Annual Report
October 31, 1997
Foreign Equity Fund
Invest With Confidence(registered trademark)
T. Rowe Price
Dear Investor,
The year ended October 31, 1997, was one of two quite separate
halves for the international investor. In the first half most
markets performed well, led by the U.S. where the S&P 500 kept
advancing to new highs. However, as the summer progressed there
was a growing realization that a number of economies in the
emerging markets of Southeast Asia had become overextended,
which led to heavy selling in the region that spilled over to
international stock markets.
Performance Comparison
Periods Ended 10/31/97 6 Months 12 Months
________________________________________________________
Foreign Equity Fund 2.04% 8.30%
MSCI EAFE Index 3.15 4.92
The last 12 months were disappointing for overseas stock markets, and the
returns of the Foreign Equity Fund were again behind the U.S. market. Over
the final six months, the fund's return of 2.04% was also behind the 3.15%
return of the Morgan Stanley Capital International Europe, Australasia and
Far East (MSCI EAFE) Index. However, over the fund's fiscal year, its return
was significantly ahead of the index.
Over the 12-month period, fund performance against the index was
significantly helped by an underweighting in Japan where the market performed
poorly in U.S. dollars. Another positive contribution came from our position
in Latin America, which did well over this period and is not part of the MSCI
EAFE Index. During the past six months, the fund lagged the index due to its
positions in emerging markets and to moderately adverse stock selection.
The U.S. market continued to be driven by strong corporate earnings and, with
inflation well under control, interest rates remained stable. Overseas the
economic picture was not quite as positive, but the stock markets of Europe
performed well at the beginning of the year. There was a powerful bull run
in the markets of Latin America.
In the emerging markets of Southeast Asia, problems grew increasingly
apparent during the past few months. The principal culprit was Thailand,
where there has been imprudent bank lending and excessive real estate
development. A weak government, dogged by constant changes in leadership,
proved unable to handle the mounting crisis, resulting in a collapsing stock
market. At first, the problem seemed confined to Thailand, but attention soon
shifted to a number of other economies in the region where rapid growth
looked unsustainable given the similar pattern of indebtedness.
Thus, the last six months have seen a savage bear market take hold in Asia,
and as the ripples spread to more established markets such as Tokyo and Wall
Street, investors questioned the impact of these developments on Japanese and
U.S. multinationals operating in the area. Europe was also caught up in the
turbulence, but the most spectacular declines occurred in Latin America,
which somewhat belatedly was dragged down by the widening loss of confidence
in emerging markets.
Turning to currency markets, the dollar has been strong against most overseas
currencies since the beginning of the year, dampening returns to U.S.
investors, but has turned in a mixed performance over the last three months.
European currencies picked up, with a particularly strong performance from
the British pound, but the minor Asian currencies continued to slip. Even the
yen has weakened recently against the dollar despite Japan's ever-widening
current account surplus.
Investment Review
Europe
In contrast with the turbulence of Asia, the economies of Europe made steady
progress over the last six months. The U.K. continued to lead the way with
strong consumer expenditure driving the service sector and a surprisingly
resilient performance turned in by exporters. The new Labour government
granted the Bank of England independence to set interest rates so that
monetary policy should now be based on controlling inflation over the longer
term rather than on political expediency. Seizing its new mandate with vigor,
the Bank raised base rates four times during the summer in an effort to rein
in an economy with the potential to overheat even though inflation is still
moderate. This, in turn, has supported sterling, recently the strongest of
the major currencies.
A strong currency and rising interest rates would usually have been enough
to unsettle the U.K. stock market, and the turmoil in Asia certainly did not
help. Never-theless, British stocks held up well in dollar terms. As investor
attention focused on the possibility of slower economic growth, our bias
toward growth stocks and smaller companies was justified as cyclicals and
manufacturing stocks sold off sharply.
Market Performance
Six Months Local Local Currency U.S.
Ended 10/31/97 Currency vs. U.S. Dollars Dollars
________________________________________________________
Australia -1.88% -9.82% -11.51%
France 2.98 1.40 4.42
Germany 7.32 0.61 7.98
Hong Kong -17.50 0.22 -17.32
Italy18.75 1.29 20.28
Japan-10.49 5.52 -5.55
Mexico 23.89 -5.42 17.17
Netherlands 16.27 0.38 16.71
Norway 15.52 1.72 17.51
Singapore -14.87 -8.05 -21.73
Sweden 11.74 4.83 17.13
Switzerland 11.32 5.52 17.47
United Kingdom 10.44 3.35 14.14
Source: FAME Information Services, Inc., using MSCI indices.
Elsewhere in Europe, there are signs that the major economies have survived
the stranglehold of tight fiscal policies as governments struggled to keep
their deficits in line with the Maastricht convergence criteria. Helped by
weak currencies and loose monetary policies, there are tentative signs of
recovery, particularly in the export sector. Germany is typical here. Earlier
this year German unemployment hit record levels, and it looked as though even
the Germans, always at the vanguard of European integration, would fail to
meet the stringent criteria required to join the European Monetary Union. In
fact, the German budget is in surplus and any weakness is entirely due to the
problems of the old East Germany. Therefore, progress depends on structural
improvement in the east, a long-term process. The fiscal position would also
improve if the government could agree on tax reform, but the corporate sector
is at least seeing a recovery in profitability, and the stock market has done
well.
In France the picture is similar with high unemployment, but the trade
account is in surplus and inflation remains low. France also intends to be
a founding member of the European Monetary Union, and there is little room
for relaxation of economic policy. Even the new left-wing government under
Monsieur Jospin realizes that EMU ambitions must prevail, and the outlook is
definitely a little brighter than it was six months ago. Italy has come
through another of its political crises with Mr. Prodi facing down a revolt
of his Communist governing partners to pass a budget that looked remarkably
sound by Italian standards. There is rising confidence that Italy can improve
on its record of government overspending, and it looks an increasingly likely
candidate to join EMU in the first round.
The stock markets of Continental Europe also performed reasonably well over
the last six months and, as in the U.K., stock prices in general held up
better than in Asia during the turbulence of October. As can be seen in the
Market Performance table, all of them are ahead in U.S. dollar terms over the
last six months, with double-digit returns from the U.K., Switzerland, and
the Netherlands, all of which are well represented in your portfolio.
