MEXICO FUND INC, N-30D, 1998-12-28

MEXICO FUND INC
N-30D, 1998-12-28

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THE MEXICO FUND, INC.
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DIRECTORS:
Juan Gallardo T. -- Chairman
Philip Caldwell
Jose Luis Gomez Pimienta
Claudio X. Gonzalez
Robert L. Knauss
Agustin Santamarina V.
Jaime Serra Puche

OFFICERS:
Jose Luis Gomez Pimienta -- President
Samuel Garcia-Cuellar -- Secretary
Allan S. Mostoff -- Assistant Secretary
Sander M. Bieber -- Assistant Secretary
Carlos H. Woodworth -- Treasurer

INVESTMENT ADVISER --
Impulsora del Fondo Mexico, S.A. de C.V.

CUSTODIAN --
Bancomer, S.A.
Merrill Lynch Pierce Fenner & Smith Inc.

TRANSFER AGENT AND REGISTRAR --
American Stock Transfer & Trust Company

COUNSEL --
Dechert Price & Rhoads
Creel, Garcia-Cuellar y Muggenburg, S.C.

AUDITORS --
Arthur Andersen

This report, including the financial statements herein, is transmitted to
shareholders of The Mexico Fund, Inc. for their information. It is not a
prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in the report.
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THE MEXICO
FUND, INC.
----------------------
Annual Report
October 31, 1998
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www.themexicofund.com
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The Mexico Fund, Inc. is a diversified closed-end management investment
company with the investment objective of long-term capital appreciation
through investments in securities, primarily equity, listed on the Mex-
ican Stock Exchange. The Fund provides a vehicle to investors who wish
to invest in Mexican companies through a managed diversified portfolio
as part of their overall investment program.

.. Mexican economic activity, measured by the gross domestic product (GDP),
grew at a rate of 5.3% during the first nine months of calendar 1998.

.. The rate of exchange of the Mexican peso against the US dollar increased 20%
during the fiscal year to end at Ps. 10.074.

.. Mexico's inflation rate increased as a consequence of the higher exchange
rate. At the end of October, the accumulated 12-month inflation rate was
16.7%.

.. Interest rates on the 28-day Cetes (treasury bills) also increased recently,
from 20% at the end of July 1998 to 33% at the end of October 1998.

.. Amendments to existing legislation were passed by the Mexican Chambers of
Deputies and Senators to address on a comprehensive basis the financial sys-
tem bailout program, previously known as Fobaproa. A new savings insurance
institution will replace Fobaproa.

.. The financial package approved also incorporates a new relief program ad-
dressed to reduce the payment burden of small and medium bank borrowers.

.. The market price and net asset value (NAV) per share of the Fund declined
36.7% and 31.4%, respectively, during the Fund's fiscal year 1998, and the
discount of the per share market price to NAV ended October at 27.5%.

.. The Fund's Board of Directors declared a dividend of 26.9 cents per share,
payable on January 29, 1999, to shareholders of record on December 31, 1998.
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THE MEXICO FUND, INC.
TO OUR SHAREHOLDERS:
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ECONOMIC ENVIRONMENT.

The fiscal year which ended on October 31, 1998 ranks among the most turbulent
ever for Mexican and international financial markets. Despite the turmoil in
capital markets, the Mexican economy continued to move forward dynamically.
During the three months ending in September, the Mexican GDP expanded 5.0%,
bringing growth for the first nine months of 1998 to 5.3%. The main engine of
the economy continued to be the domestic sector, and in particular private con-
sumption and investment. During the 1998 fiscal year, the Fund directed a sig-
nificant portion of its investments to listed companies in these sectors of the
economy. The Mexican authorities estimate that in 1998 and 1999 the GDP will
grow by 4.2% and 3.0%, respectively.

The preservation of healthy public sector finances remains a priority for the
Mexican Government. Three reductions to the public sector budget were imple-
mented during 1998 to compensate for the loss of oil-related income. Authori-
ties estimate the public sector deficit to represent 1.42% and 1.25% of
Mexico's GDP during 1998 and 1999, respectively, and several fiscal measures to
achieve this level in 1999 have already been submitted to the Mexican Congress
for approval.

The rate of exchange of the Mexican peso against the US dollar ended October
1998 at a level of Ps. 10.074, which represents an increase of 20% from the
previous fiscal year end. Even though this indicator remained at levels of
around Ps. 8.80 during most of the Fund's fiscal 1998, the international finan-
cial turmoil experienced since the second half of August 1998 resulted in a
further devaluation of the peso. The Mexican authorities have stated that the
current floating foreign exchange policy will continue.

Mexico's inflation rate was in decline until May 1998 when it reached an
annualized level of 15%. However, the annual inflation rate has recently re-
turned to levels near 17%, mainly because of the devaluation of the peso. The
authorities expect Mexico's annual inflation rate to be 18% this year and 13%
in 1999.

In an effort to stimulate investments in peso-denominated instruments, and as
a consequence of the volatility experienced by international financial markets
and a tighter monetary policy, Mexico's interest rates also increased recently.
The yield on the 28-day Cetes (treasury bills) ended October 1998 at 33%, com-
pared with 21% one year earlier.

THE BOLSA AND THE FUND'S PERFORMANCE.

The Fund's 1998 fiscal year was a difficult one. Several international events
contributed significantly to the Fund's negative performance during fiscal
1998. The beginning of the Fund's fiscal year coincided with the Asian economic
crisis. A general withdrawal of resources from emerging markets looking for
safety affected financial markets around the world. Although Mexico has sounder
fundamentals than many other emerging countries, its financial markets were
also affected by the flight from those markets. In addition, the delay by the
Mexican Chamber of Deputies in approving the banking system bailout package
created concerns about Mexican markets. The bailout package was finally ap-
proved by the Chamber of Deputies and the Senate in December. The proposal was
supported by the PRI (the President's party) and the PAN (right of center par-
ty), but was opposed by the PRD (left of center party) and some members of the
PRI and PAN.

The approved version of the bailout package incorporates most of the fundamen-
tal components of the original proposal filed by the Executive Branch nine
months ago, but also reflects the input of members of the PAN. Fobaproa (span-
ish acronym for Banking Fund for the Protection of Depositors), will be re-
placed by a new Bank Savings Insurance Institute or IPAB. The Government, the
Congress and the Mexican Bankers Association have also announced a new debtor
support program aimed at bringing relief to qualified small and medium-sized
borrowers whose loans are being serviced on time. Non-performing borrowers will
be given the opportunity to qualify for this support program if they bring
their loans current. Progressively, over several
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years, IPAB will limit deposit insurance to an approximate present level of
around US$100,000. Fobaproa coverage was unlimited.

