Management Limited (the "Sub-Advisor"),
affiliates of the Investment Manager, determines that the latest sale price, the
bid price or the mean between the last reported bid and asked price do not
reflect a security's market value, portfolio securities are valued at their fair
value as determined in good faith under procedures established by and under the
general supervision of the Fund's Directors. Occasionally, developments
affecting 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 developments occur during such periods that are expected to
materially affect the value of such securities, such valuations may be adjusted
to reflect the estimated fair value of such securities as of the close of the
NYSE, as determined in good faith by the Fund's Directors or by the Investment
Manager using a pricing service and/or procedures
16
<Page>
approved by the Directors of the Fund; (6) certain portfolio securities may be
valued by an outside pricing service approved by the Fund's Directors; and (7)
short-term debt securities having a maturity date of more than sixty days at
time of purchase are valued on a mark-to-market basis until sixty days prior to
maturity and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends on foreign securities which are recorded as soon as
the Fund is informed after the ex-dividend date. Discounts are accreted and
premiums are amortized over the life of the respective securities. Interest
income is accrued daily.
C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes in
the market prices of the securities. Forward contracts are valued daily at the
appropriate exchange rates. The resultant unrealized exchange gains and losses
are recorded as unrealized foreign currency
17
<Page>
gain or loss. The Fund records realized gains or losses on delivery of the
currency or at the time the forward contract is extinguished (compensated) by
entering into a closing transaction prior to delivery.
F. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
H. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.95% to the portion of net assets not exceeding $500
million; 0.90% to the portion of daily net assets exceeding $500 million but not
exceeding $2 billion; 0.85% to the portion of daily net assets exceeding $2
billion but not exceeding $3 billion; and 0.825% to the portion of daily net
assets in excess of $3 billion.
Under a Sub-Advisory Agreement between the Sub-Advisor and the Investment
Manager, the Sub-Advisor provides the Fund with investment advice and portfolio
management relating to the Fund's investments in securities, subject to the
overall supervision of the Investment Manager. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager paid the
Sub-Advisor compensation of $3,093,027 for the year ended October 31, 2004.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager and Sub-Advisor. The Fund
has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- up to 1.0%
of the lesser of: (a) the average daily aggregate gross sales of the Class B
shares since the inception of the Fund (not including reinvestment of dividend
or capital gain distributions) less the average daily aggregate net asset value
of the Class B shares redeemed since the Fund's inception upon which a
contingent deferred sales charge has been
18
<Page>
imposed or waived; or (b) the average daily net assets of Class B; and (iii)
Class C -- up to 1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Directors will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that there were no excess expenses as of
October 31, 2004.
For the year ended the October 31, 2004 , the Distributor rebated a portion of
the distribution fees paid by the Fund on Class B shares in the amount of
$4,253,481. Included in the Statement of Assets and Liabilities is a receivable
from affiliate which represents a distribution fee rebate due to the Fund.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended October 31, 2004, the distribution fee was accrued for Class
A shares and Class C shares at the annual rate of 0.24% and 1.0%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 2004,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $915, $454,789 and
$961, respectively and received $39,672 in front-end sales charges from sales of
the Fund's Class A shares. The respective shareholders pay such charges which
are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended October 31, 2004 aggregated
$727,346,018 and $964,631,830, respectively.
Included in the aforementioned transactions are sales of $706,333 with other
Morgan Stanley funds, including a net realized gain of $80,390.
Morgan Stanley Trust, an affiliate of the Investment Manager, Sub-Advisor, and
Distributor, is the Fund's transfer agent. At October 31, 2004, the Fund had
transfer agent fees and expenses payable of approximately $29,000.
19
<Page>
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation.
Aggregate pension costs for the year ended October 31, 2004 included in
Directors' fees and expenses in the Statement of Operations amounted to $6,893.
At October 31, 2004, the Fund had an accrued pension liability of $60,323 which
is included in accrued expenses in the Statement of Assets and Liabilities. On
December 2, 2003, the Directors voted to close the plan to new participants and
eliminate the future benefits growth due to increases to compensation after July
31, 2003.
Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan
(the "Compensation Plan") which allows each independent Director to defer
payment of all, or a portion, of the fees he receives for serving on the Board
of Directors. Each eligible Director generally may elect to have the deferred
amounts credited with a return equal to the total return on one or more of the
Morgan Stanley funds that are offered as investment options under the
Compensation Plan. Appreciation/depreciation and distributions received from
these investments are recorded with an offsetting increase/decrease in the
deferred compensation obligation and do not affect the net asset value of the
Fund.
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward contracts to facilitate settlement of foreign
currency denominated portfolio transactions or to manage foreign currency
exposure associated with foreign currency denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At October 31, 2004, investments in securities of issuers in the United Kingdom
represented 31.2% of the Fund's net assets. These investments, as well as other
non-U.S. investments, which involve risks and considerations not present with
respect to U.S. securities, may be affected by economic or political
developments in this region.
20
<Page>
6. CAPITAL STOCK
Transactions in capital stock were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2004 OCTOBER 31, 2003
--------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
CLASS A SHARES
Sold 344,522 $ 5,072,788 20,595,524 $ 240,024,811
Reinvestment of dividends 7,674 110,742 -- --
Redeemed (583,125) (8,530,247) (20,936,181) (248,059,299)
--------------- --------------- --------------- ---------------
Net decrease -- Class A (230,929) (3,346,717) (340,657) (8,034,488)
--------------- --------------- --------------- ---------------
CLASS B SHARES
Sold 1,239,609 17,507,893 2,602,222 28,926,477
Reinvestment of dividends 166,797 2,323,489 -- --
Redeemed (14,834,405) (208,156,645) (20,026,785) (225,759,996)
--------------- --------------- --------------- ---------------
Net decrease -- Class B (13,427,999) (188,325,263) (17,424,563) (196,833,519)
--------------- --------------- --------------- ---------------
CLASS C SHARES
Sold 117,097 1,647,604 818,242 9,094,822
Reinvestment of dividends 941 13,081 -- --
Redeemed (397,311) (5,549,360) (1,239,678) (13,947,336)
--------------- --------------- --------------- ---------------
Net decrease -- Class C (279,273) (3,888,675) (421,436) (4,852,514)
--------------- --------------- --------------- ---------------
CLASS D SHARES
Sold 128,108 1,938,286 4,540,208 51,606,931
Reinvestment of dividends 4,805 71,313 -- --
Redeemed (2,784,964) (40,901,502) (4,799,575) (55,426,326)
--------------- --------------- --------------- ---------------
Net decrease -- Class D (2,652,051) (38,891,903) (259,367) (3,819,395)
--------------- --------------- --------------- ---------------
Net decrease in Fund (16,590,252) $ (234,452,558) (18,446,023) $ (213,539,916)
=============== =============== =============== ===============
</Table>
7. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
21
<Page>
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2004 OCTOBER 31, 2003
---------------- ----------------
Ordinary income $ 3,160,486 --
================ ================
</Table>
As of October 31, 2004, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed ordinary income $ 6,668,351
Undistributed long-term gains --
---------------
Net accumulated earnings 6,668,351
Foreign tax credit pass-through 2,584,789
Capital loss carryforward* (239,296,219)
Temporary differences (2,704,741)
Net unrealized appreciation 128,685,616
---------------
Total accumulated losses $ (104,062,204)
===============
</Table>
*During the year ended October 31, 2004, the Fund utilized $81,863,985 of its
net capital loss carryforward. As of October 31, 2004, the Fund had a net
capital loss carryforward of $239,296,219 of which $81,217,815 will expire on
October 31, 2009, $103,743,465 will expire on October 31, 2010 and $54,334,939
will expire on October 31, 2011 to offset future capital gains to the extent
provided by regulations.
As of October 31, 2004, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and foreign tax credit
pass-through and permanent book/tax differences attributable to foreign currency
losses. To reflect reclassifications arising from the permanent differences,
accumulated undistributed net investment income was charged and accumulated net
realized loss was credited $1,113,672.