Another feature livening up market sentiment was a wave of mergers and
acquisitions as corporations sought to position themselves better for an
integrated Europe and to compete on a wider global scale. In terms of size,
one of the largest was a $32 billion merger between the Anglo Dutch publisher
Reed Elsevier and its German Dutch rival Wolters Kluwer, which has long been
in the works and was finally announced. Reed Elsevier is becoming the world's
main provider of specialist professional infor-mation- "must-have" data for
lawyers, accountants, and scientists. Wolters Kluwer is the biggest legal
publisher in Germany and the Benelux countries, and there will be many
synergies from this combination. Two British drinks and food firms, Guinness
and Grand Metropolitan, finally consummated their marriage as the chairman
of LVMH, the French luxury goods company with a stake in Guinness, finally
agreed to terms. Since the two firms have a strong portfolio of brands that
complement each other, distribution and marketing costs should fall. Europe's
financial services industry is also consolidating, with a merger between the
Swiss insurance company Zurich Group and the British conglomerate BAT, an
important merger between Swedish bank Nordbanken and Finland's Merita, and
also a bid by Italian insurer Assicurazioni Generali for Assurances Generales
de France, France's third-largest insurer.
Far East
In Japan, which accounted for only 21% of fund assets, the economic picture
has changed quite dramatically over the last six months. At the beginning of
the year, growth was robust as the yen's weakness of 1996 fueled an export
boom and a strong service sector. In April, the government raised the sales
tax from 3% to 5%, which had the effect of causing an anticipatory consumer
boom in March followed by a sharp downturn in April. With more than half of
Japan's GDP accounted for by consumer spending, the economy never recovered
and the trend was not helped by the depressed housing sector and by weak
capital investment. The only bright spot was the export sector, with sales
of electronic equipment and vehicles to the U.S. and Europe particularly
strong. Reflecting the dire state of the domestic economy, imports have
stagnated and the trade surplus rose over 50% in yen terms in the six months
through September. Japan is now a significant overseas creditor and its
current account, supported by a net interest surplus, grew even more sharply.
Geographic Diversification
Europe Japan Far East Latin America Otherand
Reserves
61% 21% 7% 6% 5%
Despite the positives of a strong trade position and minimal inflation, the
government faces a considerable policy dilemma as it contemplates a very weak
economy. Monetary policy is already very loose and Japanese government bond
yields recently dipped below 2%. The economy has been awash with liquidity
for some time, and any further weakening of the yen will stimulate exports.
Moderate currency depreciation is probably a secret hope of Japan's
policymakers, but the trade surplus with the U.S. is already at levels that
historically have triggered loud complaints from Washington. A more
stimulatory fiscal policy is a reasonable option, but conservatism holds sway
in the Ministry of Finance as evidenced by the sales tax increase last
spring.
With this uncertainty, it is not surprising that the Japanese stock market
turned in a poor performance over the last six months. Corporations exposed
to the domestic economy were particularly weak but, in sharp contrast, the
multinationals fared much better.
Our strategy in the Tokyo market continued to favor the export and technology
sectors. Stocks such as NEC (communications and computers), Sony (consumer
electronics and media), and Canon (cameras and office equipment) remain among
our largest positions. In contrast, the portfolio has no exposure to bank
stocks-the largest sector in the index itself-where valuations remain
excessive given the problems of their loan books. Banking failures are likely
before the situation begins to improve, and with a high weighting in the
financial sector, the market as a whole is unlikely to perform well until
these problems are resolved.
Elsewhere in the Pacific, as noted, the economic turmoil that began in
Thailand rapidly spread to the "junior tigers" of the region. Economies such
as Indonesia, Malaysia, and the Philippines each share a common pattern of
over-lending to infrastructure and industrial development, which became
vulnerable as the export boom was not sustained. Even traditional,
commodity-based exports began to falter, and there was a round of competitive
devaluations either by choice or imposed by speculative pressure. Turning to
Northeast Asia, South Korea, once admired as one of the original "tiger"
economies, hit trouble when its export of electronic chips proved
particularly vulnerable to the slowdown in U.S. and European demand.
Corporate leverage here has been excessive, with a government joined
hand-in-hand with the banks in supporting a number of smaller conglomerates
that should have been allowed to fail long ago. Some of these corporations
have now filed for bankruptcy, but there is probably worse to come.
Portfolio exposure to these minor markets of the region is limited, but the
loss of confidence spread to the older tigers such as Singapore and Hong Kong
where the fundamentals are much more sound. Hong Kong's dollar is formally
pegged to the U.S. dollar, and this link survived a ferocious speculative
attack in October. So far it has held, but the cost has been huge increases
in domestic interest rates that, in turn, have hit the real estate and stock
market. In Singapore the currency is also backed by substantial reserves, but
stock prices have fallen just as far as in Hong Kong.
Latin America
The Latin American stock markets performed extremely well at the beginning
of the year but, not surprisingly, they were caught up in October's upheaval
in the emerging markets. This is frustrating for those watching their steady
economic renaissance because, in many ways, these developing economies are
in better shape than their counterparts in Asia. For example, the government
of Brazil has demonstrated a strong political will to protect the currency
even though this may push the economy into recession. President Cardoso has
orchestrated a strong campaign to defend the real through aggressive
intervention on the foreign exchange markets and a substantial increase in
overnight interest rates. Consumer expenditure in Brazil was already weak
even ahead of the hike in interest rates, but at least the slowing economy
has pushed inflation down to under 5%-a remarkable achievement for this
country. For the foreign investor, one of the most important developments in
Brazil is the continuing privatization program valued at $70 billion over the
next three years. Clearly this is ambitious, but the government has indicated
this program will go ahead despite the pressure on its currency and a very
unsettled stock market.
The prospects for the stock market depend on how quickly confidence returns
and interest rates fall. Much hinges on what damage is done to the economy,
but the banking system is in better shape than it has been for many years.
Brazil remains the core of our Latin American strategy and our exposure is
focused on the large utilities such as Telecomunicacoes Brasileiras, which
are at the center of the reform and privatization program.
Mexico has already experienced a painful readjustment process following the
peso devaluation at the end of 1994. Since then, the economy is much stronger
with foreign participation in the banking industry and wider integration with
the U.S. and Canada under NAFTA. The trade account is now in surplus, and
even the current account deficit is less than 2% of the GDP. With inflation
falling to under 15% in 1997 and consumers beginning to regain confidence,
the economy could well be entering a period of sustainable growth.
Argentina, too, was buffeted by the sell-off in October but the peg linking
the Argentine peso to the U.S. dollar seems to have held. There is strong
domestic political support for this link, which has helped reduce inflation
to a low level. With the Argentine economy now linked to that of Brazil, a
recession to the north would clearly have a negative impact. However, as the
country's banking system has been considerably strengthened, we expect the
peso link to the dollar to be maintained and the economy to continue its
steady improvement.
Investment Policy and Outlook
The year under review has been disappointing for the international investor,
and the volatile conditions of September and October have been particularly
trying. Despite the sound fundamentals of the U.S. economy, even Wall Street
was caught up in this turbulence while emerging markets were hit particularly
hard.
