<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, 2006
Date of reporting period: April 30, 2006
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 semiannual period. We will
provide an overview of the market conditions, and discuss some of the factors
that affected performance during the reporting period. In addition, this report
includes the Fund's financial statements and a list of Fund investments.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
<Page>
Fund Report
For the six months ended April 30, 2006
TOTAL RETURN FOR THE 6 MONTHS ENDED APRIL 30, 2006
MORGAN
STANLEY LIPPER
CAPITAL EUROPEAN
INTERNATIONAL REGION
(MSCI) FUNDS
CLASS A CLASS B CLASS C CLASS D EUROPE INDEX(1) INDEX(2)
- ------- ------- ------- ------- --------------- --------
21.27% 21.28% 20.74% 21.37% 22.55% 27.61%
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 APRIL 30, 2006, 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
The six-month period marked a sustained improvement in Europe's economy. Strong
global economic conditions -- especially in the United States, Eastern Europe,
and China -- and subdued inflation helped rouse Europe from its previous
sluggishness. The European Central Bank (ECB) implemented an interest rate hike
(and many observers expect that additional rate increases are forthcoming),
which bolstered confidence that European economic growth stands on more solid
footing. Investors also viewed with optimism the prospect that the U.S. Federal
Open Market Committee (the "Fed") is nearing the end of its federal funds rate
increases. In the United Kingdom, continued strengthening in the housing market
and signs of increased inflationary pressures dashed hopes that its central bank
would begin a policy of monetary easing. Sentiment improved in Germany as its
newly elected coalition government turned out to be more effective than
initially anticipated. France's economy, however, was more muted.
In this environment, European stock markets produced considerable gains, on an
absolute basis. The diversified financials sector, and banks in particular,
performed well amid strength in the capital markets and increased corporate
activity (including mergers and acquisitions). Cyclical areas of the market --
so called because their performance is tied to movements in the economy -- also
advanced with strength, namely the materials, capital goods and the industrials
sectors. Improving macroeconomic conditions prompted expectations for an
extension of the capital spending cycle, which benefited companies in these
sectors. In addition, record high commodity prices have been a boon to the
materials sector. Conversely, the telecommunication services sector languished
during the six-month period. Unfavorable regulatory action, increased pricing
pressure and rising competition continue to exert downward pressure on profits.
Also, the pharmaceuticals and biotechnology sector did not fare well, nor did
the food, beverage and tobacco sector. During the period, investors demonstrated
a preference for the higher volatility segments of the market, making
2
<Page>
these stocks' defensive characteristics appear unattractive.
PERFORMANCE ANALYSIS
Morgan Stanley European Equity Fund underperformed the Morgan Stanley Capital
International (MSCI) Europe Index and the Lipper European Region Funds Index for
the six months ended April 30, 2006, assuming no deduction of applicable sales
charges.
Stock selection across a variety of sectors contributed to the Fund's return
relative to the MSCI Europe Index. Select holdings in transportation, media,
banks and technology hardware were standouts, as positive company-specific
factors led to strong stock price appreciation. In addition, an underweight
allocation to the lagging food, beverage and tobacco sector helped the Fund hold
its ground relative to the Index.
In contrast, our picks in the pharmaceutical and biotechnology sector hampered
relative results. Despite strong stock selection in the telecom sector, a sector
overweight turned out to be detrimental to performance. In the materials sector,
we have tended to avoid the many overvalued stocks in this group, in keeping
with our valuation-conscious approach. As such, the Fund's underweight in
materials prevented it from fully enjoying the sector's recent appreciation.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM AS
DISCUSSED HEREIN OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN
THE FUTURE.
TOP 10 HOLDINGS
BP PLC 3.9%
Total S.A. 3.7
Banco Bilbao Vizcaya Argentaria, S.A. 3.6
BNP Paribas S.A. 3.5
Novartis AG (Registered Shares) 3.0
Vodafone Group PLC 2.9
Credit Suisse Group 2.7
GlaxoSmithKline PLC 2.7
Cadbury Schweppes PLC 2.7
Morrison (W.M.) Supermarkets PLC 2.5
TOP FIVE COUNTRIES
United Kingdom 27.1%
France 15.3
Germany 13.2
Switzerland 11.4
Netherlands 10.2
DATA AS OF APRIL 30, 2006. 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.
3
<Page>
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. THE
FUND MAY ALSO INVEST IN EMERGING MARKET COUNTRIES.
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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL
AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS
PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A
COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND
THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS
FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS
POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM
N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE
SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE
SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF
THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800)
SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A
DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS
(publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, DC 20549-0102.
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.
