<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
Dear Shareholder:
We are pleased to present you with the semi-annual report for The Italy
Fund, Inc. for the six-month period ended July 31, 1996. As of that date, the
Fund's net asset value (NAV) per share was $9.84 as compared to $9.56 as of
January 31, 1996.
The Fund's NAV increased by 2.93% during the past six months. Since its
inception in 1986, the Italy Fund has consistently outperformed the BCI Index, a
widely followed Italian index which includes all the securities listed on the
Milan Stock Exchange.
Political Overview
As we stated in our last report, Italy's once-feared Communists won power
from the center-right party, after forty-nine years, in the election held on
April 21, 1996. Following the election of the Communists, the Italian financial
markets surged. Romano Prodi, an economics professor with centrist views, became
Italy's prime minister and currently heads an eight-party center-left coalition
that uses an Olive Tree as an electoral symbol.
After its election in April, the honeymoon period for the Prodi government
appears to have ended quickly. For example, during the parliamentary debate for
the approval of the new three-year Economic and Planning document (DPEF) which
covers the years 1997 through 1999, the Communists only agreed to support the
Prodi government after their demands had been met and the DPEF was finally
approved.
Other signs have recently emerged regarding possible weakness in the center-
left Prodi government. The coalition recently clashed with the Green Party and
Mr. Di Pietro, the Minister of Public Works, over the approval of the building
permit for the second highway link between Bologna and Firenze, a dispute which
was subsequently resolved.
Another troubling political development has been separatist Umberto Bossi
and his green-shirted followers' intention to declare symbolic independence for
the mythical state of Padania in northern Italy on September 15, 1996. (Padania
is an ancient name that today refers vaguely to Italian territory stretching
north from the Po River Valley.) This symbolic secession movement, referred to
as "Bossismo" in the Italian press, has grown out of the frustration and
resentment that many northern Italians feel regarding decades of waste and the
diversion of revenues to poorer southern Italy. Because of difficulties with its
own coalition as it heads towards crucial budget battles this fall, the Prodi
government has not yet fully addressed the challenges posed by Mr. Bossi's
symbolic secessionist movement.
Although recent political events have led many to wonder who is actually in
charge of the Prodi coalition government, investors should realize that this
coalition government by its very nature must offer compromise solutions. In our
view, recent political developments in Italy do not necessarily mean that the
Prodi government's reign will be short lived, but rather indicate that the
current Prodi coalition will experience its fair share of ups and downs in
governing.
Economic Overview
Italy's ambitious plan for cutting its deficit to meet the Maastricht limit
of 3.0% of Gross Domestic Product (GDP) by 1998, the year after the deadline for
eligibility in the Economic-Monetary Union (EMU), was submitted to Parliament in
early June of 1996. Most of the measures for the fiscal year 1997 Italian budget
are likely to be approved, as was the mini-budget to meet fiscal year 1996
targets which includes significant reductions in subsidies to state-owned firms.
Moreover, the planned spending cuts in the fiscal year 1997 Italian budget
include outright reductions in subsidies to many Italian families and less
funding for pensions. All of these deficit-reduction measures in the upcoming
budget should result in higher medical costs as well as higher state services
costs for many Italian citizens. A new regional tax to replace numerous local
taxes is planned and investment income from banks and Certificates of Deposit
(CDs) will be taxed at a uniform rate of 27%. One key assumption in the fiscal
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
year 1997 budget is that the average of taxes and revenues will remain unchanged
at 42% of GDP in 1996 and 1997.
The Italian government's inflation forecast calls for the Consumer Price
Index (CPI) to rise 3.9% in 1996, 2.5% in 1997 and 2.0% in 1998. However, our
forecast for inflation in Italy during the years of 1996 through 1998 is higher.
We anticipate Italy's annual rate of inflation for the remainder of 1996 to be
roughly 4.8%, 3.8% in 1997 and 4.2% in 1998. Confindustria Director-General
Innocenzo Cipoletta noted that the government's price targets are unrealistic as
long as nominal labor costs continue rising at a 5.5%-6.0% annual rate. We
expect that labor compensation in Italy will rise an average 5.8% in 1996 (after
a 4.2% annual rate of growth in 1995), but slow down to a 4.1% annual rate in
1997. Unless there is a dramatic rise in labor productivity, either Italian
corporate profits will suffer or prices will rise higher than current government
forecasts.
