N-30D 1 0001.txt Annual Report International Discovery Fund October 31, 2000 T. Rowe Price REPORT HIGHLIGHTS -------------------------------------------------------------------------------- International Discovery Fund o International small-cap stocks declined during the six months ended October 31 as technology stocks fell sharply. o The fund posted negative returns, lagging its benchmarks for the six months; strong results late in 1999 and early in 2000 led to solid gains for the 12-month period. o We trimmed our holdings in technology, media, and telecommunications and added positions in business services and biotechnology. o Despite this year's setback, the outlook is bright for emerging growth companies, but stock selection and research remain crucial. UPDATES AVAILABLE For updates on T. Rowe Price funds following the end of each calendar quarter, please see our Web site at www.troweprice.com. Fellow Shareholders International small-cap stocks struggled during the six months ended October 31, 2000, reversing trends of the previous 18 months. Building on a powerful fourth-quarter 1999 rally, markets surged early in 2000, fueled by investor enthusiasm for shares of technology companies-especially Internet-related stocks. Asian markets peaked in January, but European small-caps continued to climb until mid-March, when technology stocks began a sharp decline that continued-with considerable volatility-through October. Telecommunications and media companies were hit hard late in the period. Performance Comparison -------------------------------------------------------------------------------- Periods Ended 10/31/00 6 Months 12 Months -------------------------------------------------------------------------------- International Discovery Fund -12.34% 40.07% MSCI EAFE Small Cap Index* -6.56 -7.92 Salomon Non-U.S. Extended Market Index -6.34 -1.04 * Principal return only Your fund posted sharply negative returns for the six-month period, lagging its benchmark indices. Fund returns were hurt by the reversal of market conditions, as the high-potential growth stocks your fund favors underperformed value stocks. Strong results in the previous six months lifted the fund to a 40.07% 12-month return, far superior to its benchmarks. The recent downturn was at least partially the result of a slowdown in corporate information technology (IT) spending after Y2K fears passed. The failure of a number of high-profile e-commerce retailers and a general slowdown in advertising spending by dot-com companies also contributed to the decline. Broader concerns weighing on the equity markets included slower economic growth, high oil prices, and euro weakness. Some sectors bucked the downtrend, however, including alternative energy and oil services, health care and medical devices, and biotechnology. PORTFOLIO AND MARKET REVIEW Six months ago we reported that we were selling European technology and telecommunications highfliers whose valuations had become stretched. Although that move proved judicious, it did not prevent the fund from suffering losses in the tech and telecom sell-off. Stocks that hurt fund performance included Dialog Semiconductor (U.K.), Bright Station (e-commerce, U.K.), Lynx Group (IT services, U.K.), IFCO Systems (logistic services, Netherlands), Software (systems software, Germany), and Ubizen (IT services, Belgium). Non-European tech stocks also dragged down returns, including Partner Communications (mobile telecommunications, Israel) and Gilat Satellite Networks (satellite technology, Israel). Can the Euro Also Rise? Understanding why the euro has been weak helps explain why it should recover. Several factors have pushed the euro-the common currency for 11 countries in Continental Europe-down 27% since its launch on January 1, 1999. Chris Rothery, a portfolio manager at T. Rowe Price International (TRPI), thinks each of these factors could moderate or reverse in the next year. Capital flows into the U.S. have risen sharply in recent years as European companies acquired an unprecedented number of U.S. businesses and as Europeans invested in U.S. financial assets. Both trends are moderating, however. This year's weakness in the U.S. stock market has made investment here less attractive. "The Nasdaq bubble appears to have been pricked, which should also take some steam out of the dollar," says Rothery. The persistent strength of the U.S. economy has also hurt the euro, as it makes the U.S. a more attractive place to invest. But U.S. growth has showed signs of slowing recently, narrowing the advantage over European growth. Higher-yielding U.S. government bonds also lured investors. Recently, however, long-term U.S. rates have declined while those in the euro zone have remained stable. Since the euro's launch, oil prices have more than tripled, and Europe's demand for the dollars needed to pay for oil has surged. But oil prices are stabilizing and expected to trend lower. While the Federal Reserve is respected and well established, the European Central Bank (ECB) has less than two years' experience. ECB officials have aggravated investors' uncertainty by making confusing remarks. Lately, ECB officials have become more politically astute and are expected to make more careful statements. Though TRPI portfolio managers have been surprised by the extent of the euro's decline, they point out that markets often overshoot. It would be a mistake for U.S. investors to shun euro assets, says Rothery. John Ford, TRPI's chief investment officer, sees Europe at an earlier stage of the economic cycle than the U.S., with greater room for productivity improvement. "If we can get into a virtuous cycle, then investors can benefit from better economic performance, higher returns on capital, and a strong chance of currency appreciation to boot," Ford says. THE EURO VS. THE U.S. DOLLAR Px Last 12/31/1998 1.1667 1/1/1999 1.1697 1/4/1999 1.1837 1/5/1999 1.1761 1/6/1999 1.1628 1/7/1999 1.1712 1/8/1999 1.1585 1/11/1999 1.1494 1/12/1999 1.156 1/13/1999 1.1669 1/14/1999 1.169 1/15/1999 1.1555 1/18/1999 1.1613 1/19/1999 1.1595 1/20/1999 1.1565 1/21/1999 1.1602 1/22/1999 1.1588 1/25/1999 1.1535 1/26/1999 1.156 1/27/1999 1.1444 1/28/1999 1.142 1/29/1999 1.1362 2/1/1999 1.1309 2/2/1999 1.1351 2/3/1999 1.1314 2/4/1999 1.134 2/5/1999 1.1266 2/8/1999 1.1323 2/9/1999 1.1315 2/10/1999 1.1326 2/11/1999 1.1223 2/12/1999 1.1308 2/15/1999 1.1223 2/16/1999 1.1209 2/17/1999 1.1248 2/18/1999 1.1195 2/19/1999 1.1069 2/22/1999 1.1021 2/23/1999 1.1007 2/24/1999 1.1007 