<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, 2005
Date of reporting period: April 30, 2005
Item 1 - Report to Shareholders
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WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY
EUROPEAN EQUITY FUND INC. PERFORMED DURING THE SEMIANNUAL 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. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
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FUND REPORT
For the six months ended April 30, 2005
TOTAL RETURN FOR THE SIX MONTHS ENDED APRIL 30, 2005
<Table>
<Caption>
MORGAN
STANLEY LIPPER
CAPITAL EUROPEAN
INTERNATIONAL REGION
(MSCI) FUNDS
CLASS A CLASS B CLASS C CLASS D EUROPE INDEX(1) INDEX(2)
7.67% 7.72% 7.18% 7.78% 9.55% 10.85%
</Table>
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES.
SUCH COSTS WOULD LOWER PERFORMANCE. SEE PERFORMANCE SUMMARY FOR STANDARDIZED
PERFORMANCE AND BENCHMARK INFORMATION.
BECAUSE CLASS B SHARES INCURRED LOWER EXPENSES UNDER THE 12b-1 PLAN THAN DID
CLASS A SHARES FOR THE 6 MONTHS ENDED APRIL 30, 2005, THE TOTAL OPERATING
EXPENSE RATIO FOR CLASS B SHARES WAS LOWER AND, AS A RESULT, THE PERFORMANCE OF
CLASS B SHARES WAS HIGHER THAN THAT OF THE CLASS A SHARES. THERE CAN BE NO
ASSURANCE THAT THIS WILL CONTINUE TO OCCUR IN THE FUTURE AS THE MAXIMUM FEES
PAYABLE BY CLASS B SHARES UNDER THE 12b-1 PLAN ARE HIGHER THAN THOSE PAYABLE BY
CLASS A SHARES.
MARKET CONDITIONS
Conditions in developed European equity markets were generally mixed for the six
months ended April 30, 2005. Although lower oil prices contributed to the
strength of many markets towards the end of 2004, the return of high oil prices
and growing concerns over economic performance slowed the markets later in the
period. Over the six months, data generally pointed to weakening economic
conditions in Europe as industrial production, consumer confidence and retail
sales faltered significantly. The export sector, which has been the driving
force behind European economic growth in recent years, also underperformed
expectations during the reporting period, thereby contributing to waning
investor confidence.
The U.K. modestly outperformed the European market for the six months, despite
signs that rising interest rates had begun to slow the country's economy. U.K.
retailers of discretionary goods became more pessimistic during the six months,
prompting a number of analysts to scale back their earnings expectations for the
sector. Meanwhile, France saw some improved economic news in the period as the
country's housing market gained momentum and supported confidence among
consumers. In contrast, Germany experienced a number of economic setbacks in the
period. Germany continued to suffer from a particularly weak domestic economy,
and Italian manufacturing and services showed signs of contraction.
PERFORMANCE ANALYSIS
Morgan Stanley European Equity Fund underperformed the Morgan Stanley Capital
International (MSCI) Europe Index and the Lipper European Region Funds Index for
the six months ended April 30, 2005, assuming no deduction of applicable sales
charges. Stock selection was largely responsible for the Fund's
underperformance, with holdings in the banking, media and capital goods sectors
in particular detracting from gains. Within the banking sector, the Fund
suffered from a lack of exposure to the larger U.K. mortgage lenders, which
performed well in the first half of the period as the country appeared to come
to the end of its monetary tightening cycle. A number of the Fund's banking
holdings, meanwhile, lagged the overall sector. The Fund was also hurt by a lack
of exposure to many of the media stocks that posted strong gains for the period.
Several media stock positions hurt the Fund's relative performance due to a lack
of momentum in restructuring and investors' concerns over the future margins of
these companies. In the capital goods sector, the solid performance of a number
of holdings was offset by the Fund's lack of emphasis in export-orientated
stocks that benefited from the strength of demand from Asia and the oil
industry.
Although these positions led the Fund to underperform its benchmarks, other
holdings were much more positive for the Fund. Stock selection in the insurance
sector boosted returns due to the Fund's exposure to a number of life insurance
companies, which generally benefited from the gains made by the equity market. A
number of holdings in the materials sector also helped the Fund, as companies
within the chemical, gas and mining industries made gains in part due to strong
demand from Asia. Several food, beverage and tobacco holdings further added to
the Fund's returns. They benefited from improving fundamentals as well as from
their defensive characteristics during a period in which many investors became
more cautious.
