N-30D 1 dn30d.txt ISHARES MSCI ANNUAL-REPORTS iShares(R) 2002 ANNUAL REPORT TO SHAREHOLDERS AUGUST 31, 2002 [PICTURE] INDUSTRIAL STRENGTH INVESTMENT TOOLS iSHARES MSCI AUSTRIA INDEX FUND iSHARES MSCI NETHERLANDS INDEX FUND iSHARES MSCI BELGIUM INDEX FUND iSHARES MSCI SPAIN INDEX FUND iSHARES MSCI EMU INDEX FUND iSHARES MSCI SWEDEN INDEX FUND iSHARES MSCI FRANCE INDEX FUND iSHARES MSCI SWITZERLAND INDEX FUND iSHARES MSCI GERMANY INDEX FUND iSHARES MSCI UNITED KINGDOM INDEX FUND iSHARES MSCI ITALY INDEX FUND Table of Contents Shareholder Letter............................................... 1 Introduction..................................................... 3 Managers' Discussion & Analysis.................................. 6 Schedules of Investments......................................... 28 iShares MSCI Austria Index Fund................................ 28 iShares MSCI Belgium Index Fund................................ 29 iShares MSCI EMU Index Fund.................................... 30 iShares MSCI France Index Fund................................. 35 iShares MSCI Germany Index Fund................................ 36 iShares MSCI Italy Index Fund.................................. 37 iShares MSCI Netherlands Index Fund............................ 38 iShares MSCI Spain Index Fund.................................. 39 iShares MSCI Sweden Index Fund................................. 40 iShares MSCI Switzerland Index Fund............................ 41 iShares MSCI United Kingdom Index Fund......................... 42 Financial Statements............................................. 44 Financial Highlights............................................. 52 Notes to Financial Statements.................................... 63 Report of Independent Accountants................................ 71 Tax Information (Unaudited)...................................... 72 Shareholder Meeting Results (Unaudited).......................... 73 Supplemental Information (Unaudited)............................. 77 Directors Information (Unaudited)................................ 84 iShares Family of Funds.......................................... 90
To Our Shareholders While the second half of 2001 was a difficult period for us all, the first half of 2002 has also been a time of tumultuous market events. As a whole, the past year has seen scores of layoffs, company closings, and corporate accounting scandals in the wake of the emotional shock of September 11. The past year has been truly remarkable for iShares considering the market environment. By the close of our second fiscal year, most traditional mutual funds had shrunk in size, hundreds had shut down entirely,/1/ and plans for dozens of new ones were quietly put on hold. However, iShares has followed a very different course. Instead of shrinking in size, iShares' assets under management grew to almost $28 billion as of August 31, 2002. In fact, the iShares family of funds became the nation's third fastest growing family of equity funds/2/ during the period June 2001 through June 2002, surpassing some of the most established and best-known mutual fund groups. In July, iShares celebrated another milestone: the launch of the first-ever fixed income exchange traded funds. These four fixed income iShares funds -- three bond funds based on Lehman U.S. Treasury indices, and one based on a Goldman Sachs-Registered Trademark- corporate bond index -- were greeted with an enthusiastic reception from the investment community. These new funds attracted $3 billion in assets in their first week of trading. That is an impressive beginning considering that total inflows for all U.S. bond mutual funds combined was $50 billion for the first six months of 2002./3/ With a total of 81 different funds, iShares now gives its investors nearly four times more ways to structure their portfolios than any other provider of exchange traded funds (ETFs). Total assets under management for all iShares funds have grown tenfold since they were first launched in May 2000. We believe this is a result of investors and their advisors recognizing that iShares are not merely an investment choice, but an important investment tool. At BGI we consider the iShares family of funds "industrial strength" for four simple reasons. We think you should keep these reasons in mind when you and your advisor meet to discuss your investment objectives, and then evaluate, and perhaps rebalance your portfolio. First, iShares strive to obtain a fundamental goal of institutional investing: taking less of a bite out of a fund's returns. iShares seek to achieve this by minimizing capital gains distributions and management fees. These are not insignificant savings. It's estimated that between 1994 and 1999, investors in diversified U.S. stock funds lost, on average, 15% of their annual gains to taxes./4/ iShares, on the other hand, are managed in a way that keeps capital gains distributions to a minimum. For example, during the calendar year 2001 none of the domestic iShares funds distributed any capital gains./5/ Additionally, the fees charged by the iShares Funds are typically about half of other actively managed mutual funds./6/ Second, iShares embody a key tactic of institutional investors: uncomplicated diversification. The benefits of diversification, as compared to picking individual stocks are well documented. Although it's possible to diversify a portfolio by hand-selecting a wide variety of securities, to do it effectively is complicated and time-consuming. This is a reason why $1.56 trillion in institutional assets/7/ are invested in index funds. ____________________________ /1/John Hechinger, Hey, Where Did My Mutual Fund Go?, The Wall Street Journal, April 17, 2002. /2/Financial Research Corporation (FRC) database, BGI analysis. /3/Financial Research Corporation (FRC) database, BGI analysis. /4/Jonathan Clements, Fund Distributions are a Taxing Problem; How the Tax Man Dines on Your Funds, the Wall Street Journal, August 1999. /5/Past performance is no guarantee of future results. There can be no assurance that iShares will not generate capital gains distributions in the future. /6/Source: Morningstar Principia, BGI analysis 6/01. /8/Source: Pensions & Investments, 5/27/02. Shareholder Letter 1 Third, iShares embody a key strategy of institutional investors: modular asset allocation. Each iShare fund focuses on a very specific slice of the equity and fixed income markets. With so many different iShares to choose from, investors have tremendous flexibility in structuring their portfolios to meet specific needs. The fourth reason iShares are "industrial strength" is that they are advised by Barclays Global Investors, one of the world's largest institutional asset managers./8/ BGI manages money for over two thousand institutional clients around the world. Also, BGI has a longer index-based investing track record than any other fund manager. In fact, over thirty years ago it was BGI that created the world's first index strategy. Throughout the coming year we will be working closely with the financial advisor community to introduce innovative strategies and structures that we have developed for their clients' portfolios. And we continue to enhance and improve the tools, data and resources on our Web site. If you haven't visited www.iShares.com in a while, we invite you to do so and learn more about iShares. In fact, Forbes Magazine named iShares.com "Best of the Web" among all ETF sites./9/ We think you'll agree everything about iShares really is industrial strength. On behalf of the iShares family of funds and our colleagues at BGI, we thank you for making iShares a part of your portfolio, and look forward to meeting your needs in the year ahead. /S/ Garrett F. Bouton /S/ Lee T. Kranefuss Garrett F. Bouton Lee T. Kranefuss President and Chairman of the Board Vice President of Ishares, Inc. of Directors of Ishares, Inc. Garrett F. Bouton and Lee T. Kranefuss are associates of BGIS. iShares are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to iShares. Barclays Global Investors Services (BGIS) assists in the marketing of iShares. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., none of which is affiliated with SEI. For complete information, including charges and expenses, request a prospectus by calling 1-800-iShares (1-800-474-2737). read it carefully before you invest. There are risks involved with investing, including possible loss of principal. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Mutual funds and iShares are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Your own iShares trading, too, will generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well. Diversification may not protect against market risk. Past performance does not guarantee future results. iShares are not sponsored or endorsed issued by Goldman, Sachs & Co. or Lehman Brothers, nor are they sponsored, endorsed, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., Morgan Stanley Capital International, The Nasdaq Stock Market, Inc., Frank Russell Company, or Standard & Poor's. None of these companies make any representation regarding the advisability of investing in iShares. Neither SEI nor BGI, nor any of their affiliates, are affiliated with Goldman, Sachs & Co. or Lehman Brothers. "GS $ InvesTop-TM-," "GS $ InvesTop-TM- Index," "GS $ Investment Grade Index-TM-" and "Goldman Sachs-Registered Trademark-" are trademarks of Goldman Sachs & Co. The methodology of the GS $ InvesTop-TM- Index is owned by Goldman, Sachs & Co., may be covered by one or more patents or pending patent applications and is provided under licence from Goldman, Sachs & Co. --------------------- /8/Source: Pensions & Investments, 5/27/02. /9/Forbes, Winter 2001. 2 2002 iShares Annual Report to Shareholders Introduction In this section, the Investment Advisor discusses the performance of the iShares MSCI Index Funds (each, a "Fund," and collectively, the "Funds"). The introduction provides an overview of how each Fund seeks to track its respective index. In addition, the introduction identifies some of the key factors that contribute to a Funds' performance against its benchmark index. Each Fund invests in a representative sample of the component securities in its underlying MSCI Index (using the analytic technique known as "portfolio sampling"), as opposed to a full replication of the component securities of the MSCI Index. Certain Funds may also invest to a limited extent in stocks that are not included in the relevant MSCI Index to permit them additional flexibility. There are several important factors that should be kept in mind when reviewing the performance of each Fund. Portfolio Sampling: Portfolio sampling is a disciplined approach to capturing index returns which involves maximizing float and liquidity, reflecting accurately the market's size and industry profiles and minimizing cross-ownership. Because of portfolio sampling, the composition of each Fund will vary from that of its underlying MSCI Index. This may cause performance to vary positively or negatively from that of its underlying MSCI Index during any period. Fund Expenses: The MSCI Indices are only statistical composites that track changes in the financial markets of a particular country or region. Since an index does not actually hold a portfolio of securities, it does not bear management, administration, distribution, transaction or other expenses, while a Fund does incur such expenses, thereby negatively impacting the performance of a Fund. Constraints On Portfolio Management: The Investment Advisor is subject to a number of constraints when managing the iShares MSCI Index Funds' portfolios. The "Single Issuer Rule" and the "5/50 Rule" are two constraints in the Internal Revenue Code that affect the performance of a number of the Funds. The "Single Issuer Rule" generally requires that not more than 25% of the value of a Fund's total assets may be invested in the securities of one single issuer. This constraint applies to all share classes of an issuer. As an example, Samsung Electronics made up 30.24% of the MSCI South Korea Index as of August 31, 2002. Because of the "Single Issuer Rule," however, the iShares MSCI South Korea Fund could not hold more than 25% of its assets in Samsung Electronics. The "5/50 Rule" generally precludes the sum of all of the securities weighted over 5% from exceeding 50% of a Fund's total assets. If a security has more than one share class, then all of the share classes must be considered as one security for 5/50 Rule purposes. Many of the benchmark MSCI Indices have a greater than 50% weighting of securities that account for more than 5% of the respective index. For example, the sum of all the stocks with weightings of 5% or greater in the MSCI Mexico Index was 79.37% as of August 31, 2002; so the iShares MSCI Mexico Index Fund had to underweight some of these stocks relative to the benchmark, and therefore overweight in other stocks. Revenue Differential: A fourth factor that causes performance of a Fund to differ from that of its underlying MSCI Index is "revenue differential," or differences between a Funds and the underlying MSCI Index in dividend accruals/reinvestments. The Funds record dividend revenues on the "ex" dates of the underlying stocks. Prior to January 1, 2001, for developed markets, MSCI used smoothed dividends as opposed to actual dividends by allocating annual dividend revenues evenly over a 12-month period. Separately, the Funds might have different dividend rates versus the Indices due to portfolio sampling or different withholding taxes. Finally, while the sole source of revenues for the MSCI Indices is dividends, the Funds receive interest on uninvested cash and, in the case of most Funds, revenues from the lending of portfolio securities. Effect of Uninvested Assets: Fifth, uninvested assets held by a Fund affects performance relative to its underlying benchmark index. In contrast, the MSCI Indices are always fully comprised of the underlying stocks and thus do not reflect any "unequitized" assets. The "effect of uninvested assets" refers to the impact on performance of the portion of a Fund that is not invested in stocks. Cash is the Introduction 3 principal "unequitized" assets of a Fund. The effect of uninvested assets will tend to cause each Fund to outperform its underlying index in falling markets and underperform the underlying index in rising markets. However, even within a period that has a down market return there can be a short period of rising market where the uninvested assets in a Fund have a negative impact on return. This could cause the effect of uninvested assets to worsen a loss for the period. Securities Lending: Finally, security lending is when a Fund loans a security in its portfolio to another party for a given time period and in return receives cash collateral for the loan. Securities lending income is the income earned on lending the security, which is split between the fund and the securities lending agent. 4 2002 iShares Annual Report to Shareholders THIS PAGE INTENTIONALLY LEFT BLANK. 5 Managers' Discussion & Analysis iShares MSCI Austria Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS ------------------------------------------------------------------------ YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 -------------------- ------------------------ ------------------------ NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 0.12% (1.46)% 2.32% (3.08)% (3.26)% (1.87)% (2.74)% (2.95)% (1.57)%