4
<Page>
Performance Summary
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED APRIL 30, 2006
<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 28.68%(3) 28.80%(3) 27.73%(3) 28.94%(3)
21.93(4) 23.80(4) 26.73(4) --
5 YEARS 5.86(3) 5.58(3) 5.06(3) 6.10(3)
4.72(4) 5.26(4) 5.06(4) --
10 YEARS -- 9.05(3) -- --
-- 9.05(4) -- --
SINCE INCEPTION 7.46(3) 9.99(3) 6.65(3) 7.83(3)
6.80(4) 9.99(4) 6.65(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 TABLE DOES NOT REFLECT THE DEDUCTION
OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF
FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL
VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1.0% 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.
5
<Page>
Expense Example
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including 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 11/01/05 - 04/30/06.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) and redemption fees. Therefore, the second line of the table is
useful in comparing ongoing costs, and will not help you determine the relative
total cost of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
11/01/05 -
11/01/05 04/30/06 04/30/06
------------- ------------- ---------------
CLASS A
Actual (21.27% return) $1,000.00 $1,212.70 $8.06
Hypothetical (5% annual return before expenses) $1,000.00 $1,017.50 $7.35
CLASS B
Actual (21.28% return) $1,000.00 $1,212.80 $7.52
Hypothetical (5% annual return before expenses) $1,000.00 $1,018.00 $6.85
CLASS C
Actual (20.74% return) $1,000.00 $1,207.40 $12.21
Hypothetical (5% annual return before expenses) $1,000.00 $1,013.74 $11.13
CLASS D
Actual (21.37% return) $1,000.00 $1,213.70 $6.75
Hypothetical (5% annual return before expenses) $1,000.00 $1,018.70 $6.16
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.47%, 1.37%,
2.23% AND 1.23% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
BECAUSE CLASS B SHARES INCURRED LOWER EXPENSES UNDER THE 12b-1 PLAN THAN
DID CLASS A SHARES FOR THE SIX MONTHS ENDED APRIL 30, 2006, 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.
6
<Page>
Investment Advisory Agreement Approval
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board reviewed similar information and
factors regarding the Sub-Adviser, to the extent applicable. The Board also
reviewed and considered the nature and extent of the non-advisory,
administrative services provided by the Fund's Administrator under the
Administration Agreement, including accounting, clerical, bookkeeping,
compliance, business management and planning, and the provision of supplies,
office space and utilities at the Investment Adviser's expense. (The Investment
Adviser, Sub-Adviser and Administrator are referred to, collectively, as the
"Adviser" and the Investment Advisory, Sub-Advisory and Administration
Agreements are referred to, collectively, as the "Management Agreement.") The
Board also compared the nature of the services provided by the Adviser with
similar services provided by non-affiliated advisers as reported to the Board by
Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and advisory services to the Fund. The Board
determined that the Adviser's portfolio managers and key personnel are well
qualified by education and/or training and experience to perform the services in
an efficient and professional manner. The Board concluded that the nature and
extent of the advisory and administrative services provided were necessary and
appropriate for the conduct of the business and investment activities of the
Fund. The Board also concluded that the overall quality of the advisory and
administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2005, as shown in a report provided by Lipper (the
"Lipper Report"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"). The Board also discussed with the Adviser
the performance goals and the actual results achieved in managing the Fund. When
a fund underperforms its performance peer group, the Board discusses with the
Adviser the causes of the underperformance and, where necessary, specific
changes to the fund's investment strategy or investment personnel. The Board
concluded that the Fund can reasonably be expected to be competitive with its
performance peer group based on recent action taken or proposed to be taken by
the Adviser with respect to the Fund's investment strategy and/or investment
personnel.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate paid by the Fund under the Management Agreement. The
Board noted that the management fee rate was comparable to the
7
<Page>
management fee rates charged by the Adviser to other proprietary funds it
manages with investment strategies comparable to those of the Fund.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund
as compared to the average management fee rate and average total expense ratio
for funds, selected by Lipper (the "expense peer group"), managed by other
advisers with investment strategies comparable to those of the Fund, as shown in
the Lipper Report. The Board concluded that the Fund's management fee rate and
total expense ratio were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it includes breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
PROFITABILITY OF THE ADVISER AND AFFILIATES
The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Fund and during the last two years from their relationship
with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost
allocation methodology used to determine the profitability of the Adviser and
affiliates. Based on its review of the information it received, the Board
concluded that the profits earned by the Adviser and affiliates were not
excessive in light of the advisory, administrative and other services provided
to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as sales charges on sales of Class A shares and "float" benefits
derived from handling of checks for purchases and sales of Fund shares, through
a broker-dealer affiliate of the Adviser and "soft dollar" benefits (discussed
in the next section). The Board also considered that a broker-dealer affiliate
of the Adviser receives from the Fund 12b-1 fees for distribution and
shareholder services. The Board also considered that an affiliate of the
Adviser, through a joint venture, receives revenue in connection with trading
done on behalf of the Fund through an electronic trading system network ("ECN").
The Board concluded that the float benefits and the above-referenced ECN-related
revenue were relatively small and that the sales charges and 12b-1 fees were
competitive with those of other broker-dealers.
