<PAGE>
Quarterly Report
October 31, 2000
The Italy Fund Inc.
<PAGE>
Dear Shareholder:
We are pleased to provide you with the quarterly report for The Italy Fund Inc.
("Fund") for the third fiscal quarter ended October 31, 2000.The Fund continued
to provide investors with strong returns when measured over the twelve-month
period ended October 31, 2000, though its quarterly performance was not
impervious to the dips experienced by the Italian stock market during the past
three months.The major Italian market indices posted negative returns for the
quarter.The Morgan Stanley Capital International Index ("MSCI Italy"),1 Milan
MIBtel 30 Index ("MIBtel 30")2 and the BCI General Index (BCI Index)3 reported
negative total returns of 5.20%, 6.53% and 5.48%, respectively.Very much in line
with these reported index returns, the portfolio value of the Fund dipped 6.31%
for the same period.The table below summarizes the Fund's stock market and
portfolio based on net asset value ("NAV")4 average annual return performance
for the period ended October 31, 2000.
The Italy Fund Inc.
Total Returns for the Period Ended October 31, 2000
Market Price NAV
------------ ---
Nine Months 10.76% 9.07%
One Year 49.64 42.59
Three Years 34.60 28.83
Five Years 26.03 24.95
Ten Years 10.99 9.86
The Italian Economy
Like most other economies, the Italian economy continues to feel the pinch of
higher oil prices and has been further squeezed by higher interest rates.The
annual rate of inflation seems to have stabilized around 2.6% but may edge
somewhat higher as a result of price increases in transportation and higher
tariffs. Most price increases are on items directly related to oil, but some
price pressures are seeping through to other consumer goods.The price of a
tazzini di cafe (cup of coffee), a reference for many Italian consumers similar
to the baguette in France, rose in September 2000 for
----------
1 The MSCI Italy is comprised of 50 companies traded on the Milan Stock
Exchange. Please note an investor cannot invest directly in an index.
2 The MIBtel 30 is comprised of 30 of the most liquid and highly capitalized
stocks listed on the Milan Stock Exchange, which account for 70% of the
exchange's total market cap. Please note an investor cannot invest directly
in an index.
3 The BCI Index is comprised of 296 companies traded on the Milan Stock
Exchange. Please note an investor cannot invest directly in an index.
4 The NAV is calculated by subtracting total liabilities from the closing value
of all securities held by the Fund (plus all other assets) and dividing the
results (total net assets) by the total number of shares outstanding.The NAV
fluctuates with changes in the value of the securities in which the Fund has
invested. However, the price at which the investor may buy or sell shares of
the Fund is at their market price as determined by supply and demand.
1
<PAGE>
the first time in many years.This event was widely reported in the Italian
press, sometimes even with alarmist overtones.Although this may temporarily dent
consumer confidence, the longer-term vitality of the Italian consumer is not
likely to suffer. Job creation data has been reassuring and, along with action
by the government to cut fiscal pressures, has led us to believe that consumer
spending is likely to become a driving force behind strong economic growth in
2001 and 2002.
This gap between the performance of the consumer and business sectors has been
the weak spot in the Italian economy.While the consumer has been somewhat
reticent, the business sector continues to perform well. Statistics show that
industrial production continues to grow, and that there is room for expansion in
both the number of orders and inventory levels. Domestic and external conditions
remain largely supportive of a stabilization of growth at a relatively high
level.
The Italian Stock Market and Portfolio Update
Within the context of volatile stock markets around the globe, the Italian stock
market continues to stand out as one of the best-performing.The majority of the
market's gains were realized during the telecommunications, media and technology
("TMT") euphoria earlier this year, while the strong showing of financial firms
following the reversal of fortunes among the TMTs helped to preserve some of the
market's gains.
Since we last reported to you in July, we made two significant changes in
portfolio allocation.We reduced the portfolio's allocation of TMT stocks to 24%
from 40%, and increased the portfolio's allocation to bank stocks to 26% from
21% at the end of the previous fiscal reporting period.At the end of the third
quarter, the portfolio's largest allocations were in banking and TMT, as
previously reported, and the paper & printing, energy and insurance sectors.
