-----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, OcJx8GHIYgtt/rPup8QbpT3u3tcXSlnARmI2JnlFcqorq8YUYof/uteRfbbGaGAT RCmpNqve7BOclxhYZZN42A== 0000852254-98-000008.txt : 19980619 0000852254-98-000008.hdr.sgml : 19980619 ACCESSION NUMBER: 0000852254-98-000008 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980618 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: 98650013 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 Semiannual Report April 30, 1998 Foreign Equity Fund Dear Investor International stock markets were strong as a group, and your fund performed well during the six months under review. European bourses led the way, with returns in major markets there leading S&P 500 stocks for the first time in several years. Performance Comparison Periods Ended 4/30/98 6 Months 12 Months _____________________________________________________________ Foreign Equity Fund 14.86% 17.20% MSCI EAFE Index 15.59 19.23 Returns were good for both the 6- and 12-month periods ended April 30, due largely to the portfolio's exposure to the powerful European markets. However, results were slightly behind the unmanaged Morgan Stanley Capital International Europe Australasia Far East (EAFE) Index, since the index is more heavily weighted in Europe. Nevertheless, we believe our strategy of broad regional diversification will continue to benefit shareholders over time. We also maintained our preference for quality growth stocks, which underperformed other equity sectors. Market Performance Six Months Local Local Currency U.S. Ended 4/30/98 Currency vs. U.S. Dollars Dollars _________________________________________________________________ ______ Australia 17.25% - 7.50% 8.45% France 42.66 - 4.35 36.45 Germany 36.45 - 4.09 30.87 Hong Kong - 9.43 - 0.21 - 9.62 Italy 54.01 - 4.62 46.90 Japan - 1.11 - 8.98 - 9.99 Mexico 15.25 - 0.98 14.12 Netherlands 25.96 - 3.95 20.99 Norway 5.91 - 6.13 - 0.59 Singapore - 2.54 - 0.66 - 3.18 Sweden 29.12 - 3.29 24.88 Switzerland 35.37 - 6.90 26.03 United Kingdom 23.74 - 0.29 23.38 Source: FAME Information Services, Inc., using MSCI indices. An important theme in world markets was the focus on recovering cyclicals and restructuring stories, and against this background a number of our growth favorites were left behind. A typical example would be the financial sector. This is not a natural home for the growth stock investor but, just as in the U.S., the sector has led a number of European markets, driven by a steady stream of merger and acquisition stories. The financial sector is one of the largest in most European markets, and our underweighting, although reduced significantly during the six months, has been uncomfortable. Another factor in stock selection was our use of medium- and smaller-capitalized companies, many of which are junior to the index. We find growth much more attractively valued in such stocks, but again, our choices trailed local indices during a period where most of the action has been in large companies. International stock markets recovered well following the Southeast Asian crisis of late last year. As mentioned, European markets took the lead, driven by signs of economic recovery on the Continent and continued corporate activity. Even the Pacific markets rallied at the beginning of the calendar year, but in recent months they faded again as the economy in Japan failed to recover and the secondary effects of the Southeast Asian crisis began to emerge. Major Latin American stock markets were strong but others were weak as some of the economic reforms stalled and the emerging market label impaired sentiment. 1999: The Year of the Euro On the first business day of 1999, several major European countries will officially inaugurate the European Economic and Monetary Union (EMU) and adopt the euro as a single European currency backed by the European Central Bank. The event could be one of the most significant financial developments of the century, creating a vast economic and currency bloc equal to the U.S. in size and power. Since the EMU has far-reaching implications for investors and funds with exposure to European securities, it is important for you to understand what is taking place. The currencies of the original participating countries will become fixed rate units of the euro, much the same as the nickel, dime, quarter, and half dollar are denominations of the U.S. dollar. The exchange rates versus the euro were set in May and will officially be determined by the end of 1998. Country Currency Euro Rate ___________________________________________________________ Austria Schilling 13.91 Belgium Franc 40.78 Finland Mark 6.01 France Franc 6.63 Germany Mark 1.98 Ireland Punt 0.80 Italy Lira 1958.00 Luxembourg Franc 40.78 Netherlands Guilder 2.23 Portugal Escudo 202.70 Spain Peseta 168.20 Source: The Wall Street Journal, May 4, 1998 Beginning in January 1999, some European holdings will be redenominated in euros, particularly government securities. The face value of other investments might remain in the existing national currencies for a time, but they will be priced, settled, and valued in euros by stock exchanges and other agencies. Thus, some of the European holdings in your funds will be valued in euros. This will not affect the investment value of your funds in U.S. dollar terms, since the euro will be converted into the dollar in the same way deutschemarks, francs, lire, and other