-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UTnOONgeIqqj+lhbS9n4o6OtZvne9sZLGe3pFKB9baZLimY9plWVCCBsOjLwBms7 4TiZh/qufflCjU1fhfvtiw== 0000852254-97-000008.txt : 19971223 0000852254-97-000008.hdr.sgml : 19971223 ACCESSION NUMBER: 0000852254-97-000008 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19971222 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSTITUTIONAL INTERNATIONAL FUNDS INC CENTRAL INDEX KEY: 0000852254 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05833 FILM NUMBER: 97741905 BUSINESS ADDRESS: STREET 1: 100 EAST PRATT STREET STREET 2: LEGAL DEPARTMENT 7TH FLOOR CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4105472000 MAIL ADDRESS: STREET 1: 100 EAST PRATT STREET CITY: BALTIMORE STATE: MD ZIP: 21202 N-30D 1 Annual Report October 31, 1997 Foreign Equity Fund Invest With Confidence(registered trademark) T. Rowe Price Dear Investor, The year ended October 31, 1997, was one of two quite separate halves for the international investor. In the first half most markets performed well, led by the U.S. where the S&P 500 kept advancing to new highs. However, as the summer progressed there was a growing realization that a number of economies in the emerging markets of Southeast Asia had become overextended, which led to heavy selling in the region that spilled over to international stock markets. Performance Comparison Periods Ended 10/31/97 6 Months 12 Months ________________________________________________________ Foreign Equity Fund 2.04% 8.30% MSCI EAFE Index 3.15 4.92 The last 12 months were disappointing for overseas stock markets, and the returns of the Foreign Equity Fund were again behind the U.S. market. Over the final six months, the fund's return of 2.04% was also behind the 3.15% return of the Morgan Stanley Capital International Europe, Australasia and Far East (MSCI EAFE) Index. However, over the fund's fiscal year, its return was significantly ahead of the index. Over the 12-month period, fund performance against the index was significantly helped by an underweighting in Japan where the market performed poorly in U.S. dollars. Another positive contribution came from our position in Latin America, which did well over this period and is not part of the MSCI EAFE Index. During the past six months, the fund lagged the index due to its positions in emerging markets and to moderately adverse stock selection. The U.S. market continued to be driven by strong corporate earnings and, with inflation well under control, interest rates remained stable. Overseas the economic picture was not quite as positive, but the stock markets of Europe performed well at the beginning of the year. There was a powerful bull run in the markets of Latin America. In the emerging markets of Southeast Asia, problems grew increasingly apparent during the past few months. The principal culprit was Thailand, where there has been imprudent bank lending and excessive real estate development. A weak government, dogged by constant changes in leadership, proved unable to handle the mounting crisis, resulting in a collapsing stock market. At first, the problem seemed confined to Thailand, but attention soon shifted to a number of other economies in the region where rapid growth looked unsustainable given the similar pattern of indebtedness. Thus, the last six months have seen a savage bear market take hold in Asia, and as the ripples spread to more established markets such as Tokyo and Wall Street, investors questioned the impact of these developments on Japanese and U.S. multinationals operating in the area. Europe was also caught up in the turbulence, but the most spectacular declines occurred in Latin America, which somewhat belatedly was dragged down by the widening loss of confidence in emerging markets. Turning to currency markets, the dollar has been strong against most overseas currencies since the beginning of the year, dampening returns to U.S. investors, but has turned in a mixed performance over the last three months. European currencies picked up, with a particularly strong performance from the British pound, but the minor Asian currencies continued to slip. Even the yen has weakened recently against the dollar despite Japan's ever-widening current account surplus. Investment Review Europe In contrast with the turbulence of Asia, the economies of Europe made steady progress over the last six months. The U.K. continued to lead the way with strong consumer expenditure driving the service sector and a surprisingly resilient performance turned in by exporters. The new Labour government granted the Bank of England independence to set interest rates so that monetary policy should now be based on controlling inflation over the longer term rather than on political expediency. Seizing its new mandate with vigor, the Bank raised base rates four times during the summer in an effort to rein in an economy with the potential to overheat even though inflation is still moderate. This, in turn, has supported sterling, recently the strongest of the major currencies. A strong currency and rising interest rates would usually have been enough to unsettle the U.K. stock market, and the turmoil in Asia certainly did not help. Never-theless, British stocks held up well in dollar terms. As investor attention focused on the possibility of slower economic growth, our bias toward growth stocks and smaller companies was justified as cyclicals and manufacturing stocks sold off sharply. Market Performance Six Months Local Local Currency U.S. Ended 10/31/97 Currency vs. U.S. Dollars Dollars ________________________________________________________ Australia -1.88% -9.82% -11.51% France 2.98 1.40 4.42 Germany 7.32 0.61 7.98 Hong Kong -17.50 0.22 -17.32 Italy18.75 1.29 20.28 Japan-10.49 5.52 -5.55 Mexico 23.89 -5.42 17.17 Netherlands 16.27 0.38 16.71 Norway 15.52 1.72 17.51 Singapore -14.87 -8.05 -21.73 Sweden 11.74 4.83 17.13 Switzerland 11.32 5.52 17.47 United Kingdom 10.44 3.35 14.14 Source: FAME Information Services, Inc., using MSCI indices. Elsewhere in Europe, there are signs that the major economies have survived the stranglehold of tight fiscal policies as governments struggled to keep their deficits in line with the Maastricht convergence criteria. Helped by weak currencies and loose monetary policies, there are tentative signs of recovery, particularly in the export sector. Germany is typical here. Earlier this year