FIRST ISRAEL FUND INC, N-30D, 1997-11-24

FIRST ISRAEL FUND INC
N-30D, 1997-11-24

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<PAGE>

[Photo]

The First Israel
Fund, Inc.
......................
ANNUAL REPORT
SEPTEMBER 30, 1997

<PAGE>
CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................................................................ 1

Portfolio Summary............................................................................. 6

Schedule of Investments....................................................................... 7

Statement of Assets and Liabilities........................................................... 10

Statement of Operations....................................................................... 11

Statement of Changes in Net Assets............................................................ 12

Statement of Cash Flows....................................................................... 13

Financial Highlights.......................................................................... 14

Notes to Financial Statements................................................................. 15

Report of Independent Accountants............................................................. 20

Results of Annual Meeting of Shareholders..................................................... 21

Tax Information............................................................................... 21

Description of InvestLink-SM- Program......................................................... 22
</TABLE>

PICTURED ON THE COVER IS AN AERIAL VIEW OF THE TEL AVIV SKYLINE.

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<PAGE>
LETTER TO SHAREHOLDERS
November 7, 1997

DEAR SHAREHOLDER:

I am pleased to report on the activities of The First Israel Fund, Inc. (the
"Fund") for the fiscal year ended September 30, 1997.

PERFORMANCE

For the fiscal year ended September 30, 1997, the Fund's total return, based on
net asset value ("NAV") and assuming reinvestment of dividends and
distributions, was 52.8%, versus 46.6% for the Tel Aviv Stock Exchange ("TASE")
Index.

At September 30, 1997, total net assets of the Fund were approximately $92.3
million. The Fund's investments in securities listed and trading on the TASE and
the Israeli and Israel-related companies listed and trading in the United States
totaled approximately $77.1 million, as compared to approximately $51.9 million
on September 30, 1996. The Fund also held investments valued at approximately
$9.6 million in unlisted securities of Israeli and Israel-related companies, as
compared to approximately $8.6 million on September 30, 1996. In percentage
terms, at September 30, 1997, 83.6% of the Fund's net assets was invested in
equity or equity-linked securities listed and trading on the TASE and the
Israeli and Israel-related companies listed and trading in the United States and
10.4% in unlisted Israeli and Israel-related equity or equity-linked securities.

At September 30, 1997, NAV per share was $18.41, as compared to $13.10 at
September 30, 1996. The Fund's common stock closed on the New York Stock
Exchange on September 30, 1997 at $14.9375 per share, representing a discount of
18.9% to the Fund's NAV.

I attribute this significant outperformance to a combination of effective sector
allocation relative to the TASE Index and favorable stock selection. Notable
sector allocations included overweights in financial services, which benefited
from declining interest rates and the improving climate for privatizations; and
technology, whose strength was buoyed by U.S. rallies in technology and small
stocks more generally. Additional positive contributions to performance were
provided by the Fund's shares in Star Venture Enterprises II, a private equity
investment; as well as underweights in two major companies, Bezeq Israeli
Telecommunication Corp., Ltd. and Teva Pharmaceutical Industries Ltd., both of
which fared poorly over the past year.

POLITICAL COMMENTARY

Much has happened in Israel since my last report, resulting in further
deterioration of the political environment.

Foremost in this regard is the near-cessation of the peace process, coincident
with several acts of terrorism. Prime Minister Netanyahu and Chairman Arafat did
meet for talks in September following intense U.S. diplomatic efforts, but
little was accomplished. A new round of talks is beginning in Washington as I
write, but it is difficult to see any positive short-term outcome.

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1
<PAGE>
LETTER TO SHAREHOLDERS

Compounding the difficulty of the situation are the severe internal problems
facing both Mr. Netanyahu and Mr. Arafat. Accordingly, I see no reason to
believe that there will be any meaningful decline in tensions for some time. The
stock market, therefore, may be prone to more nervousness going forward as
political developments unfold.

THE ECONOMY

Historically, it appears that investors in Israeli equities have ignored the
political scene and focused instead on positive company fundamentals and the
nation's improving economy. This pattern remains intact.

Recently, there has been good news on several fronts. Annualized inflation, for
instance, was 9.3% through September 1997, significantly lower than the 10.6%
rate in 1996 and well within the 8-10% rate for 1997 projected by the
government. Monetary policy has been accomodative, as the Bank of Israel lowered
its discount rate several times to 13.4% in September 1997 from 17.0% in June
1996.

Recent news concerning foreign reserves and the trade and current account
deficits also has been encouraging. The major stumbling block seems to be the
nation's budget deficit, which is likely to exceed the 2.8% of Gross Domestic
Product originally targeted for 1997, despite the passage of several
supplementary cuts in government spending.

In addition to the increasingly favorable economic climate, I see other factors
that should stimulate upward movement in the stock market. The government's
privatization program, whose revenue generation thus far in 1997 is nearly
double the government's original forecast, should maintain its strong momentum.
Private investment company Claridge Israel ("Claridge"), furthermore, recently
announced its intention to acquire majority ownership of Koor Industries Ltd.
("Koor"), a sprawling conglomerate that is Israel's largest publicly traded
company. Given Koor's extensive equity stakes in other Israeli companies, any
such ownership change is likely to have implications throughout the economy.
Should the transaction go through, it could be among the first steps in a
process of dismantling Israel's somewhat tangled corporate structure, which has
long been dominated by huge holding companies. This should be positive.

FEATURED COMPANIES

As is my custom, I'd like to highlight a few specific companies in order to
provide some insight into how your money is invested. The following are two good
examples of some of the technology-related stocks held in the Fund.

ECI TELECOMMUNICATIONS LTD.

Within the fast-moving telecommunications business, opportunities are plentiful
for agile companies that can exploit attractive niches. One of the Fund's
largest positions is in ECI Telecommunications Ltd. ("ECI"). ECI makes digital
equipment designed to improve the transmission infrastructure of existing
telecommunications networks. It also is the largest overall Israeli producer of
telecommunications equipment.

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2
<PAGE>
LETTER TO SHAREHOLDERS

I believe that now is a particularly good time to be optimistic about ECI
shares. This is because the company is well-positioned to benefit from a number
of strong industry trends and, for the first time in several years, the outlook
is simultaneously positive for all of its main product sectors.

FAVORABLE TRENDS FOR ECI INCLUDE:

- - Aggressive deregulation and/or privatization of most telecommunication markets
worldwide. Service providers are responding to market forces by seeking out
suppliers that offer a favorable price/performance profile. Many also no
longer are required by law to use domestic suppliers.

- - Heavier demands on network capacity as a result of greater home usage (E.G.,
for data transfer, faxing, internet access).

- - Huge need for basic telecommunications infrastructure in developing nations,
many of which also view the expansion of telephone service as an important
element of economic stimulation.

- - Increasing technological complexity, which can create big opportunities for
smaller companies like ECI.

- - Rapid buildout of wireless networks.

Current and longer-term prospects for ECI's core businesses are quite good.
Local network access (40% of 1996 sales), which is the enlargement of the
capacity of the lines connecting individual users to their local telephone
exchange, is one of the fastest-growing areas in telecommunications equipment.
In my view, it is likely to be a major growth engine for ECI over the next
several years. ECI holds a commanding 70% share in the market for digital
circuit multiplication equipment ("DCME"), 30% of which conserves precious
bandwidth space in phone lines by compressing voice and fax transmissions. The
fairly mature DCME business recently has been reinvigorated by the explosive
growth in internet usage.

Wide area network equipment (14%) is the province of Telematics, ECI's U.S.
subsidiary. Telematics is poised for a dramatic turnaround after posting
disappointing results for several years. Finally, ECI is successfully focusing
on innovative niche products in synchronous digital hierarchy systems (13%), the
European standard for high-speed fiber-optic transmission.