In our view, Italy faces an uphill battle with respect to meeting its strict
budgetary targets in the coming fiscal years. For example, in the first four
months of 1996, public-sector borrowing is already much higher than previously
expected. The rate of inflation, while improving as economic growth slows, is
currently rising at rates incompatible with the Italian government's 1996
target. In addition, we believe unemployment, which is now approximately 12.3%,
is likely to worsen because of slow economic growth and job layoffs. Therefore,
based on our analysis of current political and economic conditions, the
pressures to increase public spending in Italy should continue in the
foreseeable future.
Fund's Investment Strategy
While the Italian stock market was the best-performing stock market in
Europe during the first six months of 1996, most of the market's gains were
given back during July. From April through July 1996, the Italy Fund reduced the
number of positions in its portfolio from 67 to 43 securities. In the second
quarter of 1996, the Fund raised its cash levels by selling its holdings in SAI
(an insurance company); Costa Crociere (a cruise ship company); Olivetti Group
(a computer company); and Eridania Beghin Say (a food processing company). The
Fund increased its positions in Telecom Italia Mobile S.p.A. (a mobile telephone
company); Stet-Societa' Finanziaria Telefonica S.p.A. (a telecommunications
company); ENI (a diversified energy company that was recently privatized);
Saipem (an oil drilling company); and Rinascente (a retailer).
During the period covered by this report, the Italy Fund switched its
holdings from Italcementi (a cement manufacturer with approximately 25% group
sales in Italy) into Unicem because we believe this construction company will
benefit more from the recovery that is underway in the Italian cement sector
where an 8% price increase took effect on July 1, 1996. During the six-month
period ended July 31, 1996, the Italy Fund made an initial investment in Gucci
(luxury goods) and Pirelli (51% cables and 49% tires). While the Fund
participated in the initial public offering (IPO) of Mediolanum (a distributor
of life insurance and mutual funds) and subsequently sold the stock at a
significant profit, the Fund did not participate in the media company Mediaset's
recent IPO because of our belief that the risk factors, especially the
regulatory environment in Italy, were too high.
During the period covered by this report, the Italy Fund continued to reduce
its portfolio weighting in the insurance industry because many Italian insurance
companies are highly capitalized with a significant portion of their assets
invested in low-yielding real estate. The following chart shows the other
changes in the Italy Fund's industry weightings from March 29, 1996 through July
31, 1996:
Industry 3/29/96 7/31/96
-------- ------- -------
Automobiles 6.70% 5.72%
Banking 16.60% 12.81%
Construction 3.20% 3.50%
Consumer Products 3.30% 5.25%
Energy 2.60% 14.47%
2
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
Industry 3/29/96 7/31/96
-------- ------- -------
Engineering 4.20% 3.76%
Food 4.40% 3.26%
Insurance 18.50% 11.96%
Miscellaneous 7.50% 0.83%
Telecommunications 19.30% 23.74%
Textiles 1.70% 4.11%
Utilities 7.30% 8.65%
Cash 4.70% 1.94%
TOTAL 100.00% 100.00%
Conclusion
Because of Italy's high interest rate structure and the strong lira versus
the German mark, a consensus appears to be forming that the Italian economy may
be entering a recession. Therefore, we expect additional corporate earnings
disappointments for the remainder of 1996. In addition, as volatility has
increased recently in the U.S. stock market, many European markets have
experienced heavy selling pressure. Due to the rather volatile U.S. equity
market, international investors continue to gravitate towards higher-quality,
more liquid markets such as Germany and the U.K. Italy has become less of a
focus.
Despite this confluence of negative developments, we believe many Italian
stocks remain relatively inexpensive and therefore represent excellent long-term
investment values. For example, the Italian stock market is currently selling at
4.7 times 1996 cash earnings and corporate profits are estimated to rise at an
annual rate of 15% for the rest of 1996. While the new Prodi government has and
will continue to face many challenges over the coming months, we remain
optimistic that much-needed fiscal and electoral reforms will ultimately be
implemented in Italy.