German unemployment hit record levels, and it looked as though even the Germans, always at the vanguard of European integration, would fail to meet the stringent criteria required to join the European Monetary Union. In fact, the German budget is in surplus and any weakness is entirely due to the problems of the old East Germany. Therefore, progress depends on structural improvement in the east, a long-term process. The fiscal position would also improve if the government could agree on tax reform, but the corporate sector is at least seeing a recovery in profitability, and the stock market has done well. In France the picture is similar with high unemployment, but the trade account is in surplus and inflation remains low. France also intends to be a founding member of the European Monetary Union, and there is little room for relaxation of economic policy. Even the new left-wing government under Monsieur Jospin realizes that EMU ambitions must prevail, and the outlook is definitely a little brighter than it was six months ago. Italy has come through another of its political crises with Mr. Prodi facing down a revolt of his Communist governing partners to pass a budget that looked remarkably sound by Italian standards. There is rising confidence that Italy can improve on its record of government overspending, and it looks an increasingly likely candidate to join EMU in the first round. The stock markets of Continental Europe also performed reasonably well over the last six months and, as in the U.K., stock prices in general held up better than in Asia during the turbulence of October. As can be seen in the Market Performance table, all of them are ahead in U.S. dollar terms over the last six months, with double-digit returns from the U.K., Switzerland, and the Netherlands, all of which are well represented in your portfolio. Another feature livening up market sentiment was a wave of mergers and acquisitions as corporations sought to position themselves better for an integrated Europe and to compete on a wider global scale. In terms of size, one of the largest was a $32 billion merger between the Anglo Dutch publisher Reed Elsevier and its German Dutch rival Wolters Kluwer, which has long been in the works and was finally announced. Reed Elsevier is becoming the world's main provider of specialist professional infor-mation- "must-have" data for lawyers, accountants, and scientists. Wolters Kluwer is the biggest legal publisher in Germany and the Benelux countries, and there will be many synergies from this combination. Two British drinks and food firms, Guinness and Grand Metropolitan, finally consummated their marriage as the chairman of LVMH, the French luxury goods company with a stake in Guinness, finally agreed to terms. Since the two firms have a strong portfolio of brands that complement each other, distribution and marketing costs should fall. Europe's financial services industry is also consolidating, with a merger between the Swiss insurance company Zurich Group and the British conglomerate BAT, an important merger between Swedish bank Nordbanken and Finland's Merita, and also a bid by Italian insurer Assicurazioni Generali for Assurances Generales de France, France's third-largest insurer. Far East In Japan, which accounted for only 21% of fund assets, the economic picture has changed quite dramatically over the last six months. At the beginning of the year, growth was robust as the yen's weakness of 1996 fueled an export boom and a strong service sector. In April, the government raised the sales tax from 3% to 5%, which had the effect of causing an anticipatory consumer boom in March followed by a sharp downturn in April. With more than half of Japan's GDP accounted for by consumer spending, the economy never recovered and the trend was not helped by the depressed housing sector and by weak capital investment. The only bright spot was the export sector, with sales of electronic equipment and vehicles to the U.S. and Europe particularly strong. Reflecting the dire state of the domestic economy, imports have stagnated and the trade surplus rose over 50% in yen terms in the six months through September. Japan is now a significant overseas creditor and its current account, supported by a net interest surplus, grew even more sharply. Geographic Diversification Europe Japan Far East Latin America Otherand Reserves 61% 21% 7% 6% 5% Despite the positives of a strong trade position and minimal inflation, the government faces a considerable policy dilemma as it contemplates a very weak economy. Monetary policy is already very loose and Japanese government bond yields recently dipped below 2%. The economy has been awash with liquidity for some time, and any further weakening of the yen will stimulate exports. Moderate currency depreciation is probably a secret hope of Japan's policymakers, but the trade surplus with the U.S. is already at levels that historically have triggered loud complaints from Washington. A more stimulatory fiscal policy is a reasonable option, but conservatism holds sway in the Ministry of Finance as evidenced by the sales tax increase last spring. With this uncertainty, it is not surprising that the Japanese stock market turned in a poor performance over the last six months. Corporations exposed to the domestic economy were particularly weak but, in sharp contrast, the multinationals fared much better. Our strategy in the Tokyo market continued to favor the export and technology sectors. Stocks such as NEC (communications and computers), Sony (consumer electronics and media), and Canon (cameras and office equipment) remain among our largest positions. In contrast, the portfolio has no exposure to bank stocks-the largest sector in the index itself-where valuations remain excessive given the problems of their loan books. Banking failures are likely before the situation begins to improve, and with a high weighting in the financial sector, the market as a whole is unlikely to perform well until these problems are resolved. Elsewhere in the Pacific, as noted, the economic turmoil that began in Thailand rapidly spread to the "junior tigers" of the region. Economies such as Indonesia, Malaysia, and the Philippines each share a common pattern of over-lending to infrastructure and industrial development, which became vulnerable as the export boom was not sustained. Even traditional, commodity-based exports