N-30D 1 0001.txt Annual Report International Growth & Income Fund October 31, 2000 T. Rowe Price REPORT HIGHLIGHTS -------------------------------------------------------------------------------- International Growth & Income Fund o International markets posted steep declines during the past six months and modest losses in the 12-month period as reality set in to New Economy stocks. o Your fund reflected this weakness but handily outperformed its benchmarks for the past six months and delivered a slight positive return over 12 months. o Value-oriented and steady growth stocks came to the fore during the correction in technology, telecom, and Internet stocks, and this benefited the fund. o Volatility is likely to continue in international markets, but a shift toward more reasonably valued stocks appears to be under way. 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 stocks fell sharply during the six months ended October 31, 2000, and ended your fund's fiscal year modestly in the red. In late 1999 and early this year, momentum-style growth stocks in the Internet, technology, and telecommunications sectors surged. But these stocks endured a severe correction over the past six months, while the cyclical and value stocks favored by your fund fared relatively better. Overall, international markets struggled during the past 12 months, and your fund posted only a small gain. Performance Comparison -------------------------------------------------------------------------------- Periods Ended 10/31/00 6 Months 12 Months -------------------------------------------------------------------------------- International Growth & Income Fund -2.18% 1.43% MSCI EAFE Index -8.89 -2.66 Lipper International Funds Average -10.00 2.70 The International Growth & Income Fund fell 2.18% during the past six months, closing out the fiscal year ended October 31 with a slight gain of 1.43%, as shown in the table. These results nevertheless exceeded those of the most widely recognized index of foreign stocks, the Morgan Stanley Capital International EAFE (Europe, Australasia, and Far East) Index, in both periods. As we wrote in our last report, "The likely end of the easy money era in Internet stocks, and a broadening of market participation to include lagging sectors, should ultimately boost _ quality, value-oriented stocks." Whereas our relative lack of exposure to New Economy stocks restrained performance in the first six months, our emphasis on valuation was rewarded in the more recent period and helped the fund make up ground we had earlier lost to EAFE. The fund's greater exposure to basic materials, consumer products, financial services, capital goods, and utilities aided results compared with EAFE. Even within those sectors, our holdings were somewhat more value oriented than the index components. Performance was also ahead of the best-known average of competing funds, the Lipper International Funds Average, for the six months, but trailed slightly for the year. Your fund has less exposure than the Lipper category to emerging markets, which were particularly weak over the past six months but strong early in the year. (EAFE has no exposure to the emerging markets.) 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. Media, technology, and telecom stocks surged in late 1999 and early 2000 on investor expectations that their powerful growth rates could be sustained or that their growth potential was nearly limitless. However, moderating demand, profit warnings, high investment costs, and abundant new issuance finally weighed on these sectors and dropped share prices to more realistic levels. Investors began to focus on established companies whose shares had been beaten down, including food producers, pharmaceuticals, and banks. Broader concerns weighing on the equities markets included slowing economies, high oil prices, and weakness in the euro (see article on page 2). Economic growth eased in Europe, while in Japan the consumer sector remained weak and rising bankruptcies triggered concerns about unemployment. Growth in the rest of Asia was strong, although recurring worries