<PAGE>
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MORGAN STANLEY
DEAN WITTER
EASTERN EUROPE
FUND, INC.
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THIRD QUARTER REPORT
SEPTEMBER 30, 1999
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY DEAN WITTER
EASTERN EUROPE FUND, INC.
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DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Mary E. Mullin
SECRETARY
Belinda A. Brady
TREASURER
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INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
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CUSTODIAN
The Chase Manhattan Bank
Chaseside
Bournemouth BH7 7DB
United Kingdom
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
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SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
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LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
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For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726 or visit our website at
www.msdw.com/institutional/investmentmanagement.
<PAGE>
LETTER TO THE SHAREHOLDERS
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For the nine months ended September 30, 1999, the Morgan Stanley Dean Witter
Eastern Europe Fund, Inc. (the "Fund") had a total return, based on net asset
value per share, of 7.83% compared to 13.89% for the Fund's benchmark (described
below). For the period since the Fund's commencement of operations on
September 30, 1996 through September 30, 1999, the Fund had a total return,
based on net asset value per share, of -17.81% compared with - 22.24% for its
benchmark. For the period from September 30, 1996 to December 31, 1997, the
Fund's performance had been compared with the Russia (Moscow Times 50) and New
Europe Blended Composite. This composite was comprised of 50% of the Moscow
Times 50 Index and 50% of the market capitalization weighted Morgan Stanley
Capital International (MSCI) local indices for the Czech Republic, Hungary and
Poland, including dividends. Since December 31, 1997, the Fund's performance has
been compared with the Russia and New Europe Composite. This composite is
comprised of the market capitalization weighted MSCI local indices for Russia,
Poland, the Czech Republic and Hungary. On September 30, 1999, the closing price
of the Fund's shares on the New York Stock Exchange was $11.00, representing a
19.4% discount to the Fund's net asset value per share.
The equity markets in Russia and Central Europe were generally weak during the
third quarter of 1999, in line with markets worldwide. After a rally of over
100% during the first half, the Russian market in particular was poised for a
correction. A series of terrorist bombings in Moscow that left several hundred
dead and renewed activity by the Russian military in the Caucasus, coupled with
a delay in the latest IMF disbursement, undermined investor confidence. The
market fell 31% during the third quarter but remains up over 60% year-to-date.
Unified Energy Systems, the country's major electricity producer and the
market's bellwether stock, corrected from its second quarter highs by almost
40%, but is still up 71% since the beginning of January. Despite the improving
oil price during the third quarter, the Russian oil stocks Lukoil and
Surgutneftegaz also fell but remain up 68% and 92% for the year, respectively.
Meanwhile, the surprise benefits of last year's currency devaluation continue to
impress observers during the second half of 1999. The rebound in output, driven
by a switch by consumers to cheaper domestically produced goods, led to an
annual increase in industrial production of 3.1% for the first half of 1999 and
9% year-on-year in June. Export performance remains strong and Russia is running
a large trade surplus of $12 billion during the first five months of the year.
Also, inflation fell to below monthly rates of 2% from almost 10% at the
beginning of the year. Economic forecasts for the remainder of the year, and
into next year, continue to be upgraded. In particular, average GDP estimates
for 1999 started the year in negative territory, and now hover around zero.
Russia's current Prime Minister, Vladimir Putin, continues to confront a
difficult situation on several fronts. The country has suffered through a series
of terrorist bombings, focused mainly on Moscow, that have claimed several
hundred lives. The public has demanded that Putin take action. In retaliation,
Russian troops are active in the Caucasus and the conflict appears to be
escalating. Observers are nervous of a repeat of the unsuccessful 1994-1996 war
in Chechnya. The market will remain focused on the conflict, particularly on the
possible fiscal impact on an already strained budget and the increasingly
problematic relations with the West. In addition, relations with the IMF remain
difficult. Heightened controversy surrounding money laundering and capital
flight have led to increased scrutiny over all payments to Russia and the IMF
continues to delay the latest tranche.