began to falter, and there was a round of competitive devaluations either by choice or imposed by speculative pressure. Turning to Northeast Asia, South Korea, once admired as one of the original "tiger" economies, hit trouble when its export of electronic chips proved particularly vulnerable to the slowdown in U.S. and European demand. Corporate leverage here has been excessive, with a government joined hand-in-hand with the banks in supporting a number of smaller conglomerates that should have been allowed to fail long ago. Some of these corporations have now filed for bankruptcy, but there is probably worse to come. Portfolio exposure to these minor markets of the region is limited, but the loss of confidence spread to the older tigers such as Singapore and Hong Kong where the fundamentals are much more sound. Hong Kong's dollar is formally pegged to the U.S. dollar, and this link survived a ferocious speculative attack in October. So far it has held, but the cost has been huge increases in domestic interest rates that, in turn, have hit the real estate and stock market. In Singapore the currency is also backed by substantial reserves, but stock prices have fallen just as far as in Hong Kong. Latin America The Latin American stock markets performed extremely well at the beginning of the year but, not surprisingly, they were caught up in October's upheaval in the emerging markets. This is frustrating for those watching their steady economic renaissance because, in many ways, these developing economies are in better shape than their counterparts in Asia. For example, the government of Brazil has demonstrated a strong political will to protect the currency even though this may push the economy into recession. President Cardoso has orchestrated a strong campaign to defend the real through aggressive intervention on the foreign exchange markets and a substantial increase in overnight interest rates. Consumer expenditure in Brazil was already weak even ahead of the hike in interest rates, but at least the slowing economy has pushed inflation down to under 5%-a remarkable achievement for this country. For the foreign investor, one of the most important developments in Brazil is the continuing privatization program valued at $70 billion over the next three years. Clearly this is ambitious, but the government has indicated this program will go ahead despite the pressure on its currency and a very unsettled stock market. The prospects for the stock market depend on how quickly confidence returns and interest rates fall. Much hinges on what damage is done to the economy, but the banking system is in better shape than it has been for many years. Brazil remains the core of our Latin American strategy and our exposure is focused on the large utilities such as Telecomunicacoes Brasileiras, which are at the center of the reform and privatization program. Mexico has already experienced a painful readjustment process following the peso devaluation at the end of 1994. Since then, the economy is much stronger with foreign participation in the banking industry and wider integration with the U.S. and Canada under NAFTA. The trade account is now in surplus, and even the current account deficit is less than 2% of the GDP. With inflation falling to under 15% in 1997 and consumers beginning to regain confidence, the economy could well be entering a period of sustainable growth. Argentina, too, was buffeted by the sell-off in October but the peg linking the Argentine peso to the U.S. dollar seems to have held. There is strong domestic political support for this link, which has helped reduce inflation to a low level. With the Argentine economy now linked to that of Brazil, a recession to the north would clearly have a negative impact. However, as the country's banking system has been considerably strengthened, we expect the peso link to the dollar to be maintained and the economy to continue its steady improvement. Investment Policy and Outlook The year under review has been disappointing for the international investor, and the volatile conditions of September and October have been particularly trying. Despite the sound fundamentals of the U.S. economy, even Wall Street was caught up in this turbulence while emerging markets were hit particularly hard. It is important to try to look through this period of stock market turbulence and see how world economies might develop from here. In Europe, which accounts for 61% of the fund's portfolio, we have seen an encouraging picture of improving economic growth, rising exports, and currencies that have now stabilized against the U.S. dollar. Valuations in Europe look reasonable, and there is the added interest of corporate restructuring as companies position themselves for European Monetary Union. As noted, we have already seen activity in this area and expect the trend to continue as management increasingly recognizes the importance of shareholder value. With a pickup in economic growth, corporate restructuring, and a benign interest rate environment, Europe in many ways looks similar to the U.S. economy several years ago. If this is the case, maintaining a large position in Europe seems sensible. Turning to the Far East, clearly the prospects are less certain, and it will take some time for the less-developed economies of Asia to put themselves back on a sounder footing. The important point here is that stock markets always tend to overdo things, and taking a longer-term view, attractive valuations are beginning to emerge. This is especially true in Hong Kong, now closely integrated with the growth potential of mainland China. Despite the volatility of the region's stock markets, China has made huge progress and seems on course to take over at some point from Japan as the driving force of the region. Japan is still the largest economy in the Pacific, but its economy is clearly struggling at the moment. However, unlike many of the smaller economies of the region, it at least has a strong current account surplus and substantial foreign exchange reserves. The stock market there lists some of the best-managed companies in the world, and we believe it is right to take advantage of current weakness by adding to our favorites. In Latin America the markets will remain volatile, but again one cannot ignore the economic achievements of these countries. Governments there seem committed to the right policies for