<PAGE>
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MORGAN STANLEY
DEAN WITTER
EASTERN EUROPE
FUND, INC.
- --------------------------------------------------------------------------------
FIRST QUARTER REPORT
MARCH 31, 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 AND ACTING
SECRETARY
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT 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 SHAREHOLDERS
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EFFECTIVE MAY 3, 1999, THE FUND CHANGED ITS NAME FROM THE MORGAN STANLEY RUSSIA
& NEW EUROPE FUND, INC. TO MORGAN STANLEY DEAN WITTER EASTERN EUROPE FUND, INC.
(THE "FUND").
For the three months ended March 31, 1999, the Fund had a total return, based on
net asset value per share, of 5.53% compared to 6.94% for the Fund's benchmark
(described below). For the period since the Fund's commencement of operations on
September 30, 1996 through March 31, 1999, the Fund had a total return, based on
net asset value per share, of -19.56% compared with -26.98% 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. 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. On March 31, 1999, the closing price of
the Fund's shares on the New York Stock Exchange was $11 1/8, representing a
16.6% discount to the Fund's net asset value per share.
The Russian market roared to life during the start of 1999, rising 63% in three
months, a move reminiscent of the market's heyday. The rally focused on a narrow
range of names and was led by natural resource stocks, mainly the oil companies,
such as Lukoil which rose 79% and Surgutneftegaz which rose 89%. Select other
stocks also participated in the rally, such as UES, the electricity giant, which
rose 42%. Three basic factors drove the market upward. First, during
mid-February, the government and creditors approached the end of lengthy
negotiations on Russia's defaulted ruble denominated debt, known as GKOs. The
debt deal was important for the equity markets because the government would
allow creditors to use a portion of the cash proceeds to buy equities. Although
details remain scarce, speculation that a wave of cash would flow into the
illiquid Russian market led stocks higher.
The second and more important factor behind the rally is the negotiations
between the Russia and the IMF toward a new aid-package, which have been ongoing
since the August 1998 ruble crisis. A deal with the IMF is crucial for Russia.
Not only would a new package supply Russia with funds to meet this year's
difficult debt obligations, but it would pave the way for other institutions to
resume lending, such as the World Bank. The Russian government faces a major
budgetary constraint as it is unable to borrow internationally and the domestic
capital markets are very thin. If Russia were ever to return to international
capital markets, it would need the IMF seal of approval. A stumbling block in
the negotiations has been the IMF's insistence that the Russian government
target a 3.5% primary budget surplus (a primary budget is the budget balance
excluding interest payments), while the government insists on a 2.0% goal.
Towards the end of March, negotiations drew to an end and the Russian government
announced that a deal had finally been reached. Although details have yet to be
released, a deal with the IMF, if adhered to by the Russian government,
significantly improves the country's economic outlook.
The third contributor to this year's market recovery is a recovery in commodity
prices. Most importantly, the price of oil has rallied more than 50% from its
lows. Stronger oil prices directly benefit oil producers, which constitute the
largest industry on the market, but also benefit the economy as a whole. Almost
half of the country's tax revenue comes from the oil and gas sector and higher
oil prices ease fiscal pressures. Russia's political scene has also changed.
Last year, tension between President Yelstin and the Duma (parliament) dominated
front-page news. Today, Prime Minister Primakov has improved relations with the
Duma and achieved a high degree of reconciliation. Politics will continue to
play an important role as parliamentary elections are scheduled for the end of
1999 and presidential elections will take place in mid-2000.
The Russian economy continues to feel the effects of last year's devaluation.
Industrial production fell 3.7% year-on-year in February, an improvement over
January's 4.9% decline. Due to a steep fall in imports, Russia has recorded a
trade surplus of $2 billion in January, following the seasonally large trade
surplus of $3.7 billion in December. Recent inflation figures hit over 100%
year-on-year as a result of the inflationary impact of the devaluation. The
currency, which is now freely floating, continues to be weak. The current level
of around 25 rubles to the dollar represents a 77% devaluation from last year's
fixed rate. Surprisingly, some recently reported economic data has been better
than expected and there are signs that the economic drop is reaching a bottom.