Among specific holdings, we sold Generali, which accounted for 5.9% of the
portfolio, as we considered the outlook for Alleanza Assicurazioni S.p.A. and
Bayerische Vita S.p.A. more promising within the insurance sector.We also
eliminated Industrie Natuzzi S.p.A. as well as Ducati Motor Holding S.p.A.; both
positions were small (approximately 1%) and neither had performed up to
expectations. In order to raise cash for the tender offer that concluded on
September 5, 2000, we trimmed all positions by 10% to 25%. (As reported to you
in the semi-annual report dated July 31, 2000, the Fund conducted a tender offer
for up to 25% of the Fund's shares.) During the past quarter we initiated a
small position in UniCredito Italiano S.p.A. as bank shares seem to attract more
interest.
On September 12, 2000, following the conclusion of the tender offer, the Board
of Directors approved the reinstatement of the Fund's active share repurchase
program.This repurchase program adds liquidity to the market for the benefit of
investors who wish to sell their shares, while benefiting long-term shareholders
by increasing the Fund's net asset value per share. For the period from
September 12, 2000 (date of reinstatement) through October 31, 2000, the Fund
repurchased 42,100 of shares of stock trading on
2
<PAGE>
the New York Stock Exchange at a cost of $712,367. Since the repurchase program
began in October 1998, the Fund has repurchased and retired 1,490,475 shares at
a cost of over $23 million and has increased the Fund's NAV by $0.48 cents per
share.
We conclude this quarter's letter with an affirmation of our enthusiasm for the
investment potential offered by the Italian stock market.Among European markets,
Italy has led the way in requirements for greater disclosure of information
(mandatory quarterly reporting) and companies are increasingly adopting polices
geared at enhancing stockholder value. Italy's investment culture is becoming
stock oriented; stock options and buy-ins are becoming more common in the
corporate environment; and private individuals are joining the investment ranks
either through direct purchase of stock or equity mutual funds. Finally, the
euro5 has been substantially undervalued for too long and a rebound is likely to
be on the horizon. And while no guarantees can be made, the sum of these factors
makes us believe that the Italian stock market offers considerably greater value
versus its peers. We look forward to reporting to you in the Fund's annual
report.
Sincerely,
/s/ Heath B. McLendon /s/ Mario d'Urso
Heath B. McLendon Mario d'Urso
Chairman President
/s/ Rein W. van der Does
Rein W. van der Does
Vice President and Investment Officer
November 22, 2000
The information provided in this letter represents the opinion of the manager
and is not intended to be a forecast of future events, a guarantee of future
results nor investment advice. Further, there is no assurance that certain
securities will remain in or out of the Fund. Please refer to pages 5 and 6 for
a list and percentage breakdown of the Fund's holdings.Also, please note any
discussion of the Fund's holdings is as of October 31, 2000 and is subject to
change.
-------------
5 The euro is the single currency of the European Monetary Union that was
adopted by Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the
Netherlands,Austria, Portugal and Finland on January 1, 1999.
3
<PAGE>
[LOGO]
The Italy Fund's Sectorial Structure*
--------------------------------------------------------------------------------
October 31, 2000 (unaudited)
[PIE CHART]
Telecommunications - Wireless 12% 1% Repurchase Agreement
1% Automotive
27% Banking
Telecommunications - Telephone 13% 3% Construction
Media Group 11% 5% Consumer Cyclical Textiles
Miscellaneous 0%** 5% Consumer Staples - Food
Insurance 10% 1% Consumer Staples - Retail
1% Engineering
3% Energy Exploration
7% Energy - International
BCI General Index Sectorial Structure
--------------------------------------------------------------------------------
October 31, 2000 (unaudited)
[PIE CHART]
Miscellaneous 6%
Textiles 1%
Utilities 11% 2% Automotive
24% Banking
Telecommunications 35% 9% Energy
Paper & Printing 4%
Insurance 8%
* As a percentage of total investments.