CUMULATIVE TOTAL RETURNS --------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 --------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 0.12% (1.46)% 2.32% (14.46)% (15.30)% (9.04)% (16.48)% (17.63)% (9.75)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Banks 20.47% Materials 19.84% Energy 16.20% Telecommunication Services 13.89% Capital Goods 8.09% Transportation 7.19% Utilities 4.60% Commercial Services & Supplies 4.59% Insurance 3.51% Food Beverage & Tobacco 1.62% PERFORMANCE REVIEW The total return of the iShares MSCI Austria Index Fund (the "Austria Fund") was 0.12% for the one-year period ended August 31, 2002. The total return of the corresponding MSCI Austria Index over the same period was 2.32%. SIGNIFICANT PERFORMANCE FACTORS The Austria Fund underperformed its benchmark by 2.20 percentage points over the reporting period. This was due to the impact of security sampling, expenses and uninvested assets, which subtracted 1.58, 0.84 and 0.04 percentage points, respectively, from the Fund's return. Those factors were partially offset by the positive impact of revenue differential and security lending, which contributed 0.23 and 0.03 percentage points, respectively, to the Fund's return. 6 2002 iShares Annual Report to Shareholders As discussed in the Introduction, portfolio management constraints can restrict the Investment Adviser's ability optimize a Fund's portfolio. To comply with the Single Issuer and 5/50 Rules, for example, the Austria Fund was obligated to significantly underweight such large-cap names as Erste Bank, Telekom Austria and Wienerberger (respectively 20.40%, 13.84% and 4.45% of the Fund as of August 31, 2002) over the reporting period. At the same time, the Fund overweighted other stocks, including BWT (4.57% of the Fund as of August 31, 2002). The stocks that the Fund underweighted generally performed better than those that it overweighted over the reporting period; as a result, security sampling due to the Single Issuer and 5/50 Rules had a negative impact on the Fund's performance. KEY MARKET CONDITIONS Austria was one of the few European markets to post a gain over the year ended August 31, 2002. Several factors buoyed the Austrian market at a time when others were grappling with a widespread economic slowdown. Among the most important were restructuring and growth opportunities in eastern Europe. Once considered a backwater dominated by inefficient "old economy" companies, the Austrian stock market attracted new attention over the reporting period as many of its largest firms restructured. For example, shares of Telekom Austria (13.84% of the Fund as of August 31, 2002) appreciated as the company pared its workforce. The influx of investment dollars had an outsized impact on Telekom Austria and others in Austria's stock market, given that the exchange is still relatively illiquid. Besides individual and institutional investors, other corporations were also taking a second look at many Austrian firms. Indeed, speculation about potential mergers and acquisitions was one of the factors that helped to drive up the Austrian stock market during the year ended August 31, 2002. A number of Austrian companies were themselves in an acquisitive mode over the reporting period, especially in relation to eastern Europe. In March 2002, for example, Erste Bank announced plans to acquire the remaining shares in its majority-owned Czech subsidiary, Ceska Sporitelna. Erste Bank's expansion plans helped to drive up its shares. They also underscored the growing orientation of numerous Austrian firms toward Eastern Europe. Many of them have been seeking new growth opportunities in countries such as the Czech Republic and Hungary, which may be admitted to the European Union in the next few years. In the nearer term, these markets helped to support the earnings and shares of Austrian companies ranging from airport operator Flughafen Wien (4.97% of the Fund as of August 31, 2002) to oil and gas concern OMV (16.14% of the Fund as of August 31, 2002) over the reporting period. iShares MSCI Austria Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] MSCI iShares MSCI Austria MSCI Austria Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $9,661 $10,066 $9,401 $9,841 Aug-97 $9,764 $9,922 $10,535 $11,506 Aug-98 $9,975 $10,763 $9,402 $10,346 Aug-99 $9,108 $9,900 $7,622 $8,242 Aug-00 $7,695 $8,331 $8,498 $9,147 Aug-01 $8,342 $8,821 $7,852 $8,410 Aug-02 $8,352 $9,025 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 27, 2001. The index performance shown in the graph reflects the former index up to June 27, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 7 Managers' Discussion & Analysis iShares MSCI Belgium Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- --------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (11.10)% (11.54)% (18.29)% (1.10)% (1.14)% (0.33)% 1.28% 1.15% 2.12%
CUMULATIVE TOTAL RETURNS --------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- --------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (11.10)% (11.54)% (18.29)% (5.36)% (5.58)% (1.63)% 8.58% 7.71% 14.53%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Diversified Financials 34.08% Banks 19.64% Utilities 9.82% Food & Drug Retailing 7.23% Materials 7.13% Food Beverage & Tobacco 4.94% Pharmaceuticals & Biotechnology 3.95% Consumer Durables & Apparel 3.50% Real Estate 2.59% Capital Goods 2.21% PERFORMANCE REVIEW The total return of the iShares MSCI Belgium Index Fund (the "Belgium Fund") was -11.10% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Belgium Index over the same period was -18.29%. SIGNIFICANT PERFORMANCE FACTORS The Belgium Fund outperformed its benchmark by 7.19 percentage points over the one-year period ended August 31, 2002. This was due to the impact of security sampling (explained in more detail below), revenue differential, uninvested assets and security lending, which contributed 7.57, 0.40, 0.03 and 0.02 percentage points, respectively, to the Fund's return. These factors were partially offset by the impact of expenses, which subtracted 0.83 percentage points from the Fund's return. 8 2002 iShares Annual Report to Shareholders As discussed in the Introduction, portfolio management constraints can restrict the Investment Adviser's ability to optimize a Fund's portfolio. To comply with the Single Issuer Rule, for example, the Belgium Fund was obligated to underweight the MSCI Belgium Index's largest stock, Fortis Group, over the reporting period. In December 2001, Fortis unified its Belgian and Dutch share classes, effectively increasing Fortis' weighting in the MSCI Belgium Index to 39% from 23%. Following the merger, the Belgium Fund was obligated to limit Fortis' weighting to no more than 25% of its assets and to overweight other stocks in the MSCI Belgium Index in order to comply with IRS diversification requirements. The holdings that the Fund was overweighting generally outperformed Fortis during the year ended August 31, 2002, leading the Fund's returns to diverge significantly from those of the Index over the reporting period. KEY MARKET CONDITIONS To a large extent, the Belgium Fund's performance over the reporting period reflected the ill fortunes of its numerous financial service stocks. Many of these companies faced a very difficult operating environment on several fronts. Chief among these was the economic downturn in the United States and much of Europe, which led many banks to increase their loan-loss provisions. The economic slowdown also weighed on the U.S. and European stock markets, resulting in significant investment losses and lower commissions for many Belgian financial service companies over the period. In addition, the events of September 11 drove down many Belgian financial service stocks and the Belgian market as a whole. In the days immediately following the terrorist attacks on the United States, shares of Belgian insurance providers in particular declined sharply as investors worried about the possible liability these firms might face. The repercussions of September 11 were evident, for example, in a profit warning issued by market giant Fortis (24.08% of the Fund as of August 31, 2002) in November 2001. The company said that it would be forced to set aside additional money to cover potentially bad debts in the aviation and tourism industries, two areas that had been most affected by September 11. This announcement, and a subsequent profit warning in February, led to a decline in Fortis' share price. The company's stock dropped still further in August 2002, when it again issued a profit warning, this time attributing the disappointment primarily to declines in the value of its equity portfolio. iShares MSCI Belgium Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] MSCI iShares MSCI Belgium MSCI Belgium Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $10,501 $10,479 $11,204 $11,576 Aug-97 $11,474 $11,643 $13,161 $13,745 Aug-98 $15,997 $17,603 $16,753 $19,604 Aug-99 $15,837 $18,153 $12,329 $14,154 Aug-00 $13,382 $15,183 $13,025 $14,752 Aug-01 $12,215 $14,016 $11,067 $12,382 Aug-02 $10,859 $11,453 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 27, 2001. The index performance shown in the graph reflects the former index up to June 27, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 9 Managers' Discussion & Analysis iShares MSCI EMU Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS CUMULATIVE TOTAL RETURNS ---------------------------------------------------- ------------------------- YEAR ENDED 8/31/02 INCEPTION TO 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (18.89)% (19.64)% (18.73)% (23.02)% (23.17)% (22.85)% (42.34)% (42.58)% (42.00)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (07/25/00). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (07/31/00), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Banks 14.67% Energy 13.79% Telecommunication Services 8.24% Materials 7.08% Utilities 6.66% Insurance 5.88% Technology Hardware & Equipment 5.20% Capital Goods 5.11% Pharmaceuticals & Biotechnology 4.64% Automobiles & Components 4.55% PERFORMANCE REVIEW The total return of the iShares MSCI EMU Index Fund (the "EMU Fund") was -18.89% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI EMU Index over the same period was -18.73%. SIGNIFICANT PERFORMANCE FACTORS The EMU Fund underperformed its benchmark by 0.16 percentage points over the reporting period. This was due to the impact of expenses and uninvested assets, which subtracted 0.82 and 0.02 percentage points, respectively, from the Fund's return. Those factors were partially offset by the positive impact of security sampling, revenue differential and security lending, which contributed 0.51, 0.16 and 0.01 percentage points, respectively, to the Fund's return. KEY MARKET CONDITIONS EMU equities faced pressure from several different fronts over the year ended August 31, 2002. The economic slowdown taking place in many countries around the world was clearly the most important factor. Early in the reporting period, for example, sluggish global demand for petroleum products weighed on three of the Fund's largest stocks: Royal Dutch Petroleum of the Netherlands, TotalFinaElf of France and Eni of Italy (respectively 5.33%, 5.06% and 2.36% of the Fund as of August 31, 2002). These stocks rebounded in the spring, when political tensions in the Middle East and OPEC production cuts drove up the price of crude oil. They lost some ground, however, as the price of oil fell back in late summer. 10 2002 iShares Annual Report to Shareholders In the uncertain economic environment, many investors favored EMU banking stocks for their defensive qualities. Some of this confidence was apparently shaken, however, when several banks announced at various times over the reporting period that they had set aside significantly higher bad-debt provisions. The news drove down their shares. In addition, banks such as BNP Paribas of France (2.08% of the Fund as of August 31, 2002) cautioned that the downturn in global equity markets would have a significant impact on their investment-banking and asset-management revenues. These pressures had only appeared to intensify by the end of the reporting period. Nonetheless, banks were among the better performers in EMU markets over the year ended August 31, 2002. Pharmaceutical stocks, also typically regarded as defensive, were generally weaker than might have been expected, too. Despite their reputation for offering slow but steady growth even in an economic downturn, a number of pharmaceutical makers faced considerable challenges. Market leaders such as Aventis (2.23% of the Fund as of August 31, 2002) saw their shares decline as the threat of competition from generic producers grew and promising new products were delayed. Pharmaceutical stocks were still much stronger, however, than two other large sectors in the EMU Fund: Telecommunications Services and Technology Hardware & Equipment stocks. They remained out of favor with most investors, due to persistent worries about slowing growth. These concerns weighed more heavily on some stocks than on others. For example, Finland's Nokia (3.57% of the Fund as of August 31, 2002) proved to be somewhat more resilient over the period due to its dominance of the mobile-phone market. Similarly, shares of Telefonica of Spain (2.30% of the Fund as of August 31, 2002) were buoyed by the fact that the company has significantly less debt than many other European telecom operators. That advantage did not, however, help Telefonica escape the effects of financial crises in Latin America (an increasingly important market for the company and numerous others in Europe) in late 2001 and 2002. Toward the end of the reporting period, worries about deteriorating economic conditions put additional pressure on EMU stocks. Of concern to many investors was an apparent decline in U.S. consumer confidence and the growing strength of the euro versus the U.S. dollar. Both trends threatened to hurt results at companies such as DaimlerChrysler (2.07% of the Fund as of August 31, 2002), which, along with other consumer-oriented European exporters, had been among the better performers in EMU markets over the reporting period. iShares MSCI EMU Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI iShares MSCI EMU MSCI EMU Index Fund Index* Jul-00 $10,000 $10,000 Aug-00 $9,418 $9,422 $8,496 $8,523 Feb-01 $8,213 $8,256 $7,689 $7,712 Aug-01 $7,109 $7,137 $6,794 $6,830 Feb-02 $6,581 $6,621 $6,859 $6,901 Aug-02 $5,766 $5,800 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 20, 2001. The index performance shown in the graph reflects the former index up to June 20, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 11 Managers' Discussion & Analysis iShares MSCI France Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (20.53)% (21.12)% (20.28)% 3.47% 3.43% 3.81% 5.92% 5.85% 6.13%
CUMULATIVE TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (20.53)% (21.12)% (20.28)% 18.62% 18.39% 20.63% 45.16% 44.54% 46.98%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Energy 18.30% Pharmaceuticals & Biotechnology 12.65% Banks 10.89% Materials 6.69% Capital Goods 6.23% Food & Drug Retailing 5.15% Household & Personal Products 4.82% Automobiles & Components 4.32% Media 4.24% Food Beverage & Tobacco 3.89% PERFORMANCE REVIEW The total return of the iShares MSCI France Index Fund (the "France Fund") was -20.53% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI France Index over the same period was -20.28%. SIGNIFICANT PERFORMANCE FACTORS The France Fund underperformed its benchmark by 0.25 percentage points over the reporting period. This was due to the impact of expenses, which subtracted 0.83 percentage points from the Fund's return. That factor was partially offset by the positive impact of revenue differential, security sampling, uninvested assets and security lending, which contributed 0.30, 0.17, 0.10 and 0.01 percentage points, respectively, to the Fund's return. KEY MARKET CONDITIONS Buoyant domestic demand could not fully offset the impact that global factors had on France's equity market over the year ended August 31, 2002. Lower worldwide demand for petroleum products hit the profits and shares of market giant TotalFinaElf (17.94% of the Fund as of August 31, 2002), for example, in late 2001. The company's stock rebounded in the spring of 2002, as political concerns drove up the price 12 2002 iShares Annual Report to Shareholders of crude oil. Oil prices and TotalFinaElf's shares both fell again, however, toward the end of the summer. The company was also affected by the financial crisis in Argentina, as was the utility provider Suez (3.70% of the Fund as of August 31, 2002). TotalFinaElf and Suez faced losses after the government of Argentina, where both companies have operations, devalued the Argentine peso and capped utility rates in January 2002. The global economic slowdown contributed to the woes of French telecommunications firms as well, which were already severely depressed by investor concerns about their heavy debts and the rollout of third-generation wireless technology. As a result, Alcatel and France Telecom (respectively 1.11% and 1.00% of the Fund as of August 31, 2002) were among the weakest stocks in the French market over the reporting period. Debt concerns also helped to drive down shares of media company Vivendi Universal. In fact, the stock, which had been the Fund's fourth-largest holding as of February 28, 2002, depreciated so sharply that it had fallen to 2.29% of the Fund as of August 31, 2002, and out of the Fund's 10 largest holdings. Given the uncertain environment, many investors favored so-called "defensive" French stocks. Personal-products maker L'Oreal (4.81% of the Fund as of August 31, 2002) was one beneficiary of this trend. So, to a degree, were pharmaceutical makers such as Aventis and Sanofi-Synthelabo (respectively 7.85% and 4.76% of the Fund as of August 31, 2002). Their gains were held back, though, by investors' concerns about the growing competition the two companies face from generic producers. In light of the pharmaceutical industry's troubles, many investors regarded French banks as better defensive holdings over the spring. For a while, at least, the confidence seemed warranted. A number of French banks, including BNP Paribas and Societe Generale (respectively 7.34% and 3.51% of the Fund as of August 31, 2002), reported good results from their domestic retail banking operations. Rumors of consolidation in the French banking industry added to the rally. Over the spring investors also became less concerned about the banks' possible exposure to corporate collapses. Those fears cropped up again in late summer, however, when several French banks increased their bad-debt provisions. This helped to deflate the sector and weighed on the French equity market toward the end of the reporting period. iShares MSCI France Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI iShares MSCI France MSCI France Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $10,495 $10,363 $12,177 $12,201 Aug-97 $12,237 $12,184 $14,879 $14,921 Aug-98 $16,492 $16,487 $18,010 $18,089 Aug-99 $19,958 $19,821 $24,562 $24,744 Aug-00 $24,637 $24,749 $20,505 $20,704 Aug-01 $18,266 $18,437 $16,723 $16,962 Aug-02 $14,516 $14,698 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 20, 2001. The index performance shown in the graph reflects the former index up to June 20, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 13 Managers' Discussion & Analysis iShares MSCI Germany Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (20.54)% (20.49)% (20.40)% (2.72)% (2.69)% (2.45)% 1.36% 1.36% 1.87%