8
<Page>
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Fund and/or other funds managed
by the Adviser would be used to pay for research that a securities broker
obtains from third parties, or to pay for both research and execution services
from securities brokers who effect transactions for the Fund. The Adviser
informed the Board that it does not use Fund commissions to pay for third party
research. It does use commissions to pay for research which is bundled with
execution services. The Board recognized that the receipt of such research from
brokers may reduce the Adviser's costs, but concluded that the receipt of such
research strengthens the investment management resources of the Adviser, which
may ultimately benefit the Fund and other funds in the Morgan Stanley Fund
Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded
that it would be in the best interest of the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
9
<Page>
Morgan Stanley European Equity Fund Inc.
PORTFOLIO OF INVESTMENTS - APRIL 30, 2006 (UNAUDITED)
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
Common Stocks (97.4%)
Austria (1.3%)
MAJOR BANKS
30,437 Erste Bank der Oesterreichischen AG* $ 1,825,888
107,704 Erste Bank der Oesterreichischen Sparkassen AG 6,535,797
-----------
Total Austria 8,361,685
-----------
Finland (2.4%)
TELECOMMUNICATION EQUIPMENT
702,121 Nokia Oyj 15,988,615
-----------
France (15.3%)
ELECTRICAL PRODUCTS
59,762 Schneider Electric S.A. 6,766,768
-----------
GAS DISTRIBUTORS
40,083 Gaz de France (GDF) 1,440,197
-----------
INTEGRATED OIL
87,198 Total S.A. 24,113,972
-----------
MAJOR BANKS
244,554 BNP Paribas S.A. 23,108,846
-----------
MAJOR TELECOMMUNICATIONS
421,547 France Telecom S.A. 9,844,057
-----------
MOTOR VEHICLES
31,224 Renault S.A. 3,624,082
-----------
MULTI-LINE INSURANCE
307,952 Axa 11,301,821
-----------
PHARMACEUTICALS: MAJOR
87,588 Sanofi-Aventis 8,259,951
-----------
REGIONAL BANKS
283,629 Credit Agricole S.A. 11,428,973
-----------
Total France 99,888,667
-----------
Germany (13.2%)
INDUSTRIAL CONGLOMERATES
90,968 Siemens AG (Registered Shares) 8,607,392
-----------
MAJOR BANKS
271,044 Commerzbank AG $11,233,028
120,092 Deutsche Bank AG (Registered Shares) 14,744,765
-----------
25,977,793
-----------
MAJOR TELECOMMUNICATIONS
333,876 Deutsche Telekom AG (Registered Shares) 6,031,841
-----------
MEDICAL/NURSING SERVICES
68,729 Fresenius Medical Care AG & Co. KGaA 8,246,846
-----------
MOTOR VEHICLES
176,162 Bayerische Motoren
Werke (BMW) AG 9,581,024
-----------
MULTI-LINE INSURANCE
92,144 Allianz AG (Registered Shares) 15,426,225
32,702 Muenchener Rueckver AG (Registered Shares) 4,633,969
-----------
20,060,194
-----------
PACKAGED SOFTWARE
34,775 SAP AG 7,598,655
-----------
Total Germany 86,103,745
-----------
Greece (2.5%)
MAJOR BANKS
212,532 National Bank of Greece S.A. 10,553,611
-----------
REGIONAL BANKS
149,450 EFG Eurobank Ergasias 5,954,286
-----------
Total Greece 16,507,897
-----------
Italy (3.2%)
INTEGRATED OIL
449,937 ENI SpA 13,736,901
-----------
MAJOR BANKS
1,247,049 Banca Monte dei Paschi di Siena SpA 7,386,536
-----------
Total Italy 21,123,437
-----------
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
Netherlands (10.2%)
AIR FREIGHT/COURIERS
308,315 TNT NV $11,101,210
-----------
ELECTRONIC PRODUCTION EQUIPMENT
406,574 ASML Holding NV* 8,617,287
-----------
FINANCIAL CONGLOMERATES
167,509 ING Groep NV (Share Certificates) 6,817,485
-----------
INTEGRATED OIL
367,109 Royal Dutch Shell PLC (Class A) 12,588,273
-----------
MAJOR TELECOMMUNICATIONS
568,401 Koninklijke (Royal) KPN NV 6,676,152
-----------
PUBLISHING: BOOKS/MAGAZINES
191,886 VNU NV 6,587,089
541,452 Wolters Kluwer NV (Share Certificates) 14,105,929