In closing, thank you for your investment in the Italy Fund. We look forward
to continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
/s/ Mario d'Urso
Mario d'Urso
President
/s/ Rein W. van der Does
Rein W. van der Does
Investment Officer
August 14, 1996
3
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
THE ITALY FUND'S SECTORIAL STRUCTURE
JULY 31, 1996 (unaudited)
[PIE CHART APPEARS HERE]
Telecommunications 24.2%
Energy 14.8%
Banking 13.1%
Insurance 12.2%
Utilities 8.8%
Automobiles 5.8%
Consumer Products 5.3%
Textiles 4.2%
Construction 3.6%
Engineering 3.8%
Food 3.3%
Miscellaneous 0.9%
BCI INDEX SECTORIAL STRUCTURE
JULY 31, 1996 (unaudited)
[PIE CHART APPEARS HERE]
Telecommunications 21.8%
Banking 20.5%
Energy 18.6%
Insurance 17.3%
Automobiles 7.5%
Utilities 2.8%
Construction 2.5%
Engineering 2.4%
Textiles 2.2%
Consumer Products 1.1%
Food 2.0%
Miscellaneous 1.3%
4
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Schedule of Investments as of July 31, 1996 (unaudited)
================================================================================
Shares Security Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 99.3%
- --------------------------------------------------------------------------------
Automotive -- 5.8%
300,000 Fiat S.p.A.................... $ 940,499
330,600 IFIL Finanziaria di
Partecipazioni S.p.A........ 875,357
542,500 IFIL Finanziaria di
Partecipazioni S.p.A.
di Rsip NC**................ 762,620
900,000 Pirelli S.p.A................... 1,460,456
660,000 Sogefi S.p.A.................... 1,301,865
-----------
5,340,797
-----------
Banking -- 12.4%
1,700,000 Banca Fideuram S.p.A.......... 3,358,877
180,000 Banca Popolare di Bergamo/
Credito Varesino............ 2,662,906
1,800,000 Credito Italiano S.p.A........ 2,043,928
440,000 Istituto Mobiliare Italiano
S.p.A....................... 3,302,108
-----------
11,367,819
-----------
Construction -- 3.6%
600,000 Unicem S.p.A.
di Risp NC**................ 1,656,919
900,000 Vianini Lavori S.p.A.......... 1,621,414
-----------
3,278,333
-----------
Consumer -- 5.3%
225,000 Arnoldo Mondadori
Editore S.p.A............... 1,569,931
25,000 Industrie Natuzzi S.p.A.
ADR......................... 1,131,250
500,000 La Rinascente S.p.A.
di Risp NC**................ 1,315,015
260,000 Recordati S.p.A.
di Risp NC**................ 888,950
-----------
4,905,146
-----------
Energy -- 14.8%
2,560,000 Ente Nazionale Idrocarburi
S.p.A. #.................... 11,496,389
500,000 Saipem S.p.A.................. $ 2,040,575
-----------
13,536,964
-----------
Engineering -- 3.8%
101,000 Ansaldo Trasporti S.p.A....... 125,512
180,000 Danieli & Co.................. 1,080,548
266,750 Danieli & Co.
di Risp NC**................ 859,412
800,000 Sasib S.p.A.
di Risp NC**................ 1,462,297
-----------
3,527,769
-----------
Food -- 3.3%
800,041 Finanziarira
Autogrill S.p.A. #.......... 844,809
220,000 La Doria S.p.A. #............. 830,445
1,070,000 Parmalat Finanziaria S.p.A.... 1,336,713
-----------
3,011,967
-----------
Insurance -- 12.2%
200,000 Alleanza Assicurazioni
S.p.A....................... 1,611,288
140,000 Assicurazioni Generali
S.p.A....................... 3,205,402
1,602,000 Instituto Nazionale Delle
Assicurazioni............... 2,293,093
425,700 Riunione Adriatica
di Sicurta S.p.A............ 4,076,198
-----------
11,185,981
-----------
Miscellaneous -- 0.9%
850,000 Europa Investimenti +#........ 424,750
49,639 Quattrocentoduedue
Cat B +#.................... 359,018
-----------
783,768
-----------
Telecommunications -- 24.2%
50,500 Ericsson S.p.A................ 498,062
360,000 Sirti S.p.A................... 2,212,697
1,000,000 Stet Societa' Finanziaria
Telefonica S.p.A............ 3,052,808
See Notes to Financial Statements.
