N-CSR 1 fef.txt T. ROWE PRICE INSTITUTIONAL FOREIGN EQUITY FUND Item 1. Report to Shareholders October 31, 2004 Annual Report Institutional Foreign Equity Fund T. Rowe Price The views and opinions in this report were current as of October 31, 2004. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund's future investment intent. The report is certified under the Sarbanes-Oxley Act of 2002, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects. T. Rowe Price Institutional Foreign Equity Fund -------------------------------------------------------------------------------- Fellow Shareholders International stocks rose during the six and 12 months ended October 31, 2004, with Latin American markets leading the way in both periods. Japan was weakest, posting a loss during the past six months but gaining over the year. European stocks produced steady returns, bolstered by the strength of the euro versus the sagging dollar, which enhanced results for U.S. investors. PERFORMANCE COMPARISON -------------------------------------------------------------------------------- Periods Ended 10/31/04 6 Months 12 Months -------------------------------------------------------------------------------- Institutional Foreign Equity Fund 3.35% 12.96% MSCI EAFE Index 5.94 19.27 Lipper International Large-Cap Core Funds Average 4.19 14.63 The fund gained ground during the six months ended October 31, 2004, falling short of the results for the unmanaged MSCI EAFE Index and the Lipper International Large-Cap Core Funds Average in both periods, as shown in the table. Stock selection in various sectors was the major impediment to relative performance versus the index during the six-month period. In Japan and the U.K., value stocks were especially favored as investors sought higher-yielding stocks and were unprepared to pay for growth. Quality stocks were favored during the past three months, the reverse of the first three months of the period. As a result, the overall picture was somewhat muddied. Typically, with relative stock valuations at these levels and with the economic indicators pointing to a moderating pace of recovery, we would expect to see growth stocks returning to favor over value, which would favor the fund's investment style. Until recently, small-cap stocks had been outperforming large-caps for several years, but the trend could be reversing as investors seek to reduce their risk. MARKET REVIEW Market Performance -------------------------------------------------------------------------------- Six Months Local Local Currency U.S. Ended 10/31/04 Currency vs. U.S. Dollars Dollars -------------------------------------------------------------------------------- France 3.34% 6.11% 9.65% Germany -0.36 6.11 5.73 Hong Kong 10.22 0.21 10.45 Italy 7.14 6.11 13.69 Japan -7.06 3.92 -3.42 Mexico 15.95 -1.12 14.66 Netherlands -0.37 6.12 5.72 Singapore 8.25 2.17 10.60 Sweden 3.75 7.40 11.43 Switzerland -6.81 7.92 0.57 United Kingdom 4.13 3.32 7.60 Source: RIMES Online, using MSCI indices. European markets performed reasonably well. However, while stock valuations are attractive, economic growth in the region has been lackluster. European stock market returns were less volatile during the period compared with other markets, largely because they are less affected by the outlook for China (see special report on China in this letter). Among the markets in the region, Italy, Spain, and Norway were particularly strong. Japan was the only market to register negative results over the past six months, but the Japanese market was positive during the 12 months ended October 31. Japan's fortunes were influenced by the progress of its economic recovery and the transparency of banking sector reforms, but high oil prices had a negative impact due to the country's heavy manufacturing bias. Stocks here are also sensitive to developments in China since exports to that vast market are essential to Japan's recovery. Latin American markets far outpaced other regions, thanks partly to anticipated debt reduction in some countries and partly to the area's resource-driven exposure to China. Brazil, in particular, has benefited from the global interest rate picture; since interest rates are not expected to rise as sharply as previously thought, the outlook for the Brazilian economy is much improved. Standard & Poor's and Moody's raised their credit ratings for the country's securities, reflecting Brazil's economic rebound and improved fiscal management. Brazilian energy and materials stocks, which make up about half of the market, surged on news of better-than-expected economic growth, industrial production, jobless rates, and trade surpluses. Emerging markets overall returned about 9% since the end of April and 19% for the past 12 months, although the pattern was uneven with stocks doing well in the first quarter of 2004 but suffering in the second on concerns about slowing Chinese growth and rising oil prices. China: A Powerful Global Growth Engine -------------------------------------------------------------------------------- China has increasingly become the growth engine for Asia, and T. Rowe Price investment managers believe that it will have an expanding impact on the global economy. Investing in China, however, presents unique challenges that warrant a cautious investment approach. China's economy has grown rapidly over the past year, fueled by massive fixed-asset investment by the government, high levels of foreign investment, and the rapid emergence of its urban middle class. In December 2003, money supply was growing at a 30% annual pace, and the supply of raw materials could not keep pace. China currently consumes 25% of the world's raw materials, and this will continue to rise. Over the past year, the Chinese government has attempted to cool this boom, and the continuing challenge will be achieving a manageable rate of growth. We believe the next stage of China's modernization must be to tackle its financial architecture. Due to the lack of a functioning bond market, interest rate inflexibility, and a rigid foreign exchange structure, the government has had to rely on administrative measures to slow the economy. The secular rise in inflation is another growing concern. The country is reaching the limit of its ability to supply domestic raw materials to its industries, meaning that growth will have to be met by imported raw materials and paid for with hard currency. These trends probably mean that China's low interest rates are likely to climb further, which could have major implications for its economy and potentially for inflation trends around the world. (The government edged rates higher in October for the first time in nearly a decade.) More importantly, it raises some question about the long-term sustainability of China's blistering growth. Accordingly, we have remained cautious about the quality of investment opportunities in China, almost exclusively focusing on industry leaders that we believe are capable of achieving sustained profitability through economic peaks and troughs. An alternative strategy has been to invest in non-Chinese companies that we believe will benefit from accelerating Chinese demand. While we are pleased that more high-growth, privately owned mainland companies are starting to be listed, we remain extremely selective and seek to avoid owning Chinese companies with opaque ownership structures and a lack of corporate transparency. [GRAPHIC OMITTED] Will China's GDP Growth Slow? Real GDP Growth '97 10.29% '98 6.39 '99 3.14 '00 8.96 '01 7.3 '02 6.74 '03 14.16 '04* 9.2 '05* 8 *Estimates Sources: FactSet Research Systems, OECD, Consensus Economics Inc. PORTFOLIO PERFORMANCE AND STRATEGY Europe German stock selection was strong, mainly due to Hypo Real Estate, which sold a large amount of its nonperforming real estate loans, thereby boosting the overall quality of its loan portfolio. Results were also strong in Spain, with Banco Bilbao Vizcaya Argentaria (BBVA) and Telefonica, which is sensitive to Spain's high GDP growth rate, both adding value. Other major European holdings include the U.K.'s GlaxoSmithKline and Vodafone, France's Total and Sanofi-Aventis, and Switzerland's