the future, and greater political stability provides a firm platform for implementing them. Summing up, the portfolio structure today gives the investor a reasonable balance between the established economies overseas where we can find quality companies at reasonable valuations, and less-developed markets where there is perhaps more potential but at a higher risk. We continue to believe that this strategy will serve us well in the future. Respectfully submitted, Martin G. Wade President November 21, 1997 Portfolio Highlights Industry Diversification Percent of Net Assets 10/31/97 ________________________________________________________ Services 25.4% Finance 16.4 Consumer Goods 19.7 Capital Equipment 13.6 Energy 11.8 Materials 5.1 Multi-industry 3.1 Miscellaneous 0.2 Reserves 4.7 Net Assets 100.0% Exchange Rates to U.S. Dollars Exchange Rate Country 10/31/97 ________________________________________________________ Argentina 0.9999 Australia 1.4219 Belgium 35.5100 Brazil 1.1024 Canada 1.4093 Czech Republic 32.9629 Denmark 6.5540 Finland 5.1732 France 5.7682 Germany 1.7238 Hong Kong 7.7315 Italy 1693.0000 Japan 120.3500 Malaysia 3.3335 Mexico 8.3850 Netherlands 1.9415 New Zealand 1.6060 Norway 6.9774 Peru 2.7150 Portugal 175.8500 Singapore 1.5750 South Korea 965.0000 Spain 145.4700 Sweden 7.4899 Switzerland 1.4002 Thailand 41.0250 United Kingdom 0.5960 Security Classification Percent Market of Net Cost Value 10/31/97 Assets (000) (000) Common Stock, Rights and Warrants 92.1% $2,597,703 $2,910,132 Preferred Stocks and Rights 3.2 85,910 100,967 Bonds 0.0 468 801 Short-Term Investments 4.3 135,563 135,563 Total Investments 99.6 2,819,644 3,147,463 Other Assets Less Liabilities 0.4 12,329 12,392 Net Assets 100.0% $2,831,973 $3,159,855 Twenty-Five Largest Holdings Percent of Net Assets Company Country 10/31/97 ________________________________________________________ Royal Dutch Petroleum Netherlands 2.7% National Westminster Bank United Kingdom 2.1 Novartis Switzerland 2.0 Wolters Kluwer Netherlands 1.7 SmithKline Beecham United Kingdom 1.7 Reed International United Kingdom 1.5 Shell Transport & Trading United Kingdom 1.4 Telecomunicacoes Brasileiras Brazil 1.3 Roche Holdings Switzerland 1.3 ING Groep Netherlands 1.2 Eaux Cie Generale France 1.2 Nestle Switzerland 1.2 Elsevier Netherlands 1.2 Glaxo Wellcome United Kingdom 1.2 Canon Japan 1.2 Kingfisher United Kingdom 1.1 Sankyo Japan 1.0 Orkla Norway 1.0 Total France 1.0 NEC Japan 0.9 Norsk Hydro Norway 0.9 Sony Japan 0.9 ABB Sweden/Switzerland 0.9 Astra Sweden 0.9 Denso Japan 0.9 ________________________________________________________ Total 32.4% Summary of Investments and Cash October 31, 1997 Percent of Net Assets Percent of Equities! Cash Total MSCI EAFE* __________________________________________________________ Europe Austria - - - 0.4% Belgium 1.3% - 1.3% 1.2 Czech Republic - - - - Denmark 0.3 - 0.3 1.0 Finland 0.3 - 0.3 0.8 France 8.0 - 8.0 7.1 Germany 5.1 - 5.1 9.2 Ireland - - - 0.4 Italy 3.2 - 3.2 3.7 Netherlands 10.4 - 10.4 5.6 Norway 2.0 - 2.0 0.6 Portugal 0.5 - 0.5 - Russia - - - - Spain 2.0 - 2.0 2.5 Sweden 3.1 - 3.1 2.6 Switzerland 6.3 - 6.3 7.3 United Kingdom 18.0 - 18.0 21.1 __________________________________________________________ Total Europe 60.5% - 60.5% 63.5% __________________________________________________________ Pacific Basin __________________________________________________________ Australia 2.2% - 2.2% 2.6% China 0.3 - 0.3 - Hong Kong 2.6 - 2.6 2.8 India 0.2 - 0.2 - Japan 21.0 - 21.0 28.7 Malaysia 0.5 - 0.5 1.1 New Zealand 0.4 - 0.4 0.3 Singapore 0.8 - 0.8 0.9 South Korea 0.1 - 0.1 - Thailand - - - - __________________________________________________________ Total Pacific Basin 28.1% - 28.1% 36.4% __________________________________________________________ Americas Argentina 0.9% - 0.9% - Brazil 3.1 - 3.1 - Canada 0.3 - 0.3 - Chile 0.5 - 0.5 - Mexico 1.7 - 1.7 - Panama - - - - Peru 0.1 - 0.1 - United States - 4.3% 4.3 - Venezuela 0.1 - 0.1 - __________________________________________________________ Total Americas 6.7% 4.3% 11.0% - __________________________________________________________ Other Assets Less Liabilities - 0.4 0.4 - __________________________________________________________ TOTAL 95.3% 4.7% 100.0% 100.0% * Total may not add to 100.0% due to rounding. ! Includes bonds convertible into equities. Foreign Equity Fund 10/31/97 Performance Comparison This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with a broad-based average or index. The index return does not reflect expenses, which have been deducted from the fund's return. Foreign Equity Fund Lipper Foreign Equity MSCI EAFE International Fund Index Funds Average 9/7/89 $ 10,000 $ 10,000 $ 10,000 10/89 9,660 10,039 9,920 10/90 10,099 8,779 9,921 10/91 11,088 9,421 10,759 10/92 10,728 8,205 10,263 10/93 14,412 11,314 13,749 10/94 16,135 12,488 15,350 10/95 16,238 12,480 15,380 10/96 18,589 13,827 17,204 10/97 20,132 14,508 19,347 Total Return Performance
Periods Ended Calendar Year-to- 10/31/97 1 Month 3 Months Date 1 Year 3 Years* 5 Years* 9/7/89* ____________________________________________________________________________________ Foreign Equity Fund -7.71% -10.56% 2.80% 8.30% 7.66% 13.42% 8.97% S&P 500 Index -3.34 -3.76 25.31 32.11 27.51 19.87 15.77 MSCI EAFE Index -7.66 -9.74 2.17 4.92 5.12 12.07 4.66** Lipper International Funds Average -7.54 -8.95 5.43 10.39 6.54 12.67 8.12 FT-A Euro Pacific Index -7.53 -10.01 0.95 3.28 4.20 11.51 4.19** * Average annual compound total return. Annualized returns show how the fund would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate. ** From 8/31/89. Investment return and principal value represent past performance and will vary. Shares may be worth more or less at redemption than at original purchase.
Financial Highlights Foreign Equity Fund For a share outstanding throughout each period Year Ten Months> Year Ended Ended Ended 10/31/97 10/31/96 10/31/95 10/31/94 10/31/93 12/31/92 NET ASSET VALUE Beginning of period $ 15.62 $ 13.99 $ 14.59 $ 13.32 $ 10.05 $ 10.73 Investment activities Net investment income 0.21 0.21 0.18 0.09 0.13 0.17 Net realized and unrealized gain (loss) 1.07 1.78 (0.14) 1.48 3.14 (0.57) Total from investment activities 1.28 1.99 0.04 1.57 3.27 (0.40) Distributions Net investment income (0.22) (0.18) (0.12) (0.09) - (0.18) Net realized gain (0.17) (0.18) (0.52) (0.21) - (0.10) Total distri- butions (0.39) (0.36) (0.64) (0.30) - (0.28) NET ASSET VALUE End of period $ 16.51 $ 15.62 $ 13.99 $ 14.59 $ 13.32 $ 10.05 Ratios/Supplemental Data Total return 8.30% 14.48% 0.64% 11.96% 32.54%(3.74)% Ratio of expenses to average net assets 0.75% 0.76% 0.80% 0.82% 0.86%!0.99% Ratio of net investment income to average net assets 1.40% 1.67% 1.69% 1.26% 1.65%!1.49% Portfolio turnover rate 15.9% 13.8% 18.8% 22.0% 27.4%!35.1% Average commission rate paid $ 0.0017 $ 0.0017 - - - - Net assets, end of period (in thousands) $ 3,159,855 $2,322,469 $1,559,619 $1,058,478 $489,389 $ 238,979 ! Annualized. > The fund's fiscal year-end was changed to 10/31.