CUMULATIVE TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (20.54)% (20.49)% (20.40)% (12.90)% (12.76)% (11.69)% 9.16% 9.11% 12.76%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Automobiles & Components 15.32% Capital Goods 12.31% Utilities 12.30% Banks 11.29% Materials 11.27% Insurance 11.01% Telecommunication Services 6.11% Pharmaceuticals & Biotechnology 4.50% Software & Services 4.33% Household & Personal Products 2.33% PERFORMANCE REVIEW The total return of the iShares MSCI Germany Index Fund (the "Germany Fund") was -20.54% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Germany Index over the same period was -20.40%. SIGNIFICANT PERFORMANCE FACTORS The Germany Fund underperformed its benchmark by 0.14 percentage points over the reporting period. This was due to the impact of expenses, which subtracted 0.84 percentage points from the Fund's return. That factor was partially offset by the positive impact of security sampling, revenue differential, uninvested assets and security lending, which contributed 0.30, 0.25, 0.12 and 0.03 percentage points, respectively, to the Fund's return. KEY MARKET CONDITIONS The global economic slowdown and other factors created a formidable headwind for the German equity market over the year ended August 31, 2002. 14 2002 iShares Annual Report to Shareholders The first blow was dealt by the events of September 11, 2001. The terrorist attacks on the United States drove down the German equity market sharply, weighing most heavily on shares of insurers such as Allianz and Muenchener Rueckversicherung ("Munich Re"), respectively 6.23% and 4.73% of the Fund as of August 31, 2002. Both companies were later forced to raise their estimates of insurance claims related to the attacks by hundreds of millions of dollars. Although German insurers did benefit from the higher premiums they were able to charge in the wake of 9/11, worries about future terrorist attacks and the extent of their liabilities continued to depress the sector over much of the period. Many investors were also concerned about rising bad-debt provisions and investment losses at Allianz, Munich Re and at German banks. While most German companies did not feel direct financial consequences of the 9/11 terrorist attacks, the day's events exacerbated a broad economic slowdown that few German companies were able to escape. Lethargic U.S. sales pressured stocks ranging from business-software maker SAP (4.31% of the Fund as of August 31, 2002) to chemical and pharmaceuticals producer Bayer (4.51% of the Fund as of August 31, 2002) and numerous others. One exception was the telecommunications and engineering conglomerate Siemens (9.95% of the Fund as of August 31, 2002). Its shares rose sharply during the fourth quarter of 2001 as some investors anticipated a dramatic turnaround in the technology and telecommunications sectors. Although Germany's own economy was in recession during the latter half of 2001, consumer spending abroad remained surprisingly buoyant. This trend helped German companies such as DaimlerChrysler (9.70% of the Fund as of August 31, 2002) achieve healthy results over much of the reporting period. DaimlerChrysler reported sharply higher first-quarter 2002 profits, due in part to buoyant sales at its Mercedes division. Many investors were also encouraged by restructuring at the company's Chrysler division, which helped to lift DaimlerChrysler's shares. Volkwagen and especially Porsche, two of the Fund's smaller holdings, also benefited from robust consumer spending. The outlook for consumer-oriented companies appeared to deteriorate toward the end of the reporting period, however. Many investors began to worry that the strength of the euro versus the U.S. dollar would make German goods less competitive in the U.S. market. Broader concerns about the possibility of a "double-dip" recession in the U.S. also led to declines in many German stocks. iShares MSCI Germany Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI iShares MSCI Germany MSCI Germany Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $10,399 $10,443 $11,292 $11,467 Aug-97 $12,532 $12,769 $14,661 $15,096 Aug-98 $15,753 $16,091 $16,117 $16,630 Aug-99 $16,862 $17,099 $21,975 $22,820 Aug-00 $18,286 $18,831 $16,588 $17,220 Aug-01 $13,737 $14,166 $12,833 $13,257 Aug-02 $10,916 $11,276 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 20, 2001. The index performance shown in the graph reflects the former index up to June 20, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 15 Managers' Discussion & Analysis iShares MSCI Italy Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS ---------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (14.84)% (15.29)% (15.13)% 4.05% 4.24% 3.85% 7.18% 7.12% 7.03%
CUMULATIVE TOTAL RETURNS ---------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (14.84)% (15.29)% (15.13)% 21.98% 23.07% 20.81% 56.68% 56.19% 55.27%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Telecommunication Services 21.75% Banks 19.69% Energy 19.14% Insurance 13.42% Utilities 7.95% Transportation 4.84% Media 4.78% Diversified Financials 1.91% Automobiles & Components 1.67% Health Care Equipment & Services 1.08% PERFORMANCE REVIEW The total return of the iShares MSCI Italy Fund (the "Italy Fund") was -14.84% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Italy Index over the same period was -15.13%. SIGNIFICANT PERFORMANCE FACTORS The Italy Fund outperformed its benchmark by 0.29 percentage points over the reporting period. This was due to the impact of revenue differential, security sampling and security lending, which contributed 0.72, 0.24 and 0.18 percentage points, respectively, to the Fund's return. Those factors were partially offset by the impact of expenses and uninvested assets, which subtracted 0.83 and 0.02 percentage points, respectively, over the reporting period. 16 2002 iShares Annual Report to Shareholders KEY MARKET CONDITIONS Despite posting a double-digit loss, the Italian equity market still managed to outperform several of its European neighbors over the reporting period. Key differences between several of Italy's largest companies and their European counterparts were a major reason for this outperformance. After the events of September 11, for example, shares of Assicurazioni Generali (8.55% of the Fund as of August 31, 2002) initially fell sharply along with those of other European insurers. Assicurazioni's stock rebounded quickly, however, after it became apparent that the company had little direct exposure to the U.S. economy or the industries most affected by the terrorist attacks, such as airlines. Similarly, Telecom Italia performed better than many other European telecommunications stocks. While quite a few of them remained depressed by investors' concerns about their high debt levels, Telecom Italia's shares performed well in comparison, thanks to the company's ongoing progress in reducing its debt level and ability to maintain its dividend. (As of August 31, 2002, Telecom Italia SpA shares made up 8.14% of the Fund while Telecom Italia SpA RNC shares made up another 4.90% of the Fund.) Nonetheless, the Italian equity market was not immune from the economic slowdown that weighed on its neighbors. Weak consumer demand in Italy itself created a more difficult environment for many companies, leading to declines in their shares, which in turn further eroded consumer confidence. Slow progress on the privatization front also undermined investors' confidence in some of Italy's largest companies during the reporting period. In December, Prime Minister Silvio Berlusconi ruled out full privatization of the oil and natural gas concern ENI (19.06% of the Fund as of August 31, 2002). This led many investors to doubt the resolve of Italy's government to privatize other large companies, including the electric utility Enel (4.84% of the Fund as of August 31, 2002). Shares of the affected companies declined as a result, but recovered later in the reporting period. iShares MSCI Italy Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] MSCI iShares MSCI Italy MSCI Italy Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $10,411 $10,325 $11,151 $11,093 Aug-97 $12,845 $12,852 $17,249 $17,284 Aug-98 $18,966 $19,115 $21,325 $21,650 Aug-99 $19,941 $19,948 $24,732 $24,619 Aug-00 $22,604 $22,723 $21,017 $20,883 Aug-01 $18,398 $18,294 $16,174 $16,123 Aug-02 $15,668 $15,527 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 20, 2001. The index performance shown in the graph reflects the former index up to June 20, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 17 Managers' Discussion & Analysis iShares MSCI Netherlands Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (20.79)% (21.04)% (20.59)% (3.82)% (3.94)% (2.43)% 2.48% 2.41% 4.08%
CUMULATIVE TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (20.79)% (21.04)% (20.59)% (17.70)% (18.20)% (11.60)% 17.17% 16.71% 29.60%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BARCHART] Energy 27.17% Food Beverage & Tobacco 13.99% Diversified Financials 10.97% Media 9.88% Consumer Durables & Apparel 5.80% Materials 4.94% Banks 4.84% Transportation 4.73% Food & Drug Retailing 4.38% Insurance 4.30% PERFORMANCE REVIEW The total return of the iShares MSCI Netherlands Index Fund (the "Netherlands Fund") was -20.79% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Netherlands Index over the same period was -20.59%. SIGNIFICANT PERFORMANCE FACTORS The Netherlands Fund underperformed its benchmark by 0.20 percentage points over the reporting period. This was due to the impact of expenses, which subtracted 0.83 percentage points from the Fund's return. That factor was partially offset by the positive impact of security sampling, revenue differential and uninvested assets, which subtracted 0.32, 0.20 and 0.11 percentage points, respectively, from the Fund's return. 18 2002 iShares Annual Report to Shareholders KEY MARKET CONDITIONS The strong export orientation of many Dutch companies contributed to a sharp decline in the MSCI Netherlands Index over the year ended August 31, 2002. Market giant Royal Dutch Petroleum (24.51% of the Fund as of August 31, 2002) reported first- and second-quarter 2002 results, for example, that were weaker than the comparable period in 2001 due to lower global demand for petroleum products. The stock did benefit as political concerns and OPEC production cuts drove up the price of crude oil during the summer, but some of those gains were offset by lingering concerns about Royal Dutch's string of recent acquisitions. Macroeconomic concerns and corporate fundamentals were not the only major factors affecting the Dutch stock market over the reporting period. In July, Standard & Poor's removed two of the Netherlands' largest stocks -- Royal Dutch and Unilever -- from the S&P 500 Index in order to eliminate the overlap between S&P's U.S. and foreign indices. The move drove down shares of Royal Dutch and Unilever (7.75% of the Fund as of August 31, 2002) over the summer, as indexers readjusted their portfolios. Both stocks later recovered some of the ground they had lost, however. Like Unilever, the food retailer Royal Ahold (4.33 % of the Fund as of August 31, 2002) also faced a significant decline in its shares despite a reputation as a relatively defensive holding. Royal Ahold's shares fell dramatically over the spring and early summer due to accounting concerns. The stock was also pressured during this period by concerns that the euro's strength and weaker economic conditions would cut into Royal Ahold's profits. These trends also weighed on the shares of numerous other Dutch stocks over the summer, including chemical producer Akzo Nobel and insurer Aegon (4.89% and 4.25%, respectively, of the Fund as of August 31, 2002). Far more dramatic was the performance of the Dutch telecommunications company KPN, one of the Fund's smaller positions. The heavily indebted company appeared at risk of bankruptcy in the fall of 2001, but staged a remarkable turnaround after completing a large equity issue at the end of 2001 and making significant efforts to scale back its far-flung investments. Investors noticed: By the end of the reporting period, KPN's shares had risen 93% in U.S. dollar terms from their lows earlier in the year. iShares MSCI Netherlands Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] MSCI iShares MSCI Netherlands MSCI Netherlands Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $11,119 $10,960 $12,934 $12,932 Aug-97 $14,236 $14,661 $16,810 $17,251 Aug-98 $16,715 $16,803 $16,958 $17,551 Aug-99 $18,216 $18,838 $18,076 $19,133 Aug-00 $18,449 $19,706 $16,881 $18,192 Aug-01 $14,791 $16,320 $13,264 $14,651 Aug-02 $11,716 $12,960 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 27, 2001. The index performance shown in the graph reflects the former index up to June 27, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 19 Managers' Discussion & Analysis iShares MSCI Spain Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (15.85)% (16.16)% (17.09)% 1.99% 1.91% 1.89% 8.19% 8.13% 8.41%
CUMULATIVE TOTAL RETURNS ----------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- -------------------------- ---------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (15.85)% (16.16)% (17.09)% 10.34% 9.92% 9.86% 66.51% 65.90% 68.72%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Banks 26.30% Telecommunication Services 22.81% Utilities 17.62% Food Beverage & Tobacco 5.13% Energy 4.92% Capital Goods 3.87% Retailing 3.49% Materials 3.02% Hotels Restaurants & Leisure 2.92% Pharmaceuticals & Biotechnology 2.30% PERFORMANCE REVIEW The total return of the iShares MSCI Spain Index Fund (the "Spain Fund") was -15.85% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Spain Index over the same period was -17.09%. SIGNIFICANT PERFORMANCE FACTORS The Spain Fund outperformed its benchmark by 1.24 percentage points over the reporting period. This was due to the impact of security sampling, security lending, uninvested assets and revenue differential, which contributed 1.75, 0.12, 0.11 and 0.10 percentage points, respectively, to the Fund's return. Those factors were partially offset by the impact of expenses, which subtracted 0.84 percentage points from the Fund's return. As discussed in the Introduction, portfolio management constraints can restrict the Investment Adviser's ability to optimize a Fund's portfolio. Due to the Single Issuer Rule, the Spain Fund was obligated to underweight Telefonica (22.76% of the Fund as of August 31, 2002) over the reporting period. In addition, the Fund underweighted the banking, telecommunications services, utilities and energy sectors while overweighting other areas of the market due to the 5/50 Rule. The stocks that the Fund overweighted generally outperformed those that it underweighted over the reporting period. As a result, security sampling had a positive impact on the Fund's performance during this time. 20 2002 iShares Annual Report to Shareholders KEY MARKET CONDITIONS Numerous equities in the MSCI Spain Index were depressed by an economic downturn in Europe, the United States and key markets in Latin America over the year ended August 31, 2002. The Spanish stock market began the reporting period on a low note. Amid signs that the U.S. and Europe were headed for a significant economic slowdown, the market was already weak when it was dealt another blow by the events of September 11. The MSCI Spain Index recovered fairly quickly, however, as it became more apparent to investors that relatively few Spanish companies would suffer direct financial consequences of September 11. Soon after, a financial crisis in Argentina again shook investors' confidence in many Spanish companies, particularly banks. Over the past few years firms such as Banco Bilbao Vizcaya Argentaria (BBVA) and Banco Santander Central Hispano (BSCH), respectively 13.52% and 12.74% of the Fund as of August 31, 2002, have built a major presence in Latin America with acquisitions. As business activity in the banks' domestic market slowed over 2001, many investors regarded this geographical diversification as an advantage. It became a liability later in 2001, however, when Argentina began to talk of devaluing its currency. Shares of BBVA, BSCH and many other Spanish companies with significant interests in Latin America dropped as a result, and fell still further when Argentina finally did devalue its peso in January 2002. Over the spring, the Spanish equity market recovered some ground. Many investors became more optimistic that the U.S. economy and others around the world would recover fairly quickly, helping to boost results of numerous Spanish companies. This optimism dissipated over the summer, however, as the U.S. economy remained fairly weak. A number of Spanish companies also reported poor results, leading to declines in their equities. In addition, the repercussions of Argentina's crisis were still making themselves felt months after the devaluation. In May, for example, telecommunications firm Telefonica announced that its net profits had fallen 72% over the first quarter due to the impact of currency losses in Argentina. Many Spanish companies also faced new difficulties as Brazil's currency depreciated rapidly over the summer. While the impact of Argentina's crisis had largely been factored into the share prices of many Spanish companies, the troubles in Brazil -- where banks such as BSCH have a significant presence -- put new pressure on the market. iShares MSCI Spain Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] MSCI iShares MSCI Spain MSCI Spain Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $10,845 $10,901 $12,893 $13,047 Aug-97 $15,091 $15,357 $20,476 $21,024 Aug-98 $20,008 $20,559 $24,387 $24,935 Aug-99 $22,686 $23,674 $24,902 $27,501 Aug-00 $22,274 $24,240 $22,578 $23,557 Aug-01 $19,786 $20,349 $18,376 $18,917 Aug-02 $16,651 $16,872 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 27, 2001. The index performance shown in the graph reflects the former index up to June 27, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 21 Managers' Discussion & Analysis iShares MSCI Sweden Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS ---------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (23.29)% (23.05)% (24.58)% (5.68)% (5.68)% (3.77)% 1.60% 1.58% 3.18%