UBS and Nestle. GEOGRAPHIC DIVERSIFICATION -------------------------------------------------------------------------------- Periods Ended 4/30/04 10/31/04 -------------------------------------------------------------------------------- Europe 66.6% 64.5% Japan 21.3 21.5 Pacific Rim 8.0 8.1 Latin America 2.3 3.5 Middle East 0.4 0.2 North America 0.2 0.0 Other and Reserves 1.2 2.2 -------------------------------------------------------------------------------- Total 100% 100% Japan Soft economic data in Japan induced a round of profit-taking. Nomura Holdings was the largest detractor from performance. Sectors leading the decline included financials, technology, and basic materials. UFJ Holdings performed poorly after it unexpectedly announced $5 billion worth of bad loans, inciting fears that reforms in the industry were not as transparent as investors had hoped. We continue to add a mix of domestic and export-oriented firms, including software company Trend Micro, chemical company JSR, and building products company Daikin Industries, all of which should benefit from Japan's expected recovery. In April we had added wireless telecom equipment company KDDI; the shares have recently sold off but the company's earnings margins are growing. Asia ex-Japan and Pacific Rim Australia was strong, mainly due to the country's bias toward commodities and basic resources industries and its geographical proximity to Asia. Inflation picked up across much of the region as commodities prices rose. An overweight position in BHP Billiton (mining and metals) helped results as second-half profits more than doubled, thanks to Chinese demand, which accounted for 9% of sales in the period. South Korea detracted both relatively and in absolute terms. Samsung Electronics soared earlier in the year but has since struggled because of a poor earnings outlook. Emerging Markets Russian holdings hurt performance because of our exposure to YUKOS, which has been involved in controversy with Vladimir Putin's government. India added value, and we favor this market because of potential growth in its service sector. Brazil and Mexico were both positive contributors during the period as Brazilian oil company Petroleo Brasileiro (Petrobras) did well, and Mexico's Grupo Televisa, which is sensitive to media growth, and America Movil, a wireless telecom company with good growth potential, delivered solid results. SECTOR REVIEW Sector Diversification Percent of Percent of Net Assets Net Assets 4/30/04 10/31/04 -------------------------------------------------------------------------------- Financials 23.0% 23.2% Consumer Discretionary 17.5 17.2 Telecommunication Services 9.9 10.0 Industrials and Business Services 8.3 8.9 Information Technology 9.6 8.9 Health Care 9.2 8.3 Energy 7.6 8.0 Consumer Staples 8.5 7.7 Materials 3.8 4.0 Utilities 1.4 1.6 Other and Reserves 1.2 2.2 -------------------------------------------------------------------------------- Total 100.0% 100.0% Energy Energy stocks were among the best contributors to absolute performance during both the 6- and 12-month periods as rising oil prices drove share prices higher. French oil giant Total is our largest position in the sector, and the company projects annual earnings growth into 2008. Our emerging oil holdings also did well, with Petrobras and PetroKazakhstan returning more than 30% in the last six months--the latter company boosted by its China pipeline. YUKOS, on the other hand, hurt both absolute and relative performance because of its tax problems with the Kremlin. We were sanguine about the company at first since its earnings prospects still looked attractive even in a worst-case scenario. However, it has become clear that the issue is more personal than tax-related, making the company's future impossible to judge from a rational investment standpoint. As a result, we eliminated the stock from the portfolio. Consumer Discretionary Stocks in this sector detracted from results, largely because of U.K. catering stock Compass, which issued a profit warning following financial problems at a leading distributor. Philips Electronics of the Netherlands struggled in the face of a potential glut in LCDs and decelerating growth in semiconductors. However, the stock remains attractively valued in our view. British Sky Broadcast was weighed down by speculation that its chairman, Rupert Murdoch, might pursue growth at the expense of profitability. Over the past 12 months, stock selection in the consumer discretionary sector detracted most from relative performance. Investment Technology IT stocks were among the worst performers during the past year, reflecting a somewhat mundane economic outlook and cyclical weakness in the semiconductor cycle. In addition, the rise in raw material prices for electronic makers that use thin steel sheet and cobalt hurt manufacturers who could not pass on costs to consumers accustomed to prices falling over time. Japanese tech company NEC detracted from results due to its exposure to China. Samsung announced shrinking margins in the LCD component, and next year's earnings estimates for most semiconductor companies leave little room for disappointment if the global economy slows. Financials Financial stocks were good absolute contributors, although they detracted on a relative basis. Commercial banks led the way, with BBVA, Hypo Real Estate, and Credit Agricole among the leaders. Banks are sensitive to interest rates, which affect net interest margin. The relatively benign outlook for European interest rates, along with the attractive valuations for financial stocks, has helped boost results in the sector during both the 6- and 12-month periods. Japanese financials, however, struggled recently after performing well earlier in the year. Nomura Holdings did poorly compared with other Japanese financials because of falling fixed-income revenue and potential competition from new entrants in the securities business. INVESTMENT OUTLOOK Valuation multiples have consolidated since 2000, and quality growth companies that have generated respectable results have been unduly punished. Large-caps look less expensive relative to small-caps, and growth stocks trade comparably to value stocks, indicating that value's dominance may finally have played itself out. The economic environment going forward should be more supportive for quality growth stocks as global GDP levels off and earnings growth decelerates in 2005. Europe is currently the most attractive region in terms of stock valuation as investors await an upswing in domestic growth. Global interest rates are expected to rise in 2005, but the environment in Europe is comparatively benign as growth has been more tempered. The direction and pace of interest rates can have a significant impact on the prospects for banks and capital market companies. We own European and globally diversified banks due to their valuations, the rising rate of merger and acquisition activity, and the favorable interest rate background. Japan should continue to enjoy positive economic growth and is currently experiencing its first sustained recovery in 15 years. Government deregulation, accommodative monetary policy, corporate restructuring, a healthier financial system, and the global (and Chinese) economic cycle have revived the Japanese economy. The influence of China and India on the global economy will continue to grow in emerging markets. Both countries are experiencing rapid economic growth, but India's economy is based more on services than on manufacturing. We continue to gain exposure to China by investing in companies that are benefiting from rapid growth and demand via exports. In India, domestic companies are also attractive, offering prudent management and capital allocation in a profit-driven atmosphere. Respectfully submitted, David J.L. Warren President, T. Rowe Price International Funds, Inc. November 12, 2004 T. Rowe Price Institutional Foreign Equity Fund -------------------------------------------------------------------------------- Risks of International Investing -------------------------------------------------------------------------------- Funds that invest overseas generally carry