European currencies are currently converted at the prevailing exchange rates. During the transition period, which lasts from January 1, 1999, until June 30, 2002, other countries that have moved to adopt the economic terms of the Maastricht Treaty of 1993 will be able to participate in the EMU. The primary criteria for joining are: o a sustainable budget deficit less than 3% of GDP; o public debt less than 60% of GDP; o low inflation and interest rates; and o no currency devaluations within two years of application. Some of the original participants are not totally compliant with these terms but are expected to embrace them by 2002. Countries joining later may have to be in strict accord before entering the EMU, or at least be well along the path to achieving them. So far, the transition seems to be progressing smoothly, but there has been resistance to some of the more stringent terms. French Socialists, in particular, would prefer to maintain heavy government subsidies for social programs. Therefore, the jury is still out on whether complete economic and monetary convergence will be attained as planned. Assuming all goes well, the national currencies of participating countries will cease to exist and all accounting will be in euros following the transition period. However, regardless of whether or not full convergence is realized on the date specified, we do not expect pricing in euros to have any special impact on the value of your investment. Of course, problems could develop that might be unfavorable for the fund, but we do not anticipate them at this time. This supplements the prospectus dated March 1, 1998. INVESTMENT REVIEW Europe Stock markets in Europe performed strongly during the past six months. The goal of monetary union took a step closer to reality with 11 of the member states achieving Maastricht economic convergence criteria, thereby agreeing to link their currencies as a precursor to the introduction of the euro in 1999. Only Greece failed the Maastricht test, and the remaining three states-U.K., Sweden, and Denmark-have opted out of European Monetary Union (EMU) for the time being. Perhaps more important than the symbolism, preparation for monetary union has required key European economies to adopt far stronger fiscal measures than would otherwise have been the case. Equally important, these economies are at about the same point in their economic cycles, which means that a common monetary policy stands a better chance of success. Aside from the rising optimism about EMU, the combination of moderate inflation, steadily improving economic activity, and the realization that Europe is relatively immune to the Asian crisis all contributed to the strengths of European bourses. Turning to individual countries, the U.K. economy continues to be ahead of the cycle in Continental Europe. In fact, it has remarkable similarities to the U.S. in the sense that steady growth has not yet triggered inflation despite some signs of overheating in the economy. This is partly due to the strength of sterling, which in turn has suppressed the export sector, but consumer expenditure has been remarkably buoyant. This has left the Bank of England, which is now independently responsible for monetary policy, with something of a dilemma. If it raises interest rates to moderate the domestic economy, sterling will rise further, putting the export sector under even more pressure. Conversely, any decline in interest rates will help manufacturers but run the risk of further stimulating the buoyant consumer sector. Faced with this dilemma, the Bank's policy committee remains split, but it is probably right to do nothing until the outlook clears a little more. The stock market performed well with attention focused on the service sector, whereas the export companies were held back by the strength of sterling. The financial sector led the way and our position in National Westminster Bank, currently the portfolio's largest holding, recovered lost ground against its peers. Although not part of the merger and acquisition activity, a heavy cost-cutting program at this bank caught the investor's eye. Two other large U.K. holdings, Glaxo Wellcome and SmithKline Beecham, made headlines when they announced a merger that would have created the largest pharmaceutical company outside the U.S. Unfortunately, the merger aborted over the inability of management to agree on key executive positions in the new combine, and it was frustrating to see stock prices slide away. In Germany the economy continued to recover steadily led by the export sector. Unemployment has started to edge down but is still high compared with historical levels, and this has undermined consumer confidence. Interest rates remained stable despite the weakness of the deutschemark. Politics have attracted increased attention in Germany with the Social Democratic Party electing Mr. Gerhard Schroeder as its candidate for Chancellor, whereas Chancellor Kohl's Christian Democrats performed very poorly in recent provincial elections. There are general elections in September and it looks as though Mr. Kohl's long tenure as Chancellor might end. Buoyed by signs of recovery and stable interest rates, the German market did well. Although the portfolio is underweighted in Germany, a number of our larger holdings such as business software supplier SAP aided results. In the Netherlands, our overweighting