** Represents less than 1% of total investments.
4
<PAGE>
[LOGO OF ITA]
The Italy Fund Inc.
Schedule of Investments
October 31, 2000 (unaudited)
--------------------------------------------------------------------------------
Shares Security Value
--------------------------------------------------------------------------------
COMMON STOCK -- 100%
Automotive -- 0.9%
116,563 Brembo S.p.A. ...................................... $ 1,034,519
------------
Banking -- 27.4%
630,000 Banca Fideuram S.p.A. .............................. 9,718,596
630,000 Banca Popolare di Milano ........................... 3,930,158
1,080,000 BIPOP - Carire S.p.A. .............................. 8,531,616
450,000 San Paolo - IMI S.p.A. ............................. 7,246,991
300,000 UniCredito Italiano S.p.A. ......................... 1,535,854
------------
30,963,215
------------
Construction -- 3.1%
750,000 Buzzi Unicem S.p.A. di Risp NC++. .................. 3,477,284
------------
Consumer Cyclical Textiles -- 5.2%
60,000 Gucci Group N.V. - NY Registered Shares ............ 5,865,000
------------
Consumer Staples - Food -- 4.8%
490,027 Autogrill S.p.A.+ .................................. 5,411,978
------------
Consumer Staples - Retail -- 0.9%
109,750 Recordati S.p.A. di Risp NC++. ..................... 1,041,965
------------
Energy Exploration -- 3.4%
720,000 Saipem S.p.A. ...................................... 3,826,411
------------
Energy - International -- 6.9%
1,440,000 ENI S.p.A.+. ....................................... 7,762,672
------------
Engineering -- 1.0%
140,000 Danieli & Co. S.p.A. ............................... 618,715
200,000 Danieli & Co. di Risp NC++. ........................ 441,431
------------
1,060,146
------------
Insurance -- 9.8%
444,999 Alleanza Assicurazioni S.p.A.+. .................... 5,940,612
450,000 Bayerische Vita S.p.A. ............................. 5,149,178
------------
11,089,790
------------
See Notes to Financial Statements.
5
<PAGE>
[LOGO OF ITA]
The Italy Fund Inc.
Schedule of Investments
October 31, 2000 (unaudited) (continued)
--------------------------------------------------------------------------------
Shares Security Value
--------------------------------------------------------------------------------
Media Group -- 11.2%
363,316 Gruppo Editoriale L'Espresso S.p.A.+. ................. $ 3,969,442
360,000 Mediaset S.p.A. ....................................... 5,226,988
1,246,000 Seat - Pagine Gialle S.p.A.+ .......................... 3,390,117
------------
12,586,547
------------
Miscellaneous -- 0.1%
4,220 ETF Group* ............................................. 135,350
------------
Telecommunications - Telephone -- 13.1%
810,000 Telecom Italia S.p.A.+ ................................. 9,378,369
990,000 Telecom Italia S.p.A. di Risp NC+++ .................... 5,393,897
------------
14,772,266
------------
Telecommunications - Wireless -- 11.7%
990,000 Telecom Italia Mobile S.p.A.+ .......................... 8,466,774
900,000 Telecom Italia MobileS.p.A.di Risp NC++ ................ 4,786,828
------------
13,253,602
------------
TOTAL COMMON STOCK
(Cost -- $65,485,151 ................................... 112,280,745
------------
Face
Amount
-----------
REPURCHASE AGREEMENT -- 0.5%
$ 600,000 CIBC Wood Gundy Securities Inc.,6.470% due
11/1/00; Proceeds at maturity -- $600,108;
(Fully collateralized by U.S.Treasury Notes,
6.500% due 8/31/01; Market value $612,236)
(Cost -- $600,000) .................................. 600,000
------------
TOTAL INVESTMENTS -- 100%
(Cost-- $66,085,151**) ............................... $112,880,745
============
___________
+ All or a portion of this security is on loan (See Note 6).