CUMULATIVE TOTAL RETURNS ---------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (23.29)% (23.05)% (24.58)% (25.34)% (25.35)% (17.50)% 10.85% 10.73% 22.47%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BARCHART] Banks 23.08% Capital Goods 21.34% Telecommunication Services 10.28% Materials 9.22% Retailing 8.73% Technology Hardware & Equipment 5.81% Consumer Durables & Apparel 5.37% Commercial Services & Supplies 4.50% Food Beverage & Tobacco 2.90% Health Care Equipment & Services 2.48% PERFORMANCE REVIEW The total return of the iShares MSCI Sweden Index Fund (the "Sweden Fund") was --23.29% for the one-year period ended August 31, 2002. The total return of the corresponding MSCI Sweden Index over the same period was --24.58%. SIGNIFICANT PERFORMANCE FACTORS The Sweden Fund outperformed its benchmark by 1.29 percentage points over the reporting period. This was due to the positive impact of security sampling, revenue differential and security lending, which contributed 1.69, 0.46 and 0.06 percentage points, respectively, to the Fund's return. Those factors were partially offset by the impact of expenses, which subtracted 0.92 percentage points from the Fund's return. As discussed in the Introduction, portfolio management constraints can restrict the Investment Adviser's ability to optimize a Fund's portfolio. To comply with the Single Issuer Rule, for example, the Sweden Fund was obligated to underweight Ericsson for part of the reporting period. (As of August 31, 2002, shares of Telefonakfiebolaget LM Ericsson made up 11.61% of the Fund.) During this time the portfolio was overweighted in other securities which outperformed the benchmark. As Ericsson's market value depreciated over the 22 2002 iShares Annual Report to Shareholders reporting period, its Index weighting declined to below the Single Issuer limit, making the rule no longer applicable. As a result, the Fund had shifted to an Index weighting in Ericsson by the end of the reporting period. Nonetheless, the earlier underweighting of Ericsson enabled the Fund to outperform the Index over the reporting period. KEY MARKET CONDITIONS Sweden's equity market was among the weakest in Europe over the reporting period, due in large part to ongoing difficulties for Ericsson, one of its largest stocks. The telecommunications equipment maker surprised many investors by reporting heavier than expected losses for the fourth quarter of 2001 and the first quarter of 2002. After the second announcement (in April), Ericsson's shares lost nearly 24% of their value in a single day. Ericsson's woes sent a ripple effect throughout the Swedish equity market and economy. While announcing its first-quarter 2002 results, the company also said it would cut 17,000 jobs on top of the 22,000 it had already eliminated. The job cuts dealt a blow to consumer confidence in Sweden. The dramatic decline in Ericsson's share price also had a significant impact on the investment portfolios of individual Swedish investors, pension funds and other Swedish companies. In August, for example, Swedish banking giant Nordea (10.52% of the Fund as of August 31, 2002) said that its operating profits had dropped by 44% over the first half of 2002 largely as a result of equity losses. This announcement, in turn, sent Nordea's shares down. In addition, the exodus of international investors from Ericsson helped to weaken Sweden's currency in late 2001. Despite Ericsson's influence, Sweden's economy appeared to be strong enough over the spring that the country's central bank saw the need to raise interest rates in March and again in April. Resurgent consumer spending both at home and abroad also led to good results and higher share prices for several Swedish companies, including the retailer Hennes & Mauritz (8.73% of the Fund as of August 31, 2002) and the appliance maker Electrolux (5.37% of the Fund as of August 31, 2002). Another standout was Securitas (4.50% of the Fund as of August 31, 2002). As one of the world's largest providers of security services, the company and its shareholders were among the relatively few to benefit from the increased demand for security worldwide in the wake of September 11. iShares MSCI Sweden Index Fund GROWTH OF $10,000 INVESTMENT iShares MSCI [GRAPH] Sweden MSCI Sweden Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $11,413 $11,192 $13,357 $13,335 Aug-97 $14,848 $14,845 $16,354 $16,584 Aug-98 $15,661 $16,081 $16,750 $17,404 Aug-99 $19,590 $20,831 $31,615 $37,466 Aug-00 $27,260 $31,604 $18,896 $21,499 Aug-01 $14,451 $16,238 $14,496 $16,063 Aug-02 $11,085 $12,247 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 27, 2001. The index performance shown in the graph reflects the former index up to June 27, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 23 Managers' Discussion & Analysis iShares MSCI Switzerland Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS -------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------ ------------------------ ---------------------- NAV Market Index NAV Market Index NAV Market Index (10.47)% (10.60)% (7.83)% (1.18)% (1.24)% 1.08% 1.88% 1.88% 3.70%
CUMULATIVE TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV Market Index NAV Market Index NAV Market Index (10.47)% (10.60)% (7.83)% (5.75)% (6.06)% 5.52% 12.84% 12.82% 26.54%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% OF PORTFOLIO) [BAR CHART] PHARMACEUTICALS & BIOTECHNOLOGY 32.86% FOOD BEVERAGE & TOBACCO 13.94% MATERIALS 13.51% BANKS 13.25% INSURANCE 6.67% CONSUMER DURABLES & APPAREL 4.82% CAPITAL GOODS 4.42% HEALTH CARE EQUIPMENT & SERVICES 3.11% TELECOMMUNICATION SERVICES 2.71% COMMERCIAL SERVICES & SUPPLIES 2.52% PERFORMANCE REVIEW The total return of the iShares MSCI Switzerland Index Fund (the "Switzerland Fund") was -10.47% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Switzerland Index over the same period was -7.83%. SIGNIFICANT PERFORMANCE FACTORS The Switzerland Fund underperformed its benchmark by 2.64 percentage points over the reporting period. This was due to the impact of security sampling (explained in more detail below) and expenses, which subtracted 2.35 and 0.83 percentage points, respectively, from the Fund's return. These factors were partially offset by the positive impact of revenue differential, uninvested assets and security lending, which respectively contributed 0.45, 0.08 and 0.01 percentage points to the Fund's return. As discussed in the Introduction, portfolio management constraints can restrict the Investment Adviser's ability to optimize a Fund's portfolio. To comply with the 5/50 rule, the Switzerland Fund was obligated to underweight several of the largest stocks in the MSCI Switzerland Index, including Novartis, Nestle, Roche AG Genusschein and UBS during the reporting period, while overweighting other 24 2002 iShares Annual Report to Shareholders Swiss stocks. These overweighted positions generally did not perform as well as the stocks the Fund was underweighting. As a result, security sampling had a negative impact on the Fund's performance relative to its benchmark. KEY MARKET CONDITIONS The Swiss equity market was weak in absolute terms but stronger than quite a few other European markets over the year ended August 31, 2002. In large part, this was due to the defensive qualities of the Swiss market, which is dominated by stocks in the Pharmaceuticals and Biotechnology sector and the Food, Beverage and Tobacco sector. Several stocks in these areas held up solidly amid the global economic slowdown. Nestle (13.78% of the Fund as of August 31, 2002) performed especially well over the reporting period, driven by strong growth in its eastern European markets and the successful spin-off of Alcon, its U.S. eye care subsidiary. Shares of Swiss pharmaceutical makers such as Novartis (23.19% of the Fund as of August 31, 2002) also performed well over much of the period. Many investors apparently favored Novartis for its defensive qualities and for the growth prospects offered by new drugs in its pipeline. The performance of Switzerland's two other large sectors, banks and insurers, was mixed. On one end of the spectrum was UBS (5.69% of the Fund as of August 31, 2002). Its stock was a standout over the reporting period, as the bank managed to achieve results that were better than many investors had expected. One reason was that UBS successfully employed derivatives to reduce its exposure to potential loan defaults in the poor economic environment. At the other end of the spectrum were stocks such as Credit Suisse Group (4.83% of the Fund as of August 31, 2002), which faced major investment losses. The share price of Swiss Re (4.09% of the Fund as of August 31, 2002) and other Swiss insurers also declined dramatically in the wake of September 11, as investors worried about the companies' exposure to the devastation at the World Trade Center and losses at several airlines. Toward the end of the reporting period, many of the Swiss market's outperformers also weakened, as the strength of the Swiss franc began to make the country's goods less competitive overseas and fears grew of a "double-dip" recession in Europe and the United States. iShares MSCI Switzerland Index Fund GROWTH OF $10,000 INVESTMENT IShares MSCI [GRAPH] Switzerland MSCI Switzerland Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $10,260 $10,314 $10,210 $10,342 Aug-97 $11,972 $11,992 $15,123 $16,262 Aug-98 $14,515 $15,601 $15,019 $16,698 Aug-99 $14,728 $15,966 $13,560 $14,302 Aug-00 $15,017 $16,037 $14,988 $15,902 Aug-01 $12,603 $13,728 $11,917 $13,201 Aug-02 $11,284 $12,654 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 20, 2001. The index performance shown in the graph reflects the former index up to June 20, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 25 Managers' Discussion & Analysis iShares MSCI United Kingdom Index Fund Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV Market Index NAV Market Index NAV Market Index (14.19)% (14.34)% (13.71)% (1.55)% (1.45)% (1.08)% 4.53% 4.52% 5.11%
CUMULATIVE TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/02 FIVE YEARS ENDED 8/31/02 INCEPTION TO 8/31/02 ------------------------- ------------------------- ------------------------- NAV Market Index NAV Market Index NAV Market Index (14.19)% (14.34)% (13.71)% (7.51)% (7.04)% (5.27)% 33.23% 33.14% 38.08%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96)."Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% OF PORTFOLIO) [BAR GRAPH] BANKS 20.51% ENERGY 16.92% PHARMACEUTICALS & BIOTECHNOLOGY 11.10% TELECOMMUNICATION SERVICES 9.40% FOOD BEVERAGE & TOBACCO 7.82% UTILITIES 4.76% MATERIALS 3.90% MEDIA 3.67% INSURANCE 3.06% CAPITAL GOODS 2.80% PERFORMANCE REVIEW The total return of the iShares MSCI United Kingdom Index Fund (the "United Kingdom Fund") was -14.19% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI United Kingdom Index over the same period was -13.71%. SIGNIFICANT PERFORMANCE FACTORS The United Kingdom Fund underperformed its benchmark by 0.48 percentage points over the reporting period. This was due to the impact of expenses, which subtracted 0.84 percentage points from the Fund's return. That factor was partially offset by the positive impact of security sampling, uninvested assets and revenue differential, which contributed 0.25, 0.09 and 0.02 percentage points, respectively, to the Fund's return. KEY MARKET CONDITIONS In the face of a global economic slowdown and investor pessimism, many of the U.K.'s largest stocks posted significant declines over the year ended August 31, 2002. U.K. energy stocks rode the wave of crude-oil prices down and up and then down again over the reporting period. Weak global demand during the fall and winter of 2001 pushed down the price of oil and resulted in profit declines for BP and Shell Transport & Trading 26 2002 iShares Annual Report to Shareholders (respectively 11.44% and 4.31% of the Fund as of August 31, 2002). Both companies reported better results as political tensions in the Middle East and OPEC production cuts forced up the price of crude oil over the spring. The rally was relatively short-lived, however. Energy stocks sank back over the summer as the price of oil declined. Shell's stock also came under pressure when Standard & Poor's removed it from the S&P 500 Index in July 2002. The move, which S&P said was simply intended to eliminate the overlap between its U.S. and foreign indices, drove down Shell's stock as indexers readjusted their portfolios. Facing even more difficulties was Vodafone Group (7.11% of the Fund as of August 31, 2002), the U.K. wireless operator that is Europe's largest telecommunications stock. Vodafone's shares remained weak, reaching lows not seen for several years. Many investors remained skeptical about Vodafone's plans to introduce third-generation wireless services in Europe. They also worried about slowing revenue growth in the company's key markets. Many of their fears were realized in May 2002, when Vodafone announced the largest-ever loss in U.K. corporate history and its shares sank even lower. Later in the summer, Vodafone faced additional selling pressure after U.S. telecommunications giant WorldCom declared bankruptcy and revealed accounting irregularities. This led some investors to question whether Vodafone might present similar problems, a claim that the company vehemently denied. Nonetheless, the mere rumor that Vodafone might go the way of Enron and WorldCom created a ripple effect across the U.K. market. There was much speculation about how much exposure British banks had to failing businesses and bad debts in general. (As of August 31, 2002, banks had a collective weighting of 20.34% in the Fund -- representing its largest sector.) These concerns led to declines in the share prices of Royal Bank of Scotland Group and Lloyds TSB Group (respectively 4.31% and 3.24% of the Fund as of August 31, 2002), among others. U.K. banking stocks were not the only so-called "defensive" issues to reveal some potential vulnerabilities over the reporting period. As in several other markets, a number of U.K. pharmaceutical stocks did not offer the haven many investors expect them to provide during an economic downturn. Shares of GlaxoSmithKline and AstraZeneca Group (respectively 7.55% and 3.24% of the Fund as of August 31, 2002) came under especially intense pressure as the companies faced legal challenges to the patents on their best-selling drugs. Many investors also worried that GlaxoSmithKline and AstraZeneca would not be able to introduce promising new drugs fast enough to offset the potential loss of earnings from its top sellers. iShares MSCI United Kingdom Index Fund GROWTH OF $10,000 INVESTMENT iShares MSCI [GRAPH] United Kingdom MSCI United Kingdom Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $11,041 $11,059 $12,768 $12,973 Aug-97 $14,405 $14,576 $17,432 $17,820 Aug-98 $16,564 $16,714 $18,581 $18,939 Aug-99 $19,102 $19,428 $18,007 $18,520 Aug-00 $18,528 $18,909 $16,727 $17,105 Aug-01 $15,526 $16,003 $14,585 $15,081 Aug-02 $13,323 $13,808 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 20, 2001. The index performance shown in the graph reflects the former index up to June 20, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 27 Schedule of Investments iShares MSCI Austria Index Fund August 31, 2002 Security Shares Value -------------------------------------------------------------- COMMON STOCKS - 99.66% Erste Bank der oesterreichischen Sparkassen AG 44,892 $ 3,007,769 OMV AG 26,658 2,379,011 Telekom Austria AG/1/ 242,478 2,040,258 Flughafen Wien AG 23,364 732,975 Voest-Alpine AG 24,606 710,405 Mayr-Melnhof Karton AG 11,250 700,574 Oesterreichische Elektrizitaetswirtschafts AG "A" 9,828 675,151 BWT AG 42,426 674,022 Boehler-Uddeholm AG 15,282 671,407 Wienerberger Baustoffindustrie AG 43,632 656,382 VA Technologie AG 26,496 532,676 Generali Holding Vienna AG 3,582 515,433 RHI AG/1/ 62,694 467,271 Lenzing AG 4,914 365,044 Austrian Airlines AG/1/ 48,114 323,215 BBAG Oesterreichische Brau-Beteiligungs AG 4,608 238,150 TOTAL COMMON STOCKS (COST: $15,974,123) 14,689,743 TOTAL INVESTMENTS IN SECURITIES - 99.66% (COST $15,974,123) 14,689,743 OTHER ASSETS, LESS LIABILITIES - 0.34% 50,747 ----------- NET ASSETS - 100.00% $14,740,490 =========== /1/ Non-income earning securities. See Notes to Financial Statements. 