<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: October 31, 2005
<Page>
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. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
<Page>
FUND REPORT
For the year ended October 31, 2005
TOTAL RETURN FOR THE 12 MONTHS ENDED OCTOBER 31, 2005
<Table>
<Caption>
MORGAN
STANLEY
CAPITAL LIPPER
INTERNATIONAL EUROPEAN
(MSC) REGION
EUROPE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
- ------- ------- ------- ------- ------------- --------
14.25% 14.40% 13.38% 14.50% 16.30% 19.99%
</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 FISCAL PERIOD ENDED OCTOBER 31, 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
During the 12 months ended October 31, 2005, European markets posted a robust
absolute gain, besting the U.S. stock market by a respectable margin. Although
at a somewhat sluggish pace, the European economy grew nonetheless. Export
strength was among the key factors driving European economies during the period;
demand from Eastern Europe, Asia and the United States fuelled the
export-reliant economies of Germany and France, in particular. Toward the end of
the reporting period, the European Central Bank signaled that a rise in interest
rates could be forthcoming to help keep inflation in check.
On a country basis, France saw a healthy improvement in its housing market,
which encouraged consumer spending. In contrast, consumer spending was weak in
Germany, hindered by a sour economic climate. Signs of economic contraction
disturbed the United Kingdom's stock market, as a cooling real estate market
slowed consumer spending, and in turn, the retail sector. Rising unemployment
and falling industrial production further added to negative sentiment. The Bank
of England implemented an interest rate decrease -- a measure intended to
stimulate economic growth -- which heightened investor uncertainty about the
economy's current course.
Against this backdrop, European stocks generally performed well during the
12-month period, even as oil prices remained stubbornly high. We attribute this
strength to several factors. Among them, while the gap has narrowed somewhat due
to Europe's outperformance, relative to U.S. stocks, valuations are still
cheaper in Europe. Also, although economic conditions were lethargic or
deteriorating within some countries, we note that many leading European
companies are global companies that happen to be headquartered in Europe. In
other words, they may be less susceptible to local economic turmoil.
Additionally, restructuring activities resulted in improved operations and
profits, which helped to boost stock returns.
2
<Page>
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 12 months ended October 31, 2005, assuming no deduction of applicable sales
charges.
Due to individual company circumstances, exposure to food retailing, banks and
transportation detracted from the Fund's return relative to the MSCI benchmark.
Additionally in the banking sector, we avoided Italian banking stocks based on
our concerns about the country's lagging economy. However, these stocks
appreciated on merger and acquisition speculation, and the Fund did not
participate in that rally. The Fund's stock selection in the energy sector also
dampened results. While the Fund did maintain some energy positions that
performed well, we generally avoided the smaller, more volatile companies. Based
on a prudent approach to long-term energy prices, we sought companies that were
more likely to weather falling commodity prices.
However, the Fund generated positive results in other areas. Telecommunication
services stocks, especially in the United Kingdom and the Netherlands, were a
standout for the Fund. Stock selection in insurance companies also boosted
results due to the prospect of new business and recent strength in the capital
markets. A number of holdings within the materials sector, including chemicals,
gasses and mining, benefited from greater demand and other company-specific
events. An underweight to the retail sector relative to the MSCI Europe Index
served the Fund well. Retail was one of the benchmark index's few negative
sectors during the 12-month period, with the UK struggling in particular due to
retrenching consumers, profit warnings and business closures. Holdings in
semiconductors and utilities also added to the Fund's return.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN THE FUTURE.
3
<Page>
TOP 1O HOLDINGS
<Table>
BP PLC 4.2%
Total S.A. 4.0
BNP Paribas S.A. 3.5
Morrison (W.M.) Supermarkets PLC 3.5
Banco Bilbao Vizcaya Argentaria, S.A. 3.4
Vodafone Group PLC 3.1
Novartis AG (Registered Shares) 3.1
GlaxoSmithKline PLC 2.9
Allianz AG (Registered Shares) 2.4
ENI SpA 2.2
</Table>
TOP FIVE COUNTRIES
<Table>
United Kingdom 33.3%
France 16.0
Netherlands 11.1
Germany 10.8
Switzerland 10.1
</Table>
DATA AS OF OCTOBER 31, 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 EQUITY
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 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
4
<Page>
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.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
http://www.sec.gov.
YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO
PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30
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.