++ Risp NC - Risparmio Non-Convertible (non-covertible savings shares).
* Security is valued by the Fund's Board of Directors and is restricted
as to re-sale (See Note 4).
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
6
<PAGE>
[LOGO OF ITA]
The Italy Fund Inc.
Statement of Assets and Liabilities
October 31, 2000 (unaudited)
--------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $66,085,151) ......................$ 112,880,745
Collateral for securities on loan (Note 6) ...................... 24,170,845
Foreign currency, at value (Cost -- $2,298,755) ................... 2,231,356
Receivable for securities sold ................................... 704,346
Dividends and interest receivable ................................ 119,994
------------
Total Assets ..................................................... 140,107,286
------------
LIABILITIES:
Payable for securities on loan (Note 6) .......................... 24,170,845
Management fees payable .......................................... 89,536
Payable to bank .................................................. 12,181
Accrued expenses ................................................. 19,013
-------------
Total Liabilities ................................................ 24,291,575
-------------
Total Net Assets ................................................. $115,815,711
-------------
NET ASSETS:
Par value of capital shares ...................................... $ 59,997
Capital paid in excess of par value .............................. 30,868,676
Overdistributed net investment income ............................ (434,314)
Accumulated net realized gain from security transactions ......... 38,603,421
Net unrealized appreciation of investments and foreign
currencies ..................................................... 46,717,931
============
Total Net Assets
(Equivalent to $19.30 a share on 5,999,735 shares of $0.01
par value outstanding; 20,000,000 shares authorized) ............ $115,815,711
============
See Notes to Financial Statements.
7
<PAGE>
[LOGO OF ITA]
The Italy Fund Inc.
Statement of Operations
For the Nine Months Ended October 31, 2000 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends ........................................................ $ 2,811,970
Interest ......................................................... 358,699
Less: Foreign withholding tax .................................... (377,090)
------------
Total Investment Income .......................................... 2,793,579
------------
EXPENSES:
Management fees (Note 2) ......................................... 923,279
Administration fees (Note 2) ..................................... 246,208
Custody .......................................................... 92,083
Audit and legal .................................................. 66,628
Directors' fees .................................................. 65,354
Shareholder communications ....................................... 42,297
Shareholder and system servicing fees ............................ 35,935
Pricing service fees ............................................. 225
Other ............................................................ 11,772
------------
Total Expenses ................................................... 1,483,781
------------
Net Investment Income ............................................ 1,309,798
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) ........ 38,593,653
Foreign currency transactions .................................. (1,552,554)
------------
Net Realized Gain ................................................ 37,041,099
------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period ............................................ 70,793,392
End of period .................................................. 46,717,931
------------
Decrease in Net Unrealized Appreciation .......................... (24,075,461)
------------
Net Gain on Investments and Foreign Currencies ................... 12,965,638
------------
Increase in Net Assets From Operations ........................... $ 14,275,436
============
See Notes to Financial Statements.
8
<PAGE>
[LOGO OF ITA]
The Italy Fund Inc.
Statements of Changes in Net Assets
For the Nine Months Ended October 31, 2000 (unaudited)
and the Year Ended January 31, 2000
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
October 31 January 31
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income......................................................... $ 1,309,798 $ 1,049,168
Net realized gain............................................................. 37,041,099 31,648,704
Increase (decrease) in net unrealized appreciation............................ (24,075,461) 948,607
-------------- --------------
Increase in Net Assets From Operations........................................ 14,275,436 33,646,479
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income......................................................... (1,849,433) (2,060,542)
Net realized gains............................................................ (10,421,880) (24,858,556)
-------------- --------------
Decrease in Net Assets From
Distributions to Shareholders............................................ (12,271,313) (26,919,098)
-------------- --------------
FUND SHARE TRANSACTIONS (NOTE 7):
Treasury stock acquired....................................................... (6,505,589) (13,678,215)
Tender offer (includes expenses of $95,722)................................... (40,413,689) --
-------------- --------------
Decrease in Net Assets From
Fund Share Transactions.................................................. (46,919,278) (13,678,215)
-------------- --------------
Decrease in Net Assets........................................................ (44,915,155) (6,950,834)
NET ASSETS:
Beginning of period........................................................... 160,730,866 167,681,700
-------------- --------------
End of period*................................................................ $ 115,815,711 $ 160,730,866
============== ==============
* Includes undistributed (overdistributed)
net investment income of:.................................................. $ (434,314) $ 1,668,382
============== ==============
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
[LOGO OF ITA]
The Italy Fund Inc.