It is important to try to look through this period of stock market turbulence
and see how world economies might develop from here. In Europe, which
accounts for 61% of the fund's portfolio, we have seen an encouraging picture
of improving economic growth, rising exports, and currencies that have now
stabilized against the U.S. dollar. Valuations in Europe look reasonable, and
there is the added interest of corporate restructuring as companies position
themselves for European Monetary Union. As noted, we have already seen
activity in this area and expect the trend to continue as management
increasingly recognizes the importance of shareholder value. With a pickup
in economic growth, corporate restructuring, and a benign interest rate
environment, Europe in many ways looks similar to the U.S. economy several
years ago. If this is the case, maintaining a large position in Europe seems
sensible.
Turning to the Far East, clearly the prospects are less certain, and it will
take some time for the less-developed economies of Asia to put themselves
back on a sounder footing. The important point here is that stock markets
always tend to overdo things, and taking a longer-term view, attractive
valuations are beginning to emerge. This is especially true in Hong Kong, now
closely integrated with the growth potential of mainland China. Despite the
volatility of the region's stock markets, China has made huge progress and
seems on course to take over at some point from Japan as the driving force
of the region. Japan is still the largest economy in the Pacific, but its
economy is clearly struggling at the moment. However, unlike many of the
smaller economies of the region, it at least has a strong current account
surplus and substantial foreign exchange reserves. The stock market there
lists some of the best-managed companies in the world, and we believe it is
right to take advantage of current weakness by adding to our favorites.
In Latin America the markets will remain volatile, but again one cannot
ignore the economic achievements of these countries. Governments there seem
committed to the right policies for the future, and greater political
stability provides a firm platform for implementing them.
Summing up, the portfolio structure today gives the investor a reasonable
balance between the established economies overseas where we can find quality
companies at reasonable valuations, and less-developed markets where there
is perhaps more potential but at a higher risk. We continue to believe that
this strategy will serve us well in the future.
Respectfully submitted,
Martin G. Wade
President
November 21, 1997
Portfolio Highlights
Industry Diversification
Percent of
Net Assets
10/31/97
________________________________________________________
Services 25.4%
Finance 16.4
Consumer Goods 19.7
Capital Equipment 13.6
Energy 11.8
Materials 5.1
Multi-industry 3.1
Miscellaneous 0.2
Reserves 4.7
Net Assets 100.0%
Exchange Rates to U.S. Dollars
Exchange Rate
Country 10/31/97
________________________________________________________
Argentina 0.9999
Australia 1.4219
Belgium 35.5100
Brazil 1.1024
Canada 1.4093
Czech Republic 32.9629
Denmark 6.5540
Finland 5.1732
France 5.7682
Germany 1.7238
Hong Kong 7.7315
Italy 1693.0000
Japan 120.3500
Malaysia 3.3335
Mexico 8.3850
Netherlands 1.9415
New Zealand 1.6060
Norway 6.9774
Peru 2.7150
Portugal 175.8500
Singapore 1.5750
South Korea 965.0000
Spain 145.4700
Sweden 7.4899
Switzerland 1.4002
Thailand 41.0250
United Kingdom 0.5960
Security Classification
Percent Market
of Net Cost Value
10/31/97 Assets (000) (000)
Common Stock, Rights
and Warrants 92.1% $2,597,703 $2,910,132
Preferred Stocks
and Rights 3.2 85,910 100,967
Bonds 0.0 468 801
Short-Term
Investments 4.3 135,563 135,563
Total Investments 99.6 2,819,644 3,147,463
Other Assets Less
Liabilities 0.4 12,329 12,392
Net Assets 100.0% $2,831,973 $3,159,855
Twenty-Five Largest Holdings
Percent of
Net Assets
Company Country 10/31/97
________________________________________________________
Royal Dutch Petroleum Netherlands 2.7%
National Westminster
Bank United Kingdom 2.1
Novartis Switzerland 2.0
Wolters Kluwer Netherlands 1.7
SmithKline Beecham United Kingdom 1.7
Reed International United Kingdom 1.5
Shell Transport &
Trading United Kingdom 1.4
Telecomunicacoes
Brasileiras Brazil 1.3
Roche Holdings Switzerland 1.3
ING Groep Netherlands 1.2
Eaux Cie Generale France 1.2
Nestle Switzerland 1.2
Elsevier Netherlands 1.2
Glaxo Wellcome United Kingdom 1.2
Canon Japan 1.2
Kingfisher United Kingdom 1.1
Sankyo Japan 1.0
Orkla Norway 1.0
Total France 1.0
NEC Japan 0.9
Norsk Hydro Norway 0.9
Sony Japan 0.9
ABB Sweden/Switzerland 0.9
Astra Sweden 0.9
Denso Japan 0.9
________________________________________________________
Total 32.4%
Summary of Investments and Cash
October 31, 1997
Percent of Net Assets
Percent of
Equities! Cash Total MSCI EAFE*
__________________________________________________________
Europe
Austria - - - 0.4%
Belgium 1.3% - 1.3% 1.2
Czech Republic - - - -
Denmark 0.3 - 0.3 1.0
Finland 0.3 - 0.3 0.8
France 8.0 - 8.0 7.1
Germany 5.1 - 5.1 9.2
Ireland - - - 0.4
Italy 3.2 - 3.2 3.7
Netherlands 10.4 - 10.4 5.6
Norway 2.0 - 2.0 0.6
Portugal 0.5 - 0.5 -
Russia - - - -
Spain 2.0 - 2.0 2.5
Sweden 3.1 - 3.1 2.6
Switzerland 6.3 - 6.3 7.3
United Kingdom 18.0 - 18.0 21.1
__________________________________________________________
Total Europe 60.5% - 60.5% 63.5%
__________________________________________________________
Pacific Basin
__________________________________________________________
Australia 2.2% - 2.2% 2.6%
China 0.3 - 0.3 -
Hong Kong 2.6 - 2.6 2.8
India 0.2 - 0.2 -
Japan 21.0 - 21.0 28.7
Malaysia 0.5 - 0.5 1.1
New Zealand 0.4 - 0.4 0.3
Singapore 0.8 - 0.8 0.9
South Korea 0.1 - 0.1 -
Thailand - - - -
__________________________________________________________
Total Pacific
Basin 28.1% - 28.1% 36.4%
__________________________________________________________
Americas
Argentina 0.9% - 0.9% -
Brazil 3.1 - 3.1 -
Canada 0.3 - 0.3 -
Chile 0.5 - 0.5 -
Mexico 1.7 - 1.7 -
Panama - - - -
Peru 0.1 - 0.1 -
United States - 4.3% 4.3 -
Venezuela 0.1 - 0.1 -
__________________________________________________________
Total Americas 6.7% 4.3% 11.0% -
__________________________________________________________
Other Assets Less
Liabilities - 0.4 0.4 -
__________________________________________________________
TOTAL 95.3% 4.7% 100.0% 100.0%
* Total may not add to 100.0% due to rounding.