5
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Schedule of Investments as of July 31, 1996 (unaudited) (continued)
================================================================================
Shares Security Value
- --------------------------------------------------------------------------------
Telecommunications -- 24.2% (continued)
1,902,500 Stet Societa' Finanziaria
Telefonica S.p.A.
di Risp NC **............... $ 4,410,702
1,416,000 Telecom Italia S.p.A.......... 2,672,058
1,900,000 Telecom Italia S.p.A.
di Risp *................... 2,989,490
1,700,000 Telecom Italia Mobile
S.p.A. di Risp * #.......... 2,060,037
2,076,000 Telecom Italia Mobile
S.p.A. Ordinary #........... 4,314,720
-----------
22,210,574
-----------
Textiles -- 4.2%
100,000 Benetton Group S.p.A.......... 1,172,928
35,000 Gucci Group N.V.-- N.Y.
Registered Shares ADR....... 1,990,625
216,223 Simint S.p.A. #............... 682,408
-----------
3,845,961
-----------
Utilities -- 8.8%
1,800,000 Autostrade Concessioni
E Costruzioni............... 2,793,092
460,000 Edison S.p.A.................. 2,694,256
356,000 Italgas S.p.A................. 1,213,901
756,000 SONDEL -- Societa
Nordelettrica S.p.A......... 1,381,373
-----------
8,082,622
-----------
TOTAL COMMON
STOCKS
(Cost -- $83,101,134)......... 91,077,701
-----------
- --------------------------------------------------------------------------------
RIGHTS-- 0.0%
- --------------------------------------------------------------------------------
Food -- 0.0%
1,070,000 Parmalat Finanziaria S.p.A.
Rights, Expire 8/21/96
TOTAL RIGHTS
(Cost-- $0)................... 38,694
-----------
================================================================================
Face
Amount++ Security Value
- --------------------------------------------------------------------------------
BONDS -- 0.7%
- --------------------------------------------------------------------------------
Banking -- 0.7%
900,000,000 Banca Popolare di Bergamo
Convertible, 8.800%
due 12/31/00
TOTAL BONDS
(Cost-- $558,226)............. $ 616,137
-----------
TOTAL INVESTMENTS
AT VALUE -- 100%
(Cost-- $83,659,360+++)....... $91,732,532
===========
- ----------
* Risp -- Risparmio (savings shares).
** Risp NC -- Risparmio Non-Convertible
(non-covertible savings shares).
# Non-income producing security.
+ Security restricted as to resale (See Note 4).
++ Represents local currency.
+++ Aggregate cost for Federal income tax purposes is substantially the
same.
See Notes to Financial Statements.
6
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Statement of Assets and Liabilities
July 31, 1996 (unaudited)
================================================================================
ASSETS:
Investments, at value (Cost--$83,659,360).......... $91,732,532
Foreign currency (Cost--$1,716,095)................ 1,715,767
Cash............................................... 23,154
Receivable for securities sold..................... 294,601
Dividends and interest receivable.................. 102,812
-----------
Total Assets....................................... 93,868,866
-----------
LIABILITIES:
Management fees payable............................ 78,626
Accrued expenses................................... 225,195
Other liabilities.................................. 9,311
-----------
Total Liabilities.................................. 313,132
-----------
Total Net Assets...................................... $93,555,734
===========
NET ASSETS:
Par value of capital shares........................ $ 95,031
Capital paid in excess of par value................ 94,936,689
Undistributed net investment income................ 1,729,707
Accumulated net realized loss from security
transactions..................................... (11,278,020)
Net unrealized appreciation of investments and
foreign currencies............................... 8,072,327
-----------
Total Net Assets
(Equivalent to $9.84 a share on 9,503,089 shares
of $0.01 par value outstanding; 20,000,000
shares authorized).............................. $93,555,734
===========
See Notes to Financial Statements.
