<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
Dear Shareholder,
We are pleased to present the quarterly report for The Italy Fund Inc. for
the three months ended April 30, 1994. As of that date the Fund's net asset
value ("NAV") was $12.04. At the end of the previous quarter, January 30, 1994,
the NAV was $9.84.
POLITICS
The political scene in Italy has been dominated by the campaign leading up
to the end of March general elections. The electoral results were, from an
investor's viewpoint, better than expected, because they delivered a fairly
concentrated distribution of parliamentary seats. The right-wing "Polo della
Liberta" (Freedom Alliance -- FA) won a historic victory paving the way for the
first radical change of government in 45 years. The Freedom Alliance, which
includes Silvio Berlusconi's Forza Italia, the vociferous Northern League and
the far-right National Alliance, secured an overall parliamentary majority of
53%, i.e. just enough to make a right-wing government. The Italian electorate
seems to have chosen the radical solution to the previous political system
embroiled in scandals and corruption over the moderate one offered by the center
and left-wing coalitions. Also an important factor was their refusal to vote for
a left alliance which included the hard core Communists of "Rifondazione
Comunista."
The desire to break with the old political system resulted in a parliament
which was largely purged of its "old" faces and includes a large number of
newcomers; out of total of 945 members of parliament, 425 are new. Also, the
average age of the members of parliament has decreased, with 70% of the lower
house being less than 50 years old.
As expected, the new majority electoral system has dealt a major blow to the
centre parties, (mainly the former Christian Democrats and Socialists). They
were almost completely erased from the political map as the electors most
closely identified them with the old political system. But perhaps the most
notable casualty of the new voting system has been the ironic situation of Mr.
Segni, the leading proponent of electoral reform, who failed to win his majority
seat and was elected thanks to the proportional part of the vote that he fought
hard to abolish.
At the end of April, Mr. Berlusconi was asked by President Scalfaro to form
Italy's 53rd post-war government, thus crowning his four month career in
politics. As expected, the path to the next government was not very smooth, as
witnessed by the recalcitrant behaviour of the leader of the Northern League,
Mr. Bossi, during the negotiations to form the new government. However, after
the usual bargaining in the allocation of the ministerial posts among the
coalition partners (which unfortunate-
ly reminds us of past political customs) Mr. Berlusconi was able to present his
25-member cabinet on May 10th. Its composition reflects the parties within the
Freedom Alliance with five ministers each from the Northern League and the
National Alliance, eight from Forza Italia, four from the small centre parties
and three independents.
One problem which has not yet been resolved and which will take some time to
solve is the potential conflict of interest which may arise for Mr. Berlusconi
in his role as Prime Minister and at the same time as owner of Italy's third
largest private industrial group. Fininvest, Berlusconi's conglomerate, has wide
interests ranging from television to advertising, publishing, real estate,
retail, insurance, mutual funds, football, etc. Mr. Berlusconi, who resigned as
chairman of Fininvest when he entered politics in February, has declared his
willingness to find a solution, but so far, only a promise that he might float
off a majority stake in his companies and the appointment of three respected
Italian legal experts to act as guarantors against possible conflicts of
interest have taken place. Clearly, the problem of a possible conflict of
interest will need to be further addressed, especially since Mr. Berlusconi's
election was supposed to represent a break from the old system characterized by
the corrupt connections between politics and the business community.
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
ECONOMICS
Turning to the economic outlook, recent data suggest that the Italian
economy has bottomed out and that 1994 will see again positive growth. Gross
Domestic Product ("GDP") rose by 0.8% quarter on quarter, an increase of 0.3% as
compared with the same period in 1993, thus leading to an overall 0.7% GDP
decline for 1993. The latest GDP report confirmed the earlier picture of split
developments, with heavy falls in domestic demand partly offset by dramatic
improvements in real net exports. The final figures for the 1993 trade balance
illustrate this development well, with a marked improvement from a Lit 15.3
trillion deficit the previous year to a Lit 32.5 trillion surplus in 1993.
Better trade volumes reflect the sharp competitive gains from a steep fall in
the Lira real exchange rate, coupled with falling real wages. For 1994, a
combination of a pickup in private consumption and continued strong net exports
should result in a return to economic growth, although below trend, as fiscal
policy should remain tight to preserve primary surpluses. GDP may therefore grow
up to 1.8% this year.