! Includes bonds convertible into equities.
Foreign Equity Fund
10/31/97
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the
fund over the past 10 fiscal year periods or since inception (for funds
lacking 10-year records). The result is compared with a broad-based
average or index. The index return does not reflect expenses, which have
been deducted from the fund's return.
Foreign Equity Fund
Lipper
Foreign Equity MSCI EAFE International
Fund Index Funds Average
9/7/89 $ 10,000 $ 10,000 $ 10,000
10/89 9,660 10,039 9,920
10/90 10,099 8,779 9,921
10/91 11,088 9,421 10,759
10/92 10,728 8,205 10,263
10/93 14,412 11,314 13,749
10/94 16,135 12,488 15,350
10/95 16,238 12,480 15,380
10/96 18,589 13,827 17,204
10/97 20,132 14,508 19,347
Total Return Performance
<TABLE>
<CAPTION>
Periods Ended
Calendar
Year-to-
10/31/97 1 Month 3 Months Date 1 Year 3 Years* 5 Years* 9/7/89*
____________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Foreign Equity
Fund -7.71% -10.56% 2.80% 8.30% 7.66% 13.42% 8.97%
S&P 500 Index -3.34 -3.76 25.31 32.11 27.51 19.87 15.77
MSCI EAFE Index -7.66 -9.74 2.17 4.92 5.12 12.07 4.66**
Lipper
International
Funds Average -7.54 -8.95 5.43 10.39 6.54 12.67 8.12
FT-A Euro
Pacific Index -7.53 -10.01 0.95 3.28 4.20 11.51 4.19**
<FN>
* Average annual compound total return. Annualized returns show how the fund would have
performed each year if its actual (or cumulative) returns for the periods shown had been
earned at a constant rate.
** From 8/31/89.
</FN>
Investment return and principal value represent past performance and will vary. Shares may be worth more
or less at redemption than at original purchase.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Foreign Equity Fund
For a share outstanding throughout each period
Year Ten Months> Year
Ended Ended Ended
10/31/97 10/31/96 10/31/95 10/31/94 10/31/93 12/31/92
<C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of
period $ 15.62 $ 13.99 $ 14.59 $ 13.32 $ 10.05 $ 10.73
Investment
activities
Net investment
income 0.21 0.21 0.18 0.09 0.13 0.17
Net realized and
unrealized gain
(loss) 1.07 1.78 (0.14) 1.48 3.14 (0.57)
Total from
investment
activities 1.28 1.99 0.04 1.57 3.27 (0.40)
Distributions
Net investment
income (0.22) (0.18) (0.12) (0.09) - (0.18)
Net realized
gain (0.17) (0.18) (0.52) (0.21) - (0.10)
Total distri-
butions (0.39) (0.36) (0.64) (0.30) - (0.28)
NET ASSET VALUE
End of period $ 16.51 $ 15.62 $ 13.99 $ 14.59 $ 13.32 $ 10.05
Ratios/Supplemental Data
Total return 8.30% 14.48% 0.64% 11.96% 32.54%(3.74)%
Ratio of expenses
to average net
assets 0.75% 0.76% 0.80% 0.82% 0.86%!0.99%
Ratio of net
investment
income to average
net assets 1.40% 1.67% 1.69% 1.26% 1.65%!1.49%
Portfolio turnover
rate 15.9% 13.8% 18.8% 22.0% 27.4%!35.1%
Average commission
rate paid $ 0.0017 $ 0.0017 - - - -
Net assets, end
of period
(in thousands) $ 3,159,855 $2,322,469 $1,559,619 $1,058,478 $489,389 $ 238,979
<FN>
! Annualized.
> The fund's fiscal year-end was changed to 10/31.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
Statement of Net Assets
Foreign Equity Fund
October 31, 1997
Shares/Par Value
In thousands
ARGENTINA 0.9%
Common Stocks 0.9%
Banco de Galicia Buenos Aires
(Class B) ADR (USD) 93,992 $ 2,278
Banco Frances del Rio
de la Plata ADR (USD) 109,808 2,704
Perez Companc (Class B) 772,082 4,836
Sociedad Comercial del Plata
ADR (144a) (USD) 6,631 96
Telecom Argentina Stet
(Class B) 114,560 573
Telecom Argentina Stet
(Class B) ADR (USD) 40,074 1,014
Telefonica de Argentina
(Class B) ADR (USD) 186,794 5,254
YPF Sociedad Anonima
(Class D) ADR (USD) 384,119 12,292
Total Argentina (Cost $25,187) 29,047
AUSTRALIA 2.2%
Common Stocks 2.1%
Australia & New Zealand
Bank Group 332,000 2,316
Australian Gas Light
Company 845,181 5,646
Boral Limited 679,506 1,787
Brambles Industries 88,000 1,692
Broken Hill Proprietary 697,238 6,914
Commonwealth Bank
of Australia 22,067 254
Commonwealth Bank
of Australia, Installment
Receipts, 11/14/97 563,300 4,714
Fosters Brewing Group 1,512,000 2,871
John Fairfax Holdings 1,344,000 2,968
Lend Lease 222,494 4,556
National Australia Bank 252,445 3,453
National Mutual Holdings 859,947 1,482
News Corporation 1,025,618 4,912
Publishing & Broadcasting 787,124 4,567
St. George Bank 425,079 2,575
Tabcorp Holdings 770,000 3,530
WMC 499,258 1,773
Westpac Bank 657,000 3,826
Woodside Petroleum 615,000 5,194
65,030
Preferred Stocks 0.1%
News Corporation 358,876 $ 1,593
News Corporation ADR (USD) 11,750 209
Sydney Harbour Casino
Holdings 2,220,600 2,264
4,066
Total Australia (Cost $64,682) 69,096
BELGIUM 1.3%
Common Stocks 1.3%
Dexia 24,759 2,705
Generale de Banque 21,588 8,831
Generale de Banque,
VVPR Strip* 1,524 1
Kredietbank 57,081 23,951
UCB 1,039 3,590
39,078
Convertible Bonds 0.0%
Kredietbank,
5.75%, 11/30/03 BEF 14,782,500 801
Total Belgium (Cost $27,297) 39,879
BRAZIL 3.1%