2
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In general, the Fund's positioning became more defensive over the six months
ended April 30, 2005. While decreasing exposure to consumer discretionary
stocks, the Fund increased its allocation to consumer staples stocks and
pharmaceutical companies over the period. By the end of the six months, the Fund
was underweighted in technology, materials and industrials companies relative to
the MSCI Europe Index.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR BE HELD BY THE FUND IN THE FUTURE.
TOP 10 HOLDINGS
<Table>
Novartis AG (Registered Shares) 4.0%
GlaxoSmithKline PLC 3.8
Total S.A. 3.5
UBS AG (Registered Shares) 3.3
Vodafone Group PLC 3.1
BP PLC 3.1
Banco Bilbao Vizcaya Argentaria, S.A. 3.1
BNP Paribas S.A. 3.0
Royal Bank of Scotland Group PLC 2.9
Royal Dutch Petroleum Co. 2.8
</Table>
TOP FIVE COUNTRIES
<Table>
United Kingdom 32.4%
France 14.2
Netherlands 14.2
Switzerland 11.4
Germany 10.5
</Table>
DATA AS OF APRIL 30, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10
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.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN THE
SECURITIES OF 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 FRANCE, THE UNITED KINGDOM, GERMANY, THE
NETHERLANDS, SPAIN, SWEDEN, SWITZERLAND AND ITALY.
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
3
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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 JUNE 30, 2004, IS AVAILABLE WITHOUT CHARGE 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.
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.
4
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PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED APRIL 30, 2005
<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 11.54%(3) 11.65%(3) 10.65%(3) 11.83%(3)
5.68(4) 6.65(4) 9.65(4)
5 YEARS (2.05)(3) (2.48)(3) (2.79)(3) (1.82)(3)
(3.10)(4) (2.81)(4) (2.79)(4) --
10 YEARS -- 8.71(3) -- --
-- 8.71(4) -- --
SINCE INCEPTION 4.99(3) 8.83(3) 4.19(3) 5.38(3)
4.26(4) 8.83(4) 4.19(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 TABLE DOES 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, IRELAND, ITALY, THE
NETHERLANDS, NORWAY, PORTUGAL, SPAIN, SWEDEN, SWITZERLAND AND THE UNITED
KINGDOM. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUME
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.
5
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) 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 11/01/04 - 04/30/05.
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 and do not reflect any transactional costs, such as sales
charges (loads) and redemption fees. 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. In addition, if these transactional costs
were included, your costs would have been higher.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
11/01/04 -
11/01/04 04/30/05 04/30/05
------------- ------------- ---------------
CLASS A
Actual (7.67% return) $ 1,000.00 $ 1,076.70 $ 7.36
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,017.70 $ 7.15
CLASS B
Actual (7.72% return) $ 1,000.00 $ 1,077.20 $ 6.70
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.35 $ 6.51
CLASS C
Actual (7.18% return) $ 1,000.00 $ 1,071.80 $ 11.15
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,014.03 $ 10.84
CLASS D
Actual (7.78% return) $ 1,000.00 $ 1,077.80 $ 6.13
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.89 $ 5.96
</Table>
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* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.43%,
1.30%, 2.17% AND 1.19% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT
VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF
YEAR PERIOD).
6
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INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement and the Sub-Advisor (an affiliated company of the Investment Adviser)
under the Sub-Advisory Agreement, including portfolio management, investment
research and equity and fixed income securities trading. The Board also reviewed
and considered the nature and extent of the non-advisory, administrative
services provided by the Fund's Administrator under the Administration
Agreement, including accounting, clerical, bookkeeping, compliance, business
management and planning, and the provision of supplies, office space and
utilities at the Adviser's expense. (The Investment Adviser, the Sub-Advisor and
the Administrator are referred to, collectively, as the "Adviser" and the
Investment Advisory, the Sub-Advisory and Administration Agreements are referred
to, collectively, as the "Management Agreement.") The Board also compared the
nature of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Fund. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Fund. The Board also concluded that the overall quality of the
advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Fund's performance for one-, three- and five-year periods
ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper
Reports"), compared to the performance of comparable funds selected by Lipper
(the "performance peer group"), and noted that the Fund's performance was lower
than its performance peer group average for all three periods. The Board
discussed with the Adviser possible steps to improve performance. The Adviser
informed the Board that, in order to try to improve performance, it changed the
portfolio manager, made a management strategy change and was in the process of
strengthening the research resources available to the Fund through hiring of key
experienced research analysts, whose names and areas of research experience were
provided to the Board. The Board concluded that the action taken by the Adviser
was appropriate and acceptable.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement. The Board
noted that the rate was comparable to the management fee rates charged by the
Adviser to any other funds it manages with investment strategies comparable to
those of the Fund.