has not worked well. Publishing companies Wolters Kluwer and Elsevier, two important holdings, have underperformed since they abandoned their merger earlier this year. Both companies pursued a successful strategy of acquiring smaller publishers; together they would have been a formidable force, but separately they are likely to compete with each other as smaller publishers are bought out by their larger rivals. At least ING Groep, the financial holding company, participated in Europe's booming financial sector, and the musical publisher Polygram powered ahead as parent Philips Electronics announced it was considering a spinoff. France is showing signs of recovery from its awkward mix of high unemployment, low growth, but a steady trade surplus. Some moderate reflation looks like the obvious answer but labor rigidities remain a formidable obstacle. With France one of the largest of the new EMU countries, monetary policy will now lie in the hands of the new European Central Bank, and this will ensure that an external discipline pushes domestic reform. Despite this dull economic background, the stock market was one of the leaders in Europe and our overweighting here was helpful. Strong performance was seen in financial conglomerate AXA, retailer Pinault Printemps, and caterer Sodexho Alliance, which has recently announced a tie-in with Marriott to gain access to the U.S. market and improve economies of scale. In Switzerland, the trend was similar to other markets with pharmaceuticals such as Novartis and Roche Holdings lagging the market, but we did have a large position in Credit Suisse Group. Employment services company Adecco is a good example of a European niche service company doing well and our holding here contributed strongly. Far East In contrast to the brighter picture in Europe, the economies of the Pacific Basin continue to be in poor shape. In Japan a range of problems plagued the economy-some external, some self-induced. A large proportion of Japanese exports go to the Pacific region and the collapse in demand here has been unhelpful. However, the most important factor is probably poor consumer sentiment with rising unemployment becoming a real source of concern, and corporate bankruptcies at unprecedented levels simply add to the gloom. Foreign governments, particularly the U.S., have tried to persuade Japan to ease fiscal policy, but Prime Minister Hashimoto, who was the author of the ill-fated rising consumption tax last year, has found it politically difficult to reverse his position. Geographic Diversification Europe 68% Japan 15% Latin America 6% Far East 6% Other and Reserves 5% Based on net assets as of 4/30/98. To see the real extent of Japan's problems, one need look no further than the banking sector itself. Following the bubble years of the late 1980s, Japan's banks became overextended and are now saddled with substantial bad loans particularly in the real estate sector. For a long time the Japanese authorities seemed to deny the problems facing Japanese banks, whereas resolute action earlier might have avoided the trauma now engulfing the financial sector. Last November there was a series of unprecedented bankruptcies of which Hokkaido Takushoku (Japan's tenth-largest bank) and Yamaichi Securities (one of Japan's "big four" brokers) were the most prominent. Japanese bond yields recently reached an all-time low of 1.3% but, although the economy is awash with money, there is a worsening credit crunch as Japanese banks rein in their lending. As bank lending declined, the scarcity of long-term capital resulted in lower capital equipment orders, and corporate expenditure programs have been put on hold. The stock market started the year well with investors optimistic that the worst of the banking crisis was over and that the economy should now improve. More recently, however, prices slipped as the news on the economy remained unremittingly poor. Our strategy has been to underweight the market in general and bias our selections toward the international blue chips, such as Sony, NEC, and Canon, which remain well managed and internationally competitive and offer reasonable valuations compared with the Japanese market. Turning to Southeast Asia, stock markets seem to have shrugged off the crisis and performed better in February and March. However, we know from the Mexican experience that the secondary effects of a massive currency devaluation may be slow to emerge but are very traumatic when they eventually arrive. IMF-led reforms are slow to have an effect whereas rapidly rising inflation-which we are now seeing in the worst-hit Asian economies-is socially and financially disruptive. Capturing the headlines at the moment is the social unrest in Indonesia but countries such as South Korea, Malaysia, and Thailand are also struggling to bring their economies under control. Asia's financial crisis was certainly damaging, but not all the economies were affected equally by a mix of currency devaluation and financial collapse. There has been a slowdown in China, but the Chinese renminbi and the Hong Kong dollar have been stable as the authorities managed to avoid a competitive devaluation with the rest of the region. Singapore saw its dollar drift a little against the U.S. dollar but continued to show the economic and political stability that makes it such an important regional financial center. Our investment strategy