Thanks to the abovementioned real wage weakness, an undervalued Lira and
subtrend demand growth, inflation is also expected to continue to fall in 1994.
In April, inflation as expressed by the Consumer Price Index ("CPI") stood at
4.1% and it is expected to fall further to an average of 3.9% for the year.
THE ITALIAN STOCK MARKET
REVIEW
The recent performance of the Italian equity market has been quite
remarkable, appreciating almost 30% in Lira terms in the first four months of
the year, despite the weakness of global equity and bond markets. For 1994 thus
far, the Italian stock market is recording the best performance among the major
equity markets. The market's rally was overwhelmingly guided by the liquidity
factor. The euphoria over the right-wing victory and the expectations of a new
government coalition have channelled a massive amount of private savings into
the stock market. Accordingly, liquidity has prevailed in driving up prices in
the Italian bourse while investor sentiment has been indifferent with regard to
the sluggish performance of markets abroad, the fundamentals on individual
securities and technical indicators on the market. The prevailing widespread
opinion that the stock exchange and not the bond market would be the key
beneficiary of the new government's programs and the ensuing economic recovery
also contributed to the strong flow of liquidity into the equity market. As a
consequence of strong liquidity, daily volumes have reached an all time high --
above Lit 2,000 billion (almost $1.3 billion) -- causing several technical
problems to the continuous screen-based market.
In terms of sector performance, the best performing sectors this year were
the more cyclical ones such as steel, automobile, construction and chemicals.
These sectors started to discount the benefits of the past corporate
restructuring and the expected economic recovery. Conversely, the more defensive
sectors like the textiles, food and banking have underperformed.
OUTLOOK
After the recent strong performance in defiance of the weakness of the other
global financial markets, has the Italian equity market run ahead of itself and
what are its prospects?
In terms of valuation, at first sight the market looks overvalued in
price/earnings terms (P/E of 31x 1994 earnings), even relative to its own
history. However, comparisons with the recent past may be misleading given the
fact that inflation and interest rates are significantly lower than the
historical average (both inflation and interest rates are more than 40% lower
than the 10 year average). Lower inflation, and especially lower interest rates,
could therefore justify a 40% multiple expansion, thus bringing the evaluation
at around fair value.
The main driving force for the equity market this year has been domestic
liquidity and it will continue to play a predominant role in order to assess
2
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
the outlook for the Italian equity market. The contribution of foreign investors
to the market's recent performance has been rather limited. Taken by surprise by
the right-wing victory and even more so by the enthusiastic reaction of the
market, foreign investors seem to have been waiting for the formation of the new
government and the announcement of its new economic policies to change their
investment plans. It, therefore, becomes essential to understand the causes and
potential of the domestic liquidity increase. The major cause for the rising
liquidity has been a gradual change in Italian saving habits that has come about
because of the sharp drop in interest rates, which, unlike the declines of the
1980's, are expected to be long-lasting. Consequently, there has been a shift
from money market instruments into shares. In addition, the recent right-wing
electoral victory is likely to reverse the capital outflows by Italians, which
had been based on fears of economic and political instability and the Lira
devaluation.
In terms of the potential of the present shift in liquidity, it is important
to consider that the capitalisation of Italian debt is around six times the
capitalisation of the Italian equity market, and that it is probably around 15
times the free float, while in the U.S. the bond and stock markets are of
similar dimension. Reasoning in concrete numbers, if households were to shift
2.5% of their holdings in bonds or deposit accounts into equities, the impact
could be sizeable, (Lit 50 trillion, i.e. 15% of the equity market
capitalisation, or more importantly almost 50% of the free float). It is true
that the upcoming privatisations and the large amount of announced rights
offerings will absorb a large part of this potential additional demand. Still
the net effect could be prices which go beyond levels justified by fundamentals.
Recent continued strong net inflows in mutual funds, especially those investing
in the domestic market, illustrate this changing pattern in Italian savings,
(the April Lit 4 trillion net inflow in domestic equity funds already
constitutes more than twice the total net inflow for 1993).