-----------
20,693,018
-----------
Total Netherlands 66,493,425
-----------
Norway (0.9%)
PULP & PAPER
381,691 Norske Skogindustrier ASA 5,876,642
-----------
Spain (5.2%)
MAJOR BANKS
1,071,352 Banco Bilbao Vizcaya Argentaria, S.A. 23,666,826
-----------
MAJOR TELECOMMUNICATIONS
379,499 Telefonica S.A. 6,080,454
-----------
TOBACCO
95,086 Altadis, S.A. 4,512,914
-----------
Total Spain 34,260,194
-----------
Sweden (4.7%)
INDUSTRIAL MACHINERY
261,921 Atlas Copco AB (A Shares) 7,735,463
206,750 Sandvik AB 13,447,383
-----------
21,182,846
-----------
MAJOR BANKS
341,065 ForeningsSparbanken AB $ 9,378,188
-----------
Total Sweden 30,561,034
-----------
Switzerland (11.4%)
CHEMICALS: SPECIALTY
96,273 Ciba Specialty Chemicals AG (Registered Shares) 5,904,082
-----------
FINANCIAL CONGLOMERATES
68,932 UBS AG (Registered Shares) 8,165,851
-----------
INVESTMENT BANKS/BROKERS
99,562 EFG International* 2,968,647
-----------
MAJOR BANKS
282,939 Credit Suisse Group (Registered Shares) 17,762,066
-----------
MEDICAL SPECIALTIES
21,732 Nobel Biocare
Holding AG Bearer 5,367,764
-----------
PHARMACEUTICALS: MAJOR
345,283 Novartis AG (Registered Shares) 19,797,635
93,405 Roche Holding AG 14,354,367
-----------
34,152,002
-----------
Total Switzerland 74,320,412
-----------
United Kingdom (27.1%)
APPAREL/FOOTWEAR
387,349 Burberry Group PLC 3,329,985
-----------
ELECTRIC UTILITIES
2,219,123 International Power PLC 12,047,343
-----------
FOOD RETAIL
4,748,445 Morrison (W.M.) Supermarkets PLC 16,125,227
1,528,156 Tesco PLC 8,902,186
-----------
25,027,413
-----------
FOOD: SPECIALTY/CANDY
1,755,459 Cadbury Schweppes PLC 17,411,962
-----------
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
Morgan Stanley European Equity Fund Inc.
PORTFOLIO OF INVESTMENTS - APRIL 30, 2006 (UNAUDITED) CONTINUED
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
HOTELS/RESORTS/CRUISELINES
53,387 Carnival PLC $ 2,645,715
------------
HOUSEHOLD/PERSONAL CARE
236,684 Reckitt Benckiser PLC 8,626,603
------------
INTEGRATED OIL
304,941 BG Group PLC 4,097,712
2,067,066 BP PLC 25,496,483
------------
29,594,195
------------
MAJOR BANKS
78,014 Royal Bank of Scotland Group PLC 2,547,571
------------
MEDICAL SPECIALTIES
348,898 Smith & Nephew PLC 2,884,921
------------
MULTI-LINE INSURANCE
464,931 Aviva PLC 6,790,147
------------
OTHER METALS/MINERALS
213,268 Anglo American PLC 9,079,684
180,555 Rio Tinto PLC 9,928,851
------------
19,008,535
------------
PHARMACEUTICALS: MAJOR
106,470 AstraZeneca PLC 5,882,040
616,789 GlaxoSmithKline PLC 17,498,642
------------
23,380,682
------------
SEMICONDUCTORS
1,784,186 ARM Holdings PLC 4,424,225
------------
WIRELESS TELECOMMUNICATIONS
8,077,289 Vodafone Group PLC 19,071,881
------------
Total United Kingdom 176,791,178
------------
Total Common Stocks (COST $431,702,231) 636,276,931
------------
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- --------------------------------------------------------------------------------
Short-Term Investment(1.5%)
Repurchase Agreement
$9,975 Joint repurchase agreement account 4.78% due 05/01/06
(dated 04/28/06; proceeds $9,978,973) (a)
(COST $9,975,000) $ 9,975,000
------------
Total Investments (COST $441,677,231)(b) 98.9% 646,251,931
Other Assets in Excess of Liabilities 1.1 6,785,088
----- ------------
Net Assets 100.0% $653,037,019
===== ============
- ----------
* NON-INCOME PRODUCING SECURITY.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $205,355,313 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $780,613, RESULTING IN NET UNREALIZED APPRECIATION OF
$204,574,700.
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
Morgan Stanley European Equity Fund Inc.
