<PAGE>
----------------------------------------------------------------
MORGAN STANLEY
DEAN WITTER
EASTERN EUROPE
FUND, INC.
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FIRST QUARTER REPORT
MARCH 31, 2000
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
Harold J. Schaaff, Jr.
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Mary E. Mullin
SECRETARY
Belinda A. Brady
TREASURER
Robin L. Conkey
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
---------
For the three months ended March 31, 2000, the Morgan Stanley Dean Witter
Eastern Europe Fund, Inc. (the "Fund") had a total return, based on net asset
value per share, of 21.05% compared to 20.78% for the Fund's benchmark
(described below). For the period from the Fund's commencement of operations on
September 30, 1996 through March 31, 2000, the Fund had a total return, based on
net asset value per share, of 48.66% compared with 37.96% for its benchmark. For
the period from September 30, 1996 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 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.
Beginning January 1, 1998, 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, 2000, the closing price of the Fund's shares
on the New York Stock Exchange was $19 1/8, representing a 22.5% discount to the
Fund's net asset value per share.
Eastern European markets experienced strong performance during the first quarter
of 2000. MSCI Czech was the best performer as it appreciated by 30.0% while MSCI
Russia, Poland and Hungary followed with returns of 22.9%. 19.0% and 13.2%,
respectively. The performance in the region was primarily driven by the telecom,
media and technology sectors. This was a phenomenon experienced across all the
major markets around the world. Given the large weighting of telecommunications
in the index of over 30%, Eastern Europe was the best performing region in
emerging markets.
RUSSIA
Russia performed strongly in the first quarter with all the performance
coming in March when the index appreciated by 37.6%. Presidential elections
were held on March 26 and Vladimir Putin won in the first round with 52.4% of
the vote. Putin's success is expected to provide Russia with much needed
political stability and further bolster Russia's economic recovery, which has
benefited from oil price strength, debt restructuring and forgiveness,
current account surpluses and improving international reserves. Attention
will now be focused on the composition of Putin's new cabinet and the
prospects for reform. The cabinet will be announced after Putin's
inauguration on May 8.
Russia's macro performance for the first quarter has been most encouraging. GDP
is expected to have grown by over 6% driven by double digit increase in
industrial production and strong growth in exports. This pick up in the economy
has led to foreign exchange reserves rising to over $16 billion, the highest
level since the August 1998 devaluation. Further, the current and fiscal
accounts are also performing exceptionally. The current account surplus for 2000
is expected to come in at greater than 15% of GDP while the primary balance is
running at a surplus level of approximately 3.5% of GDP.
Russia still needs to concentrate on economic reform and tackling corruption
and creating greater transparency in government-controlled companies. We are
overweight Russia versus the benchmark as we believe it will outperform other
markets in the near-term as we anticipate positive macro fundamentals to
remain intact and to be supported by political stability.
POLAND
Poland finished 1999 with a current account deficit of 7.6% and the forecast
for 2000 is not expected to be much better. This remains the biggest concern
with regard to the Polish macro picture. However, as in 1999 we expect
foreign direct investment and portfolio flows to cover most of this deficit
in 2000. Further, the recent full float of the zloty theoretically provides a
self adjusting mechanism that will adjust to counter any trade/current
account imbalances. Privatizations receipts are expected to be about $6
billion in 2000 with the largest contribution coming in from the 25-35%
strategic sale of TPSA. The primary risk with regard to the funding of the
current account remains in the political arena. Tensions remain within the
coalition government of Solidarity (AWS) and Freedom Union (UW). Further,
there is no consensus within the AWS with regard to government policies
towards privatization. With declining popularity of the government the risk
is that they may pursue a populist policy and slow down the existing reform
program.
Inflation remains high at around the 10% level versus a targeted level of
5.5-6.5% by year end 2000. Inflation is being driven by food prices which
represent 35% of the CPI basket and, by higher oil prices. We expect these
pressures to alleviate in the second half of the year. Due to the existing
current account and inflation concerns we expect rates to remain at current
levels or even rise a further 1% before declining late in current year. Given
this uncertain political and macro environment we remain underweight Poland
versus the benchmark.
CZECH REPUBLIC
The Czech Republic continues to emerge from its recession with export growth
being the main economic driver, fuelled by Germany's recovery (42% of all
Czech exports go to Germany). Private consumption and fixed investment are
also showing signs of recovery. We believe GDP growth may reach 2.0% in 2000,
compared to a contraction of 0.5% in 1999. Although we believe interest rates
may
2
<PAGE>
rise in the longer term, based on stronger growth and higher inflation, we do
not anticipate the central bank to raise rates before the second half of the
year.
Czech equities have performed strongly this year, led by telecoms and the
recovering banking sector. In February, the Czech government sold its 51%
stake in Ceska Sporitelna Bank to Erste Bank and is expected to also sell its
60% stake in Komercni Banka in the second half of the current year. Other
privatizations will include the sale of a 51% stake in Cesky Telecom for
about $3.5 billion and a 51% stake in Ceska Radiokomunikace. The sale of
these assets are expected to raise over $6 billion in the current year.