7
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FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Fund. The Board noted that: (i) the Fund's management fee rate was slightly
higher than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Fund, as shown in the Lipper Report for the Fund; but
(ii) the Fund's total expense ratio was lower than the average total expense
ratio of the funds included in the Fund's expense peer group. The Board
concluded that the management fee was competitive with the management fees
charged by other investment advisers considering that the Adviser's overall
management of the Fund resulted in lower total expenses compared to its expense
peer group average.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it includes breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Fund and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Fund Complex, such
as "float" benefits derived from handling of checks for purchases and
redemptions of Fund shares through a broker-dealer affiliate of the Adviser and
"soft dollar" benefits (discussed in the next section). The Board also
considered that a broker-dealer affiliate of the Adviser receives from the Fund
12b-1 fees for distribution and shareholder services. The Board also considered
that an affiliate of the Adviser, through a joint venture, receives revenue in
connection with trading done on behalf of the Fund through an electronic trading
system network ("ECN"). The Board concluded that the float benefits and the
above-referenced ECN-related revenue were relatively small and that the 12b-1
fees were competitive with those of other broker-dealer affiliates of investment
advisers of mutual funds.
8
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SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Fund and/or other funds managed
by the Adviser would be used to pay for research that a securities broker
obtains from third parties, or to pay for both research and execution services
from securities brokers who effect transactions for the Fund. The Adviser
informed the Board that it does not use Fund commissions to pay for third party
research. It does use commissions to pay for research which is bundled with
execution services. The Board recognized that the receipt of such research from
brokers may reduce the Adviser's costs but concluded that the receipt of such
research strengthens the investment management resources of the Adviser, which
may ultimately benefit the Fund and other funds in the Fund Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Fund and its shareholders to approve
renewal of the Management Agreement for another year.
9
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MORGAN STANLEY EUROPEAN EQUITY FUND INC.
PORTFOLIO OF INVESTMENTS - APRIL 30, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------
COMMON STOCKS (98.7%) (a)
AUSTRIA (0.9%)
MAJOR TELECOMMUNICATIONS
320,265 Telekom Austria AG $ 6,151,324
-------------
DENMARK (2.3%)
BEVERAGES: ALCOHOLIC
175,793 Carlsberg A/S (Series B) 8,622,927
-------------
PHARMACEUTICALS: MAJOR
133,894 Novo Nordisk A/S (Series B) 6,746,596
-------------
TOTAL DENMARK 15,369,523
-------------
FINLAND (1.0%)
MULTI-LINE INSURANCE
500,142 Sampo Oyj (A Shares) 6,970,074
-------------
FRANCE (14.2%)
BROADCASTING
188,690 M6 Metropole Television 4,868,099
-------------
ELECTRICAL PRODUCTS
152,739 Schneider Electric S.A. 10,990,518
-------------
INTEGRATED OIL
105,114 Total S.A. 23,313,457
-------------
INTERNET SOFTWARE/SERVICES
157,889 Business Objects S.A.* 4,088,751
-------------
MAJOR BANKS
310,141 BNP Paribas S.A. 20,424,316
-------------
MAJOR TELECOMMUNICATIONS
520,304 France Telecom S.A. 15,222,060
-------------
MULTI-LINE INSURANCE
386,131 Axa 9,513,358
-------------
PHARMACEUTICALS: MAJOR
77,960 Sanofi-Aventis 6,899,374
-------------
TOTAL FRANCE 95,319,933
-------------
GERMANY (10.5%)
INDUSTRIAL CONGLOMERATES
182,673 Siemens AG
(Registered Shares) 13,383,040
-------------
MAJOR BANKS
150,580 Deutsche Bank AG
(Registered Shares) $ 12,296,340
-------------
MAJOR TELECOMMUNICATIONS
562,358 Deutsche Telekom AG
(Registered Shares) 10,503,377
-------------
MEDICAL/NURSING SERVICES