SUMMARY OF INVESTMENTS - APRIL 30, 2006 (UNAUDITED)
PERCENT OF
INDUSTRY VALUE NET ASSETS
- -------------------------------------------------------------------------------
Major Banks $128,743,122 19.7%
Integrated Oil 80,033,341 12.3
Pharmaceuticals: Major 65,792,635 10.1
Multi-Line Insurance 38,152,162 5.8
Major Telecommunications 28,632,504 4.4
Food Retail 25,027,413 3.8
Industrial Machinery 21,182,846 3.2
Publishing: Books/Magazines 20,693,018 3.2
Wireless Telecommunications 19,071,881 2.9
Other Metals/Minerals 19,008,535 2.9
Food: Specialty/Candy 17,411,962 2.7
Regional Banks 17,383,259 2.7
Telecommunication Equipment 15,988,615 2.4
Financial Conglomerates 14,983,336 2.3
Motor Vehicles 13,205,106 2.0
Electric Utilities 12,047,343 1.8
Air Freight/Couriers 11,101,210 1.7
Repurchase Agreement 9,975,000 1.5
Household/Personal Care 8,626,603 1.3
Electronic Production Equipment 8,617,287 1.3
Industrial Conglomerates 8,607,392 1.3
Medical Specialties 8,252,685 1.3
Medical/Nursing Services 8,246,846 1.3
Packaged Software 7,598,655 1.2
Electrical Products 6,766,768 1.0
Chemicals: Specialty 5,904,082 0.9
Pulp & Paper 5,876,642 0.9
Tobacco 4,512,914 0.7
Semiconductors 4,424,225 0.7
Apparel/Footwear 3,329,985 0.5
Investment Banks/Brokers 2,968,647 0.5
Hotels/Resorts/Cruiselines 2,645,715 0.4
Gas Distributors 1,440,197 0.2
------------ ----
$646,251,931* 98.9%
============ ====
- ----------
* DOES NOT INCLUDE OPEN FORWARD FOREIGN CURRENCY CONTRACTS WITH NET
UNREALIZED DEPRECIATION OF $387,619.
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT APRIL 30, 2006:
UNREALIZED
CONTRACTS IN EXCHANGE DELIVERY APPRECIATION
TO DELIVER FOR DATE (DEPRECIATION)
- -------------------------------------------------------------
EUR 124,945 $ 155,407 05/02/2006 $ (2,224)
CHF 8,200,000 EUR 5,268,907 05/08/2006 36,246
EUR 2,600,000 DKK 19,411,080 05/08/2006 1,428
EUR 5,200,000 NOK 41,848,040 05/08/2006 222,159
EUR 31,000,000 GBP 21,163,328 05/08/2006 (544,760)
EUR 2,636,088 GBP 1,800,000 05/08/2006 (45,641)
SEK 24,825,000 GBP 1,828,931 05/08/2006 (38,746)
NOK 20,337,786 GBP 1,800,000 05/08/2006 (16,081)
---------
Net Unrealized Depreciation $(387,619)
=========
CURRENCY ABBREVIATIONS:
- -----------------------
GBP BRITISH POUND.
DKK DANISH KRONE.
EUR EURO.
NOK NORWEGIAN KRONE.
SEK SWEDISH KRONA.
CHF SWISS FRANC.
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
Morgan Stanley European Equity Fund Inc.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
APRIL 30, 2006 (UNAUDITED)
Assets:
Investments in securities, at value (cost $441,677,231) $ 646,251,931
Unrealized appreciation on open forward foreign currency
contracts 2,634,441
Cash 51,237
Receivable for:
Investments sold 5,504,770
Dividends 2,432,156
Foreign withholding taxes reclaimed 656,941
Capital stock sold 104,522
Interest 3,973
Prepaid expenses and other assets 13,471
Receivable from affiliate 125,526
-------------
Total Assets 657,778,968
-------------
Liabilities:
Unrealized depreciation on open forward foreign currency
contracts 3,022,060
Payable for:
Capital stock redeemed 761,814
Investment advisory fee 451,340
Distribution fee 250,012
Administration fee 42,029
Transfer agent fee 27,459
Accrued expenses and other payables 187,235
-------------
Total Liabilities 4,741,949
-------------
Net Assets $ 653,037,019
=============
Composition of Net Assets:
Paid-in-capital $ 555,173,318
Net unrealized appreciation 204,314,082
Accumulated undistributed net investment income 2,069,668
Accumulated net realized loss (108,520,049)
-------------
Net Assets $ 653,037,019
=============
Class A Shares:
Net Assets $ 455,617,619
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 22,428,556
Net Asset Value Per Share $ 20.31
=============
Maximum Offering Price Per Share,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 21.44
=============
Class B Shares:
Net Assets $ 177,924,648
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 9,050,071
Net Asset Value Per Share $ 19.66
=============
Class C Shares:
Net Assets $ 14,325,527
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 733,207
Net Asset Value Per Share $ 19.54
=============
Class D Shares:
Net Assets $ 5,169,225
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 246,869
Net Asset Value Per Share $ 20.94
=============
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
Statement of Operations
FOR THE SIX MONTHS ENDED APRIL 30, 2006 (UNAUDITED)
Net Investment Income:
Income
Dividends (net of $655,823 foreign withholding tax) $ 6,541,107
Interest 107,966
------------
Total Income 6,649,073
------------
Expenses
Investment advisory fee 2,684,471
Transfer agent fees and expenses 563,213
Distribution fee (Class A shares) 509,114
Distribution fee (Class B shares) 127,375
Distribution fee (Class C shares) 68,650
Administration fee 249,805
Custodian fees 135,357
Shareholder reports and notices 105,077
Professional fees 45,541
Registration fees 29,573
Directors' fees and expenses 7,516
Other 33,011
------------
Total Expenses 4,558,703
Less: expense offset (992)
------------
Net Expenses 4,557,711
------------
Net Investment Income 2,091,362
------------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain on:
Investments 36,652,240
Foreign exchange transactions 445,616
------------
Net Realized Gain 37,097,856
------------
Net Change in Unrealized Appreciation/Depreciation on:
Investments 82,408,787
Translation of forward foreign currency contracts, other assets
and liabilities denominated in foreign currencies (236,880)
------------
Net Appreciation 82,171,907
------------
Net Gain 119,269,763
------------
Net Increase $121,361,125
============
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2006 OCTOBER 31, 2005
-------------- ----------------
(UNAUDITED)
Increase (Decrease) in Net Assets:
Operations:
Net investment income $ 2,091,362 $ 8,485,412
Net realized gain 37,097,856 99,824,731
Net change in unrealized appreciation/depreciation 82,171,907 (12,111,936)
------------ -------------
Net Increase 121,361,125 96,198,207
------------ -------------
Dividends to Shareholders from Net Investment Income:
Class A shares (6,193,173) (104,311)
Class B shares (2,623,483) (6,500,714)
Class C shares (71,962) --
Class D shares (76,421) (63,363)
------------ -------------
Total Dividends (8,965,039) (6,668,388)
------------ -------------
Net decrease from capital stock transactions (73,647,053) (201,412,654)
------------ -------------
Net Increase (Decrease) 38,749,033 (111,882,835)
Net Assets:
Beginning of period 614,287,986 726,170,821
------------ -------------
End of Period
(INCLUDING ACCUMULATED UNDISTRIBUTED NET
INVESTMENT INCOME OF $2,069,668 AND $8,943,345,
RESPECTIVELY) $653,037,019 $ 614,287,986
============ =============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
Morgan Stanley European Equity Fund Inc.
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2006 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley European Equity Fund Inc. (the "Fund"), is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
maximize the capital appreciation of its investments. The Fund was incorporated
in Maryland on February 13, 1990 and commenced operations on June 1, 1990. On
July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within 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.
The Fund will assess 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, subject to certain exceptions.
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) 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; (2) 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; (3) 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; (4) 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; (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
17
<Page>
securities trade) and the close of business on the NYSE. If developments occur
during such periods that are expected to materially affect the value of such
securities, such valuations may be adjusted to reflect the estimated fair value
of such securities as of the close of the NYSE, as determined in good faith by
the Fund's Directors or by the Investment Adviser 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
18
<Page>
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.
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 the daily net assets not exceeding $500
million; 0.82% to the portion of the daily net assets exceeding $500 million but
not exceeding $2 billion; 0.77% to the portion of the daily net assets exceeding
$2 billion but not exceeding $3 billion; and 0.745% to the portion of the 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 $1,301,899 for the six months ended April 30, 2006.
19
<Page>
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 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
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that there were no excess expenses as of
April 30, 2006. For the six months ended April 30, 2006, the distribution fee
was accrued for Class B at the annual rate of 0.14%. At April 30, 2006, 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 six months ended April 30, 2006, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.24% and 1.0%,
respectively.
The Distributor has informed the Fund that for the six months ended April 30,
2006, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $109,665 and $615, respectively
and received $20,511 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.
20
<Page>
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended April 30, 2006 aggregated
$105,286,357 and $200,555,812, respectively.
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 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 six months ended April 30, 2006 included in Directors'
fees and expenses in the Statement of Operations amounted to $3,466. At April
30, 2006, the Fund had an accrued pension liability of $62,351 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 for many purposes, including to
facilitate settlement of foreign currency denominated portfolio transactions or
to manage foreign currency exposure associated with foreign currency denominated
securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At April 30, 2006, investments in securities of issuers in the United Kingdom
and France represented 27.1% and 15.3%, 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 these regions.