Notes to Financial Statements (unaudited)
--------------------------------------------------------------------------------
1. Significant Accounting Policies
The Italy Fund Inc. ("Fund"), a Maryland corporation, is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as a non-diversified, closed-end management 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 price in the primary exchange on
which they are traded; securities for which no sales price was reported on that
date are valued at the mean between the bid and ask price. 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 premium and accretion of discount, is recorded on an accrual basis; (f)
dividend income is recorded on the ex-dividend date; foreign dividends are
recorded on the ex-dividend date or as soon as practical after the Fund
determines the existence of a dividend declaration after exercising reasonable
due diligence; (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 or 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.At January 31, 2000, reclassifications
were made to the capital accounts of the Fund to reflect permanent book/tax
differences and income and gains available for distributions under income tax
regulations. Net investment income, net realized
10
<PAGE>
[LOGO OF ITA]
The Italy Fund Inc.
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
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.
2. Management Agreement and Transactions with Affiliated Persons
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings, Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc., acts
as investment manager of the Fund.The Fund pays SSBC 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.
All officers (except one) and one Director of the Fund are employees of Salomon
Smith Barney Inc. ("SSB"), another subsidiary of SSBH. For the nine months ended
October 31, 2000, SSB received no brokerage commissions.
3. Investments
During the nine months ended October 31, 2000, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
Purchases.............................................. $35,504,871
===========
Sales.................................................. $94,967,149
===========
At October 31, 2000, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
Gross unrealized appreciation.......................... $47,210,218
Gross unrealized depreciation.......................... (414,624)
-----------
Net unrealized appreciation............................ $46,795,594
===========
11
<PAGE>
[LOGO OF ITA]
The Italy Fund Inc.
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
4. Securities Valued by the Fund's Board of Directors
One of the Fund's investments is valued at the direction of the Fund's Board of
Directors; this security is restricted as to resale and has been valued in good
faith, taking into consideration the appropriate economic, financial and other
pertinent available information pertaining to the restricted security.The table
below shows the security valued by the Fund's Board of Directors:
<TABLE>
<CAPTION>
Number of Acquisition 10/31/00 Value Per Percentage of
Security Shares Date Fair Value Unit Net Assets Cost
-------- --------- ----------- ---------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
ETF Group 4,220 3/13/2000 $135,350 $32.07 0.12% $297,774
</TABLE>
5. 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.
6. Lending of Portfolio Securities
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations. Fees earned by the Fund on securities lending are recorded as
interest income. Loans of securities by the Fund are collaterized by cash, U.S.
government securities or high quality money market instruments that are
maintained at all times in an amount at least equal to the current market value
of the loaned securities, plus a margin which may vary depending on the type of
securities loaned.The custodian establishes and maintains the collateral in a
segregated account.The Fund maintains exposure for the risk of any losses in the
investment of amounts received as collateral.
At October 31, 2000, the Fund had loaned common stocks which were collateralized
by cash.The market value for the securities on loan for the Fund was
$22,996,793.
12
<PAGE>
[LOGO OF ITA]
The Italy Fund Inc.
