<PAGE>
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MORGAN STANLEY
DEAN WITTER
EASTERN EUROPE
FUND, INC.
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THIRD QUARTER REPORT
SEPTEMBER 30, 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
John D. Barrett II
DIRECTOR
Gerard E. Jones
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
Andrew McNally IV
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Samuel T. Reeves
DIRECTOR
Fergus Reid
Director
Frederick O. Robertshaw
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Arthur J. Lev
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
Clifford Chance Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
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INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
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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/im.
<PAGE>
LETTER TO SHAREHOLDERS
---------
For the nine months ended September 30, 2000, the Morgan Stanley Dean Witter
Eastern Europe Fund, Inc. (the "Fund") had a total return, based on net asset
value per share, of -8.29% compared to -8.89% for the Fund's benchmark
(described below). For the period from the Fund's commencement of operations on
September 30, 1996 through September 30, 2000, the Fund had a total return,
based on net asset value per share, of 12.62% compared with 4.08% for its
benchmark. Since 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 Morgan Stanley Capital International (MSCI) local
indices for Russia, Poland, the Czech Republic and Hungary. 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 MSCI local indices for the Czech Republic,
Hungary and Poland. On September 30, 2000, the closing price of the Fund's
shares on the New York Stock Exchange was $16 9/16, representing a 11.4%
discount to the Fund's net asset value per share.
Russian equities have advanced 9.3% for the third quarter and 3.2% year-to-date.
Russia's sustained positive macroeconomic developments, passage of extensive tax
reform legislation, and greater political stability were tempered by fears of a
global economic slowdown, a rise in U.S. inflation and NASDAQ volatility. Strong
commodity prices, notably oil, have benefited Russia as foreign reserves reached
U.S.$24.7 billion on September 22nd and industrial output in August rose 10.2%.
The increased profitability of Russian companies has boosted tax revenues and
created a surge in investment. Oil and gas stocks have been buoyed by higher oil
prices, yet the telecommunications sector has fared poorly as the Russian
Ministry planned to take back existing frequencies from incumbent wireless
operators Vimpelcom and Mobile Telesystems.
Russia faces numerous structural deficiencies. If current planned reforms are
implemented, sustainable economic growth for Russia over the longer term is
possible. One of the most significant areas of progress is increasing and
improving investment conditions. An underdeveloped banking sector and state
interference in markets must also be addressed. In July, both houses of
Parliament passed a large-scale tax reform. These reforms should improve tax
collection and simplify tax computation. We are also encouraged by the
government's federal budget for 2001, which demonstrates cautious fiscal
planning by understating budget revenues and showing spending restraint.
In 2000, growth should reach 6.0% and the overall federal budget surplus is
expected to reach 2.0% of GDP. Given relative political stability and favorable
oil prices, we believe the Russian economy shall continue to enjoy positive
momentum and that equities will perform well amidst this supportive backdrop.
Equities in Hungary have fallen 24.6% year-to-date, weighed down by the
government's unfavorable price increase for index-heavyweight oil and gas
producer MOL and concerns over government interference in the prices of
regulated industries, e.g. telecommunications services, pharmaceuticals, and
energy. MOL will hold an extraordinary general meeting on October 20 to decide
on whether to separate its gas storage, transmission and trading activities into
three legally independent (but 100% MOL-owned) subsidiaries. This would create a
more transparent structure and alleviate problems in the gas business. In
September, MOL also announced plans to sue the government over the
lower-than-expected 6% increase in gas prices. Recently, Hungary's macroeconomic
situation has been better than expected. Industrial production has been growing
year-over-year and has been accompanied by smaller trade and current account
deficits. We anticipate GDP growth to average 5.5% for 2000. Robust consumer
demand, strong growth in exports, and infrastructure investment are providing a
strong underpin to the economy. Inflation remains high, near 9.0%, but should be
moderated by small or no increases in regulated prices. However, higher oil
prices may lead to a higher pick-up in inflation. Given the supportive
macroeconomic environment, we maintain a positive outlook on the market.