more risk than funds that invest strictly in U.S. assets. Funds investing in a single country or in a limited geographic region tend to be riskier than more diversified funds. Risks can result from varying stages of economic and political development, differing regulatory environments, trading days, and accounting standards, and higher transaction costs of non-U.S. markets. Non-U.S. investments are also subject to currency risk, or a decline in the value of a foreign currency versus the U.S. dollar, which reduces the dollar value of securities denominated in that currency. Glossary -------------------------------------------------------------------------------- Lipper averages: The averages of available mutual fund performance returns for specified periods in defined categories as tracked by Lipper Inc. MSCI EAFE Index: Widely accepted as the benchmark for international stock performance (EAFE refers to Europe, Australasia, and Far East). The index represents the major foreign markets of the world. Price/earnings ratio: Calculated by dividing a stock's market value per share by the company's earnings per share for the past 12 months or by expected earnings for the coming year. PORTFOLIO HIGHLIGHTS Twenty-Five Largest Holdings -------------------------------------------------------------------------------- Percent of Net Assets Country 10/31/04 -------------------------------------------------------------------------------- GlaxoSmithKline United Kingdom 3.0% Total France 2.5 Vodafone United Kingdom 2.5 Royal Bank of Scotland United Kingdom 2.4 Shell T&T/Royal Dutch United Kingdom/ Netherlands 2.0 Sanofi-Aventis France 1.8 UBS Switzerland 1.8 Nestle Switzerland 1.6 Kingfisher United Kingdom 1.3 ENI S.p.A. Italy 1.3 AstraZeneca United Kingdom 1.2 BNP Paribas France 1.1 Adecco Switzerland 1.1 Canon Japan 1.1 Securitas Sweden 1.1 Reed Elsevier United Kingdom/ Netherlands 1.1 France Telecom France 1.1 Telefonica Spain 1.0 Nokia Finland 1.0 Banco Bilbao Vizcaya Argentaria Spain 1.0 ING Groep GDS Netherlands 1.0 UniCredito Italiano Italy 1.0 Credit Agricole France 1.0 Sumitomo Mitsui Financial Japan 1.0 Credit Suisse Group Switzerland 0.9 -------------------------------------------------------------------------------- Total 35.9% Note: Table excludes investments in the T. Rowe Price Reserve Investment Fund and collateral for securities lending. T. Rowe Price Institutional Foreign Equity Fund -------------------------------------------------------------------------------- SUMMARY OF INVESTMENTS AND CASH -------------------------------------------------------------------------------- October 31, 2004 Percent of Equities Cash Total MSCI EAFE -------------------------------------------------------------------------------- EUROPE ------ Austria -- -- -- 0.3% Belgium 0.3% -- 0.3% 1.3 Denmark 0.6 -- 0.6 0.8 Finland 1.0 -- 1.0 1.5 France 13.8 -- 13.8 9.4 Germany 3.1 -- 3.1 6.8 Greece -- -- -- 0.5 Ireland -- -- -- 0.8 Italy 4.9 -- 4.9 4.0 Luxembourg -- -- -- -- Netherlands 4.2 -- 4.2 4.8 Norway 0.3 -- 0.3 0.6 Portugal -- -- -- 0.4 Russia 1.1 -- 1.1 -- Spain 4.5 -- 4.5 3.8 Sweden 2.6 -- 2.6 2.5 Switzerland 5.9 -- 5.9 6.7 United Kingdom 21.8 -- 21.8 25.2 -------------------------------------------------------------------------------- Total Europe 64.1% 0.0% 64.1% 69.4% -------------------------------------------------------------------------------- PACIFIC BASIN ------------- Australia 1.7% -- 1.7% 5.4% China 0.4 -- 0.4 -- Hong Kong 1.2 -- 1.2 1.7 India 1.1 -- 1.1 -- Japan 21.5 -- 21.5 22.3 Malaysia 0.4 -- 0.4 -- New Zealand -- -- -- 0.2 Singapore 0.9 -- 0.9 0.8 South Korea 1.5 -- 1.5 -- Taiwan 0.9 -- 0.9 -- Thailand -- -- -- -- -------------------------------------------------------------------------------- Total Pacific Basin 29.6% 0.0% 29.6% 30.4% -------------------------------------------------------------------------------- Percent of Equities Cash Total MSCI EAFE -------------------------------------------------------------------------------- MIDDLE EAST ----------- Egypt -- -- -- -- Israel 0.2% -- 0.2% -- Turkey -- -- -- -- -------------------------------------------------------------------------------- Total Middle East 0.2% 0.0% 0.2% 0.0% -------------------------------------------------------------------------------- AMERICAS -------- Argentina -- -- -- -- Brazil 1.3% -- 1.3% -- Canada -- -- -- -- Chile -- -- -- -- Mexico 2.2 -- 2.2% -- Panama -- -- -- -- Peru -- -- -- -- United States -- 1.7 1.7 -- Venezuela -- -- -- -- -------------------------------------------------------------------------------- Total Americas 3.5% 1.7% 5.2% 0.0% -------------------------------------------------------------------------------- SOUTH AFRICA ------------ South Africa -- -- -- -- -------------------------------------------------------------------------------- Total South Africa 0.0% 0.0% 0.0% 0.0% -------------------------------------------------------------------------------- Other Assets Less Liabilities 0.5% 0.5% -------------------------------------------------------------------------------- TOTAL* 97.9% 1.7% 99.6% 99.8% -------------------------------------------------------------------------------- * Total may not add to 100.0% due to rounding. T. Rowe Price Institutional Foreign Equity Fund -------------------------------------------------------------------------------- Growth of $10,000 -------------------------------------------------------------------------------- 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. [GRAPHIC OMITTED] INSTITUTIONAL FOREIGN EQUITY FUND -------------------------------------------------------------------------------- As of 10/31/04 Institutional Foreign Equity Fund $14,312 MSCI EAFE Index $15,305 Lipper International Large-Cap Core Funds Average $15,227 Lipper Institutional MSCI International Foreign EAFE Large-Cap Core Equity Fund Index Funds Average -------------------------------------------------------------------------------- 10/94 $ 10,000 $ 10,000 $ 10,000 10/95 10,064 9,993 10,133 10/96 11,521 11,072 11,363 10/97 12,477 11,617 12,703 10/98 13,432 12,773 13,356 10/99 16,224 15,758 16,673 10/00 16,622 15,338 17,051 10/01 11,964 11,553 12,534 10/02 10,357 10,060 10,892 10/03 12,670 12,833 13,274 10/04 14,312 15,305 15,227 AVERAGE ANNUAL COMPOUND TOTAL RETURN -------------------------------------------------------------------------------- Periods Ended 10/31/04 1 Year 5 Years 10 Years -------------------------------------------------------------------------------- Institutional Foreign Equity Fund 12.96% -2.48% 3.65% MSCI EAFE Index 19.27 -0.58 4.35 Lipper International Large-Cap Core Funds Average 14.63 -2.42 4.07 Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. Past performance cannot guarantee future results. Fund Expense Example As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs such as redemption fees or sales loads and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period. Actual Expenses The first line of the following table ("Actual") provides information about actual account values and actual expenses. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information on the second line of the table ("Hypothetical") is based on hypothetical account values and expenses derived from the fund's actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund's actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Note: T. Rowe Price charges an annual small-account maintenance fee of $10, generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $25,000 or more, accounts employing automatic investing, and IRAs and other retirement plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although a separate custodial or administrative fee may apply to such accounts). This fee is not included in the accompanying tables. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher. T. Rowe Price Institutional Foreign Equity Fund -------------------------------------------------------------------------------- Expenses Beginning Ending Paid During Account Account Period* Value Value 5/1/04 to 5/1/04 10/31/04 10/31/04 -------------------------------------------------------------------------------- Actual $ 1,000 $ 1,033.50 $ 3.92 Hypothetical (Assumes 5% return before expenses) 1,000 1,021.28 3.89 * Expenses are equal to the fund's annualized expense ratio for the six-month period (0.77%), multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the most recent fiscal half-year (184) by the days in the year (366) to reflect the half-year period. QUARTER-END RETURNS -------------------------------------------------------------------------------- Periods Ended 9/30/04 1 Year 5 Years 10 Years -------------------------------------------------------------------------------- Institutional Foreign Equity Fund 14.86% -2.50% 3.50% MSCI EAFE Index 22.52 -0.51 4.34 Lipper International Large-Cap Core Funds Average 17.26 -2.28 4.26 Current performance may be higher or lower than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when you sell your shares. For the most recent month-end performance information or to request a prospectus or a fund profile, each of which includes investment objectives, risks, fees, expenses, and other information you should read carefully before investing, please visit our Web site (troweprice.com) or contact a T. Rowe Price representative at 1-800-225-5132. This table provides returns through the most recent calendar quarter-end rather than through the end of the fund's fiscal period. It 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. Average annual total return figures include changes in principal value, reinvested dividends, and capital gain distributions. Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. When assessing performance, investors should consider both short- and long-term returns. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- T. Rowe Price Institutional Foreign Equity Fund For a share outstanding throughout each period ------------------------------------------------------------ Year Ended 10/31/04 10/31/03 10/31/02 10/31/01 10/31/00 NET ASSET VALUE Beginning of period $ 12.82 $ 10.65 $ 12.70 $ 19.16 $ 20.08 Investment activities Net investment income (loss) 0.26 0.23 0.18 0.39 0.13 Net realized and unrealized gain (loss) 1.38 2.11 (1.81) (5.35) 0.46 Total from investment activities 1.64 2.34 (1.63) (4.96) 0.59 Distributions Net investment income (0.25) (0.15) (0.42) (0.11) (0.17) Net realized gain (0.02) (0.02) -- (1.39) (1.34) Total distributions (0.27) (0.17) (0.42) (1.50) (1.51) NET ASSET VALUE End of period $ 14.19 $ 12.82 $ 10.65 $ 12.70 $ 19.16 ------------------------------------------------------------ Ratios/Supplemental Data Total return^ 12.96% 22.33% (13.43)% (28.02)% 2.45% Ratio of total expenses to average net assets 0.76% 0.76% 0.75% 0.74% 0.74% Ratio of net investment income (loss) to average net assets 1.35% 1.64% 1.06% 2.25% 0.57% Portfolio turnover rate 28.8% 27.8% 20.0% 21.4% 39.7% Net assets, end of period (in millions) $ 743 $ 1,061 $ 1,168 $ 1,903 $ 3,138 ^ Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions and payment of no redemption or account fees. The accompanying notes are an integral part of these financial statements. PORTFOLIO OF INVESTMENTS (1) T. Rowe Price Institutional Foreign Equity Fund October 31, 2004 Shares Value -------------------------------------------------------------------------------- (Cost and value in $ 000s) AUSTRALIA 1.7% Common Stocks 1.0% BHP Billiton 528,751 5,469 Brambles Industries LTD (ss.) 379,800 2,011 7,480 Preferred Stocks 0.7% News Corporation 628,279 4,927 4,927 Total Australia (Cost $8,265) 12,407 BELGIUM 0.3% Common Stocks 0.3% Fortis 46,584 1,182 UCB 22,803 1,204 Total Belgium (Cost $830) 2,386 BRAZIL 1.3% Common Stocks 1.3% Petrobras ADR (USD) 170,760 5,567 Tele Norte Leste ADR (USD) 301,100 3,938 Total Brazil (Cost $6,884) 9,505 CHINA 0.4% Common Stocks 0.4% China Telecom, 144A (HKD) * 7,016,000 2,254 China Telecom (H shares) (HKD) 2,198,000 706 Total China (Cost $2,721) 2,960 DENMARK 0.6% Common Stocks 0.6% Novo Nordisk, Series B 83,351 4,140 Total Denmark (Cost $2,405) 4,140 FINLAND 1.0% Common Stocks 1.0% Nokia 500,659 7,716 Total Finland (Cost $878) 7,716 FRANCE 13.8% Common Stocks 13.8% AXA 199,944 4,300 BNP Paribas 122,536 8,334 Compagnie de Saint-Gobain 86,004 4,720 Credit Agricole (ss.) 249,024 7,292 France Telecom * 273,600 7,827 Groupe Danone 42,960 3,593 Hermes International (ss.) 25,995 5,010 L'Oreal 37,165 2,532 Lafarge 10,290 938 LVMH (ss.) 70,316 4,813 Sanofi-Aventis 186,840 13,648 Schneider Electric, Series A 77,899 5,154 Societe Generale 40,189 3,725 Societe Television Francaise 1 (ss.) 175,636 5,282 Sodexho Alliance (ss.) 122,979 3,106 Thomson 94,655 2,141 Total 90,157 18,734 Vivendi Universal * 59,097 1,613 Total France (Cost $56,162) 102,762 GERMANY 3.1% Common Stocks 3.1% Allianz 19,629 2,087 Bayer 41,284 1,169 Depfa Bank 83,600 1,269 Deutsche Bank 37,586 2,855 E.On 27,006 2,196 Hypo Real Estate * 143,504 5,364 Rhoen-Klinikum 29,020 1,620 SAP 21,520 3,663 Siemens 37,808 2,812 Total Germany (Cost $15,469) 23,035 HONG KONG 1.2% Common Stocks 1.2% Cheung Kong Holdings 433,000 3,588 Li & Fung 1,498,000 2,223 Sun Hung Kai Properties 348,000 3,219 Total Hong Kong (Cost $7,112) 9,030 INDIA 1.1% Common Stocks 1.1% I-Flex Solutions 146,900 1,929 National Thermal Power, 144A * 224,200 307 Oil & Natural Gas 55,500 964 Oil & Natural Gas (Regulation S shares) 45,400 789 Zee Telefilms 1,226,300 4,042 Total India (Cost $7,563) 8,031 ISRAEL 0.2% Common Stocks 0.2% Check Point Software Technologies (USD) * 67,916 1,536 Total Israel (Cost $1,255) 1,536 ITALY 4.9% Common Stocks 4.9% Alleanza Assicurazioni 350,050 4,128 Banca Intesa 456,910 1,870 Banco Popolare di Verona e Novara 96,900 1,717 ENI S.p.A. 433,131 9,828 Mediaset 143,381 1,634 Mediolanum (ss.) 207,535 1,302 Telecom Italia 185,136 616 Telecom Italia Mobile 780,566 4,597 Telecom Italia-RNC 1,349,964 3,356 UniCredito Italiano 1,363,593 7,318 Total Italy (Cost $17,635) 36,366 JAPAN 21.5% Common Stocks 21.5% Canon 163,400 8,061 Credit Saison (ss.) 56,300 1,800 Dai Nippon Printing 305,000 4,174 Daikin Industries 100,300 2,441 Daito Trust Construction (ss.) 100,800 4,259 Daiwa Securities 506,000 3,102 Denso 102,300 2,451 Fanuc 73,100 4,413 Fujisawa Pharmaceutical 56,000 1,463 Funai Electric 25,100 3,281 Hoya 31,100 3,192 JSR (ss.) 152,100 2,766 KDDI 1,166 5,609 Keyence 11,600 2,613 Kirin Brewery 203,000 1,823 Kyocera 40,800 2,959 Leopalace21 80,200 1,465 Marui (ss.) 172,300 2,160 Matsui Securities 52,300 1,386 Mitsubishi 572,300 6,321 Mitsubishi Estate (ss.) 225,000 2,375 Mitsui Fudosan (ss.) 581,000 6,165 Mitsui Trust 374,000 2,572 NEC 586,000 3,250 Nidec (ss.) 15,500 1,678 Nissan Motor 410,600 4,628 Nomura 525,000 6,437 NTT DoCoMo 840 1,482 Oji Paper (ss.) 318,000 1,815 Orix (ss.) 32,000 3,752 Rohm 31,100 3,192 Secom 161,500 5,865 Sega Sammy Holdings *(ss.) 31,600 1,466 Seven-Eleven Japan 163,200 4,726 Shin-Etsu Chemical 115,700 4,398 SMC 17,900 1,916 Softbank 32,500 1,471 Sumitomo Metal Industries 1,095,000 1,322 Sumitomo Mitsui Financial (ss.) 1,088 7,071 Suzuki Motor (ss.) 173,000 3,058 T&D Holdings *(ss.) 51,150 2,258 Takefuji 28,200 1,782 Teijin 537,000 2,087 Toyota Motor 145,100 5,652 Trend Micro (ss.) 45,500 2,180 UFJ * 436 2,023 Uniden 112,000 2,424 USS 15,680 1,268 Yamanouchi Pharmaceutical 116,100 4,260 Yamato Transport (ss.) 130,000 1,752 Total Japan (Cost $137,243) 160,064 KAZAKHSTAN 0.4% Common Stocks 0.4% PetroKazakhstan (USD) 87,063 3,213 Total Kazakhstan (Cost $2,351) 3,213 MALAYSIA 0.4% Common Stocks 0.4% Astro All Asia (Ordinary shares) * 1,260,100 1,724 Astro All Asia (Regulation S shares) * 810,000 1,109 Total Malaysia (Cost $2,412) 2,833 MEXICO 2.2% Common Stocks 2.2% America Movil ADR Series L (USD) 111,100 4,888 Grupo Financiero Banorte 120,700 567 Grupo Modelo, Series C 1,106,000 2,835 Grupo Televisa ADR (USD) 57,400 3,157 Wal-Mart de Mexico, Series V 1,401,773 4,586 Total Mexico (Cost $11,115) 16,033 NETHERLANDS 4.2% Common Stocks 4.2% Akzo Nobel 13,241 498 ASML Holding * 263,330 3,750 Fortis (Unified shares) 57,607 1,465 ING Groep GDS 287,920 7,616 Koninklijke Numico * 132,136 4,450 Philips Electronics 208,183 4,923 Reed Elsevier 87,810 1,153 Royal Dutch Petroleum 44,729 2,428 Royal KPN 437,700 3,499 STMicroelectronics 97,652 1,799 Total Netherlands (Cost $17,896) 31,581 NORWAY 0.3% Common