21
<Page>
6. Capital Stock
Transactions in capital stock were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2006 OCTOBER 31, 2005
------------------------- ---------------------------
(UNAUDITED)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
CLASS A SHARES
Sold 111,336 $ 2,077,964 192,824 $ 3,178,345
Conversion from Class B 1,056,829 20,176,288 26,755,559 437,439,478
Reinvestment of dividends 314,610 5,556,012 5,562 91,380
Redeemed (3,001,517) (55,477,544) (4,024,683) (66,671,564)
---------- ------------ ----------- -------------
Net increase (decrease) -- Class A (1,518,742) (27,667,280) 22,929,262 374,037,639
---------- ------------ ----------- -------------
CLASS B SHARES
Sold 217,900 3,970,309 592,949 9,365,922
Conversion to Class A (1,092,225) (20,176,288) (27,720,983) (437,439,478)
Reinvestment of dividends 136,657 2,335,472 369,059 5,853,268
Redeemed (1,630,145) (29,089,451) (9,205,052) (145,579,207)
---------- ------------ ----------- -------------
Net decrease -- Class B (2,367,813) (42,959,958) (35,964,027) (567,799,495)
---------- ------------ ----------- -------------
CLASS C SHARES
Sold 28,201 510,158 52,225 814,864
Reinvestment of dividends 4,053 69,024 -- --
Redeemed (151,665) (2,665,996) (378,947) (5,980,841)
---------- ------------ ----------- -------------
Net decrease -- Class C (119,411) (2,086,814) (326,722) (5,165,977)
---------- ------------ ----------- -------------
CLASS D SHARES
Sold 34,032 674,138 66,401 1,133,714
Reinvestment of dividends 4,058 73,825 3,455 58,396
Redeemed (89,236) (1,680,964) (218,157) (3,676,931)
---------- ------------ ----------- -------------
Net decrease -- Class D (51,146) (933,001) (148,301) (2,484,821)
---------- ------------ ----------- -------------
Net decrease in Fund (4,057,112) $(73,647,053) (13,509,788) $(201,412,654)
========== ============ =========== =============
</Table>
7. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
22
<Page>
As of October 31, 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.
8. Expense Offset
The expense offset represents a reduction of the transfer agent fees and
expenses for earnings on cash balances maintained by the Fund.
9. 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 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. On March 9, 2005, Plaintiffs sought leave to supplement their complaint
to assert claims on behalf of other investors, which motion defendants opposed.
On April 14, 2006, the Court granted defendants' motion to dismiss in its
entirety. Additionally, the Court denied plaintiff's motion to supplement their
complaint. This matter is now concluded.
23
<Page>
Morgan Stanley European Equity Fund Inc.
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of capital stock outstanding
throughout each period:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED -------------------------------------------------
APRIL 30, 2006 2005 2004 2003 2002 2001
-------------- -------- ------- ------- ------- -------
(UNAUDITED)
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period $ 17.01 $ 14.99 $ 13.30 $ 11.51 $ 13.35 $ 20.17
-------- -------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income++ 0.06 0.19 0.11 0.12 0.06 0.07
Net realized and unrealized gain (loss) 3.51 1.94 1.68 1.67 (1.67) (3.71)
-------- -------- ------- ------- ------- -------
Total income (loss) from investment operations 3.57 2.13 1.79 1.79 (1.61) (3.64)
-------- -------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.27) (0.11) (0.10) -- (0.23) --
Net realized gain -- -- -- -- -- (3.18)
-------- -------- ------- ------- ------- -------
Total dividends and distributions (0.27) (0.11) (0.10) -- (0.23) (3.18)
-------- -------- ------- ------- ------- -------
Net asset value, end of period $ 20.31 $ 17.01 $ 14.99 $ 13.30 $ 11.51 $ 13.35
======== ======== ======= ======= ======= =======
Total Return+ 21.27%(1) 14.25% 13.51% 15.55% (12.41)% (21.07)%
Ratios to Average Net Assets(3):
Expenses 1.47%(2) 1.47% 1.43% 1.45% 1.38% 1.27%
Net investment income 0.66%(2) 1.16% 0.79% 0.79% 0.41% 0.43%
Supplemental Data:
Net assets, end of period, in thousands $455,618 $407,446 $15,265 $16,612 $18,294 $22,604
Portfolio turnover rate 17%(1) 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) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ---------------------------------------------------
APRIL 30, 2006 2005 2004 2003 2002 2001
-------------- ------ ------ ------ ------- -------
(UNAUDITED)
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period $16.44 $14.50 $12.79 $11.12 $ 12.88 $ 19.70
------ ------ ------ ------ ------- -------
Income (loss) from for investment operations:
Net investment income (loss)++ 0.06 0.21 0.13 0.03 (0.05) (0.06)
Net realized and unrealized gain (loss) 3.40 1.87 1.62 1.64 (1.62) (3.58)
------ ------ ------ ------ ------- -------
Total income (loss) from investment operations 3.46 2.08 1.75 1.67 (1.67) (3.64)
------ ------ ------ ------ ------- -------
Less dividends and distributions from:
Net investment income (0.24) (0.14) (0.04) -- (0.09) --
Net realized gain -- -- -- -- -- (3.18)
------ ------ ------ ------ ------- -------
Total dividends and distributions (0.24) (0.14) (0.04) -- (0.09) (3.18)
------ ------ ------ ------ ------- -------
Net asset value, end of period $19.66 $16.44 $14.50 $12.79 $ 11.12 $ 12.88
====== ====== ====== ====== ======= =======