The market price and NAV per share of the Fund declined 36.7% and 31.4%, re-
spectively, during the 1998 fiscal year, compared with a decrease of 27% for
the Bolsa index. The fundamental reason for the relatively poor performance of
the Fund in relation to the Bolsa index is the 20% increase in the price of
Telmex, which represents around 28% of the Bolsa index and less than 7% of the
Fund's assets. Conversely, a decline in the price of Telmex would have a
greater negative effect on the performance of the Bolsa index than on the per-
formance of the Fund. Because the Fund is a diversified investment company,
its exposure to any single issuer is limited. The Fund's diversification
strategy has been successful throughout most of its existence and management
believes that this strategy is in the best interests of shareholders.

The discount between the Fund's market price and NAV per share ended this
fiscal year at a level of 27.5%. Because of the importance of this matter, the
Board of Directors discusses this issue in a separate letter to shareholders
included with this report. The Board will continue to monitor the discount.

Fund shares continued to register high levels of liquidity. During the 1998
fiscal year, a total of 62.6 million shares traded on all US consolidated mar-
kets, equivalent to 1.2 times the total number of shares outstanding.

PORTFOLIO STRATEGY

In order to take advantage of attractive investment opportunities related to
the dynamic performance of the domestic economy, during the 1998 fiscal year
the Fund increased its exposure to the construction, housing, entertainment,
consumer goods and retail sectors. The Fund also invested in two companies
dedicated to agrobiotechnology and insurance activities that have, in the Ad-
viser's view, interesting growth potential. On the other hand, the Fund re-
duced its exposure to financial groups and only one institution in this sector
remains in the Fund's portfolio. The financial rescue package, mentioned pre-
viously, will still require substantial infu- sions of new capital into sev-
eral financial groups, which may now be funded 100% from foreign sources, in-
cluding the largest banks. This process may result in the consolidation of
various banking groups. The Fund also reduced its investments in some compa-
nies that produce and export commodities as well as in some others that face
specific adverse circumstances.

In addition to the Fund's portfolio composition at the end of October 1998,
we have included for your convenience a basic description of the Fund's top
ten holdings, which at that time represented 60.6% of its total net assets.

SECURITIES LENDING PROGRAM

The Fund commenced a Securities Lending Program during August 1998 in order
to generate additional net investment income. The Fund's Board of Directors
appointed Merrill Lynch Portfolio Services, Inc. as the securities lending
agent under the Program. The Fund's equity securities currently on loan are
indicated in a note to the Schedule of Investments included in this Report. We
will be reporting to you regularly about the status and development of the Se-
curities Lending Program.

YEAR 2000 ISSUE

Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, may not cor-
rectly process the change from "99" to "00" on January 1, 2000, and may not be
able to perform necessary functions. The Year 2000 issue affects virtually all
companies and organizations on a worldwide basis.

The Adviser has informed the Fund that it is implementing steps intended to
ensure that the Adviser's computer systems are capable of processing informa-
tion on or after January 1, 2000. In addition, the Fund is inquiring with
third parties to assess the adequacy of their Year 2000 plans and compliance
efforts. The Fund has prepared a contingency plan intended to provide for pos-
sible Year 2000 occur-
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rences if, and as, the Fund begins to experience system and computer difficul-
ties. In addition, the Fund is trying to ensure that third party noncompli-
ance, should it occur, will not materially affect the Fund's operations. The
Fund does not currently anticipate that the Year 2000 issue will have an ad-
verse effect on the Adviser's ability to continue to provide the services it
currently provides to the Fund.

Companies in which the Fund invests could be adversely affected by the Year
2000 issue, but the Fund cannot predict the consequential effect on its in-
vestment return. To the extent the impact on a portfolio holdings is negative,
the Fund's investment return could be adversely affected.

Although the Fund has been inquiring with third parties to assess their Year
2000 preparedness, there can be no assurance that the Fund will not experience
adverse effects if certain Year 2000 problems arise. For example, if the Mexi-
can Stock Exchange or the Mexican central securities depository experiences
interruptions in operations related to the Year 2000, the Fund may be unable
to engage in certain securities transactions or to obtain current exchange
quotations on portfolio securities. Similarly, the efficient operations of the
Fund and the Adviser are significantly dependent on the technology infrastruc-
ture of Mexico, including telephone and electrical systems. Year 2000 problems
related to these systems are outside of the control of either the Fund or the
Adviser. The Fund also relies on third party services for transfer agency,
custody, brokerage, and securities lending services, among others. Despite the
Fund's continuing efforts to assess the Year 2000 readiness of these service
providers, there can be no assurance that such service providers will not ex-
perience Year 2000 problems that may adversely affect the Fund.

DECLARATION OF DIVIDEND

The Fund's Board of Directors has declared a dividend of 26.9 cents per share
to shareholders of record on December 31, 1998, payable on January 29, 1999.
This dividend is comprised entirely of net investment income and is not sub-
ject to any Mexican withholding tax.

DIVIDEND REINVESTMENT PLAN

The Fund's Dividend Reinvestment Plan (the Plan) provides a convenient way to
increase your holdings in the Common Stock of the Fund through the reinvest-
ment of net investment income and capital gain distributions. UNDER THE TERMS
OF THE PLAN, FUND SHAREHOLDERS ARE AUTOMATICALLY ENROLLED AS PARTICIPANTS IN
THE PLAN. IF YOU DO NOT WISH TO PARTICIPATE IN THE PLAN, PLEASE CONTACT THE
PLAN AGENT. Upon any termination of participation under the Plan, the Plan
Agent will cause a share certificate for the appropriate number of full shares
to be delivered to the participant, and a cash adjustment for any fractional
share. At a shareholder's request, the Plan Agent will sell the participant's
shares and remit any proceeds to the participant, net of brokerage commis-
sions. Shareholders who do not participate in the Plan will receive all dis-
tributions in cash. The Plan provides a convenient way to increase your hold-
ings in the Common Stock of the Fund through the reinvestment of distribu-
tions.