Stocks 0.3% Orkla, Series A 71,395 2,027 Total Norway (Cost $606) 2,027 RUSSIA 1.1% Common Stocks 1.1% AO VimpelCom ADR (USD) * 22,100 2,519 JSC MMC Norilsk Nickel ADR (USD) 45,500 2,810 Lukoil ADR, 144A (USD) 22,290 2,792 Total Russia (Cost $6,036) 8,121 SINGAPORE 0.9% Common Stocks 0.9% United Overseas Bank 647,060 5,251 Venture Manufacturing 186,000 1,766 Total Singapore (Cost $5,807) 7,017 SOUTH KOREA 1.5% Common Stocks 1.5% Hyundai Motor GDR, 144A (USD) 118,100 2,802 Kookmin Bank * 54,380 1,815 Samsung Electronics 8,393 3,292 South Korea Telecom 19,650 3,078 Total South Korea (Cost $7,528) 10,987 SPAIN 4.5% Common Stocks 4.5% Banco Bilbao Vizcaya Argentaria (ss.) 491,453 7,706 Banco Santander Central Hispano (ss.) 445,463 4,969 Endesa (ss.) 154,479 3,133 Gas Natural (ss.) 121,180 3,293 Inditex (ss.) 141,700 3,598 Repsol 128,843 2,791 Telefonica 336,489 5,551 Telefonica ADR (USD) 45,107 2,248 Total Spain (Cost $19,815) 33,289 SWEDEN 2.6% Common Stocks 2.6% Hennes & Mauritz, Series B 175,060 5,093 LM Ericsson, Series B *(ss.) 746,233 2,165 Sandvik, Series A (ss.) 14,170 530 Securitas, Series B (ss.) 582,135 7,955 Tele2, Series B (ss.) 106,200 3,523 Total Sweden (Cost $16,608) 19,266 SWITZERLAND 5.9% Common Stocks 5.9% Adecco 169,420 8,149 Credit Suisse Group * 200,620 6,855 Nestle 51,133 12,085 Roche Holding (Participation certificates) 39,100 3,993 UBS 180,732 13,014 Total Switzerland (Cost $20,927) 44,096 TAIWAN 0.9% Common Stocks 0.9% Chinatrust Financial * 87,793 100 E.Sun Financial 2,849,000 1,945 Quanta Computer 1,087,000 1,757 Taiwan Semiconductor Manufacturing 2,052,456 2,691 Total Taiwan (Cost $6,773) 6,493 TURKEY 0.0% Common Stocks 0.0% Turkiye Is Bankasi (Isbank) 41,858,500 173 Total Turkey (Cost $156) 173 UNITED KINGDOM 21.8% Common Stocks 21.8% AstraZeneca 210,851 8,634 Autonomy * 123,128 405 British Sky Broadcasting 282,474 2,635 Cadbury Schweppes 180,527 1,499 Capita 174,100 1,123 Carnival 33,667 1,780 Centrica 619,389 2,736 Compass 1,656,450 6,838 David S. Smith 307,694 787 Diageo 340,399 4,549 Electrocomponents 436,220 2,327 GlaxoSmithKline 1,071,321 22,544 Hays 1,535,154 3,626 Hilton Group 260,940 1,234 Kesa Electricals 259,315 1,294 Kingfisher 1,805,503 10,012 MFI Furniture Group 892,500 1,678 Reed Elsevier (Ordinary shares) 757,240 6,759 Rio Tinto (Ordinary shares) 219,487 5,734 Royal Bank of Scotland 605,344 17,824 Shell Transport & Trading 1,545,054 12,153 Standard Chartered 133,300 2,381 Tesco 908,804 4,785 Tomkins 677,866 3,097 Unilever N.V. 515,136 4,338 United Business Media 285,389 2,497 Vodafone 7,291,957 18,662 William Morrison Supermarkets 798,400 3,318 WPP Group 653,260 6,550 Total United Kingdom (Cost $123,376) 161,799 SHORT-TERM INVESTMENTS 1.7% Money Market Funds 1.7% T. Rowe Price Reserve Investment Fund, 1.81% #+ 12,633,156 12,633 Total Short-Term Investments (Cost $12,633) 12,633 SECURITIES LENDING COLLATERAL 8.2% Money Market Pooled Account 8.2% Investment in money market pooled account managed by JP Morgan Chase Bank, London, 1.788% # 61,104,295 61,104 Total Securities Lending Collateral (Cost $61,104) 61,104 Total Investments in Securities 107.7% of Net Assets (Cost $579,565) $ 800,603 (1) Denominated in currency of country of incorporation unless otherwise noted # Seven-day yield * Non-income producing (ss.) All or a portion of this security is on loan at October 31, 2004 - See Note 2 + Affiliated company - See Note 5 144A Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration only to qualified institutional buyers--total value of such securities at period-end amounts to $8,155 and represents 1.1% of net assets ADR American Depository Receipts GDR Global Depository Receipts GDS Global Depository Shares HKD Hong Kong dollar USD U.S. dollar The accompanying notes are an integral part of these financial statements. STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------------------------------------------- T. Rowe Price Institutional Foreign Equity Fund October 31, 2004 (In thousands except shares and per share amounts) Assets Investments in securities, at value Affiliated companies (cost $12,633) $ 12,633 Other companies (cost $566,932) 787,970 Total investments in securities 800,603 Other assets 5,104 Total assets 805,707 Liabilities Obligation to return securities lending collateral 61,104 Other liabilities 1,488 Total liabilities 62,592 NET ASSETS $ 743,115 -------------------- Net Assets Consist of: Undistributed net investment income (loss) $ 12,278 Undistributed net realized gain (loss) (348,319) Net unrealized gain (loss) 221,103 Paid-in-capital applicable to 52,385,778 shares of $0.01 par value capital stock outstanding; 1,000,000,000 shares of the Corporation authorized 858,053 NET ASSETS $ 743,115 -------------------- NET ASSET VALUE PER SHARE $ 14.19 -------------------- The accompanying notes are an integral part of these financial statements. STATEMENT OF OPERATIONS -------------------------------------------------------------------------------- T. Rowe Price Institutional Foreign Equity Fund ($ 000s) Year Ended 10/31/04 Investment Income (Loss) Income Dividend (net of foreign taxes of $2,336) $ 19,152 Securities lending 792 Interest (net of foreign taxes of $1) 49 Other 2 Total income 19,995 Expenses Investment management 6,645 Custody and accounting 442 Registration 51 Legal and audit 41 Shareholder servicing 15 Directors 6 Prospectus and shareholder reports 5 Miscellaneous 28 Total expenses 7,233 Net investment income (loss) 12,762 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 111,545 Foreign currency transactions (8) Payment from investment manager 87 Net realized gain (loss) 111,624 Change in net unrealized gain (loss) Securities (6,971) Other assets and liabilities denominated in foreign currencies 41 Change in net unrealized gain (loss) (6,930) Net realized and unrealized gain (loss) 104,694 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 117,456 -------------------- The accompanying notes are an integral part of these financial statements. STATEMENT OF CHANGES IN NET ASSETS -------------------------------------------------------------------------------- T. Rowe Price Institutional Foreign Equity Fund ($ 000s) Year Ended 10/31/04 10/31/03 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 12,762 $ 18,927 Net realized gain (loss) 111,624 (37,680) Change in net unrealized gain (loss) (6,930) 253,179 Increase (decrease) in net assets from operations 117,456 234,426 Distributions to shareholders Net investment income (18,935) (16,127) Net realized gain (1,515) (2,150) Decrease in net assets from distributions (20,450) (18,277) Capital share transactions * Shares sold 163,466 256,719 Distributions reinvested 17,964 14,775 Shares redeemed (596,441) (594,653) Increase (decrease) in net assets from capital share transactions (415,011) (323,159) Net Assets Increase (decrease) during period (318,005) (107,010) Beginning of period 1,061,120 1,168,130 End of period $ 743,115 $ 1,061,120 --------------------------------------- (Including undistributed net investment income of $12,278 at 10/31/04 and $18,451 at 10/31/03) *Share information Shares sold 11,790 23,184 Distributions reinvested 1,369 1,413 Shares redeemed (43,551) (51,540) Increase (decrease) in shares outstanding (30,392) (26,943) The accompanying notes are an integral part of these financial statements. NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- T. Rowe Price Institutional Foreign Equity Fund October 31, 2004 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Institutional International Funds, Inc. (the corporation) is registered under the Investment Company Act of 1940 (the 1940 Act). The Institutional Foreign Equity Fund (the fund), a diversified, open-end management investment company, is one portfolio established by the corporation. The fund commenced operations on September 7, 1989. The fund seeks long-term growth of capital through investments primarily in the common stocks of established, non-U.S. companies. The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates made by fund management. Valuation The fund values its investments and computes its net asset value per share at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day that the NYSE is open for business. Equity securities listed or regularly traded on a securities exchange or in the over-the-counter market are valued at the last quoted sale price or, for certain markets, the official closing price at the time the valuations are made, except for OTC Bulletin Board securities, which are valued at the mean of the latest bid and asked prices. 