Other positive factors for ECI include its longstanding relationships with most
of the world's major telecommunication providers; global geographic
diversification; minimal presence in the Israeli domestic market; lack of
dependence on any particular product or customer; record-high order backlog; and
low debt level.

A wildcard in the ECI picture is the recent announcement that Koor, as part of
the transaction mentioned earlier, intends to acquire the 10.4% equity stake in
ECI currently owned by Claridge. Koor will receive the ECI shares from Claridge
in exchange for at least 16.5% of its own equity. Koor also has declared its
intention to purchase more ECI shares.

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3
<PAGE>
LETTER TO SHAREHOLDERS

DSP GROUP INC.

DSP Group Inc. ("DSPG") is one of a number of U.S.-based technology companies
with Israeli origins. Its focus is the digital signal processor ("DSP"), a
specialized semiconductor chip designed to process image, video, audio and
speech information that has been converted from its natural analog form to a
digital data record.

DSPG has three principal products, including DSPs for speech and telephony
applications; DSP "cores" (I.E., the architectural designs used in the
production of DSPs); and the TrueSpeech family of voice compression software. As
a "fabless" semiconductor maker (I.E., one that does not manufacture its own
products), DSPG outsources the production of its speech and telephony chips and
licenses its core designs and TrueSpeech line to other companies for inclusion
in their own products.

The prospects for DSPs (and, hence, for DSPG) are quite strong for several
reasons. First, the development of advanced, more powerful semiconductor
technologies allows for greatly increased use of digital computing. This is best
reflected by the growing inclusion of DSPs in consumer products like compact
disk players, telephone answering devices, cellular phones, talking toys and
more. Second, DSPs possess significant performance advantages over their analog
forebears.

I regard DSPG as an equity play both on the explosive growth of the DSP
semiconductor sector and the exciting advances being made in the development of
telecommunications equipment. The following are the most prominent reasons why
the Fund owns DSPG shares:

EMERGING ROYALTY INCOME STREAM - The potential sizzle in the DSPG story is its
licensing of DSP cores for use by other manufacturers. Licensing royalties began
to trickle in during 1997, but their true impact likely will not be felt until
late 1998 or 1999, when licensee development cycles start to bear fruit. If
actual royalties even come close to equaling potential royalties, DSPG could
enjoy a huge stream of new revenues. I note that profit margins on royalities
typically run about 80-90%.

MARKET LEADERSHIP - The company's bread-and-butter business, DSPs for the
digital segment of the telephone answering device market, is the market leader
with an estimated 30-40% share. The overall segment, furthermore, is growing
rapidly.

STRONGEST SEMICONDUCTOR GROWTH RATE - The DSP market is projected to grow
approximately twice as quickly as the total semiconductor market over the next
few years. Analysts estimate its size to reach about $8 billion in 2001 versus
about $2.2 billion in 1996.

SUBSTANTIAL "BUY VS. MAKE" ADVANTAGES - In spite of the growing demand and
applicability of DSPs, their complexity is such that only a few companies
actually develop them. The vast majority of companies, then, realize tremendous
savings in costs, manpower and time to market by choosing to buy/license DSPs
from a recognized leader like DSPG instead of making their own.

INDUSTRY STANDARD - In 1995, the International Telecommunications Union
designated TrueSpeech as the industry software standard for the transmission of
compressed audio over conventional telephone lines and the internet. This means
that virtually any company seeking to make industry-compatible products must use
DSPG compression software.

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4
<PAGE>
LETTER TO SHAREHOLDERS

INCREASINGLY DIGITAL WORLD - The world is going digital, primarily driven by the
adoption of digital audio and video devices to replace older analog models.
Demand for DSPs should grow accordingly.

BLUE-CHIP CUSTOMER LIST - DSPG's list of customers and licensees reads like a
who's who of the telecommunications equipment industry. It includes AT&T,
Fujitsu, IBM, Intel, Microsoft, NEC, Samsung, Siemens, Texas Instruments, Unisys
and many more.

OUTLOOK

In general, some degree of caution is appropriate when fashioning a strategy for
investment in Israeli equities. The volatility of political events dictates such
an approach, but I continue to believe in the ultimate success of the peace
process while recognizing that many bumps remain in its long road ahead.

The macroeconomic environment also is becoming increasingly favorable for the
nation's equity market: interest rates are trending downward; inflation is
subsiding; and, aided by privatization revenues, the budget deficit is gradually
shrinking. I add that the government has relaxed foreign exchange controls and
made clear its intention to allow the shekel to freely float in 1998. Should the
shekel depreciate, as it has in recent months, the important export sector will
receive a strong boost. Finally, Israel this month becomes a component of the
widely followed IFC Emerging Market Equity Index. This inclusion means that
Israel will attain greater presence in index-oriented international portfolios
and, thus, could attract much greater attention and investment inflows.

I appreciate your interest in the Fund, and would be pleased to respond to your
questions or comments.

Respectfully,

/s/ Richard W. Watt
Richard W. Watt
President and Chief Investment Officer*

- --------------------------------------------------------------------------------
* Richard W. Watt, who is a Managing Director of BEA Associates, is primarily
responsible for management of the Fund's assets. Mr. Watt has served the Fund in
such capacity since January 1, 1997. He joined BEA Associates on August 2, 1995.
Mr. Watt was formerly associated with Gartmore Investment Limited in London,
where he was head of emerging markets investments and research. In this
capacity, he led a team of four portfolio managers and was manager of a
closed-end Latin American fund focusing on smaller companies. Before joining
Gartmore Investment Limited in 1992, Mr. Watt was a director of Kleinwort Benson
International Investments in London, where he was responsible for research,
analysis and trading of equities in Latin America and other regions. Mr. Watt is
a Director, President and Chief Investment Officer of the The Brazilian Equity
Fund, Inc., The Chile Fund, Inc., The Emerging Markets Infrastructure Fund,
Inc., the Emerging Markets Telecommunications Fund, Inc., The Latin America
Equity Fund, Inc., The Latin America Investment Fund, Inc. and The Portugal
Fund, Inc.

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5
<PAGE>
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THE FIRST ISRAEL FUND, INC.

PORTFOLIO SUMMARY - AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
AS A PERCENT OF NET ASSETS

<S> <C> <C>
September 30, 1997 September 30, 1996
Banking 9.39 6.50
Building Products 3.29 3.17
Chemicals 3.58 1.72
Computer Software 4.79 4.31
Conglomerates 10.19 10.78
Electronics/Electrical Equipment 2.94 2.41
Financial Services 3.39 3.15
Food & Beverages 3.12 4.14
Insurance 3.55 2.13
Mortgage Banking 5.77 3.01
Pharmaceuticals 6.60 7.96
Semiconductor & Related Technology 4.80 7.41
Telecommunications 14.75 14.99
Venture Capital 4.56 3.50
Other 13.22 17.05
Cash & Other Assets 6.06 7.77
</TABLE>

TOP 10 HOLDINGS, BY ISSUER

<TABLE>
<CAPTION>
Percent of Net
Holding Sector Assets
<C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
1. Teva Pharmaceutical Industries Pharmaceuticals
Ltd. 5.7
- ------------------------------------------------------------------------------------------------------------------------------
2. Bank Hapoalim Ltd. Banking 5.0
- ------------------------------------------------------------------------------------------------------------------------------
3. Bank Leumi Israel Banking 4.4
- ------------------------------------------------------------------------------------------------------------------------------
4. ECI Telecommunications Ltd. Telecommunications 4.0
- ------------------------------------------------------------------------------------------------------------------------------
5. Koor Industries Ltd. Conglomerates 3.0
- ------------------------------------------------------------------------------------------------------------------------------
6. Star Venture Enterprises II Venture Capital 2.8
- ------------------------------------------------------------------------------------------------------------------------------
7. F.I.B.I. Holdings Ltd. Financial Services 2.6
- ------------------------------------------------------------------------------------------------------------------------------
8. Gilat Satellite Networks Ltd. Telecommunications 2.3
- ------------------------------------------------------------------------------------------------------------------------------
9. DSP Group Inc. Semiconductor & Related Technology 2.2
- ------------------------------------------------------------------------------------------------------------------------------
10. IDB Holding Corp., Ltd. Conglomerates 2.2
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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6
<PAGE>
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THE FIRST ISRAEL FUND, INC.