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
At October 31, 2000, the cash collateral received for these securities on loan
was invested as follows:
<TABLE>
<CAPTION>
Security Description Value
===================================================================================
<S> <C>
Time Deposits:
Banco Santander, London, 6.66% due 11/1/00 $ 1,194,134
Bank of Austria, 6.66% due 11/1/00 1,194,134
Bank of Ireland, 6.69% due 11/1/00 1,194,134
Banque Bruxelles Lambert London, 6.66% due 11/1/00 1,194,134
Barclays Bank PLC, 6.66% due 11/1/00 1,194,134
Caisse de Depots et Consign, Paris, 6.66% due 11/1/00 1,194,134
Firstar Bank, 6.66% due 11/1/00 1,197,566
Nordeutsche Landesbank G.C., Singapore, 6.66% due 11/1/00 1,194,134
Toronto Dominion, London, 6.66% due 11/1/00 1,194,134
Wells Fargo Bank, Minnesota, 6.66% due 11/1/00 1,197,566
Commercial Paper:
Associates Corp. of North America, 6.65% due 11/1/00 1,193,914
General Electric Credit, 6.66% due 11/1/00 1,197,344
UBS Finance, Inc., 6.65% due 11/1/00 1,193,914
Repurchase Agreements:
Bear Stearns, 6.68% due 11/1/00 2,296,206
CS First Boston Corp., 6.68% due 11/1/00 2,573,565
J.P. Morgan Securities, 6.70% due 11/1/00 1,194,134
Morgan Stanley, 6.61% due 11/1/00 2,573,565
----------------------------------------------------------------------------------
Total $ 24,170,846
==================================================================================
</TABLE>
Income earned by the Fund from securities loaned for the nine months ended
October 31, 2000 was $212,051.
7. Capital Stock
At October 31, 2000, the Fund had authority to issue 20,000,000 shares of common
stock with a par value of $0.01 per share.
On October 27, 1998, the Fund commenced a share repurchase plan. Since inception
of the share repurchase plan, the Fund has repurchased 1,490,475 shares with a
total cost of $23,579,048. For the nine months ended October 31, 2000, the Fund
has repurchased 340,100 shares with a total cost of $6,505,589.
In addition for the nine months ended October 31,2000, the Fund repurchased
2,012,879 shares through a tender offer amounting to $40,413,689 (including
expenses of $95,722).
13
<PAGE>
[LOGO OF 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 year ended January 31, except where noted.
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>
2000/(1)/(2)/ 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period............................. $ 19.24 $ 18.09 $ 14.49 $ 11.94 $ 9.56 $ 9.82
------- -------- -------- -------- -------- --------
Income (Loss) From Operations:
Net investment income........................... 0.17 0.12 0.17 0.07 0.10 0.15
Net realized and unrealized gain (loss)......... 1.18 3.94 3.82 2.50 2.52 (0.39)
------- -------- -------- -------- -------- --------
Total Income (Loss) From Operations................ 1.35 4.06 3.99 2.57 2.62 (0.24)
------- -------- -------- -------- -------- --------
Gain From Repurchase of Treasury Stock............. 0.14 0.27 0.07 -- -- --
------- -------- -------- -------- -------- --------
Gain on Tender Offer............................... 0.09 -- -- -- -- --
------- -------- -------- -------- -------- --------
Less Distributions From:
Net investment income........................... (0.23) (0.24) (0.20) (0.02) (0.24) (0.02)
Net realized gains.............................. (1.29) (2.94) (0.26) -- -- --
------- -------- -------- -------- -------- --------
Total Distributions................................ (1.52) (3.18) (0.46) (0.02) (0.24) (0.02)
------- -------- -------- -------- -------- --------
Net Asset Value, End of Period..................... $ 19.30 $ 19.24 $ 18.09 $ 14.49 $ 11.94 $ 9.56
======= ======== ======== ======== ======== ========
Market Value, End of Period........................ $ 17.00 $ 16.688 $ 14.938 $ 12.125 $ 10.000 $ 8.250
======= ======== ======== ======== ======== ========
Total Return, Based on Market Value (3)............ 10.76%++ 35.61% 26.96% 21.53% 24.49% (5.51)%
======= ======== ======== ======== ======== ========
Total Return, Based on
Net Asset Value (3)............................. 9.07%++ 29.10% 28.66% 21.59% 28.27% (2.43)%
======= ======== ======== ======== ======== ========
Net Assets, End of Period (000's).................. $15,856 $160,731 $167,682 $137,712 $113,433 $ 90,841
======= ======== ======== ======== ======== ========
Ratios to Average Net Assets:
Net investment income........................... 1.07%+ 0.68% 0.58% 0.61% 0.97% 1.12%
Expenses (4).................................... 1.21+ 1.23 1.22 1.29 1.42 1.42
Portfolio Turnover Rate............................ 23% 28% 22% 16% 47% 58%
</TABLE>
_______
(1) For the nine months ended October 31, 2000 (unaudited).