Another factor which is currently supporting the equity market is the
perception that the Berlusconi government constitutes for the first time an
equity market friendly government. The Freedom Alliance ran an essentially
liberal and market friendly political campaign, which was clearly different from
past political campaigns where economic policies were rarely featured. The
market is therefore expecting that some of the promised policies will be
introduced in the medium term. Among the measures which would particularly
benefit the equity market, one can mention: a more flexible labour market, the
restructuring of the pension and healthcare systems, (with the fiscal
incentivisation of private pension funds), an acceleration of the privatisation
process, lower taxation through bringing public spending under control,
(reversing the trend of the last twenty years where tax revenues tried to keep
up with runaway spending), and finally, the further development of the stock
market in fiscally incentivizing share capital.
What are the risks to the present optimistic outlook?
Political uncertainty still remains. The right-wing coalition under
Berlusconi's leadership is composed of parties having in part different
priorities. For example, there are clear differences between the federalist
ideology of the Northern League and the more centralist National Alliance. Will
they be able to form a long-lasting government? Will the new government be
tempted to cut taxes as promised without simultaneously cutting public spending?
Disappointments in the budgetary consolidation would clearly negatively affect
financial markets, although the bond market more than the equity market. The new
government's first decisions in economic policy will therefore need to be
closely scrutinised. From an investor's viewpoint, there will be two issues for
immediate government attention: the renewing of public sector wages and a
supplementary budget to contain possible deficit overshoots before the first big
test, the 1995 budget.
3
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
But the appointments of highly qualified professionals, like Lamberto Dini, the
director general of the Bank of Italy as treasury minister, and Giulio Tremonti,
a leading tax expert, as finance minister, seems to signal that the new
government will pursue a sound economic policy, respecting the need to maintain
a tight budgetary discipline.
Finally, given the importance of the liquidity factor for the market, should
the bullish trend of the market be interrupted, the liquidity effect could work
to the market's disadvantage with the reversal of the flow of funds giving
little choice to fund managers but to sell their holdings. This is a real risk,
but as long as the interest rate trend remains downward, or at least does not
reverse sharply, it is unlikely to materialise.
In summary, therefore, while pure valuation considerations would only
suggest a limited further potential for the Italian equity market, a combination
of earnings momentum, strong retail inflows, further rate cuts and the
possibility of equity friendly policy surprises should boost the market further
to reach its 1986 high.
INVESTMENT STRATEGY
After the rights offering at the end of January, the Fund invested most of
the cash in equities. This was done by adding to the Fund's core holdings. In
addition, new investments were made by taking part in the privitisation of IMI,
in buying Ansaldo Trasporti and Cogefar, (which should benefit from increased
infrastructure spending and in particular from the high speed train program), in
buying Cofide (to gain further exposure to the booming mutual fund market) and
increasing the exposure to the promising power generating sector through Sondel.
In the insurance sector, valuation grounds led us to replace Toro ordinary
shares with those of La Previdente. Similarly, in the banking sector Credito
Fondiario was replaced by Banca Popolare di Bergamo, which has one of the most
attractive valuations in this sector.
We hope you continue to be pleased with your investment in the Fund and look
forward to continuing to assist you in meeting your investment goals.
Sincerely,
Heath B. McLendon
CHAIRMAN OF THE BOARD
Mario d'Urso
PRESIDENT
Erich Stock
INVESTMENT OFFICER
June 1, 1994
4
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
THE ITALY FUND'S EQUITY PORTFOLIO VERSUS THE BCI INDEX
APRIL 30, 1994 (UNAUDITED)
THE ITALY FUND INC.
Sectorial Structure
SECTOR BREAKDOWN
Pie charts depicting the allocation of The Italy Fund's investment
securities and The BCI Index held at April 30, 1994 by sector classification.