SCHEDULE OF INVESTMENTS - SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
<S> <C> <C>
- --------------------------------------------------------------------
EQUITY OR EQUITY-LINKED SECURITIES-93.94%
AEROSPACE/DEFENSE EQUIPMENT-0.36%
Elbit Systems Ltd....................... 24,191 $ 330,580
-----------
AUTO PARTS-0.53%
Delek Automotive Systems Ltd............ 327,641 491,757
-----------
BANKING-9.39%
Bank Hapoalim Ltd....................... 1,995,800 4,615,919
Bank Leumi Israel....................... 2,484,132 4,048,015
-----------
8,663,934
-----------
BUILDING PRODUCTS-3.29%
Industrial Buildings Corp., Ltd......... 568,200 1,107,843
Property & Building Corp., Ltd.......... 15,103 1,239,164
Wolfman Industries Ltd., (Shares 5)+.... 22,800 214,970
Ytong Industries Ltd.................... 182,302 471,664
-----------
3,033,641
-----------
CHEMICALS-3.58%
Agan Chemical
Manufacturers Ltd...................... 21,531 604,399
Dead Sea Bromine Ltd.................... 30,662 224,757
Israel Chemicals Ltd., (Shares 1)....... 1,390,000 1,700,792
Makhteshim Chemical
Works Ltd.+............................ 114,632 778,330
-----------
3,308,278
-----------
COMPUTER NETWORKING-0.33%
Madge Networks N.V.+.................... 40,590 304,425
-----------
COMPUTER SOFTWARE-4.79%
ISG International Software
Group Ltd.+............................ 32,300 524,875
Magic Software Enterprises Ltd.+........ 92,800 533,600
Oshap Technologies Ltd.+................ 177,345 1,795,618
Sapiens International Corp. N.V.+....... 69,000 629,625
Tecnomatix Technologies Ltd.+........... 24,622 941,791
-----------
4,425,509
-----------
CONGLOMERATES-10.19%
Clal Israel Ltd., (Shares 10)........... 1,978,000 627,685

<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
CONGLOMERATES (CONTINUED)
Discount Investment Corp................ 21,000 $ 621,133
Elco Holdings Ltd....................... 23,600 164,422
Elron Electronic Industries Ltd......... 33,356 599,819
FMS Enterprises Migun Ltd............... 13,538 80,074
Granite Hacarmel
Investments Ltd........................ 299,660 479,744
IDB Development Corp., Ltd.............. 36,000 849,493
IDB Holding Corp., Ltd.................. 87,245 2,015,567
Koor Industries Ltd..................... 18,762 1,954,726
<CAPTION>
Par (000)
-------------
<S> <C> <C>
Koor Industries Ltd., Convertible Note,
1.75%, 01/31/98*....................... NIS 600 276,800
Koor Industries Ltd., Convertible Note,
1.75%, 01/31/99*....................... 600 276,800
Koor Industries Ltd., Convertible Note,
1.75%, 01/31/00*....................... 600 276,800
<CAPTION>
No. of
Shares
-------------
<S> <C> <C>
PEC Israel Economic Corp.+.............. 61,228 1,182,466
-----------
9,405,529
-----------
ELECTRONICS/ELECTRICAL EQUIPMENT-2.94%
Clal Electronic Industries Ltd.......... 3,404 481,381
Elbit Ltd............................... 24,191 90,390
Elco Industries Ltd..................... 23,500 366,283
Electra Consumers Products Ltd.......... 125,893 755,811
Electra Israel Ltd...................... 17,500 731,439
Electronics Line Ltd., (Shares 1)....... 28,154 45,718
Rada Electronic Industries Ltd.+........ 87,942 239,092
-----------
2,710,114
-----------
ENERGY SERVICES-1.13%
Delek Israel Fuel Corp., Ltd............ 16,773 574,457
Superbowl Acquisition LDC*=/=........... 36 465,552
-----------
1,040,009
-----------
FINANCIAL SERVICES-3.39%
Ampal-American Israel, Class A+......... 92,500 514,531
Ampal-American Israel, Warrants
(expiring 02/28/99)+................... 92,500 5,781
</TABLE>

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7
<PAGE>
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THE FIRST ISRAEL FUND, INC.

SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES (CONTINUED)
F.I.B.I. Holdings Ltd................... 12,648 $ 2,372,020
Nesuah Trading and Investment in
Securities Ltd......................... 72,468 137,358
Taya Investment Company Ltd.+........... 30,360 97,991
-----------
3,127,681
-----------
FOOD & BEVERAGES-3.12%
Blue Square Chain Investments &
Properties Ltd.+....................... 40,157 359,334
Elite Industries Ltd., (Shares 5)....... 28,148 816,794
Israel Salt Industries Ltd.............. 208,552 864,520
Jafora Tavori Ltd....................... 29,520 84,140
Mayanot Eden Ltd........................ 149,750 751,769
-----------
2,876,557
-----------
INDUSTRIAL TECHNOLOGY-2.08%
Cubital Ltd.*+.......................... 329,278 105,639
Orbotech Ltd.+.......................... 31,500 1,819,125
-----------
1,924,764
-----------
INSURANCE-3.55%
Clal Insurance Enterprises Holdings
Ltd., (Shares 1)....................... 145,330 1,665,651
Harel-Hamishmar
Investments Ltd., (Shares 5)........... 28,797 1,370,390
Leumi Insurance Holdings Ltd.+.......... 349,678 241,922
-----------
3,277,963
-----------
INVESTMENT & HOLDING COMPANIES-2.10%
Dankner Investments Ltd., (Shares 1).... 207,327 1,025,996
GC Holdings Corp., Series K
Preferred*+............................ 299,513 47,922
GC Holdings Corp., Series L
Preferred*+............................ 308,432 37,012
Polaris Fund II LLC+=/=#................ 250,000 240,212
The Renaissance Fund LDC=/=............. 60 585,393
-----------
1,936,535
-----------
MEDICAL EQUIPMENT-1.71%
Elbit Medical Imaging Ltd............... 24,191 183,271
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
MEDICAL EQUIPMENT (CONTINUED)
Laser Industries Ltd.+.................. 81,000 $ 1,397,250
-----------
1,580,521
-----------
METAL PRODUCTS-1.79%
Caniel-Israel Can Co., Ltd., (Shares
1)..................................... 105,210 879,181
Cvalim-The Electric Wire & Cable Co. of
Israel Ltd............................. 113,640 371,339
Klil Industries Ltd., (Shares 5)........ 18,654 398,148
-----------
1,648,668
-----------
MORTGAGE BANKING-5.77%
Discount Mortgage Bank Ltd.............. 11,198 993,795
Israel Discount Bank Ltd................ 1,484,216 1,620,888
Mishkan Hapoalim Mortgage Bank Ltd.+.... 8,288 1,537,755
Tefahot Israel Mortgage
Bank Ltd.+............................. 1,456 1,170,282
-----------
5,322,720
-----------
PHARMACEUTICALS-6.60%
Peptor Ltd.*+........................... 56,000 392,000
Taro Pharmaceutical
Industries Ltd. ADR+................... 64,210 449,470
Teva Pharmaceutical
Industries Ltd. ADR.................... 94,200 5,251,650
-----------
6,093,120
-----------
REAL ESTATE & CONSTRUCTION-0.24%
Kardan Investments Ltd., (Shares 5)+.... 34,850 224,172
-----------
SEMICONDUCTOR & RELATED TECHNOLOGY-4.80%
DSP Group Inc.+......................... 51,607 2,025,575
M-Systems Flash Disk
Pioneers Ltd.+......................... 54,542 361,341
M-Systems Flash Disk
Pioneers Ltd., Warrants
(expiring 06/30/98)+................... 35,021 100,791
Zoran Corp., Series K+=/=............... 50,000 1,057,500
</TABLE>

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8
<PAGE>
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THE FIRST ISRAEL FUND, INC.