about financial stability plagued some emerging markets. PORTFOLIO REVIEW At the end of October, Europe represented 68% of net assets, up from 66% in April. Our largest single country weighting within Europe was the U.K., unchanged from six months ago at about 20%. Exposure to Japan fell to 17% from 18%. Far East exposure increased modestly to 8% from 6%, while Latin America held steady at 3%. Value stocks' advantage over growth stocks was most pronounced in Asia and the U.K., but was quite slim in Continental Europe. Market Performance -------------------------------------------------------------------------------- Six Months Local Local Currency U.S. Ended 10/31/0 Currency vs. U.S. Dollars Dollars -------------------------------------------------------------------------------- France 0.66% -6.99% -6.37% Germany -5.58 -6.98 -12.18 Hong Kong -11.74 -0.13 -11.85 Italy 9.53 -6.98 1.88 Japan -13.51 -1.02 -14.39 Mexico -0.67 -1.87 -2.53 Netherlands 6.37 -6.98 -1.06 Norway 17.46 -3.80 13.00 Sweden -18.52 -10.65 -27.19 Switzerland 7.27 -4.32 2.65 United Kingdom 4.74 -7.20 -2.81 Source: RIMES Online, using MSCI indices. Europe Telecom stocks fell in Europe (and indeed, around the world), as investors worried about the high costs companies are incurring to provide services, such as third-generation, Internet-compatible wireless phone service, that will not launch until at least 2002. European governments have been auctioning off portions of the airwave spectrum that telecom providers need to offer these services, but the costs of these licenses as well as the number of licensees (that is, competitors) has been higher than expected. We have emphasized the dominant national telecom operators such as Deutsche Telekom, France Telecom, Tele Danmark, and Telefonica (of Spain), but these stocks were weak during the past six months after healthy runups in the previous period. Deutsche Telekom was the fund's second-worst contributor overall. Profits from traditional fixed-line services have declined even as these companies have had to invest heavily in new areas, such as wireless. We took advantage of reduced prices to initiate a position in British Telecom, which we found reasonably valued relative to other telecom service companies. Despite overall weakness in the technology and telecom sectors, two of the fund's best contributors during the past six months were in telecom equipment: France's Alcatel, and Spirent of the U.K., which was our top contributor. Industry Diversification -------------------------------------------------------------------------------- Percent of Net Assets 4/30/00 10/31/00 -------------------------------------------------------------------------------- Finance 21.7% 25.9% Services 18.7 17.5 Consumer Goods 17.6 16.4 Capital Equipment 17.1 15.0 Energy 9.3 11.0 Materials 8.7 7.8 Multi-industry 2.1 2.0 All Other 0.9 0.8 Reserves 3.9 3.6 Total 100.0% 100.0% Health care and consumer nondurable stocks performed well. The fund's second-best contributor overall was U.K. medical device maker Smith & Nephew. Other significant contributors to performance included drug and personal-care products maker Altana of Germany and French drugmaker Aventis, which benefited from healthy sales growth and cost-cutting. Food stocks like France's Danone gained as investors sought their defensive characteristics, such as predictable earnings that are not dependent on strong economic growth. Danone is one of Europe's largest food processors, and is well known in the U.S. for its Dannon yogurt line. Financial stocks were also relatively strong in a weak market environment, especially those with dependable earnings streams. Our third-best contributor was Vontobel of Switzerland, with extensive interests in investment management and private banking. Financial companies continued to restructure and make acquisitions. Finnish/Swedish group Nordic Baltic Holding, our fifth-best contributor, acquired Norway's Christiania Bank. The combined company is now Scandinavia's largest bank. Netherlands banking and insurance conglomerate ING Groep gained as it acquired U.S. insurer Reliastar