7
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Statement of Operations
For the Six Months Ended July 31, 1996 (unaudited)
================================================================================
INVESTMENT INCOME:
Dividends........................................... $ 2,448,706
Interest............................................ 236,619
Less: Foreign withholding tax....................... (564,959)
-----------
Total Investment Income............................. 2,120,366
-----------
EXPENSES:
Management fees (Note 2)............................ 448,344
Audit and legal..................................... 56,000
Directors' fees..................................... 51,250
Shareholder and system servicing fees............... 48,000
Custody............................................. 37,710
Shareholder communications.......................... 22,000
Registration fees................................... 14,000
Other............................................... 91,960
-----------
Total Expenses...................................... 769,264
-----------
Net Investment Income.................................. 1,351,102
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities).................................... (4,371,359)
Foreign currency transactions.................... 182,607
-----------
Net Realized Loss................................... (4,188,752)
-----------
Change in Net Unrealized Appreciation of
Investments and Foreign Currencies:
Beginning of period.............................. 2,519,552
End of period.................................... 8,072,327
-----------
Increase in Net Unrealized Appreciation............. 5,552,775
-----------
Net Gain on Investments and Foreign Currencies......... 1,364,023
-----------
Increase in Net Assets From Operations................. $ 2,715,125
===========
See Notes to Financial Statements.
8
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
Six Months
The Italy Fund Inc. Ended Year
7/31/96 Ended
Statements of Changes in Net Assets (unaudited) 1/31/96
================================================================================
OPERATIONS:
Net investment income.......................... $ 1,351,102 $ 1,131,274
Net realized loss.............................. (4,188,752) (3,663,972)
Increase in net unrealized appreciation........ 5,552,775 216,237
----------- -----------
Increase (Decrease) in Net Assets From
Operations.................................... 2,715,125 (2,316,461)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.......................... -- (190,062)
----------- -----------
Decrease in Net Assets From Distributions to
Shareholders.................................. -- (190,062)
----------- -----------
Increase (Decrease) in Net Assets.............. 2,715,125 (2,506,523)
NET ASSETS:
Beginning of period............................ 90,840,609 93,347,132
----------- -----------
End of period*................................. $93,555,734 $90,840,609
=========== ===========
*Includes undistributed net investment income of: $1,729,707 $195,998
=========== ===========
See Notes to Financial Statements.
9
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Notes to Financial Statements (unaudited)
================================================================================
1. Significant Accounting Policies
The Italy Fund Inc. ("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.
The significant accounting policies followed by the Fund are: (a) security
transactions are accounted for on trade date; (b) securities traded on national
securities markets are valued at the closing prices in the primary exchange on
which they are traded; securities listed or traded on certain foreign exchanges
or other markets whose operations are similar to the U.S. over-the-counter
market (including securities listed on exchanges where the primary market is
believed to be over-the-counter) and listed securities for which no sale was
reported on that date are valued at the mean between the bid and ask prices.
Securities which are listed or traded on more than one exchange or market are
valued at the quotations on the exchange or market determined to be the primary
market for such securities. If bid and ask quotations are not available, then
over-the-counter securities will be valued as determined in good faith by the
Board of Directors; (c) securities maturing within 60 days are valued at cost
plus accreted discount, or minus amortized premium, which approximates value;
(d) gains or losses on the sale of securities are calculated by using the
specific identification method; (e) interest income, adjusted for amortization
of premiums and accretion of discount, is recorded on the accrual basis; (f)
dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the Fund is informed
of the ex-dividend date; (g) dividends and distributions to shareholders are
recorded on the ex-dividend date; (h) the accounting records are maintained in
U.S. dollars. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars based on the rate of exchange of such currencies
against U.S. dollars on the date of valuation. Purchases and sales of
securities, and income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are adjusted
when reported by the custodian bank; (i) the Fund intends to comply with the
applicable provisions of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies and to make distributions of
taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (j) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. Reclassifications were made to the
Fund's capital accounts to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations. At January 31,
1996, a portion of overdistributed net investment income amounting to $512,466
has been reclassified to paid-in capital. Net investment income, net realized
gains and net assets were not affected by this change; and (k) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
In addition, the Fund may enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked to market daily,
by recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when the contracts are settled.