TOTAL INVESTMENTS-93.94%
(Cost $65,657,614) (Notes A,D)........................ 86,708,448
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES-6.06%...
5,589,465
-----------
NET ASSETS-100.00%..................................... $92,297,913
-----------
-----------
- ---------------------------------------------------------
* Not readily marketable security.
+ Security is non-income producing.
=/= Restricted security (See Note F).
# As of September 30, 1997, the Fund committed to
investing an additional $750,000 of capital in
Polaris Fund II LLC.
(l) With an additional 595 warrants attached, expiring
06/20/01, with no market value.
ADR American Depositary Receipts.
NIS New Israeli Shekel.
</TABLE>

- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------

THE FIRST ISRAEL FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES - SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost $65,657,614)
(Note A)............................... $86,708,448
Cash (including $143 of foreign currency
with a cost of $143) (Note A).......... 4,829,435
Receivables:
Investments sold...................... 986,315
Note.................................. 272,079
Dividends............................. 46,121
Interest.............................. 6,983
Prepaid expenses........................ 28,605
Unamortized organizational costs (Note
A)..................................... 18,967
-----------
Total Assets............................ 92,896,953
-----------

LIABILITIES
Payables:
Advisory fee (Note B)................. 282,308
Israeli capital gains tax (Note A).... 70,522
Administration fees (Note B).......... 18,758
Other accrued expenses................ 227,452
-----------
Total Liabilities....................... 599,040
-----------
NET ASSETS (applicable to 5,012,295
shares of common stock outstanding)
(Note C)............................... $92,297,913
-----------
-----------

NET ASSET VALUE PER SHARE ($92,297,913
DIVIDED BY 5,012,295)................. $18.41
-----------
-----------

NET ASSETS CONSIST OF
Capital stock, $0.001 par value;
5,012,295 shares issued and outstanding
(100,000,000 shares authorized)........ $ 5,012
Paid-in capital......................... 67,371,893
Undistributed net investment income..... 1,902,985
Accumulated net realized gain on
investments and foreign currency
related transactions................... 2,060,397
Net unrealized appreciation in value of
investments and translation of other
assets and liabilities denominated in
foreign currency....................... 20,957,626
-----------
Net assets applicable to shares
outstanding............................ $92,297,913
-----------
-----------
</TABLE>

- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.

STATEMENT OF OPERATIONS - FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME
Income (Note A):
Dividends............................. $ 1,678,947
Dividend received from investment
partnership.......................... 1,902,985
Interest.............................. 224,745
Less: Foreign taxes withheld.......... (275,077)
-----------
Total Investment Income............... 3,531,600
-----------
Expenses:
Investment advisory fees (Note B)..... 1,104,264
Custodian fees........................ 177,837
Audit and legal fees.................. 118,501
Administration fees (Note B).......... 95,190
Printing.............................. 70,000
Amortization of organizational costs
(Note A)............................. 63,539
Accounting fees....................... 59,999
Directors' fees....................... 46,500
Transfer agent fees................... 31,927
Insurance............................. 17,187
NYSE listing fees..................... 16,159
Other................................. 18,054
-----------
Total Expenses........................ 1,819,157
Less: Fee waivers (Note B)............ (31,663)
-----------
Net Expenses........................ 1,787,494
-----------
Net Investment Income................. 1,744,106
-----------

NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS
Net realized gain/(loss) from:
Investments........................... 2,210,283
Foreign currency related
transactions......................... (94,544)
Net change in unrealized depreciation in
value of investments and translation of
other assets and liabilities
denominated in foreign currency........ 28,979,212
-----------
Net realized and unrealized gain on
investments and foreign currency
related transactions................... 31,094,951
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS........................ $32,839,057
-----------
-----------
</TABLE>

- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Fiscal Years Ended
September 30,
---------------------------
1997 1996
<S> <C> <C>
---------------------------

INCREASE/(DECREASE) IN NET ASSETS
Operations:
Net investment income/(loss).......... $ 1,744,106 $ (450,669)
Net realized gain on investments and
foreign currency related
transactions......................... 2,115,739 6,923,616
Net change in unrealized depreciation
in value of investments and
translation of other assets and
liabilities denominated in foreign
currency............................. 28,979,212 (6,974,241)
----------- -----------
Net increase/(decrease) in net
assets resulting from operations... 32,839,057 (501,294)
----------- -----------
Distributions to shareholders:
Net realized gain on investments...... (6,190,185) --
----------- -----------
Total increase/(decrease) in net
assets............................. 26,648,872 (501,294)
----------- -----------

NET ASSETS
Beginning of year....................... 65,649,041 66,150,335
----------- -----------
End of year (including undistributed net
investment income of
$1,902,985 and $0, respectively)....... $92,297,913 $65,649,041
----------- -----------
----------- -----------
</TABLE>

- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.

STATEMENT OF CASH FLOWS - FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
INCREASE/(DECREASE) IN CASH FROM
Operating Activities
Investment income received............ $ 1,619,866
Operating expenses paid............... (1,677,341)
------------
Net decrease in cash from operating
activities............................. $ (57,475)
Investing Activities
Purchases of long-term portfolio
investments.......................... (12,824,569)
Proceeds from disposition of long-term
portfolio investments................ 17,698,966
------------
Net increase in cash from investing
activities............................. 4,874,397
Financing Activities
Notes receivable...................... 380,263
Cash dividends paid................... (6,190,185)
------------
Net decrease in cash from financing
activities............................. (5,809,922)
------------
Net decrease in cash.................... (993,000)
Cash at beginning of year............... 5,822,435
------------
Cash at end of year (Note A)............ $ 4,829,435
------------
------------

RECONCILIATION OF NET INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS TO NET
DECREASE IN CASH FROM OPERATING
ACTIVITIES
Net increase in net assets resulting
from operations........................ $ 32,839,057
Adjustments:
Increase in dividend and interest
receivable........................... $ (8,749)
Increase in accrued expenses.......... 65,766
Decrease in prepaid expenses.......... 44,387
Dividend received from investment
partnership*......................... (1,902,985)
Net realized and unrealized gain on
investments and foreign currency
related transactions................... (31,094,951)
------------
Total adjustments....................... (32,896,532)
------------
NET DECREASE IN CASH FROM OPERATING
ACTIVITIES............................. $ (57,475)
------------
------------
</TABLE>

- ------------------
* On September 30, 1997, an investment partnership owned by the Fund,
distributed to the Fund marketable equity securities of Ciena Corp. This
distribution was accounted for as dividend income for the fiscal year ended
September 30, 1997.

- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
13
<PAGE>
- --------------------------------------------------------------------------------

THE FIRST ISRAEL FUND, INC.

