HSBC MUTUAL FUNDS TRUST, N-30D, 1998-03-06

HSBC MUTUAL FUNDS TRUST
N-30D, 1998-03-06

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HSBC MUTUAL FUNDS TRUST
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------

[LOGO OMITTED]

ANNUAL REPORT
December 31, 1997

Managed by:
HSBC ASSET MANAGEMENT AMERICAS INC.

Sponsored and distributed by:
BISYS FUND SERVICES
<PAGE>
HSBC MUTUAL FUNDS TRUST
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
[LOGO OMITTED]
- --------------------------------------------------------------------------------

January 15, 1998

Dear Shareholder:

The HSBC International Equity Fund returned -2.06% for the 12 months ended
December 31, 1997. The year 1997 was characterized by de-synchronized market
returns between Europe and Asia. While Europe enjoyed the benefit of
productivity gains, moderate growth, and a low inflation environment, Asia was
rocked by both a currency crisis and substantial equity market selling,
especially in the second half of the year. What began in Asia as a currency
devaluation in Thailand led to weakness throughout the ASEAN (Association of
Southeast Asia Nations) and eventually to the rest of Asia as a whole. Interest
rates rose throughout the region in defense of the local currencies. Further, as
the local economies weakened, the prospects for future earnings growth also
weakened. As a result, stocks in Asia sold off sharply in the second half of
1997. To illustrate the differences in regional market performance, the Morgan
Stanley Capital International (MSCI) Pacific Basin Index declined 30.75% in
1997. Over the same 12 month period, the MSCI Europe Index returned a positive
24.19%.

The portfolio's country allocation favored Europe at the expense of Asia. In
fact, exposure to Asia (excluding Japan) was eliminated early in the 4th
quarter. The portfolio will remain overweight Europe at the expense of Asia over
the near term. What follows is more detail on our views of the regional markets
and economies.

EXECUTIVE SUMMARY
- -----------------

We expect financial and economic turbulence in Asia to result in a deceleration
of 0.5% to 1% in real economic growth in the OECD (Organization for Economic
Co-operation & Development) countries as a whole. However, regional differences
in growth rates will persist as various economies move through different stages
of the economic cycle. For example, in the US, real GDP growth is expected to
slow from the current rate of over 3% to around 2.5% per annum. In the UK, a
strong currency and rising interest rates coupled with the Asian crisis are
expected to cause a sharp slowdown in economic growth. In Continental Europe, we
expect the economic recovery to gather momentum, and real GDP growth to
potentially exceed trend levels. In Japan, we anticipate that the economy will
continue to struggle with growth averaging below 1% for 1998. Finally, in Asia,
the collapse in exchange rates and financial and real asset values is likely to
lead to a sharp contraction in domestic demand.

On the inflation front, we expect price pressures at the producer and consumer
level to remain subdued, as considerable spare capacity still exists around the
world. Consequently, we expect global interest rate environment to remain
generally stable.

In a global context, we consider the equity markets in the UK, Continental
Europe, and Australia to offer the best relative value, the US and Japan to
carry a neutral valuation, and Asia to be relatively unattractive at current
market levels.

<PAGE>
UNITED KINGDOM
- --------------

The UK economy will be the odd man out in Europe in 1998 if our expectation for
a sharp slowdown in economic growth proves correct. With the economy expected to
grow at 3.5% in 1997, our expectation for 2% growth in the whole of 1998 might
appear quite aggressive, but domestic and external conditions are deteriorating
rapidly. Interest rates have risen by 1.5%, the PSBR (Public Sector Borrowing
Requirement) is undershooting earlier estimates and the exchange rate has
strengthened considerably. Exports have been quite resilient to date but look
vulnerable from here particularly given the sharp slowdown we expect in Asia.
The inflation outturn has been slightly worse than expected and is likely to end
1997 above the Bank of England target. We are clearly now close to the top of
the interest rate cycle and our central expectation is for just one more rise.

We have again downgraded our earnings expectations and we remain below consensus
- - the risk to our own forecast we believe remains on the downside. The valuation
of the market remains in neutral territory and at 1% over core European yields,
Gilts could prove to be quite supportive. High levels of institutional
liquidity, accelerating M&A activity and share buybacks all underpin the market
at current levels.

CONTINENTAL EUROPE
- ------------------

There is a high probability that 1998 will be the first time this decade that
growth in Europe will be both above trend and stronger than growth in the US.
The recovery in European economies to date has been largely export driven, but
the impetus from exports is likely to slow somewhat next year because of softer
demand in the US, UK and Asia. Domestic demand will be the key to stronger
European economies, and the European consumer is beginning to show signs of
life. Unemployment is now falling everywhere except East Germany, the fiscal
retrenchment is close to an end, monetary policy remains quite loose and
consumer confidence is rising sharply. Inflationary pressures are not evident
and EMU inflation will probably average around 2% in '98. The convergence of
short term interest rates dictated by EMU will probably be at about 4% which
implies tighter policy in Germany and France but a loosening in Spain, Portugal,
Ireland and Italy, which overall represents a fairly benign interest rate
environment. Earnings, however, remain the key to driving European equity
markets higher. In this regard, stronger domestic demand, competitive exchange
rates and accelerating restructuring provide a very positive backdrop. The key
risk to earnings is a significantly weaker US$ which is not our central
expectation.

A constant flow of positive earnings forecast revisions together with markets
trading a little off their peaks leave valuations looking a little less rich. 12
month forward PE's are generally in the 17-18 range having been close to 20
three months ago. While not particularly cheap, European equity markets still
appear to offer reasonable relative value given our expectation of much slower
profits growth in the US, UK and Asia.

JAPAN
- -----

The Japanese capital markets have been focused in two areas over recent months;
continued distress in the financial system, and the weakening outlook for the
economy.

Bankruptcies in the banking and broking sectors in Japan have again called into
question the lack of transparency in Japan's financial sector, and the
gradualist approach the government and regulators have chosen to take to the
debt overhang from Japan's "bubble economy". These concerns have been
exacerbated by the growing financial distress in Asia, which heightens the need
for Japan to take a more pro-active approach on this issue. While the Bank of
Japan has clearly become more aggressive in terms of both the supply and price
of money, public funds are clearly urgently required to accelerate the

<PAGE>

process of writing off bad loans and re-capitalizing the banking sector. Plans
on this front are expected at the time of writing. While we expect the use of
public funds, we suspect that the approach will be to retain a degree of caution
in the management of this problem, rather than a more (market attractive) degree
of radicalism.

The real economy has struggled against the background of premature tightening of
fiscal policy in April, and financial sector worries with obvious implications
for consumer confidence. The "net" result has been growth of around zero. We
expect this situation to continue with a slight autonomous pick up in 1998 as
the effects of fiscal tightening drop out of the year on year comparisons. While
a more aggressive fiscal easing is, in fact required to generate more meaningful
growth within the economy, the present position of policymakers suggests this is
unlikely.