2/25/1999 1.1034 2/26/1999 1.1028 3/1/1999 1.0892 3/2/1999 1.0941 3/3/1999 1.0875 3/4/1999 1.0799 3/5/1999 1.0823 3/8/1999 1.0888 3/9/1999 1.0881 3/10/1999 1.0943 3/11/1999 1.1042 3/12/1999 1.0905 3/15/1999 1.0932 3/16/1999 1.0996 3/17/1999 1.1002 3/18/1999 1.0972 3/19/1999 1.0896 3/22/1999 1.0907 3/23/1999 1.0892 3/24/1999 1.087 3/25/1999 1.0839 3/26/1999 1.08 3/29/1999 1.0732 3/30/1999 1.0732 3/31/1999 1.0762 4/1/1999 1.0795 4/2/1999 1.0786 4/5/1999 1.0712 4/6/1999 1.083 4/7/1999 1.0775 4/8/1999 1.0742 4/9/1999 1.0797 4/12/1999 1.0804 4/13/1999 1.0782 4/14/1999 1.0802 4/15/1999 1.0713 4/16/1999 1.0705 4/19/1999 1.066 4/20/1999 1.0625 4/21/1999 1.0584 4/22/1999 1.0646 4/23/1999 1.0599 4/26/1999 1.059 4/27/1999 1.0662 4/28/1999 1.062 4/29/1999 1.0608 4/30/1999 1.057 5/3/1999 1.0567 5/4/1999 1.063 5/5/1999 1.0762 5/6/1999 1.0792 5/7/1999 1.0757 5/10/1999 1.0782 5/11/1999 1.0712 5/12/1999 1.0646 5/13/1999 1.0656 5/14/1999 1.0659 5/17/1999 1.0671 5/18/1999 1.0674 5/19/1999 1.0662 5/20/1999 1.0623 5/21/1999 1.0584 5/24/1999 1.0607 5/25/1999 1.0624 5/26/1999 1.0443 5/27/1999 1.0423 5/28/1999 1.0429 5/31/1999 1.042 6/1/1999 1.0448 6/2/1999 1.0359 6/3/1999 1.0324 6/4/1999 1.0377 6/7/1999 1.0328 6/8/1999 1.0466 6/9/1999 1.0466 6/10/1999 1.0482 6/11/1999 1.0519 6/14/1999 1.0423 6/15/1999 1.0426 6/16/1999 1.0308 6/17/1999 1.0343 6/18/1999 1.0397 6/21/1999 1.0347 6/22/1999 1.0325 6/23/1999 1.0337 6/24/1999 1.0412 6/25/1999 1.043 6/28/1999 1.0331 6/29/1999 1.0319 6/30/1999 1.0351 7/1/1999 1.023 7/2/1999 1.0249 7/5/1999 1.0223 7/6/1999 1.0236 7/7/1999 1.0222 7/8/1999 1.0222 7/9/1999 1.0196 7/12/1999 1.0145 7/13/1999 1.017 7/14/1999 1.0136 7/15/1999 1.019 7/16/1999 1.0201 7/19/1999 1.0313 7/20/1999 1.04 7/21/1999 1.05 7/22/1999 1.0508 7/23/1999 1.0504 7/26/1999 1.0647 7/27/1999 1.0632 7/28/1999 1.0662 7/29/1999 1.0725 7/30/1999 1.0711 8/2/1999 1.0691 8/3/1999 1.068 8/4/1999 1.0776 8/5/1999 1.0758 8/6/1999 1.0742 8/9/1999 1.0717 8/10/1999 1.071 8/11/1999 1.0658 8/12/1999 1.0674 8/13/1999 1.0567 8/16/1999 1.0581 8/17/1999 1.0507 8/18/1999 1.052 8/19/1999 1.0644 8/20/1999 1.0672 8/23/1999 1.049 8/24/1999 1.0544 8/25/1999 1.0424 8/26/1999 1.0453 8/27/1999 1.0464 8/30/1999 1.0482 8/31/1999 1.0566 9/1/1999 1.0582 9/2/1999 1.0689 9/3/1999 1.0612 9/6/1999 1.0575 9/7/1999 1.0587 9/8/1999 1.0598 9/9/1999 1.0538 9/10/1999 1.0374 9/13/1999 1.0424 9/14/1999 1.0358 9/15/1999 1.0409 9/16/1999 1.0383 9/17/1999 1.0423 9/20/1999 1.0355 9/21/1999 1.0491 9/22/1999 1.0439 9/23/1999 1.0503 9/24/1999 1.0439 9/27/1999 1.0462 9/28/1999 1.0525 9/29/1999 1.0645 9/30/1999 1.0684 10/1/1999 1.0725 10/4/1999 1.0737 10/5/1999 1.0737 10/6/1999 1.0687 10/7/1999 1.0717 10/8/1999 1.0632 10/11/1999 1.0638 10/12/1999 1.0772 10/13/1999 1.0806 10/14/1999 1.0776 10/15/1999 1.0894 10/18/1999 1.0812 10/19/1999 1.0825 10/20/1999 1.0749 10/21/1999 1.0802 10/22/1999 1.069 10/25/1999 1.0675 10/26/1999 1.0592 10/27/1999 1.0518 10/28/1999 1.0511 10/29/1999 1.0549 11/1/1999 1.0513 11/2/1999 1.0527 11/3/1999 1.0489 11/4/1999 1.0375 11/5/1999 1.0421 11/8/1999 1.0383 11/9/1999 1.0403 11/10/1999 1.0447 11/11/1999 1.0405 11/12/1999 1.0318 11/15/1999 1.0332 11/16/1999 1.0302 11/17/1999 1.0416 11/18/1999 1.0296 11/19/1999 1.03 11/22/1999 1.0321 11/23/1999 1.0279 11/24/1999 1.0185 11/25/1999 1.0179 11/26/1999 1.0171 11/29/1999 1.0103 11/30/1999 1.0093 12/1/1999 1.0086 12/2/1999 1.0013 12/3/1999 1.0017 12/6/1999 1.0228 12/7/1999 1.0254 12/8/1999 1.0278 12/9/1999 1.0214 12/10/1999 1.0134 12/13/1999 1.0144 12/14/1999 1.0057 12/15/1999 1.0071 12/16/1999 1.017 12/17/1999 1.0087 12/20/1999 1.0133 12/21/1999 1.0085 12/22/1999 1.0093 12/23/1999 1.0156 12/24/1999 1.011 12/27/1999 1.0132 12/28/1999 1.007 12/29/1999 1.0051 12/30/1999 1.0086 12/31/1999 1.0062 1/3/2000 1.0243 1/4/2000 1.0296 1/5/2000 1.0321 1/6/2000 1.0328 1/7/2000 1.0295 1/10/2000 1.0256 1/11/2000 1.0336 1/12/2000 1.0309 1/13/2000 1.0258 1/14/2000 1.0122 1/17/2000 1.0122 1/18/2000 1.0137 1/19/2000 1.0133 1/20/2000 1.0168 1/21/2000 1.0098 1/24/2000 1.0072 1/25/2000 1.0009 1/26/2000 1.0019 1/27/2000 0.9882 1/28/2000 0.9747 1/31/2000 0.9707 2/1/2000 0.9711 2/2/2000 0.9765 2/3/2000 0.9894 2/4/2000 0.9832 2/7/2000 0.9815 2/8/2000 0.9855 2/9/2000 0.9942 2/10/2000 0.9854 2/11/2000 0.9875 2/14/2000 0.9783 2/15/2000 0.9815 2/16/2000 0.9863 2/17/2000 0.9878 2/18/2000 0.9839 2/21/2000 0.9877 2/22/2000 1.0038 2/23/2000 1.0036 2/24/2000 0.992 2/25/2000 0.9749 2/28/2000 0.9709 2/29/2000 0.9642 3/1/2000 0.9727 3/2/2000 0.9656 3/3/2000 0.9586 3/6/2000 0.9586 3/7/2000 0.9584 3/8/2000 0.961 3/9/2000 0.9669 3/10/2000 0.9637 3/13/2000 0.9642 3/14/2000 0.9686 3/15/2000 0.9669 3/16/2000 0.9696 3/17/2000 0.9721 3/20/2000 0.9728 3/21/2000 0.9615 3/22/2000 0.961 3/23/2000 0.9715 3/24/2000 0.9779 3/27/2000 0.9672 3/28/2000 0.9605 3/29/2000 0.9514 3/30/2000 0.9613 3/31/2000 0.9553 4/3/2000 0.9553 4/4/2000 0.9596 4/5/2000 0.9625 4/6/2000 0.9584 4/7/2000 0.9553 4/10/2000 0.9627 4/11/2000 0.9592 4/12/2000 0.959 4/13/2000 0.9524 4/14/2000 0.9622 4/17/2000 0.9527 4/18/2000 0.9453 4/19/2000 0.9402 4/20/2000 0.9374 4/21/2000 0.9385 4/24/2000 0.938 4/25/2000 0.9208 4/26/2000 0.9235 4/27/2000 0.9099 4/28/2000 0.9119 5/1/2000 0.9158 5/2/2000 0.91 5/3/2000 0.8948 5/4/2000 0.8895 5/5/2000 0.897 5/8/2000 0.8977 5/9/2000 0.9075 5/10/2000 0.9068 5/11/2000 0.9016 5/12/2000 0.9197 5/15/2000 0.9112 5/16/2000 0.9003 5/17/2000 0.8959 5/18/2000 0.8946 5/19/2000 0.8975 5/22/2000 0.9031 5/23/2000 0.9071 5/24/2000 0.9044 5/25/2000 0.9115 5/26/2000 0.9309 5/29/2000 0.9266 5/30/2000 0.9301 5/31/2000 0.938 6/1/2000 0.9312 6/2/2000 0.9463 6/5/2000 0.9479 6/6/2000 0.9548 6/7/2000 0.9622 6/8/2000 0.956 6/9/2000 0.9536 6/12/2000 0.9538 6/13/2000 0.9596 6/14/2000 0.9579 6/15/2000 0.9547 6/16/2000 0.965 6/19/2000 0.9567 6/20/2000 0.9548 6/21/2000 0.9442 6/22/2000 0.9355 6/23/2000 0.9359 6/26/2000 0.9369 6/27/2000 0.9459 6/28/2000 0.9401 6/29/2000 0.952 6/30/2000 0.9525 7/3/2000 0.9502 7/4/2000 0.9513 7/5/2000 0.9525 7/6/2000 0.9507 7/7/2000 0.9484 7/10/2000 0.9553 7/11/2000 0.9527 7/12/2000 0.9424 7/13/2000 0.9372 7/14/2000 0.9385 7/17/2000 0.9366 7/18/2000 0.9248 7/19/2000 0.9246 7/20/2000 0.9331 7/21/2000 0.9369 7/24/2000 0.9337 7/25/2000 0.9385 7/26/2000 0.9428 7/27/2000 0.9317 7/28/2000 0.923 7/31/2000 0.9266 8/1/2000 0.9147 8/2/2000 0.9136 8/3/2000 0.9061 8/4/2000 0.9083 8/7/2000 0.9071 8/8/2000 0.9022 8/9/2000 0.9006 8/10/2000 0.9083 8/11/2000 0.9026 8/14/2000 0.9056 8/15/2000 0.9135 8/16/2000 0.9161 8/17/2000 0.9162 8/18/2000 0.9064 8/21/2000 0.9017 8/22/2000 0.8964 8/23/2000 0.9017 8/24/2000 