5
<Page>
PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF $10,000 INVESTMENT--CLASS B
($ IN THOUSANDS)
<Table>
<Caption>
FUND++ MSCI EUROPE INDEX(1) LIPPER EUROPEAN REGION FUNDS INDEX(2)
-------- -------------------- -------------------------------------
October 31, 1995 $ 10,000 $ 10,000 $ 10,000
October 31, 1996 $ 12,227 $ 11,747 $ 11,804
October 31, 1997 $ 14,599 $ 14,799 $ 14,502
October 31, 1998 $ 16,887 $ 18,212 $ 16,724
October 31, 1999 $ 19,563 $ 20,492 $ 19,531
October 31, 2000 $ 21,529 $ 20,685 $ 22,585
October 31, 2001 $ 16,861 $ 15,959 $ 16,679
October 31, 2002 $ 14,650 $ 13,744 $ 14,548
October 31, 2003 $ 16,850 $ 17,065 $ 18,130
October 31, 2004 $ 19,163 $ 20,801 $ 22,066
October 31, 2005 $ 21,924 $ 24,191 $ 26,476
</Table>
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED OCTOBER 31, 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 14.25%(3) 14.40%(3) 13.38%(3) 14.50%(3)
8.25(4) 9.40(4) 12.38(4) --
5 YEARS 0.71(3) 0.36(3) (0.04)(3) 0.94(3)
(0.37)(4) 0.03(4) (0.04)(4) --
10 YEARS -- 8.17(3) -- --
-- 8.17(4) -- --
SINCE INCEPTION 5.43(3) 8.95(3) 4.64(3) 5.81(3)
4.75(4) 8.95(4) 4.64(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 most recent month-end performance figures, please visit
www.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, 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 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, 2005.
7
<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 advisory 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 05/01/05 - 10/31/05.
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 *
------------- ------------- ---------------
05/01/05 -
05/01/05 10/31/05 10/31/05
------------- ------------- ---------------
CLASS A
Actual (6.11% return) $ 1,000.00 $ 1,061.10 $ 7.84
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,017.59 $ 7.68
CLASS B
Actual (6.20% return) $ 1,000.00 $ 1,062.00 $ 7.28
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.15 $ 7.12
CLASS C
Actual (5.79% return) $ 1,000.00 $ 1,057.90 $ 11.72
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,013.81 $ 11.47
CLASS D
Actual (6.24% return) $ 1,000.00 $ 1,062.40 $ 6.55
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.85 $ 6.41
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.51%, 1.40%,
2.26% AND 1.26% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 184/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
8
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------
COMMON STOCKS (99.7%) (a)
AUSTRIA (2.0%)
MAJOR BANKS
120,832 Erste Bank
der Oesterreichischen
Sparkassen AG $ 6,283,276
--------------
MAJOR TELECOMMUNICATIONS
286,557 Telekom Austria AG 5,918,648
--------------
TOTAL AUSTRIA 12,201,924
--------------
FINLAND (2.1%)
TELECOMMUNICATION EQUIPMENT
787,711 Nokia Oyj 13,219,527
--------------
FRANCE (16.0%)
ELECTRICAL PRODUCTS
67,046 Schneider Electric S.A. 5,505,866
--------------
GAS DISTRIBUTORS
44,969 Gaz de France (GDF) 1,382,249
--------------
INTEGRATED OIL
97,828 Total S.A. 24,637,195
--------------
MAJOR BANKS
285,325 BNP Paribas S.A. 21,634,536
--------------
MAJOR TELECOMMUNICATIONS
472,935 France Telecom S.A. 12,295,249
--------------
MULTI-LINE INSURANCE
345,491 Axa 10,006,790
--------------
PHARMACEUTICALS: MAJOR
165,984 Sanofi-Aventis 13,291,894
--------------
REGIONAL BANKS
318,204 Credit Agricole S.A. 9,327,134
--------------
TOTAL FRANCE 98,080,913
--------------
GERMANY (10.8%)
INDUSTRIAL CONGLOMERATES
163,446 Siemens AG
(Registered Shares) 12,156,673
--------------
MAJOR BANKS
304,084 Commerzbank AG $ 7,957,732
134,731 Deutsche Bank AG
(Registered Shares) 12,620,194
--------------
20,577,926
--------------
MEDICAL/NURSING SERVICES
77,106 Fresenius Medical Care AG 6,937,508
--------------
MOTOR VEHICLES
197,637 Bayerische Motoren
Werke (BMW) AG 8,576,801
--------------
MULTI-LINE INSURANCE
103,377 Allianz AG
(Registered Shares) 14,602,508
--------------
PACKAGED SOFTWARE
22,096 SAP AG 3,778,126
--------------
TOTAL GERMANY 66,629,542
--------------
GREECE (1.5%)
MAJOR BANKS