Supported by strategic investment and European Union economic growth, we
believe the Czech equities market stands to gain further from privatization
and economic growth.
HUNGARY
Hungary's GDP is expected to increase by 5.0% in 2000, boosted by a
combination of exports (benefiting from the economic recovery of Hungary's
main trading partners), private consumption (fuelled by real wage growth) and
capital formation (including new funds from domestic pension funds). Although
we believe private consumption will be robust, high unemployment and a high
personal tax burden should prevent a consumer boom.
We have become concerned about the 3% interest rate reduction in Hungary
during the first quarter. The rationale for the rate reduction has been due
to concerns about the forint becoming overvalued as a result of significant
foreign portfolio inflows in long-term government securities. These inflows
have been attracted into the country as a result of continued strong economic
growth and confidence in the currency which fluctuates within a 2.25% band.
As the government has no intention of widening the band in the near term the
only method to make the currency less attractive is by reducing interest
rates. With inflation still around 10% we feel the rate cuts have been too
aggressive and monetary policy has become too loose. We have as a result gone
underweight Hungary in the short term.
Sincerely,
/s/ Harold J. Schaaff, Jr.
Harold J. Schaaff, Jr.*
PRESIDENT AND DIRECTOR
April 2000
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.
--------------------------------------------------------------------------------
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.
EFFECTIVE MARCH 2000, JAIDEEP KHANNA, A PRINCIPAL OF MORGAN STANLEY DEAN
WITTER INVESTMENT MANAGEMENT INC., AND PORTFOLIO MANAGER OF OTHER MORGAN
STANLEY DEAN WITTER INVESTMENT MANAGEMENT ADVISED CLOSED-END FUNDS, IS NOW
RESPONSIBLE FOR THE DAY-TO-DAY MANAGEMENT OF THE FUND. PAUL PSAILA, THE
FUND'S FORMER PORTFOLIO MANAGER, HAS TAKEN A NEW ROLE WITHIN MORGAN STANLEY
DEAN WITTER INVESTMENT MANAGEMENT.
* HAROLD J. SCHAAFF, JR. WAS ELECTED PRESIDENT AND DIRECTOR OF THE FUND ON
MARCH 20, 2000. MR. SCHAAFF JOINED MORGAN STANLEY DEAN WITTER IN 1989 AND IS
A MANAGING DIRECTOR OF MORGAN STANLEY & CO. INCORPORATED AND MORGAN STANLEY
DEAN WITTER INVESTMENT MANAGEMENT INC. HE FORMERLY SERVED AS GENERAL COUNSEL
AND SECRETARY OF MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
3
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Investment Summary as of March 31, 2000 (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 13.33% -- 21.05% -- 20.78% --
One Year 71.91 71.91% 84.79 84.79% 88.94 88.94%
Since Inception* 15.24 4.14 48.66 12.00 37.96 9.63
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
--------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS
ENDED
MARCH 31,
1996* 1997 1998 1999 2000
------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share............. $20.77 $26.59 $12.65 $20.38 $24.67
Market Value Per Share................ $18.00 $23.88 $ 9.81 $16.88 $19.13
Premium/(Discount).................... -13.3% -10.2% -22.4% -17.2% -22.5%
Income Dividends...................... $ 0.07 -- -- -- --
Capital Gains Distributions........... -- $ 3.68 $ 0.67 -- --
Fund Total Return (2)................. 4.18% 48.19% -50.62% 61.11% 21.05%
Index Total Return (3)................ 9.25% 48.23% -57.84% 67.30% 20.78%
</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) Beginning January 1, 1998, 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. 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.
* The Fund commenced operations on September 30, 1996.