Under the terms of the Plan, whenever the Fund declares a distribution, Plan
participants will receive their distribution entirely in shares of Common
Stock purchased either in the open market or from the Fund. If, on the date a
distribution becomes payable or such other date as may be specified by the
Fund's Board of Directors (the valuation date), the market price of the Common
Stock plus estimated brokerage commissions is equal to or exceeds the NAV per
share of Common Stock, the Plan Agent will invest the distribution in newly
issued shares of Common Stock, which will be priced at NAV. If on the valua-
tion date, the market price of the Common Stock plus estimated brokerage com-
missions is lower than the NAV per share, the Plan Agent will buy Common Stock
in the open market. As a participant in the Plan, you will be charged a pro
rata portion of brokerage commissions on all open market purchases.

If your shares are registered in the name of a broker-dealer or any other
nominee, you must contact
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the broker-dealer or other nominee regarding his or her status under the Plan,
including whether such broker-dealer or nominee will participate in the Plan on
your behalf. Generally, shareholders receiving Common Stock under the Plan will
be treated as having received a distribution equal to the amount payable to
them in cash as a distribution had the shareholder not participated in the
Plan.

If you have any questions concerning the Plan or would like a copy of the Plan
brochure, please contact the Plan Agent:

American Stock Transfer & Trust Company
Attention: Dividend Reinvestment Department
40 Wall Street
New York, NY 10005
(212) 936-5100

COMMUNICATIONS WITH SHAREHOLDERS

For the benefit of the Fund's shareholders and the investing public, the Fund
has created a Web Site that contains, among other information, a daily update
of the Fund's NAV per share, market price, discount or premium, and total net
asset level. We invite shareholders and individuals interested in information
about the Fund to consult the Fund's Web Site at the following Internet ad-
dress:

WWW.THEMEXICOFUND.COM

The Adviser prepares a Monthly Summary Report with information relating to the
Fund, as well as other indicators of the Mexican economy and the Bolsa. This
report is available, free of charge, on the Fund's Web Site, or by mail, if re-
quested by writing to the Adviser at:

IMPULSORA DEL FONDO MEXICO, S.A. DE C.V.
77 ARISTOTELES ST., 3RD FLOOR
11560, MEXICO, D.F.
MEXICO

Additionally, the Fund has made arrangements to improve communications with
Fund shareholders and the investing public through a toll free tele-
phone number and a liaison office. Upon request, this office will be pleased to
provide you with the Fund's current NAV per share, quarterly reports and other
materials available from the Fund. The office will also be able to direct your
inquiries regarding other Fund matters to the appropriate firms or individuals.
Please refer your information requests to:

MORROW & CO., INC.
14755 Preston Road--Suite 725
One Signature Place
Dallas, TX 75240
(800) 224-4134

The Fund has also recently subscribed to the Annual Report Service of the most
important financial newspapers. Our subscription to this service will enable
the Fund to disseminate in a cost-effective manner its annual and quarterly re-
ports to potential investors.

ANNUAL SHAREHOLDER MEETING

The Fund's Annual Meeting of Shareholders will be held on February 26, 1999 at
2:00 p.m. at the offices of Dechert Price & Rhoads, located at 30 Rockefeller
Plaza, 23rd Floor, New York, NY 10112. Shareholders of record on December 22,
1998 will be entitled to vote at and attend the meeting. Accompanying this 1998
Annual Report is the notice of the meeting together with the corresponding
proxy materials. We encourage all Fund shareholders who do not plan to attend
the meeting to vote by proxy and in this way help reduce the Fund's expenses of
solicitation.

The Directors and Officers of your Fund extend to all of you their best wishes
for the Holiday Season and for a prosperous 1999.

JOSE LUIS GOMEZ JUAN GALLARDO T.
PIMIENTA Chairman of the Board
President
December 22,
1998.
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GERMAN INVESTORS ARE ADVISED THAT THE FUND'S GERMAN DOMESTIC TAX REPRESENTATIVE
IS:
ARTHUR ANDERSEN
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
Mergenthalerallee 10-12
65760 Eschborn/Frankfurt/M.
Postfach 53 23
65728 Eschborn/Frankfurt/M.
Germany
Telefon 06196-99-6264
Telefax 06196-99-6419

SHAREHOLDER INFORMATION

Daily NAV and market price for the Fund's shares are available on the
Fund's Web Site at:
WWW.THEMEXICOFUND.COM
Weekly comparative NAV and market price information about the Fund's
shares is published in The Wall Street Journal, The New York Times and
other newspapers in a table called "Closed-End Funds". Daily market price
for the Fund's shares is published in the New York Stock Exchange Composite
Transactions under the designations "MexFd" or "MexicoFd". The Fund's New
York Stock Exchange trading symbol is MXF. The Fund's shares are also
listed and traded on the Third Section ("Freiverkehr") of the Stuttgart
Stock Exchange.

For current NAV information or copies of reports, call (800) 224-4134.
For information about dividends and shareholder accounts, call Shareholder
Services at (212) 936-5100.

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DESCRIPTION OF THE FUND'S TEN LARGEST HOLDINGS AS OF OCTOBER 31, 1998

1. CIFRA, S.A. DE C.V. (9.24%)

Cifra is the largest chain of retail stores in Mexico and has the dominant
market position in the commercial sector of the country. The company is a sub-
sidiary of the US firm Wal-Mart Stores, Inc. At the end of 1997, Cifra had a
total of 388 units in Mexico, which included supermarkets, retail stores and
restaurants.

2. GRUPO MODELO, S.A. DE C.V. (8.47%)

Founded in 1925, Grupo Modelo is the leader in the production, distribution
and sale of beer in Mexico with a market share in the domestic and export mar-
kets of 57.9%. The group currently owns 10 brand names, including Corona, the
most popular beer imported from Mexico, Victoria and Modelo. The company also
imports and distributes in Mexico brand name beer produced by its partner
Anheuser-Busch, including Budweiser and Bud Light.

3. KIMBERLY CLARK DE MEXICO, S.A. DE C.V. (7.97%)

The company is dedicated to the manufacturing, marketing and sale of paper
and consumer products for personal care. Kimberly has the leading market posi-
tion in every product category where it competes. Products sold by the company
include tissue paper, diapers, feminine care products, notebooks, office paper
and specialty products.

4. GRUPO INDUSTRIAL BIMBO, S.A. DE C.V. (6.69%)

Bimbo is the most important food producer in Mexico and one of the largest in
Latin America. The company is dedicated to the production, distribution and
sale of bread, cookies, cakes, candies, chocolates, snacks, tortillas and
processed foods. Bimbo is the leader in the Mexican bread market and has the
largest distribution network in the country. Since 1989, Bimbo has expanded
its operations to the United States and Central and South America.