0.9021 8/25/2000 0.9021 8/28/2000 0.9002 8/29/2000 0.8921 8/30/2000 0.894 8/31/2000 0.8878 9/1/2000 0.8997 9/4/2000 0.8978 9/5/2000 0.8903 9/6/2000 0.8702 9/7/2000 0.8713 9/8/2000 0.8672 9/11/2000 0.8577 9/12/2000 0.864 9/13/2000 0.8594 9/14/2000 0.8644 9/15/2000 0.8543 9/18/2000 0.8537 9/19/2000 0.8509 9/20/2000 0.8493 9/21/2000 0.8599 9/22/2000 0.8766 9/25/2000 0.8745 9/26/2000 0.8828 9/27/2000 0.8834 9/28/2000 0.8791 9/29/2000 0.8827 10/2/2000 0.8772 10/3/2000 0.8757 10/4/2000 0.8735 10/5/2000 0.8692 10/6/2000 0.8684 10/9/2000 0.8686 10/10/2000 0.8716 10/11/2000 0.8683 10/12/2000 0.8629 10/13/2000 0.856 10/16/2000 0.8499 10/17/2000 0.8544 10/18/2000 0.8389 10/19/2000 0.8435 10/20/2000 0.842 10/23/2000 0.8354 10/24/2000 0.8359 10/25/2000 0.8272 10/26/2000 0.8303 10/27/2000 0.8405 10/30/2000 0.8411 10/31/2000 0.8489 Chart shows the euro-the common currency of 11 countries in Continental Europe-has declined steadily in value versus the U.S. dollar since its January 1, 1999, launch. Top positive contributors to fund returns came mostly from the alternative energy, oil services, biotech, and business services sectors. These included Orbital Engine (alternative engine technology, Australia), Coflexip (oil services, France), Saipem (oil services, Italy), Proffice (temporary employment services, Sweden), and Shire Pharmaceuticals Group (U.K.). Country allocations ended the period little changed from six months ago. European stocks accounted for 52% of fund assets, up from 48% six months ago, while Japanese stocks accounted for 19%, down slightly from 21%. Our Japanese allocation represents a significantly underweighted position relative to the MSCI EAFE Small Cap Index, and reflects the fragility of the Japanese economy, especially for smaller companies. We were net sellers of technology, media, and telecom stocks, and this sector now represents about 35% of the portfolio. Europe New Economy stocks were hardest hit in the downturn as valuations unwound from unsustainably high levels. The failure of the much-hyped fashion e-retailer Boo.com and other e-commerce businesses led investors to doubt the concept of pure dot-com retailing, and demand for mobile data and especially wireless application protocol (WAP) services was slower than expected. Continued currency weakness in the euro region also hurt returns for U.S. investors (see the story on page 2). Despite the stock market decline, the small- and mid-cap universe continued to broaden and deepen. The market for initial public offerings remained buoyant, although IPOs could no longer count on the high premiums previously seen. European indicators point to gently slowing growth. Euro zone GDP grew 3.7% in the second quarter year-over-year, and unemployment continued to fall. Progress with structural reforms continued, including tax cuts in Germany, France, and other euro zone countries. Germany pressed ahead with proposals for important pension reforms. The U.K. economy weakened, in part because the strength of its currency relative to the depressed euro caused difficulty for exporters. In Europe, as elsewhere, we were net sellers of technology, media, and telecommunications stocks, particularly fiber optics companies and mobile Internet enablers. We eliminated Wavecom (France), A Novo (France), Enea Data (Sweden), Disetronic Holdings (Switzerland), and Bachem (Switzerland) and trimmed our holdings in Dialog Semiconductor and NDS Group (all U.K.). We purchased select technology companies as well as business services and biotech firms. Buys included Genesys (telecom services, France), Articon Integralis (IT services, Germany), Direkt Anlage Bank (financial services, Germany), IFCO systems, Cyber Com Consulting (e-business consulting, Sweden), PyroSequencing (biotechnology, Sweden), Poolia (staffing agency, Sweden), Bobst (packaging machinery, Switzerland), and Gemini Genomics (biotechnology, U.K.). Market Performance -------------------------------------------------------------------------------- Six Months Local Local Currency U.S. Ended 10/31/00 Currency vs. U.S. Dollars Dollars -------------------------------------------------------------------------------- Australia 6.06% -11.20% -5.82% Brazil 6.55 -5.42 0.77 France 0.66 -6.99 -6.37 Germany -5.58 -6.98 -12.18 Hong Kong -11.74 -0.13 -11.85 India -20.61 -6.78 -26.00 Japan -13.51 -1.02 -14.39 Mexico -0.67 -1.87 -2.53 Netherlands 6.37 -6.98 -1.06 Sweden -18.52 -10.65 -27.19 United Kingdom 4.74 -7.20 -2.81 Source: RIMES Online, using MSCI indices. Regionally, we overweighted Scandinavia, which is particularly well placed to take advantage of the New Economy, and underweighted Italy and Spain, which lack attractive opportunities. Japan While Japan is no longer technically in a recession, pockets of economic strength are limited to major manufacturers. The strength in such sectors as housing reflects government subsidies, while the driving force of the economy-consumer spending-remains weak. The Japanese economy is simply not robust enough to sustain a broad rally in small companies at this time. However, Japan's gradual moves toward deregulation are positive and could provide an attractive environment for equities going forward. We sold Aeon Credit Services and concentrated our allocation to the consumer credit sector-which has suffered from the Shokoh Fund scandal-to a single stock, Aiful. We eliminated Combi, a maker of child safety seats, fiber optics company Hitachi Cable, and Hitachi Metals. We trimmed our holdings of Santen Pharmaceutical, previously one of our largest Japanese positions. Despite the difficulties for small-caps in Japan, we are still finding a few solid growth companies. We added Toys "R" Us-Japan, which had 20% to 25% physical asset growth. Its format is doing well in Tokyo's metropolitan area and is about to be rolled out in the provinces. Mid-market cosmetics maker KOSE, beverage company ITO EN, and Kaneka, which supplies chemicals to the pharmaceutical industry, were also added to the portfolio. Rest of the World New Economy stocks outside Europe and Japan also felt the chill wind of a bear market. Our holdings in Australia generally held up well, in contrast to the indiscriminate small-cap sell-off in Hong Kong. The Indian market was weak, and we eliminated our very successful investment in Zee Telefilms, which is experiencing rising competition that is driving down profits. Industry Diversification -------------------------------------------------------------------------------- Percent of Net Assets 