8. LEGAL MATTERS
The Investment Manager, certain affiliates of the Investment Manager, certain
officers of such affiliates and certain investment companies advised by the
Investment Manager or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. This consolidated action also names as defendants certain
individual Trustees and Directors of the Morgan Stanley funds. The consolidated
amended complaint generally alleges that defendants, including the Fund,
violated their statutory disclosure obligations and fiduciary duties by failing
properly to disclose (i) that the Investment Manager and certain affiliates of
the Investment Manager allegedly offered economic incentives to brokers and
others to recommend the funds advised by the Investment Manager or its
affiliates to investors rather than funds managed by other companies,
22
<Page>
and (ii) that the funds advised by the Investment Manager or its affiliates,
including the Fund, allegedly paid excessive commissions to brokers in return
for their efforts to recommend these funds to investors. The complaint seeks,
among other things, unspecified compensatory damages, rescissionary damages,
fees and costs. The defendants have moved to dismiss the action and intend to
otherwise vigorously defend it. While the Fund believes that it has meritorious
defenses, the ultimate outcome of this matter is not presently determinable at
this early stage of the litigation, and no provision has been made in the Fund's
financial statements for the effect, if any, of this matter.
23
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of capital stock outstanding
throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 13.30 $ 11.51 $ 13.35 $ 20.17 $ 20.70
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.11 0.12 0.06 0.07 0.05
Net realized and unrealized gain
(loss) 1.68 1.67 (1.67) (3.71) 2.34
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 1.79 1.79 (1.61) (3.64) 2.39
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.10) - (0.23) - -
Net realized gain - - - (3.18) (2.92)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.10) - (0.23) (3.18) (2.92)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 14.99 $ 13.30 $ 11.51 $ 13.35 $ 20.17
========== ========== ========== ========== ==========
TOTAL RETURN+ 13.51% 15.55% (12.41)% (21.07)% 10.92%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.43% 1.45% 1.38 % 1.27 % 1.29%
Net investment income 0.79% 0.79% 0.41 % 0.43 % 0.23%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 15,265 $ 16,612 $ 18,294 $ 22,604 $ 53,012
Portfolio turnover rate 89% 89% 51 % 86 % 71%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 12.79 $ 11.12 $ 12.88 $ 19.70 $ 20.41
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income (loss)++ 0.13 0.03 (0.05) (0.06) (0.11)
Net realized and unrealized gain
(loss) 1.62 1.64 (1.62) (3.58) 2.32
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 1.75 1.67 (1.67) (3.64) 2.21
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.04) - (0.09) - -
Net realized gain - - - (3.18) (2.92)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.04) - (0.09) (3.18) (2.92)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 14.50 $ 12.79 $ 11.12 $ 12.88 $ 19.70
========== ========== ========== ========== ==========
TOTAL RETURN+ 13.73% 15.02% (13.11)% (21.68)% 10.05 %
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.26%(2) 1.94%(2) 2.15 % 2.10 % 2.05 %
Net investment income (loss) 0.96%(2) 0.30%(2) (0.36)% (0.40)% (0.53)%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 687 $ 778 $ 870 $ 1,335 $ 2,206
Portfolio turnover rate 89% 89% 51% 86% 71%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(2) IF THE DISTRIBUTOR HAD NOT REBATED A PORTION OF ITS FEES TO THE FUND, THE
EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
------------ ------- --------------
OCTOBER 31, 2004 1.82% 0.40%
OCTOBER 31, 2003 2.20 0.04
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 12.74 $ 11.11 $ 12.85 $ 19.67 $ 20.38
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income (loss)++ 0.00 0.00 (0.04) (0.06) (0.11)
Net realized and unrealized gain
(loss) 1.62 1.63 (1.61) (3.58) 2.32
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 1.62 1.63 (1.65) (3.64) 2.21
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.01) - (0.09) - -