238,441 National Bank of Greece S.A. 9,312,031
--------------
ITALY (4.1%)
INTEGRATED OIL
504,786 ENI SpA 13,503,155
--------------
MAJOR BANKS
1,399,066 Banca Monte dei Paschi
di Siena SpA 6,354,366
--------------
MAJOR TELECOMMUNICATIONS
2,287,741 Telecom Italia SpA - RNC 5,529,848
--------------
TOTAL ITALY 25,387,369
--------------
NETHERLANDS (11.1%)
AIR FREIGHT/COURIERS
345,898 TNT NV 8,166,037
--------------
ELECTRONIC PRODUCTION EQUIPMENT
618,563 ASML Holding NV* 10,461,047
--------------
FOOD: SPECIALTY/CANDY
151,618 Royal Numico NV* 6,137,823
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------
INTEGRATED OIL
411,860 Royal Dutch Shell PLC (Class A) $ 12,701,753
--------------
MAJOR TELECOMMUNICATIONS
1,333,606 Koninklijke (Royal) KPN NV 12,653,419
--------------
PUBLISHING: BOOKS/MAGAZINES
215,278 VNU NV 6,844,547
607,455 Wolters Kluwer NV
(Share Certificates) 11,267,817
--------------
18,112,364
--------------
TOTAL NETHERLANDS 68,232,443
--------------
SPAIN (4.2%)
MAJOR BANKS
1,201,951 Banco Bilbao Vizcaya
Argentaria, S.A. 21,181,003
--------------
TOBACCO
106,678 Altadis, S.A. 4,526,924
--------------
TOTAL SPAIN 25,707,927
--------------
SWEDEN (4.5%)
INDUSTRIAL MACHINERY
293,850 Atlas Copco AB (A Shares) 5,366,048
231,952 Sandvik AB 11,151,551
--------------
16,517,599
--------------
MAJOR BANKS
449,452 ForeningsSparbanken AB 11,086,905
--------------
TOTAL SWEDEN 27,604,504
--------------
SWITZERLAND (10.1%)
FINANCIAL CONGLOMERATES
77,334 UBS AG (Registered Shares) 6,566,330
--------------
INVESTMENT BANKS/BROKERS
111,700 EFG International* 3,210,617
--------------
MAJOR BANKS
209,456 Credit Suisse Group
(Registered Shares) 9,267,839
--------------
OTHER CONSUMER SPECIALTIES
285,495 Compagnie Financiere
Richemont AG
(Series A) (Units)+ $ 10,867,641
--------------
PHARMACEUTICALS: MAJOR
351,647 Novartis AG
(Registered Shares) 18,920,802
86,816 Roche Holding AG 12,973,664
--------------
31,894,466
--------------
TOTAL SWITZERLAND 61,806,893
--------------
UNITED KINGDOM (33.3%)
CHEMICALS: SPECIALTY
442,269 BOC Group PLC 8,713,837
--------------
ELECTRIC UTILITIES
2,489,638 International Power PLC 10,224,395
--------------
FOOD RETAIL
7,409,718 Morrison (W.M.)
Supermarkets PLC 21,445,658
1,714,441 Tesco PLC 9,126,801
--------------
30,572,459
--------------
FOOD: SPECIALTY/CANDY
1,274,240 Cadbury Schweppes PLC 12,540,822
--------------
HOTELS/RESORTS/CRUISELINES
59,895 Carnival PLC 3,038,442
--------------
HOUSEHOLD/PERSONAL CARE
265,536 Reckitt Benckiser PLC 8,023,717
--------------
INTEGRATED OIL
342,113 BG Group PLC 3,001,843
2,319,043 BP PLC 25,665,115
--------------
28,666,958
--------------
LIFE/HEALTH INSURANCE
1,245,869 Prudential PLC 10,453,590
--------------
MAJOR BANKS
196,840 Royal Bank of Scotland
Group PLC 5,449,423
434,601 Standard Chartered PLC 9,124,075
--------------
14,573,498
--------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------
MEDICAL SPECIALTIES
391,429 Smith & Nephew PLC $ 3,311,891
--------------
OTHER METALS/MINERALS
239,266 Anglo American PLC 7,068,012
118,269 Rio Tinto PLC 4,517,209
--------------
11,585,221
--------------
PHARMACEUTICALS: MAJOR
213,662 AstraZeneca PLC 9,588,822
691,977 GlaxoSmithKline PLC 18,001,198
--------------
27,590,020
--------------
SEMICONDUCTORS
2,001,682 ARM Holdings PLC 3,853,483
--------------
WIRELESS TELECOMMUNICATIONS
3,392,764 O2 PLC 12,350,896
7,242,095 Vodafone Group PLC 19,005,462
--------------
31,356,358
--------------
TOTAL UNITED KINGDOM 204,504,691
--------------
TOTAL COMMON STOCKS
(COST $490,521,852) 612,687,764
--------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
SHORT-TERM INVESTMENT (0.6%)
REPURCHASE AGREEMENT
$ 3,517 Joint repurchase agreement
account 4.02% due
11/01/05 (dated 10/31/05;
proceeds $3,517,393) (b)
(COST $3,517,000) 3,517,000
--------------
TOTAL INVESTMENTS
(COST $494,038,852) (c) 100.3% 616,204,764
LIABILITIES IN EXCESS OF
OTHER ASSETS (0.3) (1,916,778)
----- --------------
NET ASSETS 100.0% $ 614,287,986
===== ==============
</Table>
- ----------
* NON-INCOME PRODUCING SECURITY.
+ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT;
STOCKS WITH ATTACHED WARRANTS.
(a) SECURITIES WITH TOTAL MARKET VALUE EQUAL TO $612,687,764 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 IS $497,321,124.
THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $126,650,492 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION IS $7,766,852, RESULTING IN
NET UNREALIZED APPRECIATION OF $118,883,640.
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
SUMMARY OF INVESTMENTS - OCTOBER 31, 2005
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------
Major Banks $ 120,271,380 19.6%
Integrated Oil 79,509,061 13.0
Pharmaceuticals: Major 72,776,380 11.9
Major Telecommunications 36,397,164 5.9
Wireless Telecommunications 31,356,358 5.1
Food Retail 30,572,459 5.0
Multi-Line Insurance 24,609,298 4.0
Food: Specialty/Candy 18,678,645 3.0
Publishing: Books/
Magazines 18,112,364 2.9
Industrial Machinery 16,517,599 2.7
Telecommunication
Equipment 13,219,527 2.2
Industrial Conglomerates 12,156,673 2.0
Other Metals/Minerals 11,585,221 1.9
Other Consumer
Specialties 10,867,641 1.8
Electronic Production
Equipment 10,461,047 1.7
Life/Health Insurance $ 10,453,590 1.7%
Electric Utilities 10,224,395 1.7
Regional Banks 9,327,134 1.5
Chemicals: Specialty 8,713,837 1.4
Motor Vehicles 8,576,801 1.4
Air Freight/Couriers 8,166,037 1.3
Household/Personal Care 8,023,717 1.3
Medical/Nursing Services 6,937,508 1.1
Financial Conglomerates 6,566,330 1.1
Electrical Products 5,505,866 0.9
Tobacco 4,526,924 0.7
Semiconductors 3,853,483 0.6
Packaged Software 3,778,126 0.6
Repurchase Agreement 3,517,000 0.6
Medical Specialties 3,311,891 0.5
Investment Banks/Brokers 3,210,617 0.5
Hotels/Resorts/Cruiselines 3,038,442 0.5
Gas Distributors 1,382,249 0.2
------------- -----
$ 616,204,764 100.3%
============= =====
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2005
<Table>
ASSETS:
Investments in securities, at value (cost $494,038,852) $ 616,204,764
Cash (including foreign currency valued at $47,918 with a cost of $47,905) 48,225
Receivable for:
Investments sold 13,902,092
Foreign withholding taxes reclaimed 421,719
Dividends 125,901
Capital stock sold 34,026
Prepaid expenses and other assets 33,216
Receivable from affiliate 146,205
----------------
TOTAL ASSETS 630,916,148
----------------
LIABILITIES:
Payable for:
Investments purchased 14,283,208
Capital stock redeemed 1,376,799
Investment advisory fee 452,370
Distribution fee 261,692
Administration fee 42,062
Transfer agent fee 23,655
Accrued expenses and other payables 188,376
----------------
TOTAL LIABILITIES 16,628,162
----------------
NET ASSETS $ 614,287,986
================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 628,820,371
Net unrealized appreciation 122,142,175
Accumulated undistributed net investment income 8,943,345
Accumulated net realized loss (145,617,905)
----------------
NET ASSETS $ 614,287,986
================
CLASS A SHARES:
Net Assets $ 407,445,989
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 23,947,298
NET ASSET VALUE PER SHARE $ 17.01
================
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 17.95
================
CLASS B SHARES:
Net Assets $ 187,747,465
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 11,417,884
NET ASSET VALUE PER SHARE $ 16.44
================
CLASS C SHARES:
Net Assets $ 13,869,817
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 852,618
NET ASSET VALUE PER SHARE $ 16.27
================
CLASS D SHARES:
Net Assets $ 5,224,715
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 298,015
NET ASSET VALUE PER SHARE $ 17.53
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2005
<Table>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $1,989,193 foreign withholding tax) $ 18,003,289
Interest 166,920
----------------
TOTAL INCOME 18,170,209
----------------
EXPENSES
Investment advisory fee 5,910,604
Transfer agent fees and expenses 1,316,464
Distribution fee (Class A shares) 560,122
Distribution fee (Class B shares) 542,658
Distribution fee (Class C shares) 158,467
Administration fee 552,254
Custodian fees 250,271
Shareholder reports and notices 158,846
Professional fees 97,515
Registration fees 67,149
Directors' fees and expenses 15,702
Other 54,745
----------------
TOTAL EXPENSES 9,684,797
----------------
NET INVESTMENT INCOME 8,485,412
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN ON:
Investments 99,246,809
Foreign exchange transactions 577,922
----------------
NET REALIZED GAIN 99,824,731
----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (11,880,537)
Translation of forward foreign currency contracts, other assets and liabilities
denominated in foreign currencies (231,399)
----------------
NET DEPRECIATION (12,111,936)
----------------
NET GAIN 87,712,795
----------------
NET INCREASE $ 96,198,207
================
</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, 2005 OCTOBER 31, 2004
---------------- ----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 8,485,412 $ 7,812,438
Net realized gain 99,824,731 90,386,379
Net change in unrealized appreciation/depreciation (12,111,936) 10,372,445
---------------- ----------------
NET INCREASE 96,198,207 108,571,262
---------------- ----------------
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 (201,412,654) (234,452,558)
---------------- ----------------
NET DECREASE (111,882,835) (129,041,782)
NET ASSETS:
Beginning of period 726,170,821 855,212,603
---------------- ----------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $8,943,345
AND $6,548,399, RESPECTIVELY) $ 614,287,986 $ 726,170,821
================ ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
MORGAN STANLEY EUROPEAN EQUITY FUND INC.