5. TELEFONOS DE MEXICO, S.A. DE C.V. (6.51%)

Telmex is the major telecommunications company in Mexico and provides local
telephone, domestic and international long-distance, wireless, data, and video
transmission services. Since its privatization in 1990, Telmex has aggres-
sively modernized and has emerged as a leader in telecommunications services
in Latin America.

6. FOMENTO ECONOMICO MEXICANO, S.A. DE C.V. (5.14%)

Femsa is the largest, totally integrated producer of soft drinks and beer in
Mexico, and exports its products worldwide. Femsa also operates the largest
chain of convenience stores in Mexico (Oxxo), produces packaging materials and
is an important bottler in Argentina. Brand names produced by Femsa include
Sol beer and Coca Cola, among others.

7. DESC, S.A. DE C.V. (4.87%)

Desc is one of Mexico's largest holding groups and focuses its activities in
five business sectors: auto parts, chemicals, consumer products, food and real
estate. The company's diversification has enabled it to compensate for the ef-
fects of the natural cycles of the business sectors in which it participates.
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8. CEMEX, S.A. DE C.V. (4.11%)

Cemex is the largest cement company in the Americas and one of the three
largest in the world. The company and its subsidiaries are dedicated to the
production, distribution, commercialization and sale of cement, concrete, mix,
clinker and value added products. Cemex operates in 22 countries around the
world and has commercial relations with 60 countries. Cemex is the leader in
the cement markets of Mexico, Spain, Venezuela, Panama and the Dominican Re-
public and has important market presence in the Caribbean, Philippines and the
southwest region of the United States.

9. GRUPO CARSO, S.A. DE C.V. (3.98%)

Carso is a diversified holding company with interests in key sectors of the
Mexican economy such as telecommunications, consumer goods, retail, construc-
tion, autoparts and mining. The company holds large market shares in most of
the businesses in which it participates and its business strategy includes ac-
quiring controlling interests in undervalued companies to maximize their long-
term growth and value.

10. APASCO, S.A. DE C.V. (3.62%)

The Apasco Group is an organization founded in 1928, dedicated to the produc-
tion and commercialization of cement, ready-mixed concrete, aggregates and
other related products and services. Apasco is the second largest producer of
cement and ready-mixed concrete in Mexico and the company also has market
presence in Honduras and El Salvador. Holderbank, the world's leading producer
of cement, holds a majority position in Apasco.
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THE MEXICO FUND, INC.
SCHEDULE OF INVESTMENTS AS OF OCTOBER 31, 1998
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<TABLE>
<CAPTION>
PERCENT
SHARES VALUE OF NET
INDUSTRIES HELD COMMON STOCK (92.52%) SERIES (NOTE 1) ASSETS
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<C> <C> <C> <S> <C> <C> <C>
AGROBIOTECHNOLOGY (a) 1,500,000 Empresas la Moderna,
S.A. de C.V............ A $ 8,933,889 1.14%
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BEVERAGES 8,000,000 Coca-Cola Femsa, S.A. de
C.V.................... L 13,023,625 1.66
(c) 15,570,000 Fomento Economico
Mexicano, S.A. de C.V.. UBD 40,261,912 5.14
7,200,000 Grupo Continental, S.A.. * 17,653,365 2.25
(c) 31,415,000 Grupo Modelo, S.A. de
C.V.................... C 66,422,424 8.47
5,045,000 Sistema Argos, S.A...... B 4,857,703 0.62
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142,219,029 18.14
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CEMENT INDUSTRY (c) 7,720,000 Apasco, S.A. de C.V..... * 28,354,179 3.62
(c) 13,474,000 Cemex, S.A. de C.V...... CPO 32,233,810 4.11
5,000,000 Corporacion Moctezuma,
S.A. de C.V............ B2 4,516,577 0.58
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65,104,566 8.31
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COMMUNICATIONS 10,036,994 Carso Global Telecom,
S.A. de C.V............ A1 27,398,981 3.50
(a) 1,268,200 Grupo Televisa, S.A..... CPO 17,246,714 2.20
(c) 9,500,000 Telefonos de Mexico,
S.A. de C.V............ A 24,848,620 3.17
(c) 10,000,000 Telefonos de Mexico,
S.A. de C.V............ L 26,206,075 3.34
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95,700,390 12.21
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CONSTRUCTION & HOUSING (a) 2,102,000 Consorcio ARA, S.A. de
C.V.................... * 4,632,162 0.59
(a) 2,000,000 Consorcio Hogar, S.A. de
C.V.................... B 956,919 0.12
(a)(c) 2,000,000 Corporacion Geo, S.A. de
C.V.................... B 3,474,290 0.44
11,920,000 Empresas ICA, Sociedad
Controladora, S.A. de
C.V.................... * 10,412,547 1.33
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19,475,918 2.48
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CONSUMER PRODUCTS Kimberly-Clark de
FOR PERSONAL CARE 21,250,000 Mexico, S.A. de C.V.... A 62,437,959 7.97
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ENTERTAINMENT (a)(c) 3,748,000 Corporacion
Interamericana de
Entretenimiento, S.A.
de C.V. ............... B 7,515,346 0.96
(a) 1,000,000 Corporacion
Interamericana de
Entretenimiento, S.A.
de C.V. ............... L 1,488,982 0.19
(a) 1,710,000 ECE, S.A. de C.V........ * 848,720 0.11
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9,853,048 1.26
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FINANCIAL GROUPS 4,077,000 Grupo Financiero
Inbursa, S.A. de C.V... B 7,171,376 0.91
(a)(b) -- Grupo Financiero
Inverlat Recovery
Trust.................. -- 0.00
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7,171,376 0.91
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FOOD 6,000,000 Pasteleria Francesa,
S.A. de C.V............ * 1,357,951 0.17
(a) 2,930,000 Grupo Azucarero Mexico,
S.A. de C.V............ B 639,865 0.08
(c) 31,079,000 Grupo Industrial Bimbo,
S.A. de C.V............ A 52,446,198 6.69
17,000,000 Grupo Industrial Maseca,
S.A. de C.V............ B 13,837,602 1.77
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68,281,616 8.71
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HOLDINGS (c) 10,150,001 Alfa, S.A. de C.V....... A 27,203,695 3.47
2,095,000 Cydsa, S.A.............. A 2,075,452 0.26
8,945,950 Desc, S.A. de C.V....... A 8,347,422 1.07
32,530,950 Desc, S.A. de C.V....... B 29,773,214 3.80
8,980,000 Grupo Carso, S.A. de
C.V.................... A1 31,199,127 3.98
3,220,000 Grupo Imsa, S.A. de
C.V.................... UBC 3,611,872 0.46
</TABLE>
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THE MEXICO FUND, INC.
SCHEDULE OF INVESTMENTS AS OF OCTOBER 31, 1998 -- (CONTINUED)
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<TABLE>
<CAPTION>
PERCENT
SHARES VALUE OF NET
INDUSTRIES HELD COMMON STOCK (CONTINUED) SERIES (NOTE 1) ASSETS
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<C> <C> <C> <S> <C> <C> <C>
HOLDINGS (CONTINUED) 3,100,000 Sanluis Corporacion,
S.A. de C.V............ CPO $ 4,455,827 0.57%
4,496,237 Vitro, S.A.............. A 6,516,286 0.83
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113,182,895 14.44
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INSURANCE (a) 1,000,000 Seguros Comercial
America, S.A. de C.V... B 3,275,759 0.42
- ------------------------------------------------------------------------------------------------
IRON & STEEL INDUSTRY (c) 3,000,000 Hylsamex, S.A. de C.V... BCP 4,586,063 0.59
(a) 1,705,000 Industrias CH, S.A. de
C.V.................... B 3,943,468 0.50
1,011,000 Tubos de Acero de
Mexico, S.A............ * 8,550,447 1.09
------------ ------
17,079,978 2.18
- ------------------------------------------------------------------------------------------------
MINING INDUSTRY 7,000,000 Grupo Mexico, S.A. de
C.V.................... B 17,857,852 2.28
4,000,000 Industrias Penoles, S.A.
de C.V................. * 12,269,208 1.56
------------ ------
30,127,060 3.84
- ------------------------------------------------------------------------------------------------
RETAIL TRADE (a)(c) 16,232,807 Cifra, S.A. de C.V...... C 21,108,772 2.69
(a)(c) 37,723,784 Cifra, S.A. de C.V...... V 51,301,950 6.55
9,500,000 Controladora Comercial
Mexicana, S.A. de C.V.. UBC 6,035,339 0.77
(a) 888,000 Organizacion Soriana,
S.A. de C.V............ B 2,644,431 0.34
------------ ------
81,090,492 10.35
- ------------------------------------------------------------------------------------------------
SERVICE 7,822,000 Corporacion Mexicana de
Restaurantes, S.A. de
C.V.................... B 1,242,327 0.16
- ------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Identified Cost--
$506,894,178 )......... $725,176,302 92.52
- ------------------------------------------------------------------------------------------------
<CAPTION>
PERCENT
FACE SHORT- VALUE OF NET
SECURITIES VALUE TERM SECURITIES (12.06%) (NOTE 1) ASSETS
- ------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
REPURCHASE $59,348,092 Bancomer, S.A., 29.25%,
AGREEMENTS dated 10/30/98, due
11/03/98, repurchase
price $59,540,973
collateralized by
Udibonos............... $ 59,348,092 7.57%
$20,000,000 Morgan Stanley Dean
Witter, 5.55%, dated
10/30/98, due 11/02/98,
repurchase price
$20,009,250
collateralized by U.S.
Treasury--Note ........ 20,000,000 2.55
$15,030,000 Lehman Brothers, Inc.,
5.60%, dated 10/30/98,
due 11/02/98,
repurchase price
$15,037,014
collateralized by
Federal Home Loan
Mortgage............... 15,030,000 1.92
- ------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM
SECURITIES (Identified
Cost--$94,378,092)..... $ 94,378,092 12.04
------------ ------
TOTAL INVESTMENTS
(Identified Cost--
$601,272,270).......... 819,554,394 104.56
LIABILITIES IN EXCESS OF
OTHER ASSETS........... (35,779,038) (4.56)
------------ ------
NET ASSETS (Equivalent
to $15.52 per share on
50,506,925 Shares of
Capital Stock
Outstanding)........... $783,775,356 100.00%
------------ ------
</TABLE>