Net realized gain - - - (3.18) (2.92)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.01) - (0.09) (3.18) (2.92)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 14.35 $ 12.74 $ 11.11 $ 12.85 $ 19.67
========== ========== ========== ========== ==========
TOTAL RETURN+ 12.72% 14.67% (12.98)% (21.76)% 10.11 %
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 2.19% 2.20% 2.08 % 2.10 % 2.05 %
Net investment income (loss) 0.03% 0.04% (0.29)% (0.40)% (0.53)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 16,922 $ 18,581 $ 20,881 $ 29,075 $ 46,886
Portfolio turnover rate 89% 89% 51 % 86 % 71 %
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
CLASS D SHARES
Selected Per Share Data:
Net asset value, beginning of period $ 13.70 $ 11.83 $ 13.73 $ 20.61 $ 21.05
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.20 0.13 0.09 0.10 0.12
Net realized and unrealized gain
(loss) 1.69 1.74 (1.72) (3.80) 2.36
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment
operations 1.89 1.87 (1.63) (3.70) 2.48
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.14) - (0.27) - -
Net realized gain - - - (3.18) (2.92)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.14) - (0.27) (3.18) (2.92)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 15.45 $ 13.70 $ 11.83 $ 13.73 $ 20.61
========== ========== ========== ========== ==========
TOTAL RETURN+ 13.86% 15.81% (12.20)% (20.95)% 11.19%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.19% 1.20% 1.15 % 1.10 % 1.05%
Net investment income 1.03% 1.04% 0.64 % 0.60 % 0.47%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 6,896 $ 42,454 $ 39,716 $ 49,539 $ 54,016
Portfolio turnover rate 89% 89% 51 % 86 % 71%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF
DIRECTORS OF MORGAN STANLEY EUROPEAN EQUITY FUND INC.:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley European Equity Fund Inc. (the "Fund"), formerly Morgan Stanley European
Growth Fund, Inc., including the portfolio of investments, as of October 31,
2004, and the related statements of operations for the year then ended and
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley European Equity Fund Inc., formerly Morgan Stanley European Growth Fund.
Inc., as of October 31, 2004, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
DECEMBER 30, 2004
2004 FEDERAL TAX NOTICE (UNAUDITED)
Of the amounts paid by the Fund during the fiscal year ended October 31, 2004
that were reported to individuals as ordinary dividends, 100% qualified for the
lower income tax rate available to individuals under the Jobs and Growth Tax
Relief Reconciliation Act of 2003.
Additionally, please note that the Fund has elected, pursuant to section 853 of
the Internal Revenue Code, to pass through foreign taxes of $0.04 per share to
its shareholders, of which 100% would be allowable as a credit. The Fund
generated net foreign source income of $0.09 per share with respect to this
election.
28
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
DIRECTOR AND OFFICER INFORMATION
INDEPENDENT DIRECTORS:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR
- --------------------------------------- ----------- ------------ ------------------------- ------------- ---------------------
Michael Bozic (63) Director Since Private Investor; 208 Director of Weirton
c/o Kramer Levin Naftalis & Frankel LLP April 1994 Director or Trustee of Steel Corporation.
Counsel to the Independent Director the Retail Funds (since
919 Third Avenue April 1994) and the
New York, NY Institutional Funds
(since July 2003);
formerly Vice Chairman of
Kmart Corporation
(December 1998-October
2000), Chairman and Chief
Executive Officer of
Levitz Furniture
Corporation (November
1995-November 1998) and
President and Chief
Executive Officer of
Hills Department Stores
(May 1991-July 1995);
formerly variously
Chairman, Chief Executive
Officer, President and
Chief Operating Officer
(1987-1991) of the Sears
Merchandise Group of
Sears, Roebuck & Co.
Edwin J. Garn (72) Director Since Managing Director of 208 Director of Franklin
c/o Summit Ventures LLC January 1993 Summit Ventures LLC; Covey (time
1 Utah Center Director or Trustee of management systems),
201 S. Main Street the Retail Funds (since BMW Bank of North
Salt Lake City, UT January 1993) and the America, Inc.