Industrial production in March was actually up versus last year and was over 10%
higher than February. Monthly inflation is high, but falling as the central bank
continued to abstain from injecting credit into the budget. Overall, while the
situation in Russia remains difficult, it is actually better than many had
expected in the aftermath of the ruble devaluation, and the market's strong
performance reflects a recognition that the country is `muddling through.'
The economic situation in the Czech Republic continued to deteriorate during the
quarter. Gross domestic product (GDP) forecasts have been revised downward,
unemployment is on the rise and recent inflation numbers have been less than
expectations. Fourth quarter 1998 GDP dropped 4.1% year-on-year, bringing growth
for the year to -2.7% and year-end inflation to 6.8%. Unemployment rose to 7.5%
by year-end versus 3% three years ago. The Czech central bank reacted to the
situation by significantly cutting interest rates, but as inflation has fallen
rapidly, real interest rates remain high. The balance of payments situation
reflects the underlying economy--the current account deficit fell to 1.9% in
1998 versus 6% the year before. The trade data for the first two months of 1999
suggest that trade and current account deficits should continue to im-
2
<PAGE>
prove. Despite improved balance of payment data, the Czech currency, the koruna,
has fallen sharply this year. Last year, the koruna staged a surprising rally,
increasing 15.8% versus the dollar as foreigners invested in the local fixed
income markets on the assumption that interest rates would fall. This year's
fixed income investors have been net sellers of Czech assets and the currency
has reversed itself, falling about 15% against the dollar.
The current crisis may produce a major positive side effect--economic reform.
The Czech economy has been plagued by a lack of major restructuring due to
fundamental problems with corporate governance and a significant bad debt
problem. The process of bank privatization, the linchpin to reforming the
economy, has accelerated. In particular, the government has finally established
a plan to sell government stakes in the country's two largest banks, Ceska
Sportitelna and Komercni Banka. Progress has been made at both banks in
restructuring problem loans, increasing provisioning and meeting capital
adequacy and liquidity requirements before privatization. Another positive
surprise is the flow of foreign direct investment (FDI) which, despite the
cyclical slow-down and the delays in reform, increased significantly to $2.7
billion last year. Overall, Czech stocks performed poorly during the quarter in
dollar terms--the market fell 18%, mostly due to the adverse currency movements.
One highlight for the first quarter was a short-lived rally of Komercni Banka
due to the privatization news. The stock has moved up 63% from its lows of the
year to finish the quarter up 18% in koruna terms.
The Polish and Hungarian stock markets confronted similar issues during the
first quarter of 1999. First, both markets were hit by fears of a growing
current account deficit due to a slowdown in Western Europe. For both countries,
Germany is a large export partner, and the German economic slump during the
fourth quarter of 1998 raised the possibility of a growing trade deficit in
Central Europe. Poland is in a better situation because of a more flexible
exchange rate regime. The Polish currency, the zloty, freely floats in a broad
band, which has allowed the currency to fall more than 10% versus the euro this
year. The weaker currency should allow the country's overall trade balance to
improve. Hungary, on the other hand, still maintains a narrow currency band, and
the currency has not moved significantly versus other currencies this year. The
current account numbers for Poland and Hungary thus far this year have been
better than expected, but as long as German growth remains in question, the
market will remain nervous. The Polish market finished the quarter up 2.3% while
Hungary has fell 15%.
Another issue impacting the markets are larger than anticipated budget deficits.