The accompanying notes are an integral part of these financial statements. Statement of Net Assets Foreign Equity Fund October 31, 1997 Shares/Par Value In thousands ARGENTINA 0.9% Common Stocks 0.9% Banco de Galicia Buenos Aires (Class B) ADR (USD) 93,992 $ 2,278 Banco Frances del Rio de la Plata ADR (USD) 109,808 2,704 Perez Companc (Class B) 772,082 4,836 Sociedad Comercial del Plata ADR (144a) (USD) 6,631 96 Telecom Argentina Stet (Class B) 114,560 573 Telecom Argentina Stet (Class B) ADR (USD) 40,074 1,014 Telefonica de Argentina (Class B) ADR (USD) 186,794 5,254 YPF Sociedad Anonima (Class D) ADR (USD) 384,119 12,292 Total Argentina (Cost $25,187) 29,047 AUSTRALIA 2.2% Common Stocks 2.1% Australia & New Zealand Bank Group 332,000 2,316 Australian Gas Light Company 845,181 5,646 Boral Limited 679,506 1,787 Brambles Industries 88,000 1,692 Broken Hill Proprietary 697,238 6,914 Commonwealth Bank of Australia 22,067 254 Commonwealth Bank of Australia, Installment Receipts, 11/14/97 563,300 4,714 Fosters Brewing Group 1,512,000 2,871 John Fairfax Holdings 1,344,000 2,968 Lend Lease 222,494 4,556 National Australia Bank 252,445 3,453 National Mutual Holdings 859,947 1,482 News Corporation 1,025,618 4,912 Publishing & Broadcasting 787,124 4,567 St. George Bank 425,079 2,575 Tabcorp Holdings 770,000 3,530 WMC 499,258 1,773 Westpac Bank 657,000 3,826 Woodside Petroleum 615,000 5,194 65,030 Preferred Stocks 0.1% News Corporation 358,876 $ 1,593 News Corporation ADR (USD) 11,750 209 Sydney Harbour Casino Holdings 2,220,600 2,264 4,066 Total Australia (Cost $64,682) 69,096 BELGIUM 1.3% Common Stocks 1.3% Dexia 24,759 2,705 Generale de Banque 21,588 8,831 Generale de Banque, VVPR Strip* 1,524 1 Kredietbank 57,081 23,951 UCB 1,039 3,590 39,078 Convertible Bonds 0.0% Kredietbank, 5.75%, 11/30/03 BEF 14,782,500 801 Total Belgium (Cost $27,297) 39,879 BRAZIL 3.1% Common Stocks and Rights 0.4% Companhia Siderurgica Nacional 76,839,000 2,788 Eletrobras 11,582,768 4,675 Eletrobras ADR (USD) 20,340 412 Pao de Acucar GDS (USD) 111,340 2,036 Telecomunicacoes de Sao Paulo* 967,420 206 Telecomunicacoes de Sao Paulo, Rights, 11/11/97* 32,348 0 Unibanco, Units (Each unit consists of 1 preferred share and 1 Unibanco Holdings (Class B) share)* 59,729,000 3,359 White Martins 400,674 672 14,148 Preferred Stocks and Rights 2.7% Banco Bradesco 465,618,322 3,463 Banco Itau 4,882,000 1,971 Brahma 5,531,989 3,462 Brasmotor 5,547,410 780 Cia Cimento Portland Itau 4,882,700 1,253 Cia Energetica de Sao Paulo ADR (USD) * 20,600 $ 386 Cia Energetica Minas Gerais 118,383,577 4,725 Cia Energetica Minas Gerais ADR (144a) (USD) 16,530 657 Cia Energetica Minas Gerais ADR, Cv. (USD) 23,337 928 Cia Energetica Minas Gerais ADR, Sponsored, Nonvoting (USD) 103,555 4,116 Cia Tecidos Norte de Minas 3,724,770 1,385 Encorpar* 3,724,770 0 Lojas Americanas 37,644,000 307 Pao de Acucar GDS (USD) 6,600 121 Petrol Brasileiros 21,518,917 4,001 Telecomunicacoes Brasileiras ADR (USD) 408,442 41,457 Telecomunicacoes de Minas Gerais (Class B) 10,703,000 1,340 Telecomunicacoes de Minas Gerais(Class B), Preference Receipts* 132,753 12 Telecomunicacoes de Sao Paulo 29,160,420 7,618 Telecomunicacoes de Sao Paulo, Rights, 11/11/97* 975,054 1 Telecomunicacoes do Rio de Janeiro 11,275,077 1,074 Telecomunicacoes do Rio de Janeiro, Rights, 11/11/97* 437,179 4 Usiminas 391,919 2,844 Usiminas ADR (USD) 361,810 2,623 Usiminas ADR (144a) (USD) 12,540 91 84,619 Total Brazil (Cost $81,911) 98,767 CANADA 0.3% Common Stocks 0.3% Alcan Aluminium 169,810 4,819 Royal Bank of Canada 61,480 3,287 Total Canada (Cost $5,846) 8,106 CHILE 0.5% Common Stocks and Warrants 0.5% Chilectra ADR (144a) (USD) 82,522 $ 2,146 Chilgener ADS (USD) 78,377 2,136 Compania Cervecerias Unidas ADS (USD) 43,830 1,068 Compania de Telecomunicaciones de Chile ADR (USD) 94,681 2,627 Empresa Nacional de Electricidad de Chile ADR (USD) 140,341 2,824 Enersis ADS (USD) 65,396 2,158 Five Arrows Chile Investment Trust (USD) 231,740 638 Five Arrows Chile Investment Trust, Warrants, 5/31/99 (USD)* 36,758 8 Genesis Chile Fund (USD) 66,410 2,989 Santa Isabel ADR (USD) 50,195 929 Total Chile (Cost $15,383) 17,523 CHINA 0.3% Common Stocks 0.3% Huaneng Power International (Class N) ADR (USD)* 413,700 9,101 Total China (Cost $8,310) 9,101 CZECH REPUBLIC 0.0% Common Stocks 0.0% SPT Telecom 8,781 1,012 Total Czech Republic (Cost $834) 1,012 DENMARK 0.3% Common Stocks 0.3% Den Danske Bank 48,550 5,482 Tele Danmark (Class B) 13,050 766 Unidanmark (Class A) 40,121 2,712 Total Denmark (Cost $5,669) 8,960 FINLAND 0.3% Common Stocks 0.3% Nokia (Class A) 101,530 8,949 Total Finland (Cost $3,847) 8,949 FRANCE 8.0% Common Stocks 8.0% AXA 120,211 $ 8,232 Accor 18,740 3,489 Alcatel Alsthom 104,631 12,625 Assurances Generales de France 65,582 3,451 Canal Plus 28,830 5,013 Carrefour 16,915 8,827 Cie de St. Gobain 84,886 12,185 Credit Commercial de France 65,873 3,732 Danone 21,240 3,248 Dexia France, Bearer 19,298 1,937 Dexia France, Registered 1998> 16,696 1,676 Dexia France, Registered 1999> 20,520 2,060 Eaux Cie Generale 337,932 39,310 Elf Aquitaine 103,010 12,751 GTM Entrepose 25,080 1,565 Guilbert 32,371 4,226 Havas 22,490 1,482 L'Oreal 12,225 4,332 LVMH 48,297 8,205 Lapeyre 58,000 3,388 Legrand 20,839 3,880 Pathe 16,728 3,001 Pinault Printemps 47,073 21,528 Primagaz 6,680 498 Rexel 5,312 1,409 Sanofi 124,410 11,819 Schneider 218,806 11,683 Societe Generale 54,272 7,433 Sodexho 22,614 11,279 Television Francaise 88,346 8,225 Total (Class B) 275,811 30,602 Total France (Cost $222,550) 253,091 GERMANY 5.1% Common Stocks and Warrants 4.7% Allianz 61,610 13,885 Allianz, Warrants, 2/23/98* 13,000 1,418 Bayer 291,014 10,264 Bayerische Hypotheken und Wechsel Bank 230,098 $ 9,544 Bayerische Vereinsbank 61,391 3,561 Bilfinger & Berger 