(a) Shares of these securities are currently non-income producing. Equity
investments that have not paid dividends within the last twelve months are
considered to be non-income producing.
(b) See Note 9 to Financial Statements.
(c) Securities are partially on loan.

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
THE MEXICO FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments:
Securities, at value (Note 1):
Common stock (identified cost -- $506,894,178)..... $725,176,302
Short-term securities (identified cost --
$94,378,092)..................................... 94,378,092
------------
Total investments (identified cost --
$601,272,270)................................... $819,554,394
Cash................................................ 162,273
Interest receivable................................. 107,316
Dividends receivable................................ 2,624
------------
Total assets...................................... 819,826,607
------------
LIABILITIES:
Payable upon return of securities loaned (Note 1).. 35,124,264
Investment adviser (Notes 2 and 3)................. 527,892
Accrued expenses and other liabilities............. 399,095
------------
Total liabilities................................. 36,051,251
------------
NET ASSETS -- Equivalent to $15.52 per share on
50,506,925 shares of capital stock outstanding
(Note 7)........................................... $783,775,356
============
</TABLE>

See Notes to Financial Statements.
<PAGE>

- --------------------------------------------------------------------------------
THE MEXICO FUND, INC.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME:
Income (Note 1):
Dividends....................................... $ 18,450,723
Interest and discounts earned................... 10,661,265
Income from securities loaned, net (Note 1)..... 98,330
-------------
Total income.................................... $ 29,210,318
Expenses:
Investment advisory fee (Note 2)................ 6,959,011
Administrative services (Note 3)................ 350,000
Trustee fee (Note 4)............................ 47,990
Value-added taxes (Note 1)...................... 1,126,911
Printing, distribution and mailing of
shareholder reports............................ 316,749
Legal fees...................................... 202,861
Directors' fees................................. 180,000
Directors' expenses............................. 35,861
Accounting and audit fees....................... 109,305
Custodian fees (Note 5)......................... 77,003
Transfer agent and dividend disbursement fees... 21,000
Shareholders' information....................... 74,326
Stock exchange fees............................. 33,169
Miscellaneous................................... 195,339
-------------
Operating expenses.............................. 9,729,525
-------------
Net investment income (Note 1).................. 19,480,793
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY:
Realized gain (loss) on investments and foreign
currency transactions (Notes 1 and 6):
Proceeds from sales............................. 74,870,524
Cost of securities sold......................... 129,355,348
-------------
Net realized loss on investments................ (54,484,824)
Net realized loss from foreign currency
transactions................................... (6,886,284)
-------------
Net realized loss on investments and foreign
currency transactions.......................... (61,371,108)
Increase (decrease) in net unrealized gain (loss)
on investments and translation of assets and
liabilities in foreign currency:
Investments:
End of period (Note 6).......................... 218,282,123
Beginning of period............................. 532,153,219
-------------
Decrease in net unrealized gain on investments.. (313,871,096)
Translation of assets and liabilities in foreign
currency:
End of period................................... (4,955,696)
Beginning of period............................. (2,763,362)
-------------
Increase in net unrealized loss on translation
of assets and liabilities in foreign currency.. (2,192,334)
Decrease in net unrealized gain on investments
and translation of assets and liabilities in
foreign currency............................... (316,063,430)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS...................................... $(357,953,745)
=============
</TABLE>