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. Listed securities not traded on a particular day are valued at the mean of the latest bid and asked prices for domestic securities and the last quoted sale price for international securities. Investments in mutual funds are valued at the mutual fund's closing net asset value per share on the day of valuation. Other investments and those 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 the T. Rowe Price Valuation Committee, established by the fund's Board of Directors. In the course of making a good faith determination of a security's fair value, the fund reviews a variety of factors, including market and trading trends and the value of comparable securities, such as unrestricted securities of the same issuer. Most foreign markets close before the close of trading on the NYSE. If the fund determines that developments between the close of a foreign market and the close of the NYSE will, in its judgment, materially affect the value of some or all of its portfolio securities, which in turn will affect the fund's share price, the fund will adjust the previous closing prices to reflect the fair value of the securities as of the close of the NYSE, as determined in good faith by the T. Rowe Price Valuation Committee, established by the fund's Board of Directors. A fund may also fair value securities in other situations, such as when a particular foreign market is closed but the fund is open. In deciding whether to make fair value adjustments, the fund reviews a variety of factors, including developments in foreign markets, the performance of U.S. securities markets, and the performance of instruments trading in U. S. markets that represent foreign securities and baskets of foreign securities. The fund uses outside pricing services to provide it with closing market prices and information used for adjusting those prices. The fund cannot predict how often it will use closing prices and how often it will adjust those prices. As a means of evaluating its fair value process, the fund routinely compares closing market prices, the next day's opening prices in the same markets, and adjusted prices. Currency Translation Assets, including investments, 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 asked prices of such currencies against U.S. dollars as quoted by a major bank. Purchases and sales of securities, income, and expenses are translated into U.S. dollars at the prevailing exchange rate on the date of the transaction. The effect of changes in foreign currency exchange rates on realized and unrealized security gains and losses is reflected as a component of security gains and losses. Redemption Fees A 2% fee is assessed on redemptions of fund shares held less than 90 days to deter short-term trading and protect the interests of long-term shareholders. Redemption fees are withheld from proceeds that shareholders receive from the sale or exchange of fund shares. The fees are paid to the fund, and have the primary effect of increasing paid-in capital. The fees may cause the redemption price per share to differ from the net asset value per share. Investment Transactions, Investment Income, and Distributions Income and expenses are recorded on the accrual basis. Dividends received from mutual fund investments are reflected as dividend income; capital gain distributions are reflected as realized gain/loss. Dividend income and capital gain distributions are recorded on the ex-dividend date. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Distributions to shareholders are recorded on the ex-dividend date. Income distributions are declared and paid on an annual basis. Capital gain distributions, if any, are declared and paid by the fund, typically on an annual basis. Other In the normal course of business, the fund enters into contracts that provide general indemnifications. The fund's maximum exposure under these arrangements is dependent on claims that may be made against the fund in the future and, therefore, cannot be estimated; however, based on experience, the risk of material loss from such claims is considered remote. 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. Emerging Markets At October 31, 2004, approximately 11% of the fund's net assets were invested in securities of companies located in emerging markets or denominated in or linked to the currencies of emerging markets. Future economic or political developments could adversely affect the liquidity or value, or both, of such securities. Restricted Securities The fund may invest in securities that are subject to legal or contractual restrictions on resale. Although certain of these securities may be readily sold, for example, under Rule 144a, others may be illiquid, and their sale may involve substantial delays and additional costs, and prompt sale at an acceptable price may be difficult. Securities Lending The fund lends its securities to approved brokers to earn additional income. It receives as collateral cash and U.S. government securities valued at 102% to 105% of the value of the securities on loan. Cash collateral is invested in a money market pooled account managed by the fund's lending agent in accordance with investment guidelines approved by fund management. Collateral is maintained over the life of the loan in an amount not less than the value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund the next business day. 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 the securities. Securities lending revenue recognized by the fund consists of earnings on invested collateral and borrowing fees, net of any rebates to the borrower and compensation to the lending agent. At October 31, 2004, the value of loaned securities was $58,120,000; aggregate collateral consisted of $61,104,000 in the money market pooled account. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $265,378,000 and $688,110,000, respectively, for the year ended October 31, 2004. 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 under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its taxable income and gains. Federal income tax regulations differ from generally accepted accounting principles; therefore, distributions determined in accordance with tax regulations may differ significantly in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. Distributions during the year ended October 31, 2004 totaled $20,450,000 and were characterized as ordinary income for tax purposes. At October 31, 2004, the tax-basis components of net assets were as follows: -------------------------------------------------------------------------------- Unrealized appreciation $ 239,769,000 Unrealized depreciation (18,666,000) Net unrealized appreciation (depreciation) 221,103,000 Undistributed ordinary income 12,286,000 Capital loss carryforwards (348,327,000) Paid-in capital 858,053,000 Net assets $ 743,115,000 -------------------- The fund intends to retain realized gains to the extent of available capital loss carryforwards for federal income tax purposes. During the fiscal year ended October 31, 2004, the fund utilized $111,545,000 of capital loss carryforwards. As of October 31, 2004, the fund had $94,844,000 of capital loss carryforwards that expire in fiscal 2009, $214,055,000 that expire in fiscal 2010, and $39,428,000 that expire in fiscal 2011. At October 31, 2004, the cost of investments for federal income tax purposes was $579,565,000. 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 income. Gains realized upon disposition of certain Indian securities held by the fund are subject to capital gains tax in India, payable prior to repatriation of sale proceeds. The tax is computed on net realized gains, and realized losses in excess of gains may be carried forward eight years to offset future gains. In addition, the fund accrues a deferred tax liability for net unrealized gains on Indian securities when applicable. 