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)
522 Fifth Avenue, New York, New York					10036
(Address of principal executive offices)					(Zip code)
Ronald E. Robison 522 Fifth Avenue, New York, New York 10036
(Name and address of agent for service)
Registrant’s telephone number, including area code:				212-296-6990
Date of fiscal year end:	October 31, 2007
Date of reporting period:		October 31, 2007

Item 1 - Report to Shareholders

Welcome, Shareholder:

In this report, you'll learn about how your investment in Morgan Stanley European Equity Fund Inc. performed during the annual 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.

Fund Report

For the year ended October 31, 2007

Total Return for the 12 Months Ended October 31, 2007
Class A			Class B			Class C			Class D			MSCI Europe Index1			Lipper European Region Funds Index2
	25.29	%		25.31	%		24.36	%		25.55	%		27.96	%		32.87	%

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 October 31, 2007, 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.

Currently, the Distributor has agreed to waive the 12b-1 fee on Class B shares to the extent it exceeds 0.24% of the average daily net assets of such shares on an annualized basis. The Distributor may discontinue this waiver in the future.

Market Conditions

The volatility in the U.S. capital markets caused by concerns about credit quality and availability spilled over into the European markets in August and September. Nonetheless, for the full 12-month period, European equity markets performed strongly. European equities benefited from their broad exposure to the global economy and particularly the emerging markets, whose consumers are much less constrained than those in the U.S. Valuations in the European markets also continued to be attractive relative to the U.S. and the rest of the world, supporting a vigorous level of attention from investors.

While conditions certainly became more challenging for investors as the period progressed, the underlying fundamentals of Europe's economy remained strong. Europe did not experience the same extremes of the U.S. housing mania, although areas where the real estate markets were strong, principally the U.K. and Spain, will be affected to some degree by credit market concerns. European consumers have higher savings rates and less leverage than U.S. consumers, and therefore stand better positioned to weather a downdraft. Inflation remained contained but rising energy prices in 2007 were a persistent threat to that stability. At the end of the period, most investors felt comfortable that the European Central Bank remained vigilant on this front and did not expect any significant monetary easing or tightening in the near future.

Performance Analysis

All share classes of Morgan Stanley European Equity Fund underperformed the Morgan Stanley Capital

2

International (MSCI) Europe Index and the Lipper European Region Funds Index for the 12 months ended October 31, 2007, assuming no deduction of applicable sales charges.

For the 12-month period, the Fund's underperformance relative to the MSCI Europe Index was primarily due to positioning in the health care, materials, and information technology sectors. In the health care sector, the Fund's overweight allocation included several pharmaceutical holdings that dampened performance. The materials sector was another detractor from relative performance, as an underweight allocation left the Fund underexposed to the sector's strong gains during the period. However, valuations have been excessively high for materials stocks, in our view, and therefore too expensive to be considered attractive opportunities by our risk-reward standards. The Fund also lost ground with a disadvantageous position in the information technology sector. In this sector, we had overweighted the stock of wireless infrastructure and handset maker that performed poorly, while underweighting its competitor which performed significantly better than expected. However, offsetting some of the negative influence to relative performance during the period was our strong stock picking across a number of sectors. In particular, holdings in the industrials, financials, consumer staples and utilities sectors were the greatest positive contributors to relative results.

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
Royal Dutch Shell PLC (A Shares)	4.8	%
Nestle S.A. (Registered Shares)	4.0
HSBC Holdings PLC	3.4
Vodafone Group PLC	3.3
Telefonica S.A.	3.1
Siemens AG (Registered Shares)	2.8
Novartis AG (Registered Shares)	2.6
Compagnie Financiere Richemont AG (Series A)	2.5
Tesco PLC	2.4
GlaxoSmithKline PLC	2.4
TOP FIVE COUNTRIES
United Kingdom	31.6	%
Switzerland	16.4
France	14.0
Germany	13.9
Spain	5.3

Data as of October 31, 2007. 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

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 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) 869-NEWS, 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

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Performance Summary

Performance of $10,000 Investment—Class B

6

Average Annual Total Returns—Period Ended October 31, 2007
Symbol	Class A Shares* (since 07/28/97) EUGAX		Class B Shares** (since 06/01/90) EUGBX		Class C Shares† (since 07/28/97) EUGCX		Class D Shares†† (since 07/28/97) EUGDX
1 Year	25.29% 18.71	3 4	25.31% 20.31	3 4	24.36% 23.36	3 4	25.55% —	3
5 Years	19.34 18.06	3 4	19.32 19.12	3 4	18.43 18.43	3 4	19.62 —	3
10 Years	9.70 9.11	3 4	9.27 9.27	3 4	8.87 8.87	3 4	10.07 —	3
Since Inception	9.34 8.77	3 4	10.90 10.90	3 4	8.52 8.52	3 4	9.71 —	3

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/msim 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 graph and table do 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 is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. 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. The Index is unmanaged and its 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 10 funds represented in this Index. The Fund is in the Lipper European Region Funds classification as of the date of this report.

(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.

‡  Ending value assuming a complete redemption on October 31, 2007.

7

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 05/01/07 – 10/31/07.

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.

	Beginning Account Value		Ending Account Value		Expenses Paid During Period *
	05/01/07		10/31/07		05/01/2007 – 10/31/07
Class A
Actual (9.04% return)	$	1,000.00	$	1,090.40	$	7.17
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,018.35	$	6.92
Class B
Actual (9.10% return)	$	1,000.00	$	1,091.00	$	7.01
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,018.50	$	6.77
Class C
Actual (8.65% return)	$	1,000.00	$	1,086.50	$	11.10
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,014.57	$	10.71
Class D
Actual (9.17% return)	$	1,000.00	$	1,091.70	$	5.85
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,019.61	$	5.65

*  Expenses are equal to the Fund's annualized expense ratios of 1.36%, 1.33%, 2.11% and 1.11% for Class A, Class B, Class C and Class D shares, respectively, multiplied by the average account value over the period, multiplied by 184/365 (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 October 31, 2007, 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.

Currently, the Distributor has agreed to waive the 12b-1 fee on Class B shares to the extent it exceeds 0.24% of the average daily net assets of such shares on an annualized basis. The Distributor may discontinue this waiver in the future.

8

Morgan Stanley European Equity Fund Inc.