(2) Per share amounts have been calculated using the average shares method.
(3) The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
(4) During the years ended January 31, 1997 and January 31, 1996, the Fund
earned credits from the custodian which reduced service fees incurred. If
the credits are taken into consideration, the ratios of expenses to average
net assets would have been 1.42% and 1.41%, respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
14
<PAGE>
[LOGO OF ITA]
The Italy Fund Inc.
Quarterly Results of Operations (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Increase
Net Realized (Decrease) in
Investment Net Investment and Unrealized Net Assets
Income (Loss) Income (Loss) Gain (Loss) From Operations
--------------------- --------------------- ---------------------- ----------------------
Per Per Per Per
Quarter Ended Total Share Total Share Total Share Total Share
----------- ------- ----------- ------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
April 30, 1998..... $ 146,182 $ 0.02 $ (326,512) $ (0.03) $ 25,944,182 $ 2.73 $ 25,617,670 $ 2.70
July 31, 1998...... 2,658,231 0.28 2,148,071 0.23 5,682,751 0.60 7,830,822 0.83
October 31, 1998... 207,822 0.02 (255,194) (0.03) (17,814,957) (1.87) (18,070,151) (1.90)
January 31, 1999... (102,909) (0.01) (628,555) (0.07) 22,888,424 2.47 22,259,869 2.40
April 30, 1999..... 194,353 0.02 (289,898) (0.03) (2,892,195) (0.33) (3,182,093) (0.36)
July 31, 1999...... 2,483,951 0.29 2,020,175 0.23 (3,929,497) (0.46) (1,909,322) (0.22)
October 31, 1999... 59,189 0.01 (392,546) (0.05) (373,073) (0.04) (765,619) (0.09)
January 31, 2000... 203,844 0.02 (288,563) (0.03) 39,792,076 4.76 39,503,513 4.73
April 30, 2000..... 757,114 0.09 225,691 0.03 13,125,426 1.62 13,351,117 1.65
July 31, 2000...... 1,870,965 0.23 1,353,674 0.17 8,589,820 1.07 9,943,494 1.23
October 31, 2000... 165,500 0.03 (269,567) (0.04) (8,749,608) (1.46) (9,019,175) (1.50)
</TABLE>
15
<PAGE>
[LOGO]
The Italy Fund Inc.
Additional Shareholder Information (unaudited)
--------------------------------------------------------------------------------
On May 10, 2000, the annual meeting of the shareholders of the Fund was held for
the purpose of voting on the following matters:
1. The election of two Directors of the Fund for a three-year period;
2. Ratification of the selection of KPMG LLP as the independent auditors
of the Fund for the current fiscal year; and
3. Consideration of a non-binding shareholder recommendation that the
Board of Directors take steps to convert the Fund to an open-end
structure.
The results of the vote on Proposal 1 were as follows:
Shares % of Shares
Directors* Votes For Voted For
----------------------------------------------------------------------
Paolo M. Cucchi 2,370,885 41.36%
Mario D'Urso 2,372,271 41.38%
Phillip Goldstein 3,316,429 57.85%
Glenn Goodstein 3,316,429 57.85%
----------------------------------------------------------------------
*The following Directors, representing the balance of the Board of Directors,
continue to serve as Directors: Paul Hardin, George M. Pavia and Heath B.