The pies are broken in pieces representing industries in the following
percentages:
<TABLE>
<CAPTION>
SECTOR PERCENTAGE
<S> <C>
Communications 20.8%
Financials 10.2%
Food & Sugar 4.8%
Electromechanical, Engineering & Autos 14.5%
Banks 13.9%
Textiles 3.6%
Property, Construction & Cement 4.7%
Chemicals 6.6%
Pharmaceuticals 0.8%
Other 2.5%
Insurance 17.6%
THE BCI INDEX
Sectorial Structure
<CAPTION>
SECTOR PERCENTAGE
<S> <C>
Communications 19.5%
Financials 7.0%
Food & Sugar 2.6%
Electromechanical, Engineering & Autos 13.0%
Banks 18.8%
Textiles 2.4%
Property, Construction & Cement 3.5%
Chemicals 4.9%
Pharmaceuticals 0.4%
Paper & Publishing 1.7%
Other 4.6%
Insurance 21.6%
</TABLE>
5
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
THE ITALY FUND INC.
Investment Portfolio as of April 30, 1994 (Unaudited)
- - - - - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET VALUE ($)
SHARES (NOTE 1)
- - - - - -------------------------------------------------------------------------------
<C> <S> <C>
- - - - - -----------------------------------------------
STOCKS -- 93.3%
- - - - - -------------------------------------------
COMMUNICATIONS -- 16.7%
55,000 Ericsson........................................ $ 1,185,755
946,000 SIP............................................. 2,830,918
1,450,000 SIP Risp NC**+++................................ 3,597,271
330,000 Sirti S.p.A. ................................... 2,805,364
810,000 STET+++......................................... 3,133,654
1,740,000 STET Risp NC**+++............................... 5,702,408
----------------
19,255,370
----------------
INSURANCE -- 16.5%
200,000 Alleanza........................................ 2,370,378
165,000 Assicurazioni Generali.......................... 4,798,780
90,000 Compagnia di Assicurazioni di Milano............ 527,339
152,291 Lloyd Adriatico................................. 1,572,714
61,250 Lloyd Adriatico Risp NC**....................... 454,283
160,000 RAS+++.......................................... 3,149,978
390,000 SAI Risp NC**................................... 2,999,208
160,000 SAI-Societa Assicuratrice Industriale........... 2,319,591
85,000 Toro Assicurazioni Risp NC**.................... 773,937
----------------
18,966,208
----------------
BANKING -- 13.0%
280,000 Banca Comerciale Italiana Risp*+++.............. 1,014,425
424,998 Banca di Roma................................... 586,086
1,425,000 Banca Fideuram.................................. 1,983,931
80,000 Banca Popolare di Bergamo....................... 1,204,950
550,000 Banco Ambrosiano Veneto......................... 1,696,009
1,070,000 Credito Italiano S.p.A.+++...................... 1,776,866
120,000 Credito Romagnolo............................... 1,237,886
201,500 IMI S.p.A. ..................................... 1,660,918
150,000 Istituto Bancario San Paolo di Torino........... $ 1,081,039
220,000 Mediobanca S.p.A.+++............................ 2,595,385
----------------
14,837,495
----------------
HOLDING COMPANIES -- 12.1%
1,100,000 Cofide.......................................... 1,263,192
850,000 Europa Investimenti++#.......................... 534,265
10,000 Finanziaria Italiana di Participazioni++#....... 672,546
800,000 Gaic Conv. di Risp*............................. 472,668
200,000 IFI Privilegio.................................. 3,390,259
264,480 IFIL+++......................................... 1,373,128
370,000 IFIL Risp NC**.................................. 1,046,066
3,000,000 Montedison S.p.A. .............................. 2,962,344
210,000 Sopaf Risp#..................................... 338,435
600,000 Sopaf........................................... 1,481,360
49,639 422 S.p.A. ..................................... 312,005
----------------
13,846,268
----------------
UTILITIES -- 8.1%
2,200,000 Autostrade Privilegio+++........................ 3,271,715
546,500 Italgas......................................... 2,083,334
510,000 Edison.......................................... 2,885,032
500,000 Sondel.......................................... 973,306
----------------
9,213,387
----------------
AUTOMOBILES -- 6.5%
930,000 Fiat S.p.A. .................................... 4,030,466
1,708,000 Pirelli S.p.A. ................................. 3,414,991
----------------
7,445,457
----------------
FOOD -- 4.6%
15,595 Eridania-Beghin-Say............................. 2,533,868
660,000 Parmalat Finanziaria............................ 1,122,560
900,000 Parmalat Finanziaria S.p.A. .................... 1,536,987
----------------
5,193,415
----------------
</TABLE>
See Notes to Investment Portfolio.