28 2002 iShares Annual Report to Shareholders Schedule of Investments iShares MSCI Belgium Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------- COMMON STOCKS - 99.53% Fortis 140,775 $ 2,511,229 Dexia Group 116,225 1,534,170 Electrabel SA 4,400 1,019,202 Solvay SA 7,550 522,362 Algemene Maatschappij voor Nijverheidskredit NV 13,400 517,103 Interbrew SA 19,225 513,006 Groupe Bruxelles Lambert SA 11,475 507,974 KBC Bankverzekeringsholding 13,950 504,263 Delhaize 14,425 431,605 UCB SA 14,350 409,658 Agfa-Gevaert NV 19,000 363,157 Colruyt NV 6,725 319,201 Cofinimmo 2,825 268,315 Bekaert NV 4,975 229,747 Omega Pharma NV 5,150 227,273 NV Umicore SA 5,475 217,722 SA D'Ieteren NV 1,025 143,743 Barco NV 2,475 104,854 Compagnie Maritime Belge SA 675 33,131 TOTAL COMMON STOCKS (COST: $12,774,030) 10,377,715 SHORT TERM INSTRUMENTS - 2.88% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 240,980 $ 240,980 Dreyfus Money Market Fund 20,256 20,256 Goldman Sachs Financial Square Prime Obligation Fund 10,023 10,023 Providian Temp Cash Money Market Fund 29,337 29,337 TOTAL SHORT TERM INSTRUMENTS (COST: $300,596) 300,596 TOTAL INVESTMENTS IN SECURITIES - 102.41% (COST $13,074,626) 10,678,311 OTHER ASSETS, LESS LIABILITIES - (2.41%) (251,435) ----------- NET ASSETS - 100.00% $10,426,876 =========== See Notes to Financial Statements. Schedules of Investments 29 Schedule of Investments iShares MSCI Emu Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------------- COMMON STOCKS - 98.09% AUSTRIA - 0.41% Boehler-Uddeholm AG 399 $ 17,530 BWT AG 1,026 16,300 Erste Bank der oesterreichischen Sparkassen AG 1,653 110,751 Flughafen Wien AG 798 25,035 Mayr-Melnhof Karton AG 342 21,297 Oesterreichische Elektrizitaetswirtschafts AG "A" 798 54,820 OMV AG 1,083 96,649 RHI AG1 4,332 32,287 Telekom Austria AG1 8,322 70,023 VA Technologie AG 2,052 41,253 Voest-Alpine AG 1,653 47,724 Wienerberger Baustoffindustrie AG 171 2,572 536,241 BELGIUM - 3.15% Agfa-Gevaert NV 8,094 154,705 Barco NV 741 31,393 Bekaert NV 1,368 63,174 Colruyt NV 1,995 94,692 Compagnie Maritime Belge SA 570 27,977 Delhaize 3,819 114,267 Dexia Group 47,082 621,482 Electrabel SA 2,223 514,929 Fortis 66,918 1,193,723 Groupe Bruxelles Lambert SA 5,586 247,280 Interbrew SA 10,830 288,991 KBC Bankverzekeringsholding 6,669 241,070 NV Umicore SA 1,596 63,467 Omega Pharma NV 1,482 65,402 SA D'Ieteren NV 342 47,961 Solvay SA 2,622 181,408 UCB SA 6,213 177,366 4,129,287 FINLAND - 5.22% Amer Group PLC 912 27,279 Fortum OYJ 17,727 100,482 Instrumentarium OYJ 3,192 74,157 KCI Konecranes 798 21,443 Kesko OYJ 5,700 61,433 KONE OYJ "B" 1,368 37,564 Metso OYJ 5,700 63,222 Nokia OYJ 350,550 4,682,261 Orion-Yhtyma OYJ "B" 627 13,896 Outokumpu OYJ 5,700 60,985 Rautaruukki OYJ 11,400 47,737 Sampo OYJ "A" 18,924 132,879 Sonera OYJ1 42,180 186,558 Stora Enso OYJ 51,300 566,480 TietoEnator OYJ 6,270 96,537 UPM-Kymmene OYJ 17,442 555,913 Uponor OYJ 4,047 81,956 Wartsila OYJ "B" 2,052 29,682 6,840,464 FRANCE - 27.12% Accor 13,965 486,180 Air France 6,213 83,352 Alcatel "A" 81,510 414,063 ALSTOM1 18,981 140,351 Altran Technologies 4,503 74,189 Atos Origin1 1,425 52,098 Autoroutes du Sud de la France - ASF1 5,700 145,337 Aventis 49,761 2,930,420 AXA 102,315 1,401,726 BNP Paribas 58,368 2,722,354 Bouygues SA 11,514 285,112 Business Objects SA1 4,332 82,205 Cap Gemini Ernst & Young 7,467 224,003 Carrefour SA 37,392 1,682,034 Castorama-Dubois Investissements 5,472 357,394 Club Mediterranee SA1 1,083 29,738 Compagnie de Saint-Gobain 21,660 647,868 Compagnie Generale des Etablissements Michelin "B" 9,462 338,690 Dassault Systemes SA 2,850 92,317 Essilor International SA 6,270 246,570 30 2002 iShares Annual Report to Shareholders Schedule of Investments (Continued) iShares MSCI EMU Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------------- Etablissements Economiques du Casino Guichard - Perrachon SA 2,508 $ 177,579 European Aeronautic Defence and Space Co. 21,375 285,713 France Telecom 29,070 363,767 Groupe Danone 9,177 1,144,763 Imerys SA 741 96,722 L'Air Liquide SA 7,308 1,012,671 L'Oreal SA 24,909 1,796,664 Lafarge SA 9,633 891,315 Lagardere SCA 8,949 347,270 LVMH Moet Hennessy Louis Vuitton SA 16,587 690,840 Pechiney "A" 5,016 183,679 Pernod Ricard 3,477 303,986 Pinault-Printemps-Redoute 5,016 410,744 PSA Peugeot Citroen SA 11,628 520,220 Publicis Groupe SA 6,441 142,249 Renault SA 10,887 526,360 Sagem SA 855 57,562 Sanofi-Synthelabo 28,443 1,705,687 Schneider Electric SA 14,421 663,278 Societe BIC SA 2,964 113,363 Societe Generale "A" 22,059 1,307,704 Societe Television Francaise 1 8,493 173,158 Sodexho Alliance 7,524 220,621 Suez 60,021 1,377,944 Technip-Coflexip 1,322 101,124 Thales 4,503 169,133 Thomson Multimedia1 10,716 212,807 TotalFinaElf SA 46,569 6,640,320 Unibail (Union du Credit-Bail Immobilier) 2,907 175,042 Valeo 5,130 197,714 Vinci SA 4,047 246,265 Vivendi Universal SA 64,524 809,950 Zodiac SA 3,420 75,430 35,577,645 GERMANY - 19.47% adidas-Salomon AG 2,850 203,332 AIXTRON AG 5,700 41,980 Allianz AG 12,939 1,662,136 ALTANA AG 5,700 279,494 BASF AG 40,470 1,668,489 Bayer AG 51,300 1,218,985 Beiersdorf 2,394 227,262 Buderus AG 2,850 61,321 Continental AG1 8,550 138,349 DaimlerChrysler AG 62,700 2,709,806 Deutsche Bank AG 40,014 2,479,636 Deutsche Boerse AG 3,648 137,735 Deutsche Lufthansa AG1 12,198 154,075 Deutsche Post AG 25,650 279,467 Deutsche Telekom AG 150,537 1,688,875 Douglas Holding AG 2,109 48,087 E.ON AG 43,320 2,232,063 EPCOS AG1 4,218 63,082 Fresenius Medical Care AG 2,565 73,199 GEHE AG 912 40,068 HeidelbergerCement AG 2,508 110,188 HVB Group 25,878 557,811 Infineon Technologies AG1 24,681 284,883 Karstadt Quelle AG 2,850 60,930 Linde AG 6,783 282,708 Man AG 8,550 175,159 Merck KGaA 3,306 65,167 METRO AG1 9,549 242,541 MLP AG 4,446 69,282 Muenchener Rueckversicherungs- Gesellschaft AG 7,467 1,359,760 RWE AG 26,049 956,689 SAP AG 15,048 1,158,741 Schering AG 11,742 649,570 SGL CARBON AG1 1,482 27,134 Siemens AG 58,824 2,772,463 ThyssenKrupp AG 25,650 338,075 TUI AG 11,001 245,546 Volkswagen AG 16,644 757,362 WCM Beteiligungs- und Grundbesitz-Aktiengesellschaft1 7,300 22,694 25,544,144 Schedules of Investments 31 Schedule of Investments (Continued) iShares MSCI EMU Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------------- GREECE - 0.86% Hellenic Telecommunications Organization SA ADR 84,303 $ 603,609 National Bank of Greece SA ADR 139,593 524,870 1,128,479 IRELAND - 2.50% Allied Irish Bank PLC 65,265 844,855 Bank of Ireland 74,214 867,539 CRH PLC 39,330 561,196 DCC PLC 5,700 60,930 Elan Corp. PLC1 24,624 77,275 Greencore Group PLC 6,270 16,540 Independent News & Media PLC 34,200 57,018 Irish Life & Permanent PLC 19,722 255,301 Jefferson Smurfit Group PLC 73,164 216,690 Kerry Group PLC "A" 9,747 146,822 Ryanair Holdings PLC1 21,760 122,702 Waterford Wedgwood PLC 83,334 47,400 3,274,268 ITALY - 10.78% ACEA SpA 11,400 64,842 Alitalia - Linee Aeree Italiane SpA1 159,429 52,070 Alleanza Assicurazioni SpA 30,780 234,842 Arnoldo Mondadori Editore SpA 11,400 67,972 Assicurazione Generali SpA 73,872 1,403,982 Autogrill SpA1 8,550 84,771 Autostrade SpA 57,000 488,553 Banca di Roma SpA 98,229 132,069 Banca Fideuram SpA 19,950 100,757 Banca Monte dei Paschi Siena SpA 65,892 186,105 Banca Nazionale del Lavoro SpA1 114,000 164,342 Banca Popolare di Milano S.c.a.r.l.1 28,500 112,076 Benetton Group SpA 6,327 73,465 Bulgari SpA 11,400 53,552 e.Biscom SpA1 627 14,235 Enel SpA 153,004 777,245 ENI SpA 204,687 3,099,309 Fiat SpA 17,100 195,701 Fineco SpA1 145,464 74,318 Gruppo Editoriale L'Espresso SpA 11,799 40,383 IntesaBci SpA 266,589 650,984 Italcementi SpA 8,265 78,217 Italglas SpA 14,250 145,337 La Rinascente SpA 14,250 47,095 Luxottica Group SpA 11,400 153,722 Mediaset SpA 45,600 314,376 MEDIOBANCA - Banca di Credito Finanziario SpA 37,107 290,756 Mediolanum SpA 17,100 96,928 Parmalat Finanziaria SpA 31,350 91,003 Pirelli SpA 57,000 60,762 Riunione Adriatica di Sicurta SpA 25,650 294,308 Sanpaolo IMI SpA 62,700 520,811 SEAT Pagine Gialle SpA1 362,178 225,890 Snam Rete Gas SpA 41,667 124,630 Telecom Italia Mobile SpA 277,077 1,287,965 Telecom Italia SpA 173,850 1,382,681 Tiscali SpA1 11,970 62,333 UniCredito Italiano SpA 236,436 895,005 14,143,392 LUXEMBOURG - 0.23% Arcelor1 24,738 300,824 300,824 NETHERLANDS - 16.97% ABN AMRO Holding NV 99,978 1,629,531 AEGON NV 67,545 967,103 Akzo Nobel NV 20,121 750,222 ASML Holding NV1 32,775 335,239 Burhmann NV 6,327 45,295 Getronics NV1 20,862 20,255 Hagemeyer NV 6,612 74,245 Heineken NV 13,623 553,898 IHC Caland NV 1,710 85,944 ING Groep NV 124,203 2,711,339 Koninklijke Ahold NV 43,947 733,097 Koninklijke Luchtvaart Maatschappij NV 3,420 38,503 Koninklijke Numico NA "CVA" 10,203 200,819 32 2002 iShares Annual Report to Shareholders Schedule of Investments (Continued) iShares MSCI EMU Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------------- Koninklijke (Royal) KPN NV1 126,369 $ 692,755 Koninklijke (Royal) Philips Electronics NV 95,817 1,916,905 Koninklijke Vendex KBB NV 5,757 59,845 Oce NV 5,244 49,370 QIAGEN NV1 10,431 63,423 Reed Elsevier NV 46,683 591,950 Royal Dutch Petroleum Co. 155,040 6,994,056 TPG NV 24,567 484,498 Unilever NV 42,009 2,482,144 Vedior NV 6,726 63,454 VNU NV 14,307 350,765 Wolters Kluwer NV 20,007 357,877 22,252,532 PORTUGAL - 1.17% Banco Comercial Portugues SA "R" 128,324 356,138 Banco Espirito Santo SA 7,182 79,518 BPI-SGPS SA 34,941 76,070 Brisa-Auto Estradas de Portugal SA 34,428 183,333 CIMPOR-Cimentos de Portugal SGPS SA 5,301 93,575 Electricidade de Portugal SA 141,075 231,039 Jeronimo Martins SGPS SA1 5,928 40,055 Portugal Telecom SGPS SA 64,581 417,368 PT Multimedia-Servicos de Telecomunicacoes e Multimedia SGPS SA1 3,648 25,579 Sonae SGPS SA1 72,333 36,174 1,538,849 SPAIN - 9.57% Acciona SA 1,539 59,918 Acerinox SA 3,591 134,350 ACS SA 3,933 107,264 Altadis SA 21,603 487,057 Amadeus Global Travel Distribution SA 17,955 97,725 Autopistas Concesionaria Espanola SA 8,892 99,324 Banco Bilbao Vizcaya Argentaria SA 228,114 2,239,304 Banco Santander Central Hispano SA 305,634 2,041,146 Corporacion Mapfre SA 11,286 69,507 Endesa SA 65,436 776,477 Fomento de Costrucciones y Contratas SA 3,591 73,954 Gas Natural SDG SA 15,219 275,516 Grupo Dragados SA 10,659 152,614 Grupo Ferrovial SA 3,819 93,630 Iberdrola SA 55,746 718,895 Iberia Lineas Aereas de Espana SA 28,956 50,262 Industria de Desino Textil SA 16,252 317,166 Metrovacesa SA 3,266 59,670 NH Hoteles SA1 7,923 82,361 Promotora de Infomaciones SA 3,819 34,606 Repsol YPF SA 68,856 898,096 Sociedad General de Aguas de Barcelona SA 4,446 44,037 Sol Melia SA 10,602 51,986 Tele Pizza SA1 13,281 12,895 Telefonica Publicidad e Informacion SA 12,540 42,674 Telefonica SA1 328,320 3,010,497 Terra Networks SA1 29,754 157,277 Union Electrica Fenosa SA 18,810 232,796 Vallehermoso SA 7,980 62,606 Zeltia SA 10,089 67,181 12,550,791 SWITZERLAND - 0.64% STMicroelectronics NV 41,724 842,908 842,908 TOTAL COMMON STOCKS (COST: $165,666,305) 128,659,824 Schedules of Investments 33 Schedule of Investments (Continued) iShares MSCI EMU Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------------- PREFERRED STOCKS - 1.47% GERMANY - 0.75% Fresenius Medical Care AG 1,140 $ 23,712 Henkel KGaA 3,534 241,908 Hugo Boss AG 1,140 12,242 Porsche AG 513 246,514 ProsiebenSat.1 Media AG 5,700 49,191 RWE AG 4,104 113,900 Volkswagen AG 6,840 220,688 Wella AG 1,710 79,823 987,978 ITALY - 0.72% Fiat SpA 7,182 51,979 Fiat SpA - RNC 5,700 40,526 IntesaBci SpA 57,000 103,415 Telecom Italia SpA 139,650 747,756 943,676 TOTAL PREFERRED STOCKS (COST: $1,963,471) 1,931,654 SHORT TERM INSTRUMENTS - 4.30% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 4,521,987 4,521,987 Dreyfus Money Market Fund 380,109 380,109 Goldman Sachs Financial Square Prime Obligation Fund 188,067 188,067 Providian Temp Cash Money Market Fund 550,503 550,503 TOTAL SHORT TERM INSTRUMENTS (COST: $5,640,666) 5,640,666 TOTAL INVESTMENTS IN SECURITIES - 103.86% (COST $173,270,442) 136,232,144 OTHER ASSETS, LESS LIABILITIES - (3.86%) (5,064,398) ------------ NET ASSETS - 100.00% $131,167,746 ============ /1/ Non-income earning securities. See notes to financial statements. 34 2002 iShares Annual Report to Shareholders Schedule of Investments iShares MSCI France Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------------- COMMON STOCKS - 99.74% TotalFinaElf SA 62,512 $ 8,913,649 Aventis 66,224 3,899,925 BNP Paribas 78,160 3,645,476 L'Oreal SA 33,104 2,387,762 Sanofi-Synthelabo 39,392 2,362,283 Carrefour SA 52,176 2,347,075 AXA 135,840 1,861,022 Suez 80,080 1,838,453 Societe Generale "A" 29,440 1,745,265 Groupe Danone 12,464 1,554,792 L' Air Liquide SA 9,882 1,369,351 Lafarge SA 12,800 1,184,348 STMicroelectronics NV 57,232 1,156,201 Vivendi Universal SA 90,432 1,135,166 Schneider Electric SA 19,952 917,670 LVMH Moet Hennessy Louis Vuitton SA 21,696 903,627 Compagnie de Saint-Gobain 30,032 898,281 Renault SA 15,408 744,940 PSA Peugeot Citroen SA 15,232 681,458 Accor 18,608 647,823 Alcatel "A" 108,336 550,336 Pinault-Printemps-Redoute 6,640 543,728 Lagardere SCA 12,880 499,815 France Telecom 39,600 495,535 Compagnie Generale des Etablissements Michelin "B" 12,800 458,173 Castorama-Dubois Investissements 7,008 457,716 Bouygues SA 16,656 412,439 Arcelor1 33,856 411,702 Vinci SA 6,320 384,580 European Aeronautic Defence and Space Co. 27,936 373,412 Essilor International SA 9,440 371,231 Pernod Ricard 4,176 365,098 Valeo 7,808 300,926 Thomson Multimedia1 14,912 296,134 Cap Gemini Ernst & Young 9,840 295,190 Sodexho Alliance 8,736 256,160 Societe Television Francaise 1 12,352 251,836 Unibail (Union du Credit-Bail Immobilier) 4,160 250,489 Thales 6,464 242,788 Pechiney "A" 6,608 241,976 Publicis Groupe SA 9,568 211,308 Autoroutes du Sud de la France - ASF1 7,904 201,534 Etablissements Economiques du Casino Guichard - Perrachon SA 2,784 197,121 ALSTOM1 24,672 182,432 Technip-Coflexip 1,920 146,867 Dassault Systemes SA 3,936 127,494 Societe BIC SA 3,322 127,055 Business Objects SA1 6,048 114,768 Imerys SA 814 106,250 Air France 7,872 105,608 Altran Technologies 6,160 101,488 Zodiac SA 3,888 85,752 Sagem SA 1,136 76,480 Atos Origin1 1,952 71,365 Club Mediterranee SA1 1,232 33,830 TOTAL COMMON STOCKS (COST: $66,793,397) 49,543,183 SHORT TERM INSTRUMENTS - 6.27% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 2,498,440 2,498,440 Dreyfus Money Market Fund 210,014 210,014 Goldman Sachs Financial Square Prime Obligation Fund 103,908 103,908 Providian Temp Cash Money Market Fund 304,158 304,158 TOTAL SHORT TERM INSTRUMENTS (COST: $3,116,520) 3,116,520 TOTAL INVESTMENTS IN SECURITIES - 106.01% (COST $69,909,917) 52,659,703 OTHER ASSETS, LESS LIABILITIES - (6.01%) (2,985,423) ----------- NET ASSETS - 100.00% $49,674,280 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 35 Schedule of Investments iShares MSCI Germany Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------------- COMMON STOCKS - 94.91% Siemens AG 198,744 $ 9,367,103 DaimlerChrysler AG 211,250 9,129,929 Deutsche Bank AG 138,294 8,569,969 E.ON AG 144,638 7,452,473 Allianz AG 45,630 5,861,602 Deutsche Telekom AG 510,250 5,724,495 BASF AG 115,570 4,764,697 Muenchener Rueckversicherungs- Gesellschaft AG 24,466 4,455,322 Bayer AG 178,828 4,249,293 SAP AG 52,676 4,056,210 RWE AG 98,410 3,614,255 Schering AG 48,802 2,699,736 Volkswagen AG 59,280 2,697,453 HVB Group 93,236 2,009,739 ThyssenKrupp AG 88,998 1,173,020 Deutsche Post AG 103,948 1,132,555 Infineon Technologies AG1 92,560 1,068,383 Linde AG 24,726 1,030,552 METRO AG1 39,104 993,226 ALTANA AG 20,098 985,485 adidas-Salomon AG 11,596 827,311 TUI AG 36,660 818,262 Beiersdorf 8,476 804,626 Man AG 36,686 751,564 Deutsche Lufthansa AG1 55,484 700,830 Deutsche Boerse AG 16,978 641,025 Continental AG1 32,734 529,675 GEHE AG 9,438 414,654 HeidelbergerCement AG 8,450 371,247 Karstadt Quelle AG 14,300 305,717 Fresenius Medical Care AG 10,582 301,987 Buderus AG 13,156 283,066 Merck KGaA 14,040 276,752 MLP AG 17,030 265,379 QIAGEN NV1 41,054 249,617 EPCOS AG1 15,652 234,082 WCM Beteiligungs- und Grundbesitz- Aktiengesellschaft1 56,706 176,288 AIXTRON AG 19,578 144,190 Douglas Holding AG 5,902 134,570 SGL CARBON AG1 5,408 99,017 TOTAL COMMON STOCKS (COST: $147,927,986) 89,365,356 PREFERRED STOCKS - 4.58% Henkel KGaA 15,444 1,057,165 Porsche AG 2,184 1,049,485 Volkswagen AG 29,354 947,089 RWE AG 16,432 456,042 Wella AG 6,864 320,414 Fresenius Medical Care AG 8,892 184,956 ProsiebenSat.1 Media AG 19,760 170,529 Hugo Boss AG 11,778 126,478 TOTAL PREFERRED STOCKS (COST: $4,338,705) 4,312,158 SHORT TERM INSTRUMENTS - 3.52% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 2,656,810 2,656,810 Dreyfus Money Market Fund 223,326 223,326 Goldman Sachs Financial Square Prime Obligation Fund 110,495 110,495 Providian Temp Cash Money Market Fund 323,438 323,438 TOTAL SHORT TERM INSTRUMENTS (COST: $3,314,069) 3,314,069 TOTAL INVESTMENTS IN SECURITIES - 103.01% (COST $155,580,760) 96,991,583 OTHER ASSETS, LESS LIABILITIES - (3.01%) (2,831,924) ----------- NET ASSETS - 100.00% $94,159,659 =========== /1/ Non-income earning securities. See notes to financial statements. 36 2002 iShares Annual Report to Shareholders Schedule of Investments iShares MSCI Italy Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------------- COMMON STOCKS - 93.57% ENI SpA 371,852 $ 5,630,471 Telecom Italia Mobile SpA 543,582 2,526,787 Assicurazione Generali SpA 132,834 2,524,590 Telecom Italia SpA 302,419 2,405,229 Enel SpA 281,216 1,428,549 UniCredito Italiano SpA 362,362 1,371,685 Autostrade SpA 149,864 1,284,499 IntesaBci SpA 507,195 1,238,519 Sanpaolo IMI SpA 145,249 1,206,496 Riunione Adriatica di Sicurta SpA 64,324 738,054 Alleanza Assicurazioni SpA 89,817 685,277 Mediaset SpA 94,185 649,330 MEDIOBANCA - Banca di Credito Finanziario SpA 72,826 570,635 SEAT Pagine Gialle SpA/1/ 803,348 501,048 Fiat SpA 33,241 380,427 Snam Rete Gas SpA 125,944 376,711 Italglas SpA 36,608 373,369 Banca Monte dei Paschi Siena SpA 131,560 371,578 Banca Nazionale del Lavoro SpA/1/ 219,960 317,094 Luxottica Group SpA 23,491 316,762 Banca Popolare di Milano S.c.a.r.l./1/ 65,962 259,396 Parmalat Finanziaria SpA 81,133 235,513 Banca di Roma SpA 173,134 232,779 Banca Fideuram SpA 45,721 230,914 Autogrill SpA/1/ 20,865 206,870 Mediolanum SpA 34,125 193,431 Arnoldo Mondadori Editore SpA 28,210 168,202 ACEA SpA 28,444 161,787 Pirelli SpA 150,943 160,905 Benetton Group SpA 12,389 143,852 Alitalia - Linee Aeree Italiane SpA/1/ 427,518 139,627 Fineco SpA/1/ 271,440 138,679 Tiscali SpA/1/ 25,649 133,565 Bulgari SpA 20,592 96,731 Gruppo Editoriale L'Espresso SpA 25,896 88,632 Snia SpA1 38,350 77,475 La Rinascente SpA 15,587 51,513 e.Biscom SpA/1/ 975 22,135 TOTAL COMMON STOCKS (Cost: $35,216,650) 27,639,116 PREFERRED STOCKS - 6.03% Telecom Italia SpA - RNC 270,153 1,446,534 IntesaBci SpA 124,072 225,104 Fiat SpA - RNC 9,594 68,213 Fiat SpA 5,902 42,715 TOTAL PREFERRED STOCKS (Cost: $1,797,480) 1,782,566 SHORT TERM INSTRUMENTS - 11.94% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 2,827,007 2,827,007 Dreyfus Money Market Fund 237,632 237,632 Goldman Sachs Financial Square Prime Obligation Fund 117,574 117,574 Providian Temp Cash Money Market Fund 344,157 344,157 TOTAL SHORT TERM INSTRUMENTS (Cost: $3,526,370) 3,526,370 TOTAL INVESTMENTS IN SECURITIES - 111.54% (COST $40,540,500) 32,948,052 OTHER ASSETS, LESS LIABILITIES - (11.54%) (3,409,968) ----------- NET ASSETS - 100.00% $29,538,084 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 37 Schedule of Investments iShares MSCI Netherlands Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------------- COMMON STOCKS - 98.88% Royal Dutch Petroleum Co. 103,792 $ 4,682,192 ING Groep NV 94,926 2,072,225 Unilever NV 25,064 1,480,932 Koninklijke (Royal) Philips Electronics NV 54,782 1,095,963 Akzo Nobel NV 25,038 933,554 ABN AMRO Holding NV 56,108 914,499 Heineken NV 21,398 870,021 Reed Elsevier NV 68,016 862,456 Koninklijke (Royal) Ahold NV 49,634 827,965 AEGON NV 56,706 811,911 TPG NV 37,674 742,988 Koninklijke (Royal) KPN NV/1/ 110,994 608,469 Wolters Kluwer NV 29,172 521,817 VNU NV 19,656 481,906 IHC Caland NV 8,970 450,831 ASML Holding NV/1/ 34,138 349,181 Koninklijke Numico NA "CVA" 14,846 292,203 Oce NV 23,868 224,705 Koninklijke Vendex KBB NV 16,458 171,084 Vedior NV 18,122 170,965 Koninklijke Luchtvaart Maatschappij NV 13,338 150,162 Hagemeyer NV 8,190 91,964 Burhmann NV 7,722 55,282 Getronics NV/1/ 26,390 25,622 TOTAL COMMON STOCKS (Cost: $26,872,234) 18,888,897 TOTAL INVESTMENTS IN SECURITIES - 98.88% (Cost $26,872,234) 18,888,897 OTHER ASSETS, LESS LIABILITIES - 1.12% 214,518 ----------- NET ASSETS - 100.00% $19,103,415 =========== /1/ Non-income earning securities. See notes to financial statements. 