80,960 2,907 Buderus 4,012 1,946 Commerzbank 102,930 3,493 Deutsche Bank 253,284 16,655 Deutsche Telekom 287,365 5,385 Gehe 327,224 17,085 Hoechst 94,660 3,602 Hornbach Baumarkt 14,770 438 Mannesmann 12,767 5,392 Praktiker 32,915 497 Rhoen Klinikum 52,994 5,073 SAP 37,160 10,660 Siemens 186,271 11,465 Veba 370,756 20,669 Veba, Warrants, 4/6/98* 9,526 3,205 Volkswagen 5,994 3,535 150,679 Preferred Stocks 0.4% Fielmann 27,225 640 Fresenius 16,900 2,853 Hornbach Holdings 32,830 2,209 Krones 4,621 1,568 SAP 16,644 4,958 12,228 Total Germany (Cost $144,493) 162,907 HONG KONG 2.6% Common Stocks 2.6% China Light & Power 628,000 3,306 Dao Heng Bank Group 1,609,000 3,704 First Pacific 6,084,486 3,836 Guoco Group 1,774,000 3,878 HSBC Holdings 244 6 Henderson Land Development 548,000 3,034 Hong Kong Land Holdings (USD) 4,330,719 9,874 Hutchison Whampoa 3,003,000 20,780 New World Development 4,170,505 14,672 Sun Hung Kai Properties 277,000 2,042 Swire Pacific (Class A) 1,634,000 8,728 Wharf Holdings 3,508,000 7,169 Total Hong Kong (Cost $110,863) 81,029 INDIA 0.2% Common Stocks 0.2% State Bank of India GDR (USD) 302,700 $ 5,449 Total India (Cost $4,283) 5,449 ITALY 3.2% Common Stocks 3.2% Assicurazioni Generali 153,000 3,421 Banca Commerciale Italiana 670,000 1,828 Banca Fideuram 571,940 2,179 Credito Italiano 4,740,429 12,642 ENI 3,090,232 17,466 Gucci Group (USD) 97,641 3,552 IMI 522,757 4,732 Industrie Natuzzi ADR (USD) 101,084 2,262 Italgas 730,325 2,631 Mediolanum 363,119 6,091 Rinascente 316,500 2,346 Telecom Italia 3,022,930 18,945 Telecom Italia Mobile 5,400,866 19,938 Telecom Italia Mobile, Savings Shares 872,266 1,783 Total Italy (Cost $75,447) 99,816 JAPAN 21.0% Common Stocks 21.0% Advantest 51,900 4,291 Alps Electric 468,000 5,250 Amada 776,000 4,127 Canon 1,527,000 37,049 Citizen Watch 448,000 2,859 DDI 1,551 5,181 Daifuku 126,000 944 Daiichi Pharmaceutical 961,000 13,654 DaiNippon Screen Manufacturing 682,000 5,531 Daiwa House 1,102,000 10,622 Denso 1,291,000 27,890 East Japan Railway 2,533 12,312 Fanuc 210,800 8,513 Hitachi 1,540,000 11,836 Hitachi Zosen 1,097,000 $ 2,416 Honda Motor 79,000 2,659 Inax 331,000 1,441 Ishihara Sangyo Kaisha 368,000 755 Ito-Yokado 360,000 17,888 Kao 611,000 8,529 Kawada Industries 107,000 317 Kokuyo 387,000 9,132 Komatsu 1,016,000 5,428 Komori 330,000 6,032 Kumagai Gumi 633,000 621 Kuraray 807,000 7,242 Kyocera 481,000 27,537 Makita 584,000 8,201 Marui 946,000 15,957 Matsushita Electric Industrial 1,309,000 21,971 Mitsubishi 1,095,000 9,371 Mitsubishi Heavy Industries 4,383,000 21,524 Mitsubishi Paper Mills 458,000 1,214 Mitsui Fudosan 2,090,000 23,618 Mitsui Petrochemical Industries 269,000 995 Murata Manufacturing 414,000 16,787 NEC 2,717,000 29,800 National House Industrial 170,000 1,850 Nippon Hodo 176,000 1,037 Nippon Steel 5,662,000 11,667 Nippon Telephone & Telecom 1,113 9,433 Nomura Securities 1,396,000 16,239 Pioneer Electronic 470,000 7,732 Sangetsu 111,000 1,799 Sankyo 986,000 32,525 Sega Enterprises 133,050 3,272 Sekisui Chemical 1,218,000 9,584 Sekisui House 685,000 5,863 Seven Eleven Japan 111,000 8,301 Sharp 1,300,000 10,100 Shin-Etsu Chemical 754,000 18,419 Shiseido 197,000 2,685 Sony 356,200 29,567 Sumitomo 1,431,000 10,226 Sumitomo Electric Industries 2,105,000 $ 27,810 Sumitomo Forestry 435,000 3,145 TDK 300,000 24,877 Teijin 1,811,000 5,944 Tokio Marine & Fire Insurance 419,000 4,178 Tokyo Electronics 178,000 8,874 Tokyo Steel Manufacturing 383,200 2,706 Toppan Printing 763,000 9,573 Uny 361,000 5,849 Yurtec 154,000 1,039 Total Japan (Cost $739,324) 663,788 MALAYSIA 0.5% Common Stocks 0.5% Berjaya Sports Toto 1,572,000 4,291 Commerce Asset Holdings 2,908,199 2,268 Resorts World 887,000 1,583 Tanjong 2,061,000 3,648 Time Engineering 1,215,000 525 United Engineers 1,151,000 2,728 Total Malaysia (Cost $34,796) 15,043 MEXICO 1.7% Common Stocks 1.7% Cemex (Class B)* 612,840 2,690 Cemex ADS (USD)* 302,160 2,342 Cemex ADS (144a) (USD) * 410,812 3,184 Cifra (Class B) ADR (USD) 395,587 758 Fomentos Economico Mexicano (Class B) 663,862 4,671 Gruma (Class B)* 621,077 2,429 Gruma (Class B) ADS (144a) (USD)* 150,784 2,337 Grupo Financiero Banamex (Class B)* 966,552 1,913 Grupo Financiero Banamex (Class L)* 31,801 58 Grupo Financiero Bancomer (Class L)* 8,266 3 Grupo Industrial Maseca (Class B) 1,664,467 $ 1,608 Grupo Modelo (Class C) 347,864 2,597 Grupo Televisa GDR (USD)* 49,322 1,529 Kimberly-Clark Mexico (Class A) 1,001,310 4,395 Panamerican Beverages (Class A) (USD) 201,428 6,244 Telefonos de Mexico (Class L) ADR (USD) 304,614 13,175 TV Azteca ADR (USD)* 194,300 3,716 Total Mexico (Cost $54,957) 53,649 NETHERLANDS 10.4% Common Stocks and Warrants 10.4% ABN Amro Holdings 862,208 17,364 Ahold 187,547 4,801 Akzo Nobel 21,098 3,717 Baan Company 51,155 3,623 Baan Company (USD) 58,260 4,085 CSM 274,349 12,520 Elsevier 2,462,182 38,680 Fortis Amev 264,177 10,382 ING Groep 902,305 37,877 ING Groep, Warrants, 3/15/01* 149,267 1,537 Koninklijke PTT Nederland 96,125 3,674 Nutricia 192,920 5,515 Otra 45,880 732 Polygram 303,179 17,240 Royal Dutch Petroleum 1,635,068 86,491 Unilever 461,184 24,514 Wolters Kluwer 444,211 54,545 327,297 Preferred Stocks 0.0% ING Groep 10,797 54 Total Netherlands (Cost $250,634) 327,351 NEW ZEALAND 0.4% Common Stocks 0.4% Air New Zealand (Class B) 965,300 2,044 Carter Holt Harvey 499,115 870 Fletcher Challenge Building 798,544 $ 2,412 Fletcher Challenge Energy 484,044 2,170 Fletcher Challenge Forests Division 1,183,654 1,142 Fletcher Challenge Paper 520,089 855 Telecom Corporation of New Zealand 698,372 3,383 Tranz Rail Holdings 186,000 845 Total New Zealand (Cost $15,074) 13,721 NORWAY 2.0% Common Stocks 2.0% Bergesen (Class A) 46,430 1,358 Norsk Hydro 536,982 29,630 Orkla (Class A) 342,000 31,517 Saga Petroleum (Class B) 85,950 1,527 Total Norway (Cost $43,463) 64,032 PANAMA 0.0% Common Stocks 0.0% Banco Latinoamericano de Exportaciones (Class E) (USD) 25,252 1,004 Total Panama (Cost $1,243) 1,004 PERU 0.1% Common Stocks 0.1% Credicorp (USD) 66,880 1,200 Telefonica del Peru (Class B) 316,910 631 Telefonica del Peru (Class B) ADS (USD) 83,788 1,655 Total Peru (Cost $3,725) 3,486 PORTUGAL 0.5% Common Stocks 0.5% Jeronimo Martins 221,857 14,509 Total Portugal (Cost $5,562) 14,509 RUSSIA 0.0% Common Stocks 0.0% Rao Gazprom ADS (USD) 38,080 852 Total Russia (Cost $600) 852 SINGAPORE 0.8% Common Stocks 0.8% City Developments 405,000 $ 1,697 DBS Land 1,448,000 