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), which is wholly owned by T. Rowe Price Group, Inc. The investment management agreement between the fund and the manager provides for an annual investment management fee equal to 0.70% of the fund's average daily net assets. The fee is computed daily and paid monthly. At October 31, 2004, investment management fee payable totaled $448,000. In addition, the fund has entered into service agreements with Price Associates and two wholly owned subsidiaries of Price Associates (collectively, Price). Price Associates computes the daily share price and maintains the financial records of the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund's transfer and dividend disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. For the year ended October 31, 2004, expenses incurred pursuant to these service agreements were $107,000 for Price Associates, $18,000 for T. Rowe Price Services, Inc., and $0 for T. Rowe Price Retirement Plan Services, Inc. At period-end, a total of $10,000 of these expenses was payable. The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe Price Government Reserve Investment Fund (collectively, the Reserve Funds), open-end management investment companies managed by Price Associates and affiliates of the fund. The Reserve Funds are offered as cash management options to mutual funds, trusts, and other accounts managed by Price Associates and/or its affiliates, and are not available for direct purchase by members of the public. The Reserve Funds pay no investment management fees. During the year ended October 31, 2004, dividend income from the Reserve Funds totaled $148,000, and the value of shares of the Reserve Funds held at October 31, 2004 and October 31, 2003 was $12,633,000 and $1,000, respectively. On September 29, 2004, Price Associates fully reimbursed the fund for an $87,000 loss realized on the sale of foreign currency sold in error. The reimbursement had no impact on total return for the year ended October 31, 2004. NOTE 6 - INTERFUND BORROWING Pursuant to its prospectus, the fund may borrow up to 33 1/3% of its total assets. The fund is party to an inter-fund borrowing agreement between itself and other T. Rowe Price-sponsored mutual funds, which permits it to borrow or lend cash at rates beneficial to both the borrowing and lending funds. Loans totaling 10% or more of a borrowing fund's total assets are collateralized at 102% of the value of the loan; loans of less than 10% are unsecured. During the year ended October 31, 2004, the fund had outstanding borrowings on 29 days, in the average amount of $11,517,000, and at an average annual rate of 1.60%. There were no borrowings outstanding at October 31, 2004. T. Rowe Price Institutional Foreign Equity Fund -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of T. Rowe Price Institutional International Funds, Inc. and Shareholders of T. Rowe Price Institutional Foreign Equity Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of T. Rowe Price Institutional Foreign Equity Fund (one of the portfolios comprising T. Rowe Price Institutional International Funds, Inc., hereafter referred to as the "Fund") at October 31, 2004, 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 the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2004 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Baltimore, Maryland November 22, 2004 T. Rowe Price Institutional Foreign Equity Fund -------------------------------------------------------------------------------- Tax Information (Unaudited) for the Tax Year Ended 10/31/04 -------------------------------------------------------------------------------- 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 $1,515,000 from short-term capital gains. For taxable non-corporate shareholders, $9,504,000 of the fund's income represents qualified dividend income subject to the 15% rate category. The fund will pass through foreign source income of $13,810,000 and foreign taxes paid of $969,000. Information on Proxy Voting Policies, Procedures, and Records -------------------------------------------------------------------------------- A description of the policies and procedures used by T. Rowe Price funds and portfolios to determine how to vote proxies relating to portfolio securities is available in each fund's Statement of Additional Information, which you may request by calling 1-800-225-5132 or by accessing the SEC's Web site, www.sec.gov. The description of our proxy voting policies and procedures is also available on our Web site, www.troweprice.com. To access it, click on the words "Company Info" at the top of our homepage for individual investors. Then, in the window that appears, click on the "Proxy Voting Policy" navigation button in the top left corner. Each fund's most recent annual proxy voting record is available on our Web site and through the SEC's Web site. To access it through our Web site, follow the directions above, then click on the words "Proxy Voting Record" at the bottom of the Proxy Voting Policy page. How to Obtain Quarterly Portfolio Holdings -------------------------------------------------------------------------------- The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available electronically on the SEC's Web site (www.sec.gov); hard copies may be reviewed and copied at the SEC's Public Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330. T. Rowe Price Institutional Foreign Equity Fund -------------------------------------------------------------------------------- About the Fund's Directors and Officers -------------------------------------------------------------------------------- Your fund is governed by a Board of Directors that meets regularly to review investments, performance, compliance matters, advisory fees and expenses, and other business affairs, and is responsible for protecting the interests of shareholders. The majority of the fund's directors are independent of T. Rowe Price Associates, Inc. (T. Rowe Price); "inside" directors are officers of T. Rowe Price. The Board of Directors elects the fund's officers, who are listed in the final table. The business address of each director and officer is 100 East Pratt Street, Baltimore, MD 21202. The Statement of Additional Information includes additional information about the fund directors and is available without charge by calling a T. Rowe Price representative at 1-800-225-5132. Independent Directors Name (Year of Birth) Principal Occupation(s) During Past 5 Years and Year Elected* Directorships of Other Public Companies -------------------------------------------------------------------------------- Anthony W. Deering Director, Chairman of the Board, and Chief Executive (1945) Officer, The Rouse Company, real estate developers; 1991 Director, Mercantile Bank (4/03 to present) Donald W. Dick, Jr. Principal, EuroCapital Advisors, LLC, an acquisition (1943) and management advisory firm 1989 David K. Fagin Director, Golden Star Resources Ltd., Canyon (1938) Resources Corp. (5/00 to present), and Pacific Rim 2001 Mining Corp. (2/02 to present); Chairman and President, Nye Corporation Karen N. Horn Managing Director and President, Global Private (1943) Client Services, Marsh, Inc.