Common Stocks and Rights 0.4%
Companhia Siderurgica
Nacional 76,839,000 2,788
Eletrobras 11,582,768 4,675
Eletrobras ADR (USD) 20,340 412
Pao de Acucar GDS (USD) 111,340 2,036
Telecomunicacoes
de Sao Paulo* 967,420 206
Telecomunicacoes de Sao
Paulo, Rights, 11/11/97* 32,348 0
Unibanco, Units
(Each unit consists of 1
preferred share and 1
Unibanco Holdings
(Class B) share)* 59,729,000 3,359
White Martins 400,674 672
14,148
Preferred Stocks and Rights 2.7%
Banco Bradesco 465,618,322 3,463
Banco Itau 4,882,000 1,971
Brahma 5,531,989 3,462
Brasmotor 5,547,410 780
Cia Cimento Portland Itau 4,882,700 1,253
Cia Energetica de Sao
Paulo ADR (USD) * 20,600 $ 386
Cia Energetica Minas
Gerais 118,383,577 4,725
Cia Energetica Minas
Gerais ADR (144a) (USD) 16,530 657
Cia Energetica Minas
Gerais ADR, Cv. (USD) 23,337 928
Cia Energetica Minas
Gerais ADR, Sponsored,
Nonvoting (USD) 103,555 4,116
Cia Tecidos Norte
de Minas 3,724,770 1,385
Encorpar* 3,724,770 0
Lojas Americanas 37,644,000 307
Pao de Acucar GDS (USD) 6,600 121
Petrol Brasileiros 21,518,917 4,001
Telecomunicacoes
Brasileiras ADR (USD) 408,442 41,457
Telecomunicacoes de
Minas Gerais (Class B) 10,703,000 1,340
Telecomunicacoes de
Minas Gerais(Class B),
Preference Receipts* 132,753 12
Telecomunicacoes de
Sao Paulo 29,160,420 7,618
Telecomunicacoes de
Sao Paulo, Rights,
11/11/97* 975,054 1
Telecomunicacoes do
Rio de Janeiro 11,275,077 1,074
Telecomunicacoes do
Rio de Janeiro, Rights,
11/11/97* 437,179 4
Usiminas 391,919 2,844
Usiminas ADR (USD) 361,810 2,623
Usiminas ADR (144a)
(USD) 12,540 91
84,619
Total Brazil (Cost $81,911) 98,767
CANADA 0.3%
Common Stocks 0.3%
Alcan Aluminium 169,810 4,819
Royal Bank of Canada 61,480 3,287
Total Canada (Cost $5,846) 8,106
CHILE 0.5%
Common Stocks and Warrants 0.5%
Chilectra ADR (144a)
(USD) 82,522 $ 2,146
Chilgener ADS (USD) 78,377 2,136
Compania Cervecerias
Unidas ADS (USD) 43,830 1,068
Compania de
Telecomunicaciones de
Chile ADR (USD) 94,681 2,627
Empresa Nacional de
Electricidad de Chile
ADR (USD) 140,341 2,824
Enersis ADS (USD) 65,396 2,158
Five Arrows Chile
Investment Trust (USD) 231,740 638
Five Arrows Chile
Investment Trust, Warrants,
5/31/99 (USD)* 36,758 8
Genesis Chile Fund (USD) 66,410 2,989
Santa Isabel ADR (USD) 50,195 929
Total Chile (Cost $15,383) 17,523
CHINA 0.3%
Common Stocks 0.3%
Huaneng Power
International (Class N)
ADR (USD)* 413,700 9,101
Total China (Cost $8,310) 9,101
CZECH REPUBLIC 0.0%
Common Stocks 0.0%
SPT Telecom 8,781 1,012
Total Czech Republic
(Cost $834) 1,012
DENMARK 0.3%
Common Stocks 0.3%
Den Danske Bank 48,550 5,482
Tele Danmark (Class B) 13,050 766
Unidanmark (Class A) 40,121 2,712
Total Denmark (Cost $5,669) 8,960
FINLAND 0.3%
Common Stocks 0.3%
Nokia (Class A) 101,530 8,949
Total Finland (Cost $3,847) 8,949
FRANCE 8.0%
Common Stocks 8.0%
AXA 120,211 $ 8,232
Accor 18,740 3,489
Alcatel Alsthom 104,631 12,625
Assurances Generales
de France 65,582 3,451
Canal Plus 28,830 5,013
Carrefour 16,915 8,827
Cie de St. Gobain 84,886 12,185
Credit Commercial
de France 65,873 3,732
Danone 21,240 3,248
Dexia France, Bearer 19,298 1,937
Dexia France,
Registered 1998> 16,696 1,676
Dexia France,
Registered 1999> 20,520 2,060
Eaux Cie Generale 337,932 39,310
Elf Aquitaine 103,010 12,751
GTM Entrepose 25,080 1,565
Guilbert 32,371 4,226
Havas 22,490 1,482
L'Oreal 12,225 4,332
LVMH 48,297 8,205
Lapeyre 58,000 3,388
Legrand 20,839 3,880
Pathe 16,728 3,001
Pinault Printemps 47,073 21,528
Primagaz 6,680 498
Rexel 5,312 1,409
Sanofi 124,410 11,819
Schneider 218,806 11,683
Societe Generale 54,272 7,433
Sodexho 22,614 11,279
Television Francaise 88,346 8,225
Total (Class B) 275,811 30,602
Total France (Cost $222,550) 253,091
GERMANY 5.1%
Common Stocks and Warrants 4.7%
Allianz 61,610 13,885
Allianz, Warrants,
2/23/98* 13,000 1,418
Bayer 291,014 10,264
Bayerische Hypotheken
und Wechsel Bank 230,098 $ 9,544
Bayerische Vereinsbank 61,391 3,561
Bilfinger & Berger 80,960 2,907
Buderus 4,012 1,946
Commerzbank 102,930 3,493
Deutsche Bank 253,284 16,655
Deutsche Telekom 287,365 5,385
Gehe 327,224 17,085
Hoechst 94,660 3,602
Hornbach Baumarkt 14,770 438
Mannesmann 12,767 5,392
Praktiker 32,915 497
Rhoen Klinikum 52,994 5,073
SAP 37,160 10,660
Siemens 186,271 11,465
Veba 370,756 20,669
Veba, Warrants, 4/6/98* 9,526 3,205
Volkswagen 5,994 3,535
150,679
Preferred Stocks 0.4%
Fielmann 27,225 640
Fresenius 16,900 2,853
Hornbach Holdings 32,830 2,209
Krones 4,621 1,568
SAP 16,644 4,958
12,228
Total Germany (Cost $144,493) 162,907
HONG KONG 2.6%
Common Stocks 2.6%
China Light & Power 628,000 3,306
Dao Heng Bank Group 1,609,000 3,704
First Pacific 6,084,486 3,836
Guoco Group 1,774,000 3,878
HSBC Holdings 244 6
Henderson Land
Development 548,000 3,034
Hong Kong Land
Holdings (USD) 4,330,719 9,874
Hutchison Whampoa 3,003,000 20,780
New World Development 4,170,505 14,672
Sun Hung Kai Properties 277,000 2,042