and Aetna's financial services businesses, giving it an inside track in U.S. life and annuity premiums. Swiss Re, Deutsche Bank of Germany, Svenska Handelsbanken of Sweden, and HSBC Holdings of the U.K. also performed well. Swiss bank UBS acquired U.S. brokerage firm Paine Webber for $12 billion. Woolwich, a U.K. savings and loan, was bought by Barclays. On the weak side, in addition to national telecom carriers, were technology stocks. German semiconductor maker Epcos, one of the best performers in the previous six-month period, was our third-worst this time. Certain industrial and cyclical stocks also declined sharply, including U.K. chemical producer Imperial Chemical Industries (ICI) and diversified Swiss industrial manufacturing and construction giant ABB. Far East and Other A similar pattern held in the Far East, with financial stocks generally strong and technology and telecom stocks weak. One of the few Far East holdings to contribute significantly in a positive way to performance was Australia's Santos, an oil and gas producer that benefited from increased production and higher energy prices. Another was Hang Seng Bank of Hong Kong. Diversified Hong Kong conglomerate Hutchison Whampoa and its parent Cheung Kong reported robust earnings. Geographic Diversification -------------------------------------------------------------------------------- Europe 68 Japan 17 Far East 8 Latin America 3 Other and Reserves 4 Financial shares were pressured in Japan, however, by bankruptcies among companies holding large loans. Our overall position in Japan is well below that represented in the EAFE Index. However, we initiated a position in Nomura Securities amid the weakness, believing that brokerages will benefit from increased interest in equity investments as consumers flee low-yielding postal savings accounts. NTT (Nippon Telegraph & Telephone) declined as it experienced regulatory pressure on its rates and as the government continued sales of its stake in the company, now down to 46%. Other weak stocks in Japan included technology leaders Sony, Kyocera, Toshiba, and NEC. Hardware component manufacturers were hurt by concerns about demand for PCs, semiconductors, and wireless-telecom related parts. Even though Kyocera, Toshiba, and NEC announced better-than-expected results and raised their forecasts, their shares fell on concern about future growth. Sony disappointed investors by announcing that the eagerly awaited U.S. launch of its new games console, PlayStation 2, would be cut in half due to component shortages. Consumer electronics giant Matsushita Electric Industrial, known for its Panasonic brand, bucked the trend and performed strongly. Bridgestone, of course, became infamous in the U.S. during this summer's scandal-plagued recall of its Firestone brand tires used on the popular Ford Explorer sport-utility vehicle. The stock detracted significantly from performance. We exited the position as it appeared the tire problem and associated public distrust would take time to be addressed. Latin America Closer to home, Mexico's Grupo Financiero Banamex was a solid contributor, as Mexican financial stocks did well. Telecom operators such as Telefonos de Mexico and Telebras of Brazil felt the pain of the global telecom downturn but held up better than most other telecom stocks around the world. OUTLOOK In Europe, continuing restructuring, increased management focus on returns, and tax and social security reforms could assist earnings growth. The possibility of peaking interest rates and oil prices, along with an undervalued euro, could provide a positive backdrop for stocks. In Japan the economic environment is more challenging, but valuations are moving toward the bottom of their recent ranges, offering more attractive opportunities. Although it is difficult to see a short-term catalyst for the stock market, the downside appears limited. In the rest of Asia, further market liberalization, structural reforms, and more shareholder friendly corporate management remain essential to achieve superior long-term economic growth. The recent period of political stability