Institutional Funds (industrial loan
(since July 2003); member corporation), United
of the Utah Regional Space Alliance (joint
Advisory Board of Pacific venture between
Corp.; formerly United Lockheed Martin and
States Senator (R-Utah) the Boeing Company)
(1974-1992) and Chairman, and Nuskin Asia
Senate Banking Committee Pacific (multilevel
(1980-1986), Mayor of marketing); member of
Salt Lake City, Utah the board of various
(1971-1974), Astronaut, civic and charitable
Space Shuttle Discovery organizations.
(April 12-19, 1985), and
Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (70) Director Since Retired; Director or 208 Director of The PMI
c/o Kramer Levin Naftalis & Frankel LLP September Trustee of the Retail Group Inc. (private
Counsel to the Independent Directors 1997 Funds (since September mortgage insurance);
919 Third Avenue 1997) and the Trustee and Vice
New York, NY Institutional Funds Chairman of The Field
(since July 2003); Museum of Natural
formerly associated with History; director of
the Allstate Companies various other
(1966-1994), most business and
recently as Chairman of charitable
The Allstate Corporation organizations.
(March 1993-December
1994) and Chairman and
Chief Executive Officer
of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
29
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR
- --------------------------------------- ----------- ------------ ------------------------- ------------- ---------------------
Dr. Manuel H. Johnson (55) Director Since Senior Partner, Johnson 208 Director of NVR, Inc.
c/o Johnson Smick International, Inc. July 1991 Smick International, (home construction);
2099 Pennsylvania Avenue, N.W. Inc., a consulting firm; Chairman and Trustee
Suite 950 Chairman of the Audit of the Financial
Washington, D.C. Committee and Director or Accounting Foundation
Trustee of the Retail (oversight
Funds (since July 1991) organization of the
and the Institutional Financial Accounting
Funds (since July 2003); Standards Board);
Co-Chairman and a founder Director of RBS
of the Group of Seven Greenwich Capital
Council (G7C), an Holdings (financial
international economic holding company).
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and
Assistant Secretary of
the U.S. Treasury.
Joseph J. Kearns (62) Director Since President, Kearns & 209 Director of Electro
PMB754 July 2003 Associates LLC Rent Corporation
23852 Pacific Coast Highway (investment consulting); (equipment leasing),
Malibu, CA Deputy Chairman of the The Ford Family
Audit Committee and Foundation, and the
Director or Trustee of UCLA Foundation.
the Retail Funds (since
July 2003) and the
Institutional Funds
(since August 1994);
previously Chairman of
the Audit Committee of
the Institutional Funds
(October 2001-July 2003);
formerly CFO of the J.
Paul Getty Trust.
Michael E. Nugent (68) Director Since General Partner of 208 Director of various
c/o Triumph Capital, L.P. July 1991 Triumph Capital, L.P., a business
445 Park Avenue private investment organizations.
New York, NY partnership; Chairman of
the Insurance Committee
and Director or Trustee
of the Retail Funds
(since July 1991) and the
Institutional Funds
(since July 2001);
formerly Vice President,
Bankers Trust Company and
BT Capital Corporation
(1984-1988).
Fergus Reid (72) Director Since Chairman of Lumelite 209 Trustee and Director
c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; of certain investment
85 Charles Colman Blvd. Chairman of the companies in the
Pawling, NY Governance Committee and JPMorgan Funds
Director or Trustee of complex managed by
the Retail Funds (since J.P. Morgan
July 2003) and the Investment Management
Institutional Funds Inc.
(since June 1992).
</Table>
30
<Page>
INTERESTED DIRECTORS:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDERESTED DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR
- --------------------------------------- ----------- ------------ ------------------------- ------------- ---------------------
Charles A. Fiumefreddo (71) Chairman of Since Chairman and Director or 208 None
c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail
Harborside Financial Center, and Funds (since July 1991)
Plaza Two, Director and the Institutional
Jersey City, NJ Funds (since July 2003);
formerly Chief Executive
Officer of the Retail
Funds (until September
2002).