See Notes to Financial Statements.
<PAGE>

- --------------------------------------------------------------------------------
THE MEXICO FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS
Net investment income................... $ 19,480,793 $ 20,012,313
Net realized (loss) gain on investments
and foreign currency transactions...... (61,371,108) 50,449,917
Net (decrease) increase in unrealized
gain on investments and translation of
assets and liabilities in foreign
currency............................... (316,063,430) 255,566,988
------------- --------------
Net (decrease) increase in net assets
resulting from operations.............. (357,953,745) 326,029,218
Dividends to shareholders from net
investment income...................... (11,616,592) (18,889,938)
Dividends to shareholders from net
realized gain on investments........... (29,625,602) (996,424)
Net increase in capital stock (Note 7).. 15,078,787 --
------------- --------------
Total (decrease) increase in net
assets................................ (384,117,152) 306,142,856
NET ASSETS:
Beginning of period..................... 1,167,892,508 861,749,652
------------- --------------
End of period........................... $ 783,775,356 (A) $1,167,892,508 (A)
============= ==============
</TABLE>

See Notes to Financial Statements.
(A) Including accumulated net investment loss of $(6,182,706) as of October 31,
1998 and $(7,160,623) as of October 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
THE MEXICO
FUND, INC.
FINANCIAL
HIGHLIGHTS ----
- ----------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning of
period........ $ 23.49 $ 17.33 $ 13.80 $ 33.48 $ 28.88 $ 24.91
-------- ---------- -------- -------- ---------- ----------
Net investment
income (Note
1)........... 0.39** 0.40 0.50 0.59** 0.21** 0.58**
Net (loss)
gain on
investments
and
translation
of foreign
currency
(Note1)...... (7.48)** 6.16 3.46 (19.21)** 4.89** 8.77**
-------- ---------- -------- -------- ---------- ----------
Total from
investments
operations.... (7.09)** 6.56 3.96 (18.62)** 5.10** 9.35**
-------- ---------- -------- -------- ---------- ----------
LESS DIVIDENDS
AND
DISTRIBUTIONS:
Dividends to
common
shareholders
from net
investment
income....... (0.23) (0.38) (0.43) -- (0.27) (0.49)
Distributions
to common
shareholders
from net
capital gains. (0.60) (0.02) -- (0.01) (0.23) (2.48)
-------- ---------- -------- -------- ---------- ----------
Total dividends
and
distributions. (0.83) (0.40) (0.43) (0.01) (0.50) (2.97)
-------- ---------- -------- -------- ---------- ----------
Tax return of
capital...... -- -- -- (0.05) -- --
-------- ---------- -------- -------- ---------- ----------
Capital charge
resulting
from issuance
of fund
shares....... (0.05) -- -- (1.00) -- (2.41)
-------- ---------- -------- -------- ---------- ----------
Net asset
value, end of
period....... $ 15.52 $ 23.49 $ 17.33 $ 13.80 $ 33.48 $ 28.88
======== ========== ======== ======== ========== ==========
Market value
per share,
end of
period....... $ 11.25 $ 18.69 $ 14.13 $ 12.25 $ 31.38 $ 27.00
======== ========== ======== ======== ========== ==========
Total
investment
return based
on market
value per
share......... (36.70%) 35.03% 18.77% (60.79%) 15.39% 27.41%
RATIOS TO
AVERAGE NET
ASSETS
Expenses...... 0.93% 0.91% 1.00% 1.14% 0.92% 1.08%
Net investment
income....... 1.87% 1.80% 2.93% 3.24% 0.63% 2.27%
SUPPLEMENTAL
DATA:
Net assets at
end of period
(in 000's)... $783,775 $1,167,893 $861,750 $685,896 $1,248,094 $1,075,948
Portfolio
turnover
rate......... 3.69% 7.58% 9.57% 10.61% 3.89% 5.14%
</TABLE>
- --------
**Amounts were computed based on average shares outstanding during the period.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------------------
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
10/31/1998 07/31/1998 04/30/1998 01/31/1998
-------------------- -------------------- --------------------- ---------------------
TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
--------- --------- --------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income....... $ 5,409 $ 0.11 $ 10,939 $ 0.22 $ 9,851 $ 0.20 $ 3,011 $ 0.06
Net Investment Income... $ 3,512 $ 0.07 $ 8,456 $ 0.17 $ 7,240 $ 0.14 $ 273 $ 0.01
Net realized (loss) gain
on investments......... $ (37,524) $(0.74) $ 2,744 $ 0.05 $ (3,675) $(0.07) $ (16,030) $(0.32)
Net realized loss from
foreign currency
transactions........... $ (2,745) $(0.05) $ (2,249) $(0.04) $ (597) $(0.01) $ (1,295) $(0.03)
Net increase (decrease)
in unrealized gain on
investments............ $(138,118) $(2.73) $(257,338) $(5.10) $ 82,680 $ 1.64 $ (1,095) $(0.02)
Net decrease (increase)
in unrealized loss on
translation of assets
and liabilities in
foreign currency....... $ (3,244) $(0.06) $ (186) $(0.00) $ 568 $ 0.01 $ 670 $ 0.01
Net asset value......... $ 783,775 $15.52 $ 967,956 $19.16 $1,222,086 $24.20 $1,135,869 $22.49
</TABLE>
- --------
See Notes to Financial Statements.
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THE MEXICO FUND, INC.
NOTES TO FINANCIAL STATEMENTS--
OCTOBER 31, 1998
- -------------------------------------------------------------------------------

1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

The Fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, closed-end management investment company. The investment ob-
jective of the Fund is to seek long-term capital appreciation through invest-
ment in securities, primarily equity, listed on the Mexican Stock Exchange.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses for the
period. Actual results could differ from those estimates. The following is a
summary of significant accounting policies followed by the Fund.