The upcoming parliamentary and presidential elections are likely to lead to
major changes in the Russian political scene. Yeltsin has managed to remain in
office through eight difficult years of transition, but the last few years have
been characterized by instability. Current opinion polls show virtually no
public support for the Yeltsin government and a remarkably high level of support
for the centrist parties in the upcoming Duma elections and the mid-2000
Presidential elections. Former Prime Minister Yevgeny Primakov, whose
administration brought stability to the country in the aftermath of the 1998
devaluation, is the presidential front-runner. If centrist parties manage to
gain control of Parliament at the expense of the currently dominant Communist
party, and Primakov wins presidency, the political situation in Russia should be
markedly improved.
After five quarters of negative growth, the Czech economy has returned to
positive territory as second quarter GDP rose by 0.3% against market
expectations of a decline. Consumer spending has returned, fueled by higher real
wages. Exports are also recovering, boosted by the burgeoning demand in Western
Europe and the benefits of a weaker currency. In addition, foreign direct
investment should reach a record $3 billion this year. Meanwhile, inflation
remains subdued, rising at around a 2% rate. Czech's gradual economic recovery
is a welcomed development. The stock market, which has underperformed other
markets in the region for several years, has outperformed its closest neighbors,
rising 7.4% during the quarter and 13% year-to-date.
The one risk to the economic turnaround remains the weak investment picture.
Many companies continue to struggle with a heavy debt burden and cash-flow
problems in a restrictive banking environment. But the government's progress on
privatization of the current state-
2
<PAGE>
owned banks would significantly improve the country's banking situation. The
Czech authorities have discussed privatization for several years, but the
economic recession has finally acted as an impetus for accelerated reform. The
recently installed head of the National Property Fund, who was appointed by the
reform-minded Minister of Finance, has put the privatization process on track.
The privatization of Ceska Sporitelna, the country's largest savings bank,
should be finished by the end of the year or early 2000 at the latest, and the
second largest bank, Komercni Banka, should follow shortly thereafter. In
addition to the banks, several other major companies are on a short-list to be
sold off. The privatization will benefit the country on several fronts. The
government will use the proceeds in its efforts to restructure the bad debt it
has absorbed from the banks and new management will reinvigorate stagnant credit
markets. The Fund remains overweight the Czech market and fully invested in the
two banks that are scheduled to be privatized.
The negative impact felt in Central Europe from the slowdown in Western Europe,
coupled with the collapse in exports to Russia, appears to have bottomed out
during the third quarter. After a disappointing first quarter, growth in
Poland's manufacturing sector returned, helping the economy expand. Second
quarter GDP rose 3% year-on-year following a 1.5% rise in the first quarter. By
August, industrial output was rising at a greater than 7% annual increase.
Domestic demand remains the growth engine, particularly in the automotive
segment. While good growth bodes well for the market, renewed fears of inflation
have dampened sentiment. Inflation in August was unexpectedly high, bringing the
annual rate to 7.2%, threatening the government's year-end targets. The main
driver behind rising CPI is higher energy prices. A weaker zloty also pushed up
prices. In response to inflation fears, the National Bank of Poland increased
the key intervention rate by 1.0%, reversing the long trend in falling interest
rates. The government's overly optimistic growth estimates for the year have led
to disappointing tax revenue collection numbers, causing the budget to overshoot
the 2.15% target, but the deterioration in the central budget deficit reversed
itself during the third quarter. And the government succeeded in approving next
year's budget with a planned deficit of a conservative 1.88%.
In the near term, the market will remain focused on the Polish zloty-both its
value and the status of the current currency regime. The government is
considering changing the regime from the current crawling band to a floating
exchange rate. As the currency has fluctuated in a relatively narrow range for
some time, rarely testing the band, the float of the currency will not likely
have a significant impact on the zloty's value. The market fell over 20% in the
third quarter, giving back almost all of this year's gains. Hungary also did not
perform positively during the third quarter. The market remains concerned that
both the current account and budget deficit performance will be worse than
expected this year, although the latest data strongly indicates that the
deterioration in the current account has bottomed-out. In addition, the
government announced that natural gas prices for MOL, the country's largest
energy company, will not be increased next year in line with rising import
costs. As a result, the company faces significant losses on its gas business,
which led to a 12% fall in the stock price. Progress towards eventual European
Union (EU) membership continues apace, and the longer-term prospects for Central
European markets remains strong. The markets, however, are likely to remain
focused on short- term macroeconomic issues through the remainder of the year
and until the target EU membership date is closer.