Total Return+ 21.28%(1) 14.40% 13.73% 15.02% (13.11)% (21.68)%
Ratios to Average Net Assets(3):
Expenses 1.37%(2) 1.34% 1.26%(4) 1.94%(4) 2.15% 2.10%
Net investment income (loss) 0.76%(2) 1.29% 0.96%(4) 0.30%(4) (0.36)% (0.40)%
Supplemental Data:
Net assets, end of period, in millions $ 178 $ 188 $ 687 $ 778 $ 870 $ 1,335
Portfolio turnover rate 17%(1) 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) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
(4) IF THE DISTRIBUTOR HAD NOT REBATED A PORTION OF ITS FEES TO THE FUND, THE
EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
- ---------------- ------- --------------
OCTOBER 31, 2004 1.82% 0.40%
OCTOBER 31, 2003 2.20 0.04
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ------------------------------------------------
APRIL 30, 2006 2005 2004 2003 2002 2001
-------------- ------- ------- ------- ------- -------
(UNAUDITED)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period $ 16.27 $ 14.35 $ 12.74 $ 11.11 $ 12.85 $ 19.67
------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income (loss)++ (0.01) 0.07 0.00 0.00 (0.04) (0.06)
Net realized and unrealized gain (loss) 3.37 1.85 1.62 1.63 (1.61) (3.58)
------- ------- ------- ------- ------- -------
Total income (loss) from investment operations 3.36 1.92 1.62 1.63 (1.65) (3.64)
------- ------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.09) -- (0.01) -- (0.09) --
Net realized gain -- -- -- -- -- (3.18)
------- ------- ------- ------- ------- -------
Total dividends and distributions (0.09) -- (0.01) -- (0.09) (3.18)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 19.54 $ 16.27 $ 14.35 $ 12.74 $ 11.11 $ 12.85
======= ======= ======= ======= ======= =======
Total Return+ 20.74%(1) 13.38% 12.72% 14.67% (12.98)% (21.76)%
Ratios to Average Net Assets(3):
Expenses 2.23%(2) 2.21% 2.19% 2.20% 2.08% 2.10%
Net investment income (loss) (0.10)%(2) 0.42% 0.03% 0.04% (0.29)% (0.40)%
Supplemental Data:
Net assets, end of period, in thousands $14,326 $13,870 $16,922 $18,581 $20,881 $29,075
Portfolio turnover rate 17%(1) 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) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ----------------------------------------------
APRIL 30, 2006 2005 2004 2003 2002 2001
-------------- ------ ------ ------- ------- -------
(UNAUDITED)
Class D Shares
Selected Per Share Data:
Net asset value, beginning of period $17.53 $15.45 $13.70 $ 11.83 $ 13.73 $ 20.61
------ ------ ------ ------- ------- -------
Income (loss) from investment operations:
Net investment income++ 0.09 0.24 0.20 0.13 0.09 0.10
Net realized and unrealized gain (loss) 3.61 1.99 1.69 1.74 (1.72) (3.80)
------ ------ ------ ------- ------- -------
Total income (loss) from investment operations 3.70 2.23 1.89 1.87 (1.63) (3.70)
------ ------ ------ ------- ------- -------
Less dividends and distributions from:
Net investment income (0.29) (0.15) (0.14) -- (0.27) --
Net realized gain -- -- -- -- -- (3.18)
------ ------ ------ ------- ------- -------
Total dividends and distributions (0.29) (0.15) (0.14) -- (0.27) (3.18)
------ ------ ------ ------- ------- -------
Net asset value, end of period $20.94 $17.53 $15.45 $ 13.70 $ 11.83 $ 13.73
====== ====== ====== ======= ======= =======
Total Return+ 21.37%(1) 14.50% 13.86% 15.81% (12.20)% (20.95)%
Ratios to Average Net Assets(3):
Expenses 1.23%(2) 1.22% 1.19% 1.20% 1.15% 1.10%
Net investment income 0.90%(2) 1.41% 1.03% 1.04% 0.64% 0.60%
Supplemental Data:
Net assets, end of period, in thousands $5,169 $5,225 $6,896 $42,454 $39,716 $49,539
Portfolio turnover rate 17%(1) 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) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
DIRECTORS
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Ronald E. Robison
PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
J. David Germany
VICE PRESIDENT
Dennis F. Shea
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang Yu
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
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
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its directors. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD
(C) 2006 Morgan Stanley
[Morgan Stanley LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
European Equity Fund
Semiannual Report
April 30, 2006
EUGRPT-37908RPT-RA06-00491P-YO4/06
[Morgan Stanley LOGO]
<Page>
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
<Page>
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer
have concluded that the Fund's disclosure controls and procedures are
sufficient to ensure that information required to be disclosed by the Fund in
this Form N-CSR was recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, based upon such officers' evaluation of these controls and procedures
as of a date within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over
financial reporting that occurred during the second fiscal quarter of the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial
reporting.
Item 12. Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant are attached hereto as part of
EX-99.CERT.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Morgan Stanley European Equity Fund Inc.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
June 20, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
June 20, 2006
/s/ Francis Smith
Francis Smith
Principal Financial Officer
June 30, 2006