A "muddle through" scenario is expected with Japan doing sufficient to avoid
further major distress within either the financial or real economy, but not
enough to "break out" to a more optimistic scenario. The equity market is cheap,
but is likely to remain so until the structural issues are addressed. We believe
however that there are significant stock specific opportunities.

ASIA
- ----

The difficulties of Asia have been well documented in recent months.
Stockmarkets in some cases have fallen by over 70% in U.S. dollar terms. The IMF
has most recently been called into Korea and is now "operating" in much of the
region. The difficulties from trade deficits, overinvestment, and massive U.S.
dollar borrowings with insufficient regard to foreign exchange risks has led to
a collapse in exchange rates across much of the region, with obvious
implications for interest rates, and equity valuations, as well as distressed
borrowers.

The critical issue remains the implementation of IMF agreed terms, and whether
the political will exists to take the necessarily tough medicine. Investor
scepticism on this front is justifiably high, as is doubt on whether the
existing scale of the IMF packages is adequate. While macro economic risks
remain prevalent throughout the region from a "bottom up" perspective, Hong
Kong, China, Taiwan and Singapore appear sound with an absence of excessive
balance sheet leverage.

We expect to see a turnaround in trade accounts in 1998 but mostly as a result
of sharply contracting domestic demand. This will over time improve domestic
liquidity and the interest rate environment. Balance sheet adjustment will be
painful, but necessary, as is a pragmatic and transparent approach by
policymakers. We remain cautious regarding prospects for the region over the
next six months, but much of the known negatives have already been priced in.

We continue to manage the investments of the HSBC International Equity Fund with
the objective of delivering solid returns to our shareholders. We thank you for
choosing the HSBC International Equity Fund to help you meet your investment
needs.

Sincerely,

/S/ SIGNATURE
James B. McHugh
Director, Client Investment Services

The views expressed in this letter reflect those of the portfolio manager
through the end of the period covered by the report as stated on the cover.

3
<PAGE>

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERNATIONAL EQUITY FUND VS. MSCI-EAFE INDEX
- -----------------------------------------------------------------------
TOTAL RETURN -- SERVICE CLASS SHARES INSTITUTIONAL CLASS SHARES
- -----------------------------------------------------------------------
INCEPTION INCEPTION
1 YEAR (4/25/94) 1 YEAR (3/1/95)
- -----------------------------------------------------------------------
OFFERING PRICE(1) -6.97% -0.42% N/A N/A
NAV(2) -2.06% 1.07% -2.15% 5.94%
- -----------------------------------------------------------------------
[LINE GRAPH OMITTED]
FUND(1) MSCI-EAFE FUND(2)
4/94 9,476 10,000 10,000
6/94 9,544 10,088 10,050
12/94 9,069 9,991 9,550
6/95 8,946 10,250 9,420
12/95 9,478 11,111 9,970
6/96 9,893 11,605 10,417
12/96 10,083 11,775 10,617
6/97 11,015 13,104 11,599
12/97 9,845 11,999 10,399

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. WITHOUT CERTAIN FEE
WAIVERS, RETURN WOULD HAVE BEEN LOWER. THE FUND'S INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THE ORIGINAL COST.

(1) INCLUDES THE MAXIMUM SALES CHARGE OF 5.00%
(2) EXCLUDES THE MAXIMUM SALES CHARGE OF 5.00%

THE ABOVE ILLUSTRATION COMPARES A $10,000 INVESTMENT IN THE SERVICE CLASS SHARES
OF THE INTERNATIONAL EQUITY FUND ON APRIL 25, 1994 (DATE OF INCEPTION) TO A
$10,000 INVESTMENT IN THE MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA
AND FAR EAST INDEX ON THAT DATE. ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
ARE REINVESTED. PLEASE REFER TO THE BOX ABOVE FOR RETURNS ON INSTITUTIONAL CLASS
SHARES, WHICH HAVE BEEN OFFERED SINCE MARCH 1, 1995.

THE FUND'S PERFORMANCE TAKES INTO ACCOUNT ALL APPLICABLE FEES AND EXPENSES. THE
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA AND FAR EAST INDEX IS A
WIDELY ACCEPTED UNMANAGED INDEX OF OVER 900 SECURITIES LISTED ON THE STOCK
EXCHANGES OF THE FOLLOWING COUNTRIES IN EUROPE, AUSTRALIA, AND THE FAR EAST:
AUSTRALIA, AUSTRIA, BELGIUM, DENMARK, FINLAND, FRANCE, HONG KONG, IRELAND,
ITALY, JAPAN, MALAYSIA, NETHERLANDS, NEW ZEALAND. THIS INDEX IS A WIDELY
ACCEPTED UNMANAGED INDEX OF OVERALL STOCK MARKET PERFORMANCE, AND DOES NOT TAKE
INTO ACCOUNT CHARGES, FEES AND OTHER EXPENSES.

INTERNATIONAL INVESTING INVOLVES INCREASED RISKS AND VOLATILITY.

4
<PAGE>
BOARD OF TRUSTEES

JOHN P. PFANN* Chairman and President, JPP Equities, Inc.

WOLFE J. FRANKL* Former Director, North America, Berlin Economic
Development Corporation