Valuation of investments -- Investments traded on the Mexican Stock Exchange
are valued at the last sale price. Short-term securities are carried at cost,
plus accrued interest, which approximates market value. All other securities
are valued in accordance with methods determined by the Board of Directors. If
the Board of Directors believes that the price of a security obtained under
the Fund's valuation procedures does not represent the amount that the Fund
reasonably expects to receive on a current sale of the security, the Fund will
value the security based on a method that the Board believes accurately re-
flects fair value.

Foreign Currency -- The Fund has adopted the provisions of Statement of Posi-
tion 93-4, Foreign Currency Accounting and Financial Statement Presentation
for Investment Companies ("SOP") effective for the period ended October 31,
1995. The Fund has elected not to restate prior periods. The adoption of this
SOP results in the reclassification of net realized gain (loss) from foreign
currency transactions, previously included as a component of net investment
income, to net realized gain (loss) on investments and foreign currency trans-
actions, and the inclusion of unrealized gain (loss) on translation of cur-
rency into unrealized appreciation (depreciation) of investments and transla-
tion of assets and liabilities in foreign currencies.

The market value of Mexican securities, currency holdings and other assets
and liabilities denominated in Pesos ("Ps.") was recorded in the financial
statements after translation into U.S. dollars based on the open market ex-
change rate prevailing in Mexico City at the end of the period. The open mar-
ket exchange rate at October 31, 1998 was Ps. 10.074 to $1.00.

The identified cost of portfolio holdings is translated at approximate rates
prevailing when acquired. Income and expense amounts are translated at approx-
imate rates prevailing when earned or incurred.

Since the net assets of the Fund are determined based on the currency ex-
change rate and market values at the close of each business day, it is not
practicable to isolate that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the fluctuations arising
from changes in the market prices of securities during the year. Accordingly,
the net realized and unrealized gain on investments presented in the accompa-
nying financial statements include the effects of both such changes.

Reported net realized foreign exchange gains or losses arise from sales of
short-term securities in exchange of property, payment of services or func-
tional currency denominated assets, currency gains or losses realized between
the trade and settlement dates on securities transactions, the difference be-
tween the amounts of dividends, interest, and foreign withholding taxes re-
corded by the Fund, and the U.S. dollar equivalent of the amount actually re-
ceived or paid.

Net unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities other than investments in common stocks at
fiscal year end, resulting from changes in the exchange rate.
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

Security transactions and investment income -- Security transactions are re-
corded on the date which the transactions are entered into (the trade date).
Dividend income is recorded on the ex-dividend date and interest income is re-
corded as it is earned.

Repurchase Agreements -- The Fund enters into repurchase agreements with ap-
proved institutions. The Fund's repurchase agreements are fully collateralized
by Mexican or U.S. Government securities. The Fund takes possession of the
collateral and monitors the credit standing of repurchase agreement
counterparties. The fair value of the collateral exceeds the principal amount
of the repurchase transaction, including accrued interest, at all times. If
the counterparty defaults, and the fair value of the collateral declines, re-
alization of the collateral by the Fund may be delayed or limited.

Realized gains and losses on investments -- Realized gains and losses on in-
vestments are determined on the identified cost basis.

Taxes -- No provision has been made for U.S. income taxes for the year ended
October 31, 1998, on net investment company taxable income or net long-term
capital gains as defined by the Internal Revenue Code (the "Code"), since the
Fund intends to comply with the requirements of the Code applicable to regu-
lated investment companies and to distribute substantially all of such income
to its shareholders.

The Fund is subject to Mexican withholding taxes in accordance with the Mexi-
can Income Tax Law and with the provisions included in the treaty to avoid
double taxation signed between Mexico and the United States, on specific
sources of income. For the year ended October 31, 1998, the Fund was not sub-
ject to Mexican withholding taxes.

The provision for value-added taxes represents Mexican value-added tax on
certain services rendered by Mexican corporations to the Fund.

Dividends to shareholders -- Cash dividends are recorded by the Fund on the
ex-dividend date. Dividends paid to shareholders are subject to Mexican with-
holding taxes if applicable.

Lending of portfolio securities -- During fiscal year 1998, the Board of Di-
rectors approved a securities lending program for the Fund proposed by the in-
vestment adviser. The Board also approved Merrill Lynch Portfolio Services,
Inc. as the lending agent for the Fund. Since August 18, 1998, the Fund has
been lending part of its portfolio securities to approved financial institu-
tions, provided that the market value of securities loaned will not at any
time exceed one-third of the Fund's total assets. The Fund continues to re-
ceive dividends on the securities loaned. The gain or loss in the fair value
of the securities loaned that may occur during the term of the loan will be
accounted for by the Fund. The Fund earns interest on the investment of the
collateral received for the securities loaned. The Fund may rebate a portion
of the interest earned on the investment of collateral to the borrower, and
pays a commission to the lending agent. All amounts earned and paid are in-
cluded in the accompanying Statement of Operations. In order to protect
against the risk of failure by the borrower to return the securities loaned or
any delay in the delivery of such securities, each loan is collateralized by
U.S. dollars (cash), securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities, or irrevocable stand-by letters of credit
issued by U.S. banks. The collateral is maintained at all times in an amount
equal to at least 105 percent of the current market value of the loaned secu-
rities. At October 31, 1998, the value of securities loaned and collateral re-
ceived thereon were as follows:

<TABLE>
<S> <C>
Value of Securities Loaned......................................... $33,309,645
===========
Value of Collateral Received....................................... $35,036,625
===========
</TABLE>

2. INVESTMENT ADVISORY AGREEMENT:

The Fund has a management contract with Impulsora del Fondo Mexico, S.A. de
C.V. (the "Adviser"), a Mexican corporation registered under the U.S. Invest-
ment Advisers Act of 1940. The Adviser furnishes investment research and port-
folio management services consistent with the Fund's stated investment poli-
cies. The Fund pays to the Adviser a monthly fee at the annual rate of 0.85%
on the first $200 million of
<PAGE>

3. ADMINISTRATIVE SERVICES AGREEMENT:

Effective April 1, 1994, the Fund entered into an Administrative Services
Agreement with the Adviser, which provides for certain administrative services
to be performed by the Adviser, including the determination and publication of
the net asset value of the Fund, the maintenance of the Fund's books and rec-
ords in accordance with applicable U.S. and Mexican Laws and the provision of
assistance to the Fund's auditors in the preparation and filing of annual re-
ports and tax returns. The term of this agreement was renewed by the Board of
Directors through August 31, 1999. The annual fee payable to the Adviser by the
Fund under this agreement is $350,000.