for the region has been to avoid almost completely the worst-hit economies, but we still have small positions in Hong Kong, Singapore, and Australia that we believe have good long-term potential. Latin America The stock markets of Latin America have been in a more somber mood this year. To some degree, they still carry the emerging market label and are therefore affected when such markets generally perform poorly. However, fiscal reform in Brazil seemed to slow down earlier in the year although recent signs have been more encouraging. Indeed, the abolition of lifetime employment for civil servants was a significant achievement. The other key issue in Brazil was the large privatization program where Telebras (Telecomunicacoes Brasileiras), the national telecommunications company and a core holding for us, is playing a central role. We believe this program will provide more evidence that telecommunications is a growth business in Brazil and will confirm that Telebras looks inexpensive compared with similar companies throughout the world. Industry Diversification Percent of Net Assets 4/30/98 ___________________________________________________________ Services 26.7% Finance 20.8 Consumer Goods 19.5 Capital Equipment 11.0 Energy 10.8 Materials 4.0 Multi-industry 2.7 Miscellaneous 0.1 Reserves 4.4 Net Assets 100.0% In Mexico, the market was unexciting, but the economy itself made progress and inflation is in slow but steady decline. The immediate problem was a deterioration in the trade balance, partly caused by a weak oil price, but a lower peso should help matters here. INVESTMENT POLICY AND OUTLOOK Our investment strategy has been based on a geographical allocation of about two-thirds of assets in Europe, just over one-fifth in the Pacific, and the balance in Latin America with a small cash reserve. Compared with EAFE, Europe is slightly underweighted, the Pacific rather more underweighted, and the Latin American markets are not part of the index. While some competitors have extremely high European exposure, we believe our own strategy makes more sense given recent frothiness in Europe and the depressed conditions of the Pacific markets, Japan in particular. We are also maintaining our bias toward quality growth stocks even though a number of them trailed the index during this strong bull run in Europe. We believe that the virtues of steady growth will be more apparent particularly if the prospects for worldwide economic growth moderate from here. We still have great confidence in the long-term future of Latin America and believe that other emerging markets, such as those in Eastern Europe, should be increasingly represented in the portfolio. Looking back, there was a remarkable divergence in performance between the stock markets of the U.S. and Europe on one hand and those of the Pacific and Latin America on the other. This divergence looks unsustainable over the longer term, and Europe, in particular, looks due for some form of correction. Therefore, we believe our more broadly diversified regional diversification and accent on growth stocks will continue to reward investors over time. Respectfully submitted, Martin G. Wade President May 22, 1998 Twenty-Five Largest Holdings Percent of Net Assets Company Country 4/30/98 _________________________________________________________________ ______ National Westminster BankUnited Kingdom 2.6% Royal Dutch Petroleum Netherlands 2.1 Novartis Switzerland 1.9 SmithKline Beecham United Kingdom 1.8 ING Groep Netherlands 1.7 Nestle Switzerland 1.6 Wolters Kluwer Netherlands 1.6 Diageo United Kingdom 1.5 Glaxo Wellcome United Kingdom 1.4 Telecomunicacoes Brasileiras Brazil 1.3 Roche Holdings Switzerland 1.3 Shell Transport & TradingUnited Kingdom 1.3 Kingfisher United Kingdom 1.2 Eaux Cie Generale France 1.2 Reed International United Kingdom 1.1 Orkla Norway 1.1 Telecom Italia Italy 1.0 Pinault Printemps France 1.0 Canon Japan 1.0 Kredietbank Belgium 0.9 Total France 0.9 Unilever Netherlands 0.9 Telecom Italia Mobile Italy 0.9 Astra Sweden 0.9 NEC Japan 0.8 _________________________________________________________________ ______ Total 33.0 % _________________________________________________________________ ______ Security Classification Percent Market of Net Cost Value 4/30/98 Assets (000) (000) _________________________________________________________________ ______ Common Stock, Rights, and Warrants 92.2% $2,618,082 $3,365,501 Preferred Stocks 3.4 87,290 122,110 Short-Term Investments 4.5 165,955 165,955 Total Investments 100.1 2,871,327 3,653,566 Other Assets Less Liabilities - 0.1 - 3,749 - 3,942 Net Assets 100.0% $2,867,578 $3,649,624 Summary of Investments and Cash April 30, 1998 Percent of Equities Cash Total MSCI EAFE* _________________________________________________________________ ______ Europe Austria - - - 0.4% Belgium 1.5 - 1.5 1.5 Czech Republic 0.0 - 0.0 - Denmark 0.3 - 0.3 1.0 Finland 0.4 - 0.4 1.0 France 9.3 - 9.3 8.8 Germany 6.1 - 6.1 10.3 Ireland - - - 0.5 Italy 5.0 - 5.0 4.7 Netherlands 10.3 - 10.3 5.8 Norway 1.9 - 1.9 0.6 Portugal 0.4 - 0.4 0.7 Russia 0.1 - 0.1 - Spain 2.7 - 2.7 3.4 Sweden 3.5 - 3.5 3.2 Switzerland 7.4 - 7.4 7.8 United Kingdom 18.6 - 18.6 21.7 Total Europe 67.5% -% 67.5% 71.5% _________________________________________________________________ _______ Pacific Basin Australia 2.1 - 2.1 2.5 China 0.2 - 0.2 - Hong Kong 2.1 - 2.1 2.1 India 0.3 - 0.3 - Japan 15.5 - 15.5 22.0 Malaysia 0.1 - 0.1 0.8 New Zealand 0.3 - 0.3 0.2 Singapore 0.5 - 0.5 0.8 South Korea 0.1 - 0.1 - Thailand 0.2 - 0.2 - Total Pacific Basin 21.4% -% 21.4% 28.5% _________________________________________________________________ _______ Americas Argentina 0.9 - 0.9 - Brazil 3.2 - 3.2 - Canada 0.2 - 0.2 - Chile 0.3 - 0.3 - Mexico 1.9 - 1.9 - Panama 0.0 - 0.0 - Peru 0.1 - 0.1 - United States - 4.5 4.5 - Venezuela 0.1 - 0.1 - _________________________________________________________________ _______ Total Americas 6.7% 4.5% 11.2% - _________________________________________________________________ _______ Other Assets Less Liabilities - - 0.1 - 0.1% -% _________________________________________________________________ _______ TOTAL 95.6% 4.4% 100.0% 100.0% _________________________________________________________________ _______ * Totals may not appear to foot due to rounding. Foreign Equity Fund 4/30/98 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 As of 4/30/98 Lipper Foreign Equity International Fund MSCI EAFE Funds Average 9/7/89 $10,000 $ 10,000 $10,000 4/90 10,069 8,714 10,116 4/91 10,688 9,124 10,438 4/92 11,338 8,378 10,949 4/93 12,334 10,226 11,894 4/94 15,350 11,959 14,694 4/95 15,623 12,662 14,716 4/96 18,399 14,149 17,164 4/97 19,730 14,065 18,505 4/98 23,124 16,770 22,586 !Data from 8/31/89 Total Return Performance
Periods Ended Calendar Year-to- Since 10/31/97 1 Month 3 Months Date 1 Year 3 Years* 5 Years* 9/7/89* ___________________________________________________________________________________________________ Foreign Equity Fund 0.89% 10.73% 14.49% 17.20% 13.96% 13.39% 10.18% S&P 500 Index 1.01 13.84 15.10 41.07 31.97 23.25 17.52 MSCI EAFE Index 0.81 10.63 15.72 19.23 9.82 10.40 6.15** Lipper International Funds Average 1.37 13.58 16.26 20.89 13.36 12.41 9.55 FT-A Euro Pacific Index 0.36 9.78 15.03 16.87 8.41 9.29 5.49** * Average annual compound total return. This table shows how the fund would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate. ** 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 (Unaudited)
Financial Highlights Foreign Equity Fund For a share outstanding throughout each period 6 Months Year Ten Months> Year Ended Ended Ended Ended 4/30/98 10/31/97 10/31/96 10/31/95 10/31/94 10/31/93 12/31/92 NET ASSET VALUE Beginning of period $ 16.51 $ 15.62 $ 13.99 $ 14.59 $ 13.32 $ 10.05 $ 10.73 Investment activities Net investment income 0.13 0.21 0.21 0.18 0.09 0.13 0.17 Net realized and unrealized gain (loss) 2.22 1.07 1.78 (0.14) 1.48 3.14 (0.57) Total from investment activities 2.35 1.28 1.99 0.04 1.57 3.27 (0.40) Distributions Net investment income (0.21) (0.22) (0.18) (0.12) (0.09) - (0.18) Net realized gain (0.48) (0.17) (0.18) (0.52) (0.21) - (0.10) Total distri- butions (0.69) (0.39) (0.36) (0.64) (0.30) - (0.28) NET ASSET VALUE End of period $ 18.17 $ 16.51 $ 15.62 $ 13.99 $ 14.59 $ 13.32 $ 10.05 _______________________________________________________________________________ Ratios/Supplemental Data Total return 14.86% 8.30% 14.48% 0.64% 11.96% 32.54% (3.74)% Ratio of expenses to average net assets 0.74%! 0.75% 0.76% 0.80% 0.82% 0.86%! 0.99% Ratio of net investment income to average net assets 1.47%! 1.40% 1.67% 1.69% 1.26% 1.65%! 1.49% Portfolio turnover rate 10.6% 15.9% 13.8% 18.8% 22.0% 27.4%! 35.1% Average commission rate paid $0.0055 $0.0017 $0.0017 $ - $ - $ - $ - Net assets, end of period (in thousands) $3,649,624$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 April 30, 1998 (Unaudited) Shares/Par Value In thousands ARGENTINA 0.9% Common Stocks 0.9% Banco de Galicia Buenos Aires (Class B) ADR (USD) 110,440 $ 2,706 Banco Frances del Rio de la Plata ADR (USD) 109,808 3,191 Perez Companc (Class B) 783,762 4,711 Telefonica de Argentina (Class B) ADR (USD) 189,624 7,312 YPF Sociedad Anonima (Class D) ADR (USD) 434,689 15,160 Total Argentina (Cost $25,547) 33,080 AUSTRALIA 2.1% Common Stocks 2.0% Australian Gas Light Company 872,335 6,493 Brambles Industries 174,000 3,587 Broken Hill Proprietary 727,470 7,117 Colonial Limited * 187,299 660 Commonwealth Bank of Australia 600,276 7,208 Fosters Brewing Group 826,000 1,799 Goodman Fielder 1,399,000 2,172 John Fairfax Holdings 1,777,000 3,245 Lend Lease 225,857 5,186 National Australia Bank 258,844 3,681 News Corporation 1,041,618 6,984 Publishing & Broadcasting 799,124 3,821 Tabcorp Holdings 770,000 4,194 Telstra, Installment Receipts, 11/17/98 1,889,458 4,437 Westpac Bank 1,003,000 6,738 Woodside Petroleum 718,000 4,697 72,019 Preferred Stocks 0.1% News Corporation 510,283 2,875 News Corporation ADR (USD) 11,750 274 Sydney Harbour Casino Holdings 2,787,600 1,982 5,131 Total Australia (Cost $67,505) 77,150 BELGIUM 1.5% Common Stocks 1.5% Dexia 24,759 $ 3,393 Generale de Banque 23,658 13,668 Generale de Banque, VVPR Strip * 1,524 0 Kredietbank 58,111 32,787 UCB 1,039 4,968 Total Belgium (Cost $29,091) 54,816 BRAZIL 3.2% Common Stocks 0.4% Eletrobras 115,827,680 4,760 Eletrobras ADR (USD) 20,340 422 Pao de Acucar GDS (USD) 111,340 2,964 Telecomunicacoes de Sao Paulo * 967,420 253 Unibanco GDR (USD) 119,458 4,748 White Martins 400,674 582 13,729 Preferred Stocks 2.8% Banco Bradesco 465,618,322 4,275 Banco Itau 4,882,000 3,287 Brahma 5,531,989 3,604 Brasmotor 5,547,410 769 Cia Cimento Portland Itau 4,882,700 1,110 Cia Energetica Minas Gerais 85,153,577 4,132 Cia Energetica Minas Gerais ADR (144a) (USD) 16,530 793 Cia Energetica