HARALD PAUMGARTEN President, Paumgarten and Company

ROBERT A. ROBINSON* Trustee, Henrietta and B. Frederick H. Bugher Foundation

*Member of the Audit and Nominating Committees

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

OFFICERS

WALTER B. GRIMM PRESIDENT

ERIC F. ALMQUIST SENIOR VICE PRESIDENT

KAREN DOYLE VICE PRESIDENT

CHARLES L. BOOTH VICE PRESIDENT

THOMAS LINE TREASURER

STEVEN R. HOWARD SECRETARY

ALAINA V. METZ ASSISTANT SECRETARY

ROBERT L. TUCH ASSISTANT SECRETARY

<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997

INTERNATIONAL EQUITY FUND

<TABLE>
<CAPTION>
COUNTRY/ VALUE PERCENT OF
INDUSTRY SHARES SECURITY (NOTE 2) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
EQUITIES
AUSTRALIA
- ---------
BANKING 77,647 Australia & New Zealand Banking Group Ltd. ......... $ 513,005 0.8%
---------- -----
DIVERSIFIED 76,183 Broken Hill Proprietary Co. Ltd. ................... 707,346
131,187 Southcorp Ltd. ..................................... 434,223
---------- -----
1,141,569 1.7
---------- -----
ENTERTAINMENT 786,700 Crown Ltd.(b) ...................................... 348,559
286,072 Crown Ltd. Rights(b) ............................... 24,231
---------- -----
372,790 0.5
---------- -----
METALS & MINING 60,717 North Ltd. ......................................... 159,906 0.2
---------- -----
RETAIL 39,800 Coles Myer Ltd. .................................... 191,121 0.3
---------- -----
TOTAL AUSTRALIA .................................... 2,378,391 3.5
---------- -----
(COST - $3,036,218)
DENMARK
- -------
BANKING 7,404 Unidanmark A/S, Class A ............................ 543,902 0.8
---------- -----
TOTAL DENMARK ...................................... 543,902 0.8
---------- -----
(COST - $533,125)
FINLAND
- -------
TELECOMMUNICATIONS 7,814 Nokia AB, Class A .................................. 555,326 0.8
---------- -----
TOTAL FINLAND ...................................... 555,326 0.8
---------- -----
(COST - $509,215)
FRANCE
- ------
BANKING 9,862 Credit Commercial de France ........................ 676,225 1.0
---------- -----
CHEMICALS 11,516 Rhone-Poulenc SA, Class A .......................... 516,088
12,000 Rhone-Poulenc SA, Warrants(b) ...................... 41,291
---------- -----
557,379 0.9
---------- -----
COMPUTER SOFTWARE 8,446 Cap Gemini SA ...................................... 692,852 1.0
---------- -----
ELECTRONICS 6,047 SGS Thomson Microelectronics N.V.(b) ............... 374,428 0.6
---------- -----
FINANCIAL SERVICES 3,550 Compagnie Bancaire SA .............................. 575,354 0.8
---------- -----
HEALTH & PERSONAL CARE 5,475 ELF Sanofi SA ...................................... 609,763 0.9
---------- -----
INDUSTRIAL GOODS
& SERVICES 3,713 Compagnie de Saint Gobain .......................... 527,707 0.8
---------- -----
</TABLE>

6
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)

INTERNATIONAL EQUITY FUND

<S> <C> <C> <C> <C>
EQUITIES (continued)
FRANCE (continued)
- ------
INSURANCE 7,964 Axa-UAP .......................................... $ 616,509 0.9%
---------- -----
OIL CO.-INTEGRATED 6,322 Total SA, Class B ................................ 688,332 1.0
---------- -----
RETAIL 1,011 Pinault-Printemps-Redoute SA ..................... 539,627 0.8
---------- -----
TOTAL FRANCE ..................................... 5,858,176 8.7
---------- -----
(COST - $4,748,022)
GERMANY
- -------
APPAREL-FOOTWEAR 4,256 Adidas AG ........................................ 563,350 0.8
---------- -----
AUTOMOBILES 735 Bayerische Motoren Werke AG ...................... 549,806
939 Volkswagen AG .................................... 524,846
---------- -----
1,074,652 1.6
---------- -----
BANKING 8,716 Bayerische Vereinsbank AG ........................ 562,309
19,679 Commerzbank AG ................................... 766,128
---------- -----
1,328,437 2.0
---------- -----
CHEMICALS 14,722 BASF AG .......................................... 525,656
12,834 Bayer AG ......................................... 476,446
3,631 SGL Carbon AG .................................... 464,466
---------- -----
1,466,568 2.2
---------- -----
COMPUTER SOFTWARE 1,909 SAP AG, Vorzug (Preferred) ....................... 620,251 0.9
---------- -----
INDUSTRIAL GOODS
& SERVICES 1,580 Mannesmann AG .................................... 793,496
2,057 Thyssen AG ....................................... 439,304
---------- -----
1,232,800 1.8
---------- -----
INSURANCE 4,000 Allianz AG ....................................... 1,032,233 1.5
---------- -----
OIL CO.-INTEGRATED 9,823 RWE AG ........................................... 527,195 0.8
---------- -----
TOTAL GERMANY .................................... 7,845,486 11.6
---------- -----
(COST - $6,934,141)
</TABLE>

7
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)

INTERNATIONAL EQUITY FUND

<S> <C> <C> <C> <C>
EQUITIES (continued)
IRELAND
- -------
BANKING 47,755 Bank of Ireland ................................... $ 736,481 1.1%
---------- -----
PAPER &
RELATED PRODUCTS 102,000 Jefferson Smurfit Group PLC ....................... 287,860 0.4
---------- -----
TOTAL IRELAND ..................................... 1,024,341 1.5
---------- -----
(COST - $789,989)
ITALY
- -----
BANKING 78,769 Istituto Bancario San Paolo di Torino ............. 752,941 1.1
---------- -----
INSURANCE 35,211 Assicurazioni Generali SpA ........................ 865,340 1.3
---------- -----
OIL & GAS EXPLORATION,
PRODUCTION & SERVICES 79,897 Ente Nozionale Idrocarburi SpA .................... 453,263 0.7
---------- -----
TELECOMMUNICATIONS 90,437 Telecom Italia SpA ................................ 578,020
123,237 Telecom Italia Mobile SpA ......................... 569,136
---------- -----
1,147,156 1.7
---------- -----
TOTAL ITALY ....................................... 3,218,700 4.8
---------- -----
(COST - $2,725,333)
JAPAN
- -----
BANKING 22,000 Bank of Tokyo - Mitsubishi Ltd. ................... 304,566
23,000 Sanwa Bank Ltd. ................................... 233,501
26,000 Sumitomo Bank Ltd. ................................ 297,952
37,000 Sumitomo Trust & Banking Corp. .................... 192,938
---------- -----
1,028,957 1.5
---------- -----
BROKERAGE SERVICES 25,000 Nomura Securities Co. Ltd. ........................ 334,561 0.5
---------- -----
BUILDING MATERIALS 78,000 Juken Sangyo Co. Ltd. ............................. 203,367 0.3
---------- -----
CHEMICALS 116,000 Asahi Chemical Industry Co. Ltd. .................. 394,336 0.6
---------- -----
COMMERCIAL SERVICES 39,000 Yamato Transport Co. Ltd. ......................... 524,915 0.8
---------- -----
CONSTRUCTION 53,000 Obayashi Corp. .................................... 180,986 0.3
---------- -----

</TABLE>
8
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)