Sluggish growth in neighboring countries has fed into the Central European
economies. Polish economic growth, long a leader in the region, dropped to 2.9%
in the fourth quarter of 1998 and the first quarter of 1999 is expected to be
weak. Hungarian growth will likely slow to 4% this year versus 5% last year. As
a result of slower growth, there will likely be a shortfall in government
revenue collection. Budget deficits for the first quarter are much larger as a
percentage of the total budget than last year, and in order to meet budget
deficit targets, the governments will be forced to cut spending later in the
year if the situation does not improve. On the positive side, the Polish market
was hit by takeover fever. The merger mania in small cap stocks that began in
early 1999 spread to the banking sector. Two bank stocks in particular, BIG and
Bank Handlowy, staged strong rallies on takeover speculation. BIG rallied 127%
during the quarter due to speculation that a bidding war between potential
strategic investors would lead to a buy out.
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. From that date through March
31, 1999, the Fund repurchased 492,900 shares or 9.78% of its Common Stock at an
average price per share of $9.79 and an average discount of 18.38% 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
May 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 CHARACTERISTICS,
CAN NOW BE ACCESSED AT WWW.MSDW.COM/INSTITUTIONAL/INVESTMENTMANAGEMENT.
3
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Investment Summary as of March 31, 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 13.38% -- 5.53% -- 6.94% --
One Year -52.26 -52.26% -47.14 -47.14% -52.44 -52.44%
Since Inception* -32.96 -14.79 -19.56 -8.34 -26.98 -11.82
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
THREE MONTHS
PERIOD FROM YEAR ENDED DECEMBER 31, ENDED
SEPTEMBER 30, 1996* MARCH 31,
TO DECEMBER 31, 1996 1997 1998 1999
-------------------- ---- ---- ------------
<S> <C> <C> <C> <C>
Net Asset Value Per Share..... $ 20.77 $ 26.59 $ 12.65 $ 13.35
Market Value Per Share ....... $ 18.00 $ 23.88 $ 9.81 $ 11.13
Premium/(Discount)............ -13.3% -10.2% -22.4% -16.6%
Income Dividends.............. $ 0.07 -- -- --
Capital Gains Distributions... -- $ 3.68 $ 0.67 --
Fund Total Return (2)......... 4.18% 48.19% -50.62% 5.53%
Index Total Return (3)........ 9.25% 48.23% -57.84% 6.94%
</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 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 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 Stanley Dean Witter Eastern Europe Fund, Inc.
Portfolio Summary as of March 31, 1999 (Unaudited)
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DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities (99.2%)
Debt Instruments (0.8%)
</TABLE>
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SECTORS
[CHART]
<TABLE>
<S> <C>
Banking (14.0%)
Broadcasting & Publishing (2.9%)
Data Processing & Reproduction (5.3%)
Energy Sources (27.6%)
Leisure & Tourism (3.1%)
Multi-Industry (3.2%)
Telecommunications--Integrated (22.4%)
Telecommunications--Long Distance (3.7%)
Telecommunications--Wireless (2.0%)
Utilities--Electrical & Gas (10.2%)
Other (5.6%)
</TABLE>
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COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Russia (39.4%)
Poland (28.4%)
Hungary (16.6%)
Czech Republic (14.4%)
Other (1.2%)
</TABLE>
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TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. LUKoil Holdings (Russia) 15.1%
2. Surgutneftegaz (Russia) 10.2
3. Telekomunikacja Polska (Poland) 8.0
4. SPT Telekom (Czech Republic) 7.5
5. Unified Energy Systems (Russia) 6.2
6. Matav Rt. (Hungary) 5.1
7. Wielkopolski Bank Kredytowy (Poland) 4.9
8. OTP Bank Rt. (Hungary) 4.3
9. Prokom (Poland) 4.0
10. Rostelecom (Russia) 3.7
----