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

Contained below is per share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets and
other supplemental data for each period indicated. This information has been
derived from information provided in the financial statements and market price
data for the Fund's shares.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Fiscal Years Ended September 30, For the Period
--------------------------------------------- October 29, 1992*
through
1997 1996 1995 1994 September 30, 1993
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $13.10 $13.20 $11.74 $15.83 $13.74**
---------- -------- -------- -------- --------
Net investment income/(loss).................. 0.35 (0.09) (0.10) (0.28) (0.07)
Net realized and unrealized gain/(loss) on
investments and foreign currency related
transactions................................. 6.20 (0.01) 1.56 (3.27) 2.16
---------- -------- -------- -------- --------
Net increase/(decrease) in net assets
resulting from operations.................. 6.55 (0.10) 1.46 (3.55) 2.09
---------- -------- -------- -------- --------
Distributions to shareholders:
Net realized gains on investments and
foreign currency related transactions...... (1.24) -- -- (0.43) --
In excess of net realized gains............. -- -- -- (0.11) --
---------- -------- -------- -------- --------
Total distributions to shareholders......... (1.24) -- -- (0.54) --
---------- -------- -------- -------- --------
Net asset value, end of period................ $18.41 $13.10 $13.20 $11.74 $15.83
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
Market value, end of period................... $14.938 $11.250 $12.000 $13.250 $17.375
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
Total investment return(a).................... 44.36% (6.25)% (9.43)% (21.26)% 24.58%
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted)....... $92,298 $65,649 $66,150 $58,855 $79,274
Ratio of expenses to average net assets....... 2.26%(c) 2.23% 2.57% 2.64% 2.41%(b)
Ratio of net investment income/(loss) to
average net assets........................... 2.20% (0.68)% (0.91)% (2.08)% (0.50)%(b)
Portfolio turnover rate....................... 16.98% 21.68% 22.17% 17.07% 34.80%
Average commission rate per share(d).......... $0.0056 $0.0073 -- -- --
</TABLE>

- ---------------------------------------------------------------------------
* Commencement of investment operations.
** Initial public offering price of $15.00 per share less underwriting
discount of $1.05 per share and offering expenses of $0.21 per share.
(a) Total investment return at market value is based on the changes in
market price of a share during the period and assumes reinvestment of
dividends and distributions, if any, at actual prices pursuant to the
Fund's dividend reinvestment program. Total investment return does not
reflect brokerage commissions or initial underwriting discounts and
has not been annualized.
(b) Annualized.
(c) Ratio reflects actual expenses incurred by the Fund. Amounts are net
of fee waivers. Ratio of expenses to average net assets would have
been 2.30% excluding fee waivers, for the fiscal year ended September
30, 1997.
(d) Computed by dividing the total amount of brokerage commissions paid by
the total shares of investment securities purchased and sold during
the respective periods for which commissions were charged, as required
by the SEC for fiscal years beginning on or after September 1, 1995.

- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
14
<PAGE>
- --------------------------------------------------------------------------------

THE FIRST ISRAEL FUND, INC.

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE A. SIGNIFICANT ACCOUNTING POLICIES
The First Israel Fund, Inc. (the "Fund") was incorporated in Maryland on March
6, 1990 and commenced investment operations on October 29, 1992. The Fund is
registered under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified management investment company. Significant
accounting policies are as follows:

MANAGEMENT ESTIMATES: The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make certain
estimates and assumptions that may affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.

PORTFOLIO VALUATION: Investments are stated at value in the accompanying
financial statements. All securities for which market quotations are readily
available are valued at the last sales price or lacking any sales, at the
closing price last quoted for the securities (but if bid and asked quotations
are available, at the mean between the current bid and asked prices). Securities
that are traded over-the-counter are valued at the mean between the current bid
and the asked prices. All other securities and assets are valued at fair value
as determined in good faith by the Board of Directors. Short-term investments
having a maturity of 60 days or less are valued on the basis of amortized cost.
The Board of Directors has established general guidelines for calculating fair
value of non-publicly traded securities. At September 30, 1997, the Fund held
10.37% of its net assets in securities valued in good faith by the Board of
Directors with an aggregate cost of $6,354,237 and fair value of $9,575,265. The
net asset value per share of the Fund is calculated weekly, at the end of each
month and at any other times determined by the Board of Directors.

CASH: Deposits held at Brown Brothers Harriman & Co., the Fund's custodian, in a
variable rate account are classified as cash. At September 30, 1997, the
interest rate was 5.125% which resets on a daily basis. Amounts on deposit are
generally available on the same business day.

INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
income tax purposes. Interest income is recorded on an accrual basis; dividend
income is recorded on the ex-dividend date.

TAXES: No provision is made for U.S. federal income or excise taxes as it is the
Fund's intention to continue to qualify as a regulated investment company and to
make the requisite distributions to its shareholders which will be sufficient to
relieve it from all or substantially all U.S. federal income and excise taxes.

Pursuant to a ruling the Fund received from the Israeli tax authorities, the
Fund, subject to certain conditions, will not be subject to Israeli tax on
capital gains derived from the sale of securities listed on the Tel Aviv Stock
Exchange ("TASE"). Gains derived from securities not listed on the TASE
(unlisted securities) will be subject to a 25% Israeli tax provided the security
is an approved investment. Generally, stock of corporations that produce a
product or provide a service that support the infrastructure of Israel, are
considered approved investments. Any gain sourced to unlisted unapproved
securities are subject to a 40% Israeli tax and an inflationary tax. Dividends
derived from listed or approved securities are subject to 15% withholding tax,
while dividends from unlisted unapproved securities are subject to a 25%
withholding tax. Interest on debt obligations (whether listed or not) is subject
to withholding tax of 25% to 35%. The Fund records deferred Israeli capital
gains taxes on the net unrealized

- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
appreciation on unlisted Israeli debt obligations. At September 30, 1997, the
Fund had deferred $93,193 in Israeli capital gains taxes on unlisted Israeli
debt obligations.

FOREIGN CURRENCY TRANSLATIONS: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:

(I) market value of investment securities, assets and liabilities at the
current rate of exchange; and

(II) purchases and sales of investment securities, income and expenses at
the relevant rates of exchange prevailing on the respective dates of
such transactions.

The Fund does not isolate that portion of gains and losses on investments in
equity securities which are due to changes in the foreign exchange rates from
that which are due to changes in market prices of equity securities.
Accordingly, realized and unrealized foreign currency gains and losses with
respect to such securities are included in the reported net realized and
unrealized gains and losses on investment transactions balances. However, the
Fund does isolate the effect of fluctuations in foreign exchange rates when
determining the gain or loss upon the sale or maturity of foreign currency
denominated debt obligations pursuant to U.S. federal income tax regulations,
with such amount categorized as foreign exchange gain or loss for both financial
reporting and U.S. federal income tax reporting purposes.

Net currency gains from valuing foreign currency denominated assets and
liabilities at period end exchange rates are reflected as a component of net
unrealized appreciation/depreciation in value of investments and translation of
other assets and liabilities denominated in foreign currency.

Net realized foreign exchange losses represent foreign exchange gains and losses
from sales and maturities of debt securities, transactions in foreign currency
and forward foreign currency contracts, exchange gains or losses realized
between the trade date and settlement dates on security transactions, and the
difference between the amounts of interest and dividends recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received.

DISTRIBUTIONS OF INCOME AND GAINS: The Fund distributes at least annually to
shareholders, substantially all of its net investment income and net realized
short-term capital gains, if any. The Fund determines annually whether to
distribute any net realized long-term capital gains in excess of net realized
short-term capital losses, including capital loss carryovers, if any. An
additional distribution may be made to the extent necessary to avoid the payment
of a 4% U.S. federal excise tax. Dividends and distributions to shareholders are
recorded by the Fund on the ex-dividend date.

The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for U.S.
federal income tax purposes due to U.S. generally accepted accounting
principles/tax differences in the character of income and expense recognition.