Minas Gerais ADR, Cv. (USD) 23,337 1,120 Cia Energetica Minas Gerais ADR, Sponsored, Nonvoting (USD) 103,555 4,971 Cia Tecidos Norte de Minas 3,724,770 912 Encorpar * 3,724,770 10 Pao de Acucar GDS (USD) 6,600 176 Petrol Brasileiros 33,819,021 8,576 Telecomunicacoes Brasileiras ADR (USD) 400,442 48,779 Telecomunicacoes de Minas Gerais (Class B) 10,835,753 1,672 Telecomunicacoes de Sao Paulo 31,817,420 10,822 Telecomunicacoes do Rio de Janeiro 11,275,077 1,774 Usiminas 391,918$ 2,570 Usiminas ADR (USD) 361,810 2,533 Usiminas ADR (144a) (USD) 12,540 88 101,973 Total Brazil (Cost $81,176) 115,702 CANADA 0.2% Common Stocks 0.2% Alcan Aluminum 172,380 5,593 Royal Bank of Canada 61,480 3,672 Total Canada (Cost $5,919) 9,265 CHILE 0.3% Common Stocks 0.3% Chilectra ADR (144a) (USD) 82,522 2,300 Compania Cervecerias Unidas ADS (USD) 43,830 1,211 Empresa Nacional de Electricidad Chile ADR (USD) 140,341 2,447 Enersis ADS (USD) 65,396 1,925 Genesis Chile Fund (USD) 66,410 2,391 Santa Isabel ADR (USD) * 16,681 275 Total Chile (Cost $9,807) 10,549 CHINA 0.2% Common Stocks 0.2% Huaneng Power International (Class N) ADR (USD) * 413,700 9,101 Total China (Cost $8,311) 9,101 CZECH REPUBLIC 0.0% Common Stocks 0.0% SPT Telecom * 8,781 1,277 Total Czech Republic (Cost $834) 1,277 DENMARK 0.3% Common Stocks 0.3% Den Danske Bank 49,280 5,977 Tele Danmark (Class B) 13,050 1,097 Unidanmark (Class A) 40,121 3,371 Total Denmark (Cost $5,760) 10,445 FINLAND 0.4% Common Stocks 0.4% Nokia (Class A) 206,140 $ 13,814 Total Finland (Cost $3,971) 13,814 FRANCE 9.3% Common Stocks 9.3% AXA 165,361 19,422 Accor 22,200 6,053 Alcatel Alsthom 98,611 18,292 Canal Plus 29,270 5,089 Carrefour 16,865 9,666 Cie de St. Gobain 86,166 14,363 Credit Commercial de France 65,873 5,260 Danone 51,350 12,131 Dexia France, Bearer 19,298 2,337 Dexia France, Registered 1999 + 20,520 2,485 Dexia France, Registered 2000 + 16,696 2,022 Eaux Cie Generale 239,542 44,553 Elf Aquitaine 99,530 13,064 GTM Entrepose 25,080 1,978 LVMH 13,837 2,850 L'Oreal 12,405 5,923 Lafarge 49,700 4,696 Lafarge, New * 4,141 380 Lapeyre 58,000 4,410 Legrand 25,609 6,774 Pathe 16,728 3,640 Pinault Printemps 48,923 36,446 Primagaz 6,680 577 Sanofi 152,790 18,530 Schneider 258,216 19,331 Societe Generale 59,472 12,387 Sodexho Alliance 112,492 20,604 Television Francaise 88,346 12,419 Total (Class B) 273,441 32,525 Total France (Cost $222,915) 338,207 GERMANY 6.1% Common Stocks and Warrants 5.7% Allianz 55,440 17,053 Bayer 295,414 13,136 Bayerische Hypotheken und Wechsel Bank 233,578 13,328 Bayerische Vereinsbank 174,561 $ 13,278 Bilfinger & Berger 80,960 2,729 Buderus 5,392 2,533 Commerzbank 102,930 3,969 Deutsche Bank 263,654 20,290 Deutsche Telekom 484,595 12,260 Dresdner Bank 234,327 12,679 Dresdner Bank, Warrants, 4/30/02 * 193,719 4,858 Gehe 311,824 16,160 Hoechst 94,660 3,818 Hornbach Baumarkt 14,770 675 Mannesmann 12,767 10,131 Rhoen Klinikum 52,994 5,537 SAP 45,760 21,675 Siemens 107,641 6,298 Veba 347,056 22,937 Volkswagen 6,455 5,140 208,484 Preferred Stocks 0.4% Fielmann 27,225 762 Fresenius 16,900 4,054 Hornbach Holdings 42,180 4,090 SAP 12,124 6,047 14,953 Total Germany (Cost $165,325) 223,437 HONG KONG 2.1% Common Stocks and Warrants 2.1% CLP Holdings 1,354,000 6,503 Cheung Kong Holdings 663,000 4,408 Dao Heng Bank Group 1,915,000 5,661 HSBC Holdings 129,844 3,705 Hang Seng Bank 576,000 4,852 Henderson Land Development 1,361,000 6,079 Hong Kong and China Gas 2,915,000 3,970 Hong Kong and China Gas, Warrants, 9/30/99 * 132,500 10 Hong Kong Land Holdings (USD) 2,034,719 2,869 Hutchison Whampoa 2,665,000 16,480 New World Development 2,370,448 6,748 Sun Hung Kai Properties 1,074,000 6,378 Swire Pacific (Class A) 1,659,000 8,289 Total Hong Kong (Cost $94,921) 75,952 INDIA 0.3% Common Stocks 0.3% Mahanagar Telephone GDR (USD) * 309,000$ 4,983 State Bank of India GDR (USD) 302,700 5,751 Total India (Cost $7,978) 10,734 ITALY 5.0% Common Stocks 5.0% Assicurazioni Generali 482,560 14,520 Banca Commerciale Italiana 670,000 3,389 Banca di Roma * 6,210,000 11,446 Credito Italiano 4,812,429 25,294 ENI 3,327,232 22,343 Gucci Group (USD) 97,641 4,546 IMI 530,757 8,689 Industrie Natuzzi ADR (USD) 132,084 3,393 Istituto Nazionale delle Assicurazioni 1,489,000 4,451 Italgas 730,325 3,381 Mediolanum 330,119 9,896 Rinascente 316,500 3,172 Telecom Italia * 4,962,930 37,124 Telecom Italia Mobile 5,537,866 31,576 Total Italy (Cost $107,837) 183,220 JAPAN 15.5% Common Stocks 15.5% Advantest 57,090 3,839 Alps Electric 468,000 4,880 Amada 776,000 3,137 Canon 1,523,000 36,021 Citizen Watch 448,000 3,013 DDI 1,574 3,984 Daifuku 126,000 498 Daiichi Pharmaceutical 660,000 9,471 DaiNippon Screen Manufacturing 692,000 3,216 Daiwa House 794,000 6,420 Denso 1,337,000 22,984 East Japan Railway 2,227 11,106 Fanuc 171,300 6,317 Hitachi 1,563,000 11,208 Hitachi Zosen 1,097,000 1,674 Honda Motor 99,000 $ 3,591 Inax 331,000 1,226 Ito-Yokado 365,000 18,893 Kao 676,000 9,935 Kokuyo 387,000 6,638 Komatsu 823,000 3,731 Komori 335,000 5,696 Kuraray 916,000 7,738 Kyocera 335,000 17,568 Makita 584,000 6,354 Marui 960,000 15,161 Matsushita Electric Industrial 1,421,000 22,763 Mitsubishi 950,000 7,178 Mitsubishi Heavy Industries 4,176,000 15,462 Mitsui Fudosan 2,063,000 18,831 Murata Manufacturing 420,000 12,314 NEC 2,657,000 29,915 National House Industrial 170,000 1,381 Nippon Telephone & Telecom 1,130 9,905 Nomura Securities 1,417,000 17,292 