As of July 31, 1996, there were no open forward foreign currency contracts.
10
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
2. Management Agreement and Transactions with Affiliated Persons
At December 15, 1995, Smith Barney Mutual Funds Management Inc. ("SBMFM"), a
subsidiary of Smith Barney Holdings, Inc. ("SBH"), acts as investment manager of
the Fund. The Fund pays SBMFM a fee calculated at an annual rate of 0.95% of the
average daily net assets for all management and administrative services. This
fee is calculated daily and paid monthly.
For the six months ended July 31, 1996, the Fund incurred total brokerage
commissions of $117,370.
All officers (except one) and one Director of the Fund are employees of Smith
Barney Inc.
3. Securities Transactions
During the six months ended July 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (excluding short-term securities) when
aggregated amounted to $26,267,783 and $27,311,655, respectively.
As of July 31, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost amounted to
approximately $13,859,487 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value to approximately
$5,786,315 or net unrealized appreciation of $8,073,172.
4. Restricted Securities
Certain of the Fund's investments are valued at the direction of the Fund's
Board of Directors; these securities are restricted as to resale and have been
valued in good faith, taking into consideration the appropriate economic,
financial and other pertinent available information pertaining to the restricted
securities. The table below shows all securities valued by the Fund's Board of
Directors:
<TABLE>
<CAPTION>
Number of Acquisition 7/31/96 Value Per Percentage of
Security Shares Date Fair Value Unit Net Assets Cost
-------- --------- ----------- ---------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Europa Investimenti. 850,000 7/02/91 $424,750 $0.50 0.5% $623,396
Quattrocentoduedue..
Cat B............ 49,639 3/21/94 359,018 7.23 0.4 295,889
-------- --- --------
Total......... $783,768 0.9% $919,285
======== === ========
</TABLE>
5. 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 July 31, 1996, the Fund had no securities on loan to brokers.
11
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
6. Capital Loss Carryforwards
At January 31, 1996, the Fund had, for Federal income tax purposes,
approximately $6,602,000 of capital loss carryforwards available to offset
future capital gains. To the extent that these carryforward losses are used to
offset capital gains, it is probable that the gains so offset will not be
distributed. The amount and expiration of the carryforwards are indicated below.
Expiration occurs on January 31 of the year indicated:
2004 2005
---- ----
Capital Loss Carryforward...................... $1,756,000 $4,846,000
7. Concentration of Risk
Because the Fund concentrates its investments in securities issued by Italian
corporations, its portfolio may be subject to special risks and considerations
not typically associated with investing in a broader range of domestic
securities. In addition, the Fund is more susceptible to factors adversely
affecting the Italian economy than a fund not concentrated in these issuers to
the same extent.
12
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Financial Highlights
================================================================================
Set forth below is per share operating performance data for a share of common
stock outstanding throughout each period; total return and ratios to average net
assets are also provided. This information has been derived from information
provided in the financial statements and market price data for the Fund's
shares.