Swire Pacific (Class A) 1,634,000 8,728
Wharf Holdings 3,508,000 7,169
Total Hong Kong (Cost $110,863) 81,029
INDIA 0.2%
Common Stocks 0.2%
State Bank of India
GDR (USD) 302,700 $ 5,449
Total India (Cost $4,283) 5,449
ITALY 3.2%
Common Stocks 3.2%
Assicurazioni Generali 153,000 3,421
Banca Commerciale
Italiana 670,000 1,828
Banca Fideuram 571,940 2,179
Credito Italiano 4,740,429 12,642
ENI 3,090,232 17,466
Gucci Group (USD) 97,641 3,552
IMI 522,757 4,732
Industrie Natuzzi
ADR (USD) 101,084 2,262
Italgas 730,325 2,631
Mediolanum 363,119 6,091
Rinascente 316,500 2,346
Telecom Italia 3,022,930 18,945
Telecom Italia Mobile 5,400,866 19,938
Telecom Italia Mobile,
Savings Shares 872,266 1,783
Total Italy (Cost $75,447) 99,816
JAPAN 21.0%
Common Stocks 21.0%
Advantest 51,900 4,291
Alps Electric 468,000 5,250
Amada 776,000 4,127
Canon 1,527,000 37,049
Citizen Watch 448,000 2,859
DDI 1,551 5,181
Daifuku 126,000 944
Daiichi Pharmaceutical 961,000 13,654
DaiNippon Screen
Manufacturing 682,000 5,531
Daiwa House 1,102,000 10,622
Denso 1,291,000 27,890
East Japan Railway 2,533 12,312
Fanuc 210,800 8,513
Hitachi 1,540,000 11,836
Hitachi Zosen 1,097,000 $ 2,416
Honda Motor 79,000 2,659
Inax 331,000 1,441
Ishihara Sangyo Kaisha 368,000 755
Ito-Yokado 360,000 17,888
Kao 611,000 8,529
Kawada Industries 107,000 317
Kokuyo 387,000 9,132
Komatsu 1,016,000 5,428
Komori 330,000 6,032
Kumagai Gumi 633,000 621
Kuraray 807,000 7,242
Kyocera 481,000 27,537
Makita 584,000 8,201
Marui 946,000 15,957
Matsushita Electric
Industrial 1,309,000 21,971
Mitsubishi 1,095,000 9,371
Mitsubishi Heavy Industries 4,383,000 21,524
Mitsubishi Paper Mills 458,000 1,214
Mitsui Fudosan 2,090,000 23,618
Mitsui Petrochemical
Industries 269,000 995
Murata Manufacturing 414,000 16,787
NEC 2,717,000 29,800
National House
Industrial 170,000 1,850
Nippon Hodo 176,000 1,037
Nippon Steel 5,662,000 11,667
Nippon Telephone &
Telecom 1,113 9,433
Nomura Securities 1,396,000 16,239
Pioneer Electronic 470,000 7,732
Sangetsu 111,000 1,799
Sankyo 986,000 32,525
Sega Enterprises 133,050 3,272
Sekisui Chemical 1,218,000 9,584
Sekisui House 685,000 5,863
Seven Eleven Japan 111,000 8,301
Sharp 1,300,000 10,100
Shin-Etsu Chemical 754,000 18,419
Shiseido 197,000 2,685
Sony 356,200 29,567
Sumitomo 1,431,000 10,226
Sumitomo Electric
Industries 2,105,000 $ 27,810
Sumitomo Forestry 435,000 3,145
TDK 300,000 24,877
Teijin 1,811,000 5,944
Tokio Marine & Fire
Insurance 419,000 4,178
Tokyo Electronics 178,000 8,874
Tokyo Steel
Manufacturing 383,200 2,706
Toppan Printing 763,000 9,573
Uny 361,000 5,849
Yurtec 154,000 1,039
Total Japan (Cost $739,324) 663,788
MALAYSIA 0.5%
Common Stocks 0.5%
Berjaya Sports Toto 1,572,000 4,291
Commerce Asset
Holdings 2,908,199 2,268
Resorts World 887,000 1,583
Tanjong 2,061,000 3,648
Time Engineering 1,215,000 525
United Engineers 1,151,000 2,728
Total Malaysia (Cost $34,796) 15,043
MEXICO 1.7%
Common Stocks 1.7%
Cemex (Class B)* 612,840 2,690
Cemex ADS (USD)* 302,160 2,342
Cemex ADS (144a)
(USD) * 410,812 3,184
Cifra (Class B) ADR
(USD) 395,587 758
Fomentos Economico
Mexicano (Class B) 663,862 4,671
Gruma (Class B)* 621,077 2,429
Gruma (Class B)
ADS (144a) (USD)* 150,784 2,337
Grupo Financiero Banamex
(Class B)* 966,552 1,913
Grupo Financiero Banamex
(Class L)* 31,801 58
Grupo Financiero Bancomer
(Class L)* 8,266 3
Grupo Industrial Maseca
(Class B) 1,664,467 $ 1,608
Grupo Modelo (Class C) 347,864 2,597
Grupo Televisa
GDR (USD)* 49,322 1,529
Kimberly-Clark Mexico
(Class A) 1,001,310 4,395
Panamerican Beverages
(Class A) (USD) 201,428 6,244
Telefonos de Mexico
(Class L) ADR (USD) 304,614 13,175
TV Azteca ADR (USD)* 194,300 3,716
Total Mexico (Cost $54,957) 53,649
NETHERLANDS 10.4%
Common Stocks and Warrants 10.4%
ABN Amro Holdings 862,208 17,364
Ahold 187,547 4,801
Akzo Nobel 21,098 3,717
Baan Company 51,155 3,623
Baan Company (USD) 58,260 4,085
CSM 274,349 12,520
Elsevier 2,462,182 38,680
Fortis Amev 264,177 10,382
ING Groep 902,305 37,877
ING Groep,
Warrants, 3/15/01* 149,267 1,537
Koninklijke PTT
Nederland 96,125 3,674
Nutricia 192,920 5,515
Otra 45,880 732
Polygram 303,179 17,240
Royal Dutch Petroleum 1,635,068 86,491
Unilever 461,184 24,514
Wolters Kluwer 444,211 54,545
327,297
Preferred Stocks 0.0%
ING Groep 10,797 54
Total Netherlands (Cost
$250,634) 327,351
NEW ZEALAND 0.4%
Common Stocks 0.4%
Air New Zealand
(Class B) 965,300 2,044
Carter Holt Harvey 499,115 870
Fletcher Challenge
Building 798,544 $ 2,412
Fletcher Challenge
Energy 484,044 2,170
Fletcher Challenge Forests
Division 1,183,654 1,142
Fletcher Challenge Paper 520,089 855
Telecom Corporation of
New Zealand 698,372 3,383
Tranz Rail Holdings 186,000 845
Total New Zealand (Cost
$15,074) 13,721
NORWAY 2.0%
Common Stocks 2.0%
Bergesen (Class A) 46,430 1,358
Norsk Hydro 536,982 29,630
Orkla (Class A) 342,000 31,517
Saga Petroleum (Class B) 85,950 1,527