(1999-2003); Managing 2004 Director and Head of International Private Banking, Bankers Trust (1996-1999) F. Pierce Linaweaver President, F. Pierce Linaweaver & Associates, Inc., (1934) consulting environmental and civil engineers 2001 John G. Schreiber Owner/President, Centaur Capital Partners, Inc., a (1946) real estate investment company; Partner, Blackstone 2001 Real Estate Advisors, L.P. * Each independent director oversees 111 T. Rowe Price portfolios and serves until retirement, resignation, or election of a successor. Inside Directors Name (Year of Birth) Year Elected** [Number of T. Rowe Price Principal Occupation(s) During Past 5 Years and Portfolios Overseen] Directorships of Other Public Companies -------------------------------------------------------------------------------- James S. Riepe Director and Vice President, T. Rowe Price; Vice (1943) Chairman of the Board, Director, and Vice President, 2002 T. Rowe Price Group, Inc.; Chairman of the Board and [111] Director, T. Rowe Price Global Asset Management Limited, T. Rowe Price Global Investment Services Limited, T. Rowe Price Investment Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, Director, President, and Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price International, Inc.; Chairman of the Board, Institutional International Funds ** Each inside director serves until retirement, resignation, or election of a successor. Officers Name (Year of Birth) Title and Fund(s) Served Principal Occupation(s) Christopher D. Alderson (1962) Vice President, T. Rowe Price, Vice President, Institutional T. Rowe Price Group, Inc., and International Funds T. Rowe Price International, Inc. Mark C.J. Bickford-Smith (1962) Vice President, T. Rowe Price Group, Vice President, Institutional Inc., and T. Rowe Price International Funds International, Inc. Stephen V. Booth, CPA (1961) Vice President, T. Rowe Price, Vice President, Institutional T. Rowe Price Group, Inc., and International Funds T. Rowe Price Trust Company Joseph A. Carrier (1960) Vice President, T. Rowe Price, Treasurer, Institutional International T. Rowe Price Group, Inc., T. Rowe Funds Price Investment Services, Inc., and T. Rowe Price Trust Company Roger L. Fiery III, CPA (1959) Vice President, T. Rowe Price, Vice President, Institutional T. Rowe Price Group, Inc., T. Rowe International Funds Price International, Inc., and T. Rowe Price Trust Company Gregory S. Golczewski (1966) Vice President, T. Rowe Price and Vice President, Institutional T. Rowe Price Trust Company International Funds Henry H. Hopkins (1942) Director and Vice President, T. Rowe Vice President, Institutional Price Group, Inc., T. Rowe Price International Funds Investment Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price Trust Company; Vice President, T. Rowe Price, T. Rowe Price International, Inc., and T. Rowe Price Retirement Plan Services, Inc. Patricia B. Lippert (1953) Assistant Vice President, T. Rowe Secretary, Institutional International Price and T. Rowe Price Investment Funds Services, Inc. George A. Murnaghan (1956) Vice President, T. Rowe Price, Vice President, Institutional T. Rowe Price Group, Inc., T. Rowe International Funds Price International, Inc., T. Rowe Price Investment Services, Inc., and T. Rowe Price Trust Company R. Todd Ruppert (1956) Vice President, T. Rowe Price, Vice President, Institutional T.Rowe Price Group, Inc., T. Rowe International Funds Price Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Chief Investment Officer, Director, and President, T. Rowe Price Global Asset Management Limited and T. Rowe Price Global Investment Services Limited James B.M. Seddon (1964) Vice President, T. Rowe Price Group, Vice President, Institutional Inc., and T. Rowe Price International Funds International, Inc. Julie L. Waples (1970) Vice President, T. Rowe Price Vice President, Institutional International Funds David J.L. Warren (1957) Director and Vice President, T. Rowe President, Institutional Price; Vice President, T. Rowe Price International Funds Group, Inc.; Chief Executive Officer, Director, and President, T. Rowe Price International, Inc.; Director, T. Rowe Price Global Asset Management Limited and T. Rowe Price Global Investment Services Limited William F. Wendler II, CFA (1962) Vice President, T. Rowe Price, Vice President, Institutional T. Rowe Price Group, Inc., and International Funds T. Rowe Price International, Inc. Edward A. Wiese, CFA (1959) Vice President, T. Rowe Price, Vice President, Institutional T. Rowe Price Group, Inc., and International Funds T. Rowe Price Trust Company; Chief Investment Officer, Director, and Vice President, T. Rowe Price Savings Bank Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. Item 2. Code of Ethics. The registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of this code of ethics is filed as an exhibit to this Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the period covered by this report. Item 3. Audit Committee Financial Expert. The registrant's Board of Directors/Trustees has determined that Mr. David K. Fagin qualifies as an audit committee financial expert, as defined in Item 3 of Form N-CSR. Mr. Fagin is considered independent for purposes of Item 3 of Form N-CSR. Item 4. Principal Accountant Fees and Services. (a) - (d) Aggregate fees billed to the registrant for the last two fiscal years for professional services rendered by the registrant's principal accountant were as follows: 2004 2003 Audit Fees $15,070 $16,676 Audit-Related Fees 1,410 1,016 Tax Fees 6,399 4,971 All Other Fees 124 -- Audit fees include amounts related to the audit of the registrant's annual financial statements and services normally provided by the accountant in connection with statutory and regulatory filings. Audit-related fees include amounts reasonably related to the performance of the audit of the registrant's financial statements, specifically the issuance of a report on internal controls. Tax fees include amounts related to tax compliance, tax planning, and tax advice. Other fees include the registrant's pro-rata share of amounts for agreed-upon procedures in conjunction with service contract approvals by the registrant's Board of Directors/Trustees. (e)(1) The registrant's audit committee has adopted a policy whereby audit and non-audit services performed by the registrant's principal accountant for the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant require pre-approval in advance at regularly scheduled audit committee meetings. If such a service is required between regularly scheduled audit committee meetings, pre-approval may be authorized by one audit committee member with ratification at the next scheduled audit committee meeting. Waiver of pre-approval for audit or non-audit services requiring fees of a de minimis amount is not permitted. (2) No services included in (b) - (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (f) Less than 50 percent of the hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. (g) The aggregate fees billed for the most recent fiscal year and the preceding fiscal year by the registrant's principal accountant for non-audit services rendered to the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant were $849,000 and $819,000, respectively, and were less than the aggregate fees billed for those same periods by the registrant's principal accountant for audit services rendered to the T. Rowe Price Funds. (h) All non-audit services rendered in (g) above were pre-approved by the registrant's audit committee. Accordingly, these services were considered by the registrant's audit committee in maintaining the principal accountant's independence. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. Schedule of Investments. Not applicable. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of Matters to a Vote of Security Holders. Not applicable. Item 11. Controls and Procedures. (a) The registrant's principal executive officer and principal financial officer have evaluated the registrant's disclosure controls and procedures within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) The registrant's principal executive officer and principal financial officer are aware of no change in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is attached. (2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached. (3) Written solicitation to repurchase securities issued by closed-end companies: not applicable. (b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. T. Rowe Price Institutional International Funds, Inc. By /s/ James S. Riepe ----------------------------------- James S. Riepe Principal Executive Officer Date December 17, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ James S. Riepe ----------------------------------- James S. Riepe Principal Executive Officer Date December 17, 2004 By /s/ Joseph A. Carrier ----------------------------------- Joseph A. Carrier Principal Financial Officer Date December 17, 2004