Portfolio of Investments  nOctober 31, 2007

NUMBER OF SHARES			VALUE
		Common Stocks (97.5%) (c)
		Austria (1.3%)
		Major Telecommunications
	288,372	Telekom Austria AG	$	8,290,818
		Belgium (1.4%)
		Other Metals/Minerals
	37,271	Umicore		9,322,721
		France (14.0%)
		Construction Materials
	76,123	Lafarge S.A. (a)		12,430,153
		Electric Utilities
	118,832	Electricite de France (EDF) (a)		14,293,485
	223,263	Suez S.A. (a)		14,568,856
				28,862,341
		Electrical Products
	87,845	Schneider Electric S.A. (a)		12,136,668
		Major Banks
	131,013	BNP Paribas		14,512,252
		Motor Vehicles
	66,144	Renault S.A. (a)		11,156,701
		Pharmaceuticals: Major
	143,052	Sanofi-Aventis (a)		12,586,180
		Total France		91,684,295
		Germany (12.9%)
		Industrial Conglomerates
	84,608	MAN AG		15,197,471
	134,875	Siemens AG (Registered Shares) (a)		18,376,630
				33,574,101
		Major Banks
	256,973	Commerzbank AG		10,951,805
		Motor Vehicles
	152,404	Bayerische Motoren Werke (BMW) AG		10,227,405
		Multi-Line Insurance
	66,731	Allianz SE (Registered Shares)		15,054,376

NUMBER OF SHARES			VALUE
	73,853	Muenchener Rueckversicherungss- Gesellschaft AG (Registered Shares)	$	14,207,619
				29,261,995
		Total Germany		84,015,306
		Greece (3.8%)
		Major Banks
	200,727	National Bank of Greece S.A.		14,016,486
		Regional Banks
	284,642	EFG Eurobank Ergasias		11,110,466
		Total Greece		25,126,952
		Italy (4.3%)
		Integrated Oil
	398,746	Eni SpA (a)		14,571,671
		Major Banks
	1,602,759	UniCredito Italiano SpA		13,781,707
		Total Italy		28,353,378
		Netherlands (3.2%)
		Air Freight/Couriers
	210,573	TNT NV		8,657,425
		Publishing: Books/Magazines
	386,668	Wolters Kluwer NV (Share Certificates)		12,161,396
		Total Netherlands		20,818,821
		Norway (1.6%)
		Major Telecommunications
	434,058	Telenor ASA*		10,239,701
		Spain (5.3%)
		Major Banks
	586,304	Banco Bilbao Vizcaya Argentaria, S.A. (a)		14,834,429
		Major Telecommunications
	604,821	Telefonica S.A.		20,025,717
		Total Spain		34,860,146

See Notes to Financial Statements
9

Morgan Stanley European Equity Fund Inc.

Portfolio of Investments  nOctober 31, 2007 continued

NUMBER OF SHARES			VALUE
		Sweden (1.7%)
		Industrial Machinery
	595,366	Sandvik AB	$	11,366,456
		Switzerland (16.4%)
		Financial Conglomerates
	264,511	UBS AG (Registered Shares)		14,196,465
		Food: Major Diversified
	55,901	Nestle S.A. (Registered Shares)		25,840,611
		Medical Specialties
	25,812	Nobel Biocare Holding AG Bearer		7,539,451
		Multi-Line Insurance
	36,539	Zurich Financial Services AG (Registered Shares)		11,041,892
		Other Consumer Specialties
	224,008	Compagnie Financiere Richemont AG (Series A) (Units)†		16,022,859
		Pharmaceuticals: Major
	318,660	Novartis AG (Registered Shares)		16,976,870
	91,562	Roche Holding AG		15,651,815
				32,628,685
		Total Switzerland		107,269,963
		United Kingdom (31.6%)
		Aerospace & Defense
	1,238,638	BAE Systems PLC		12,869,217
	900,085	Rolls-Royce Group PLC*		10,102,081
	36,363,434	Rolls-Royce Group PLC (B Shares)		83,154
				23,054,452
		Food Retail
	1,346,368	Morrison (W.M.) Supermarkets PLC		8,305,836
	1,570,927	Tesco PLC		15,980,488
				24,286,324

NUMBER OF SHARES			VALUE
		Integrated Oil
	717,072	Royal Dutch Shell PLC (A Shares)	$	31,378,566
		Investment Managers
	728,838	Man Group PLC		8,963,112
		Major Banks
	892,024	Barclays PLC		11,320,045
	1,126,962	HSBC Holdings PLC		22,327,678
				33,647,723
		Other Metals/Minerals
	214,733	Anglo American PLC		14,824,614
		Pharmaceuticals: Major
	611,215	GlaxoSmithKline PLC		15,764,545
		Publishing: Books/Magazines
	624,027	Reed Elsevier PLC		8,184,623
		Tobacco
	364,162	British American Tobacco PLC		13,879,110
	218,555	Imperial Tobacco Group PLC		11,083,142
				24,962,252
		Wireless Telecommunications
	5,451,253	Vodafone Group PLC		21,501,874
		Total United Kingdom		206,568,085
		Total Common Stocks (Cost $433,879,646)		637,916,642
		Preferred Stock (1.0%) (c)
		Germany
		Medical Specialties
	80,388	Fresenius SE (Cost $6,503,563)		6,381,373

See Notes to Financial Statements
10

Morgan Stanley European Equity Fund Inc.

Portfolio of Investments  nOctober 31, 2007 continued

PRINCIPAL AMOUNT IN THOUSANDS			VALUE
		Short-Term Investments (11.7%)
		Short-Term Debt Securities held as Collateral on Loaned Securities (10.3%)
$	2,359	AIG Match Funding Corp., 5.03%, 12/17/07 (b)	$	2,359,334
	1,685	Alliance and Leister PLC., 5.14%, 09/02/08 (b)		1,685,211
	843	Bancaja, 5.35%, 08/12/08 (b)		842,606
	843	Bank of New York Co., Inc., 5.12%, 08/08/08 (b)		842,606
	3,202	Bank of Nova Scotia London, 4.75%, 11/01/07		3,201,901
	843	BASF AG, 5.18%, 08/19/08 (b)		842,547
	1,685	BNP Paribas Mtn., 5.50%, 05/19/08 (b)		1,685,211
	3,370	CAM U.S. Finance SA Unipersonal, 5.24%, 07/25/08 (b)		3,370,422
	1,685	Canadian Imperial Bank, NY, 4.67%, 07/28/08 (b)		1,685,211
	842	CC USA, Inc., 4.55%, 01/28/08 (b)		842,238
	3,033	CIT Group Holdings Inc., 5.23%, 06/18/08 (b)		3,033,380
	8,426	Citigroup Global Markets Inc., 4.95%, 11/01/07		8,426,056
	1,685	Credit Suisse First Boston, NY, 4.57%, 03/14/08 (b)		1,685,211
		First Tennesee Bank,
	843	5.05%, 08/15/08 (b)		842,606
	3,370	5.07%, 08/15/08 (b)		3,370,221
		Goldman Sachs Group, Inc.,
	843	5.16%, 09/12/08 (b)		842,606
	1,584	5.06%, 11/14/08 (b)		1,584,098
	843	HSBC Finance Corp., 5.14%, 08/05/08 (b)		842,606
	3,371	IBM Corp., 5.10%, 09/08/08 (b)		3,370,531
	4,234	Lehman Brothers, Inc., 4.94%, 11/01/07		4,233,571