INTERNATIONAL EQUITY FUND

<S> <C> <C> <C> <C>
EQUITIES (continued)
JAPAN (continued)
- -----
ELECTRICAL & ELECTRONICS 64,000 Hitachi Ltd. ..................................... $ 457,772
16,000 Murata Manufacturing Co. Ltd. .................... 403,627
5,000 Rohm Co. Ltd. .................................... 511,456
6,000 Sony Corp. ....................................... 535,298
---------- -----
1,908,153 2.8%
---------- -----
FINANCIAL SERVICES 5,000 Credit Saison Co. Ltd. ........................... 123,826 0.2
---------- -----
FOOD & HOUSEHOLD
PRODUCTS 45,000 Kao Corp. ........................................ 650,664 1.0
---------- -----
INDUSTRIAL GOODS
& SERVICES 16,000 Fuji Machine Manufacturing Co. Ltd. .............. 387,629 0.6
---------- -----
LEISURE, RECREATION
& GAMING 15,800 NAMCO Ltd. ....................................... 460,556 0.7
---------- -----
OFFICE EQUIPMENT
& SUPPLIES 30,000 Ricoh Co. Ltd. ................................... 373,786 0.5
---------- -----
OIL & GAS-WHOLESALE 156,000 Cosmo Oil Co. Ltd. ............................... 237,561 0.3
---------- -----
PAPER &
RELATED PRODUCTS 86,000 Nippon Paper Industries Co. ...................... 338,653 0.5
---------- -----
PHARMACEUTICALS 21,000 Sankyo Co. Ltd. .................................. 476,461 0.7
---------- -----
PHOTOGRAPHY 14,000 Fuji Photo Film Co. .............................. 538,374
9,300 Noritsu Koki Co. Ltd. ............................ 230,316
---------- -----
768,690 1.1
---------- -----
REAL ESTATE 38,000 Mitsubishi Estate Co Ltd. ........................ 415,010 0.6
---------- -----
RETAIL 8,300 Family Mart Co. Ltd. ............................. 298,752
6,000 Ito Yokado Co. Ltd. .............................. 306,873
---------- -----
605,625 0.9
---------- -----
STEEL 209,000 Nippon Steel Corp. ............................... 310,234 0.4
---------- -----
TELECOMMUNICATIONS 62 Nippon Telegraph & Telephone Corp. ............... 534,067 0.8
---------- -----
</TABLE>

9
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)

INTERNATIONAL EQUITY FUND

<S> <C> <C> <C> <C>
EQUITIES (continued)
JAPAN (continued)
- -----
TRANSPORTATION 210,000 Mitsui O.S.K. Lines, Ltd.(b) ..................... $ 292,337 0.4%
---------- -----
WHOLESALE &
INTERNATIONAL TRADE 43,000 Mitsui & Co. ..................................... 255,312 0.4
---------- -----
TOTAL JAPAN ...................................... 10,805,686 15.9
---------- -----
(COST - $13,981,064)
NETHERLANDS
- -----------
BANKING 21,485 ING Groep N.V. ................................... 905,088 1.3
---------- -----
ELECTRONICS 6,339 Phillips Electronics N.V. ........................ 380,235 0.6
---------- -----
FOOD PRODUCTS
& SERVICES 10,114 Unilever N.V. CVA ................................ 623,635 0.9
---------- -----
OIL CO.-INTEGRATED 18,257 Royal Dutch Petroleum Co. ........................ 1,002,356 1.5
---------- -----
PRINTING & PUBLISHING 5,587 Wolters Kluwer N.V. CVA .......................... 721,792 1.1
---------- -----
RETAIL 18,416 Koninklijke Ahold N.V. ........................... 480,561 0.7
---------- -----
TOTAL NETHERLANDS ................................ 4,113,667 6.1
---------- -----
(COST - $3,650,829)
NORWAY
- ------
OILFIELD EQUIPMENT
& SERVICES 10,414 Transocean Offshore, Inc. ........................ 459,097 0.7
---------- -----
TOTAL NORWAY ..................................... 459,097 0.7
---------- -----
(COST - $602,114)
SPAIN
- -----
BANKING 18,924 Banco Bilbao Vizcaya SA .......................... 612,112 0.9
---------- -----
OIL CO.-INTEGRATED 11,666 Repsol SA ........................................ 497,515 0.8
---------- -----
TELECOMMUNICATIONS 19,774 Telefonica de Espana ............................. 564,358 0.8
---------- -----
TOBACCO 6,919 Tabacalera SA, Class A ........................... 560,637 0.8
---------- -----
TOTAL SPAIN ...................................... 2,234,622 3.3
---------- -----
(COST - $2,045,195)
</TABLE>
10
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)

INTERNATIONAL EQUITY FUND

<S> <C> <C> <C> <C>
EQUITIES (continued)
SWEDEN
- ------
AUTOMOTIVE PARTS 12,570 Autoliv, Inc. ..................................... $ 409,528 0.6%
---------- -----
BANKING 101,164 Nordbanken Holding AB(b) .......................... 572,480
13,100 Svenska Handelsbanken, Class A .................... 453,212
---------- -----
1,025,692 1.5
---------- -----
FOREST PRODUCTS 22,471 Stora Kopparbergs Bergslags Aktiebolag, Class B ... 278,963 0.4
---------- -----
INSURANCE 10,940 Skandia Forsakrings AB ............................ 516,366 0.8
---------- -----
RETAIL 14,691 Hennes & Mauritz AB, Class B ...................... 648,048 1.0
---------- -----
TELECOMMUNICATIONS 15,143 Telelfonaktiebolaget L.M. Ericsson ................ 569,698 0.8
---------- -----
TOTAL SWEDEN ...................................... 3,448,295 5.1
---------- -----
(COST - $3,113,443)
SWITZERLAND
- -----------
BANKING 4,847 Credit Suisse Group ............................... 751,034
353 Union Bank of Switzerland, Bearer Shares .......... 511,148
---------- -----
1,262,182 1.8
---------- -----
FOOD PRODUCTS
& SERVICES 414 Nestle SA, Registered Shares ...................... 621,333 0.9
---------- -----
INSURANCE 316 Swiss Reinsurance ................................. 591,897 0.9
---------- -----
PHARMACEUTICALS 270 Ares-Serono Group SA .............................. 446,128
931 Novartis AG, Registered Shares .................... 1,512,782
156 Roche Holdings AG ................................. 1,551,389
---------- -----
3,510,299 5.2
---------- -----
TOTAL SWITZERLAND ................................. 5,985,711 8.8
---------- -----
(COST - $4,857,585)
UNITED KINGDOM
- --------------
AUTOMOTIVE PARTS 40,500 GKN PLC ........................................... 830,986 1.2
---------- -----
BANKING 80,000 National Westminster Bank PLC ..................... 1,332,118
56,300 Standard Chartered PLC ............................ 643,821
---------- -----
1,975,939 2.9
---------- -----
</TABLE>

11
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)