4/30/00 10/31/00 -------------------------------------------------------------------------------- Services 50.8% 42.1% Consumer Goods 9.3 16.6 Capital Equipment 11.7 11.6 Finance 9.3 11.1 Energy 3.4 3.9 Multi-industry 2.8 2.3 All Other 4.4 4.5 Reserves 8.3 7.9 -------------------------------------------------------------------------------- Total 100.0% 100.0% Australia, India, and Hong Kong are our most important markets outside Europe and Japan. The Australian allocation rose to 6.6% during the period, while the 4.7% weighting in India was also slightly higher. Recent purchases in Asia and Australia include soft drink maker Frucor Beverages Group (Australia), medical-device manufacturer Fisher & Paykel (New Zealand), and QBE Insurance Group (Australia). We also bought two Hong Kong companies that could profit from growth in Chinese consumer spending: consumer products distributor Hengan International and Denway Motors, an auto assembler that has a joint venture with Honda. INVESTMENT OUTLOOK Emerging growth stocks suffered a major setback during the past six months, with technology, communications, and the Internet-key areas of the New Economy-hardest hit. In our previous report we pointed out that companies that need to raise fresh equity could face increasing difficulty, and this has been borne out. However, investor appetite for young, entrepreneurial companies in emerging sectors of the economy is strong, and opportunities in the international growth stock universe are greater than ever. We remain committed to our growth stock strategy, but as always when investing in smaller companies, rigorous investment analysis will be crucial. While we believe that general corporate IT spending will remain subdued and that spending on Internet infrastructure and telecommunications equipment may weaken, demand in certain areas remains very good. These include mobile telephones and cable infrastructure, customer call centers, and enabling technologies for interactive TV. Other aspects of the global economy, such as capital expenditure in oil exploration and production, steps toward pension reform in Germany, deregulation in Japan, and growing consumerism in India are healthy signs for the future. Respectfully submitted, John R. Ford President, T. Rowe Price International Funds, Inc. November 22, 2000 T. Rowe Price International Discovery Fund -------------------------------------------------------------------------------- Portfolio Highlights -------------------------------------------------------------------------------- TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 10/31/00 -------------------------------------------------------------------------------- Tandberg Television, Norway 1.7% Coflexip, France 1.7 IHC Caland, Netherlands 1.7 Teleste, Finland 1.5 NICE Systems, Israel 1.5 -------------------------------------------------------------------------------- Proffice, Sweden 1.4 Orbital Engine, Australia 1.3 Shire Pharmaceuticals Group, United Kingdom 1.2 New Skies Satellites, Netherlands 1.2 Housing Development Finance, India 1.2 -------------------------------------------------------------------------------- Eyretel, United Kingdom 1.1 PyroSequencing, Sweden 1.1 Aldata Solutions, Finland 1.1 NH Hoteles, Spain 1.1 Taylor Nelson, United Kingdom 1.1 -------------------------------------------------------------------------------- Galen Holdings, United Kingdom 1.1 NDS Group, United Kingdom 1.1 Articon Integralis, Germany 1.0 Energy Development, Australia 1.0 Straumann Holding, Switzerland 1.0 -------------------------------------------------------------------------------- Swisslog Holding, Switzerland 0.9 Yakult Honsha, Japan 0.9 Aiful, Japan 0.9 Poolia, Sweden 0.9 Saipem, Italy 0.9 -------------------------------------------------------------------------------- Total 29.6% Note: Table excludes reserves. T. Rowe Price International Discovery Fund Performance Comparison This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes. INTERNATIONAL DISCOVERY FUND -------------------------------------------------------------------------------- Salomon Non-U.S Extended Market IDF 10/31/1990 10.000 10.000 10/31/1991 9.838 10.379 10/31/1992 7.987 9.413 10/31/1993 10.915 12.893 10/31/1994 12.153 14.141 10/31/1995 11.582 12.294 10/31/1996 13.064 13.721 10/31/1997 12.641 13.953 10/31/1998 12.531 13.200 10/31/1999 14.835 24.038 10/31/2000 14.681 33.670 Average Annual Compound Total Return -------------------------------------------------------------------------------- This table shows how the fund would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate. Periods Ended 10/31/00 1 Year 3 Years 5 Years 10 Years -------------------------------------------------------------------------------- International Discovery Fund 40.07% 34.13% 22.32% 12.91% Investment return and principal value represent past performance and will vary. Shares may be worth more or less at redemption than at original purchase. T. Rowe Price International Discovery Fund -------------------------------------------------------------------------------- Financial Highlights For a share outstanding throughout each period -------------------------------------------------------------------------------- Year Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 NET ASSET VALUE Beginning of period $ 26.75 $ 14.99 $ 16.11 $ 15.97 $ 14.43 Investment activities Net investment income (loss) 0.06 (0.03) 0.05 0.02 0.07 Net realized and unrealized gain (loss) 10.39 12.09 (0.92) 0.25 1.59 Total from investment activities 10.45 12.06 (0.87) 0.27 1.66 Distributions Net investment income -- (0.01) -- (0.07) (0.10) Net realized gain (2.81) (0.30) (0.25) (0.06) (0.02) Total distributions (2.81) (0.31) (0.25) (0.13) (0.12) Redemption fees added to paid-in-capital 0.13 0.01 -- -- -- NET ASSET VALUE End of period $ 34.52 $ 26.75 $ 14.99 $ 16.11 $1 5.97 Ratios/Supplemental Data Total return 40.07% 82.11% (5.40)% 1.69% 11.60% Ratio of total expenses to average net assets 1.27% 1.42% 1.47% 1.41% 1 .45 Ratio of net investment income loss to average net assets 0.15% (0.17)% 0.25% 0.13% 0.40% Portfolio turnover rate 81.0% 98.2% 34.2% 72.7% 52.0% Net assets, end of period (in thousands) $905,387 $381,462 $189,001 $254,430 $325,639 (diamond) Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions and payment of no redemption or account fees. The accompanying notes are an integral part of these financial statements. T. Rowe Price International Discovery Fund -------------------------------------------------------------------------------- October 31, 2000 Portfolio of Investments Shares Value -------------------------------------------------------------------------------- In thousands AUSTRALIA 6.5% Common Stocks and Warrants 6.5% Aristocrat Leisure 2,400,000 $ 7,501 Circadian Technologies * ! 