and economic health bode well for Latin America. Internationally, economies have been slowing, but we expect them to improve by the second half of 2001. Slower growth in general is not good news for value-oriented shares, many of which tend to be economically sensitive. However, despite this year's sobering correction in high-growth stocks, valuations in that sector are still very high, as growth stocks have outpaced value stocks by a wide margin for more than five years. Investors are now discovering that technology stocks can be cyclical, too. So from a standpoint of relative valuation and investor expectation, the outlook for our value-conscious approach over the next several years seems very positive. Due to the short-term uncertainty about economic growth, oil prices, technology trends, and the direction of the euro, international markets could continue to struggle a bit. However, we expect these factors to mitigate in coming months and we remain optimistic about the fund's prospects in the year ahead. Respectfully submitted, John R. Ford President, T. Rowe Price International Funds, Inc. November 20, 2000 T. Rowe Price International Growth & Income Fund -------------------------------------------------------------------------------- Portfolio Highlights -------------------------------------------------------------------------------- TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 10/31/00 -------------------------------------------------------------------------------- Shell Transport & Trading, United Kingdom 1.5% Vontobel Holdings, Switzerland 1.4 Aventis, France 1.3 Glaxo Wellcome, United Kingdom 1.3 Spirent, United Kingdom 1.2 -------------------------------------------------------------------------------- Sony, Japan 1.1 TotalFinaElf, France 1.1 Hutchison Whampoa, Hong Kong 1.1 British Telecom, United Kingdom 1.1 ABB, Switzerland 1.0 -------------------------------------------------------------------------------- Telefonica, Spain 1.0 NEC, Japan 0.9 Alcatel, France 0.9 AstraZeneca Group, United Kingdom 0.9 Hitachi, Japan 0.9 -------------------------------------------------------------------------------- Swiss Re, Switzerland 0.9 Matsushita Electric Industrial, Japan 0.9 Toshiba, Japan 0.8 Sumitomo Bank, Japan 0.8 Terumo, Japan 0.8 -------------------------------------------------------------------------------- Svenska Handelsbanken, Sweden 0.8 Mizuho Holdings, Japan 0.8 Reed International, United Kingdom 0.8 ING Groep, Netherlands 0.8 Tesco, United Kingdom 0.8 -------------------------------------------------------------------------------- Total 24.9% Note: Table excludes reserves. T. Rowe Price International Growth & Income 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 GROWTH & INCOME FUND -------------------------------------------------------------------------------- MSCI EAFE IGI line IGI area 12/21/98 10000 10000 10000 10/31/99 11285 11000 11000 10/31/00 10984 11157 11157 *From 12/31/98 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. Since Inception Periods Ended 10/31/00 1 Year Inception Date -------------------------------------------------------------------------------- International Growth & Income Fund 1.43% 6.06% 12/21/98 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 Growth & Income Fund -------------------------------------------------------------------------------- Financial Highlights For a share outstanding throughout each period -------------------------------------------------------------------------------- Year 12/21/98 Ended Through 10/31/00 10/31/99 NET ASSET VALUE Beginning of period $ 11.00 $ 10.00 Investment activities Net investment income (loss) 0.14* 0.16* Net realized and unrealized gain (loss) 0.03** 0.84 Total from investment activities 0.17 1.00 Distributions Net investment income (0.19) -- Net realized gain (0.23) -- Total distributions (0.42) -- NET ASSET VALUE End of period $10.75 $11.00 Ratios/Supplemental Data Total return(diamond) 1.43%* 10.00%* Ratio of total expenses to average net assets 1.25%* 1.25%!* Ratio of net investment income (loss) to average net assets 1.24%* 1.87%!