INTERNATIONAL EQUITY FUND

<S> <C> <C> <C> <C>
EQUITIES (continued)
UNITED KINGDOM (continued)
- --------------
BEVERAGES 97,121 Diageo PLC ......................................... $ 892,501
99,988 Scottish & Newcastle PLC ........................... 1,210,048
---------- -----
2,102,549 3.1%
---------- -----
DIVERSIFIED 131,000 General Electric Co. PLC ........................... 860,036 1.3
---------- -----
INSURANCE 69,956 Commercial Union PLC ............................... 1,033,650 1.5
---------- -----
LEISURE 54,670 Granada Group PLC .................................. 842,871 1.2
---------- -----
METALS & MINING 42,000 Rio Tinto PLC ...................................... 487,549 0.7
---------- -----
OIL CO.-INTEGRATED 123,298 British Petroleum Co. PLC .......................... 1,624,013 2.4
---------- -----
PHARMACEUTICALS 148,000 SmithKline Beecham PLC ............................. 1,523,215 2.3
---------- -----
PRINTING & PUBLISHING 50,161 United News & Media PLC ............................ 571,968 0.8
---------- -----
RETAIL 71,000 Next PLC ........................................... 808,419 1.2
---------- -----
TELECOMMUNICATIONS 212,632 Vodafone Group PLC ................................. 1,551,652 2.3
---------- -----
TOBACCO 91,500 B.A.T. Industries PLC .............................. 834,824 1.2
---------- -----
TRANSPORTATION 54,539 British Airways PLC ................................ 535,291 0.8
---------- -----
WATER UTILITY 65,500 Thames Water PLC ................................... 981,820 1.5
---------- -----
TOTAL UNITED KINGDOM ............................... 16,564,782 24.4
---------- -----
(COST - $13,859,775)
TOTAL EQUITIES ..................................... 65,036,182 96.0
---------- -----
(COST - $61,386,048)
</TABLE>
12
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)

INTERNATIONAL EQUITY FUND

<TABLE>
<CAPTION>
SHARES OR
COUNTRY/ PRINCIPAL VALUE PERCENT OF
INDUSTRY AMOUNT SECURITY (NOTE 2) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
TIME DEPOSITS
UNITED STATES $3,287,796 The Bank of New York (Cayman)
- -------------
Time Deposit(c) ................................ $ 3,287,796 4.8%
----------- -----
TOTAL TIME DEPOSITS .............................. 3,287,796 4.8
----------- -----
(COST - $3,287,796)

TOTAL INVESTMENTS ................................ 68,323,978 100.8%
----------- -----
(COST - $64,673,844)(A)
LIABILITIES IN EXCESS OF OTHER ASSETS ............ (556,608) (0.8%)
----------- -----
NET ASSETS ....................................... $67,767,370 100.0%
----------- -----
<FN>
- ----------------
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for financial
reporting purposes in excess of federal income tax purposes of $169,338 and by
the amount of market to market adjustment for passive foreign investment
companies of $456,737. Cost for federal income tax purposes differs from value
by net unrealized appreciation of securities as follows:
Unrealized appreciation ..................................................................... $8,341,775
Unrealized depreciation ..................................................................... (5,317,716)
-----------
Net unrealized appreciation ................................................................. $3,024,059
===========
(b) Represents non-income producing security.
(c) Security serves as collateral in relation to the Fund's outstanding forward
foreign exchange contract commitments.
</FN>
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

13
<PAGE>

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1997

INTERNATIONAL EQUITY FUND

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (cost $64,673,844) ........................................ $68,323,978
Cash ......................................................................................... 114,505
Interest and dividends receivable ............................................................ 97,609
Receivable for capital shares sold ........................................................... 4,455
Foreign tax receivable ....................................................................... 28,833
Receivable for securities sold ............................................................... 953,872
Deferred organization costs .................................................................. 12,094
Unrealized appreciation on forward contracts ................................................. 56,550
Prepaid expenses ............................................................................. 4,685
-----------
Total Assets ............................................................................... 69,596,581
-----------
LIABILITIES:
Foreign currency overdraft ................................................................... 1,313,869
Payable for securities purchased ............................................................. 70,875
Dividends payable ............................................................................ 210,404
Unrealized depreciation on forward contracts ................................................. 7,927
Accrued expenses and other payables:
Investment advisory fees ................................................................... 28,811
Administration fees ........................................................................ 9,783
Custodian fees ............................................................................. 130,910
Legal and audit fees ....................................................................... 29,210
Accounting and transfer agent fees ......................................................... 8,810
Deferred trustee fees payable .............................................................. 5,750
Other ...................................................................................... 12,862
-----------
Total Liabilities ....................................................................... 1,829,211
-----------
Net Assets ...................................................................................... $67,767,370
===========
COMPUTATION OF NET ASSETS
Net Assets:
Institutional Class ........................................................................ $67,458,329
Service Class .............................................................................. 309,041
-----------
Total ................................................................................... $67,767,370
-----------
Shares of beneficial interest issued and outstanding:
($0.001 par value per share, unlimited number of shares authorized)
Institutional Class ........................................................................ 6,520,055
Service Class .............................................................................. 29,868
-----------
Total ................................................................................... 6,549,923
-----------
Net Asset Value:
Institutional Class - offering and redemption price per share .............................. $ 10.35
===========
Service Class - redemption price per share ................................................. $ 10.35
Maximum sales charge 5.00%
Maximum offering price (Service Classes)
(Net asset value of service class / (100% - Maximum SalesCharge)) ....................... $ 10.89
===========
COMPOSITION OF NET ASSETS:
Paid-in capital .............................................................................. $65,675,154
Distributions in excess of net investment income ............................................. (422,475)
Accumulated undistributed net realized losses from investment
and foreign currency transactions .......................................................... (1,180,096)
Net unrealized appreciation from investments and assets
and liabilities denominated in foreign currencies .......................................... 3,694,787
-----------
Net Assets, December 31, 1997 ................................................................ $67,767,370
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.

14
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997

INTERNATIONAL EQUITY FUND

<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $95,718) ........................................ $ 562,281
Interest ..................................................................................... 89,682
-----------
Total Income ............................................................................... 651,963
-----------
EXPENSES:
Advisory fees ................................................................................ 397,031
Administration fees .......................................................................... 68,904
Co-administration fee ........................................................................ 18,430
Shareholder services fees (Service Shares) ................................................... 144
Distribution fees (Service Shares) ........................................................... 2,800
Audit fees ................................................................................... 17,427
Transfer agent fees .......................................................................... 38,629
Fund accounting fees ......................................................................... 4,538
Custodian fees ............................................................................... 228,247
Printing costs ............................................................................... 20,132
Registration fees ............................................................................ 5,875
Legal fees ................................................................................... 19,496
Trustee fees ................................................................................. 10,403
Amortization of organizational costs ......................................................... 7,811
Other expenses ............................................................................... 5,499
-----------
Gross Expenses .................................................................................. 845,366
Less: Fee waivers ............................................................................ (350,944)
-----------
Net Expenses .................................................................................... 494,422
-----------
Net Investment Income ........................................................................... 157,541
-----------
NET REALIZED/UNREALIZED GAINS (LOSSES) FROM INVESTMENTS:
Net realized losses from investments and foreign currency transactions .......................... (1,197,928)
Net change in unrealized appreciation (depreciation) from investments
and assets and liabilities denominated in foreign currencies ................................. (1,687,823)
-----------
Net Realized/Unrealized Losses from Investments and Foreign Currencies .......................... (2,885,751)
-----------
Net Decrease in Net Assets Resulting from Operations ............................................ $(2,728,210)
===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