38 2002 iShares Annual Report to Shareholders Schedule of Investments iShares MSCI Spain Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------------- COMMON STOCKS - 99.82% Telefonica SA/1/ 467,964 $ 4,290,949 Banco Bilbao Vizcaya Argentaria SA 259,518 2,547,584 Banco Santander Central Hispano SA 359,590 2,401,486 Iberdrola SA 72,338 932,864 Repsol YPF SA 70,924 925,069 Endesa SA 77,448 919,013 Altadis SA 29,974 675,788 Industria de Desino Textil SA 33,600 655,721 Union Electrica Fenosa SA 51,072 632,077 Gas Natural SDG SA 31,542 571,017 NH Hoteles SA/1/ 35,574 369,799 Acerinox SA 9,338 349,363 Terra Networks SA/1/ 57,988 306,519 Sociedad General de Aguas de Barcelona SA 26,334 260,836 FAES FARMA SA 22,624 257,590 Amadeus Global Travel Distribution SA 39,102 212,824 Promotora de Infomaciones SA 22,666 205,388 Telefonica Publicidad e Informacion SA 58,366 198,620 Fomento de Costrucciones y Contratas SA 9,562 196,923 Grupo Dragados SA 13,468 192,833 ACS SA 7,000 190,909 Zeltia SA 26,208 174,514 Autopistas Concesionaria Espanola SA 15,428 172,331 Ebro Puleva SA 16,471 167,989 Uralita SA 24,528 135,664 Viscofan SA 17,500 121,335 Corporacion Mapfre SA 18,102 111,485 Tele Pizza SA/1/ 110,292 107,082 Iberia Lineas Aereas de Espana SA 50,162 87,071 Vallehermoso SA 10,864 85,232 Grupo Empresarial ENCE SA 5,600 83,311 Acciona SA 2,002 77,944 Sol Melia SA 14,896 73,041 Grupo Ferrovial SA 2,800 68,648 Prosegur Compania de Seguridad SA 2,492 28,837 Metrovacesa SA 1,470 26,857 TOTAL COMMON STOCKS (Cost: $25,957,265) 18,814,513 SHORT TERM INSTRUMENTS - 6.19% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 935,729 935,729 Dreyfus Money Market Fund 78,655 78,655 Goldman Sachs Financial Square Prime Obligation Fund 38,917 38,917 Providian Temp Cash Money Market Fund 113,915 113,915 TOTAL SHORT TERM INSTRUMENTS (Cost: $1,167,216) 1,167,216 TOTAL INVESTMENTS IN SECURITIES - 106.01% (Cost $27,124,481) 19,981,729 OTHER ASSETS, LESS LIABILITIES - (6.01%) (1,131,951) ----------- NET ASSETS - 100.00% $18,849,778 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 39 Schedule of Investments iShares MSCI Sweden Index Fund August 31, 2002 Security Shares Value -------------------------------------------------------------------- COMMON STOCKS - 100.01% Telefonaktiebolaget LM Ericsson "B"/1/ 1,243,286 $ 947,011 Nordea AB 182,512 857,405 Hennes & Mauritz AB "B" 38,742 711,911 Svenska Handelsbanken AB "A" 45,199 628,338 Svenska Cellulosa AB "B" 15,400 525,779 Electrolux AB "B" 25,443 437,719 Sandvik AB 16,929 393,135 Securitas AB "B" 23,584 366,797 Skandinaviska Enskilda Banken AB "A" 38,478 356,603 Volvo AB "B" 17,204 284,064 ASSA Abloy AB "B" 23,661 255,832 Swedish Match AB 29,172 236,177 Telia AB 72,644 229,061 Skandia Forsakrings AB 70,642 191,892 Skanska AB "B" 30,800 187,018 Atlas Copco AB "A" 8,998 185,953 Tele/2/ AB "B"/1/ 7,227 135,881 SKF AB "B" 5,500 130,068 Volvo AB "A" 8,019 126,853 Atlas Copco AB "B" 5,863 116,793 Nobel Biocare Holding AB/1/ 1,870 90,239 Holmen AB "B" 3,982 85,685 Drott AB "B" 8,041 74,094 Gambro AB "A" 14,256 73,046 Eniro AB 13,915 67,594 SKF AB "A" 2,552 60,623 Trelleborg AB "B" 6,600 59,409 SSAB Svenskt Stal AB "A" 4,400 44,293 Hoganas AB "B" 2,200 41,364 SAS AB/1/ 5,478 41,140 Sapa AB 2,145 39,759 Svenska Handelsbanken AB "B" 2,893 39,293 Gambro AB "B" 7,634 39,034 Modern Times Group MTG AB "B"/1/ 4,521 35,157 OM AB 4,774 23,292 WM-Data AB "B" 22,913 21,236 Svenski Stal AB "B" 1,573 14,829 TOTAL COMMON STOCKS (Cost: $14,380,146) 8,154,377 SHORT TERM INSTRUMENTS - 10.82% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 707,387 707,387 Dreyfus Money Market Fund 59,462 59,462 Goldman Sachs Financial Square Prime Obligation Fund 29,419 29,419 Providian Temp Cash Money Market Fund 86,117 86,117 TOTAL SHORT TERM INSTRUMENTS (Cost: $882,385) 882,385 TOTAL INVESTMENTS IN SECURITIES - 110.83% (Cost $15,262,531) 9,036,762 OTHER ASSETS, LESS LIABILITIES - (10.83%) (882,754) ---------- NET ASSETS - 100.00% $8,154,008 ========== /1/ Non-income earning securities. See notes to financial statements. 40 2002 iShares Annual Report to Shareholders Schedule of Investments iShares MSCI Switzerland Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------------- COMMON STOCKS - 98.85% Novartis AG 182,226 $ 7,394,931 Nestle SA - Registered 20,482 4,394,751 Roche Holding AG - Genussein 34,078 2,446,794 UBS AG - Registered/1/ 38,478 1,812,749 Credit Suisse Group/1/ 66,166 1,538,743 Swiss Reinsurance Co. 18,480 1,305,311 Holcim Ltd. "B" 4,620 858,919 Swisscom AG - Registered 3,212 852,923 Compagnie Financiere Richemont AG "A" 44,000 828,278 Givaudan SA - Registered 1,958 820,672 Zurich Financial Services 8,052 796,776 Ciba Specialty Chemicals AG - Registered 11,000 787,965 Syngenta AG - Registered 11,946 661,898 ABB Ltd./1/ 101,376 553,929 Adecco SA - Registered 12,452 544,313 Synthes-Stratec Inc. 946 517,536 Serono SA 902 514,501 Schindler Holding AG - Participation Certificates 2,640 471,460 Lonza Group AG - Registered 7,348 469,074 Clariant AG 20,460 420,598 Julius Baer Holding AG 1,540 355,574 Swatch Group (The) AG "B" 4,400 327,647 Valora Holding AG - Registered 1,606 321,050 Swatch Group (The) AG 19,800 310,715 SGS Societe Generale de Surveillance Holding SA 946 250,258 Vontobel Holding AG - Registered 13,200 241,448 Holcim Ltd. - Registered 6,490 238,288 Banque Cantonale Vaudoise/1/ 2,508 228,539 Phonak Holding AG - Registered 15,774 210,222 Schindler Holding AG - Registered 1,100 197,908 Centerpulse AG1 1,342 197,406 Kuoni Reisen Holding AG - Registered/1/ 726 162,064 Logitech International SA/1/ 3,080 100,977 Georg Fischer AG - Registered 660 99,833 Kudelski SA - Bearer/1/ 4,180 74,508 Gebruder Sulzer AG/1/ 440 69,194 Tecan AG - Registered 1,650 54,480 Forbo Holding AG 176 52,775 PubliGroupe SA - Registered/1/ 220 33,718 TOTAL COMMON STOCKS (Cost: $39,121,874) 31,518,725 SHORT TERM INSTRUMENTS - 3.18% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 812,310 812,310 Dreyfus Money Market Fund 68,281 68,281 Goldman Sachs Financial Square Prime Obligation Fund 33,784 33,784 Providian Temp Cash Money Market Fund 89,890 98,890 TOTAL SHORT TERM INSTRUMENTS (Cost: $1,013,265) 1,013,265 TOTAL INVESTMENTS IN SECURITIES - 102.03% (Cost $40,135,139) 32,531,990 OTHER ASSETS, LESS LIABILITIES - (2.03%) (648,704) ----------- NET ASSETS - 100.00% $31,883,286 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 41 Schedule of Investments iShares MSCI United Kingdom Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------------- COMMON STOCKS - 99.20% BP PLC 1,773,404 $ 13,730,226 GlaxoSmithKline PLC 482,079 9,068,099 Vodafone Group PLC 5,330,035 8,533,919 HSBC Holdings PLC 728,218 8,285,300 Shell Transport & Trading Co. PLC 771,834 5,175,842 Royal Bank of Scotland Group PLC 216,670 5,171,653 Lloyds TSB Group PLC 450,307 3,893,895 AstraZeneca PLC 137,992 3,889,263 Barclays PLC 530,536 3,808,028 HBOS PLC 289,332 3,240,403 Diageo PLC 256,714 3,105,418 BT Group PLC 694,389 2,148,301 Unilever PLC 220,618 2,010,117 Tesco PLC 528,327 1,728,527 British American Tobacco PLC 132,211 1,535,935 Rio Tinto PLC 86,292 1,513,734 Aviva PLC 183,958 1,419,990 Prudential PLC 162,291 1,277,847 BG Group PLC 287,593 1,198,946 Cadbury Schweppes PLC 164,312 1,188,912 BAE Systems PLC 222,310 1,052,304 National Grid Group PLC 149,648 1,045,187 Marks & Spencer Group PLC 192,140 1,017,996 Centrica PLC 333,747 970,603 Compass Group PLC 184,005 935,040 BHP Billiton Ltd. 188,371 888,753 British Sky Broadcasting Group PLC/1/ 92,026 868,376 Imperial Tobacco Group PLC 51,324 855,864 Reckitt Benckiser PLC 45,449 840,852 Scottish Power PLC 146,358 833,158 Reed Elsevier PLC 90,992 812,167 Lattice Group PLC 301,035 800,964 Legal & General Group PLC 402,179 763,657 BAA PLC 86,762 744,886 Six Continents PLC 78,819 740,087 Scottish & Southern Energy PLC 69,842 723,863 Pearson PLC 68,855 683,813 WPP Group PLC 91,979 677,269 GUS PLC 86,057 666,942 Boots Company PLC 73,226 620,744 Kingfisher PLC 175,653 578,092 Smiths Group PLC 49,914 563,649 Land Securities PLC 44,650 551,173 Scottish & Newcastle PLC 59,690 508,302 J Sainsbury PLC 102,930 503,945 Reuters Group PLC 113,975 499,837 Amersham PLC 53,956 474,915 Cable & Wireless PLC 189,833 471,317 Wolseley PLC 51,700 471,054 Rentokil Initial PLC 126,571 466,477 BOC Group PLC 31,067 457,030 3i Group PLC 50,290 447,707 Smith & Nephew PLC 77,362 445,775 Hanson PLC 65,988 403,207 Severn Trent PLC 36,801 382,270 AMVESCAP PLC 55,836 377,021 Next PLC 28,059 365,903 United Utilities PLC 36,378 352,274 Dixons Group PLC 132,305 335,645 SABMiller PLC 46,248 326,229 British Land Company PLC 44,086 325,641 Imperial Chemical Industries PLC 81,874 322,649 Invensys PLC 261,273 311,202 P&O Princess Cruises PLC 46,765 303,832 Canary Wharf Group PLC/1/ 49,256 297,920 GKN PLC 70,171 297,693 Granada PLC 235,517 291,452 Bunzl PLC 39,809 286,967 Hilton Group PLC 97,055 286,759 Man Group PLC 15,510 254,082 Rexam PLC 36,284 251,314 Safeway PLC 74,166 246,669 Hays PLC 117,782 243,691 Brambles Industries PLC 66,787 242,530 Peninsular & Oriental Steam Navigation Co. 68,291 239,012 Exel PLC 20,304 231,009 Corus Group PLC/1/ 263,670 224,331 Associated British Ports Holdings PLC 34,592 218,058 Daily Mail & General Trust 24,440 212,850 42 2002 iShares Annual Report to Shareholders Schedule of Investments (Continued) iShares MSCI United Kingdom Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------------- ARM Holdings PLC/1/ 88,360 $ 209,811 EMI Group PLC 75,858 208,875 Rank Group PLC 50,854 208,857 AWG PLC/1/ 26,508 201,951 Johnson Matthey Public Ltd. Co. 14,570 200,367 Capita Group PLC 44,368 199,035 Hammerson PLC 24,863 197,303 Kelda Group PLC 32,900 197,212 Rolls-Royce PLC 87,843 191,261 RMC Group PLC 22,842 185,329 Royal & Sun Alliance Insurance Group PLC 95,034 183,026 BPB PLC 37,600 180,890 Slough Estates PLC 34,498 179,483 BBA Group PLC 53,110 179,103 Signet Group PLC 136,300 177,108 Sage Group PLC 88,642 176,885 Misys PLC 49,444 173,623 FirstGroup PLC 43,193 166,038 Electrocomponents PLC 34,122 162,837 Chubb PLC 76,563 157,521 Whitebread PLC 18,800 153,844 Taylor Woodrow PLC 56,165 149,438 Pilkington PLC 116,466 142,776 Celltech Group PLC/1/ 23,500 137,776 IMI PLC 33,699 135,015 Tate & Lyle PLC 22,889 129,945 Provident Financial PLC 14,805 129,739 Barratt Developments PLC 19,928 129,397 Berkeley Group PLC 11,891 124,161 Securicor PLC 79,195 122,198 International Power PLC/1/ 55,601 112,675 AMEC PLC 23,359 110,570 Close Brothers Group PLC 12,408 100,289 Logica PLC 38,023 99,548 Balfour Beatty PLC 28,153 85,793 Serco Group PLC 30,738 84,637 Schroders PLC 10,058 82,928 Carlton Communications PLC 36,237 82,262 De La Rue PLC 15,510 72,937 United Business Media PLC 15,933 70,491 Spirent PLC 67,774 69,455 FKI PLC 38,963 65,696 CMG PLC 50,055 59,621 British Airways PLC/1/ 23,453 55,145 MyTravel Group PLC 23,077 49,352 Great Portland Estates PLC 14,523 49,200 Amey PLC 23,500 45,223 Wimpey (George) PLC 8,037 35,526 SSL International PLC 6,956 33,734 Aegis Group PLC 28,012 32,065 BTG PLC/1/ 7,943 26,970 Stagecoach Holdings PLC 48,457 25,484 Kidde PLC 18,612 19,003 Novar PLC 1,880 3,533 TOTAL COMMON STOCKS (Cost: $155,489,173) 119,099,304 SHORT TERM INSTRUMENTS - 0.06% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 59,813 59,813 Dreyfus Money Market Fund 5,028 5,028 Goldman Sachs Financial Square Prime Obligation Fund 2,487 2,487 Providian Temp Cash Money Market Fund 7,282 7,282 TOTAL SHORT TERM INSTRUMENTS (Cost: $74,610) 74,610 TOTAL INVESTMENTS IN SECURITIES - 99.26% (Cost $155,563,783) 119,173,914 OTHER ASSETS, LESS LIABILITIES - 0.74% 893,439 ------------ NET ASSETS - 100.00% $120,067,353 ============ /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 43 Statements of Assets and Liabilities iShares, Inc. August 31, 2002
iShares MSCI ------------------------------------------------------------------------- Austria Belgium EMU France Germany Italy Index Fund Index Fund Index Fund Index Fund Index Fund Index Fund -------------------------------------------------------------------------------------------------------- ASSETS Investments at cost $15,974,123 $13,074,626 $173,270,442 $ 69,909,917 $155,580,760 $40,540,500 ----------- ----------- ------------ ------------ ------------ ----------- Foreign currency, at cost $ 13,772 $ 17,417 $ 74,990 $ 64,819 $ 192,618 $ (126,073) ----------- ----------- ------------ ------------ ------------ ----------- Investments in securities, at value (including securities on loan/1/) (Note 1) $14,689,743 $10,678,311 $136,232,144 $ 52,659,703 $ 96,991,583 $32,948,052 Foreign currency, at value 13,458 17,448 75,019 63,417 192,909 - Cash 1,751 5,368 88,877 34,390 69,730 33,535 Receivables: Investment securities sold 409,756 270,799 625,798 39,188 1,917,434 28,599 Dividends and interest 28,410 32,338 465,281 120,828 373,898 219,597 ----------- ----------- ------------ ------------ ------------ ----------- Total Assets 15,143,118 11,004,264 137,487,119 52,917,526 99,545,554 33,229,783 ----------- ----------- ------------ ------------ ------------ ----------- LIABILITIES Payables: Investment securities purchased 380,682 262,618 526,829 64,994 1,953,475 - Collateral for securities on loan (Note 5) - 300,596 5,640,666 3,116,520 3,314,069 3,526,370 Foreign currency overdraft - - - - - 129,282 Advisory fees (Note 2) 17,707 10,520 125,045 51,236 98,629 29,825 Distribution fees 3,039 2,154 26,833 10,496 19,722 6,222 Miscellaneous 1,200 1,500 - - - - ----------- ----------- ------------ ------------ ------------ ----------- Total Liabilities 402,628 577,388 6,319,373 3,243,246 5,385,895 3,691,699 ----------- ----------- ------------ ------------ ------------ ----------- NET ASSETS $14,740,490 $10,426,876 $131,167,746 $ 49,674,280 $ 94,159,659 $29,538,084 =========== =========== ============ ============ ============ =========== NET ASSETS CONSIST OF: Paid-in capital $18,928,252 $15,475,633 $173,212,914 $ 70,676,346 $175,729,378 $40,904,935 Undistributed net investment income 208,682 72,170 1,482,500 567,205 838,725 733,556 Accumulated net realized loss (3,113,131) (2,726,889) (6,508,100) (4,324,031) (23,842,826) (4,507,571) Net unrealized depreciation on investments and translation of assets and liabilities in foreign currencies (1,283,313) (2,394,038) (37,019,568) (17,245,240) (58,565,618) (7,592,836) ----------- ----------- ------------ ------------ ------------ ----------- NET ASSETS $14,740,490 $10,426,876 $131,167,746 $ 49,674,280 $ 94,159,659 $29,538,084 =========== =========== ============ ============ ============ =========== iShares outstanding 1,800,000 1,000,000 2,850,000 3,200,000 7,800,000 1,950,000 =========== =========== ============ ============ ============ =========== Net asset value per iShare $ 8.19 $ 10.43 $ 46.02 $ 15.52 $ 12.07 $ 15.15 =========== =========== ============ ============ ============ ===========
/1/ Securities on loan with market values of $-, $285,646, $5,222,314, $2,949,526, $3,111,214 and $3,179,013, respectively. See Note 5. See notes to financial statements. 44 2002 iShares Annual Report to Shareholders Statements of Assets and Liabilities (Continued) iShares, Inc. August 31, 2002