James F. Higgins (56) Director Since Director or Trustee of 208 Director of AXA
c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and
Harborside Financial Center, June 2000) and the The Equitable Life
Plaza Two, Institutional Funds Assurance Society of
Jersey City, NJ (since July 2003); Senior the United States
Advisor of Morgan Stanley (financial services).
(since August 2000);
Director of the
Distributor and Dean
Witter Realty Inc.;
previously President and
Chief Operating Officer
of the Private Client
Group of Morgan Stanley
(May 1999-August 2000),
and President and Chief
Operating Officer of
Individual Securities of
Morgan Stanley (February
1997-May 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE DIRECTOR BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER ") (THE
"RETAIL FUNDS ").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT
INC.).
31
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ---------------------------- ------------------- ------------------- ------------------------------------------------------
Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan
1221 Avenue of the Americas Stanley Investment Management Inc.; President,
New York, NY Director and Chief Executive Officer of the Investment
Manager and Morgan Stanley Services; Chairman and
Director of the Distributor; Chairman and Director of
the Transfer Agent; Director of various Morgan Stanley
subsidiaries; President of the Institutional Funds
(since July 2003) and President of the Retail Funds
(since May 1999); Trustee (since July 2003) and
President (since December 2002) of the Van Kampen
Closed-End Funds; Trustee (since May 1999) and
President (since October 2002) of the Van Kampen
Open-End Funds.
Ronald E. Robison (65) Executive Vice Since Principal Executive Officer-Office of the Funds (since
1221 Avenue of the Americas President and April 2003 November 2003); Managing Director of Morgan Stanley &
New York, NY Principal Co. Incorporated, Managing Director of Morgan Stanley;
Executive Managing Director, Chief Administrative Officer and
Officer Director of the Investment Manager and Morgan Stanley
Services; Chief Executive Officer and Director of the
Transfer Agent; Managing Director and Director of the
Distributor; Executive Vice President and Principal
Executive Officer of the Institutional Funds (since
July 2003) and the Retail Funds (since April 2003);
Director of Morgan Stanley SICAV (since May 2004);
previously President and Director of the Retail Funds
(March 2001-July 2003) and Chief Global Operations
Officer and Managing Director of Morgan Stanley
Investment Management Inc.
Joseph J. McAlinden (61) Vice President Since July 1995 Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas Investment Manager and Morgan Stanley Investment
New York, NY Management Inc., Director of the Transfer Agent, Chief
Investment Officer of the Van Kampen Funds; Vice
President of the Institutional Funds (since July 2003)
and the Retail Funds (since July 1995).
Barry Fink (49) Vice President Since General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas February 1997 (since December 2000) of Morgan Stanley Investment
New York, NY Management; Managing Director (since December 2000),
Secretary (since February 1997) and Director (since
July 1998) of the Investment Manager and Morgan
Stanley Services; Vice President of the Retail Funds;
Assistant Secretary of Morgan Stanley DW; Vice
President of the Institutional Funds (since July
2003); Managing Director, Secretary and Director of
the Distributor; previously Secretary (February
1997-July 2003) and General Counsel (February
1997-April 2004) of the Retail Funds; Vice President
and Assistant General Counsel of the Investment
Manager and Morgan Stanley Services (February
1997-December 2001).
Amy R. Doberman (42) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas Management; Managing Director of Morgan Stanley
New York, NY Investment Management Inc. and the Investment Manager,
Vice President of the Institutional and Retail Funds
(since July 2004); previously, Managing Director and
General Counsel - Americas, UBS Global Asset Management
(July 2000 - July 2004) and General Counsel, Aeltus
Investment Management, Inc. (January 1997 - July
2000).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for
1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since October
New York, NY 10020 Officer 2004); Executive Director of the Investment Adviser
and Morgan Stanley Investment Management Inc.;
formerly Assistant Secretary and Assistant General
Counsel of the Morgan Stanley Retail Funds.