Equities in the Czech Republic have declined 5.2% year-to-date after leading the
region during the first half of 2000. Gains at the beginning of the year were
fueled by strong performance in the telecommunications and banking sectors.
Declines during the third quarter were driven by a setback in the privatization
of index heavyweight telecommunications company Cesky Telecom. Cesky Telecom
has been weighed down by the overhang of the government's stake in the company
and the strategic partner's announcement that it would not increase its stake in
the company. The Czech economy had surprising gains on the upside, albeit at a
moderate pace. GDP growth seemed to be highly geared to the Western Europe
economic recovery, as strong exports have helped lift the economy. Imports have
been somewhat constrained by modest growth in consumer spending, which is
depressed by high unemployment and lackluster real wage growth. We believe
growth for 2000 and 2001 should reach 3.0% and 4.0%, respectively, as exports
provide a positive stim-
2
<PAGE>
ulus combined with domestic consumption and investment. We also expect fixed
capital investment to increase driven by new foreign direct investment.
Inflation may rise due to higher oil prices yet, after a prolonged period of low
inflation, we are not overly concerned and expect inflation to finish this year
below the central bank's target range of 5.5%. The key drivers affecting
equities in the near term are expected to be privatization in the banking,
telecommunications and utilities sectors.
The Polish stock market declined 18.6% year-to-date, pulled down by heightened
political tensions, macroeconomic concerns, and the poor price performance of
technology stocks. Although Polish exporters have temporarily been buoyed by the
pick up in demand in Germany, the current account deficit may reach 7.0-7.5% of
GDP and is increasingly being financed by portfolio flows rather than longer
term capital. The coalition government collapsed during the second quarter, and
although we do not anticipate the minority government to last until next year,
we believe this is already factored into the market. GDP growth has been
declining, mostly due to decreasing consumer demand as a result of high interest
rates. We anticipate growth of 5.5% in 2000, slowing to 4.5% in 2001. The
central bank has lost credibility, as this is the second consecutive year that
the central bank will most likely miss its inflation target by a wide margin. In
addition, fiscal policy may become increasingly uncertain over the coming months
as the minority government is unlikely to garner enough parliamentary support to
push through a credible budget for 2001. We anticipate near-term volatility in
the market owing to an employer share overhang in the telecommunications company
TPSA (Telekomunikacja Polska) and questions surrounding the Universal Mobile
Telecommunications System (UMTS) license auction process.
We believe Russian oil stocks will continue to prosper in the near term from
strong oil prices, coupled with Russia's positive momentum on reform. We also
have a positive outlook for Hungary in the near term based on a supportive
macroeconomic environment.
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 month period ended
September 30, 2000, the Fund repurchased 273,300 or 6.13% shares of its Common
Stock at an average price per share of $18.31, excluding $14,000 in commissions,
and an average discount of 16.68% from net asset value per share. For the year
ended December 31, 1999, the Fund repurchased 307,500 shares or 6.45% of its
Common Stock at an average price per share of $11.13, excluding $15,000 in
Commissions, and an average discount of 17.78% from net asset value per share.
Since the inception of the program, the Fund has repurchased 851,300 shares or
16.90% of its Common Stock at an average price per share of $12.78, excluding
$43,000 in commissions paid, and an average discount of 17.29% 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 of
Directors.
Sincerely,
/s/Harold J. Schaaff, Jr.
Harold J. Schaaff, Jr.
PRESIDENT AND DIRECTOR
October 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.
FOREIGN INVESTING INVOLVES CERTAIN RISKS, INCLUDING CURRENCY FLUCTUATIONS AND
CONTROLS, RESTRICTIONS ON FOREIGN INVESTMENTS, LESS GOVERNMENTAL SUPERVISION AND
REGULATION, LESS LIQUIDITY AND THE POTENTIAL FOR MARKET VOLATILITY AND POLITICAL
INSTABILITY.