<TABLE>
<CAPTION>
1996(1) 1996 1995 1994(2) 1993 1992
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $9.56 $9.82 $9.84 $8.43 $11.08 $11.37
-------- -------- -------- -------- -------- --------
Income (Loss) From Operations:
Net investment income........................... 0.16 0.15 0.09 0.12 0.19 0.25
Net realized and unrealized gain (loss)......... 0.12 (0.39) 0.06 1.72 (2.84) 0.03
-------- -------- -------- -------- -------- --------
Total Income (Loss) From Operations............... 0.28 (0.24) 0.15 1.84 (2.65) 0.28
-------- -------- -------- -------- -------- --------
Dilution in NAV From Rights Offering.............. -- -- -- (0.32) -- --
-------- -------- -------- -------- -------- --------
Offering Expenses Charged to Paid-in Capital...... -- -- -- (0.03) -- --
-------- -------- -------- -------- -------- --------
Less Distributions From:
Net investment income........................... -- (0.02) (0.06) (0.07) -- (0.25)
Overdistribution of net investment income....... -- -- (0.11) -- -- --
Net realized gains.............................. -- -- -- -- -- (0.24)
Capital......................................... -- -- -- (0.01) -- (0.08)
-------- -------- -------- -------- -------- --------
Total Distributions............................... -- (0.02) (0.17) (0.08) -- (0.57)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period.................... $9.84 $9.56 $9.82 $9.84 $8.43 $11.08
======== ======== ======== ======== ======== ========
Market Value, End of Period....................... $8.00 $8.25 $8.75 $12.38 $8.88 $9.50
======== ======== ======== ======== ======== ========
Total Return...................................... 2.93%++ (2.43)% (27.90)% 40.54%# (6.58)% 1.00%
======== ======== ======== ======== ======== ========
Net Assets, End of Period (000's)................. $93,556 $90,841 $93,347 $93.518 $53,384 $70,186
======== ======== ======== ======== ======== ========
Ratios to Average Net Assets:
Net investment income........................... 3.27%+ 1.12% 0.85% 1.30% 2.04% 2.17%
Expenses*....................................... 1.64+ 1.42 1.69 1.69 1.70 1.53
Portfolio Turnover Rate........................... 29% 58% 42% 46% 33% 24%
Average commissions per share paid on
equity transactions(3).......................... $0.00** $0.00** -- -- -- --
</TABLE>
- ----------
(1) For the six months ended July 31, 1996 (unaudited).
(2) Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the period
since the use of the undistributed method does not accord with results of
operations.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
# The total return for the year ended January 31, 1994, adjusted for the
effect of the rights offering completed in January of 1994 is 45.85%
(unaudited).
* During the year ended January 31, 1996, the Fund earned credits from the
custodian which reduce service fees incurred. If the credits are taken into
consideration, the ratio of expenses to average net assets would have been
1.41%.
** Amount represents less than $0.01 per share.
13
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Quarterly Results of Operations (unaudited)
================================================================================
<TABLE>
<CAPTION>
Net Realized
and Unrealized Net Increase
Gain (Loss) on (Decrease) in
Investment Net Investment Investments and Net Assets
Income Income (Loss) Foreign Currencies 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, 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.... 262,201 0.03 37,867 0.01 376,390 0.04 21,587,589 2.27
July 31, 1994..... 1,568,187 0.17 933,702 0.10 2,317,766 0.24 (12,011,879) (1.26)
October 31, 1994.. 275,691 0.03 19,893 0.00 578,197 0.06 (6,426,246) (0.68)
January 31, 1995.. 396,171 0.04 (152,088) (0.02) (2,089,977) (0.22) (1,682,024) (0.18)
April 30, 1995.... 252,540 0.03 (74,178) (0.01) (1,556,369) (0.16) (6,441,384) (0.68)
July 31, 1995..... 1,539,509 0.16 1,141,497 0.12 (1,724,100) (0.18) 4,471,408 0.47
October 31, 1995.. 287,963 0.03 (81,879) (0.01) (172,867) (0.02 (6,926,030) (0.72)
January 31, 1996.. 282,141 0.03 145,834 0.02 (210,636) (0.02) 6,579,545 0.69
April 30, 1996.... 176,114 0.02 (188,803) (0.02) (1,589,084) (0.17) 6,727,660 0.70
July 31, 1996..... 1,944,252 0.20 1,539,905 0.16 2,953,107 0.31 (4,012,535) (0.42)
</TABLE>
14
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Dividend Reinvestment and Cash Purchase Plan (unaudited)
================================================================================
Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders of the Fund whose shares are registered in their own name
may elect to have all distributions automatically reinvested in additional
shares of the Fund by First Data Investor Services Group, Inc., ("First Data"),
as agent under the Plan. Distributions with respect to shares registered in the
name of shareholders, such as banks, brokers or nominees, which hold shares for
others (that is, in "street name"), may be reinvested by the broker or nominee
in additional shares under the Plan, but only if the service is provided by the
broker or nominee. Investors who own Fund shares registered in the street name
should consult their broker or nominee for details regarding reinvestment.