PRINCIPAL AMOUNT IN THOUSANDS			VALUE
$	1,685	Macquarie Bank Ltd., 5.02%, 08/20/08 (b)	$	1,685,211
	1,690	Marshall & Ilsley Bank, 5.37%, 12/17/07		1,689,939
	2,528	Metropolitan Life Global Funding, 4.99%, 08/21/08 (b)		2,527,817
	3,370	National Bank of Canada, 5.11%, 04/02/08 (b)		3,370,008
	3,370	National Rural Utilities Coop., Fin., 5.14%, 09/02/08 (b)		3,370,422
	1,955	Nationwide Building Society, 5.28%, 07/25/08 (b)		1,954,845
	4,044	Societe Generale, NY, 4.73%, 12/31/07 (b)		4,044,301
	1,854	Unicredito Delaware Inc., 5.10%, 08/14/08 (b)		1,853,784
	1,180	Unicredito Italiano Bank (IRE) Plc., 5.15%, 08/08/08 (b)		1,179,648
		Total Short-Term Debt Securities held as Collateral on Loaned Securities (Cost $67,264,148)		67,264,148
NUMBER OF SHARES (000)
		Investment Company (d) (1.4%)
	8,888	Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class (Cost $8,888,888)		8,888,888
		Total Short-Term Investments (Cost $76,153,036)		76,153,036

Total Investments (Cost $516,536,245) (e)	110.2	%		720,451,051
Liabilities in Excess of Other Assets	(10.2	)		(66,619,550	)
Net Assets	100.0	%	$	653,831,501

See Notes to Financial Statements
11

Morgan Stanley European Equity Fund Inc.

Portfolio of Investments  nOctober 31, 2007 continued

  *  Non-income producing security.

  †  Consists of one or more class of securities traded together as a unit; stocks with attached warrants.

  (a)  All or portion of this security was on loan as of October 31, 2007.

  (b)  Variable/Floating Rate Security - interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on October 31, 2007.

  (c)  Securities with total market value equal to $644,298,015 have been valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Directors.

  (d)  See Note 4 to the financial statements regarding Investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class.

  (e)  The aggregate cost for federal income tax purposes is $517,196,274. The aggregate gross unrealized appreciation is $207,510,316 and the aggregate gross unrealized depreciation is $4,255,539, resulting in net unrealized appreciation of $203,254,777.

See Notes to Financial Statements
12

Morgan Stanley European Equity Fund Inc.

Summary of Investments  nOctober 31, 2007

INDUSTRY	VALUE		PERCENT OF TOTAL INVESTMENTS
Major Banks	$	101,744,402		14.1	%
Short-Term Investments		76,153,036		10.6
Pharmaceuticals: Major		60,979,410		8.5
Integrated Oil		45,950,237		6.4
Multi-Line Insurance		40,303,887		5.6
Major Telecommunications		38,556,236		5.3
Industrial Conglomerates		33,574,101		4.7
Electric Utilities		28,862,341		4.0
Food: Major Diversified		25,840,611		3.6
Tobacco		24,962,252		3.5
Food Retail		24,286,324		3.4
Other Metals/Minerals		24,147,335		3.3
Aerospace & Defense		23,054,452		3.2
Wireless Telecommunications		21,501,874		3.0

INDUSTRY	VALUE		PERCENT OF TOTAL INVESTMENTS
Motor Vehicles	$	21,384,106		3.0	%
Publishing: Books/ Magazines		20,346,019		2.8
Other Consumer Specialties		16,022,859		2.2
Financial Conglomerates		14,196,465		2.0
Medical Specialties		13,920,824		1.9
Construction Materials		12,430,153		1.7
Electrical Products		12,136,668		1.7
Industrial Machinery		11,366,456		1.6
Regional Banks		11,110,466		1.5
Investment Managers		8,963,112		1.2
Air Freight/Couriers		8,657,425		1.2
	$	720,451,051		100.0	%

See Notes to Financial Statements
13

Morgan Stanley European Equity Fund Inc.

Financial Statements

Statement of Assets and Liabilities

October 31, 2007

Assets:
Investments in securities, at value (cost $507,647,357) (including $64,873,289 of securities loaned)	$	711,562,163
Investment in affiliate, at value (cost $8,888,888)		8,888,888
Foreign cash, at value (cost $8,389)		6,191
Receivable for:
Dividends		640,789
Foreign withholding taxes reclaimed		320,174
Capital stock sold		94,249
Dividends from affiliate		19,001
Prepaid expenses and other assets		804,617
Total Assets		722,336,072
Liabilities:
Collateral on securities loaned at value		67,264,148
Payable for:
Investment advisory fee		495,176
Capital stock redeemed		369,993
Distribution fee		124,132
Administration fee		46,146
Transfer agent fee		7,418
Accrued expenses and other payables		197,558
Total Liabilities		68,504,571
Net Assets	$	653,831,501
Composition of Net Assets:
Paid-in-capital	$	384,792,475
Net unrealized appreciation		203,936,156
Accumulated undistributed net investment income		8,224,109
Accumulated undistributed net realized gain		56,878,761
Net Assets	$	653,831,501
Class A Shares:
Net Assets	$	33,169,515
Shares Outstanding (500,000,000 authorized, $.01 par value)		1,238,987
Net Asset Value Per Share	$	26.77
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value)	$	28.25
Class B Shares:
Net Assets	$	600,572,840
Shares Outstanding (500,000,000 authorized, $.01 par value)		23,199,304
Net Asset Value Per Share	$	25.89
Class C Shares:
Net Assets	$	15,315,903
Shares Outstanding (500,000,000 authorized, $.01 par value)		597,897
Net Asset Value Per Share	$	25.62
Class D Shares:
Net Assets	$	4,773,243
Shares Outstanding (500,000,000 authorized, $.01 par value)		172,753
Net Asset Value Per Share	$	27.63

See Notes to Financial Statements
14

Morgan Stanley European Equity Fund Inc.

Financial Statements continued

Statement of Operations

For the year ended October 31, 2007

Net Investment Income: Income
Dividends (net of $1,849,782 foreign withholding tax)	$	16,162,007
Income from securities loaned - net		663,846
Interest		168,042
Dividends from affiliate		150,359
Total Income		17,144,254
Expenses
Investment advisory fee		5,451,101
Distribution fee (Class A shares)		557,246
Distribution fee (Class B shares)		846,264
Distribution fee (Class C shares)		146,270
Transfer agent fees and expenses		754,242
Administration fee		507,425
Shareholder reports and notices		259,371
Custodian fees		192,335
Professional fees		85,538
Registration fees		51,962
Directors' fees and expenses		16,322
Other		57,737
Total Expenses		8,925,813
Less: amounts waived/reimbursed		(2,632	)
Less: expense offset		(5,135	)
Net Expenses		8,918,046
Net Investment Income		8,226,208
Net Realized and Unrealized Gain: Net Realized Gain on:
Investments		69,874,813
Foreign exchange transactions		57,705
Net Realized Gain		69,932,518
Net Change in Unrealized Appreciation/Depreciation on:
Investments		64,210,073
Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies		36,669
Net Change in Unrealized Appreciation/Depreciation		64,246,742
Net Gain		134,179,260
Net Increase	$	142,405,468

See Notes to Financial Statements
15

Morgan Stanley European Equity Fund Inc.