Pioneer Electronic 477,000 7,821 Sangetsu 111,000 1,417 Sankyo 969,000 24,016 Sega Enterprises 133,050 2,212 Sekisui Chemical 1,236,000 6,790 Sekisui House 778,000 6,079 Seven Eleven Japan 111,000 7,423 Sharp 531,000 4,173 Shin-Etsu Chemical 787,000 15,343 Shiseido 520,000 6,857 Sony 349,800 29,102 Sumitomo 1,585,000 9,102 Sumitomo Electric Industries 2,060,000 24,547 Sumitomo Forestry 435,000 2,547 TDK 328,000 25,925 Teijin 669,000 1,911 Tokio Marine & Fire Insurance 419,000 4,559 Tokyo Electronics 181,000 7,112 Tokyo Steel Manufacturing 383,200 1,688 Toppan Printing 775,000 9,212 Uny 409,000 6,583 Yurtec 126,000 671 Total Japan (Cost $679,046) 564,430 MALAYSIA 0.1% Common Stocks 0.1% Berjaya Sports Toto 862,000 $ 2,045 Tanjong 669,000 1,525 Total Malaysia (Cost $5,313) 3,570 MEXICO 1.9% Common Stocks 1.9% Cemex (Class B) * 612,840 3,679 Cemex ADS (USD) * 482,160 4,761 Cemex ADS (144a) (USD) * 410,812 4,057 Cifra (Class V) ADR (USD) 44,164 773 Fomentos Economico Mexicano (Class B) * 673,862 4,990 Gruma (Class B) * 621,077 1,427 Gruma (Class B) ADS (144a) (USD) * 150,784 1,404 Grupo Financiero Banamex (Class B) * 966,552 3,015 Grupo Financiero Banamex (Class L) * 31,801 81 Grupo Financiero Bancomer (Class L) 8,266 4 Grupo Industrial Maseca (Class B) 1,664,467 1,201 Grupo Modelo (Class C) 445,864 4,217 Grupo Televisa ADR (USD) * 100,322 4,113 Kimberly-Clark Mexico (Class A) 1,182,310 5,807 Panamerican Beverages (Class A) (USD) 226,428 9,029 TV Azteca ADR (USD) 194,300 3,619 Telefonos de Mexico (Class L) ADR (USD) 309,614 17,532 Total Mexico (Cost $61,402) 69,709 NETHERLANDS 10.3% Common Stocks and Warrants 10.3% ABN Amro Holdings 724,388 17,643 ASM Lithography * 38,000 3,450 Ahold 306,927 9,572 Akzo Nobel 21,098 4,293 Baan Company * 102,310 4,482 Baan Company (USD) * 139,340 6,183 CSM 278,499 15,069 Elsevier 1,909,982$ 28,837 Fortis Amev 343,827 20,118 ING Groep 904,265 58,774 ING Groep, Warrants, 3/15/01 * 149,267 2,704 Koninklijke PTT Nederland 96,125 4,968 Numico 192,920 6,446 Otra 45,880 840 Philips Electronics 98,790 8,705 Polygram 400,639 16,540 Royal Dutch Petroleum 1,370,048 75,620 Unilever 446,314 31,771 Wolters Kluwer * 447,241 58,471 374,486 Preferred Stocks 0.0% ING Groep 10,797 53 53 Total Netherlands (Cost $265,288) 374,539 NEW ZEALAND 0.3% Common Stocks 0.3% Fletcher Challenge Building 811,083 1,640 Fletcher Challenge Energy 711,005 2,425 Telecom Corporation of New Zealand 976,372 4,637 Telecom Corporation of New Zealand, Installment Receipts, 3/31/99 * 333,000 894 Total New Zealand (Cost $10,481) 9,596 NORWAY 1.9% Common Stocks 1.9% Bergesen (Class A) 46,430 1,009 Norsk Hydro 514,282 25,657 Orkla (Class A) 334,850 39,698 Saga Petroleum (Class B) 85,950 1,533 Total Norway (Cost $43,315) 67,897 PANAMA 0.0% Common Stocks 0.0% Banco Latinoamericano de Exportaciones (Class E) (USD) 25,252 903 Total Panama (Cost $1,243) 903 PERU 0.1% Common Stocks 0.1% Credicorp (USD) 73,568 $ 1,232 Telefonica del Peru (Class B) 316,910 698 Telefonica del Peru (Class B) ADR (USD) 83,788 1,854 Total Peru (Cost $3,725) 3,784 PORTUGAL 0.4% Common Stocks 0.4% Jeronimo Martins 353,261 16,516 Total Portugal (Cost $4,666) 16,516 RUSSIA 0.1% Common Stocks 0.1% Lukoil ADR (USD) 22,490 1,535 Rao Gazprom ADS (USD) * 142,100 2,622 Total Russia (Cost $4,078) 4,157 SINGAPORE 0.5% Common Stocks 0.5% Overseas Union Bank 756,400 2,868 Singapore Press 720,710 7,970 Singapore Telecommunications 1,663,000 2,858 United Overseas Bank 695,352 3,296 Total Singapore (Cost $23,794) 16,992 SOUTH KOREA 0.1% Common Stocks and Rights 0.1% Samsung Electronic 53,817 2,980 Samsung Electronic, Rights, 6/2/98 * 4,281 82 Total South Korea (Cost $6,201) 3,062 SPAIN 2.7% Common Stocks and Rights 2.7% Argentaria Banca de Espana 84,210 7,022 Banco Bilbao Vizcaya 133,650 6,880 Banco Popular Espanol 97,844 8,031 Banco Santander 418,211 22,105 Empresa Nacional de Electricidad 524,068 12,732 Gas Natural 103,616 6,640 Iberdrola 596,256 $ 9,592 Repsol 135,510 7,429 Telefonica de Espana 441,677 18,444 Telefonica de Espana, Rights, 5/7/98 * 441,677 348 Total Spain (Cost $52,455) 99,223 SWEDEN 3.5% Common Stocks 3.5% ABB (Class A) 617,890 10,016 Astra (Class B) 1,586,605 31,560 Atlas Copco (Class B) 368,282 10,846 Electrolux (Class B) 195,727 18,203 Esselte (Class B) 91,130 2,084 Granges 81,378 1,482 Hennes and Mauritz 426,945 22,224 Nordbanken Holding 2,835,248 20,874 Sandvik (Class A) 70,120 2,024 Sandvik (Class B) 308,980 8,900 Scribona (Class B) 49,060 627 Total Sweden (Cost $76,262) 128,840 SWITZERLAND 7.4% Common Stocks 7.4% ABB 10,930 17,919 Adecco 45,643 19,924 Credit Suisse Group 90,725 19,953 Nestle 30,563 59,273 Novartis 41,243 68,166 Roche Holdings * 4,714 47,768 Schweizerischer Bankverein 51,544 17,897 Union Bank of Switzerland 11,670 18,790 Total Switzerland (Cost $177,939) 269,690 THAILAND 0.2% Common Stocks 0.2% Thai Farmers Bank * 2,548,000 5,834 Total Thailand (Cost $5,975) 5,834 UNITED KINGDOM 18.6% Common Stocks 18.6% Abbey National 1,188,440 22,324 Asda Group 3,790,530 12,697 BG 1,087,352$ 5,820 British Petroleum 1,008,802 15,946 Cable & Wireless 2,329,200 26,688 Cadbury Schweppes 1,617,578 23,634 Caradon 2,708,215 8,834 Centrica * 901,200 1,564 Compass Group 771,000 13,316 David S. Smith 1,456,500 5,482 Diageo 4,464,808 53,436 Electrocomponents 847,000 8,260 GKN 189,000 5,463 Glaxo Wellcome 1,750,650 49,488 Heywood Williams Group 249,576 1,064 Hillsdown Holdings 