Total Norway (Cost $43,463) 64,032
PANAMA 0.0%
Common Stocks 0.0%
Banco Latinoamericano
de Exportaciones
(Class E) (USD) 25,252 1,004
Total Panama (Cost $1,243) 1,004
PERU 0.1%
Common Stocks 0.1%
Credicorp (USD) 66,880 1,200
Telefonica del Peru
(Class B) 316,910 631
Telefonica del Peru
(Class B) ADS (USD) 83,788 1,655
Total Peru (Cost $3,725) 3,486
PORTUGAL 0.5%
Common Stocks 0.5%
Jeronimo Martins 221,857 14,509
Total Portugal (Cost $5,562) 14,509
RUSSIA 0.0%
Common Stocks 0.0%
Rao Gazprom ADS (USD) 38,080 852
Total Russia (Cost $600) 852
SINGAPORE 0.8%
Common Stocks 0.8%
City Developments 405,000 $ 1,697
DBS Land 1,448,000 2,464
Fraser & Neave 415,400 2,110
Overseas Chinese Bank 230,400 1,280
Overseas Union Bank 504,400 1,681
Singapore Land 1,318,000 3,749
Singapore Press 556,820 7,672
United Overseas Bank 685,352 3,786
Total Singapore (Cost $42,851) 24,439
SOUTH KOREA 0.1%
Common Stocks 0.1%
Samsung Electronic 53,817 2,114
Total South Korea (Cost $6,201) 2,114
SPAIN 2.0%
Common Stocks 2.0%
Argentaria Banca de
Espana 82,960 4,608
Banco Bilbao Vizcaya 133,650 3,574
Banco Popular Espanol 133,564 7,887
Banco Santander 401,921 11,259
Centros Comerciales
Pryca 91,773 1,457
Empresa Nacional de
Electricidad 478,288 9,009
Gas Natural 87,646 4,061
Iberdrola 587,376 7,026
Repsol 133,490 5,598
Telefonica de Espana 359,007 9,797
Total Spain (Cost $50,183) 64,276
SWEDEN 3.1%
Common Stocks 3.1%
ABB (Class A) 503,590 5,883
Astra (Class B) 1,850,945 28,667
Atlas Copco (Class B) 336,112 9,985
Electrolux (Class B) 181,767 15,046
Esselte (Class B) 91,130 1,983
Granges* 81,378 1,331
Hennes and Mauritz 409,955 16,776
Nordbanken 236,160 7,410
Sandvik (Class A) 70,120 2,125
Sandvik (Class B) 272,400 $ 8,292
Scribona (Class B) 49,060 648
Total Sweden (Cost $66,196) 98,146
SWITZERLAND 6.3%
Common Stocks and Warrants 6.3%
ABB 17,620 22,965
Adecco 49,253 15,653
Credit Suisse Group 46,155 6,502
Nestle 27,453 38,682
Novartis 39,803 62,338
Roche Holdings 4,704 41,337
Roche Holdings,
Warrants, 5/5/98* 31 2
Schweizerischer
Bankverein 41,064 11,041
Total Switzerland (Cost $143,240) 198,520
THAILAND 0.0%
Common Stocks 0.0%
Advanced Information
Service 139,974 737
Siam Cement 86,625 722
Total Thailand (Cost $4,792) 1,459
UNITED KINGDOM 18.0%
Common Stocks 18.0%
Abbey National 1,089,440 17,328
Argos 1,161,200 12,371
Asda Group 3,734,530 9,712
BG 1,214,200 5,256
British Petroleum 855,802 12,578
Cable & Wireless 2,474,200 19,759
Cadbury Schweppes 1,545,578 15,559
Caradon 2,668,215 8,506
Centrica* 901,200 1,262
Compass Group 760,000 8,008
David S. Smith 1,434,500 5,487
Electrocomponents 746,000 5,820
GKN 186,000 4,166
Glaxo Wellcome 1,790,650 38,154
Grand Metropolitan 2,753,000 24,826
Guinness 2,349,000 21,006
Heywood Williams
Group 249,576 $ 1,005
Hillsdown Holdings 675,300 1,903
John Laing (Class A) 594,300 3,644
Kingfisher 2,392,977 34,447
Ladbroke Group 1,587,000 7,109
National Westminster
Bank 4,567,619 65,905
Rank Group 1,334,000 7,453
Reed International 4,644,140 45,932
Rio Tinto 977,960 12,618
Rolls Royce 811,851 2,915
Safeway 2,104,200 13,706
Sears 304,000 301
Shell Transport &
Trading 6,289,000 44,527
SmithKline Beecham 5,734,230 54,356
T & N 1,851,000 7,814
Tesco 1,464,903 11,730
Tomkins 4,787,080 24,576
United News & Media 1,651,620 20,769
Total United Kingdom (Cost
$423,444) 570,508
VENEZUELA 0.1%
Common Stocks 0.1%
Compania Anonima
Nacional Telefonos de
Venezuela (Class D)
ADR (USD) 51,920 2,271
Total Venezuela (Cost $1,194) 2,271
SHORT-TERM INVESTMENTS 4.3%
Money Market Funds 4.3%
Reserve Investment
Fund, Inc., 5.65% $135,562,848 135,563
Total Short-Term Investments
(Cost $135,563) 135,563
Total Investments in Securities
99.6% of Net Assets
(Cost $2,819,644) $ 3,147,463
Other Assets Less Liabilities 12,392
NET ASSETS $ 3,159,855
____________
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 39,528
Accumulated net realized gain/loss -
net of distributions 81,393
Net unrealized gain (loss) 327,882
Paid-in-capital applicable to
191,374,520 shares of $0.01 par
value capital stock outstanding;
1,000,000,000 shares authorized 2,711,052
NET ASSETS $ 3,159,855
____________
NET ASSET VALUE PER SHARE $ 16.51
____________
* Non-income producing
> Securities contain some restrictions as to public resale-total of
such securities at year-end amounts to 0.1% of net assets.
144a Security was purchased pursuant to Rule 144a under the Securities
Act of 1933 and may not be resold subject to that rule except to
qualified institutional buyers - total of such securities at
year-end amounts to 0.3% of net assets.
ADR American depository receipt
ADS American depository share
BEF Belgian franc
GDR Global depository receipt
GDS Global depository share
USD U.S. dollar
VVPR Entitles holders to a reduced rate of foreign withholding tax.
The accompanying notes are an integral part of these financial statements.