Financial Statements continued

Statements of Changes in Net Assets

	FOR THE YEAR ENDED OCTOBER 31, 2007			FOR THE YEAR ENDED OCTOBER 31, 2006
Increase (Decrease) in Net Assets: Operations:
Net investment income	$	8,226,208		$	6,776,156
Net realized gain		69,932,518			132,800,283
Net change in unrealized appreciation/depreciation		64,246,742			17,547,239
Net Increase		142,405,468			157,123,678
Dividends to Shareholders from Net Investment Income:
Class A shares		(4,964,234	)		(6,193,173	)
Class B shares		(1,897,447	)		(2,623,483	)
Class C shares		(61,922	)		(71,962	)
Class D shares		(69,093	)		(76,421	)
Total Dividends		(6,992,696	)		(8,965,039	)
Net decrease from capital stock transactions		(102,484,323	)		(141,543,573	)
Net Increase		32,928,449			6,615,066
Net Assets:
Beginning of period		620,903,052			614,287,986
End of Period (Including accumulated undistributed net investment income of $8,224,109 and $6,932,892, respectively)	$	653,831,501		$	620,903,052

See Notes to Financial Statements
16

Morgan Stanley European Equity Fund Inc.

Notes to Financial Statements  nOctober 31, 2007

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 or exchanged 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 including circumstances under which 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,

17

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Notes to Financial Statements  nOctober 31, 2007 continued

close of the foreign market on which the 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; (7) investments in open-end mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value as of the close of each business day; and (8) 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 and are included in interest income. Interest income is accrued daily.

C. 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.

D. 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 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.

18

Morgan Stanley European Equity Fund Inc.

Notes to Financial Statements  nOctober 31, 2007 continued

E. Securities Lending — The Fund may lend securities to qualified financial institutions, such as broker-dealers, to earn additional income. Any increase or decrease in the fair value of the securities loaned that might occur and any interest earned or dividends declared on those securities during the term of the loan would remain in the Fund. The Fund receives cash or securities as collateral in an amount equal to or exceeding 100% of the current fair value of the loaned securities. The collateral is marked-to-market daily, by the securities lending agent, to ensure that a minimum of 100% collateral coverage is maintained.

Based on pre-established guidelines, the securities lending agent invests any cash collateral that is received in high-quality short-term investments. Securities lending income is generated from the earnings on the invested collateral and borrowing fees, less any rebates owed to the borrowers and compensation to the lending agent.

The value of loaned securities and related collateral outstanding at October 31, 2007 were $64,873,289 and $67,264,148, respectively. The Fund has the right under the lending agreement to recover the securities from the borrower on demand.

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.

19

Morgan Stanley European Equity Fund Inc.

Notes to Financial Statements  nOctober 31, 2007 continued

Under an agreement between the Administrator and State Street Bank and Trust Company ("State Street"), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund.

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 $2,812,506 for the year ended October 31, 2007.

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 shares; (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 shares; and (iii) Class C — up to 1.0% of the average daily net assets of Class C shares.

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 Directors will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that there were no such expenses as of October 31, 2007.

Currently, the Distributor has agreed to waive the 12b-1 fee on Class B shares to the extent it exceeds 0.24% of the average daily net assets of such shares on an annualized basis. The Distributor may discontinue this waiver at any time.

For the year ended October 31, 2007, the distribution fee was accrued for Class B at the rate of 0.23%.

20

Morgan Stanley European Equity Fund Inc.

Notes to Financial Statements  nOctober 31, 2007 continued

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 and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. For the year ended October 31, 2007, 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 year ended October 31, 2007, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $905, $102,012 and $937, respectively and received $134,521 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.

4. Security Transactions and Transactions with Affiliates

The Fund invests in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class, an open-end management investment company managed by the Investment Adviser. Advisory fees paid by the Fund are reduced by an amount equal to the Advisory and administrative services fees paid by Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class with respect to assets invested by the Fund in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class. For the year ended October 31, 2007, advisory fees paid were reduced by $2,632 relating to the Fund's investment in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class. Income distributions earned by the Fund are recorded as dividends from affiliate in the Statement of Operations and totaled $150,359 for the year ended October 31, 2007. During the year ended October 31, 2007, cost of purchases and sales of investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class aggregated $56,621,876 and $47,732,988, respectively.

The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended October 31, 2007 aggregated $241,869,257 and $335,435,167, respectively. Included in the aforementioned transactions are sales of $1,917,864 with other Morgan Stanley funds, including net realized gains of $66,385.

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

21

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Notes to Financial Statements  nOctober 31, 2007 continued

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 year ended October 31, 2007, included in Directors' fees and expenses in the Statement of Operations amounted to $5,636. At October 31, 2007, the Fund had an accrued pension liability of $60,041 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 or she 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. Purposes 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.

The Fund may lend securities to qualified financial institutions, such as broker-dealers, to earn additional income. Risks in securities lending transactions are that a borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral plus any rebate that is required to be returned to the borrower.

At October 31, 2007, investments in securities of issuers in the United Kingdom, Switzerland, France and Germany represented 31.6%, 16.4%, 14.0% and 13.9% 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.

At October 31, 2007, the Fund's cash balances consisted principally of interest bearing deposits with J.P. Morgan Chase, the Fund's custodian.

22

Morgan Stanley European Equity Fund Inc.