</Table>
32
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ---------------------------- ------------------- ------------------- ------------------------------------------------------
Stefanie V. Chang (37) Vice President Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management
New York, NY Inc., and the Investment Manager; Vice President of
the Institutional Funds (since December 1997) and the
Retail Funds (since July 2003); formerly practiced law
with the New York law firm of Rogers & Wells (now
Clifford Chance US LLP).
Francis J. Smith (39) Treasurer and Treasurer since Executive Director of the Investment Manager and
c/o Morgan Stanley Trust Chief Financial July 2003 and Morgan Stanley Services (since December 2001);
Harborside Financial Center, Officer Chief Financial previously, Vice President of the Retail Funds
Plaza Two, Officer since (September 2002-July 2003), and Vice President of the
Jersey City, NJ September 2002 Investment Manager and Morgan Stanley Services (August
2000-November 2001) and Senior Manager at
PricewaterhouseCoopers LLP (January 1998-August 2000).
Thomas F. Caloia (58) Vice President Since July 2003 Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust Treasurer of the Investment Manager, the Distributor
Harborside Financial Center, and Morgan Stanley Services; previously Treasurer of
Plaza Two, the Retail Funds (April 1989-July 2003); formerly
Jersey City, NJ First Vice President of the Investment Manager, the
Distributor and Morgan Stanley Services.
Mary E. Mullin (37) Secretary Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management
New York, NY Inc. and the Investment Manager; Secretary of the
Institutional Funds (since June 1999) and the Retail
Funds (since July 2003); formerly practiced law with
the New York law firms of McDermott, Will & Emery and
Skadden, Arps, Slate, Meagher & Flom LLP.
</Table>
- ----------------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE
OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
33
<Page>
(This page has been left blank intentionally.)
<Page>
(This page has been left blank intentionally.)
<Page>
DIRECTORS
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Joseph J. McAlinden
Vice President
Barry Fink
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Thomas F. Caloia
Vice President
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
SUB-ADVISOR
Morgan Stanley Investment Management Limited
25 Cabot Square, Canary Wharf
London, United Kingdom E14 4QA
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its Directors. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C)2004 Morgan Stanley
[MORGAN STANLEY LOGO]
37908RPT-RA04-00909P-Y10/04
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
EUROPEAN EQUITY FUND
(FORMERLY MORGAN STANLEY
EUROPEAN GROWTH FUND)
ANNUAL REPORT
OCTOBER 31, 2004
[MORGAN STANLEY LOGO]
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Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the Fund or a
third party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Fund has amended its Code of Ethics during the period
covered by the shareholder report presented in Item 1 hereto to delete
from the end of the following paragraph on page 2 of the Code the
phrase "to the detriment of the Fund":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial
reporting by the Fund whereby the Covered Officer would benefit
personally (directly or indirectly)."
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund 's Board of Directors has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Directors: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Directors
in the absence of such designation or identification.
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Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 39,015 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 5,067,400(2)
TAX FEES $ 6,084(3) $ 545,053(4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 6,536 $ 5,612,453
TOTAL $ 45,551 $ 5,612,453
</Table>
2003
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 36,919 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 684(2) $ 1,086,576(2)
TAX FEES $ 5,936(3) $ 252,500(4)
ALL OTHER FEES $ - $ -(5)
TOTAL NON-AUDIT FEES $ 6,620 $ 1,339,076
TOTAL $ 43,539 $ 1,339,076
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors)
and any entity controlling, controlled by or under common
control with the Adviser that provides ongoing services to the
Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically
data verification and agreed-upon procedures related to asset
securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and
review of the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered
Entities' tax returns.
(5) All other fees represent project management for future
business applications and improving business and operational
processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
<Page>
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
<Page>
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
<Page>
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Directors has considered whether
the provision of services other than audit services performed by the
auditors to the Registrant and Covered Entities is compatible with
maintaining the auditors' independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
<Page>
Item 8. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
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) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are 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.
Morgan Stanley European Equity Fund Inc.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
December 14, 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.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
December 14, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
December 14, 2004