69.0%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
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STATEMENT OF NET ASSETS (UNAUDITED)
- ---------
MARCH 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
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<S> <C> <C>
COMMON STOCKS (98.0%)
(Unless Otherwise Noted)
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CZECH REPUBLIC (14.4%)
BANKING
Komercni Banka 47,800 U.S.$ 561
Komercni Banka GDR 54,000 212
----------
773
----------
LEISURE & TOURISM
Tabak 3,595 789
----------
TELECOMMUNICATIONS -- INTEGRATED
SPT Telecom 340,500 4,561
----------
TELECOMMUNICATIONS -- WIRELESS
Ceske Radiokomunikace GDR 35,688 1,223
----------
UTILITIES -- ELECTRICAL & GAS
Czech Power Co. 1,017,800 1,425
----------
8,771
----------
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HUNGARY (16.6%)
BANKING
OTP Bank Rt. 67,800 2,629
----------
ENERGY SOURCES
MOL Magyar Olaj-es Gazipari Rt. GDR 67,618 1,386
----------
HEALTH & PERSONAL CARE
Richter Gedeon Rt. 31,580 1,026
----------
LEISURE & TOURISM
Danubius Hotel and Spa Rt. 57,520 1,074
----------
TELECOMMUNICATIONS -- INTEGRATED
Matav Rt. ADR 116,440 3,115
----------
TRANSPORTATION -- ROAD & RAIL
North American Bus Industries Rt. 66,229 827
----------
10,057
----------
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POLAND (28.4%)
BANKING
BRE 16 -
Pekao Bank 45,000 468
Powszechny Bank Kredytowy 98,138 1,670
Wielkopolski Bank Kredytowy 541,625 2,983
----------
5,121
----------
BROADCASTING & PUBLISHING
Agora GDR 120,000 1,308
----------
CONSUMER GOODS
Zwyiec 7,755 804
----------
DATA PROCESSING & REPRODUCTION
Prokom 4,223 138
Prokom GDR 135,160 2,291
Softbank 26,440 771
----------
3,200
----------
MULTI-INDUSTRY
Elektrim 183,687 1,954
----------
TELECOMMUNICATIONS -- INTEGRATED
Telekomunikacja Polska GDR 895,000 4,855
----------
17,242
----------
- --------------------------------------------------------------------------------
RUSSIA (38.6%)
BROADCASTING & PUBLISHING
Storyfirst Communications 'A'
(Preferred) 1,920 U.S. $ 464
----------
ELECTRONIC COMPONENTS, INSTRUMENTS
Unified Energy Systems GDR 757,500 3,738
----------
ENERGY SOURCES
LUKoil Holdings 197,000 1,424
LUKoil Holdings ADR 267,738 7,731
Surgutneftegaz ADR 951,842 6,187
----------
15,342
----------
TELECOMMUNICATIONS -- INTEGRATED
Mustcom 5,356,352 588
----------
TELECOMMUNICATIONS -- LONG DISTANCE
Rostelecom ADR 485,000 2,273
----------
UTILITIES -- ELECTRICAL & GAS
Gazprom ADR 98,800 1,020
----------
23,425
----------
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TOTAL COMMON STOCKS
(Cost U.S.$69,316) 59,495
------------
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<CAPTION>
FACE
AMOUNT
(000)
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<S> <C> <C>
DEBT INSTRUMENTS (0.8%)
- --------------------------------------------------------------------------------
RUSSIA (0.8%)
TELECOMMUNICATIONS--INTEGRATED (0.8%)
Svyazinvest (Cost U.S.$3,146) U.S.$ 3,146 478
----------
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FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.0%)
British Pound GBP 2 4
Polish Zloty PLZ 41 10
----------
(Cost U.S.$14) 14
----------
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TOTAL INVESTMENTS (98.8%)
(Cost U.S.$72,476) 59,987
----------
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OTHER ASSETS & LIABILITIES (1.2%)
Other Assets U.S.$ 1,511
Liabilities (777) 734
-------------------------------
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NET ASSETS (100%)
Applicable to 4,549,148, issued and
outstanding U.S.$0.01 par value shares
(500,000,000 shares authorized) U.S.$60,721
-----------
-----------
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NET ASSET VALUE PER SHARE U.S.$13.35
-----------
-----------
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</TABLE>
ADR--American Depositary Receipt
GDR--Global Depositary Receipt
6