Notes to Financial Statements  nOctober 31, 2007 continued

6. Capital Stock

Transactions in capital stock were as follows:

	FOR THE YEAR ENDED OCTOBER 31, 2007						FOR THE YEAR ENDED OCTOBER 31, 2006
	SHARES			AMOUNT			SHARES			AMOUNT
CLASS A SHARES
Sold		534,550		$	12,875,153			345,179		$	6,878,095
Conversion from Class B		—			—			1,716,459			32,882,078
Conversion to Class B		(17,967,692	)		(442,918,417	)		—			—
Reinvestment of dividends		196,956			4,429,539			314,610			5,556,012
Redeemed		(2,151,219	)		(49,380,767	)		(5,697,154	)		(109,557,446	)
Net decrease — Class A		(19,387,405	)		(474,994,492	)		(3,320,906	)		(64,241,261	)
CLASS B SHARES
Sold		370,750			9,235,075			476,735			9,071,767
Conversion to Class A		—			—			(1,773,640	)		(32,882,078	)
Conversion from Class A		18,585,947			442,918,417			—			—
Reinvestment of dividends		73,600			1,600,797			136,657			2,335,472
Redeemed		(3,305,686	)		(77,919,541	)		(2,782,943	)		(51,424,445	)
Net increase (decrease) — Class B		15,724,611			375,834,748			(3,943,191	)		(72,899,284	)
CLASS C SHARES
Sold		53,697			1,252,151			54,263			1,018,358
Reinvestment of dividends		2,644			57,299			4,053			69,024
Redeemed		(135,364	)		(3,101,909	)		(234,014	)		(4,255,953	)
Net decrease — Class C		(79,023	)		(1,792,459	)		(175,698	)		(3,168,571	)
CLASS D SHARES
Sold		47,218			1,168,134			58,550			1,197,304
Reinvestment of dividends		2,080			48,197			4,059			73,825
Redeemed		(107,561	)		(2,748,451	)		(129,608	)		(2,505,586	)
Net decrease — Class D		(58,263	)		(1,532,120	)		(66,999	)		(1,234,457	)
Net decrease in Fund		(3,800,080	)	$	(102,484,323	)		(7,506,794	)	$	(141,543,573	)

7. Expense Offset

The expense offset represents a reduction of the fees and expenses for interest earned on cash balances maintained by the Fund with the transfer agent.

8. 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

23

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Notes to Financial Statements  nOctober 31, 2007 continued

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.

The tax character of distributions paid was as follows:

	FOR THE YEAR ENDED OCTOBER 31, 2007		FOR THE YEAR ENDED OCTOBER 31, 2006
Ordinary income	$	6,992,696	$	8,965,039

As of October 31, 2007, the tax-basis components of accumulated earnings were as follows:

Undistributed ordinary income	$	23,899,138
Undistributed long-term gains		41,966,907
Net accumulated earnings		65,866,045
Foreign tax credit pass-through		1,401,283
Temporary differences		(1,504,429	)
Net unrealized appreciation		203,276,127
Total accumulated earnings	$	269,039,026

During the year ended October 31, 2007, the Fund utilized its net capital loss carryforward of $11,893,800.

As of October 31, 2007, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and foreign tax credit pass-through.

Permanent differences, due to foreign currency gains, resulted in the following reclassifications among the Fund's components of net assets at October 31, 2007:

ACCUMULATED NET INVESTMENT INCOME		ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN			UNDISTRIBUTED PAID-IN-CAPITAL
$	57,705	$	(57,705	)		—

9. Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. FIN 48 is effective for fiscal years beginning

24

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Notes to Financial Statements  nOctober 31, 2007 continued

after December 15, 2006 and is to be applied to all open tax years as of the effective date. The impact to the Fund's financial statements, if any, is currently being assessed.

In addition, in September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund's financial statement disclosures.

25

Morgan Stanley European Equity Fund Inc.

Financial Highlights

Selected ratios and per share data for a share of capital stock outstanding throughout each period:

	FOR THE YEAR ENDED OCTOBER 31,
	2007			2006			2005			2004			2003
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period	$	21.60		$	17.01		$	14.99		$	13.30		$	11.51
Income from investment operations:
Net investment income‡		0.25			0.21			0.19			0.11			0.12
Net realized and unrealized gain		5.17			4.65			1.94			1.68			1.67
Total income from investment operations		5.42			4.86			2.13			1.79			1.79
Less dividends from net investment income		(0.25	)		(0.27	)		(0.11	)		(0.10	)		–
Net asset value, end of period	$	26.77		$	21.60		$	17.01		$	14.99		$	13.30
Total Return†		25.29	%		28.91	%		14.25	%		13.51	%		15.55	%
Ratios to Average Net Assets(1):
Total expenses (before expense offset)		1.40	%(2)		1.47	%		1.47	%		1.43	%		1.45	%
Net investment income		1.30	%(2)		1.08	%		1.16	%		0.79	%		0.79	%
Supplemental Data:
Net assets, end of period, in thousands	$	33,170		$	445,453		$	407,446		$	15,265		$	16,612
Portfolio turnover rate		39	%		68	%		64	%		89	%		89	%

  ‡  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)  Reflects overall Fund ratios for investment income and non-class specific expenses.

  (2)  Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%.

See Notes to Financial Statements
26

Morgan Stanley European Equity Fund Inc.

Financial Highlights continued

	FOR THE YEAR ENDED OCTOBER 31,
	2007			2006			2005			2004			2003
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period	$	20.91		$	16.44		$	14.50		$	12.79		$	11.12
Income from investment operations:
Net investment income‡		0.35			0.22			0.21			0.13			0.03
Net realized and unrealized gain		4.89			4.49			1.87			1.62			1.64
Total income from investment operations		5.24			4.71			2.08			1.75			1.67
Less dividends from net investment income		(0.26	)		(0.24	)		(0.14	)		(0.04	)		–
Net asset value, end of period	$	25.89		$	20.91		$	16.44		$	14.50		$	12.79
Total Return†		25.31	%		28.99	%		14.40	%		13.73	%		15.02	%
Ratios to Average Net Assets(1):
Total expenses (before expense offset)		1.39	%(3)		1.37	%		1.34	%		1.26	%(2)		1.94	%(2)
Net investment income		1.31	%(3)		1.18	%		1.29	%		0.96	%(2)		0.30	%(2)
Supplemental Data:
Net assets, end of period, in millions	$	601		$	156		$	188		$	687		$	778
Portfolio turnover rate		39	%		68	%		64	%		89	%		89	%

  ‡  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)  Reflects overall Fund ratios for investment income and non-class specific expenses.

  (2)  If the Distributor had not rebated a portion of its fees to the Fund, the expense and net investment income ratios, before expense offset, would have been as follows:

PERIOD ENDED	EXPENSE RATIO			NET INVESTMENT INCOME RATIO
October 31, 2004		1.82	%		0.40	%
October 31, 2003		2.20			0.04

(3)  Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%.

See Notes to Financial Statements
27

Morgan Stanley European Equity Fund Inc.