15
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS

INTERNATIONAL EQUITY FUND

<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
From Investment Activities:
OPERATIONS:
Net investment income (loss) ............................................. $ 157,541 $ (18,907)
Net realized gains (losses) from investments and
foreign currency transactions .......................................... (1,197,928) 492,258
Net change in unrealized appreciation (depreciation) from
investments and foreign currency transactions .......................... (1,687,823) 741,037
------------ -----------
Change in net assets resulting from operations ........................... (2,728,210) 1,214,388
------------ -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Institutional Shares
From net investment income ............................................. (156,823) --
In excess of net investment income ..................................... (52,622) --
Service Shares
From net investment income ............................................. (718) --
In excess of net investment income ..................................... (241) --
------------ -----------
Change in net assets from shareholder distributions ...................... (210,404) --
------------ -----------
CAPITAL TRANSACTIONS:
Proceeds from shares issued .............................................. 22,751,521 8,010,945
Proceeds from shares issued in connection with common trust
fund conversion ........................................................ 41,892,562 --
Cost of shares redeemed .................................................. (15,447,327) (3,626,499)
------------ -----------
Change in net assets from share transactions ............................. 49,196,756 4,384,446
------------ -----------
Change in net assets ........................................................ 46,258,142 5,598,834
NET ASSETS:
Beginning of year ........................................................ 21,509,228 15,910,394
------------ -----------
End of year .............................................................. $ 67,767,370 $21,509,228
============ ===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

16
<PAGE>
NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION

HSBC Mutual Funds Trust (the "Trust") was organized in Massachusetts on
November 1, 1989 as a Massachusetts business trust and is registered under
the Investment Company Act of 1940, as amended ("1940 Act"), as a
diversified, open-end management investment company with multiple
investment portfolios. The accompanying financial statements and notes
relate only to the International Equity Fund ("the Fund"). The Fund offers
two classes of shares: Institutional Shares and Service Shares. The
Institutional Class is available to customers of financial institutions or
corporations on behalf of their customers or employees, or on behalf of any
trust, pension, profit-sharing or other benefit plan for such customers or
employees. The Service Class is available to all other investors. The
Institutional Class Shares and Service Class Shares are identical in all
respects except that Institutional Class Shares are not subject to a sales
load or the imposition of any shareholder servicing fees or Rule 12b-1
fees.

The Fund's investment objective is to provide investors with long-term
capital appreciation by investing at least 80% of its total assets in
equity securities (including American and European Depositary Receipts)
issued by companies based outside of the United States. The balance of the
Fund's assets will be invested in equity and debt securities of companies
based in the United States and outside of the United States including bonds
and money market instruments. The Fund may also use other investment
practices to enhance return or to hedge against fluctuations in the value
of portfolio securities.

2. SIGNIFICANT ACCOUNTING POLICIES

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

SECURITIES VALUATION: Investments in securities are valued at the last
quoted sale price as of the close of business on the day the valuation is
made, or if a sale is not reported for that day, at the mean between
closing bid and asked prices. Price information for listed securities is
taken from the exchange where the securities are primarily traded.
Investments in futures and related options, which are traded on commodities
exchanges, are valued at their last sale price as of the close of such
exchanges. Other securities for which no quotations are readily available
are valued at fair value as determined in good faith by or under the
direction of the Board of Trustees. Short-term investments having
maturities of 60 days or less are valued at amortized cost, which
approximates market value.

All assets and liabilities initially expressed in foreign currencies are
translated into U.S. dollars at the bid price of such currencies against
the U.S. dollar's last quoted price by a major bank or broker. If such
quotations are not available as of the close of the New York Stock
Exchange, the rate of exchange will be determined in accordance with
policies established in good faith by the Board of Trustees.

FOREIGN CURRENCIES: Transactions denominated in foreign currencies are
recorded at the prevailing rate of exchange as incurred or earned. Asset
and liability accounts are adjusted to reflect the current rate at the end
of each period. Such adjustments are recorded in net unrealized
appreciation of other assets and liabilities

<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

denominated in foreign currencies. Net realized foreign currency gains or
losses include exchange rate differences between trade date and settlement
date for security purchases and sales, and between the date the Fund
records income, expenses and other assets and liabilities and the date such
assets and liabilities are received or paid. The portion of both realized
and unrealized gains and losses on investments that result from
fluctuations in foreign currency exchange rates is not separately
disclosed. The Fund may enter into forward foreign currency exchange
contracts for investment purposes and to hedge its exposure to changes in
foreign currency exchange rates on its foreign portfolio holdings and to
hedge certain firm purchase and sales commitments denominated in foreign
currencies. A forward foreign currency exchange contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated rate.
The gain or loss arising from the difference between the original contracts
and the closing of such contracts is included in realized gains or losses
from foreign currency transactions. Fluctuations in the value of forward
foreign currency exchange contracts are recorded for financial reporting
purposes as unrealized gains or losses by the Fund until settlement date.

The Fund's custodian will place cash or liquid high grade debt securities
into a segregated account of the Fund in an amount equal to the value of
the Fund's total assets committed to the consummation of forward foreign
exchange contracts requiring the Fund to purchase foreign currency of
foreign exchange contracts entered into for non-hedging purposes. If the
value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Fund's
commitments with respect to such contracts.

Risks may arise from the potential inability of a counterparty to meet the
terms of a contract and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The face or contract amount,
in U.S. dollars reflects the total exposure the Fund has in that particular
currency contract. The fund had the following outstanding forward foreign
currency exchange contracts as of December 31, 1997.

<TABLE>
<CAPTION>
FOREIGN SETTLEMENT CONTRACTED VALUE AT CURRENT UNREALIZED
CURRENCY CONTRACTS DATE AMOUNT SETTLEMENT DATE VALUE GAIN/(LOSS)
------------------- ------------ ------------- --------------- -------- -------------
<S> <C> <C> <C> <C> <C>
SALE CONTRACTS:
Japanese Yen 01/05/98 $83,678,000 $700,000 $643,450 $56,550
Japanese Yen 01/05/98 9,398,086 72,182 72,267 (85)
----------- -------- -------- -------
$93,076,086 $772,182 $715,717 $56,465
----------- -------- -------- -------
PURCHASE CONTRACTS:
Japanese Yen 01/05/98 $83,678,000 $651,292 $643,450 $ (7,842)
----------- -------- -------- -------
</TABLE>

TAXES: It is the Fund's policy to comply with the requirements of the
Internal Revenue Code, as amended, applicable to regulated investment
companies, and to distribute substantially all of its taxable income, and
net realized capital gains, if any, to its shareholders. Therefore, no
provision is required for federal income tax. Under the applicable foreign
tax law, a withholding tax may be imposed on interest, dividends and
capital gains earned on foreign investments at various rates. Where
available, the Fund will file for claims on foreign taxes withheld.