86,176 Fresenius Medical Care AG 6,914,387
-------------
MOTOR VEHICLES
220,885 Bayerische Motoren Werke
(BMW) AG 9,351,773
106,129 Volkswagen AG 4,416,778
-------------
13,768,551
-------------
MULTI-LINE INSURANCE
115,538 Allianz AG (Registered Shares) 13,822,569
-------------
TOTAL GERMANY 70,688,264
-------------
ITALY (3.2%)
INTEGRATED OIL
476,616 ENI SpA 11,963,213
-------------
MAJOR BANKS
1,738,165 UniCredito Italiano SpA 9,747,098
-------------
TOTAL ITALY 21,710,311
-------------
NETHERLANDS (14.2%)
AIR FREIGHT/COURIERS
386,586 TNT NV 10,508,427
-------------
ELECTRONIC PRODUCTION EQUIPMENT
787,010 ASML Holding NV* 11,368,474
-------------
FINANCIAL CONGLOMERATES
467,876 ING Groep NV
(Share Certificates) 12,820,979
-------------
FOOD RETAIL
408,641 Koninklijke Ahold NV* 3,099,389
-------------
FOOD: SPECIALTY/CANDY
169,452 Royal Numico NV* 7,013,435
-------------
INTEGRATED OIL
321,621 Royal Dutch Petroleum Co. 18,747,013
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------
MAJOR TELECOMMUNICATIONS
1,523,277 Koninklijke (Royal) KPN NV $ 12,706,618
-------------
PUBLISHING: BOOKS/MAGAZINES
240,600 VNU NV 6,767,997
678,909 Wolters Kluwer NV
(Share Certificates) 12,078,201
-------------
18,846,198
-------------
TOTAL NETHERLANDS 95,110,533
-------------
SPAIN (5.3%)
MAJOR BANKS
1,343,335 Banco Bilbao Vizcaya
Argentaria, S.A. 20,796,907
852,774 Banco Santander
Central Hispano, S.A. 9,951,363
-------------
30,748,270
-------------
TOBACCO
119,226 Altadis, S.A. 5,056,807
-------------
TOTAL SPAIN 35,805,077
-------------
SWEDEN (3.3%)
INDUSTRIAL MACHINERY
259,236 Sandvik AB 10,159,701
-------------
MAJOR BANKS
502,319 ForeningsSparbanken AB 11,822,089
-------------
TOTAL SWEDEN 21,981,790
-------------
SWITZERLAND (11.4%)
FINANCIAL CONGLOMERATES
278,974 UBS AG (Registered Shares) 22,340,371
-------------
FOOD: MAJOR DIVERSIFIED
43,900 Nestle S.A.
(Registered Shares) 11,514,220
-------------
MAJOR BANKS
159,513 Credit Suisse Group* 6,706,578
-------------
PHARMACEUTICALS: MAJOR
549,789 Novartis AG
(Registered Shares) 26,722,169
77,284 Roche Holding AG $ 9,338,459
-------------
36,060,628
-------------
TOTAL SWITZERLAND 76,621,797
-------------
UNITED KINGDOM (32.4%)
CABLE/SATELLITE TV
1,517,357 British Sky
Broadcasting Group PLC 15,697,052
-------------
CHEMICALS: SPECIALTY
494,292 BOC Group PLC 9,155,244
-------------
ELECTRIC UTILITIES
1,808,815 International Power PLC* 6,298,420
-------------
FOOD RETAIL
3,679,492 Morrison (W.M.)
Supermarkets PLC 13,686,067
1,200,549 Tesco PLC 7,081,841
-------------
20,767,908
-------------
FOOD: SPECIALTY/CANDY
1,091,907 Cadbury Schweppes PLC 10,974,090
-------------
HOTELS/RESORTS/CRUISELINES
131,422 Carnival PLC 6,781,111
-------------
HOUSEHOLD/PERSONAL CARE
223,918 Reckitt Benckiser PLC 7,266,812
-------------
INTEGRATED OIL
2,054,816 BP PLC 20,920,889
708,519 Shell Transport &
Trading Co. PLC 6,342,093
-------------
27,262,982
-------------
INVESTMENT MANAGERS
1,313,305 Amvescap PLC 7,630,995
-------------
LIFE/HEALTH INSURANCE
1,392,418 Prudential PLC 12,550,874
-------------
MAJOR BANKS
655,724 Royal Bank of Scotland
Group PLC 19,774,641
166,987 Standard Chartered PLC 3,009,791
-------------
22,784,432
-------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------
MEDICAL SPECIALTIES
795,541 Smith & Nephew PLC $ 8,186,159
-------------
PHARMACEUTICALS: MAJOR
161,136 AstraZeneca PLC 7,062,121
1,003,026 GlaxoSmithKline PLC 25,234,674
-------------
32,296,795
-------------
WIRELESS TELECOMMUNICATIONS
3,791,849 O2 PLC* 8,514,398
8,093,971 Vodafone Group PLC 21,116,632
-------------
29,631,030
-------------
TOTAL UNITED KINGDOM 217,283,904
-------------
TOTAL COMMON STOCKS
(COST $544,452,697) 663,012,530
-------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
SHORT-TERM INVESTMENT (1.0%)
REPURCHASE AGREEMENT
$ 6,752 Joint repurchase agreement
account 2.95% due
05/02/05 (dated 04/29/05;
proceeds $6,753,660) (b)
(COST $6,752,000) 6,752,000
-------------
TOTAL INVESTMENTS
(COST $551,204,697) (c) 99.7% 669,764,530
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.3 1,841,681
----- -------------
NET ASSETS 100.0% $ 671,606,211
===== =============
</Table>
- --------
* NON-INCOME PRODUCING SECURITY.