3,073,207 5,958 Computershare 248,690 1,076 Credit Suisse, Warrants * 124,345 70 Energy Development 1,382,953 8,889 Frucor Beverages Group (NZD) * 4,615,182 3,606 Lang 862,000 4,406 Orbital Engine * 10,334,000 11,463 PowerLan * 3,913,400 2,738 QBE Insurance Group 1,164,000 5,370 Sonic Healthcare 1,636,309 6,616 Telemedia Networks International * 567,000 1,317 Wine Planet Holdings * 1,962,015 285 Total Australia (Cost $52,839) 59,295 AUSTRIA 0.3% Common Stocks 0.3% Cybertron Telekom (EUR) * 300,000 3,106 Total Austria (Cost $9,626) 3,106 BELGIUM 0.6% Common Stocks 0.6% Ubizen (EUR) * 246,456 5,134 Total Belgium (Cost $11,467) 5,134 CHINA 0.3% Common Stocks 0.3% Nanjing Panda Electric (HKD) * 9,978,000 2,009 TPV Technology (HKD) 4,422,000 459 Total China (Cost $2,670) 2,468 FINLAND 4.2% Common Stocks 4.2% Aldata Solutions (EUR) * 1,455,760 $ 10,254 Comptel (EUR) 147,330 2,038 Elisa Communications (EUR) 216,203 5,999 Rapala Normark (EUR) * 1,341,220 6,260 Teleste (EUR) 460,086 13,665 Total Finland (Cost $23,227) 38,216 FRANCE 6.9% Common Stocks 6.9% Aubay (EUR) * 184,032 3,996 Boiron (EUR) 33,000 2,050 Cegedim (EUR) 60,000 3,539 Coface (EUR) 84,589 7,616 Coflexip (EUR) 131,000 15,174 CPR (EUR) * 38,636 1,902 Euler (EUR)* 140,000 6,130 Genesys (EUR) * 110,862 5,174 Ipsos (EUR) 67,272 6,965 Linedata Services (EUR) * 71,000 1,808 Neopost (EUR) * 153,333 2,942 Ubiqus (EUR) * 417,780 4,963 Total France (Cost $50,857) 62,259 GERMANY 6.2% Common Stocks 5.8% Articon Integralis (EUR) * 138,871 9,251 Boewe Systec (EUR) 67,390 1,390 CargoLifter (EUR) * 443,215 7,334 Direkt Anlage Bank (EUR) * 169,000 7,458 Evotec Biosystems (EUR) * 151,351 5,317 GfK (EUR) 179,215 6,813 QS Communications (EUR) * 654,062 4,052 Software (EUR) 62,147 4,509 Zapf Creation (EUR) 147,887 6,375 52,499 Preferred Stocks 0.4% Rhon-Klinikum (EUR) 66,510 $ 3,666 3,666 Total Germany (Cost $51,897) 56,165 HONG KONG 4.7% Common Stocks 4.7% Denway Motors * 17,706,000 2,861 e-Kong Group * 11,548,000 814 ehealthcareasia * 528,000 20 Esprit Holdings 6,859,431 5,893 Hengan International 14,772,000 3,542 Hong Kong Exchanges & Clearing 1,986,000 3,463 Li & Fung * 2,210,000 4,109 Quality Healthcare Asia * 14,114,000 3,257 South China Morning Post 4,675,000 3,207 Sun Television * 125,220,000 3,227 SUNDAY Communications * 22,376,000 2,066 Technology Venture Holdings 11,956,000 3,526 Varitronix International 3,632,000 4,191 Vodatel Networks * 16,380,000 2,163 Total Hong Kong (Cost $63,524) 42,339 INDIA 4.7% Common Stocks 4.7% Apollo Hospitals 398,350 1,786 Britannia Industries 79,499 1,293 Cipla 152,000 2,869 Global E-Com * 552,000 2,782 Global Tele-Systems * 192,000 4,321 HDFC Bank 1,183,000 6,339 Housing Development Finance 1,063,000 10,645 ICICI Bank ADR (USD) * 119,700 569 ICICI Bank 997,938 2,354 ICICI ADR (USD) 210,560 1,987 ICICI 1,005,451 1,607 McDowell & Company 671,786 $ 893 Pentamedia Graphics 132,000 983 Ranbaxy Laboratories 286,000 4,257 Total India (Cost $45,239) 42,685 IRELAND 0.4% Common Stocks 0.4% Icon ADR (USD) * 169,400 3,346 Total Ireland (Cost $2,481) 3,346 ISRAEL 3.0% Common Stocks 3.0% Gilat Satellite Networks (USD) * 129,433 6,646 NICE Systems ADR (USD) * 284,200 13,242 Partner Communications ADR (USD) * 1,134,000 6,839 Total Israel (Cost $56,741) 26,727 ITALY 1.3% Common Stocks 1.3% ACEA (EUR) 284,290 3,773 Saipem (EUR) 1,500,000 7,816 Total Italy (Cost $8,481) 11,589 JAPAN 18.9% Common Stocks 18.9% Aiful 104,400 8,228 Canon Chemicals 309,000 3,002 Cresco 45,300 3,197 Don Quijote 40,700 3,189 FANCL 24,500 1,549 Fuji Machine Manufacturing 53,000 1,447 Funai Electric * 20,000 1,510 Goldcrest 80,000 7,500 Hirose Electric 43,500 5,023 Hokuto 91,200 2,892 Homac 113,000 $ 1,605 Hoya 48,000 3,968 Hurxley 69,000 1,088 Internet Initiative ADR (USD) * 97,571 2,458 ITO EN 29,100 2,094 Japan Business Computer 74,000 1,519 Joint 217,300 6,751 Kaneka 479,000 4,653 KOSE 222,200 7,718 Koyo Seiko 1,002,000 7,089 Kuraya Sanseido 660,500 5,751 Marukyo 10,000 46 Megachips 48,000 1,887 Mitsukoshi * 1,001,000 3,569 Moritex 72,600 3,526 Net One Systems 227 6,740 Nidec 49,400 3,029 Nissho Electronics 300,000 6,324 Pacific Metals * 2,190,000 2,890 Relocation Services 52,000 2,955 Roland 91,900 1,644 Santen Pharmaceutical 287,000 5,668 Shimadzu 606,000 2,149 Shohkoh Fund 27,930 2,293 Sumisho Electronic 131,000 1,597 Sumitomo Rubber Industries 1,397,000 6,658 Sunkus & Associates 115,900 3,452 Tomen Electronics 167,000 7,499 Toyo Information 92,000 6,239 Toys "R" Us-Japan * 44,500 6,077 Trend Micro * 12,000 1,133 Watami Food Service 55,000 2,954 Yahoo Japan * 28 2,412 Yakult Honsha 735,000 8,380 Total Japan (Cost $177,094) 171,352 NETHERLANDS 4.8% Common Stocks 4.8% Draka Holdings (EUR) 129,128 $ 7,556 IFCO Systems (EUR) * 671,357 6,495 IHC Caland (EUR) 340,000 15,003 New Skies Satellites (EUR) * 1,213,460 10,915 SNT Group (EUR) * 120,257 3,679 Total Netherlands (Cost $45,673) 43,648 NEW ZEALAND 1.2% Common Stocks 1.2% Baycorp Holdings 600,030 2,808 Fisher & Paykel 1,683,000 4,806 Sky Network Television * 2,409,000 2,962 Total New Zealand (Cost $11,262) 10,576 NORWAY 2.9% Common Stocks 2.9% EDB Business Partner 440,229 5,314 Petroleum Geo-Services * 400,000 5,518 Tandberg Television * 1,508,282 15,279 Total Norway (Cost $27,030) 26,111 SINGAPORE 0.8% Common Stocks 0.8% Parkway Holdings 3,513,000 7,201 Total Singapore (Cost $10,117) 7,201 SOUTH KOREA 0.0% Common Stocks 0.0% Opicom * 51,800 266 Total South Korea (Cost $3,366) 266 SPAIN 1.2% Common Stocks 1.2% Gamesa (EUR) * 28,189 $ 520 NH Hoteles (EUR) 900,000 10,157 Total Spain (Cost $11,030) 10,677 SWEDEN 8.1% Common Stocks 8.1% A-Com * ! 