Statement of Operations
Foreign Equity Fund
In thousands
Year
Ended
10/31/97
Investment Income
Income
Dividend (net of foreign taxes
of $ 7,641) $ 54,915
Interest 7,272
Total income 62,187
Expenses
Investment management 20,250
Custody and accounting 959
Registration 310
Shareholder servicing 36
Legal and audit 20
Directors 12
Prospectus and shareholder reports 2
Miscellaneous 19
Total expenses 21,608
Net investment income 40,579
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 92,006
Foreign currency transactions (4,468)
Net realized gain (loss) 87,538
Change in net unrealized gain or loss
Securities 53,320
Other assets and liabilities
denominated in foreign currencies 47
Change in net unrealized gain or loss 53,367
Net realized and unrealized gain (loss) 140,905
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 181,484
____________
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
Foreign Equity Fund
In thousands
Year Year
Ended Ended
10/31/97 10/31/96
Increase (Decrease) in Net Assets
Operations
Net investment income $ 40,579 $ 33,107
Net realized gain (loss) 87,538 37,807
Change in net unrealized
gain or loss 53,367 178,907
Increase (decrease) in net
assets from operations 181,484 249,821
Distributions to shareholders
Net investment income (33,766) (21,229)
Net realized gain (26,079) (21,229)
Decrease in net assets
from distributions (59,845) (42,458)
Capital share transactions*
Shares sold 1,016,742 772,534
Distributions reinvested 43,555 30,404
Shares redeemed (344,550) (247,451)
Increase (decrease) in
net assets from capital
share transactions 715,747 555,487
Net Assets
Increase (decrease) during
period 837,386 762,850
Beginning of period 2,322,469 1,559,619
End of period $ 3,159,855 $ 2,322,469
_________________________
*Share information
Shares sold 60,358 51,462
Distributions reinvested 2,750 2,138
Shares redeemed (20,421) (16,389)
Increase (decrease) in shares
outstanding 42,687 37,211
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
Foreign Equity Fund
October 31, 1997
Note 1 - Significant Accounting Policies
Institutional International Funds, Inc. (the corporation) is registered
under the Investment Company Act of 1940. The Foreign Equity Fund (the
fund), a diversified, open-end management investment company, is the sole
portfolio currently established by the corporation and commenced
operations on September 7, 1989.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company
industry; these principles may require the use of estimates by fund
management.
Valuation Equity securities are valued at the last quoted sales price at
the time the valuations are made. A security which is listed or traded on
more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security.
Debt securities are generally traded in the over-the-counter market and
are valued at a price deemed best to reflect fair value as quoted by
dealers who make markets in these securities or by an independent pricing
service. Short-term debt securities are valued at amortized cost which,
when combined with accrued interest, approximates fair value.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of
such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the
officers of the fund, as authorized by the Board of Directors.
Currency Translation Assets and liabilities are translated into U.S.
dollars at the prevailing exchange rate at the end of the reporting
period. Purchases and sales of securities and income and expenses are
translated into U.S. dollars at the prevailing exchange rate on the dates
of such transactions. The effect of changes in foreign exchange rates on
realized and unrealized security gains and losses is reflected as a
component of such gains and losses.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and
losses are reported on the identified cost basis. Dividend income and
distributions to shareholders are recorded by the fund on the ex-dividend
date. Income and capital gain distributions are determined in accordance
with federal income tax regulations and may differ from those determined
in accordance with generally accepted accounting principles.
Note 2 - Investment Transactions
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $1,087,944,000 and $435,311,000, respectively, for
the year ended October 31, 1997.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends
to continue to qualify as a regulated investment company and distribute
all of its taxable income.
For federal income tax purposes, fund distributions included $23,011,000
($0.15 per share) of long-term capital gains, which were paid to
shareholders of record on December 26, 1996. The fund intends to elect to
pass through foreign source income of $43,714,000 and foreign taxes paid
of $7,648,000 for its tax year ended October 31, 1997; the per share
effect of these pass-throughs is $0.23 and $0.04, respectively, based on
fund shares outstanding on October 31, 1997. These amounts may differ from
amounts reported in the accompanying financial statements due to
differences in financial statement and federal income tax reporting
requirements.
At October 31, 1997, the aggregate cost of investments for federal income
tax and financial reporting purposes was $2,819,644,000, and net
unrealized gain aggregated $327,819,000, of which $575,378,000 related to
appreciated investments and $247,559,000 to depreciated investments.
Note 4 - Related Party Transactions
The fund is managed by Rowe Price-Fleming International, Inc. (the
manager), which is owned by T. Rowe Price Associates, Inc. (Price
Associates), Robert Fleming Holdings Limited, and Jardine Fleming Holdings
Limited under a joint venture agreement. The investment management
agreement between the fund and the manager provides for an annual
investment management fee, of which $1,992,000 was payable at October 31,
1997. The fee is computed daily and paid monthly, and is equal to 0.70% of
average daily net assets.
In addition, the fund has entered into agreements with Price Associates
and two wholly owned subsidiaries of Price Associates, pursuant to which
the fund receives certain other services. Price Associates computes the
daily share price and maintains the financial records of the fund. T. Rowe
Price Services, Inc., is the fund's transfer and dividend disbursing agent
and provides shareholder and administrative services to the fund. T. Rowe
Price Retirement Plan Services, Inc., provides subaccounting and
recordkeeping services for certain retirement accounts invested in the
fund. The fund incurred expenses pursuant to these related party
agreements totaling approximately $133,000 for the year ended October 31,
1997, of which $12,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and
other accounts managed by T. Rowe Price and its affiliates and are not
available to the public. The Reserve Funds pay no investment management
fees. Distributions from the Reserve Funds to the fund for the year ended
October 31, 1997, totaled $1,249,000 and are reflected as interest income
in the accompanying Statement of Operations.
During the year ended October 31, 1997, the fund, in the ordinary course
of business, placed security purchase and sale orders aggregating
$66,696,000 with certain affiliates of the manager and paid commissions of
$191,000 related thereto.
Report of Independent Accountants
To The Board of Directors and Shareholders of
Foreign Equity Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial
position of Foreign Equity Fund (the portfolio constituting Institutional
International Funds, Inc., hereafter referred to as the "Fund") at October
31, 1997, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended and the financial highlights for each of the three years in the
period then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1997 by correspondence with
custodians and, where appropriate, the application of alternative auditing
procedures for unsettled security transactions, provide a reasonable basis
for the opinion expressed above. The financial statements of the Fund for
the fiscal periods presented prior to the year ended October 31, 1995,
were audited by other independent accountants whose report dated November
17, 1994, expressed an unqualified opinion on those statements.
PRICE WATERHOUSE LLP
Baltimore, Maryland
November 19, 1997