4
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Portfolio Summary as of March 31, 2000 (Unaudited)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities (98.2%)
Short-Term Investments (1.8%)
</TABLE>
--------------------------------------------------------------------------------
INDUSTRIES
[CHART]
<TABLE>
<S> <C>
Other (5.9%)
Trading Companies & Distributors (2.6%)
Telecommunication Services (2.3%)
Oil & Gas Exploration & Production (10.2%)
Metals & Mining (4.3%)
Media (1.5%)
Integrated Oil & Gas (17.4%)
Banks (7.5%)
Diversified Financials (2.0%)
Diversified Telecommunication Services (30.6%)
Electric Utilities (15.7%)
</TABLE>
--------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Czech Republic (11.1%)
Hungary (16.5%)
Poland (19.7%)
Russia (53.1%)
Other (-0.4%)
</TABLE>
--------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. LUKoil Holdings (Russia) 14.3%
2. Unified Energy System (Russia) 11.8
3. Matav Rt. (Hungary) 11.2
4. Surgutneftgaz (Russia) 10.3
5. Telekomunikacja Polska (Poland) 6.9
6. Rostelecom (Russia) 6.1
7. SPT Telecom (Czech Republic) 4.7
8. AO Telneft (Russia) 3.1
9. Komercni Banka (Czech Republic) 2.9
10. CEZ (Czech Republic) 2.7
----
74.0%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
---------
STATEMENT OF NET ASSETS (UNAUDITED)
---------
MARCH 31, 2000
<TABLE>
<CAPTION>
VALUE
SHARES (000)
--------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (100.4%)
(Unless otherwise noted)
--------------------------------------------------------------------------------
CZECH REPUBLIC (11.1%)
BANKS
Ceska Sporitelna 126,430 U.S.$ 717
Ceska Sporitelna GDR 16,225 92
Komercni Banka 120,560 3,201
--------------
4,010
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES
SPT Telecom 238,477 5,188
--------------
ELECTRIC UTILITIES
CEZ 943,020 3,009
--------------
12,207
------------
-------------------------------------------------------------------------------
HUNGARY (16.5%)
AUTO COMPONENTS
North American Bus Industries Rt. 40,431 972
------------
BANKS
OTP Bank Rt. 6,206 335
OTP Bank Rt. GDR 23,000 1,245
------------
1,580
------------
CHEMICALS
Tiszai Vegyi Kombinat Rt. 30,200 554
------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Matav Rt. 543,542 4,776
Matav Rt. ADR 167,929 7,494
------------
12,270
------------
ELECTRIC UTILITIES
Demasz Rt. GDR 26,250 382
------------
HOTELS RESTAURANTS & LEISURE
Danubius Hotel and Spa Rt. 32,920 739
------------
IT CONSULTING & SERVICES
Synergon Information Systems 61,500 742
------------
PHARMACEUTICALS
EGIS Rt. 19,270 957
------------
18,196
------------
-------------------------------------------------------------------------------
POLAND (19.7%)
BANKS
BRE Bank SA 32,959 1,189
Wielkopolski Bank Kredytowy 232,729 1,528
------------
2,717
------------
COMPUTERS & PERIPHERALS
Optimus SA 20,009 1,221
------------
DIVERSIFIED FINANCIALS
Europejski Fundusz Leasingowy SA 116,000 2,175
------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Telekomunikacja Polska GDR 807,270 7,608
------------
MEDIA
Agora SA 30,340 841
------------
METALS & MINING
KGHM Polska Miedz 356,961 2,602
------------
SOFTWARE
Prokom GDR 57,860 1,649
------------
-------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS
Elektrim 195,798 U.S.$ 2,845
------------
21,658
------------
-------------------------------------------------------------------------------
RUSSIA (53.1%)
DIVERSIFIED TELECOMMUNICATION SERVICES
Mustcom 9,526,809 1,987
Rostelecom 2,935,000 3,962
Rostelecom ADR 114,200 2,712
------------
8,661
------------
ELECTRIC UTILITIES
Irkutskenergo ADR 182,700 849
Unified Energy Systems 18,839,846 3,655
Unified Energy Systems GDR 482,200 9,355
------------
13,859
------------
INTEGRATED OIL & GAS
AO Tatneft ADR 260,300 3,417
LUKoil Holdings 197,000 3,073
LUKoil Holdings-Sponsored ADR 176,298 11,001
LUKoil-Holdings- Sponsored ADR
(Preferred) 97,000 1,678
------------
19,169
------------
MEDIA
Storyfirst Communications 'A'
(Preferred) 1,920 818
------------
METALS & MINING
Norilsk Nickel 192,000 2,158
------------
OIL & GAS EXPLORATION & PRODUCTION
Surgutneftegaz ADR (Preferred) 10,760,000 1,049
Surgutneftegaz ADR 710,272 10,228
------------
11,277
------------
TELECOMMUNICATION SERVICES
Kubanelectrosvyaz 50,000 917
Nizhnovsvyazinform 500,000 1,085
St. Petersburg Telephone Network 500,000 489
------------
2,491
------------
58,433
------------
-------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$83,331) 110,494
------------
-------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
-------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (1.9%)
Chase Securities, Inc., 5.90%,
dated 3/31/00, due 4/3/00, to
be repurchased at U.S.$2,081,
collateralized by U.S.$2,010
United States Treasury Inflation
Index Note, 3.625%, due 7/15/02,
valued at U.S.$2,128
(Cost U.S.$2,080) U.S.$ 2,080 2,080
------------
-------------------------------------------------------------------------------
6
<PAGE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
-------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.0%)
Hungarian Forint
(Cost U.S.$--@) HUF 79 U.S.$ -- @
------------
-------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.3%)
(Cost U.S.$85,411) 112,574
------------
-------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.3%)
Other Assets U.S.$ 3,144
Liabilities (5,711) (2,567)
------------ ------------
-------------------------------------------------------------------------------
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.$110,007
------------
-------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 24.67
------------
-------------------------------------------------------------------------------
</TABLE>
@ - Value is less than U.S.$500.
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