2,464 Fraser & Neave 415,400 2,110 Overseas Chinese Bank 230,400 1,280 Overseas Union Bank 504,400 1,681 Singapore Land 1,318,000 3,749 Singapore Press 556,820 7,672 United Overseas Bank 685,352 3,786 Total Singapore (Cost $42,851) 24,439 SOUTH KOREA 0.1% Common Stocks 0.1% Samsung Electronic 53,817 2,114 Total South Korea (Cost $6,201) 2,114 SPAIN 2.0% Common Stocks 2.0% Argentaria Banca de Espana 82,960 4,608 Banco Bilbao Vizcaya 133,650 3,574 Banco Popular Espanol 133,564 7,887 Banco Santander 401,921 11,259 Centros Comerciales Pryca 91,773 1,457 Empresa Nacional de Electricidad 478,288 9,009 Gas Natural 87,646 4,061 Iberdrola 587,376 7,026 Repsol 133,490 5,598 Telefonica de Espana 359,007 9,797 Total Spain (Cost $50,183) 64,276 SWEDEN 3.1% Common Stocks 3.1% ABB (Class A) 503,590 5,883 Astra (Class B) 1,850,945 28,667 Atlas Copco (Class B) 336,112 9,985 Electrolux (Class B) 181,767 15,046 Esselte (Class B) 91,130 1,983 Granges* 81,378 1,331 Hennes and Mauritz 409,955 16,776 Nordbanken 236,160 7,410 Sandvik (Class A) 70,120 2,125 Sandvik (Class B) 272,400 $ 8,292 Scribona (Class B) 49,060 648 Total Sweden (Cost $66,196) 98,146 SWITZERLAND 6.3% Common Stocks and Warrants 6.3% ABB 17,620 22,965 Adecco 49,253 15,653 Credit Suisse Group 46,155 6,502 Nestle 27,453 38,682 Novartis 39,803 62,338 Roche Holdings 4,704 41,337 Roche Holdings, Warrants, 5/5/98* 31 2 Schweizerischer Bankverein 41,064 11,041 Total Switzerland (Cost $143,240) 198,520 THAILAND 0.0% Common Stocks 0.0% Advanced Information Service 139,974 737 Siam Cement 86,625 722 Total Thailand (Cost $4,792) 1,459 UNITED KINGDOM 18.0% Common Stocks 18.0% Abbey National 1,089,440 17,328 Argos 1,161,200 12,371 Asda Group 3,734,530 9,712 BG 1,214,200 5,256 British Petroleum 855,802 12,578 Cable & Wireless 2,474,200 19,759 Cadbury Schweppes 1,545,578 15,559 Caradon 2,668,215 8,506 Centrica* 901,200 1,262 Compass Group 760,000 8,008 David S. Smith 1,434,500 5,487 Electrocomponents 746,000 5,820 GKN 186,000 4,166 Glaxo Wellcome 1,790,650 38,154 Grand Metropolitan 2,753,000 24,826 Guinness 2,349,000 21,006 Heywood Williams Group 249,576 $ 1,005 Hillsdown Holdings 675,300 1,903 John Laing (Class A) 594,300 3,644 Kingfisher 2,392,977 34,447 Ladbroke Group 1,587,000 7,109 National Westminster Bank 4,567,619 65,905 Rank Group 1,334,000 7,453 Reed International 4,644,140 45,932 Rio Tinto 977,960 12,618 Rolls Royce 811,851 2,915 Safeway 2,104,200 13,706 Sears 304,000 301 Shell Transport & Trading 6,289,000 44,527 SmithKline Beecham 5,734,230 54,356 T & N 1,851,000 7,814 Tesco 1,464,903 11,730 Tomkins 4,787,080 24,576 United News & Media 1,651,620 20,769 Total United Kingdom (Cost $423,444) 570,508 VENEZUELA 0.1% Common Stocks 0.1% Compania Anonima Nacional Telefonos de Venezuela (Class D) ADR (USD) 51,920 2,271 Total Venezuela (Cost $1,194) 2,271 SHORT-TERM INVESTMENTS 4.3% Money Market Funds 4.3% Reserve Investment Fund, Inc., 5.65% $135,562,848 135,563 Total Short-Term Investments (Cost $135,563) 135,563 Total Investments in Securities 99.6% of Net Assets (Cost $2,819,644) $ 3,147,463 Other Assets Less Liabilities 12,392 NET ASSETS $ 3,159,855 ____________ Net Assets Consist of: Accumulated net investment income - net of distributions $ 39,528 Accumulated net realized gain/loss - net of distributions 81,393 Net unrealized gain (loss) 327,882 Paid-in-capital applicable to 191,374,520 shares of $0.01 par value capital stock outstanding; 1,000,000,000 shares authorized 2,711,052 NET ASSETS $ 3,159,855 ____________ NET ASSET VALUE PER SHARE $ 16.51 ____________ * Non-income producing > Securities contain some restrictions as to public resale-total of such securities at year-end amounts to 0.1% of net assets. 144a Security was purchased pursuant to Rule 144a under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers - total of such securities at year-end amounts to 0.3% of net assets. ADR American depository receipt ADS American depository share BEF Belgian franc GDR Global depository receipt GDS Global depository share USD U.S. dollar VVPR Entitles holders to a reduced rate of foreign withholding tax. The accompanying notes are an integral part of these financial statements. Statement of Operations Foreign Equity Fund In thousands Year Ended 10/31/97 Investment Income Income Dividend (net of foreign taxes of $ 7,641) $ 54,915 Interest 7,272 Total income 62,187 Expenses Investment management 20,250 Custody and accounting 959 Registration 310 Shareholder servicing 36 Legal and audit 20 Directors 12 Prospectus and shareholder reports 2 Miscellaneous 19 Total expenses 21,608 Net investment income 40,579 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 92,006 Foreign currency transactions (4,468) Net realized gain (loss) 87,538 Change in net unrealized gain or loss Securities 53,320 Other assets and liabilities denominated in foreign currencies 47 Change in net unrealized gain or loss 53,367 Net realized and unrealized gain (loss) 140,905 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 181,484 ____________ The accompanying notes are an integral part of these financial statements. Statement of Changes in Net Assets Foreign Equity Fund In thousands Year Year Ended Ended 10/31/97 10/31/96 Increase (Decrease) in Net Assets Operations Net investment income $ 40,579 $ 33,107 Net realized gain (loss) 87,538 37,807 Change in net unrealized gain or loss 53,367 178,907 Increase (decrease) in net assets from operations 181,484 249,821 Distributions to shareholders Net investment income (33,766) (21,229) Net realized gain (26,079) (21,229) Decrease in net assets from distributions (59,845) (42,458) Capital share transactions* Shares sold 1,016,742 772,534 Distributions reinvested 43,555 30,404 Shares redeemed (344,550) (247,451) Increase (decrease) in net assets from capital share transactions 715,747 555,487 Net Assets Increase (decrease) during period 837,386 762,850 Beginning of period 2,322,469 1,559,619 End of period $ 3,159,855 $ 2,322,469 _________________________ *Share information Shares sold 60,358 51,462 Distributions reinvested 2,750 2,138 Shares redeemed (20,421) (16,389) Increase (decrease) in shares outstanding 42,687 37,211 The accompanying notes are an integral part of these financial statements. Notes to Financial Statements Foreign Equity Fund October 31, 1997 Note 1 - Significant Accounting Policies Institutional International Funds, Inc. (the corporation) is