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2005
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 eighteen
months, 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.
Effective August 29, 2005, the Board of Directors of the Fund approved the
implementation of a 2% redemption fee on Class A shares, Class B shares, Class C
shares, and Class D shares, which is paid directly to the Fund, for shares
redeemed within thirty days of purchase. The redemption fee is designed to
protect the Fund and its remaining shareholders from the effects of short-term
trading.
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-Adviser"),
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
16
<Page>
securities as of the close of the NYSE, as determined in good faith by the
Fund's Directors or by the Investment Adviser and Sub-Adviser using a pricing
service and/or procedures 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 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.
17
<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 and
Sub-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-Adviser and the Investment
Adviser, the Sub-Adviser 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-Adviser compensation of $2,364,242 for the year ended October 31, 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-Adviser. 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, 2005. For the year ended October 31, 2005, the distribution fee was
accrued for Class B at the annual rate of 0.12%. At October 31, 2005, included
in the Statement of Assets and Liabilities is a receivable from affiliate, which
represents payments by the Distributor 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, 2005, the distribution fee was accrued for Class
A shares and Class C shares at the annual rate of 0.25% and 0.99%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 2005,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $200, $376,244 and
$851, respectively and received $28,869 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, 2005 aggregated
$435,336,575 and $617,092,506, 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,
Sub-Adviser and Distributor, is the Fund's transfer agent.
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
19
<Page>
of retirement. Benefits under this plan are based on factors which include years
of service and compensation. 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. Aggregate pension costs for the year ended
October 31, 2005 included in Directors' fees and expenses in the Statement of
Operations amounted to $6,990. At October 31, 2005, the Fund had an accrued
pension liability of $61,694 which is included in accrued expenses in the
Statement of Assets and Liabilities.
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 October 31, 2005, investments in securities of issuers in the United Kingdom
and France represented 33.3% and 16.0% respectively 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, 2005 OCTOBER 31, 2004
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
CLASS A SHARES
Sold 192,824 $ 3,178,345 344,522 $ 5,072,788
Conversion from Class B 26,755,559 437,439,478 -- --
Reinvestment of dividends and distributions 5,562 91,380 7,674 110,742
Redeemed (4,024,683) (66,671,564) (583,125) (8,530,247)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class A 22,929,262 374,037,639 (230,929) (3,346,717)
--------------- --------------- --------------- ---------------
CLASS B SHARES
Sold 592,949 9,365,922 1,239,609 17,507,893
Conversion to Class A (27,720,983) (437,439,478) -- --
Reinvestment of dividends and distributions 369,059 5,853,268 166,797 2,323,489
Redeemed (9,205,052) (145,579,207) (14,834,405) (208,156,645)
--------------- --------------- --------------- ---------------
Net decrease -- Class B (35,964,027) (567,799,495) (13,427,999) (188,325,263)
--------------- --------------- --------------- ---------------
CLASS C SHARES
Sold 52,225 814,864 117,097 1,647,604
Reinvestment of dividends and distributions -- -- 941 13,081
Redeemed (378,947) (5,980,841) (397,311) (5,549,360)
--------------- --------------- --------------- ---------------
Net decrease -- Class C (326,722) (5,165,977) (279,273) (3,888,675)
--------------- --------------- --------------- ---------------
CLASS D SHARES
Sold 66,401 1,133,714 128,108 1,938,286
Reinvestment of dividends and distributions 3,455 58,396 4,805 71,313
Redeemed (218,157) (3,676,931) (2,784,964) (40,901,502)
--------------- --------------- --------------- ---------------
Net decrease -- Class D (148,301) (2,484,821) (2,652,051) (38,891,903)
--------------- --------------- --------------- ---------------
Net decrease in Fund (13,509,788) $ (201,412,654) (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.