<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

At December 31, 1997, the International Equity Fund had available $101,325
of capital loss carryforwards which, if not utilized, will expire in the
year 2003.

Capital and foreign currency losses incurred after October 31 for the Fund
are deemed to arise on the first business day of the following fiscal year
for tax purposes. The Fund has incurred and will elect to defer such
capital losses of $909,432 and foreign currency losses of $123,431 after
October 31, 1997.

DIVIDENDS AND DISTRIBUTIONS: The Fund intends to distribute substantially
all of its net investment income and net realized capital gains, if any,
annually in the form of dividends.

The amounts of dividends from net investment income and of distributions
from net realized gains are determined in accordance with federal income
tax regulations, which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in
nature, such amounts are reclassified within the composition of net assets
based on their federal tax-basis treatment; temporary differences do not
require reclassification.

Dividends and distributions to shareholders which exceed net investment
income and net realized capital gains for financial reporting purposes but
not for tax purposes are reported as dividends in excess of net investment
income or distributions in excess of net realized gains. To the extent they
exceed net investment income and net realized gains for tax purposes, they
are reported as distributions of capital.

As of December 31, 1997, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to
paid-in-capital.

<TABLE>
<CAPTION>
ACCUMULATED UNDISTRIBUTED NET
DISTRIBUTIONS IN EXCESS OF REALIZED LOSSES FROM INVESTMENTS
NET INVESTMENT INCOME AND FOREIGN CURRENCY TRANSACTIONS
-------------------------- ---------------------------------
<S> <C> <C>
International Equity Fund $(363,121) $363,121
</TABLE>

SECURITY TRANSACTIONS AND RELATED INCOME: Security transactions are
recorded on trade date. Identified cost of investments sold is used for
both financial statement and federal income tax purposes. Dividend income
is recorded on the ex-dividend date. Interest income is recorded as earned.

EXPENSE ALLOCATION: Expenses directly attributed to each Fund in the Trust
are charged to that Fund's operations; expenses which are applicable to all
Funds are allocated among them on the basis of relative net assets or
another appropriate basis.

ORGANIZATIONAL COSTS: Costs incurred in connection with the organization of
the Fund have been deferred and are being amortized on a straight-line
basis over a five year period beginning on the date operations commenced.

3. PORTFOLIO SECURITIES

Purchases and sales of securities (excluding short-term securities) for the
year ended December 31, 1997 were $57,494,997 and $49,259,831,
respectively.

<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. RELATED PARTY TRANSACTIONS

The Trust retains HSBC Asset Management Americas Inc. to act as Investment
Advisor for the Fund. HSBC Asset Management Americas Inc. is the North
American investment affiliate of HSBC Holdings plc (Hong Kong and Shanghai
Banking Corporation). As Investment Advisor, HSBC Asset Management Americas
Inc. furnishes investment guidance and policy direction in connection with
the management of the portfolio of the Fund, subject to policies
established by the Board of Trustees. As compensation for its services,
HSBC Asset Management Americas Inc. is paid a monthly advisory fee at an
annual rate of 0.90% of the Fund's average daily net assets. For the year
ended December 31, 1997, HSBC Asset Management Americas Inc. earned
advisory fees of $89,584, net of fee waivers of $307,447.

The Adviser retains HSBC Asset Management Europe Ltd., HSBC Asset
Management Hong Kong Ltd., HSBC Asset Management (Japan) and HSBC Asset
Management Australia Ltd. to act as sub-advisors (the "Sub-Advisors") to
the Fund. HSBC Asset Management Europe Ltd., HSBC Asset Management Hong
Kong Ltd., HSBC Asset Management (Japan) and HSBC Asset Management
Australia Ltd. are all investment advisory affiliates of HSBC Asset
Management Americas Inc.

Under its Sub-Advisory Contract with HSBC Asset Management Americas Inc.,
each Sub-Advisor will undertake at its own expense to furnish the Fund and
HSBC Asset Management Americas Inc. with micro- and macroeconomics;
research, advice and recommendations; and economic and statistical data
with respect to the Fund's investments, subject to the overall review by
HSBC Asset Management Americas Inc. and the Board of Trustees.

BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), an Ohio limited partnership, is a subsidiary of The BISYS Group,
Inc. BISYS, with whom certain officers of the Trust are affiliated, serves
the Trust as distributor, administrator and transfer agent. Such officers
are not paid any fees directly by the Fund for serving as officers of the
Trust. Effective July 1, 1997, BISYS also became the fund accountant for
the Fund. These services were previously provided by State Street Bank and
Trust Company.

Also effective July 1, 1997, Bank of New York became the custodian for the
Fund. These services were also previously provided by State Street Bank and
Trust Company.

In accordance with the terms of the Management and Administration Agreement
and Fund Accounting Agreement, BISYS is paid a monthly fee equal to an
annual rate of 0.15% of the Fund's average daily net assets. For the year
ended December 31, 1997, BISYS earned $46,781 in administrative services
fees, net of fee waivers of $22,123.

HSBC Asset Management Americas Inc. earned co-administration/shareholder
servicer assistance fees of up to 0.07% of the Fund's average net assets
totaling $18,574 from the Fund for the year ended December 31, 1997, all of
which was waived.

The Fund has adopted a Distribution Plan and Agreement (the "Plan")
pursuant to Rule 12b-1 of the 1940 Act with respect to Service Shares of
the Fund. The Service Class Plan provides for a monthly payment by the Fund
to BISYS for expenses incurred in connection with distribution services
provided to the Fund not to exceed an annual rate of 0.35% of the Fund's
average net assets. The Fund incurred expenses totaling $2,800 with regard
to the Plan for the year ended December 31, 1997, all of which was waived.
As distributor, BISYS is entitled to receive commissions on sales of shares
of the variable net asset value funds. For the year ended

20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. RELATED PARTY TRANSACTIONS (CONTINUED)

December 31, 1997, BISYS received $68 from commissions earned on sales of
shares of the Fund, all of which was reallowed to affiliated broker/dealers
of the Fund.

The Fund may enter into agreements (the "Service Agreements") with certain
banks, financial institutions and corporations ("Service Organizations")
whereby each Service Organization handles record-keeping and provides
certain administration services for its customers who invest in the Fund
through accounts maintained at that Service Organization. Each Service
Organization will receive monthly payments for the performance of its
service under the Service Agreement. The payments from the Fund on an
annual basis will not exceed 0.35% of the average value of the Funds'
shares held in the subaccounts of the Service Organizations. For the year
ended December 31, 1997, the Fund did not participate in any Service
Agreements.

A partner of Baker & McKenzie, legal counsel to the Trust, serves as
Secretary of the Trust. For the year ended December 31, 1997 the Fund
incurred legal fees of $19,496.