748,721 4,421 Assa Abloy 188,619 3,473 Bergman & Beving 500,000 5,329 Cyber Com Consulting * 349,000 4,540 Europolitan Holdings 754,535 6,796 LGP Telecom Holding 310,000 7,756 Observer 412,603 5,409 Poolia (Class B) 190,606 8,012 Proffice 370,996 12,252 PyroSequencing * 826,531 10,257 Semcon 459,950 5,478 Total Sweden (Cost $66,551) 73,723 SWITZERLAND 3.4% Common Stocks 3.4% Bobst 3,800 4,799 Kaba Holding 2,450 3,305 PubliGroupe 7,030 4,126 Straumann Holding 4,100 8,861 Swisslog Holding 15,560 8,569 Valora Holding 7,350 1,494 Total Switzerland (Cost $16,682) 31,154 TAIWAN 0.0% Common Stocks 0.0% WYSE Technology Taiwan 239,700 129 Total Taiwan (Cost $611) 129 UNITED KINGDOM 11.5% Common Stocks 11.5% Aegis Group 1,744,000 $ 3,973 ARC International * 522,500 2,570 Baltimore Technologies * 314,000 2,415 Bell Group 851,500 787 Bright Station * 6,000,000 4,832 Dialog Semiconductor (EUR) * 245,544 5,626 Electron Boutique 2,867,071 2,600 Eyretel * 3,591,880 10,319 Galen Holdings 750,935 9,643 Gemini Genomics ADR (USD) * 439,800 5,058 Lynx Group 2,544,480 4,061 N Brown Group 252,680 935 NDS Group ADR (USD) * 127,000 9,565 Pace Micro Technology 519,400 3,730 Regus * 497,500 2,261 royalblue 350,000 7,516 Serco Group 825,000 7,577 Shire Pharmaceuticals Group * 555,000 11,274 Taylor Nelson 2,540,584 9,768 Total United Kingdom (Cost $111,838) 104,510 UNITED STATES 0.2% Common Stocks 0.2% LookSmart (AUD) * 4,603,000 1,503 Total United States (Cost $5,357) 1,503 SHORT-TERM INVESTMENTS 7.3% Money Market Funds 7.3% Reserve Investment Fund, 6.68% # 65,918,899 65,919 Total Short-Term Investments (Cost $65,919) 65,919 Total Investments in Securities 99.4% of Net Assets (Cost $931,579) $ 900,098 Other Assets Less Liabilities 5,289 NET ASSETS $905,387 * Non-income producing # Seven-day yield ! Affiliated company ADR American depository receipt AUD Australian dollar EUR Euro NZD New Zealand dollar USD U.S. dollar The accompanying notes are an integral part of these financial statements. T. Rowe Price International Discovery Fund -------------------------------------------------------------------------------- October 31, 2000 Statement of Assets and Liabilities -------------------------------------------------------------------------------- In thousands Assets Investments in securities, at value (cost $931,579) $900,098 Securities lending collateral 113,648 Other assets 25,107 Total assets 1,038,853 Liabilities Obligation to return securities lending collateral 113,648 Other liabilities 19,818 Total liabilities 133,466 NET ASSETS $905,387 Net Assets Consist of: Accumulated net realized gain/loss - net of distributions $ 148,302 Net unrealized gain (loss) (31,607) Paid-in-capital applicable to 26,225,694 shares of $0.01 par value capital stock outstanding; 2,000,000,000 shares of the Corporation authorized 788,692 NET ASSETS $905,387 NET ASSET VALUE PER SHARE $34.52 The accompanying notes are an integral part of these financial statements. T. Rowe Price International Discovery Fund -------------------------------------------------------------------------------- Statement of Operations -------------------------------------------------------------------------------- In thousands Year Ended 10/31/00 Investment Income (Loss) Income Interest (net of foreign taxes of $14) $ 6,998 Dividend (net of foreign taxes of $683) 6,091 Securities lending 858 Total income 13,947 Expenses Investment management 10,449 Shareholder servicing 1,344 Custody and accounting 421 Prospectus and shareholder reports 138 Registration 54 Legal and audit 43 Directors 7 Miscellaneous 13 Total expenses 12,469 Expenses paid indirectly (1) Net expenses 12,468 Net investment income (loss) 1,479 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities (net of foreign taxes of $2,190) 221,622 Foreign currency transactions (2,518) Net realized gain (loss) 219,104 Change in net unrealized gain or loss Securities (net of deferred foreign taxes of $892) (139,142) Other assets and liabilities denominated in foreign currencies 20 Change in net unrealized gain or loss (139,122) Net realized and unrealized gain (loss) 79,982 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 81,461 The accompanying notes are an integral part of these financial statements. T. Rowe Price International Discovery Fund -------------------------------------------------------------------------------- Statement of Changes in Net Assets -------------------------------------------------------------------------------- In thousands Year Ended 10/31/00 10/31/99 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 1,479 $ (418) Net realized gain (loss) 219,104 43,912 Change in net unrealized gain or loss (139,122) 107,803 Increase (decrease) in net assets from operations 81,461 151,297 Distributions to shareholders Net investment income -- (123) Net realized gain (46,342) (3,675) Decrease in net assets from distributions (46,342) (3,798) Capital share transactions * Shares sold 1,169,171 143,230 Distributions reinvested 44,299 3,583 Shares redeemed (727,954) (101,987) Redemption fees received 3,290 136 Increase (decrease) in net assets from capital share transactions 488,806 44,962 Net Assets Increase (decrease) during period 523,925 192,461 Beginning of period 381,462 189,001 End of period $ 905,387 $ 381,462 ----------------------------- *Share information Shares sold 28,991 6,469 Distributions reinvested 1,347 237 Shares redeemed (18,374) (5,049) Increase (decrease) in shares outstanding 11,964 1,657 The accompanying notes are an integral part of these financial statements. T. Rowe Price International Discovery Fund -------------------------------------------------------------------------------- October 31, 2000 Notes to Financial Statements -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price International Funds, Inc. (the corporation) is registered under the Investment Company Act of 1940. The International Discovery Fund (the fund), a diversified, open-end management investment company, is one of the portfolios established by the corporation, and commenced operations on December 30, 1988. The fund seeks long-term growth of capital through investments primarily in the common stocks of rapidly growing, small to medium-sized companies outside the U.S. The accompanying financial statements were prepared in accordance with generally accepted accounting principles, which require the use of estimates made by fund management. Valuation Equity securities are valued at the last quoted sales price at the time the valuations are made. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Assets and liabilities for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by or under the supervision of the officers of the fund, as authorized by the Board of Directors. Currency Translation Assets and liabilities denominated in foreign currencies are translated into U.S. dollar values each day at the prevailing exchange rate, using the mean of the bid and offer prices of such currencies against U.S. dollars quoted by a major bank. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing exchange rate on the dates of such transactions. The effect of changes in foreign exchange rates on realized and unrealized security gains and losses is reflected as a component of such gains and losses. Affiliated Companies As defined by the Investment Company Act of 1940, an affiliated company is one in which the fund owns at least 5% of the outstanding voting securities. Other Income and expenses are recorded on the accrual basis. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Dividend income and distributions to shareholders are recorded by the fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with federal income tax regulations and may differ from net investment income and realized gains determined in accordance with generally accepted accounting principles. Expenses paid indirectly reflect credits earned on daily uninvested cash balances at the custodian and are used to reduce the fund's custody charges. NOTE 2 - INVESTMENTTRANSACTIONS Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks or enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund's prospectus and Statement of Additional Information. Securities Lending The fund lends its securities to approved brokers to earn additional income and receives cash and U.S. government securities as collateral against the loans. Cash collateral received is invested in a money market pooled account by the fund's lending agent. Collateral is maintained over the life of the loan in an amount not less than 100% of the value of loaned securities. Although risk is mitigated by the collateral, the fund could experience a delay in recovering its securities and a possible loss of income or value if the borrower fails to return them. At October 31, 2000, the value of loaned securities was $114,272,000; aggregate collateral consisted of $113,648,000 in the securities lending collateral pool and U.S. government securities valued at $7,505,000. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $1,075,370,000 and $684,523,000, respectively, for the year ended October 31, 2000. NOTE 3 - FEDERAL INCOME TAXES No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. In order for the fund's capital accounts and distributions to shareholders to reflect the tax character of certain transactions, the following reclassifications were made during the year ended October 31, 2000. The reclassifications relate primarily to a tax practice that treats a portion of the proceeds from each redemption of capital shares as a distribution of taxable net investment income and/or realized capital gain. The results of operations and net assets were not affected by the increases/(decreases) to these accounts. -------------------------------------------------------------------------------- Undistributed net investment income $(1,479) Undistributed net realized gain (67,716) Paid-in-capital 69,195 At October 31, 2000, the cost of investments for federal income tax purposes was substantially the same as for financial reporting and totaled $931,579,000. Net unrealized loss aggregated $31,481,000 at period-end, of which $149,876,000 related to appreciated investments and $181,357,000 to depreciated investments. NOTE 4 - FOREIGN TAXES The fund is subject to foreign income taxes imposed by certain countries in which it invests. Foreign income taxes are accrued by the fund as a reduction of dividend and interest income. Gains realized upon disposition of Indian securities held by the fund are subject to capital gains tax in India, payable prior to repatriation of sales proceeds. The fund accrues a deferred tax liability for net unrealized gains, which totaled $141,000 at October 31, 2000. NOTE 5 - RELATED PARTY TRANSACTIONS The fund is managed by T. Rowe Price International, Inc. (the manager), a wholly owned subsidiary of T. Rowe Price Associates, Inc. (Price Associates). The investment management agreement between the fund and the manager provides for an annual investment management fee, of which $851,000 was payable at October 31, 2000. The fee is computed daily and paid monthly, and consists of an individual fund fee equal to 0.75% of average daily net assets and a group fee. The group fee is based on the combined assets of certain mutual funds sponsored by the manager or Price Associates (the group). The group fee rate ranges from 0.48% for the first $1 billion of assets to 0.295% for assets in excess of $120 billion. At October 31, 2000, and for the year then ended, the effective annual group fee rate was 0.32%. The fund pays a pro-rata share of the group fee based on the ratio of its net assets to those of the group. In addition, the fund has entered into agreements with Price Associates and two wholly owned subsidiaries of Price Associates, pursuant to which the fund receives certain other services. Price Associates computes the daily share price and maintains the financial records of the fund. T. Rowe Price Services, Inc. is the fund's transfer and dividend disbursing agent and provides shareholder and administrative services to the fund. T. Rowe Price Retirement Plan Services, Inc. provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. The fund incurred expenses pursuant to these related party agreements totaling approximately $1,186,000 for the year ended October 31, 2000, of which $117,000 was payable at period-end. Additionally, the fund is one of several T. Rowe Price-sponsored mutual funds (underlying funds) in which the T. Rowe Price Spectrum Funds (Spectrum) may invest. Spectrum does not invest in the underlying funds for the purpose of exercising management or control. Expenses associated with the operation of Spectrum are borne by each underlying fund to the extent of estimated savings to it and in proportion to the average daily value of its shares owned by Spectrum, pursuant to special servicing agreements between and among Spectrum, the underlying funds, Price Associates, and, in the case of T. Rowe Price Spectrum International, T. Rowe Price International. Spectrum International Fund held approximately 0.2% of the outstanding shares of the International Discovery Fund at October 31, 2000. For the year then ended, the fund was allocated $10,000 of Spectrum expenses. The fund may invest in the Reserve Investment Fund and Government Reserve Investment Fund (collectively, the Reserve Funds), open-end management investment companies managed by Price Associates. The Reserve Funds are offered as cash management options only to mutual funds and other accounts managed by Price Associates or T. Rowe Price International, and