On September 15, 1998, the Fund commenced a share repurchase program for
purposes of enhancing shareholder value and reducing the discount at which the
Fund's shares traded from their net asset value. For the nine months ended
September 30, 1999, the Fund repurchased 307,500 shares of its Common Stock at
an average price per share of $11.13 and an average discount of 17.78% from net
asset value per share. The Fund expects to continue to repurchase its
outstanding shares at such time and in such amounts as it believes will further
the accomplishment of the foregoing objectives, subject to review by the Board.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
October 1999
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
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DAILY NET ASSET AND MARKET VALUES, AS WELL AS MONTHLY PORTFOLIO INFORMATION FOR
THE FUND, ARE AVAILABLE ON OUR WEBSITE AT
WWW.MSDW.COM/INSTITUTIONAL/INVESTMENTMANAGEMENT.
3
<PAGE>
Morgan Stanely Dean Witter Eastern Europe Fund, Inc.
Investment Summary as of September 30, 1999 (Unaudited)
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<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
---------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR TO DATE 12.10% -- 7.83% -- 13.89% --
ONE YEAR 39.68 39.68% 33.73 33.73% 50.00 50.00%
SINCE INCEPTION* -33.72 -12.81 -17.81 -6.33 -22.24 -8.04
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
ENDED
SEPTEMBER 30,
1996* 1997 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value Per Share $20.77 $26.59 $12.65 $13.64
Market Value Per Share $18.00 $23.88 $ 9.81 $11.00
Premium/(Discount) -13.3% -10.2% -22.4% -19.4%
Income Dividends $ 0.07 -- -- --
Capital Gains Distributions -- $ 3.68 $ 0.67 --
Fund Total Return (2) 4.18% 48.19% -50.62% 7.83%
Index Total Return (3) 9.25% 48.23% -57.84% 13.89%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) For the period from the commencement of operations through December 31,
1997, the Fund's performance had been compared with the Russia (Moscow
Times 50) and New Europe Blended Composite. This composite was comprised of
50% of the market capitalization weighted Morgan Stanley Capital
International (MSCI) local indices for the Czech Republic, Hungary and
Poland, and 50% of the Moscow Times 50 Index, including dividends.
Beginning December 31, 1997, the Fund's performance has been compared with
the Russia and New Europe Composite. This composite is comprised of the
market capitalization weighted MSCI local indices for Russia, Poland, the
Czech Republic and Hungary.
* The Fund commenced operations on September 30, 1996.
4
<PAGE>
Morgan Stanely Dean Witter Eastern Europe Fund, Inc.
Investment Summary as of September 30, 1999 (Unaudited)
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DIVERSIFICATION OF TOTAL INVESTMENTS
[PIE CHART]
<TABLE>
<S> <C>
Equity Securities 99.5%
Short-Term Investments 0.5%
</TABLE>
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INDUSTRIES
[PIE CHART]
<TABLE>
<S> <C>
Telecommnications -- Integrated 32.2%
Energy Sources 25.4%
Banking 15.6%
Utilities -- Electrical & Gas 8.3%
Other 5.9%
Misc. Materials & Commodities 4.0%
Wholesale & International Trade 2.9%
Telecommunications -- Wireless 2.6%
Data Processing & Reproduction 1.2%
Leisure & Tourism 1.0%
Health & Personal Care 0.9%
</TABLE>
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COUNTRY WEIGHTINGS
[PIE CHART]
<TABLE>
<S> <C>
Russia 30.7%
Hungary 25.3%
Czech Republic 21.6%
Poland 20.0%
Other 2.4%
</TABLE>
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TEN LARGEST
HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Matav Rt. (Hungary) 16.9%
2. LUKoil Holdings (Russia) 14.6
3. Surgutneftegaz (Russia) 10.8
4. SPT Telecom (Czech Republic) 8.4
5. Czech Power Co. (Czech Republic) 5.1
6. OTP Bank Rt. (Hungary) 5.0%
7. Telekomunikacja Polska GDR (Poland) 4.9
8. KGHM Polska Miedz (Poland) 4.0
9. Elektrim (Poland) 2.9
10. BRE (Poland) 2.9
----
75.5%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATMENTS
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STATEMENT OF NET ASSETS (UNAUDITED)
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SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
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<S> <C> <C>