* Portfolio turnover rate 32.2% 35.8%! Net assets, end of period (in thousands) $10,118 $9,776 (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. ! Annualized * Excludes expenses in excess of a 1.25% voluntary expense limitation in effect through 10/31/00. ** The amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange Commission for a share outstanding throughout the period. This amount is inconsistent with the fund's aggregate gains and losses because of the timing of sales and redemptions of fund shares in relation to fluctuating market values for the investment portfolio. The accompanying notes are an integral part of these financial statements. T. Rowe Price International Growth & Income Fund -------------------------------------------------------------------------------- October 31, 2000 Statement of Net Assets -------------------------------------------------------------------------------- Shares Value -------------------------------------------------------------------------------- In thousands ARGENTINA 0.3% Common Stocks 0.3% Grupo Financiero Galicia ADR (USD) * 924 $ 13 Telecom Argentina ADR (USD) 800 14 Total Argentina (Cost $37) 27 AUSTRALIA 2.8% Common Stocks 2.8% Australia & New Zealand Banking Group 5,900 44 Coles Myer 7,500 27 Lion Nathan (NZD) 6,400 12 Normandy Mining 39,000 19 Nufarm (NZD) 10,000 16 Pacific Dunlop 16,600 13 Publishing & Broadcasting 5,800 40 Rio Tinto 2,000 27 Santos 11,400 36 Westfield Trust 13,700 22 Westpac Banking 3,800 26 Total Australia (Cost $335) 282 AUSTRIA 0.3% Common Stocks 0.3% Brau-Union (EUR) 600 21 EVN (EUR) 600 15 Total Austria (Cost $61) 36 BELGIUM 1.1% Common Stocks 1.1% Dexia (EUR) 300 45 Electrabel (EUR) 130 28 Solvay (EUR) 700 36 Total Belgium (Cost $147) 109 BRAZIL 0.5% Common Stocks 0.5% Companhia Vale do Rio Doce ADR (USD) 1,300 $ 30 Tele Norte Leste Participacoes ADR (USD) 35 1 Telebras ADR (USD) 300 22 Total Brazil (Cost $43) 53 CHILE 0.1% Common Stocks 0.1% Compania de Telecomunicaciones de Chile (Class A) ADR (USD) * 400 6 Enersis ADR (USD) * 302 5 Total Chile (Cost $16) 11 DENMARK 0.6% Common Stocks 0.6% Danisco 840 33 Tele Danmark 600 29 Total Denmark (Cost $77) 62 FINLAND 0.7% Common Stocks 0.7% Kesko (EUR) 3,550 30 Stora Enso (SEK) 4,000 41 Total Finland (Cost $117) 71 FRANCE 12.0% Common Stocks 12.0% Accor (EUR) 1,000 40 Alcatel (EUR) 1,500 91 Assurances Generales de France (EUR) 940 51 Aventis (EUR) 1,380 100 Aventis (DAX Exchange) (EUR) 412 30 Axa ADR (USD) 1,000 66 BNP Paribas (EUR) 400 34 Compagnie de Saint Gobain (EUR) 310 41 France Telecom ADR (USD) 500 $ 54 Fromageries (EUR) 40 16 Groupe Danone (EUR) 400 56 LVMH (EUR) 400 29 Pechiney (EUR) 800 30 Pernod Ricard (EUR) 800 37 Pinault Printemps Redoute (EUR) 240 43 Renault (EUR) 1,000 50 Schneider Electric (EUR) 700 46 Societe Generale (EUR) 1,200 68 Suez Lyonnaise des Eaux (EUR) 400 61 Technip (EUR) 460 59 TotalFinaElf (Class B) (EUR) 399 57 TotalFinaElf ADR (USD) 800 57 Valeo (EUR) 600 26 Vivendi (EUR) 1,000 72 Total France (Cost $1,168) ` 1,214 GERMANY 8.8% Common Stocks 8.8% Altana (EUR) 560 67 AMB Aachener & Muenchener Beteiligungs (EUR) 400 36 AXA Colonia Konzern (EUR) 420 44 B.U.S. Berzelius Umwelt-Service (EUR) 2,000 16 BASF (EUR) 1,010 40 Bayer (EUR) 1,300 56 Bayerische Hypo-und Vereinsbank (EUR) 500 27 Celanese (EUR) 55 1 DaimlerChrysler (USD) 900 41 Deutsche Bank (EUR) 910 75 Deutsche Telekom ADR (USD) 1,300 50 Dresdner Bank (EUR) 1,140 47 E.On (EUR) 1,400 71 Epcos (EUR) * 500 38 Heidelberger Zement (EUR) 600 29 HEW-Hamburgische Electricitaets- Werke (EUR) 2,100 46 Linde (EUR) 900 39 Lufthansa (EUR) 1,210 $ 24 Man (EUR) 1,600 42 RWE (EUR) 1,200 48 Siemens (EUR) 400 51 Total Germany (Cost $940) 888 HONG KONG 3.1% Common Stocks 3.1% Cheung Kong Holdings 6,000 67 Hang Seng Bank 4,000 47 Hong Kong Electric Holdings 21,000 69 Hutchison Whampoa 8,800 110 Yue Yuen Industrial 13,000 24 Total Hong Kong (Cost $223) 317 ITALY 4.2% Common Stocks 4.2% Assicurazioni Generali (EUR) 2,000 66 Banca Commerciale Italiana (EUR) 5,900 35 Benetton Group (EUR) 26,200 48 ENI SPA ADR (USD) 700 38 Istituto Nazionale delle Assicurazioni (EUR) 18,015 