(a) SECURITIES WITH TOTAL MARKET VALUE EQUAL TO $663,012,530 HAVE BEEN VALUED
AT THEIR FAIR VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES
ESTABLISHED BY AND UNDER THE GENERAL SUPERVISION OF THE FUND'S DIRECTORS.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $125,727,927 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $7,168,094, RESULTING IN NET UNREALIZED APPRECIATION OF
$118,559,833.
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
SUMMARY OF INVESTMENTS - APRIL 30, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------------------------
Major Banks $ 114,529,123 17.1%
Pharmaceuticals: Major 82,003,393 12.2
Integrated Oil 81,286,665 12.1
Major Telecommunications 44,583,379 6.6
Financial Conglomerates 35,161,350 5.2
Multi-Line Insurance 30,306,001 4.5
Wireless Telecommunications 29,631,030 4.4
Food Retail 23,867,297 3.6
Publishing: Books/Magazines 18,846,198 2.8
Food: Specialty/Candy 17,987,525 2.7
Cable/Satellite TV 15,697,052 2.3
Motor Vehicles 13,768,551 2.1
Industrial Conglomerates 13,383,040 2.0
Life/Health Insurance 12,550,874 1.9
Food: Major Diversified 11,514,220 1.7
Electronic Production Equipment 11,368,474 1.7
Electrical Products 10,990,518 1.6
Air Freight/Couriers 10,508,427 1.6
Industrial Machinery 10,159,701 1.5
Chemicals: Specialty 9,155,244 1.4
Beverages: Alcoholic 8,622,927 1.3
Medical Specialties 8,186,159 1.2
Investment Managers 7,630,995 1.1
Household/Personal Care 7,266,812 1.1
Medical/Nursing Services 6,914,387 1.0
Hotels/Resorts/Cruiselines 6,781,111 1.0
Repurchase Agreement 6,752,000 1.0
Electric Utilities 6,298,420 0.9
Tobacco 5,056,807 0.8
Broadcasting 4,868,099 0.7
Internet Software/Services 4,088,751 0.6
--------------- ----
$ 669,764,530 99.7%
=============== ====
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2005 (UNAUDITED)
<Table>
ASSETS:
Investments in securities, at value (cost $551,204,697) $ 669,764,530
Cash 390,717
Receivable for:
Dividends 2,353,713
Foreign withholding taxes reclaimed 702,048
Capital stock sold 76,589
Prepaid expenses and other assets 90,822
Receivable from affiliate 421,523
----------------
TOTAL ASSETS 673,799,942
----------------
LIABILITIES:
Payable for:
Capital stock redeemed 938,746
Distribution fee 490,392
Investment advisory fee 488,512
Administration fee 45,655
Accrued expenses and other payables 230,426
----------------
TOTAL LIABILITIES 2,193,731
----------------
NET ASSETS $ 671,606,211
================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 725,183,588
Net unrealized appreciation 118,561,233
Accumulated undistributed net investment income 4,778,627
Accumulated net realized loss (176,917,237)
----------------
NET ASSETS $ 671,606,211
================
CLASS A SHARES:
Net Assets $ 414,421,422
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 25,856,329
NET ASSET VALUE PER SHARE $ 16.03
================
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 16.92
================
CLASS B SHARES:
Net Assets $ 235,894,909
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 15,238,667
NET ASSET VALUE PER SHARE $ 15.48
================
CLASS C SHARES:
Net Assets $ 15,614,317
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 1,015,072
NET ASSET VALUE PER SHARE $ 15.38
================
CLASS D SHARES:
Net Assets $ 5,675,563
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 344,092
NET ASSET VALUE PER SHARE $ 16.49
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2005 (UNAUDITED)
<Table>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $1,012,225 foreign withholding tax) $ 9,684,872
Interest 63,888
----------------
TOTAL INCOME 9,748,760
----------------
EXPENSES
Investment advisory fee 3,115,500
Transfer agent fees and expenses 625,406
Distribution fee (Class A shares) 39,285
Distribution fee (Class B shares) 392,357
Distribution fee (Class C shares) 83,387
Administration fee 291,856
Custodian fees 129,723
Shareholder reports and notices 66,217
Professional fees 41,126
Registration fees 26,141
Directors' fees and expenses 8,269
Other 30,877
----------------
TOTAL EXPENSES 4,850,144
----------------
NET INVESTMENT INCOME 4,898,616
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN ON:
Investments 67,457,581
Foreign exchange transactions 489,896
----------------
NET REALIZED GAIN 67,947,477
----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (15,486,617)
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies (206,261)
----------------
NET DEPRECIATION (15,692,878)
----------------
NET GAIN 52,254,599
----------------
NET INCREASE $ 57,153,215