Included in undistributed net investment income is a dividend received from one
of the Fund's investment partnerships. This dividend was received as marketable
equity securities and will be presented as undistributed net investment income
until the securities are sold.

- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

At September 30, 1997, the Fund reclassified $158,879 of accumulated net
investment loss, of which $53,196 was reclassified to accumulated net realized
gain on investments and foreign currency related transactions. The remaining
$105,683 was reclassified to paid-in capital.

OTHER: Costs incurred by the Fund in connection with its organization are being
amortized on a straight-line basis over a five-year period beginning at the
commencement of operations of the Fund.

Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in exchange rates.

Investments in Israel may involve certain considerations and risks not typically
associated with investments in the U.S., including the possibility of future
political and economic developments and the level of Israeli governmental
supervision and regulation of its securities markets. The Israeli securities
markets are substantially smaller, less liquid and more volatile than the major
securities markets in the United States. Consequently, acquisition and
disposition of securities by the Fund may be inhibited.

The Fund, subject to local investment limitations, may invest up to 30% of its
assets in non-publicly traded equity securities which may involve a high degree
of business and financial risk and may result in substantial losses. Because of
the current absence of any liquid trading market for these investments, the Fund
may take longer to liquidate these positions than would be the case for publicly
traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized on such sales could be less than
those originally paid by the Fund. Further, companies whose securities are not
publicly traded may not be subject to the disclosures and other investor
protection requirements applicable to companies whose securities are publicly
traded.
NOTE B. AGREEMENTS

BEA Associates ("BEA") serves as the Fund's investment adviser with respect to
all investments. As compensation for its advisory services, BEA receives from
the Fund an annual fee, calculated weekly and paid quarterly, equal to 1.30% of
the Fund's average weekly net assets invested in listed securities (including
securities traded over-the-counter in the United States) and 2.00% of the Fund's
average weekly net assets invested in unlisted Israeli securities. The aggregate
fee may not exceed an annual rate of 1.40% of the Fund's average weekly net
assets. BEA has agreed to waive the advisory fee previously payable to Giza Ltd.
("Giza") who had been employed by the Fund as investment sub-adviser through
August 10, 1997. For the fiscal year ended September 30, 1997, BEA earned
$1,104,264 for advisory services, of which BEA waived $31,663 in advisory fees
previously payable to Giza. BEA also provides certain administrative services to
the Fund and is reimbursed by the Fund for costs incurred on behalf of the Fund
(up to $20,000 per annum). For the fiscal year ended September 30, 1997, BEA was
reimbursed $8,000 for administrative services rendered to the Fund.

Analyst I.M.S. Investment Management Services, Ltd. ("Analyst I.M.S.") serves as
the Fund's investment sub-adviser. Pursuant to the sub-advisory agreement,
Analyst I.M.S. is paid a fee, out of the advisory fee payable to BEA, computed
weekly and paid quarterly at an annual rate of 0.20% of the Fund's average
weekly net assets. In addition, BEA pays Analyst I.M.S., out of its advisory
fee, a reimbursement for any Israeli Value Added taxes (currently 17%) and
$12,500 annually to cover expenses incurred in the execution of sub-

- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
advisory services. For the fiscal year ended September 30, 1997, Analyst I.M.S.
earned $197,976 for sub-advisory services.

Analyst I.M.S. has certain commercial arrangements with banks and brokers in
Israel from which they receive a portion of the commission on trades executed in
Israel. For the fiscal year ended September 30, 1997, such commissions amounted
to $36,931.

For the period October 1, 1996 through August 10, 1997, Giza served as the
Fund's investment sub-adviser. Effective August 11, 1997, Giza resigned as the
Fund's investment sub-adviser. Pursuant to the sub-advisory agreement, Giza was
paid a fee, out of the advisory fee payable to BEA, computed weekly and paid
quarterly at an annual rate of 0.20% of the Fund's average weekly net assets. In
addition, BEA paid Giza, out of its advisory fee, a reimbursement for any
Israeli Value Added taxes (currently 17%) and $12,500 annually to cover expenses
incurred in the execution of sub-advisory services. For the period October 1,
1996 through August 10, 1997, Giza earned $166,283 for sub-advisory services.

Bear Stearns Funds Management Inc. ("BSFM") serves as the Fund's administrator.
The Fund pays BSFM a monthly fee that is computed weekly at an annual rate of
0.11% of the Fund's average weekly net assets. For the fiscal year ended
September 30, 1997, BSFM earned $87,190 for administrative services.
NOTE C. CAPITAL STOCK
The authorized capital stock of the Fund is 100,000,000 shares of common stock,
$0.001, par value. Of the 5,012,295 shares outstanding at September 30, 1997,
BEA owned 7,169 shares.
NOTE D. INVESTMENT IN SECURITIES

For U.S. federal income tax purposes, the cost of securities owned at September
30, 1997 was $63,755,027. Accordingly, the net unrealized appreciation of
investments (including investments denominated in foreign currency) of
$22,953,421, was composed of gross appreciation of $30,542,670 for those
investments having an excess of value over cost and gross depreciation of
$7,589,249 for those investments having an excess of cost over value.

For the fiscal year ended September 30, 1997, purchases and sales of securities,
other than short-term investments, were $12,730,546 and $18,847,599,
respectively.
NOTE E. CREDIT AGREEMENT

The Fund, along with 18 other U.S. regulated investment companies for which BEA
serves as investment adviser, has a credit agreement with The First National
Bank of Boston. The agreement provides that each fund is permitted to borrow an
amount equal to the lesser of $50,000,000 or 25% of the net assets of the fund.
However, at no time shall the aggregate outstanding principal amount of all
loans to any of the 19 funds exceed $50,000,000. The line of credit will bear
interest at (i) the greater of the bank's prime rate or the Federal Funds
Effective Rate plus 0.50% or (ii) the Adjusted Eurodollar Rate plus 1.50%. The
Fund had no amounts outstanding under the credit agreement during the fiscal
year ended September 30, 1997.

- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

NOTE F. RESTRICTED SECURITIES
Certain of the Fund's investments are restricted as to resale and are valued at
the direction of the Fund's Board of Directors in good faith, at fair value,
after taking into consideration appropriate indications of value. The table
below shows the number of shares held, the acquisition dates, aggregate costs,
fair value as of September 30, 1997, per share value of the securities and
percentage of net assets which the securities comprise.

<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF ACQUISITION FAIR VALUE VALUE OF
SECURITY SHARES DATES COST AT 09/30/97 PER SHARE NET ASSETS
- --------------------------------------- -------- ---------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Advent Israel (Bermuda) L.P............ 650,000 06/16/93 $ 529,318 $ 676,000 $ 1.04 0.73
Advent Israel (Bermuda) L.P............ 350,000 06/10/96 349,632 364,000 1.04 0.40
Polaris Fund II LLC.................... 250,000 10/31/96 246,031 240,212 0.96 0.26
Superbowl Acquisition LDC.............. 36 10/10/94 316,111 465,552 12,932.00 0.50
The Renaissance Fund LDC............... 60 03/30/94 618,590 585,393 9,756.55 0.63
Walden-Israel Ventures, L.P............ 45,000 09/28/93 43,775 50,936 1.13 0.06
Walden-Israel Ventures, L.P............ 80,000 11/30/93 77,822 90,553 1.13 0.10
Walden-Israel Ventures, L.P............ 125,000 05/24/95 121,598 141,488 1.13 0.15
Walden-Israel Ventures, L.P............ 125,000 08/08/96 121,598 141,488 1.13 0.15
Walden-Israel Ventures, L.P............ 125,000 05/16/97 121,598 141,488 1.13 0.15
Zoran Corp............................. 50,000 07/31/96 75,000 1,057,500 21.15 1.15
</TABLE>

The Fund may incur certain costs in connection with the disposition of the above
securities.