Financial Highlights continued

	FOR THE YEAR ENDED OCTOBER 31,
	2007			2006			2005			2004			2003
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period	$	20.69		$	16.27		$	14.35		$	12.74		$	11.11
Income from investment operations:
Net investment income‡		0.12			0.06			0.07			0.00			0.00
Net realized and unrealized gain		4.90			4.45			1.85			1.62			1.63
Total income from investment operations		5.02			4.51			1.92			1.62			1.63
Less dividends from net investment income		(0.09	)		(0.09	)		–			(0.01	)		–
Net asset value, end of period	$	25.62		$	20.69		$	16.27		$	14.35		$	12.74
Total Return†		24.36	%		27.85	%		13.38	%		12.72	%		14.67	%
Ratios to Average Net Assets(1):
Total expenses (before expense offset)		2.16	%(2)		2.22	%		2.21	%		2.19	%		2.20	%
Net investment income		0.54	%(2)		0.33	%		0.42	%		0.03	%		0.04	%
Supplemental Data:
Net assets, end of period, in thousands	$	15,316		$	14,008		$	13,870		$	16,922		$	18,581
Portfolio turnover rate		39	%		68	%		64	%		89	%		89	%

  ‡  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)  Reflects overall Fund ratios for investment income and non-class specific expenses.

  (2)  Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%.

See Notes to Financial Statements
28

Morgan Stanley European Equity Fund Inc.

Financial Highlights continued

	FOR THE YEAR ENDED OCTOBER 31,
	2007			2006			2005			2004			2003
Class D Shares
Selected Per Share Data:
Net asset value, beginning of period	$	22.29		$	17.53		$	15.45		$	13.70		$	11.83
Income from investment operations:
Net investment income‡		0.39			0.26			0.24			0.20			0.13
Net realized and unrealized gain		5.25			4.79			1.99			1.69			1.74
Total income from investment operations		5.64			5.05			2.23			1.89			1.87
Less dividends from net investment income		(0.30	)		(0.29	)		(0.15	)		(0.14	)		–
Net asset value, end of period	$	27.63		$	22.29		$	17.53		$	15.45		$	13.70
Total Return†		25.55	%		29.19	%		14.50	%		13.86	%		15.81	%
Ratios to Average Net Assets(1):
Total expenses (before expense offset)		1.16	%(2)		1.22	%		1.22	%		1.19	%		1.20	%
Net investment income		1.54	%(2)		1.33	%		1.41	%		1.03	%		1.04	%
Supplemental Data:
Net assets, end of period, in thousands	$	4,773		$	5,149		$	5,225		$	6,896		$	42,454
Portfolio turnover rate		39	%		68	%		64	%		89	%		89	%

  ‡  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)  Reflects overall Fund ratios for investment income and non-class specific expenses.

  (2)  Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%.

See Notes to Financial Statements
29

Morgan Stanley European Equity Fund Inc.

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of
Morgan Stanley European Equity Fund Inc.:

We have audited the accompanying statement of assets and liabilities of Morgan Stanley European Equity Fund Inc. (the "Fund"), including the portfolio of investments, as of October 31, 2007, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2007, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley European Equity Fund Inc. as of October 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP
New York, New York
December 26, 2007

30

Morgan Stanley European Equity Fund Inc.

Director and Officer Information (unaudited)

Independent Directors:

Name, Age and Address of Independent Director	Position(s) Held with Registrant	Term of Office and Length of Time Served*	Principal Occupation(s) During Past 5 Years	Number of Portfolios in Fund Complex Overseen by Independent Director**		Other Directorships Held by Independent Director
Frank L. Bowman (62) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Directors 1177 Avenue of the Americas New York, NY 10036	Director	Since August 2006	President and Chief Executive Officer, Nuclear Energy Institute (policy organization) (since February 2005); Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); Chairperson of the Insurance Sub-Committee of the Valuation, Insurance and Compliance Committee (since February 2007); formerly, variously, Admiral in the U.S. Navy, Director of Naval Nuclear Propulsion Program and Deputy Administrator – Naval Reactors in the National Nuclear Security Administration at the U.S. Department of Energy (1996-2004). Honorary Knight Commander of the Most Excellent Order of the British Empire.		171	Director of the National Energy Foundation, the U.S. Energy Association, the American Council for Capital Formation and the Armed Services YMCA of the USA.
Michael Bozic (66) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Directors 1177 Avenue of the Americas New York, NY 10036	Director	Since April 1994	Private investor; Chairperson of the Valuation, Insurance and Compliance Committee (since October 2006); Director or Trustee of the Retail Funds (since April 1994) and the Institutional Funds (since July 2003); formerly, Chairperson of the Insurance Committee (July 2006-September 2006); Vice Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co.		173	Director of various business organizations.

31

Morgan Stanley European Equity Fund Inc.

Director and Officer Information (unaudited) continued

Name, Age and Address of
Independent Director Position(s)
Held with
Registrant Term of
Office and
Length of
Time Served* Principal Occupation(s)
During Past 5 Years Number of
Portfolios
in Fund
Complex
Overseen by
Independent
Director** Other Directorships
Held by Independent Director

Kathleen A. Dennis (54) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Directors 1177 Avenue of the Americas New York, NY 10036	Director	Since August 2006	President, Cedarwood Associates (mutual fund consulting) (since July 2006); Chairperson of the Money Market and Alternatives Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, Senior Managing Director of Victory Capital Management (1993-2006).	171	None.
Dr. Manuel H. Johnson (58) c/o Johnson Smick Group, Inc. 888 16th Street, N.W. Suite 740 Washington, D.C. 20006	Director	Since July 1991	Senior Partner, Johnson Smick International, Inc. (consulting firm); Chairperson of the Investment Committee (since October 2006) and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C) (international economic commission); formerly, Chairperson of the Audit Committee (July 1991-September 2006); Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury.	173	Director of NVR, Inc. (home construction); Director of Evergreen Energy.
Joseph J. Kearns (65) c/o Kearns & Associates LLC PMB754 23852 Pacific Coast Highway Malibu, CA 90265	Director	Since August 1994	President, Kearns & Associates LLC (investment consulting); Chairperson of the Audit Committee (since October 2006) and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since August 1994); formerly, Deputy Chairperson of the Audit Committee (July 2003-September 2006) and Chairperson of the Audit Committee of the Institutional Funds (October 2001-July 2003); CFO of the J. Paul Getty Trust.	174	Director of Electro Rent Corporation (equipment leasing), The Ford Family Foundation, and the UCLA Foundation.

32

Morgan Stanley European Equity Fund Inc.

Director and Officer Information (unaudited) continued

Name, Age and Address of
Independent Director Position(s)
Held with
Registrant Term of
Office and
Length of
Time Served* Principal Occupation(s)
During Past 5 Years Number of
Portfolios
in Fund
Complex
Overseen by
Independent
Director** Other Directorships
Held by Independent Director

Michael F. Klein (48) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Directors 1177 Avenue of the Americas New York, NY 10036	Director	Since August 2006	Managing Director, Aetos Capital, LLC (since March 2000) and Co-President, Aetos Alternatives Management, LLC (since January 2004); Chairperson of the Fixed-Income Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, Managing Director, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management, President, Morgan Stanley Institutional Funds (June 1998-March 2000) and Principal, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management (August 1997-December 1999).	171	Director of certain investment funds managed or sponsored by Aetos Capital, LLC. Director of Sanitized AG and Sanitized Marketing AG (specialty chemicals).
Michael E. Nugent (71) c/o Triumph Capital, L.P. 445 Park Avenue New York, NY 10022	Chairperson of the Board and Director	Chairperson of the Boards since July 2006 and Director since July 1991	General Partner, Triumph Capital, L.P. (private investment partnership); Chairperson of the Boards of the Retail Funds and Institutional Funds (since July 2006); Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly, Chairperson of the Insurance Committee (until July 2006); Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988).	173	None.