iShares MSCI ---------------------------------------------------------------- Netherlands Spain Sweden Switzerland United Kingdom Index Fund Index Fund Index Fund Index Fund Index Fund ------------------------------------------------------------------------------------------- ASSETS Investments at cost $26,872,234 $27,124,481 $15,262,531 $40,135,139 $155,563,783 ----------- ----------- ----------- ----------- ------------- Foreign currency, at cost $ 84,486 $ 12,030 $ 2,262 $ 92,368 $ 234,394 ----------- ----------- ----------- ---------- ------------- Investments in securities, at value (including securities on loan/1/) (Note 1) $18,888,897 $19,981,729 $ 9,036,762 $32,531,990 $ 119,173,914 Foreign currency, at value 84,054 12,021 2,258 91,899 234,976 Cash 13,175 11,276 6,053 4,945 70,910 Receivables: Investment securities sold 21,255 544,669 - 6,497 401,222 Dividends and interest 119,416 9,905 1,364 301,302 854,270 ----------- ----------- ----------- ----------- ------------- Total Assets 19,126,797 20,559,600 9,046,437 32,936,633 120,735,292 ----------- ----------- ----------- ----------- ------------- LIABILITIES Payables: Investment securities purchased - 517,180 - - 441,215 Collateral for securities on loan (Note 5) - 1,167,216 882,385 1,013,265 74,610 Advisory fees (Note 2) 19,444 19,204 8,359 33,257 117,069 Distribution fees 3,938 3,922 1,685 6,825 24,845 Miscellaneous - 2,300 - - 10,200 ----------- ----------- ----------- ----------- ------------- Total Liabilities 23,382 1,709,822 892,429 1,053,347 667,939 ----------- ---------- ----------- ----------- ------------- NET ASSETS $19,103,415 $18,849,778 $ 8,154,008 $31,883,286 $ 120,067,353 =========== =========== =========== =========== ============= NET ASSETS CONSIST OF: Paid-in capital $31,728,922 $28,828,591 $19,426,217 $43,159,494 $ 173,491,353 Undistributed net investment income 320,678 163,361 100,930 73,589 2,402,611 Accumulated net realized loss (4,962,391) (2,999,877) (5,147,366) (3,769,233) (19,438,726) Net unrealized depreciation on investments and translation of assets and liabilities in foreign currencies (7,983,794) (7,142,297) (6,225,773) (7,580,564) (36,387,885) ----------- ----------- ----------- ----------- ------------- NET ASSETS $19,103,415 $18,849,778 $ 8,154,008 $31,883,286 $ 120,067,353 =========== =========== =========== =========== ============= iShares outstanding 1,300,000 1,050,000 825,000 2,750,000 9,400,000 =========== =========== =========== =========== ============= Net asset value per iShare $ 14.69 $ 17.95 $ 9.88 $ 11.59 $ 12.77 =========== =========== =========== =========== =============
/1/ Securities on loan with market values of $-, $1,098,575, $732,301, $960,905 and $63,571, respectively. See Note 5. See notes to financial statements. 45 FINANCIAL STATEMENTS Statements of Operations iShares, Inc. Year Ended August 31, 2002
iShares MSCI ------------------------------------------------------------------------- Austria Belgium EMU France Germany Italy Index Fund Index Fund Index Fund Index Fund Index Fund Index Fund --------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $ 303,171 $ 293,563 $ 2,226,607 $ 999,871 $ 1,679,160 $ 872,278 Interest 575 740 4,049 947 1,656 10,767 Securities lending income 6,186 4,636 37,405 12,225 55,655 102,991 ---------- ----------- ------------ ------------ ------------ ----------- Total investment income 309,932 298,939 2,268,061 1,013,043 1,736,471 986,036 ---------- ----------- ------------ ------------ ------------ ----------- EXPENSES (NOTE 2) Advisory fees 52,808 37,985 489,430 259,112 521,451 139,606 Administration fees 5,345 4,721 44,181 28,356 55,230 16,133 Distribution fees 32,080 24,099 248,069 137,825 269,909 77,462 Custodian fees and expenses 4,629 1,642 18,033 9,498 14,274 6,177 Transfer agent fees 3,491 3,464 2,468 6,266 10,359 4,384 Directors' fees 497 439 4,104 2,635 5,130 1,499 Professional fees 7,302 7,132 17,774 13,521 20,783 10,213 Insurance 290 238 1,342 1,815 3,760 976 Printing 423 373 3,488 2,239 4,361 1,274 AMEX listing fee 33 29 270 174 338 99 Interest expense 85 115 699 449 874 255 Miscellaneous expenses 806 735 3,653 1,203 424 2,196 ---------- ----------- ------------ ------------ ------------ ----------- Total expenses 107,789 80,972 833,511 463,093 906,893 260,274 ---------- ----------- ------------ ------------ ------------ ----------- Net investment income 202,143 217,967 1,434,550 549,950 829,578 725,762 ---------- ----------- ------------ ------------ ------------ ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (378,345) (257,483) (828,744) (419,360) (7,558,325) (1,097,696) In-kind redemptions 792,331 - - - (907,285) - Foreign currency transactions 8,460 12,281 45,864 18,131 45,914 16,726 ---------- ----------- ------------ ------------ ------------ ----------- Net realized gain (loss) 422,446 (245,202) (782,880) (401,229) (8,419,696) (1,080,970) ---------- ----------- ------------ ------------ ------------ ----------- Net change in unrealized appreciation (depreciation) on: Investments (1,429,049) (1,314,240) (22,514,252) (12,524,350) (16,737,021) (4,787,736) Translation of assets and liabilities in foreign currencies 866 2,749 11,279 8,872 20,331 (360) ---------- ----------- ------------ ------------ ------------ ----------- Net change in unrealized appreciation (depreciation) (1,428,183) (1,311,491) (22,502,973) (12,515,478) (16,716,690) (4,788,096) ---------- ----------- ------------ ------------ ------------ ----------- Net realized and unrealized loss (1,005,737) (1,556,693) (23,285,853) (12,916,707) (25,136,386) (5,869,066) ---------- ----------- ------------ ------------ ------------ ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (803,594) $(1,338,726) $(21,851,303) $(12,366,757) $(24,306,808) $(5,143,304) ========== =========== ============ ============ ============ ===========
1 Net of foreign withholding tax of $53,501, $51,805, $320,859, $116,466, $289,949 and $153,448, respectively. See notes to financial statements. 46 2002 iShares Annual Report to Shareholders Statements of Operations (Continued) iShares, Inc. Year Ended August 31, 2002
iShares MSCI ---------------------------------------------------------------- Netherlands Spain Sweden Switzerland United Kingdom Index Fund Index Fund Index Fund Index Fund Index Fund ------------------------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $ 499,120 $ 346,974 $ 173,325 $ 332,880 $ 5,081,025 Interest 1,213 1,045 239 330 12,404 Securities lending income 2,092 11,385 8,610 4,005 469 ---------- ---------- ---------- ---------- ----------- Total investment income 502,425 359,404 182,174 337,215 5,093,898 ---------- ---------- ---------- ---------- ----------- EXPENSES (NOTE 2) Advisory fees 94,688 88,489 37,202 148,854 587,967 Administration fees 11,301 13,297 5,348 16,167 61,785 Distribution fees 54,040 53,098 25,008 80,898 300,622 Custodian fees and expenses 4,345 4,650 2,892 5,841 7,279 Transfer agent fees 4,031 4,609 3,755 4,386 8,493 Directors' fees 1,050 1,234 496 1,502 5,736 Professional fees 8,908 9,434 7,282 10,222 22,505 Federal and state registration fees - - - - 2,064 Insurance 855 771 337 936 3,245 Printing 892 1,049 422 1,277 4,876 AMEX listing fee 69 81 33 99 378 Interest expense 179 291 85 256 978 Miscellaneous expenses 1,217 1,406 1,168 1,381 4,162 ---------- ---------- ---------- ---------- ----------- Total expenses 181,575 178,409 84,028 271,819 1,010,090 ---------- ---------- ---------- ---------- ----------- Net investment income 320,850 180,995 98,146 65,396 4,083,808 ---------- ---------- ---------- ---------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (1,585,707) (760,164) (1,626,360) (1,153,111) (7,277,814) In-kind redemptions - (1,381,700) - - 115,248 Foreign currency transactions 19,274 (6,305) 9,059 16,057 110,778 ---------- ---------- ---------- ---------- ----------- Net realized loss (1,566,433) (2,148,169) (1,617,301) (1,137,054) (7,051,788) ---------- ---------- ---------- ---------- ----------- Net change in unrealized appreciation (depreciation) on: Investments (3,763,847) (2,582,025) (956,489) (2,931,409) (16,140,386) Translation of assets and liabilities in foreign currencies (1,262) 1,810 56 29,034 (4,659) ---------- ---------- ---------- ---------- ----------- Net change in unrealized appreciation (depreciation) (3,765,109) (2,580,215) (956,433) (2,902,375) (16,145,045) ---------- ---------- ---------- ---------- ----------- Net realized and unrealized loss (5,331,542) (4,728,384) (2,573,734) (4,039,429) (23,196,833) ---------- ---------- ---------- ---------- ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(5,010,692) $(4,547,389)$(2,475,588)$(3,974,033) $(19,113,025) ========== ========== ========== ========== ===========
/1/ Net of foreign withholding tax of $88,080, $61,993, $30,587, $60,708 and $382,599, respectively. See Notes to Financial Statements. FINANCIAL STATEMENTS 47 Statements of Changes in Net Assets iShares, INC.
iShares MSCI iShares MSCI iShares MSCI Austria Belgium EMU Index Fund Index Fund Index Fund -------------------------------- -------------------------------- -------------------------------- For the For the For the For the For the For the year ended year ended year ended year ended year ended year ended August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 ------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 202,143 $ 185,591 $ 217,967 $ 171,751 $ 1,434,550 $ 644,893 Net realized gain (loss) 422,446 (1,417,564) (245,202) (1,848,423) (782,880) (5,658,041) Net change in unrealized appreciation (depreciation) (1,428,183) 2,129,043 (1,311,491) 527,758 (22,502,973) (12,446,864) --------------- --------------- --------------- --------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations (803,594) 897,070 (1,338,726) (1,148,914) (21,851,303) (17,460,012) --------------- --------------- --------------- --------------- ------------- ------------- Undistributed net investment income included in the price of capital shares issued or redeemed - - - (1,658) - 429,359 --------------- --------------- --------------- --------------- ------------- ------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income - (185,591) (58,802) (171,751) - (644,893) In excess of net investment income - (4,555) - (54,817) - (19,828) Return of capital - (258) - - - (409,529) --------------- --------------- --------------- --------------- ------------- ------------- Total distributions to iShareholders - (190,404) (58,802) (226,568) - (1,074,250) --------------- --------------- --------------- --------------- ------------- ------------- iSHARES TRANSACTIONS: iShares sold 9,081,694 - 1,907,060 - 62,239,581 67,073,221 iShares redeemed (4,984,937) - (337) (1,934,876) - - --------------- --------------- --------------- --------------- ------------- ------------- Net increase (decrease) in net assets from iShares transactions 4,096,757 - 1,906,723 (1,934,876) 62,239,581 67,073,221 --------------- --------------- --------------- --------------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS 3,293,163 706,666 509,195 (3,312,016) 40,388,278 48,968,318 NET ASSETS: Beginning of year 11,447,327 10,740,661 9,917,681 13,229,697 90,779,468 41,811,150 --------------- --------------- --------------- --------------- ------------- ------------- End of year $ 14,740,490 $ 11,447,327 $ 10,426,876 $ 9,917,681 $ 131,167,746 $ 90,779,468 =============== =============== =============== =============== ============= ============= Undistributed (distribution in excess of) net investment income included in net assets at end of year $ 208,682 $ (1,923) $ 72,170 $ (99,277) $ 1,482,500 $ (17,943) =============== =============== =============== =============== ============= ============= iSHARES ISSUED AND REDEEMED: iShares sold 1,000,000 - 160,000 - 1,250,000 1,050,000 iShares redeemed (600,030) - (30) (160,000) - - --------------- --------------- --------------- --------------- ------------- ------------- Net increase (decrease) in iShares outstanding 399,970 - 159,970 (160,000) 1,250,000 1,050,000 =============== =============== =============== =============== ============= =============
See Notes to Financial Statements. 48 2002 iShares Annual Report to Shareholders Statements of Changes in Net Assets (Continued) iShares, Inc.
iShares MSCI iShares MSCI iShares MSCI France Germany Italy Index Fund Index Fund Index Fund ----------------------------------- ---------------------------------- -------------------------------- For the For the For the For the For the For the year ended year ended year ended year ended year ended year ended August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 ---------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 549,950 $ 217,520 $ 829,578 $ 1,454,348 $ 725,762 $ 508,408 Net realized loss (401,229) (837,382) (8,419,696) (13,695,531) (1,080,970) (2,023,718) Net change in unrealized appreciation (depreciation) (12,515,478) (22,986,821) (16,716,690) (29,186,710) (4,788,096) (6,548,102) ------------ ------------ ------------ ------------ -------------- ------------- Net decrease in net assets resulting from operations (12,366,757) (23,606,683) (24,306,808) (41,427,893) (5,143,304) (8,063,412) ------------ ------------ ------------ ------------ -------------- ------------- Undistributed net investment income included in the price of capital shares issued or redeemed - (45,191) 3,178 (156,509) - (1,915) ------------ ------------ ------------ ------------ -------------- ------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income - (142,265) - (1,454,348) - (475,208) In excess of net investment income - - - (6,871) - - In excess of net realized gain - (19) - - - (136,605) Return of capital - (27,369) - (13,170) - (496) ------------ ------------ ------------ ------------ -------------- ------------- Total distributions to iShareholders - (169,653) - (1,474,389) - (612,309) ------------ ------------ ------------ ------------ -------------- ------------- iSHARES TRANSACTIONS: iShares sold 3,457,530 4,945,074 8,628,640 23,229,591 - 6,479,761 iShares redeemed (18,419) (17,637,726) (8,690,553) (15,132,997) (501) (13,128,653) ------------ ------------ ------------ ------------ -------------- ------------- Net increase (decrease) in net assets from iShares transactions 3,439,111 (12,692,652) (61,913) 8,096,594 (501) (6,648,892) ------------ ------------ ------------ ------------ -------------- ------------- DECREASE IN NET ASSETS (8,927,646) (36,514,179) (24,365,543) (34,962,197) (5,143,805) (15,326,528) NET ASSETS: Beginning of year 58,601,926 95,116,105 118,525,202 153,487,399 34,681,889 50,008,417 ------------ ------------ ------------ ------------ -------------- ------------- End of year $ 49,674,280 $ 58,601,926 $ 94,159,659 $118,525,202 $ 29,538,084 $ 34,681,889 ============ ============ ============ ============ ============== ============= Undistributed (distribution in excess of) net investment income included in net assets at end of year $ 567,205 $ (12,576) $ 838,725 $ (36,766) $ 733,556 $ (8,931) ============ ============ ============ ============ ============== ============= iSHARES ISSUED AND REDEEMED: iShares sold 200,000 200,000 600,000 1,200,000 - 300,000 iShares redeemed (1,000) (800,000) (601,000) (900,000) (30) (600,000) ------------ ------------ ------------ ------------ -------------- ------------- Net increase (decrease) in iShares outstanding 199,000 (600,000) (1,000) 300,000 (30) (300,000) ============ ============ ============ ============ ============== =============
See notes to financial statements. Financial Statements 49 Statements of Changes in Net Assets (Continued) iShares, Inc.
iShares MSCI iShares MSCI iShares MSCI Netherlands Spain Sweden Index Fund Index Fund Index Fund -------------------------------- -------------------------------- -------------------------------- For the For the For the For the For the For the year ended year ended year ended year ended year ended year ended August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 ------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 320,850 $ 434,116 $ 180,995 $ 280,132 $ 98,146 $ 65,472 Net realized loss (1,566,433) (2,441,931) (2,148,169) (1,340,642) (1,617,301) (4,234,433) Net change in unrealized appreciation (depreciation) (3,765,109) (4,686,056) (2,580,215) (2,121,855) (956,433) (6,548,770) --------------- --------------- ------------- ------------- --------------- ------------- Net decrease in net assets resulting from operations (5,010,692) (6,693,871) (4,547,389) (3,182,365) (2,475,588) (10,717,731) --------------- --------------- ------------- ------------- --------------- ------------- Undistributed net investment income included in the price of capital shares issued or redeemed - (115,695) - (77,460) - - --------------- --------------- ------------- ------------- --------------- ------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (52,040) (369,484) - (206,976) - (38,632) Return of capital - - - (854) - (969) --------------- --------------- ------------- ------------- --------------- ------------- Total distributions to iShareholders (52,040) (369,484) - (207,830) - (39,601) --------------- --------------- ------------- ------------- --------------- ------------- iSHARES TRANSACTIONS: iShares sold - 8,897,360 11,025,560 1,833,599 - 6,947,144 iShares redeemed (17,930) (8,147,509) (14,825,946) (11,081,252) (394) (9,334,138) --------------- --------------- ------------- ------------- --------------- ------------- Net increase (decrease) in net assets from iShares transactions (17,930) 749,851 (3,800,386) (9,247,653) (394) (2,386,994) --------------- --------------- ------------- ------------- --------------- ------------- DECREASE IN NET ASSETS (5,080,662) (6,429,199) (8,347,775) (12,715,308) (2,475,982) (13,144,326) NET ASSETS: Beginning of year 24,184,077 30,613,276 27,197,553 39,912,861 10,629,990 23,774,316 --------------- --------------- ------------- ------------- --------------- ------------- End of year $ 19,103,415 $ 24,184,077 $ 18,849,778 $ 27,197,553 $ 8,154,008 $ 10,629,990 =============== =============== ============= ============= =============== ============= Undistributed (distribution in excess of) net investment income included in net assets at end of year $ 320,678 $ 32,593 $ 163,361 $ (11,327) $ 100,930 $ (6,275) =============== =============== ============= ============= =============== ============= ISHARES ISSUED AND REDEEMED: iShares sold - 400,000 525,000 75,000 - 375,000 iShares redeemed (1,000) (400,000) (750,030) (450,000) (30) (525,000) --------------- --------------- ------------- ------------- --------------- ------------- Net decrease in iShares outstanding (1,000) - (225,030) (375,000) (30) (150,000) =============== =============== ============= ============= =============== =============
See notes to financial statements. 50 2002 iShares Annual Report to Shareholders Statements of Changes in Net Assets (Continued) iShares, Inc.