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2005 OCTOBER 31, 2004
---------------- ----------------
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 4,898,616 $ 7,812,438
Net realized gain 67,947,477 90,386,379
Net change in unrealized appreciation (15,692,878) 10,372,445
---------------- ----------------
NET INCREASE 57,153,215 108,571,262
---------------- ----------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (104,311) (125,548)
Class B shares (6,500,714) (2,575,184)
Class C shares -- (13,766)
Class D shares (63,363) (445,988)
---------------- ----------------
TOTAL DIVIDENDS (6,668,388) (3,160,486)
---------------- ----------------
Net decrease from capital stock transactions (105,049,437) (234,452,558)
---------------- ----------------
NET DECREASE (54,564,610) (129,041,782)
NET ASSETS:
Beginning of period 726,170,821 855,212,603
---------------- ----------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF
$4,778,627 AND $6,548,399, RESPECTIVELY) $ 671,606,211 $ 726,170,821
================ ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2005 (UNAUDITED)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley European Equity Fund Inc. (the "Fund") 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
Adviser") or Morgan Stanley Investment Management Limited (the "Sub-Advisor"),
an affiliate of the Investment Adviser, 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
Adviser using a pricing service and/or procedures approved by the Directors of
the Fund;
17
<Page>
(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 Adviser, 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 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.
18
<Page>
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 ADVISORY/ADMINISTRATION AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Advisory Agreement, the Fund pays the Investment
Adviser an advisory fee, accrued daily and payable monthly, by applying the
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.87% to the portion of net assets not exceeding $500 million;
0.82% to the portion of daily net assets exceeding $500 million but not
exceeding $2 billion; 0.77% to the portion of daily net assets exceeding $2
billion but not exceeding $3 billion; and 0.745% to the portion of daily net
assets in excess of $3 billion.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, accrued daily and payable monthly, by applying the
annual rate of 0.08% to the Fund's daily net assets.
Under a Sub-Advisory Agreement between the Sub-Advisor and the Investment
Adviser, 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 Adviser. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Adviser paid the
Sub-Advisor compensation of $1,246,200 for the six months ended April 30, 2005.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser, Administrator 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
19
<Page>
been 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
April 30, 2005. For the six months ended April 30, 2005, the distribution fee
was accrued for Class B shares at the annual rate of 0.11%. At April 30, 2005,
included in the Statement of Assets and Liabilities is a receivable from
affiliate of $421,523, which represents payments by the Distributor.
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 six months ended April 30, 2005, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.24% and 0.98%,
respectively.
The Distributor has informed the Fund that for the six months ended April 30,
2005, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $210,018 and $554, respectively
and received $13,100 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 six months ended April 30, 2005 aggregated
$233,553,587 and $331,602,640, respectively. Included in the aforementioned
transactions are purchases of $375,730 with other Morgan Stanley funds.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator,
Distributor and Sub-Advisor, is the Fund's transfer agent.
20
<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 six months ended April 30, 2005 included in
Directors' fees and expenses in the Statement of Operations amounted to $3,466.
At April 30, 2005, the Fund had an accrued pension liability of $60,980 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.
The Fund has 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. PURPOSE 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 April 30, 2005, investments in securities of issuers in the United Kingdom
represented 32.4% 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.