44 Parmalat Finanziaria (EUR) 39,000 56 San Paolo IMI (EUR) 306 5 San Paolo IMI ADR (USD) 1,400 45 Telecom Italia (EUR) 4,100 47 Toro Assicurazioni (EUR) 2,700 36 Total Italy (Cost $423) 420 JAPAN 16.8% Common Stocks 16.8% Dai Nippon Printing 4,000 63 Denso 2,000 46 Hitachi ADR (USD) 800 89 Honda Motor ADR (USD) 1,100 76 JUSCO 3,000 56 Kao 1,000 $ 30 Kuraray 4,000 38 Kyocera 600 78 Makita 4,000 29 Marui 3,000 44 Matsushita Electric Industrial 3,000 87 Mitsui 5,000 33 Mizuho Holdings * 11 85 NEC 5,000 95 Nippon Express 10,000 60 Nippon Telegraph & Telephone ADR (USD) 1,200 55 Nomura Securities 3,000 64 Sekisui House 6,000 63 Sony ADR (USD) 1,400 116 Sumitomo Bank 7,000 85 Sumitomo Chemicals 8,000 39 Sumitomo Marine & Fire Insurance 11,000 67 Takeda Chemical Industries 1,000 66 TDK ADR (USD) 500 51 Terumo 3,000 85 Toshiba 12,000 86 Wacoal 1,000 9 Total Japan (Cost $1,726) 1,695 MEXICO 1.6% Common Stocks 1.6% Cemex Participating Certificates (Represents 2 Series A and 1 Series B shares) 6,279 26 Femsa UBD Units (Represents 1 Series B and 4 Series D 8,000 31 Grupo Financiero Banamex * 39,000 61 Kimberly-Clark de Mexico (Class A) 7,000 18 Telefonos de Mexico (Telmex) (Class L) ADR (USD) 600 32 Total Mexico (Cost $121) 168 NETHERLANDS 6.2% Common Stocks 6.2% ABN Amro Holdings ADR (USD) 2,900 68 Akzo Nobel (EUR) 1,700 $ 77 CSM (EUR) 2,200 50 DSM (EUR) 1,200 35 Fortis (EUR) 1,700 52 Hagemeyer (EUR) 1,600 38 ING Groep (EUR) 1,200 82 OCE (EUR) 1,300 19 Philips Electronics ADR (USD) 1,964 78 Royal Dutch Petroleum (USD) 800 48 Telegraaf Holdings (EUR) 3,000 60 Vendex KBB (EUR) 2,000 25 Total Netherlands (Cost $724) 632 NEW ZEALAND 0.1% Common Stocks 0.1% Telecom Corporation of New Zealand ADR (USD) 500 9 Total New Zealand (Cost $18) 9 NORWAY 1.4% Common Stocks 1.4% Norsk Hydro 1,200 48 Orkla (Class A) 3,085 56 Storebrand ASA 4,900 34 Total Norway (Cost $122) 138 SINGAPORE 2.0% Common Stocks 2.0% DSB Group Holdings 5,815 69 Singapore Airlines 5,000 50 Singapore Land 16,000 33 United Overseas Bank 6,336 47 Total Singapore (Cost $154) 199 SPAIN 3.8% Common Stocks 3.8% Banco Bilbao Vizcaya Argentaria (EUR) 2,500 $ 33 Banco Santander Central Hispanos ADR (USD) 4,000 41 Endesa ADR (USD) 3,900 65 Grupo Dragados (EUR) 5,100 49 Iberdrola (EUR) 3,000 37 Repsol ADR (USD) 2,500 40 St. Gobain Cristaleria (EUR) 740 20 Telefonica ADR (USD) * 1,703 99 Total Spain (Cost $439) 384 SWEDEN 2.4% Common Stocks 2.4% Autoliv 1,500 33 Electrolux (Class B) 4,000 50 Nordic Baltic Holding (DKK) * 10,163 77 Svenska Handelsbanken (Class A) 5,400 85 Total Sweden (Cost $264) 245 SWITZERLAND 6.8% Common Stocks 6.8% ABB 1,134 101 Clariant 125 38 Credit Suisse Group 250 47 Hero 300 32 Holderbank Financiere Glarus 70 73 Schindler Holdings 40 61 Swiss Re 45 89 UBS 320 44 Vontobel Holdings 50 140 Zurich Financial Services * 139 67 Total Switzerland (Cost $691) 692 UNITED KINGDOM 20.2% Common Stocks 20.2% Abbey National 3,100 $ 43 Associated British Foods 8,008 45 AstraZeneca Group 908 43 AstraZeneca Group ADR (USD) 1,000 48 Bank of Scotland Group 3,800 36 Barclays 1,092 31 Bass 4,200 41 BG Group 6,044 24 Blue Circle Industries 9,900 61 BP Amoco ADR (USD) 1,500 76 British Aerospace 10,000 57 British Telecom ADR (USD) 900 107 Cadbury Schweppes ADR (USD) 2,100 53 Diageo ADR (USD) 1,500 56 FKI 20,000 52 GKN 3,700 43 Glaxo Wellcome ADR (USD) 2,200 128 Halifax Group 3,700 29 Hilton Group 8,000 22 HSBC Holdings 4,800 68 Imperial Chemical Industries ADR (USD) 2,500 62 Kingfisher 8,000 48 Lattice Group * 6,044 13 Pearson 2,500 67 Powergen 6,400 50 Railtrack Group 2,500 39 Reed International 9,000 83 Rentokil Initial 15,000 35 Rolls Royce 18,000 47 Royal & Sun Alliance 6,181 44 Shell Transport & Trading ADR (USD) 3,000 148 Slough Estates 9,000 48 Spirent 13,500 125 Tesco 21,000 80 Tomkins ADR (USD) 3,500 33 United Utilities 5,700 58 Total United Kingdom (Cost $2,152) 2,043 UNITED STATES 0.6% Common Stocks 0.6% Pharmacia 1,190 $ 65 Total United States (Cost $58) 65 SHORT-TERM INVESTMENTS 2.2% Money Market Funds 2.2% Reserve Investment Fund, 6.68% # 219,820 220 Total Short-Term Investments (Cost $220) 220 Total Investments