6
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
THE ITALY FUND INC.
Investment Portfolio as of April 30, 1994 (Unaudited) (Continued)
- - - - - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET VALUE ($)
SHARES (NOTE 1)
- - - - - -------------------------------------------------------------------------------
<C> <S> <C>
- - - - - -----------------------------------------------
STOCKS -- (CONTINUED)
- - - - - -------------------------------------------
MECHANICAL ENGINEERING -- 3.9%
387,500 Ansaldo Trasporti............................... $ 1,832,805
180,000 Danieli......................................... 1,476,458
266,750 Danieli Risp NC**............................... 1,173,487
----------------
4,482,750
----------------
TEXTILES -- 3.3%
140,000 Benetton+++..................................... 2,489,689
432,446 SIMINT S.p.A. -- Societa Italiana Manufatti..... 480,293
225,000 Stefanel S.p.A.+++.............................. 832,134
----------------
3,802,116
----------------
CHEMICALS AND PHARMACEUTICALS -- 2.6%
1,070,000 Enichem Augusta S.p.A. ......................... 2,084,891
260,000 Recordati Risp NC**............................. 826,100
----------------
2,910,991
----------------
RETAILING -- 2.4%
181,790 La Rinascente+++................................ 1,267,184
186,136 La Rinascente Risp*+++.......................... 734,028
290,000 SME............................................. 725,287
----------------
2,726,499
----------------
CEMENT AND CERAMICS -- 2.2%
60,000 Calcestruzzi.................................... 503,655
380,000 Italcementi Risp*............................... 1,958,554
----------------
2,462,209
----------------
CONSTRUCTION AND PROPERTY -- 1.4%
235,000 Cogefar-Impresit Costruzioni.................... $ 376,952
328,000 Vianini Lavori.................................. 1,236,981
----------------
1,613,933
----------------
TOTAL STOCKS
(COST $82,925,160)............................. 106,756,098
----------------
- - - - - -----------------------------------------------
RIGHTS -- 0.5%
- - - - - -------------------------------------------
310,000 Cogefar-Impresit Construzioni, Rights, expire
3/01/97#...................................... 425,747
367,926 La Rinascente, Rights, expire 04/07/96#......... 68,591
225,000 Stepanel S.p.A., Rights, expire 05/03/94#....... 43,983
----------------
TOTAL RIGHTS
(COST $515,741)................................ 538,321
----------------
- - - - - -----------------------------------------------
WARRANTS -- 0.0%
- - - - - -------------------------------------------
20,900 Alleanza Risp, Warrants, expire 02/29/96#....... 40,054
3,580 Raggio di Sole, Warrants, expire 05/30/94#...... 0
3,580 Raggio di Sole di Risp, Warrants, expire
05/30/94#..................................... 0
----------------
TOTAL WARRANTS
(COST $1,000).................................. 40,054
----------------
</TABLE>
See Notes to Investment Portfolio.
7
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
THE ITALY FUND INC.
Investment Portfolio as of April 30, 1994 (Unaudited) (Continued)
- - - - - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE MARKET VALUE ($)
(MILLION LIRE) (NOTE 1)
- - - - - -------------------------------------------------------------------------------
<C> <S> <C>
- - - - - -----------------------------------------------
FIXED-INCOME INVESTMENTS -- 1.1%
(COST $1,187,745)
- - - - - -------------------------------------------
L 2,000 Italy, Republic of, 9.000% due 10/01/98 $ 1,255,209
----------------
- - - - - -----------------------------------------------
CONVERTIBLE BONDS -- 6.0%
- - - - - -------------------------------------------
1,200 BTP, 9.000% due 10/01/98.................... 753,125
8,620 Fixed Dep Lit Citln 7.900% due
05/10/94.................................. 5,410,294
1 IFIL, 8.500% due 07/01/94................... 414
265 Mediobanca-Alleanza 4.000% due 09/03/99..... 243,079
L 180 Mediobanca-Banca-Italmobiliare, 6.000% due
04/01/96.................................. $ 109,179
500 Stefanel Finance, 9.000% due 12/31/95....... 329,987
----------------
TOTAL
CONVERTIBLE BONDS (COST $6,774,177)........ 6,846,078
----------------
</TABLE>
See Notes to Investment Portfolio.