21
<Page>
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Ordinary income $ 6,668,388 $ 3,160,486
================ ================
</Table>
As of October 31, 2005, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed ordinary income $ 8,965,005
Undistributed long-term gains --
----------------
Net accumulated earnings 8,965,005
Foreign tax credit pass-through 1,989,193
Capital loss carryforward* (142,335,616)
Temporary differences (2,051,776)
Net unrealized appreciation 118,900,809
----------------
Total accumulated losses $ (14,532,385)
================
</Table>
*During the year ended October 31, 2005, the Fund utilized $97,241,854 of its
net capital loss carryforward. As of October 31, 2005, the Fund had a net
capital loss carryforward of $142,335,616 of which $88,000,677 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, 2005, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales, mark-to-market of open
forward foreign currency exchange contracts and foreign tax credit pass-through
and permanent book/tax differences attributable to foreign currency gains. To
reflect reclassifications arising from the permanent differences, accumulated
net realized loss was charged and accumulated undistributed net investment
income was credited $577,922.
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, filed in the United States District
Court Southern District of New York on April 16, 2004, 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
22
<Page>
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 9, 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 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,
------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 14.99 $ 13.30 $ 11.51 $ 13.35 $ 20.17
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.19 0.11 0.12 0.06 0.07
Net realized and unrealized gain (loss) 1.94 1.68 1.67 (1.67) (3.71)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment operations 2.13 1.79 1.79 (1.61) (3.64)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.11) (0.10) - (0.23) -
Net realized gain - - - - (3.18)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.11) (0.10) - (0.23) (3.18)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 17.01 $ 14.99 $ 13.30 $ 11.51 $ 13.35
========== ========== ========== ========== ==========
TOTAL RETURN+ 14.25% 13.51% 15.55% (12.41)% (21.07)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.47% 1.43% 1.45% 1.38% 1.27%
Net investment income 1.16% 0.79% 0.79% 0.41% 0.43%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 407,446 $ 15,265 $ 16,612 $ 18,294 $ 22,604
Portfolio turnover rate 64% 89% 89% 51% 86%
</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,
------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 14.50 $ 12.79 $ 11.12 $ 12.88 $ 19.70
---------- ---------- ---------- ---------- ----------
Income (loss) from for investment operations:
Net investment income (loss)++ 0.21 0.13 0.03 (0.05) (0.06)
Net realized and unrealized gain (loss) 1.87 1.62 1.64 (1.62) (3.58)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment operations 2.08 1.75 1.67 (1.67) (3.64)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.14) (0.04) - (0.09) -
Net realized gain - - - - (3.18)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.14) (0.04) - (0.09) (3.18)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 16.44 $ 14.50 $ 12.79 $ 11.12 $ 12.88
========== ========== ========== ========== ==========
TOTAL RETURN+ 14.40% 13.73% 15.02% (13.11)% (21.68)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.34% 1.26%(2) 1.94%(2) 2.15% 2.10%
Net investment income (loss) 1.29% 0.96%(2) 0.30%(2) (0.36)% (0.40)%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 188 $ 687 $ 778 $ 870 $ 1,335
Portfolio turnover rate 64% 89% 89% 51% 86%
</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,
------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 14.35 $ 12.74 $ 11.11 $ 12.85 $ 19.67
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income (loss)++ 0.07 0.00 0.00 (0.04) (0.06)
Net realized and unrealized gain (loss) 1.85 1.62 1.63 (1.61) (3.58)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment operations 1.92 1.62 1.63 (1.65) (3.64)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income - (0.01) - (0.09) -
Net realized gain - - - - (3.18)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions - (0.01) - (0.09) (3.18)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 16.27 $ 14.35 $ 12.74 $ 11.11 $ 12.85
========== ========== ========== ========== ==========
TOTAL RETURN+ 13.38% 12.72% 14.67% (12.98)% (21.76)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 2.21% 2.19% 2.20% 2.08% 2.10%
Net investment income (loss) 0.42% 0.03% 0.04% (0.29)% (0.40)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 13,870 $ 16,922 $ 18,581 $ 20,881 $ 29,075
Portfolio turnover rate 64% 89% 89% 51% 86%
</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,
------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 15.45 $ 13.70 $ 11.83 $ 13.73 $ 20.61
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income++ 0.24 0.20 0.13 0.09 0.10
Net realized and unrealized gain (loss) 1.99 1.69 1.74 (1.72) (3.80)
---------- ---------- ---------- ---------- ----------
Total income (loss) from investment operations 2.23 1.89 1.87 (1.63) (3.70)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.15) (0.14) - (0.27) -
Net realized gain - - - - (3.18)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (0.15) (0.14) - (0.27) (3.18)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 17.53 $ 15.45 $ 13.70 $ 11.83 $ 13.73
========== ========== ========== ========== ==========
TOTAL RETURN+ 14.50% 13.86% 15.81% (12.20)% (20.95)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.22% 1.19% 1.20% 1.15% 1.10%
Net investment income 1.41% 1.03% 1.04% 0.64% 0.60%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 5,225 $ 6,896 $ 42,454 $ 39,716 $ 49,539
Portfolio turnover rate 64% 89% 89% 51% 86%
</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"), including the portfolio of
investments, as of October 31, 2005, 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. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2005, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. 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. as of October 31, 2005, 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 19, 2005
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 (64) Director Since Private Investor; Director or 197 Director of various
c/o Kramer Levin Naftalis & April 1994 Trustee of the Retail Funds business organizations.