in Securities 98.6% of Net Assets (Cost $10,276) $ 9,980 Other Assets Less Liabilities 138 NET ASSETS $10,118 ---------- Net Assets Consist of: Accumulated net investment income - net of distributions $120 Accumulated net realized gain/loss - net of distributions 602 Net unrealized gain (loss) (296) Paid-in-capital applicable to 941,200 shares of $0.01 par value capital stock outstanding; 2,000,000,000 shares of the Corporation authorized 9,692 NET ASSETS $10,118 ---------- NET ASSET VALUE PER SHARE $10.75 ---------- * Non-income producing # Seven-day yield ADR American depository receipt DKK Danish krone EUR Euro NZD New Zealand dollar SEK Swedish krona USD U.S. dollar The accompanying notes are an integral part of these financial statements. T. Rowe Price International Growth & Income Fund -------------------------------------------------------------------------------- Statement of Operations -------------------------------------------------------------------------------- In thousands Year Ended 10/31/00 Investment Income (Loss) Income Dividend (net of foreign taxes of $30) $ 237 Interest 25 Securities lending 1 Total income 263 Expenses Custody and accounting 137 Shareholder servicing 46 Legal and audit 25 Registration 23 Prospectus and shareholder reports 13 Directors 8 Miscellaneous 5 Reimbursed by manager (125) Total expenses 132 Net investment income (loss) 131 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 759 Foreign currency transactions (30) Net realized gain (loss) 729 Change in net unrealized gain or loss on securities (739) Net realized and unrealized gain (loss) (10) INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $121 The accompanying notes are an integral part of these financial statements. T. Rowe Price International Growth & Income Fund -------------------------------------------------------------------------------- Statement of Changes in Net Assets -------------------------------------------------------------------------------- In thousands Year 12/21/98 Ended Through 10/31/00 10/31/99 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 131 $ 138 Net realized gain (loss) 729 199 Change in net unrealized gain or loss (739) 443 Increase (decrease) in net assets from operations 121 780 Distributions to shareholders Net investment income (170) -- Net realized gain (206) -- Decrease in net assets from distributions (376) -- Capital share transactions * Shares sold 10,074 13,689 Distributions reinvested 354 -- Shares redeemed (9,831) (4,693) Increase (decrease) in net assets from capital share transactions 597 8,996 Net Assets Increase (decrease) during period 342 9,776 Beginning of period 9,776 - End of period $10,118 $9,776 ---------------------- *Share information Shares sold 901 1,331 Distributions reinvested 32 -- Shares redeemed (881) (442) Increase (decrease) in shares outstanding 52 889 The accompanying notes are an integral part of these financial statements. T. Rowe Price International Growth & Income 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 Growth & Income Fund (the fund), a diversified, open-end management investment company, is one of the portfolios established by the corporation and commenced operations on December 21, 1998. The fund seeks long-term growth of capital and reasonable income through investments primarily in the common stocks of well-established, dividend-paying non-U.S. companies. 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. 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. Credits earned on daily uninvested cash balances at the custodian are used to reduce the fund's custody charges. NOTE 2 - INVESTMENT TRANSACTIONS 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 $116,000; aggregate collateral consisted of $118,000 in the securities lending collateral pool. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $3,232,000 and $2,997,000, 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 results of operations and net assets were not affected by the increases/(decreases) to these accounts. -------------------------------------------------------------------------------- Undistributed net investment income $(13,000) Undistributed net realized gain (120,000) Paid-in-capital 133,000 At October 31, 2000, the cost of investments for federal income tax purposes was substantially the same as for financial reporting and totaled $10,276,000. Net unrealized loss aggregated $296,000 at period-end, of which $1,081,000 related to appreciated investments and $1,377,000 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. 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. The fee is computed daily and paid monthly, and consists of an individual fund fee equal to 0.35% 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. Under the terms of the investment management agreement, the manager is required to bear any expenses through October 31, 2000, which would cause the fund's ratio of total expenses to average net assets to exceed 1.25%. Thereafter, through October 31, 2002, the fund is required to reimburse the manager for these expenses, provided that average net assets have grown or expenses have declined sufficiently to allow reimbursement without causing the fund's ratio of total expenses to average net assets to exceed 1.25%. Pursuant to this agreement, $70,000 of management fees were not accrued by the fund for the year ended October 31, 2000, and $125,000 of other expenses were borne by the manager. Additionally, $166,000 from a prior period remains subject to reimbursement through October 31, 2002. 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 $141,000 for the year ended October 31, 2000, of which $16,000 was payable at period-end. The fund may invest in the Reserve Investment Fund and Government Reserve Investment Fund (collectively, the Reserve Funds), open-end management investment companies managed by 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 $23,000 and are reflected as interest income in the accompanying Statement of Operations. T. Rowe Price International Growth & Income Fund -------------------------------------------------------------------------------- Report of Independent Accountants -------------------------------------------------------------------------------- To the Board of Directors of T. Rowe Price International Funds, Inc. and Shareholders of International Growth & Income Fund In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of International Growth & Income 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 Growth & Income 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 $274,000 from short-term capital gains, o $52,000 from long-term capital gains, subject to the 20% rate gains category. The fund will pass through foreign source income of $237,000 and foreign taxes paid of $29,000. T. Rowe Price International Growth & Income Fund -------------------------------------------------------------------------------- Annual Meeting Results -------------------------------------------------------------------------------- The T. Rowe Price International Growth & Income Fund held an annual meeting on October 25, 2000, to approve a new investment management agreement, to elect the directors listed below, and to ratify the Board of Directors' selection of PricewaterhouseCoopers LLP as the fund's independent accountants. The results of voting were as follows (by number of shares): To approve a new investment management agreement: Affirmative: 711,327.351 Against: 5,720.176 Abstain: 11,321.533 Total : 728,369.060 To elect the directors listed below: M. David Testa Affirmative: 722,090.716 Withhold: 6,278.344 Total: 728,369.060 Paul M. Wythes Affirmative: 722,090.716 Withhold: 6,278.344 Total: 728,369.060 Martin G. Wade Affirmative: 722,090.716 Withhold: 6,278.344 Total: 728,369.060 Anthony W. Deering Affirmative: 722,090.716 Withhold: 6,278.344 Total: 728,369.060 Donald W. Dick, Jr. Affirmative: 722,090.716 Withhold: 6,278.344 Total: 728,369.060 To ratify the appointment of PricewaterhouseCoopers LLP as independent accountants: Affirmative: 714,992.951 Against: 4,333.602 Abstain: 9,042.507 Total: 728,369.060 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. F127-050 10/31/00