33

Morgan Stanley European Equity Fund Inc.

Director and Officer Information (unaudited) continued

Name, Age and Address of Independent Director	Position(s) Held with Registrant	Term of Office and Length of Time Served*	Principal Occupation(s) During Past 5 Years	Number of Portfolios in Fund Complex Overseen by Independent Director**		Other Directorships Held by Independent Director
W. Allen Reed (60) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Directors 1177 Avenue of the Americas New York, NY 10036	Director	Since August 2006	Chairperson of the Equity Sub-Commitee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, President and CEO of General Motors Asset Management; Chairman and Chief Executive Officer of the GM Trust Bank and Corporate Vice President of General Motors Corporation (August 1994-December 2005).		171	Director of GMAC (financial services) and Temple-Inland Industries (packaging, banking and forest products); Director of Legg Mason, Inc. and Director of the Auburn University Foundation.
Fergus Reid (75) c/o Lumelite Plastics Corporation 85 Charles Colman Blvd. Pawling, NY 12564	Director	Since June 1992	Chairman of Lumelite Plastics Corporation; Chairperson of the Governance Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since June 1992).		174	Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by J.P. Morgan Investment Management Inc.

34

Morgan Stanley European Equity Fund Inc.

Director and Officer Information (unaudited) continued

Interested Director:

Name, Age and Address of Interested Director	Position(s) Held with Registrant	Term of Office and Length of Time Served*	Principal Occupation(s) During Past 5 Years	Number of Portfolios in Fund Complex Overseen by Interested Director**		Other Directorships Held by Interested Director
James F. Higgins (59) c/o Morgan Stanley Trust Harborside Financial Center Plaza Two Jersey City, NJ 07311	Director	Since June 2000	Director or Trustee of the Retail Funds (since June 2000) and the Institutional Funds (since July 2003); Senior Advisor of Morgan Stanley (since August 2000).		173	Director of AXA Financial, Inc. and The Equitable Life Assurance Society of the United States (financial services).

*  This is the earliest date the Director began serving the funds advised by Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the "Retail Funds") or the funds advised by Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP LP (the "Institutional Funds").

  **  The Fund Complex includes all open-end and closed-end funds (including all of their portfolios) advised by the Investment Adviser and any funds that have an investment adviser that is an affiliated person of the Investment Adviser (including, but not limited to, Morgan Stanley Investment Management Inc.).

35

Morgan Stanley European Equity Fund Inc.

Director and Officer Information (unaudited) continued

Executive Officers:

Name, Age and Address of Executive Officer	Position(s) Held with Registrant	Term of Office and Length of Time Served*	Principal Occupation(s) During Past 5 Years
Ronald E. Robison (68) 522 Fifth Avenue New York, NY 10036	President and Principal Executive Officer	President since September 2005 and Principal Executive Officer since May 2003	President (since September 2005) and Principal Executive Officer (since May 2003) of funds in the Fund Complex; President (since September 2005) and Principal Executive Officer (since May 2003) of the Van Kampen Funds; Managing Director, Director and/or Officer of the Investment Adviser and various entities affiliated with the Investment Adviser; Director of Morgan Stanley SICAV (since May 2004). Formerly, Executive Vice President (July 2003-September 2005) of funds in the Fund Complex and the Van Kampen Funds; President and Director of the Institutional Funds (March 2001-July 2003); Chief Administrative Officer of the Investment Adviser; Chief Administrative Officer of Morgan Stanley Services Company Inc.
J. David Germany (53) Morgan Stanley Investment Management Limited 20 Bank Street Canary Wharf, London, England E14 4AD	Vice President	Since February 2006	Managing Director and (since December 2005) Chief Investment Officer – Global Fixed Income of Morgan Stanley Investment Management; Managing Director and Director of Morgan Stanley Investment Management Limited; Vice President of the Retail Funds and Institutional Funds (since February 2006).
Dennis F. Shea (54) 522 Fifth Avenue New York, NY 10036	Vice President	Since February 2006	Managing Director and (since February 2006) Chief Investment Officer – Global Equity of Morgan Stanley Investment Management; Vice President of the Retail Funds and Institutional Funds (since February 2006). Formerly, Managing Director and Director of Global Equity Research at Morgan Stanley.
Amy R. Doberman (45) 522 Fifth Avenue New York, NY 10036	Vice President	Since July 2004	Managing Director and General Counsel, U.S. Investment Management of Morgan Stanley Investment Management (since July 2004); Vice President of the Retail Funds and Institutional Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); Secretary (since February 2006) and Managing Director (since July 2004) of the Investment Adviser and various entities affiliated with the Investment Adviser. Formerly, Managing Director and General Counsel – Americas, UBS Global Asset Management (July 2000-July 2004).
Carsten Otto (43) 522 Fifth Avenue New York, NY 10036	Chief Compliance Officer	Since October 2004	Managing Director and Global Head of Compliance for Morgan Stanley Investment Management (since April 2007); and Chief Compliance Officer of Morgan Stanley Retail Funds and Institutional Funds (since October 2004). Formerly, U.S. Director of Compliance (October 2004-April 2007) and Assistant Secretary and Assistant General Counsel of the Retail Funds.
Stefanie V. Chang Yu (40) 522 Fifth Avenue New York, NY 10036	Vice President	Since December1997	Executive Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Vice President of the Retail Funds (since July 2002) and the Institutional Funds (since December 1997). Formerly, Secretary of various entities affiliated with the Investment Adviser.

36

Morgan Stanley European Equity Fund Inc.

Director and Officer Information (unaudited) continued

Name, Age and Address of Executive Officer	Position(s) Held with Registrant	Term of Office and Length of Time Served*	Principal Occupation(s) During Past 5 Years
Francis J. Smith (42) c/o Morgan Stanley Trust Harborside Financial Center Plaza Two Jersey City, NJ 07311	Treasurer and Chief Financial Officer	Treasurer since July 2003 and Chief Financial Officer since September 2002	Executive Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Treasurer and Chief Financial Officer of the Retail Funds (since July 2003). Formerly, Vice President of the Retail Funds (September 2002-July 2003).
Mary E. Mullin (40) 522 Fifth Avenue New York, NY 10036	Secretary	Since June 1999	Executive Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Secretary of the Retail Funds (since July 2003) and the Institutional Funds (since June 1999).

* This is the earliest date the Officer began serving the Retail Funds or Institutional Funds.