21
<Page>
6. CAPITAL STOCK
Transactions in capital stock were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2005 OCTOBER 31, 2004
---------------------------------- ----------------------------------
(UNAUDITED)
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
CLASS A SHARES
Sold 108,403 $ 1,779,420 344,522 $ 5,072,788
Conversion from Class B 25,157,378 411,071,562
Reinvestment of dividends and distributions 5,562 91,381 7,674 110,742
Redeemed (433,050) (7,010,992) (583,125) (8,530,247)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class A 24,838,293 405,931,371 (230,929) (3,346,717)
--------------- --------------- --------------- ---------------
CLASS B SHARES
Sold 492,209 7,755,690 1,239,609 17,507,893
Conversion to Class A (26,066,681) (411,071,562)
Reinvestment of dividends and distributions 369,059 5,853,268 166,797 2,323,489
Redeemed (6,937,831) (109,227,990) (14,834,405) (208,156,645)
--------------- --------------- --------------- ---------------
Net decrease -- Class B (32,143,244) (506,690,594) (13,427,999) (188,325,263)
--------------- --------------- --------------- ---------------
CLASS C SHARES
Sold 41,623 645,286 117,097 1,647,604
Reinvestment of dividends and distributions -- -- 941 13,081
Redeemed (205,891) (3,218,984) (397,311) (5,549,360)
--------------- --------------- --------------- ---------------
Net decrease -- Class C (164,268) (2,573,698) (279,273) (3,888,675)
--------------- --------------- --------------- ---------------
CLASS D SHARES
Sold 36,047 604,883 128,108 1,938,286
Reinvestment of dividends and distributions 3,455 58,396 4,805 71,313
Redeemed (141,726) (2,379,795) (2,784,964) (40,901,502)
--------------- --------------- --------------- ---------------
Net decrease -- Class D (102,224) (1,716,516) (2,652,051) (38,891,903)
--------------- --------------- --------------- ---------------
Net decrease in Fund (7,571,443) $ (105,049,437) (16,590,252) $ (234,452,558)
=============== =============== =============== ===============
</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.
22
<Page>
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.
8. LEGAL MATTERS
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. 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 Adviser
and certain affiliates of the Investment Adviser allegedly offered economic
incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser 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. On March 10, 2005,
Plaintiffs sought leave to supplement their complaint to assert claims on behalf
of other investors. While the Fund and Adviser believe that each 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 SIX FOR THE YEAR ENDED OCTOBER 31
MONTHS ENDED ------------------------------------------------------------
APRIL 30, 2005 2004 2003 2002 2001 2000
-------------- --------- --------- --------- --------- ---------
(UNAUDITED)
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 14.99 $ 13.30 $ 11.51 $ 13.35 $ 20.17 $ 20.70
-------------- --------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income++ 0.11 0.11 0.12 0.06 0.07 0.05
Net realized and unrealized
gain (loss) 1.04 1.68 1.67 (1.67) (3.71) 2.34
-------------- --------- --------- --------- --------- ---------
Total income (loss) from
investment operations 1.15 1.79 1.79 (1.61) (3.64) 2.39
-------------- --------- --------- --------- --------- ---------
Less dividends and distributions from:
Net investment income (0.11) (0.10) - (0.23) - -
Net realized gain - - - - (3.18) (2.92)
-------------- --------- --------- --------- --------- ---------
Total dividends and distributions (0.11) (0.10) - (0.23) (3.18) (2.92)
-------------- --------- --------- --------- --------- ---------
Net asset value, end of period $ 16.03 $ 14.99 $ 13.30 $ 11.51 $ 13.35 $ 20.17
============== ========= ========= ========= ========= =========
TOTAL RETURN+ 7.67%(1) 13.51% 15.55% (12.41)% (21.07)% 10.92%
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.43%(2) 1.43% 1.45% 1.38% 1.27% 1.29%
Net investment income 1.24%(2) 0.79% 0.79% 0.41% 0.43% 0.23%
SUPPLEMENTAL DATA:
Net assets, end of period,
in thousands $ 414,421 $ 15,265 $ 16,612 $ 18,294 $ 22,604 $ 53,012
Portfolio turnover rate 32%(1) 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) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31
MONTHS ENDED ----------------------------------------------------------------
APRIL 30, 2005 2004 2003 2002 2001 2000
-------------- --------- --------- --------- --------- ---------
(UNAUDITED)
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 14.50 $ 12.79 $ 11.12 $ 12.88 $ 19.70 $ 20.41
-------------- --------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income (loss)++ 0.11 0.13 0.03 (0.05) (0.06) (0.11)
Net realized and unrealized gain (loss) 1.01 1.62 1.64 (1.62) (3.58) 2.32
-------------- --------- --------- --------- --------- ---------
Total income (loss) from