- --------------------------------------------------------------------------------
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
of The First Israel Fund, Inc.:

We have audited the accompanying statement of assets and liabilities of The
First Israel Fund, Inc., including the schedule of investments, as of September
30, 1997, and the related statement of operations and cash flows for the year
then ended, the statements 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
presented. These financial statements and financial highlights are the
responsibility of the Fund'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. Our procedures included confirmation of investments held by the
custodians as of September 30, 1997. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement 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
First Israel Fund, Inc. as of September 30, 1997, the results of its operations
and its cash flows 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 periods presented, in conformity with generally accepted accounting
principles.

COOPERS & LYBRAND L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 17, 1997

- --------------------------------------------------------------------------------
20
<PAGE>
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED)
On January 16, 1997, the Annual Meeting of Shareholders of The First Israel
Fund, Inc. (the "Fund") was held and the following matters were voted upon:

(1) To re-elect three directors to the Board of Directors of the Fund.

<TABLE>
<CAPTION>
NAME OF DIRECTOR FOR WITHHELD NON-VOTES
- ----------------------------------------------------------------------------------- ---------- ----------- ----------
<S> <C> <C> <C>
Dr. Enrique R. Arzac 3,471,136 60,427 1,480,732
Emilio Bassini* 3,475,861 55,702 1,480,732
Peter A. Gordon 3,462,821 68,742 1,480,732
</TABLE>

- --------------
* Resigned effective January 1, 1997.

In addition to the directors re-elected at the meeting, George W. Landau,
Jonathan W. Lubell and Steven N. Rappaport continue to serve as directors of the
Fund. Daniel Sigg and Zeev Holtzman resigned as directors of the Fund effective
February 11, 1997 and August 11, 1997, respectively.

(2) To ratify the selection of Coopers & Lybrand L.L.P. as independent public
accountants for the fiscal year ending September 30, 1997.

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTES
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
3,461,445 39,578 30,540 1,480,732
</TABLE>

TAX INFORMATION (UNAUDITED)
The Fund is required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise its shareholders within 60 days of the Fund's fiscal year end
(September 30, 1997) as to the U.S. federal tax status of distributions received
by the Fund's shareholders in respect of such fiscal year. Of the $1.235 per
share distribution paid in respect of such fiscal year, $0.055 per share was
derived from net realized short-term capital gains and $1.180 per share was
derived from net realized long-term capital gains. There were no distributions
which would qualify for the dividend received deduction available to corporate
shareholders.

The Fund does not intend to make an election under Section 853 to pass through
foreign taxes paid by the Fund to its shareholders. This information is given to
meet certain requirements of the Internal Revenue Code of 1986, as amended.
Shareholders should refer to their Form 1099-DIV to determine the amount
includable on their respective tax returns for 1997.

Notification for calendar year 1997 will be mailed in January 1998. The
notification will reflect the amount to be used by calendar year taxpayers on
their U.S. federal income tax returns along with Form 1099-DIV.

Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their distribution. They will generally not be entitled to a foreign
tax credit or deduction for the withholding taxes paid by the Fund.

In general, distributions received by tax-exempt recipients (e.g., IRAs and
Keoghs) need not be reported as taxable income for U.S. federal income tax
purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7)
plans) may need this information for their annual information reporting.

Shareholders are advised to consult their own tax advisers with respect to the
tax consequences of their investments in the Fund.

- --------------------------------------------------------------------------------
21
<PAGE>
DESCRIPTION OF INVESTLINK* PROGRAM

The InvestLink Program is sponsored and administered by The First National Bank
of Boston, not by The First Israel Fund, Inc. (the "Fund"). The First National
Bank of Boston will act as program administrator (the "Program Administrator")
of the InvestLink Program (the "Program"). The purpose of the Program is to
provide interested investors with a simple and convenient way to invest funds
and reinvest dividends in Shares of the Fund's common stock ("Shares") at
prevailing prices, with reduced brokerage commissions and fees.

An interested investor may join the Program at any time. Purchases of Shares
with funds from a participant's cash payment or automatic account deduction will
begin on the next day on which funds are invested. If a participant selects the
dividend reinvestment option, automatic investment of dividends generally will
begin with the next dividend payable after the Program Administrator receives
his enrollment form. Once in the Program, a person will remain a participant
until he terminates his participation or sells all Shares held in his Program
account, or his account is terminated by the Program Administrator. A
participant may change his investment options at any time by requesting a new
enrollment form and returning it to the Program Administrator.

A participant will be assessed certain charges in connection with his
participation in the Program. First-time investors will be subject to an initial
service charge which will be deducted from their initial cash deposit. All
optional cash deposit investments will be subject to a service charge. Sales
processed through the Program will have a service fee deducted from the net
proceeds, after brokerage commissions. In addition to the transaction charges
outlined above, participants will be assessed per share processing fees (which
include brokerage commissions.) Participants will not be charged any fee for
reinvesting dividends.

The number of Shares to be purchased for a participant depends on the amount of
his dividends, cash payments or bank account or payroll deductions, less
applicable fees and commissions, and the purchase price of the Shares. The
Program Administrator uses dividends and funds of participants to purchase
Shares of Company Common Stock in the open market. Such purchases will be made
by participating brokers as agent for the participants using normal cash
settlement practices. All Shares purchased through the Program will be allocated
to participants as of the settlement date, which is usually three business days
from the the purchase date. In all cases, transaction processing will occur
within 30 days of the receipt of funds, except where temporary curtailment or
suspension of purchases is necessary to comply with applicable provisions of the
Federal Securities laws or when unusual market conditions make prudent
investment impracticable. In the event the Program Administrator is unable to
purchase Shares within 30 days of the receipt of funds, such funds will be
returned to the participants.

The average price of all Shares purchased by the Program Administrator with all
funds received during the time period from two business days preceding any
investment date up to the second business day preceding the next investment date
shall be the price per share allocable to a participant in connection with the
Shares purchased for his account with his funds or dividends received by the
Program Administrator during such time period. The average price of all Shares
sold by the Program Administrator pursuant to sell orders received during such
time period shall be the price per share allocable to a participant in
connection with the Shares sold for his account pursuant to his sell orders
received by the Program Administrator during such time period.

The First National Bank of Boston, as Program Administrator, administers the
Program for participants, keeps records, sends statements of account to
participants and performs other duties relating to the Program. Each participant
in the Program will receive a statement of his account following each purchase
of Shares. The statements will also show the amount of

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22
<PAGE>
DESCRIPTION OF INVESTLINK* PROGRAM (CONTINUED)
dividends credited to such participant's account (if applicable), as well as the
fees paid by the participant. In addition, each participant will receive copies
of the Fund's Annual Report to shareholders, proxy statements and, if
applicable, dividend income information for tax reporting purposes.

If the Fund is paying dividends on the Shares, a participant will receive
dividends through the Program for all Shares held on the dividend record date on
the basis of full and fractional Shares held in his account, and for all other
Shares of the Fund registered in his name. The Program Administrator will send
checks to the participants for the amounts of their dividends that are not to be
automatically reinvested at no cost to the participants.

Shares of the Fund purchased under the Program will be registered in the name of
the accounts of the respective participants. Unless requested, the Fund will not
issue to participants certificates for Shares of the Fund purchased under the
Program. The Program Administrator will hold the Shares in book-entry form until
a Program participant chooses to withdraw his Shares or terminate his
participation in the Program. The number of Shares purchased for a participant's
account under the Program will be shown on his statement of account. This
feature protects against loss, theft or destruction of stock certificates.