675,300 2,022 John Laing (Class A) 594,300 3,559 Kingfisher 2,481,977 45,107 Ladbroke Group 1,611,000 8,839 National Westminster Bank 4,683,173 93,689 Rank Group 1,783,000 11,542 Reed International 4,635,140 41,363 Rio Tinto 1,216,960 17,506 Rolls Royce 811,851 3,789 Safeway 2,136,200 12,738 Shell Transport & Trading 6,266,000 46,720 SmithKline Beecham 5,650,230 67,434 Tesco 1,899,903 17,892 Tomkins 4,907,080 28,892 United News & Media 1,758,620 23,857 Total United Kingdom (Cost $444,334) 678,965 VENEZUELA 0.1% Common Stocks 0.1% Compania Anonima Nacional Telefonos de Venezuela (Class D) ADR (USD) * 94,187 3,155 Total Venezuela (Cost $2,958) 3,155 SHORT-TERM INVESTMENTS 4.5% Money Market Funds 4.5% Reserve Investment Fund, 5.65% 165,954,691 165,955 Total Short-Term Investments (Cost $165,955) 165,955 Total Investments in Securities 100.1% of Net Assets (Cost $2,871,327) $3,653,566 Other Assets Less Liabilities (3,942) NET ASSETS $3,649,624 Net Assets Consist of: Accumulated net investment income - net of distributions $ 23,244 Accumulated net realized gain/loss - net of distributions (24,869) Net unrealized gain (loss) 782,046 Paid-in-capital applicable to 200,880,861 shares of $0.01 value capital stock out- standing; 1,000,000,000 shares authorized 2,869,203 NET ASSETS $3,649,624 ___________ NET ASSET VALUE PER SHARE $ 18.17 ___________ * 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 0.2% of net assets. ADR American depository receipt ADS American depository share 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 (Unaudited) In thousands 6 Months Ended 4/30/98 Investment Income Income Dividend (net of foreign taxes of $ 4,010) $ 33,197 Interest 3,345 Total income 36,542 Expenses Investment management 11,587 Custody and accounting 547 Registration 87 Shareholder servicing 16 Legal and audit 13 Prospectus and shareholder reports 5 Directors 5 Miscellaneous 7 Total expenses 12,267 Net investment income 24,275 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities (12,641) Foreign currency transactions (917) Net realized gain (loss) (13,558) Change in net unrealized gain or loss Securities 454,421 Other assets and liabilities denominated in foreign currencies (257) Change in net unrealized gain or loss 454,164 Net realized and unrealized gain (loss) 440,606 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 464,881 ___________ The accompanying notes are an integral part of these financial statements. Statement of Changes in Net Assets Foreign Equity Fund (Unaudited) In thousands 6 Months Year Ended Ended 4/30/98 10/31/97 Increase (Decrease) in Net Assets Operations Net investment income $ 24,275 $ 40,579 Net realized gain (loss) (13,558) 87,538 Change in net unrealized gain or loss 454,164 53,367 Increase (decrease) in net assets from operations 464,881 181,484 Distributions to shareholders Net investment income (40,559) (33,766) Net realized gain (92,704) (26,079) Decrease in net assets from distributions (133,263) (59,845) Capital share transactions* Shares sold 398,916 1,016,742 Distributions reinvested 102,189 43,555 Shares redeemed (342,954) (344,550) Increase (decrease) in net assets from capital share transactions 158,151 715,747 Net Assets Increase (decrease) during period 489,769 837,386 Beginning of period 3,159,855 2,322,469 End of period $3,649,624 $3,159,855 ________________________ *Share information Shares sold 23,541 60,358 Distributions reinvested 6,463 2,750 Shares redeemed (20,498) (20,421) Increase (decrease) in shares outstanding9,506 42,687 The accompanying notes are an integral part of these financial statements. Notes to Financial Statements Foreign Equity Fund (Unaudited) 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. Investments in open-end mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. 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. Premiums and Discounts Premiums and discounts on debt securities are amortized for both financial reporting and tax purposes. 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 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 April 30, 1998, the fund held investments in securities of companies located in emerging markets. Future economic or political developments could adversely affect the liquidity or value, or both, of such securities. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $367,646,000 and $339,709,000, respectively, for the six months ended April 30, 1998. 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. At April 30, 1998, the aggregate cost of investments for federal income tax and financial reporting purposes was $2,871,327,000, and net unrealized gain aggregated $782,239,000, of which $987,645,000 related to appreciated investments and $205,406,000 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 $2,111,000 was payable at April 30, 1998. 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 $66,000 for the six months ended April 30, 1998, 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 six months ended April 30, 1998, totaled $3,312,000 and are reflected as interest income in the accompanying Statement of Operations. During the six months ended April 30, 1998, the fund, in the ordinary course of business, placed security purchase and sale orders aggregating $58,607,000 with certain affiliates of the manager and paid commissions of $131,000 related thereto. -----END PRIVACY-ENHANCED MESSAGE-----