are not available to the public. The Reserve Funds pay no investment management fees. Distributions from the Reserve Funds to the fund for the year ended October 31, 2000, totaled $6,936,000 and are reflected as interest income in the accompanying Statement of Operations. During the year ended October 31, 2000, the fund, in the ordinary course of business, placed security purchase and sale orders aggregating $91,068,000 with certain affiliates of the manager and paid commissions of $142,000 thereto. T. Rowe Price International Discovery Fund -------------------------------------------------------------------------------- Report of Independent Accountants -------------------------------------------------------------------------------- To the Board of Directors of T. Rowe Price International Funds, Inc. and Shareholders of International Discovery Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of International Discovery Fund (one of the portfolios comprising T. Rowe Price International Funds, Inc., hereafter referred to as the "Fund") at October 31, 2000, and the results of its operations, the changes in its net assets and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2000 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Baltimore, Maryland November 17, 2000 T. Rowe Price International Discovery Fund -------------------------------------------------------------------------------- Tax Information (Unaudited) for the Tax Year Ended 10/31/00 -------------------------------------------------------------------------------- We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements. The fund's distributions to shareholders included: o $56,054,000 from short-term capital gains, o $59,061,000 from long-term capital gains, subject to the 20% rate gains category. The fund will pass through foreign source income of $6,436,000 and foreign taxes paid of $2,792,000. T. Rowe Price International Discovery Fund -------------------------------------------------------------------------------- Annual Meeting Results -------------------------------------------------------------------------------- The T. Rowe Price International Discovery Fund held an annual meeting on October 25, 2000, to approve a new investment management agreement, to elect directors to the fund, and to ratify the appointment of PricewaterhouseCoopers LLP as the fund's independent accountants. The results of voting were as follows (by number of shares): For approval of a new investment management agreement: Affirmative: 15,827,131.285 Against: 359,939.003 Abstain: 362,481.393 Total: 16,549,551.681 For nominees to the Board of Directors of the International Discovery Fund: M. David Testa Affirmative: 16,211,561.447 Withhold: 337,990.234 Total: 16,549,551.681 Martin G. Wade Affirmative: 16,222,658.050 Withhold: 326,893.631 Total: 16,549,551.681 Anthony W. Deering Affirmative: 16,221,707.177 Withhold: 327,844.504 Total: 16,549,551.681 Donald W. Dick, Jr. Affirmative: 16,221,008.096 Withhold: 328,543.585 Total: 16,549,551.681 Paul M. Wythes Affirmative: 16,141,501.466 Withhold: 408,050.215 Total: 16,549,551.681 To ratify the appointment of PricewaterhouseCoopers LLP as independent accountants: Affirmative: 16,134,906.251 Against: 167,772.046 Abstain: 246,873.384 Total: 16,549,551.681 T. Rowe Price Shareholder Services -------------------------------------------------------------------------------- Investment Services and Information KNOWLEDGEABLE SERVICE REPRESENTATIVES By Phone 1-800-225-5132 Available Monday through Friday from 8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET. In Person Available in T. Rowe Price Investor Centers. ACCOUNT SERVICES Checking Available on most fixed-income funds ($500 minimum). Automatic Investing From your bank account or paycheck. Automatic Withdrawal Scheduled, automatic redemptions. Distribution Options Reinvest all, some, or none of your distributions. Automated 24-Hour Services Including Tele*Access(registered trademark) and the T. Rowe Price Web site on the Internet. Address: www.troweprice.com. BROKERAGE SERVICES* Individual Investments Stocks, bonds, options, precious metals, and other securities at a savings over full-service commission rates.** INVESTMENT INFORMATION Combined Statement Overview of all your accounts with T. Rowe Price. Shareholder Reports Fund managers' reviews of their strategies and results. T. Rowe Price Report Quarterly investment newsletter discussing markets and financial strategies. Performance Update Quarterly review of all T. Rowe Price fund results. Insights Educational reports on investment strategies and financial markets. Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A Guide to International Investing, Personal Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit. * T. Rowe Price Brokerage is a division of T. Rowe Price Investment Services, Inc., Member NASD/SIPC. ** Based on a July 2000 survey for representative-assisted stock trades. Services vary by firm, and commissions may vary depending on size of order. For fund and account information or to conduct transactions, 24 hours, 7 days a week By touch-tone telephone Tele*Access 1-800-638-2587 By Account Access on the Internet www.troweprice.com/access For assistance with your existing fund account, call: Shareholder Service Center 1-800-225-5132 To open a brokerage account or obtain information, call: 1-800-638-5660 For the hearing impaired, call: 1-800-367-0763 Internet address: www.troweprice.com Plan Account Lines for retirement plan participants: The appropriate 800 number appears on your retirement account statement. T. Rowe Price Associates 100 East Pratt Street Baltimore, Maryland 21202 This report is authorized for distribution only to shareholders and to others who have received a copy of the prospectus appropriate to the fund or funds covered in this report. Walk-In Investor Centers: For directions, call 1-800-225-5132 or visit our Web site. Baltimore Area Downtown - new address 105 East Lombard Street Owings Mills Three Financial Center 4515 Painters Mill Road Boston Area 386 Washington Street Wellesley Colorado Springs 2260 Briargate Parkway Los Angeles Area Warner Center 21800 Oxnard Street, Suite 270 Woodland Hills San Francisco Area 1990 North California Boulevard Suite 100 Walnut Creek Tampa 4200 West Cypress Street 10th Floor Washington, D.C. 900 17th Street N.W. Farragut Square T. Rowe Price, Invest With Confidence (registered trademark) T. Rowe Price Investment Services, Inc., Distributor. F38-050 10/31/00