COMMON STOCKS (97.6%)
(Unless otherwise noted)
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CZECH REPUBLIC (21.6%)
BANKING
Ceska Sporitelna 275,130 U.S.$ 1,443
Komercni Banka 46,500 1,217
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2,660
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CHEMICALS
Unipetrol 398,000 689
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TELECOMMUNICATIONS--WIRELESS
Ceske Radiokomunikace GDR 44,585 1,611
--------------
TELECOMMUNICATIONS--INTEGRATED
SPT Telecom 335,850 5,109
--------------
UTILITIES ELECTRICAL & GAS
Czech Power Co. 1,123,800 3,103
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13,172
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HUNGARY (25.3%)
BANKING
OTP Bank Rt. 68,621 3,034
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HEALTH & PERSONAL CARE
Richter Gedeon Rt. 14,000 561
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LEISURE & TOURISM
Danubius Hotel and Spa Rt. 32,920 620
--------------
TELECOMMUNICATIONS--INTEGRATED
Matav Rt. 975,591 5,346
Matav Rt. ADR 180,429 4,916
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10,262
--------------
TRANSPORTATION--ROAD & RAIL
North American Bus Industries Rt. 20,031 376
--------------
UTILITIES--ELECTRICAL & GAS
Demasz Rt. GDR 36,000 524
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15,377
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POLAND (20.0%)
BANKING
BRE 68,415 1,777
Powszechny Bank Kredytowy 844 14
Powszechny Bank Kredytowy 'C' 36,405 591
Wielkopolski Bank Kredytowy 265,369 1,398
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3,780
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DATA PROCESSING & REPRODUCTION
Prokom 4,223 79
Prokom GDR 67,860 650
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729
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MISC. MATERIALS & COMMODITIES
KGHM Polska Miedz 299,288 1,679
KGHM Polska Miedz GDR 66,000 741
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2,420
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RECREATION--OTHER CONSUMER GOODS
Orbis 69,235 507
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TELECOMMUNICATIONS--INTEGRATED
Telekomunikacja Polska GDR 602,270 2,966
--------------
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<CAPTION>
VALUE
SHARES (000)
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<S> <C> <C>
WHOLESALE & INTERNATIONAL TRADE
Elektrim 193,154 U.S.$ 1,790
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12,192
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RUSSIA (30.7%)
BROADCASTING & PUBLISHING
Storyfirst Communications 'A'
(Preferred) 1,920 480
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ENERGY SOURCES
LUKoil Holdings 197,000 1,340
LUKoil Holdings ADR 86,078 2,346
LUKoil Holdings- Sponsored ADR 190,920 5,202
Surgutneftegaz 157,630 1,054
Surgutneftegaz ADR 823,342 5,506
--------------
15,448
--------------
TELECOMMUNICATIONS--INTEGRATED
Mustcom 9,526,809 1,276
--------------
UTILITIES--ELECTRICAL & GAS
Unified Energy Systems 20,739,846 1,085
Unified Energy Systems GDR 68,800 361
--------------
1,446
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18,650
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TOTAL COMMON STOCKS
(Cost U.S.$71,316) 59,391
--------------
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<CAPTION>
FACE
AMOUNT
(000)
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<S> <C> <C> <C>
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.5%)
Euro (Cost U.S.$301) EUR 289 307
--------------
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TOTAL INVESTMENTS (98.1%)
(Cost U.S.$71,617) 59,698
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OTHER ASSETS & LIABILITIES (1.9%)
Other Assets U.S.$ 4,203
Liabilities (3,064) 1,139
--------------
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NET ASSETS (100%)
Applicable to 4,459,748 issued and
outstanding U.S.$0.01 par value shares
(500,000,000 shares authorized) U.S.$ 60,837
--------------
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NET ASSET VALUE PER SHARE U.S.$ 13.64
--------------
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</TABLE>
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
6