--------------------------------------------------------------------------------
DAILY NET ASSET AND MARKET VALUES, AS WELL AS MONTHLY PORTFOLIO INFORMATION FOR
THE FUND, ARE AVAILABLE ON OUR WEBSITE AT
www.msdw.com/im.
3
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Investment Summary as of September 30, 2000 (Unaudited)
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURN (%)
INFORMATION -----------------------------------------------------------------------------
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>
YEAR TO DATE -1.85% -- -8.29% -- -8.89% --
ONE YEAR 50.57 50.57% 37.02 37.02% 33.85 33.85%
SINCE INCEPTION* -0.20 -0.05 12.62 3.01 4.08 1.00
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
--------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[PLOT POINTS TO COME]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
ENDED
SEPTEMBER 30,
1996* 1997 1998 1999 2000
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share ....... $20.77 $26.59 $ 12.65 $20.38 $18.69
Market Value Per Share .......... $18.00 $23.88 $ 9.81 $16.88 $16.56
Premium/(Discount) .............. -13.3% -10.2% -22.4% -17.2% -11.4%
Income Dividends ................ $ 0.07 -- -- -- --
Capital Gains Distributions ..... -- $ 3.68 $ 0.67 -- --
Fund Total Return (2) ........... 4.18% 48.19% -50.62% 61.11% -8.29%
Index Total Return (3) .......... 9.25% 48.23% -57.84% 67.30% -8.89%
</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) Since 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.
* The Fund commenced operations on September 30, 1996.
4
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Portfolio Summary as of September 30, 2000 (Unaudited)
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DIVERSIFICATION OF TOTAL INVESTMENTS
[PIE CHART]
<TABLE>
<S> <C>
Equity Securities (100.0%)
</TABLE>
------------------------------------------------------------------------------
INDUSTRIES
[PIE CHART]
<TABLE>
<S> <C>
Diversified Telecommunication Services (21.9%)
Integrated Oil & Gas (19.7%)
Oil & Gas Exploration & Production (19.1%)
Electric Utilities (15.1%)
Metals & Mining (6.5%)
Banks (5.4%)
Wireless Telecommunication Services (2.7%)
Pharmaceuticals (2.5%)
Media (2.3%)
IT Consulting & Services (1.3%)
Other* (3.5%)
</TABLE>
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COUNTRY
WEIGHTINGS
[PIE CHART]
<TABLE>
<S> <C>
Russia (62.0%)
Estonia (0.5%)
Czech Republic (10.0%)
Poland (11.5%)
Hungary (14.8%)
</TABLE>
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TEN LARGEST HOLDINGS**
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Surgutneftegaz (Russia) 19.1%
2. Lukoil Holding (Russia) 17.2
3. Unified Energy Systems (Russia) 10.7
4. Matav Rt. (Hungary) 7.6
5. Telekomunikacja Polska (Poland) 5.3
6. Cesky Telecom (Czech Republic) 4.4
7. Norilsk Nickel (Russia) 3.8
8. CEZ (Czech Republic) 3.4
9. KGHM Polska Miedz (Poland) 2.8
10. OTP Bank Rt. (Hungary) 2.6
----
76.9%
----
----
</TABLE>
* Other includes industries / countries not shown separately and other
assets and liabilities.