5. CAPITAL SHARE TRANSACTIONS

Transactions in capital shares for the Fund were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- --------------------------
AMOUNT SHARES AMOUNT SHARES
------------ ---------- ----------- --------
<S> <C> <C> <C> <C>
SERVICE CLASS SHARES:
Shares issued $ 18,757 1,663 $ 63,618 6,253
Shares redeemed (113,007) (10,373) (344,943) (33,612)
------------ ---------- ----------- --------
Net decrease $ (94,250) (8,710) $ (281,325) (27,359)
============ ========== =========== ========
INSTITUTIONAL CLASS SHARES:
Shares issued $ 22,732,764 2,100,838 $ 7,947,327 782,738
Shares issued in common trust
fund conversion 41,892,562 3,815,352 -- --
Shares redeemed (15,334,320) (1,384,639) (3,281,556) (322,329)
------------ ---------- ----------- --------
Net increase $ 49,291,006 4,531,551 $ 4,665,771 460,409
============ ========== =========== ========
</TABLE>

6. COMMON TRUST FUND CONVERSION

On September 2, 1997, the Fund issued Institutional shares in a tax-free
conversion to acquire the assets and liabilities of the Diversified
International Equity Fund of Marine Midland Bank. The following is a
summary of the shares issued, net assets acquired, net asset value per
share and unrealized appreciation on the investments transferred as of the
date transferred:

<TABLE>
<CAPTION>
NET ASSET UNREALIZED
SHARES NET ASSETS VALUE APPRECIATION
--------- ----------- --------- -------------
<S> <C> <C> <C> <C>
International Equity Fund 3,815,352 $41,892,562 $10.98 $3,820,904
</TABLE>

The net assets of the Fund prior to the conversion were $36,660,474.

<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
AND PERIODS INDICATED

HSBC INTERNATIONAL EQUITY FUND

<TABLE>
<CAPTION>
SERVICE CLASS SHARES
----------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED APRIL 25, 1994(A) TO
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ...... $ 10.60 $ 9.97 $ 9.55 $ 10.00
------- -------- ------ -------
Investment Activities**
Net investment income .... 0.06 (0.02) (0.07) --
Net realized and unrealized
gains (losses) ......... (0.28) 0.65 0.49 (0.43)
------- -------- ------ -------
Total from Investment
Activities ............. (0.22) 0.63 0.42 (0.43)
------- -------- ------ -------
Distributions
From net investment
income ................. (0.03) -- -- --
In excess of net investment
income ................. -- -- -- (0.02)
------- -------- ------ -------
Total Distributions ......... (0.03) -- -- (0.02)
------- -------- ------ -------
Net Asset Value,
End of Period ............ $ 10.35 $ 10.60 $ 9.97 $ 9.55
------- -------- ------ -------
Total Return(b) ............. (2.06)% 6.32% 4.40% (4.30)%(d)
Ratios/Supplemental Data:
Net Assets at end of
period (000) ........... $ 309 $ 409 $ 658 $16,819
Ratio of expenses to
average net assets ..... 1.17% 2.10% 1.98% 2.16%(c)
Ratio of net investment
income to average
net assets ............. 0.54% (0.19)% (1.01)% (0.04)%(c)
Ratio of expenses to
average net assets* .... 2.19% 2.94% 3.66% 2.50%(c)
Ratio of net investment
income (loss) to average
net assets* ............ (0.48)% (1.03)% (2.69)% (0.39)%(c)
Average commission rate
paid(f) ................ $0.0321 $0.0006 -- --
Portfolio turnover rate(e) 112.54% 77.91% 90.31% 29.37%(d)
</TABLE>

<TABLE>
<CAPTION>
INSTITUTIONAL CLASS SHARES
-------------------------------------------------------
FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED MARCH 1, 1995(A) TO
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period ...... $ 10.61 $ 9.98 $ 8.81
------- ------ -------
Investment Activities**
Net investment income .... 0.04 (0.01) (0.03)
Net realized and unrealized
gains (losses) ......... (0.27) 0.64 1.20
------- ------ -------
Total from Investment
Activities ............. (0.23) 0.63 1.17
------- ------ -------
Distributions
From net investment
income ................. (0.02) -- --
In excess of net investment
income ................. (0.01) -- --
------- ------ -------
Total Distributions ......... (0.03) -- --
------- ------ -------
Net Asset Value,
End of Period ............ $ 10.35 $10.61 $ 9.98
------- ------ -------
Total Return(b) ............. (2.15)% 6.31% 13.28%(d)
Ratios/Supplemental Data:
Net Assets at end of
period (000) ........... $67,458 $21,100 $15,253
Ratio of expenses to
average net assets ..... 1.12% 2.04% 2.62%(c)
Ratio of net investment
income to average
net assets ............. 0.35% (0.10)% (0.34)%(c)
Ratio of expenses to
average net assets* .... 1.91% 2.89% 3.12%(c)
Ratio of net investment
income (loss) to average
net assets* ............ (0.44)% (0.95)% (0.84)%(c)
Average commission rate
paid(f) ................ $0.0321 $0.0006 --
Portfolio turnover rate(e) 112.54% 77.91% 90.31%(d)
<FN>
- ----------------------------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
** Based on average shares outstanding
(a) Commencement of operations.
(b) Excludes sales charge.
(c) Annualized.
(d) Not annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(f) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of shares purchased or sold for which commissions
were charged. Disclosure is not required for periods prior to December 31,
1996.
</FN>
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Shareholders and Board of Trustees
HSBC Mutual Funds Trust

We have audited the accompanying statement of assets and liabilities, including
the schedule of portfolio investments, of the International Equity Fund (one of
the portfolios comprising HSBC Mutual Funds Trust) as of December 31, 1997, the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
International Equity Fund at December 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 its financial highlights for each of the indicated
periods, in conformity with generally accepted accounting principles.

/S/ ERNST & YOUNG LLP

New York, New York
February 13, 1998

23
<PAGE>
HSBC[SERVICE MARK] MUTUAL FUNDS TRUST
3435 Stelzer Road
Columbus,Ohio 43219

INFORMATION:
(800) 634-2536

INVESTMENT ADVISER
HSBC Asset Management Americas Inc.
140 Broadway (6th Floor)
New York, New York 10005-1180

DISTRIBUTOR, ADMINISTRATOR, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219

CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286

INDEPENDENT AUDITORS
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019

LEGAL COUNSEL
Baker & McKenzie
805 Third Avenue
New York, New York 10022

This report is for the information of the shareholders of HSBC Mutual Funds
Trust. Its use in connection with any offering of the Trust's shares is
authorized only in the case of a concurrent or prior delivery of the Trust's
current prospectus. Shares of the Funds are not an obligation of or guaranteed
or endorsed by HSBC Holdings plc or its affiliates.In addition, such shares are
not insured by the Federal Deposit Insurance Corporation, the Federal Reserve
Board, or any other agency and may involve investment risks, including the
possible loss of principal.

2/98