8
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
THE ITALY FUND INC.
Investment Portfolio as of April 30, 1994 (Unaudited) (Continued)
- - - - - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET VALUE ($)
FACE VALUE (NOTE 1)
- - - - - -------------------------------------------------------------------------------
<C> <S> <C> <C>
- - - - - -----------------------------------------------
REPURCHASE AGREEMENTS -- 17.9%
- - - - - ------------------------------------------
$6,900,000 Agreement with Morgan Stanley & Company,
3.500% dated 04/29/94, to be repurchased at
$6,902,013 on 05/02/94, collaterlized by
$5,405,000 U.S Treasury Bonds, 9.875% due
11/15/15.................................... $ 6,900,000
6,689,000 Agreement with United Bank of Switzerland,
3.250% dated 04/29/94, to be repurchased at
$6,690,812 on 05/02/94, collateralized by
$7,055,000 U.S Treasury Bills, 9.250% due
01/12/95.................................... 6,689,000
6,900,000 Agreement with Ford Motor Company, 3.500%
dated 04/29/94, to be repurchased at
$6,902,013 on 05/02/94, collateralized by
$5,405,000 U.S Treasury Bonds, 9.875% due
11/15/15.................................... 6,900,000
----------------
TOTAL REPURCHASE AGREEMENTS (COST
$20,489,000)................................. 20,489,000
----------------
TOTAL INVESTMENTS
(COST $111,892,823+)........................... 118.8% $ 135,924,760
OTHER ASSETS AND
LIABILITIES (NET).............................. (18.8) (21,464,353)
------- ----------------
NET ASSETS....................................... 100.0% $ 114,460,407
------- ----------------
------- ----------------
NET ASSET VALUE PER SHARE
($114,460,407 DIVIDED BY 9,503,089 shares of common stock
outstanding)............................................... $ 12.04
----------------
----------------
<FN>
- - - - - --------------------------
* Risp -- Risparmio (savings shares).
** Risp NC -- Risparmio Non-Convertible
(non-convertible savings shares).
+ Aggregate cost for Federal tax purposes.
++ Security restricted as to resale (Note 2).
+++ A portion of the securities were loaned at 04/30/94. Total market value of
all securities
loaned is $18,721,270 (Note 3).
# Non-income producing security.
</TABLE>
See Notes to Investment Portfolio.
9
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
THE ITALY FUND INC.
NOTES TO INVESTMENT PORTFOLIO (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICY
The Italy Fund Inc. (the "Fund") is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended, as a
diversified, closed-end investment company for United States and other investors
desiring to achieve international diversification by participating in the
Italian economy. The policy described below is followed consistently by the Fund
in the preparation of its portfolio in conformity with generally accepted
accounting principles.
PORTFOLIO VALUATION: All securities for which market quotations are
readily available are valued at the last sales price prior to the time of
determination, or, if no sales price is available at that time, at the
closing price quoted for the securities (but if bid and asked quotations are
available, at the mean between the last current bid and asked prices, rather
than the quoted closing price). Securities that are traded over-the-counter
are valued, if bid and asked quotations are available, at the mean between
the current bid and asked prices. If bid and asked quotations are not
available, then over-the-counter securities will be valued as determined in
good faith by the Board of Directors. Investments in securities having a
maturity of 60 days or less are valued at cost with accrued interest or
discount earned included in interest receivable. All other securities and
assets are valued at fair value as determined in good faith by the Board of
Directors, although the actual calculation may be done by others. Forward
foreign currency contracts are valued at the forward rate and are
marked-to-market daily.
2. RESTRICTED SECURITIES
Certain of the Fund's investments are restricted as to resale and are valued
at the direction of the Fund's Board of Directors in good faith, at fair value,
after taking into consideration appropriate indications of value available. The
table below shows the number of shares held, the acquisition date, value as of
April 30, 1994, percentage of net assets which the securities comprise,
aggregate cost and unit value of the securities.
- - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF ACQUISITION 04/30/94 VALUE PER PERCENTAGE OF
SECURITY SHARES DATE FAIR VALUE UNIT NET ASSETS COST
- - - - - --------------------------------------------- --------- ----------- ---------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Europa Investimenti.......................... 850,000 07/02/91 $ 534,265 $ 0.63 0.5% $ 623,396
Finanziaria Italiana di Participazioni....... 10,000 03/13/87 672,546 67.25 0.6 772,361
--
---------- ----------
$1,206,811 1.1% $1,395,757
--
--
---------- ----------
---------- ----------
</TABLE>
10
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
THE ITALY FUND INC.
NOTES TO INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
3. LENDING OF PORTFOLIO SECURITIES
The Fund has the ability to lend its securities to brokers, dealers and
other financial organizations. Loans of securities by the Fund are
collateralized by cash, letters of credit or U.S. government securities that are
maintained at all times in an amount at least equal to the current market value
of the loaned securities.
At April 30, 1994, the Fund loaned securities to certain brokers for which
the Fund received $20,198,025 as collateral.
At April 30, 1994, the Fund loaned securities with an aggregate market value
of $18,721,270 which represents 16.4% of total net assets.
- - - - - --------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NET REALIZED NET INCREASE/
GAIN/(LOSS) ON (DECREASE) IN NET
INVESTMENT NET INVESTMENT INVESTMENTS AND ASSETS RESULTING
INCOME INCOME/(LOSS) CURRENCY FROM OPERATIONS
----------------------- ----------------------- ------------------------ ------------------------
QUARTER ENDED TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
- - - - - ------------------------- ---------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
April 30, 1992........... $ 171,205 $0.03 $ (89,143) $(0.01) $ (72,791) $(0.01) $(3,638,243) $(0.57)
July 31, 1992............ 1,408,295 0.22 1,133,982 0.18 (145,886) (0.02) (9,861,491) (1.56)
October 31, 1992......... 264,725 0.04 45,344 0.01 (3,290,180) (0.52) (3,331,563) (0.53)
January 31, 1993......... 324,140 0.05 92,679 0.01 113,301 0.02 28,819 0.01
April 30, 1993........... 208,399 0.03 (22,200) 0.00 (633,996) (0.10) 4,646,508 0.73
July 31, 1993............ 1,164,578 0.19 946,601 0.14 (673,685) (0.10) 2,566,981 0.41
October 31, 1993......... 231,050 0.04 (51,313) (0.01) (330,679) (0.05) 1,139,682 0.17
January 31, 1994......... 163,184 0.03 (104,964) (0.01) (1,350,029) (0.21) 4,843,089 0.53
April 30, 1994........... 384,431 0.04 37,867 0.01 376,390 0.04 21,276,792 2.24
</TABLE>
11
<PAGE>
- - - - - --------------------------------------------------------------------------------
[LOGO]
THE ITALY FUND INC.
ADDITIONAL INFORMATION
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Dividend Reinvestment and Cash Purchase Plan offers you an automatic way
to reinvest your dividends and capital gains distributions in shares of the
Fund. The Plan also allows participants to make optional cash investments in
Fund shares of $100 to $3,000 semi-annually through a purchasing agent, after
consultation with The Shareholder Services Group Inc., ("TSSG"), a subsidiary of
First Data Corporation, the Plan Agent. For an enrollment form and detailed
information about the Plan, please contact The Italy Fund Inc., Dividend
Reinvestment and Cash Purchase Plan,
c/o TSSG, P.O. Box 1376, Boston, Massachusetts 02104, (800) 331-1710.
If you own shares that are held in the name of a
brokerage firm, bank or other nominee, you should contact your nominee to
arrange for it to participate on your behalf.
12
<PAGE>
THE ITALY FUND INC.
This report is sent to the shareholders of The Italy
Fund Inc. for their information. It is not a Pro-
spectus, circular or representation intended for
use in the purchase or sale of shares of the Fund or
of any securities mentioned in the report.
Comparisons between changes in the Fund's net
asset value per share and changes in The Banca
Commerciale Italiana Index should be considered
in light of the Fund's investment policy and objec-
tives, the characteristics and quality of the Fund's
investments, the size of the Fund and variations
in the Lira/Dollar exchange rate. This Index
generally reflects ordinary shares (as opposed to
savings shares).
THE ITALY FUND INC.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 298-6263
QUARTERLY
REPORT
April 30, 1994