** Excludes short-term investments.
5
<PAGE>
INVESTMENTS (UNAUDITED)
--------------
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
VALUE
SHARES (000)
---------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.8%)
(Unless otherwise noted)
---------------------------------------------------------------------------
CZECH REPUBLIC (10.0%)
BANKS
Ceska Sporitelna 26,430 U.S.$ 136
Ceska Sporitelna GDR 16,225 84
Komercni Banka 70,860 1,442
-------------
1,662
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Cesky Telecom 262,477 3,460
-------------
ELECTRIC UTILITIES
CEZ 1,014,220 2,690
-------------
7,812
-------------
---------------------------------------------------------------------------
ESTONIA (0.5%)
DIVERSIFIED TELECOMMUNICATION SERVICES
Eesti Telekom GDR 26,400 416
-------------
---------------------------------------------------------------------------
HUNGARY (14.8%)
AUTO COMPONENTS
North American Bus Industries Rt. 31,794 607
-------------
BANKS
OTP Bank Rt. 39,670 2,047
-------------
CHEMICALS
Tiszai Vegyi Kombinat Rt. 30,200 391
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Matav Rt. 485,242 2,333
Matav Rt. ADR 152,429 3,592
-------------
5,925
-------------
HOTELS RESTAURANTS & LEISURE
Danubius Hotel and Spa Rt. 19,720 330
-------------
IT CONSULTING & SERVICES
Synergon Information Systems 61,500 362
-------------
PHARMACEUTICALS
EGIS Rt. 3,617 162
Gedeon Richter Rt. 33,460 1,771
-------------
1,933
-------------
11,595
-------------
---------------------------------------------------------------------------
POLAND (11.5%)
BANKS
BRE Bank SA 17,659 534
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Telekomunikacja Polska GDR 812,270 4,163
-------------
ELECTRICAL EQUIPMENT
Elektrim 51,697 467
-------------
IT CONSULTING & SERVICES
Prokom Software GDR 29,890 669
-------------
MEDIA
Agora SA 50,202 998
-------------
METALS & MINING
KGHM Polska Miedz 334,661 2,157
-------------
8,988
-------------
---------------------------------------------------------------------------
RUSSIA (62.0%)
DIVERSIFIED TELECOMMUNICATION SERVICES
Kubanelectrosvyaz 50,000 U.S.$ 550
Mustcom 9,526,809 1,645
Rostelecom (Preferred) 1,027,000 606
St. Petersburg MMT 500,000 350
-------------
3,151
-------------
ELECTRIC UTILITIES
Irkutskenergo ADR 145,950 766
Unified Energy Systems 18,839,846 2,525
Unified Energy Systems ADR 254,960 3,417
Unified Energy Systems GDR 182,800 2,449
-------------
9,157
-------------
INTEGRATED OIL & GAS
AO Tatneft ADR 141,800 1,409
Gazprom ADR 93,000 558
Lukoil Holding 147,000 2,117
Lukoil Holding ADR 140,498 8,093
Lukoil Holding ADR (Preferred) 143,250 3,209
-------------
15,386
-------------
MEDIA
Storyfirst Communications 'A'
(Preferred) 1,920 818
-------------
METALS & MINING
Norilsk Nickel 382,500 2,953
-------------
OIL & GAS EXPLORATION & PRODUCTION
Surgutneftegaz ADR 703,472 10,288
Surgutneftegaz (Preferred) 30,310,000 3,955
Surgutneftegaz (Preferred) ADR 47,500 695
-------------
14,938
-------------
WIRELESS TELECOMMUNICATION SERVICES
Nizhegorodsvyazinform 500,000 640
Nizhegorodsvyazinform ADR 250,000 640
Vimpel-Communications ADR 41,600 803
-------------
2,083
-------------
48,486
-------------
---------------------------------------------------------------------------
TOTAL INVESTMENTS (98.8%)
(Cost U.S.$82,635) 77,297
-------------
---------------------------------------------------------------------------
VALUE
(000)
---------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.2%)
Other Assets U.S.$ 2,592
Liabilities (1,662) 930
------------------ -------------
---------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 4,186,448, issued and
outstanding U.S.$ 0.01 par value
shares (500,000,000 shares
authorized) U.S.$ 78,227
=============
---------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 18.69
=============
---------------------------------------------------------------------------
</TABLE>
ADR - American Depositary Receipt.
GDR - Global Depositary Receipt.
6