registered under the Investment Company Act of 1940. The Foreign Equity Fund (the fund), a diversified, open-end management investment company, is the sole portfolio currently established by the corporation and commenced operations on September 7, 1989. The accompanying financial statements are prepared in accordance with generally accepted accounting principles for the investment company industry; these principles may require the use of estimates by fund management. Valuation Equity securities are valued at the last quoted sales price at the time the valuations are made. A security which is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Debt securities are generally traded in the over-the-counter market and are valued at a price deemed best to reflect fair value as quoted by dealers who make markets in these securities or by an independent pricing service. Short-term debt securities are valued at amortized cost which, when combined with accrued interest, approximates fair value. For purposes of determining the fund's net asset value per share, the U.S. dollar value of all assets and liabilities initially expressed in foreign currencies is determined by using the mean of the bid and offer prices of such currencies against U.S. dollars quoted by a major bank. Assets and liabilities for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by or under the supervision of the officers of the fund, as authorized by the Board of Directors. Currency Translation Assets and liabilities are translated into U.S. dollars at the prevailing exchange rate at the end of the reporting period. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing exchange rate on the dates of such transactions. The effect of changes in foreign exchange rates on realized and unrealized security gains and losses is reflected as a component of such gains and losses. Other Income and expenses are recorded on the accrual basis. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Dividend income and distributions to shareholders are recorded by the fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with federal income tax regulations and may differ from those determined in accordance with generally accepted accounting principles. Note 2 - Investment Transactions Purchases and sales of portfolio securities, other than short-term securities, aggregated $1,087,944,000 and $435,311,000, respectively, for the year ended October 31, 1997. Note 3 - Federal Income Taxes No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. For federal income tax purposes, fund distributions included $23,011,000 ($0.15 per share) of long-term capital gains, which were paid to shareholders of record on December 26, 1996. The fund intends to elect to pass through foreign source income of $43,714,000 and foreign taxes paid of $7,648,000 for its tax year ended October 31, 1997; the per share effect of these pass-throughs is $0.23 and $0.04, respectively, based on fund shares outstanding on October 31, 1997. These amounts may differ from amounts reported in the accompanying financial statements due to differences in financial statement and federal income tax reporting requirements. At October 31, 1997, the aggregate cost of investments for federal income tax and financial reporting purposes was $2,819,644,000, and net unrealized gain aggregated $327,819,000, of which $575,378,000 related to appreciated investments and $247,559,000 to depreciated investments. Note 4 - Related Party Transactions The fund is managed by Rowe Price-Fleming International, Inc. (the manager), which is owned by T. Rowe Price Associates, Inc. (Price Associates), Robert Fleming Holdings Limited, and Jardine Fleming Holdings Limited under a joint venture agreement. The investment management agreement between the fund and the manager provides for an annual investment management fee, of which $1,992,000 was payable at October 31, 1997. The fee is computed daily and paid monthly, and is equal to 0.70% of average daily net assets. In addition, the fund has entered into agreements with Price Associates and two wholly owned subsidiaries of Price Associates, pursuant to which the fund receives certain other services. Price Associates computes the daily share price and maintains the financial records of the fund. T. Rowe Price Services, Inc., is the fund's transfer and dividend disbursing agent and provides shareholder and administrative services to the fund. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. The fund incurred expenses pursuant to these related party agreements totaling approximately $133,000 for the year ended October 31, 1997, of which $12,000 was payable at period-end. The fund may invest in the Reserve Investment Fund and Government Reserve Investment Fund (collectively, the Reserve Funds), open-end management investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds are offered as cash management options only to mutual funds and other accounts managed by T. Rowe Price and its affiliates and are not available to the public. The Reserve Funds pay no investment management fees. Distributions from the Reserve Funds to the fund for the year ended October 31, 1997, totaled $1,249,000 and are reflected as interest income in the accompanying Statement of Operations. During the year ended October 31, 1997, the fund, in the ordinary course of business, placed security purchase and sale orders aggregating $66,696,000 with certain affiliates of the manager and paid commissions of $191,000 related thereto. Report of Independent Accountants To The Board of Directors and Shareholders of Foreign Equity Fund In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Foreign Equity Fund (the portfolio constituting Institutional International Funds, Inc., hereafter referred to as the "Fund") at October 31, 1997, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 1997 by correspondence with custodians and, where appropriate, the application of alternative auditing procedures for unsettled security transactions, provide a reasonable basis for the opinion expressed above. The financial statements of the Fund for the fiscal periods presented prior to the year ended October 31, 1995, were audited by other independent accountants whose report dated November 17, 1994, expressed an unqualified opinion on those statements. PRICE WATERHOUSE LLP Baltimore, Maryland November 19, 1997 -----END PRIVACY-ENHANCED MESSAGE-----