Shareholders who do not participate in the Plan will receive all distributions
in cash paid in dollars by check mailed directly to the shareholder by First
Data as dividend paying agent.
The number of shares of common stock participants in the Plan in lieu of a
cash dividend is determined in the following manner. Whenever the market price
of Fund shares is equal to or exceeds the net asset value of Fund shares at the
time such shares are valued for the purpose of determining the number of shares
equivalent to the cash dividend or distribution, participants will be issued
shares of the Fund at net asset value. If net asset value exceeds the market
price of Fund shares at such time, or if the Fund should declare a dividend or
other distribution payable only in cash, First Data will buy Fund shares in the
open market, on the New York Stock Exchange or elsewhere, beginning on the
record date for the dividend or distribution, until it has expended for such
purchases all of the cash that would otherwise be payable to the participants.
The number of purchased shares that will then be credited to the participants'
accounts is based on the average per share purchase price of Fund shares so
purchased, including brokerage commissions. Shares issued by the Fund are not
issued at a discount of more than 5 percent from the then current market value
of the Fund's shares. If the market price exceeds the net asset value of Fund
shares before First Data has completed its purchases, the average per share
purchase price paid by First Data may exceed the net asset value of the Fund's
shares, resulting in the acquisition of fewer shares than if the dividend or
distribution had been paid in shares issued by the Fund.
Participants in the Plan have the option of making additional semi-annual
cash payments to First Data in any amount from $100 to $3,000 for investment in
Fund shares. First Data uses all funds so received (as well as any dividends and
capital gains distributions received in cash) to purchase Fund shares in the
open market on or about February 15 and August 15 of each year.
Plan participants are not subject to any charge for reinvesting dividends or
capital gains distributions. Each Plan participant will, however, bear a pro
rata share of brokerage commissions incurred with respect to First Data's open
market purchases of Fund shares in connection with the reinvestment of dividends
or capital gains distributions.
The automatic reinvestment of dividends and capital gains distributions does
not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A participant in the Plan is treated
for federal income tax purposes as having received, on the dividend payment
date, a dividend or distribution in an amount equal to the cash that the
participant could have received instead of shares.
15
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
Dividend Reinvestment and Cash Purchase Plan (unaudited)(continued)
================================================================================
A shareholder may terminate participation in the Plan at any time by
notifying First Data in writing. A termination will be effective immediately if
notice is received by First Data not less than 10 days before any dividend or
distribution record date. Otherwise, the termination will be effective, with
respect to any subsequent dividends or distributions, on the first day after the
dividend or distribution has been credited to the participant's account in
additional shares of the Fund. Upon termination and according to a participant's
instructions, First Data will either (i) issue certificates for the shares
credited to a shareholder's Plan account together with a check representing any
fractional shares or (ii) sell such shares in the market.
Information concerning the Plan may be obtained from First Data at
1-800-331-1710.
---------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase at
market prices shares of its common stock in the open market.
16
<PAGE>
======================================================================
[LOGO] ITA
----------------------------------------------------------------------
The Italy Fund Inc.
INVESTMENT ADVISER and
ADMINISTRATOR
Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
ADVISORY BOARD
Andrea Farace
Pierre Henchoz
Ing. Dott. Ettore Lolli
Dott. Pietro Manes
DIRECTORS
Heath B. McLendon
Paolo M. Cucchi
Alessandro C. di Montezemolo
Dr. Paul Hardin
George Pavia
Mario d'Urso
OFFICERS
Heath B. McLendon
Chairman of the Board
Mario d'Urso
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Rein W. van der Does
Investment Officer
Irving P. David
Controller
Christina T. Sydor
Secretary
17
<PAGE>
THE ITALY FUND INC.
================================================================================
[LOGO] ITA
This report is sent to the shareholders of The Italy Fund Inc. for their
information. It is not a Prospectus, circular or representation intended for use
in the purchase or sale of shares of the Fund or of any securities mentioned in
this 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 objectives, 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.
388 Greenwich Street
New York, New York 10013
(212) 816-4605
FD01012 9/96
Semi-Annual
Report
July 31, 1996