4. TRUST AGREEMENT AND TRUSTEE:

At its June 7, 1995 meeting, the Board of Directors approved the appointment
of Bancomer, S.A. ("Bancomer") as the trustee for the Mexican Trust through
which the Fund invested. The Fund also obtained the approval of the Comision
Nacional Bancaria y de Valores and the Mexican Foreign Investment Commission to
permit Bancomer to become the trustee. Under this arrangement, effective Octo-
ber 5, 1995, Bancomer received an amount denominated in Mexican pesos for three
years, subject to a monthly increase linked to the Mexican Consumer Price In-
dex, paid monthly on a cumulative basis, which for the five month period ended
March 31, 1998, amounted to $47,990, equivalent to a monthly average of $9,598.

During 1997 and 1998, the Mexican governmental authorities gave approval to the
Trustee for the transfer of the total assets and liabilities of the Trust to
the Fund. On February 27, 1998, the Fund's shareholders approved matters in
connection with the termination of the Trust Agreement with Bancomer. The ter-
mination was effective on March 31, 1998.

5. MANDATE AGREEMENT AND MANDATORY PARTY:

In connection with the termination of the Trust Agreement discussed in the
preceding note, on March 31, 1998, the Fund signed a Mandate Agreement with
Bancomer. Under this Agreement, Bancomer will act as the Mandatory Party, per-
forming certain activities related to the custody of the Fund's securities,
that were previously performed under the trust agreement.

The annual fee payable to Bancomer under this Agreement is denominated in Mexi-
can pesos, which translates to approximately $49,449, equivalent to a monthly
average of $4,121.

Due to the nature of this Agreement, the fees paid to Bancomer are consolidated
with the Fund's custodian fees.

6. PURCHASES AND SALES OF INVESTMENTS:

Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1998 were as follows:

<TABLE>
<S> <C>
Purchases
- -------------------------------------------------------------------------------
Common Stock....................................................... $36,955,284
-----------
Total Purchases.................................................... $36,955,284
===========
Proceeds from Investments Sold
- -------------------------------------------------------------------------------
Common Stock....................................................... $74,870,525
-----------
Total Sales........................................................ $74,870,525
===========
</TABLE>

As of October 31, 1998, net unrealized gains on investments in common stocks
for Federal income tax purposes aggregated to approximately $218 million, of
which approximately $322 million related to appreciated securities and approxi-
mately $104 million related to depreciated securities. The aggregate cost of
investments in common stocks at October 31, 1998 for Federal income tax pur-
poses was approximately $507 million.

7. CAPITAL STOCK:

At October 31, 1998, there were 150,000,000 shares of $1.00 par value common
stock authorized, of which 50,758,750 shares were issued, 50,506,925 shares
were outstanding and 251,825 shares were held in treasury.

Starting with the distribution made to shareholders on July 30, 1993, the Fund
offered a Dividend Reinvestment Plan ("Plan"). Under this Plan, the Company
sold, in fiscal year
<PAGE>

The Plan was amended by the Board of Directors at the December 7, 1994 Board
Meeting. The new Plan became effective April 1, 1995. Under the terms of the
amended Plan, Fund shareholders automatically will be enrolled as participants
in the Plan unless they notify the Fund otherwise.

On December 10, 1997, the Board of Directors declared a stock dividend of
$29,625,602. This dividend was paid in shares of common stock of the Fund, and
in cash by specific election. Some shareholders selected the stock dividend,
therefore, the Company issued 791,018 shares, which amounted to $15,078,787.

As of October 31, 1998, net assets were comprised of the following:

<TABLE>
<S> <C>
Common Stock.................................................. $ 50,506,925
Additional paid-in capital.................................... 576,466,300
Accumulated net investment loss............................... (6,182,706)
Accumulated net realized loss on investments.................. (50,341,590)(A)
Unrealized appreciation of investments and depreciation on
translation of assets and liabilities in foreign currency.... 213,326,427
------------
$783,775,356
============
</TABLE>
- --------
(A) Including $4,143,234 of capital gains, net of income taxes paid in 1991,
which will not be distributed.

Accumulated net realized (losses) from foreign currency transactions have been
netted against undistributed net investment income to be consistent with the
tax treatment for distributions from net investment income per the tax code.

8. CAPITAL GAINS:

Net realized gains from security transactions, if any, are distributed annu-
ally to shareholders. Capital loss carryforwards will be used to offset future
capital gains available for distribution. The Fund had net capital loss
carryforwards at October 31, 1998 of approximately $54,485,000 expiring in
2006.

9. INVESTMENTS:

As a result of significant losses incurred by Grupo Financiero Inverlat, S.A.
de C.V. ("Inverlat"), certain significant shareholders, together with the fi-
nancial authorities, developed a recapitalization program. On July 23, 1996,
after the absorption of accumulated losses through the total reduction of capi-
tal stock, shareholders of Inverlat approved a cash contribution by FOBAPROA
(Banking Fund for Savings Protection) to cover such losses. As a consequence,
all shares outstanding prior to July 23, 1996, were cancelled. The Fund has re-
ceived an interest in a Recovery Trust set up to manage the recovery assets of
Inverlat. Through the trust agreement the Company may receive shares equal to
9% and up to 36% of their ownership interest. Management has assigned the mar-
ket value of the Fund's holdings in the Recovery Trust at $0 as of October 31,
1998, due to the uncertainty regarding its ultimate realization.
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE MEXICO FUND, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Shareholders of
The Mexico Fund, Inc.:

We have audited the accompanying statement of assets and liabilities of The
Mexico Fund, Inc. (a Maryland corporation), including the schedule of invest-
ments, as of October 31, 1998, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
six years in the period ended October 31, 1998. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and fi-
nancial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of Oc-
tober 31, 1998, by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant esti-
mates made by management, as well as evaluating the overall financial statement
presentation. 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 The
Mexico Fund, Inc. as of October 31, 1998, 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 six years in
the period ended October 31, 1998, in conformity with generally accepted ac-
counting principles.

ARTHUR ANDERSEN

New York, N.Y.
November 19, 1998