Frankel LLP (since April 1994) and the
Counsel to the Independent Institutional Funds (since
Directors July 2003); formerly Vice
1177 Avenue of the Americas Chairman of Kmart Corporation
New York, NY 10036 (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 (73) Director Since Consultant; Director or 197 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Funds Covey (time management
Salt Lake City, UT 84103 (since January 1993) and the systems), BMW Bank of
Institutional Funds (since North America, Inc.
July 2003); member of the (industrial loan
Utah Regional Advisory Board corporation), Escrow Bank
of Pacific Corp. (utility USA (industrial loan
company); formerly Managing corporation), United
Director of Summit Ventures Space Alliance (joint
LLC (2000-2004) (lobbying and venture between Lockheed
consulting firm); United Martin and the Boeing
States Senator (R-Utah) Company) and Nuskin Asia
(1974-1992) and Chairman, Pacific (multilevel
Senate Banking Committee marketing); member of the
(1980-1986), Mayor of Salt board of various civic
Lake City, Utah (1971-1974), and charitable
Astronaut, Space Shuttle organizations.
Discovery (April 12-19,
1985), and Vice Chairman,
Huntsman Corporation
(chemical company).
Wayne E. Hedien (71) Director Since Retired; Director or Trustee 197 Director of The PMI Group
c/o Kramer Levin Naftalis & September of the Retail Funds (since Inc. (private mortgage
Frankel LLP 1997 September 1997) and the insurance); Trustee and
Counsel to the Independent Institutional Funds (since Vice Chairman of The
Directors July 2003); formerly Field Museum of Natural
1177 Avenue of the Americas associated with the Allstate History; director of
New York, NY 10036 Companies (1966-1994), most various other business
recently as Chairman of The and charitable
Allstate Corporation (March organizations.
1993-December 1994) and
Chairman and Chief Executive
Officer of its whollyowned
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 (56) Director Since Senior Partner, Johnson Smick 197 Director of NVR, Inc.
c/o Johnson Smick Group, Inc. July 1991 International, Inc., a (home construction);
888 16th Street, NW consulting firm; Chairman of Director of KFX Energy;
Suite 740 the Audit Committee and Director of RBS Greenwich
Washington, D.C. 20006 Director or Trustee of the Capital Holdings
Retail Funds (since July (financial holding
1991) and the Institutional company).
Funds (since July 2003);
Co-Chairman and a founder of
the Group of Seven Council
(G7C), an international
economic 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 (63) Director Since President, Kearns & 198 Director of Electro Rent
c/o Kearns & Associates LLC July 2003 Associates LLC (investment Corporation (equipment
PMB754 consulting); Deputy Chairman leasing), The Ford Family
23852 Pacific Coast Highway of the Audit Committee and Foundation, and the UCLA
Malibu, CA 90265 Director or Trustee of the Foundation.
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 (69) Director Since General Partner of Triumph 197
c/o Triumph Capital, L.P. July 1991 Capital, L.P., a private
445 Park Avenue investment partnership;
New York, NY 10022 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 (73) Director Since Chairman of Lumelite Plastics 198 Trustee and Director of
c/o Lumelite Plastics July 2003 Corporation; Chairman of the certain investment
Corporation Governance Committee and companies in the JPMorgan
85 Charles Colman Blvd. Director or Trustee of the Funds complex managed by
Pawling, NY 12564 Retail Funds (since July J.P. Morgan Investment
2003) and the Institutional Management Inc.
Funds (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
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR
- ------------------------------ ------------ ------------ ----------------------------- -------------- -------------------------
Charles A. Fiumefreddo (72) Chairman of Since Chairman and Director or 197 None
c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail Funds
Harborside Financial Center, and Director (since July 1991) and the
Plaza Two, Institutional Funds (since
Jersey City, NJ 07311 July 2003); formerly Chief
Executive Officer of the
Retail Funds (until September
2002).