investment operations 1.12 1.75 1.67 (1.67) (3.64) 2.21
-------------- --------- --------- --------- --------- ---------
Less dividends and distributions from:
Net investment income (0.14) (0.04) - (0.09) - -
Net realized gain - - - - (3.18) (2.92)
-------------- --------- --------- --------- --------- ---------
Total dividends and distributions (0.14) (0.04) - (0.09) (3.18) (2.92)
-------------- --------- --------- --------- --------- ---------
Net asset value, end of period $ 15.48 $ 14.50 $ 12.79 $ 11.12 $ 12.88 $ 19.70
============== ========= ========= ========= ========= =========
TOTAL RETURN+ 7.72%(1) 13.73% 15.02% (13.11)% (21.68)% 10.05%
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.30%(2) 1.26%(4) 1.94%(4) 2.15% 2.10% 2.05%
Net investment income (loss) 1.37%(2) 0.96%(4) 0.30%(4) (0.36)% (0.40)% (0.53)%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 236 $ 687 $ 778 $ 870 $ 1,335 $ 2,206
Portfolio turnover rate 32%(1) 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) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) 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 SIX FOR THE YEAR ENDED OCTOBER 31
MONTHS ENDED ------------------------------------------------------------
APRIL 30, 2005 2004 2003 2002 2001 2000
-------------- --------- --------- --------- --------- ---------
(UNAUDITED)
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 14.35 $ 12.74 $ 11.11 $ 12.85 $ 19.67 $ 20.38
-------------- --------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income (loss)++ 0.04 0.00 0.00 (0.04) (0.06) (0.11)
Net realized and
unrealized gain (loss) 0.99 1.62 1.63 (1.61) (3.58) 2.32
-------------- --------- --------- --------- --------- ---------
Total income (loss) from
investment operations 1.03 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 0.00 (0.01) - (0.09) (3.18) (2.92)
-------------- --------- --------- --------- --------- ---------
Net asset value, end of period $ 15.38 $ 14.35 $ 12.74 $ 11.11 $ 12.85 $ 19.67
============== ========= ========= ========= ========= =========
TOTAL RETURN+ 7.18%(1) 12.72% 14.67% (12.98)% (21.76)% 10.11%
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 2.17%(2) 2.19% 2.20% 2.08% 2.10% 2.05%
Net investment income (loss) 0.5%(2) 0.03% 0.04% (0.29)% (0.40)% (0.53)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 15,614 $ 16,922 $ 18,581 $ 20,881 $ 29,075 $ 46,886
Portfolio turnover rate 32%(1) 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) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31
MONTHS ENDED ------------------------------------------------------------
APRIL 30, 2005 2004 2003 2002 2001 2000
-------------- --------- --------- --------- --------- ---------
(UNAUDITED)
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 15.45 $ 13.70 $ 11.83 $ 13.73 $ 20.61 $ 21.05
-------------- --------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income++ 0.12 0.20 0.13 0.09 0.10 0.12
Net realized and unrealized gain (loss) 1.07 1.69 1.74 (1.72) (3.80) 2.36
-------------- --------- --------- --------- --------- ---------
Total income (loss) from
investment operations 1.19 1.89 1.87 (1.63) (3.70) 2.48
-------------- --------- --------- --------- --------- ---------
Less dividends and distributions from:
Net investment income (0.15) (0.14) - (0.27) - -
Net realized gain - - - - (3.18) (2.92)
-------------- --------- --------- --------- --------- ---------
Total dividends and distributions (0.15) (0.14) - (0.27) (3.18) (2.92)
-------------- --------- --------- --------- --------- ---------
Net asset value, end of period $ 16.49 $ 15.45 $ 13.70 $ 11.83 $ 13.73 $ 20.61
============== ========= ========= ========= ========= =========
TOTAL RETURN+ 7.78%(1) 13.86% 15.81% (12.20)% (20.95)% 11.19%
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.19%(2) 1.19% 1.20% 1.15% 1.10% 1.05%
Net investment income 1.48%(2) 1.03% 1.04% 0.64% 0.60% 0.47%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 5,676 $ 6,896 $ 42,454 $ 39,716 $ 49,539 $ 54,016
Portfolio turnover rate 32%(1) 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) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
27
<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 ADVISER
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
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
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) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
37908RPT-RP05-00473P-YO4/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
EUROPEAN
EQUITY FUND
SEMIANNUAL REPORT
APRIL 30, 2005
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
<Page>
Item 11. 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 12. Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(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
June 16, 2005
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
June 16, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
June 16, 2005