McLendon.
The results of the vote on Proposal 2 were as follows:
<TABLE>
<CAPTION>
Shares % of Shares % of Shares % of
Voted For Shares Voted Votes Against Shares Voted Abstained Shares Abstained
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4,682,726 81.69% 450,927 7.87% 598,830 10.44%
-----------------------------------------------------------------------------------------
</TABLE>
The results of the vote on Proposal 3 were as follows:
<TABLE>
<CAPTION>
Shares % of Shares % of Shares % of
Voted For Shares Voted Votes Against Shares Voted Abstained Shares Abstained
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3,758,374 65.56% 1,933,341 33.73% 40,768 0.71%
-----------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
[LOGO]
The Italy Fund Inc.
Dividend Reinvestment and Cash Purchase Plan (unaudited)
--------------------------------------------------------------------------------
Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan ("Plan"), a
shareholder of the Fund whose shares are registered in his own name will
automatically be a participant in the Plan and will have all distributions
automatically reinvested in additional shares of the Fund by PFPC Global Fund
Services ("PFPC"), as dividend-paying agent under the Plan, unless the
shareholder informs PFPC that he elects to receive distributions in cash.
Distributions with respect to shares registered in the name of a broker-dealer
or nominee ("Nominee"), which holds shares for others (that is, in "street
name"), may be reinvested by the Nominee in additional shares under the Plan,
but only if the service is provided by the Nominee and the Nominee makes an
election on behalf of the shareholder to participate in the Plan. Investors who
own Fund shares registered in street name should consult their 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 PFPC as dividend paying agent.
The number of shares of common stock participants in the Plan receive 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 the greater of (i) net asset value per share or (ii) 95%
of the then current market 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, PFPC will buy Fund shares in the open market,
on the New York Stock Exchange or elsewhere, as soon as practicable after 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.Additionally, if the market
price exceeds the net asset value of Fund shares before PFPC has completed its
purchases, PFPC is permitted to cease purchasing shares and the Fund may issue
the remaining shares at the greater of (a) net asset value or (b) 95% of the
then current market price.
Participants in the Plan have the option of making additional semi-annual cash
payments to PFPC in any amount from $100 to $3,000 for investment in Fund
shares. PFPC 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.
17
<PAGE>
[LOGO]
The Italy Fund Inc.
Dividend Reinvestment and Cash Purchase Plan (unaudited) (continued)
--------------------------------------------------------------------------------
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 PFPC'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.
A shareholder may terminate participation in the Plan at any time by notifying
PFPC in writing. A termination will be effective immediately if notice is
received by PFPC no 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,
PFPC 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 PFPC Global Fund Services
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
shares of its common stock in the open market.
18
<PAGE>
[LOGO]
The Italy Fund Inc.
--------------------------------------------------------------------------------
INVESTMENT MANAGER AND OFFICERS
ADMINISTRATOR
Heath B. McLendon
SSB Citi Fund Management LLC Chairman
388 Greenwich Street
New York, New York 10013 Mario d'Urso
President
Lewis E. Daidone
ADVISORY BOARD Senior Vice President and Treasurer
Pierre Henchoz Rein W. van der Does
Vice President and Investment
Officer
Irving P. David
DIRECTORS Controller
Phillip Goldstein
Glenn Goodstein Christina T. Sydor
Dr. Paul R. Hardin Secretary
Heath B. McLendon
George M. Pavia
James J. Crisona, Emeritus
Alessandro C. di Montezemolo, Emeritus
19
<PAGE>
________________________________________________________________________________
This report is intended only for the shareholders of The Italy Fund Inc. 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 Euro/Dollar
exchange rate. This Index generally reflects ordinary shares (as opposed to
savings shares).
________________________________________________________________________________
The Italy Fund Inc.
388 Greenwich Street
NewYork, NewYork 10013
(212) 816-6082
FD01045 12/00