James F. Higgins (57) Director Since Director or Trustee of the 197 Director of AXA
c/o Morgan Stanley Trust June 2000 Retail Funds (since June Financial, Inc. and The
Harborside Financial Center, 2000) and the Institutional Equitable Life Assurance
Plaza Two, Funds (since July 2003); Society of the United
Jersey City, NJ 07311 Senior Advisor of Morgan States (financial
Stanley (since August 2000); services).
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 ADVISER") (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 ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (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**
- ------------------------------ ---------------- ---------------- ----------------------------------------------------------------
Ronald E. Robison (66) President and Since May 2003 President (since September 2005) and Principal Executive Officer
1221 Avenue of the Americas Principal of funds in the Fund Complex (since May 2003); Managing Director
New York, NY 10020 Executive of Morgan Stanley & Co. Incorporated and Morgan Stanley;
Officer Managing Director and Director of Morgan Stanley Investment
Management Inc., Morgan Stanley Distribution Inc. and Morgan
Stanley Distributors Inc.; Managing Director, Chief
Administrative Officer and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc.; Chief
Executive Officer and Director of Morgan Stanley Trust; Director
of Morgan Stanley SICAV (since May 2004); President (since
September 2005) and Principal Executive Officer (since May 2003)
of the Van Kampen Funds; previously, Executive Vice President
(July 2003-September 2005) of funds in the Fund Complex and the
Van Kampen Funds. He was also previously President and Director
of the Institutional Funds (March 2001-July 2003), Chief Global
Operations Officer of Morgan Stanley Investment Management Inc.
and Chief Executive Officer and Chairman of Van Kampen Investor
Services.
Joseph J. McAlinden (62) Vice President Since July 1995 Managing Director and Chief Investment Officer of the Investment
1221 Avenue of the Americas Adviser and Morgan Stanley Investment Management Inc.; Chief
New York, NY 10020 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 (50) Vice President Since General Counsel (since May 2000) and Managing Director (since
1221 Avenue of the Americas February 1997 December 2000) of Morgan Stanley Investment Management; Managing
New York, NY 10020 Director (since December 2000), Secretary (since February 1997)
and Director of the Investment Adviser and the Administrator;
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 Adviser and the Administrator (February 1997-
December 2001).
Amy R. Doberman (43) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management Inc. and the Investment Adviser, Vice President of
the Institutional and Retail Funds (since July 2004); Vice
President of the Van Kampen Funds (since August 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 Morgan
1221 Avenue of the Americas Compliance 2004 Stanley Investment Management (since October 2004); Executive
New York, NY 10020 Officer 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 (38) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas Stanley Investment Management Inc. and the Investment Adviser;
New York, NY 10020 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 (40) Treasurer and Treasurer since Executive Director of the Investment Adviser and the
c/o Morgan Stanley Trust Chief Financial July 2003 and Administration (since December 2001); previously, Vice President
Harborside Financial Center, Officer Chief Financial of the Retail Funds (September 2002-July 2003); Vice President
Plaza Two, Officer since of the Investment Adviser and the Administrator (August
Jersey City, NJ 07311 September 2002 2000-November 2001).
Thomas F. Caloia (59) Vice President Since July 2003 Executive Director (since December 2002) and Assistant Treasurer
c/o Morgan Stanley Trust of the Investment Adviser, the Distributor and the
Harborside Financial Center, Administrator; previously Treasurer of the Retail Funds (April
Plaza Two, 1989-July 2003); formerly First Vice President of the Investment
Jersey City, NJ 07311 Adviser, the Distributor and the Administrator.
Mary E. Mullin (38) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas Stanley Investment Management Inc. and the Investment Adviser;
New York, NY 10020 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.
2005 FEDERAL TAX NOTICE (UNAUDITED)
Of the amounts paid by the Fund during the fiscal year ended
October 31, 2005 that were reported 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.
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
Ronald E. Robison
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-ADVISER
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) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
37908RPT-RA05-01051P-Y10/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
EUROPEAN EQUITY FUND
ANNUAL REPORT
OCTOBER 31, 2005
[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)."
Additionally, Exhibit B was amended to remove Mitchell M. Merin as a covered
officer.
(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:
2005
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<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 40,975 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $ (2)
TAX FEES $ 7,601(3) $ (4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 8,141 $
TOTAL $ 49,116 $
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2004
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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 $ - $ -(5)
TOTAL NON-AUDIT FEES $ 6,536 $ 5,612,453
TOTAL $ 45,551 $ 5,612,453
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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.
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(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.
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(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.
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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
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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
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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
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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.
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Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to reports filed by closed-end funds.
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 only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
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) 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.
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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 19, 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
December 19, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
December 19, 2005