2007 Federal Tax Notice (unaudited)
For Federal income tax purposes, the following information is furnished with respect to the Fund's earnings for its taxable year ended October 31, 2007. When distributed, certain earnings may be subject to a maximum tax rate of 15% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund designated up to a maximum of $12,676,791 as taxable at this lower rate. The Fund intends to pass through foreign tax credits of $1,245,845, and has derived net income from sources within foreign countries amounting to $7,994,505.
In January, the Fund provides tax information to shareholders for the preceding calendar year.

37

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Directors

Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid

Officers

Michael E. Nugent
Chairperson of the Board

Ronald E. Robison
President and Principal Executive Officer

J. David Germany
Vice President

Dennis F. Shea
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

Legal Counsel

Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019

Counsel to the Independent Directors

Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036

Investment Adviser

Morgan Stanley Investment Advisors Inc.
522 Fifth Avenue
New York, New York 10036

Sub-Adviser

Morgan Stanley Investment Management Limited
20 Bank Street, Canary Wharf
London, England E14 4AD

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.

Morgan Stanley Distributors Inc., member FINRA.

© 2007 Morgan Stanley

MORGAN STANLEY FUNDS

Morgan Stanley
European Equity
Fund Inc.

Annual Report

October 31, 2007

EUGANN
IU07–05456P–Y1/07

Item 2.Code of Ethics.

(a)The Fund has adopted a code of ethics (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party.

(b)No information need be disclosed pursuant to this paragraph.

(c)Not applicable.

(d)Not applicable.

(e)Not applicable.

(f)

(1)The Fund’s Code of Ethics is attached hereto as Exhibit 12 A.

(2)Not applicable.

(3)Not applicable.

Item 3. Audit Committee Financial Expert.

The Fund’s Board of Trustees has determined that Joseph J. Kearns, an “independent” Trustee, is an “audit committee financial expert” serving on its audit committee. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification

Item 4. Principal Accountant Fees and Services.

(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:

2007

	Registrant			Covered Entities(1)
Audit Fees	$	42,450		N/A
Non-Audit Fees
Audit-Related Fees	$	—	(2)	$	5,041,000	(2)
Tax Fees	$	7,476	(3)	$	761,000	(4)
All Other Fees	$			$
Total Non-Audit Fees	$	7,476		$	5,802,000
Total	$	49,926		$	5,802,000

2006

	Registrant			Covered Entities(1)
Audit Fees	$	42,100		N/A
Non-Audit Fees
Audit-Related Fees	$	531	(2)	$	5,217,590	(2)
Tax Fees	$	6,980	(3)	$	1,472,895	(4)
All Other Fees	$			$		(5)
Total Non-Audit Fees	$	7,511		$	6,690,485
Total	$	49,611		$	6,690,485

N/A- Not applicable, as not required by Item 4.

(1)	Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant.
(2)	Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities’ and funds advised by the Adviser or its affiliates, specifically data verification and agreed-upon procedures related to asset securitizations and agreed-upon procedures engagements.
(3)	Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the preparation and review of the Registrant’s tax returns.
(4)	Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the review of Covered Entities’ tax returns.
(5)	All other fees represent project management for future business applications and improving business and operational processes.

(e)(1) The audit committee’s pre-approval policies and procedures are as follows:

APPENDIX A

AUDIT COMMITTEE

AUDIT AND NON-AUDIT SERVICES

PRE-APPROVAL POLICY AND PROCEDURES

OF THE

MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS

AS ADOPTED AND AMENDED JULY 23, 2004,(1)

1.Statement of Principles

The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor’s independence from the Fund.

The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee’s administration of the engagement of the independent auditor. The SEC’s rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee (“general pre-approval”); or require the specific pre-approval of the Audit Committee or its delegate (“specific pre-approval”). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee.

The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations.

(1)This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the “Policy”), adopted as of the date above, supersedes and replaces all prior versions that may have been adopted from time to time.

The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee’s responsibilities to pre-approve services performed by the Independent Auditors to management.

The Fund’s Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors’ independence.

2.Delegation

As provided in the Act and the SEC’s rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.

3.Audit Services

The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund’s financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items.

In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.

The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

4.Audit-related Services

Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund’s financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC’s rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters

not classified as “Audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR.

The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

5.Tax Services

The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor’s independence, and the SEC has stated that the Independent Auditors may provide such services.

Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

6.All Other Services

The Audit Committee believes, based on the SEC’s rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC’s rules on auditor independence.

The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

7.Pre-Approval Fee Levels or Budgeted Amounts

Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services.

8.Procedures

All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund’s Chief Financial Officer and must include a detailed description of the services to be

rendered. The Fund’s Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund’s Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.

The Audit Committee has designated the Fund’s Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund’s Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund’s Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund’s Chief Financial Officer or any member of management.

9.Additional Requirements

The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor’s independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence.

10.Covered Entities

Covered Entities include the Fund’s investment adviser(s) and any entity controlling, controlled by or under common control with the Fund’s investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund’s audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include:

Morgan Stanley Retail Funds

Morgan Stanley Investment Advisors Inc.

Morgan Stanley & Co. Incorporated

Morgan Stanley DW Inc.

Morgan Stanley Investment Management Inc.

Morgan Stanley Investment Management Limited

Morgan Stanley Investment Management Private Limited

Morgan Stanley Asset & Investment Trust Management Co., Limited

Morgan Stanley Investment Management Company

Van Kampen Asset Management

Morgan Stanley Services Company, Inc.

Morgan Stanley Distributors Inc.

Morgan Stanley Trust FSB

Morgan Stanley Institutional Funds

Morgan Stanley Investment Management Inc.

Morgan Stanley Investment Advisors Inc.

Morgan Stanley Investment Management Limited

Morgan Stanley Investment Management Private Limited

Morgan Stanley Asset & Investment Trust Management Co., Limited

Morgan Stanley Investment Management Company

Morgan Stanley & Co. Incorporated

Morgan Stanley Distribution, Inc.

Morgan Stanley AIP GP LP

Morgan Stanley Alternative Investment Partners LP

(e)(2)  Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee’s pre-approval policies and procedures (attached hereto).

(f)Not applicable.

(g)See table above.

(h)The audit committee of the Board of Trustees has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors’ independence in performing audit services.

Item 5.Audit Committee of Listed Registrants.

(a)The Fund has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:

Joseph Kearns, Michael Nugent and Allen Reed.

(b) Not applicable.

Item 6. Schedule of Investments

Refer to Item 1.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Applicable only to reports filed by closed-end funds.

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 only to reports filed by closed-end funds.

Item 10. Submission of Matters to a Vote of Security Holders

Not applicable.

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) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto.

(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.

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

December 20, 2007

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

December 20, 2007

/s/ Francis Smith

Francis Smith

Principal Financial Officer

December 20, 2007