A participant may withdraw all or a portion of the Shares from his Program
account by notifying the Program Administrator. After receipt of a participant's
request, the Program Administrator will issue to such participant certificates
for the whole Shares of the Fund so withdrawn or, if requested by the
participant, sell the Shares for him and send him the proceeds, less applicable
brokerage commissions, fees, and transfer taxes, if any. If a participant
withdraws all full and fractional Shares in his Program account, his
participation in the Program will be terminated by the Program Administrator. In
no case will certificates for fractional Shares be issued. The Program
Administrator will convert any fractional Shares held by a participant at the
time of his withdrawal to cash.

Participation in any rights offering, dividend distribution or stock split will
be based upon both the Shares of the Fund registered in participants' names and
the Shares (including fractional Shares) credited to participants' Program
accounts. Any stock dividend or Shares resulting from stock splits with respect
to Shares of the Fund, both full and fractional, which participants hold in
their Program accounts and with respect to all Shares registered in their names
will be automatically credited to their accounts.

All Shares of the Fund (including any fractional share) credited to his account
under the Program will be voted as the participant directs. The participants
will be sent the proxy materials for the annual meetings of shareholders. When a
participant returns an executed proxy, all of such Shares will be voted as
indicated. A participant may also elect to vote his Shares in person at the
Shareholders' meeting.

A participant will receive tax information annually for his personal records and
to help him prepare his U.S. federal income tax return. The automatic
reinvestment of dividends does not relieve him of any income tax which may be
payable on dividends. For further information as to tax consequences of
participation in the Program, participants should consult with their own tax
advisors.

The Program Administrator in administering the Program will not be liable for
any act done in good faith or for any good faith omission to act. However, the
Program Administrator will be liable for loss or damage due to error caused by
its negligence, bad faith or willful misconduct. Shares held in custody by the
Program Administrator are not subject to protection under the Securities
Investors Protection Act of 1970.

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23
<PAGE>
DESCRIPTION OF INVESTLINK* PROGRAM (CONTINUED)

The participant should recognize that neither the Fund nor the Program
Administrator can provide any assurance of a profit or protection against loss
on any Shares purchased under the Program. A participant's investment in Shares
held in his Program account is no different than his investment in directly held
Shares in this regard. The participant bears the risk of loss and the benefits
of gain from market price changes with respect to all of his Shares. Neither the
Fund nor the Program Administrator can guarantee that Shares purchased under the
Program will, at any particular time, be worth more or less than their purchase
price. Each participant must make an independent investment decision based on
his own judgment and research.

While the Program Administrator hopes to continue the Program indefinitely, the
Program Administrator reserves the right to suspend or terminate the Program at
any time. It also reserves the right to make modifications to the Program.
Participants will be notified of any such suspension, termination or
modification in accordance with the terms and conditions of the Program. The
Program Administrator also reserves the right to terminate any participant's
participation in the Program at any time. Any question of interpretation arising
under the Program will be determined in good faith by the Program Administrator
and any such good faith determination will be final.

Any interested investor may participate in the Program. To participate in the
Program, an investor who is not already a registered owner of the Shares must
make an initial investment of at least $250.00. All other cash payments or bank
account deductions must be at least $100.00, up to a maximum of $100,000.00
annually. An interested investor may join the Program by reading the Program
description, completing and signing the enrollment form and returning it to the
Program Administrator. The enrollment form and information relating to the
Program (including the terms and conditions) may be obtained by calling the
Program Administrator at one of the following telephone numbers: First Time
Investors--(800) 969-3321; Current Shareholders--(800) 730-6001. All
correspondence regarding the Program should be directed to: The First National
Bank of Boston, InvestLink Program, P.O. Box 1681, Boston, MA 02105-1681.

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*InvestLink-SM- is a service mark of Boston EquiServe Limited
Partnership.

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24
<PAGE>
SUMMARY OF GENERAL INFORMATION

The Fund--The First Israel Fund, Inc.--is a closed-end, non-diversified
management investment company whose shares trade on the New York Stock Exchange.
Its investment objective is long-term capital appreciation through investments
primarily in equity securities of Israeli companies. The Fund is managed and
advised by BEA Associates ("BEA"). BEA is a diversified asset manager, handling
equity, balanced, fixed income, international and derivative based accounts.
Portfolios include international and emerging market investments, common stocks,
taxable and non-taxable bonds, options, futures and venture capital. BEA manages
money for corporate pension and profit-sharing funds, public pension funds,
union funds, endowments and other charitable institutions and private
individuals. As of September 30, 1997, BEA managed approximately $34.6 billion
in assets.

SHAREHOLDER INFORMATION

The market price is published in: THE NEW YORK TIMES (daily) under the
designation "FtIsrl" and THE WALL STREET JOURNAL (daily), and BARRON'S (each
Monday) under the designation "FstIsrael". The Fund's New York Stock Exchange
trading symbol is ISL. Weekly comparative net asset value (NAV) and market price
information about The First Israel Fund, Inc.'s shares are published each Sunday
in THE NEW YORK TIMES and each Monday in THE WALL STREET JOURNAL and BARRON'S,
as well as other newspapers, in a table called "Closed End Funds."

THE BEA GROUP OF FUNDS

LITERATURE REQUEST--Call today for free descriptive information on the
closed-end funds or a prospectus on any of the open-end mutual funds listed
below. The prospectus contains more complete information, including fees,
charges and expenses, and should be read carefully before investing or sending
money.

<TABLE>
<S> <C>
CLOSED-END FUNDS BEA ADVISOR FUNDS
SINGLE COUNTRY OPEN-END MUTUAL FUNDS
The Brazilian Equity Fund, Inc. (BZL) BEA Emerging Markets Equity Fund
The Chile Fund, Inc. (CH) BEA Global Telecommunications Fund
The Indonesia Fund, Inc. (IF) BEA High Yield Fund
The Portugal Fund, Inc. (PGF) BEA International Equity Fund

MULTIPLE COUNTRY
The Emerging Markets Infrastructure Fund, Inc. (EMG)
The Emerging Markets Telecommunications Fund, Inc. (ETF)
The Latin America Equity Fund, Inc. (LAQ)
The Latin America Investment Fund, Inc. (LAM)

FIXED INCOME For shareholder information or a copy
BEA Income Fund, Inc. (FBF) of a prospectus for any of the
BEA Strategic Income Fund, Inc. (FBI) open-end mutual funds please call,
1-800-401-2230.

For closed-end fund information Visit our website on the Internet:
please call, 1-800-293-1232. http://www.beafunds.com
</TABLE>

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<PAGE>
DIRECTORS AND CORPORATE OFFICERS

William W. Priest, Jr. Chairman of the
Board of Directors

Richard W. Watt President, Chief Investment Officer
and Director
Dr. Enrique R. Arzac Director

Peter A. Gordon Director

George W. Landau Director

Jonathan W. Lubell Director
Steven N. Rappaport Director

Paul P. Stamler Senior Vice President

Hal Liebes Senior Vice President

Michael A. Pignataro Chief Financial Officer and
Secretary
Rocco A. Del Guercio Vice President

Wendy S. Setnicka Treasurer

INVESTMENT ADVISER

BEA Associates
One Citicorp Center
153 East 53rd Street
New York, NY 10022

ADMINISTRATOR

Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167

CUSTODIAN

Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109

SHAREHOLDER SERVICING AGENT

The First National Bank of Boston
P.O. Box 1865
Mail Stop 45-02-62
Boston, MA 02105-1865

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103

LEGAL COUNSEL

Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue

New York, NY 10022

<TABLE>
<S> <C>
This report, including the financial statements herein, is
sent to the shareholders of the Fund for their information.
It is not a prospectus, circular or representation intended
for use in the purchase or sale of shares of the Fund or of
any securities mentioned in this report. [LOGO]
</TABLE>

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3917-AR-97