iShares MSCI iShares MSCI Switzerland United Kingdom Index Fund Index Fund -------------------------------- -------------------------------- For the For the For the For the year ended year ended year ended year ended August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 -------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 65,396 $ 118,440 $ 4,083,808 $ 2,203,182 Net realized loss (1,137,054) (2,352,982) (7,051,788) (13,297,209) Net change in unrealized appreciation (depreciation) (2,902,375) (3,937,865) (16,145,045) (12,060,808) --------------- ------------- ------------- ------------- Net decrease in net assets resulting from operations (3,974,033) (6,172,407) (19,113,025) (23,154,835) --------------- ------------- ------------- ------------- Undistributed net investment income included in the price of capital shares issued or redeemed - (9,105) 19,118 (220,113) --------------- ------------- ------------- ------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (12,505) (118,440) (1,848,220) (1,945,352) In excess of net investment income - (21,900) - - In excess of net realized gain - (94,754) - (229,522) --------------- ------------- ------------- ------------- Total distributions to iShareholders (12,505) (235,094) (1,848,220) (2,174,874) --------------- ------------- ------------- ------------- iSHARES TRANSACTIONS: iShares sold 3,498,837 3,599,542 28,061,954 37,621,726 iShares redeemed (13,350) (9,483,717) (4,935,208) (40,991,871) --------------- ------------- ------------- ------------- Net increase (decrease) in net assets from iShares transactions 3,485,487 (5,884,175) 23,126,746 (3,370,145) --------------- ------------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS (501,051) (12,300,781) 2,184,619 (28,919,967) NET ASSETS: Beginning of year 32,384,337 44,685,118 117,882,734 146,802,701 --------------- ------------- ------------- ------------- End of year $ 31,883,286 $ 32,384,337 $ 120,067,353 $ 117,882,734 =============== ============= ============= ============= Undistributed net investment income included in net assets at end of year $ 73,589 $ 4,641 $ 2,402,611 $ 56,245 =============== ============= ============= ============= iSHARES ISSUED AND REDEEMED: iShares sold 250,000 250,000 2,000,000 2,200,000 iShares redeemed (1,000) (625,000) (401,000) (2,400,000) --------------- ------------- ------------- ------------- Net increase (decrease) in iShares outstanding 249,000 (375,000) 1,599,000 (200,000) =============== ============= ============= =============
See notes to financial statements. Financial Statements 51 Financial Highlights iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Austria Index Fund ---------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 8.18 $ 7.67 $ 9.13 $ 10.11 $ 10.51 ------------- ------------- ----------- ----------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/3/ 0.13 0.13 0.04 0.10 0.06 Net realized and unrealized gain (loss) (0.12) 0.52 (1.46) (0.98) 0.20 ------------- ------------- ----------- ----------- ------------- Total from investment operations 0.01 0.65 (1.42) (0.88) 0.26 ------------- ------------- ----------- ----------- ------------- LESS DISTRIBUTIONS FROM: Net investment income - (0.13) (0.04) (0.07) (0.04) In excess of net investment income - (0.01) (0.00)/5/ (0.01) (0.01) Net realized gain - - - - (0.61) In excess of net realized gain - - - - (0.00)/5/ Return of capital - (0.00)/5/ - (0.02) (0.00)/5/ ------------- ------------- ----------- ----------- ------------- Total distributions - (0.14) (0.04) (0.10) (0.66) ------------- ------------- ----------- ------------ ------------- NET ASSET VALUE, END OF YEAR $ 8.19 $ 8.18 $ 7.67 $ 9.13 $ 10.11 ============= ============= =========== =========== ============= TOTAL RETURN 0.12% 8.41% (15.51)% (8.69)% 2.16% ============= ============= =========== =========== ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 14,740 $ 11,447 $ 10,741 $ 12,776 $ 8,085 Ratio of expenses to average net assets 0.84% 0.84%/1/ 1.16%/1/ 1.31% 1.41% Ratio of net investment income to average net assets 1.57% 1.69%/2/ 0.51%/2/ 1.04% 0.51% Portfolio turnover rate/4/ 32% 66% 34% 50% 36%
/1/ Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the years ended August 31, 2001 and August 31, 2000 were 0.97% and 1.20%, respectively. /2/ Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the years ended August 31, 2001 and August 31, 2000 were 1.55% and 0.47%, respectively. /3/ Based on average shares outstanding throughout the period. /4/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /5/ Rounds to less than $0.01. See notes to financial statements. 52 2002 iShares Annual Report to Shareholders Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Belgium Index Fund ------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------------------------------------ --------------- --------------- --------------- ------------- NET ASSET VALUE, BEGINNING OF YEAR $ 11.81 $ 13.23 $ 16.07 $ 18.40 $ 15.64 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/3/ 0.25 0.19 0.19 0.08 0.24 Net realized and unrealized gain (loss) (1.56) (1.34) (2.67) (0.30) 6.09 ------------- ------------- ------------- ------------- ------------- Total from investment operations (1.31) (1.15) (2.48) (0.22) 6.33 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.07) (0.20) (0.17) - (0.27) In excess of net investment income - (0.07) (0.19) (0.01) (1.21) Net realized gain - - - (1.19) (1.99) Return of capital - - - (0.91) (0.10) ------------- ------------- ------------- ------------- ------------- Total distributions (0.07) (0.27) (0.36) (2.11) (3.57) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 10.43 $ 11.81 $ 13.23 $ 16.07 $ 18.40 ============= ============= ============= ============= ============= TOTAL RETURN (11.10)% (8.72)% (15.50)% (1.00)% 39.42% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 10,427 $ 9,918 $ 13,230 $ 13,496 $ 25,765 Ratio of expenses to average net assets 0.84% 0.84%/1/ 1.13% 1.24% 1.04% Ratio of net investment income to average net assets 2.26% 1.60%/2/ 1.36% 0.45% 1.28% Portfolio turnover rate/4/ 18% 36% 53% 63% 50%
/1/ Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2001 was 0.87%. /2/ Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2001 was 1.57%. /3/ Based on average shares outstanding throughout the period. /4/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. See notes to financial statements. Financial Highlights 53 Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Emu Index Fund ----------------------------------------------- Period from Jul. 25, 2000/8/ Year ended Year ended to Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 --------------------------------------------------------------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 56.74 $ 76.02 $ 80.72 ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)/3/ 0.75 0.72 (0.00)/5/ Net realized and unrealized loss (11.47) (19.32) (4.70) ------------- ------------- ------------- Total from investment operations (10.72) (18.60) (4.70) ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income - (0.41) - In excess of net investment income - (0.01) - Return of capital - (0.26) - ------------- ------------- ------------- Total distributions - (0.68) - ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD $ 46.02 $ 56.74 $ 76.02 ============= ============= ============= TOTAL RETURN (18.89)% (24.51)% (5.82)%/6/ ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $ 131,168 $ 90,779 $ 41,811 Ratio of expenses to average net assets/7/ 0.84% 0.84% 0.84%/1/ Ratio of net investment income to average net assets/7/ 1.44% 1.13% 0.03%/2/ Portfolio turnover rate/4/ 3% 24% 0%/6/
/1/ Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the period ended August 31, 2000 was 1.57%. /2/ Ratio of net investment loss to average net assets prior to waived fees and reimbursed expenses for the period ended August 31, 2000 was (0.70)%. /3/ Based on average shares outstanding throughout the period. /4/ Excludes portfolio securities received or delivered as a result of processing captial share transactions in Creation Units. /5/ Rounds to less than $0.01. /6/ Not annualized. /7/ Annualized for periods of less than one year. /8/ Commencement of operations. See notes to financial statements. 54 2002 iShares Annual Report to Shareholders Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI France Index Fund ------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $ 19.53 $ 26.41 $ 22.90 $ 19.13 $ 14.50 ------------- ------------- ------------- ------------- ------------- Income from investment operations: Net investment income/1/ 0.18 0.06 0.10 0.14 0.30 Net realized and unrealized gain (loss) (4.19) (6.89) 5.21 3.88 4.76 ------------- ------------- ------------- ------------- ------------- Total from investment operations (4.01) (6.83) 5.31 4.02 5.06 ------------- ------------- ------------- ------------- ------------- Less distributions from: Net investment income - (0.04) (0.09) (0.10) (0.19) In excess of net investment income - - (0.02) (0.02) (0.03) Net realized gain - - (1.64) (0.05) (0.13) In excess of net realized gain - (0.00)/3/ (0.03) - (0.01) Return of capital - (0.01) (0.02) (0.08) (0.07) ------------- ------------- ------------- ------------- ------------- Total distributions - (0.05) (1.80) (0.25) (0.43) ------------- ------------- ------------- ------------- ------------- Net asset value, end of year $ 15.52 $ 19.53 $ 26.41 $ 22.90 $ 19.13 ============= ============= ============= ============= ============= Total return (20.53)% (25.86)% 23.45% 21.01% 34.77% ============= ============= ============= ============= ============= Ratios/Supplemental data: Net assets, end of year (000s) $ 49,674 $ 58,602 $ 95,116 $ 77,885 $ 45,922 Ratio of expenses to average net assets 0.84% 0.84% 0.96% 1.06% 1.18% Ratio of net investment income to average net assets 1.00% 0.28% 0.36% 0.67% 1.58% Portfolio turnover rate/2/ 3% 14% 17% 0% 6%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. See notes to financial statements. Financial Highlights 55 Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Germany Index Fund ------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 -------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $ 15.19 $ 20.46 $ 21.17 $ 20.25 $ 16.31 ------------- ------------- ------------- ------------- ------------- Income from investment operations: Net investment income/1/ 0.11 0.18 0.18 0.12 0.29 Net realized and unrealized gain (loss) (3.23) (5.26) 1.64 1.31 3.92 ------------- ------------- ------------- ------------- ------------- Total from investment operations (3.12) (5.08) 1.82 1.43 4.21 ------------- ------------- ------------- ------------- ------------- Less distributions from: Net investment income - (0.19) (0.16) (0.10) (0.17) In excess of net investment income - (0.00)/3/ (0.01) (0.01) (0.01) Net realized gain - - (2.00) (0.31) (0.01) In excess of net realized gain - - (0.32) (0.08) (0.00)/3/ Return of capital - (0.00)/3/ (0.04) (0.01) (0.08) ------------- ------------- ------------- ------------- ------------- Total distributions - (0.19) (2.53) (0.51) (0.27) ------------- ------------- ------------- ------------- ------------- Net asset value, end of year $ 12.07 $ 15.19 $ 20.46 $ 21.17 $ 20.25 ============= ============= ============= ============= ============= Total return (20.54)% (24.87)% 8.44% 7.04% 25.69% ============= ============= ============= ============= ============= Ratios/Supplemental data: Net assets, end of year (000s) $ 94,160 $ 118,525 $ 153,487 $ 101,645 $ 72,934 Ratio of expenses toaverage net assets 0.84% 0.84% 0.94% 1.00% 1.08% Ratio of net investment income to average net assets 0.77% 0.99% 0.73% 0.57% 1.43% Portfolio turnover rate/2/ 9% 20% 56% 14% 1%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. See notes to financial statements. 56 2002 iShares Annual Report to Shareholders Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
IShares MSCI Italy Index Fund ------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ----------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $ 17.79 $ 22.23 $ 21.56 $ 22.89 $ 16.66 ------------- ------------- ------------- ------------- ------------- Income from investment operations: Net investment income/1/ 0.37 0.24 0.39 0.17 0.18 Net realized and unrealized gain (loss) (3.01) (4.37) 2.51 1.05 7.94 ------------- ------------- ------------- ------------- ------------- Total from investment operations (2.64) (4.13) 2.90 1.22 8.12 ------------- ------------- ------------- ------------- ------------- Less distributions from: Net investment income - (0.24) (0.12) (0.06) (0.18) In excess of net investment income - - - - (1.02) Net realized gain - - (1.69) (2.24) (0.69) In excess of net realized gain - (0.07) (0.11) - - Return of capital - (0.00)/3/ (0.31) (0.25) - ------------- ------------- ------------- ------------- ------------- Total distributions - (0.31) (2.23) (2.55) (1.89) ------------- ------------- ------------- ------------- ------------- Net asset value, end of year $ 15.15 $ 17.79 $ 22.23 $ 21.56 $ 22.89 ============= ============= ============= ============= ============= Total return (14.84)% (18.61)% 13.35% 5.14% 47.66% ============= ============= ============= ============= ============= Ratios/Supplemental data: Net assets, end of year (000s) $ 29,538 $ 34,682 $ 50,008 $ 58,224 $ 58,368 Ratio of expenses to average net assets 0.84% 0.84% 0.99% 1.03% 1.02% Ratio of net investment income to average net assets 2.34% 1.16% 1.61% 0.70% 0.76% Portfolio turnover rate/2/ 10% 20% 40% 8% 8%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. See notes to financial statements. Financial Highlights 57 Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Netherlands Index Fund --------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $ 18.59 $ 23.53 $ 23.45 $ 23.50 $ 21.42 ------------- ------------- ------------- ------------- ------------- Income from investment operations: Net investment income/1/ 0.25 0.28 0.13 0.53 0.25 Net realized and unrealized gain (loss) (4.11) (4.94) 0.18 1.60 3.53 ------------- ------------- ------------- ------------- ------------- Total from investment operations (3.86) (4.66) 0.31 2.13 3.78 ------------- ------------- ------------- ------------- ------------- Less distributions from: Net investment income (0.04) (0.28) (0.08) (0.43) (0.16) In excess of net investment income - - - (0.01) - Net realized gain - - (0.11) (1.42) (1.47) In excess of net realized gain - - - (0.24) - Return of capital - - (0.04) (0.08) (0.07) ------------- ------------- ------------- ------------- ------------- Total distributions (0.04) (0.28) (0.23) (2.18) (1.70) ------------- ------------- ------------- ------------- ------------- Net asset value, end of year $ 14.69 $ 18.59 $ 23.53 $ 23.45 $ 23.50 ============= ============= ============= ============= ============= Total return (20.79)% (19.83)% 1.28% 8.98% 17.41% ============= ============= ============= ============= ============= Ratios/Supplemental data: Net assets, end of year (000s) $ 19,103 $ 24,184 $ 30,613 $ 31,685 $ 22,349 Ratio of expenses to average net assets 0.84% 0.84% 1.03% 1.07% 1.12% Ratio of net investment income to average net assets 1.48% 1.34% 0.53% 2.20% 1.00% Portfolio turnover rate/2/ 15% 35% 22% 32% 16%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. See notes to financial statements. 58 2002 iShares Annual Report to Shareholders Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Spain Index Fund --------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ----------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $ 21.33 $ 24.19 $ 25.59 $ 23.84 $ 18.49 ------------- ------------- ------------- ------------- ------------- Income from investment operations: Net investment income/1/ 0.17 0.19 0.15 0.09 0.16 Net realized and unrealized gain (loss) (3.55) (2.89) (0.60) 3.14 5.94 ------------- ------------- ------------- ------------- ------------- Total from investment operations (3.38) (2.70) (0.45) 3.23 6.10 ------------- ------------- ------------- ------------- ------------- Less distributions from: Net investment income - (0.16) (0.14) (0.07) (0.12) In excess of net investment income - - - (0.02) (0.02) Net realized gain - - (0.48) (1.35) (0.55) In excess of net realized gain - - (0.32) - - Return of capital - (0.00)/3/ (0.01) (0.04) (0.06) ------------- ------------- ------------- ------------- ------------- Total distributions - (0.16) (0.95) (1.48) (0.75) ------------- ------------- ------------- ------------- ------------- Net asset value, end of year $ 17.95 $ 21.33 $ 24.19 $ 25.59 $ 23.84 ============= ============= ============= ============= ============= Total return (15.85)% (11.17)% (1.81)% 13.39% 32.58% ============= ============= ============= ============= ============= Ratios/Supplemental data: Net assets, end of year (000s) $ 18,850 $ 27,198 $ 39,913 $ 36,469 $ 25,029 Ratio of expenses to average net assets 0.84% 0.84% 0.99% 1.04% 1.11% Ratio of net investment income to average net assets 0.85% 0.82% 0.57% 0.31% 0.61% Portfolio turnover rate/2/ 14% 26% 39% 17% 9%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. See notes to financial statements. Financial Highlights 59 Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
IShares MSCI Sweden Index Fund --------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ----------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $ 12.88 $ 24.38 $ 22.26 $ 18.39 $ 18.32 ------------- ------------- ------------- ------------- ------------- Income from investment operations: Net investment income/1/ 0.12 0.07 0.14 0.10 0.10 Net realized and unrealized gain (loss) (3.12) (11.52) 8.38 4.52 0.95 ------------- ------------- ------------- ------------- ------------- Total from investment operations (3.00) (11.45) 8.52 4.62 1.05 ------------- ------------- ------------- ------------- ------------- Less distributions from: Net investment income - (0.05) (0.12) (0.09) (0.08) In excess of net investment income - - (0.02) (0.01) (0.01) Net realized gain - - (6.09) (0.62) (0.86) In excess of net realized gain - - (0.13) (0.01) (0.01) Return of capital - (0.00)/3/ (0.04) (0.02) (0.02) ------------- ------------- ------------- ------------- ------------- Total distributions - (0.05) (6.40) (0.75) (0.98) ------------- ------------- ------------- ------------- ------------- Net asset value, end of year $ 9.88 $ 12.88 $ 24.38 $ 22.26 $ 18.39 ============ ============= ============= ============= ============= Total return (23.29)% (46.99)% 39.15% 25.09% 5.48% ============ ============= ============= ============= ============= Ratios/Supplemental data: Net assets, end of year (000s) $ 8,154 $ 10,630 $ 23,774 $ 20,034 $ 13,791 Ratio of expenses to average net assets 0.84% 0.84% 1.03% 1.13% 1.17% Ratio of net investment income to average net assets 0.98% 0.40% 0.46% 0.49% 0.48% Portfolio turnover rate/2/ 31% 43% 90% 33% 11%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. See notes to financial statements. 60 2002 iShares Annual Report to Shareholders Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Switzerland Index Fund --------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 -------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $ 12.95 $ 15.54 $ 15.39 $ 15.55 $ 13.79 ------------- ------------- ------------- ------------- ------------- Income from investment operations: Net investment income (loss)/1/ 0.03 0.04 0.04 0.04 (0.00)/3/ Net realized and unrealized gain (loss) (1.38) (2.54) 0.27 0.19 3.01 ------------- ------------- ------------- ------------- ------------- Total from investment operations (1.35) (2.50) 0.31 0.23 3.01 ------------- ------------- ------------- ------------- ------------- Less distributions from: Net investment income (0.01) (0.04) (0.03) (0.03) - In excess of net investment income - (0.01) (0.01) (0.04) (0.01) Net realized gain - - (0.11) (0.17) (1.21) In excess of net realized gain - (0.04) - (0.14) - Return of capital - - (0.01) (0.01) (0.03) ------------- ------------- ------------- ------------- ------------- Total distributions (0.01) (0.09) (0.16) (0.39) (1.25) ------------- ------------- ------------- ------------- ------------- Net asset value, end of year $ 11.59 $ 12.95 $ 15.54 $ 15.39 $ 15.55 ============= ============= ============= ============= ============= Total return (10.47)% (16.08)% 1.96% 1.47% 21.24% ============= ============= ============= ============= ============= Ratios/Supplemental data: Net assets, end of year (000s) $ 31,883 $ 32,384 $ 44,685 $ 38,499 $ 29,163 Ratio of expenses to average net assets 0.84% 0.84% 1.01% 1.09% 1.15% Ratio of net investment income (loss) to average net assets 0.20% 0.29% 0.23% 0.24% (0.03)% Portfolio turnover rate/2/ 12% 34% 35% 35% 43%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. See Notes to Financial Statements. Financial Highlights 61 Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI United Kingdom Index Fund ----------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ----------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $ 15.11 $ 18.35 $ 20.25 $ 18.48 $ 16.50 ------------- ------------- ------------- ------------- ------------- Income from investment operations: Net investment income/1/ 0.48 0.26 0.27 0.44 0.37 Net realized and unrealized gain (loss) (2.60) (3.23) (0.85) 2.40 2.12 ------------- ------------- ------------- ------------- ------------- Total from investment operations (2.12) (2.97) (0.58) 2.84 2.49 ------------- ------------- ------------- ------------- ------------- Less distributions from: Net investment income (0.22) (0.25) (0.23) (0.36) (0.29) In excess of net investment income - - (0.02) (0.01) (0.04) Net realized gain - - (0.84) (0.60) (0.11) In excess of net realized gain - (0.02) (0.19) (0.02) - Return of capital - - (0.04) (0.08) (0.07) ------------- ------------- ------------- ------------- ------------- Total distributions (0.22) (0.27) (1.32) (1.07) (0.51) ------------- ------------- ------------- ------------- ------------- Net asset value, end of year $ 12.77 $ 15.11 $ 18.35 $ 20.25 $ 18.48 ============= ============= ============= ============= ============= Total return (14.19)% (16.20)% (3.00)% 15.33% 14.98% ============= ============= ============= ============= ============= Ratios/Supplemental data: Net assets, end of year (000s) $ 120,067 $ 117,883 $ 146,803 $ 113,402 $ 62,846 Ratio of expenses to average net assets 0.84% 0.84% 0.94% 0.97% 1.03% Ratio of net investment income to average net assets 3.39% 1.57% 1.39% 2.16% 1.90% Portfolio turnover rate/2/ 14% 30% 33% 13% 3%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. See Notes to Financial Statements. 62 2002 iShares Annual Report to Shareholders Notes to the Financial Statements iShares, Inc. 1. SIGNIFICANT ACCOUNTING POLICIES iShares, Inc. (the "Company"), is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company was incorporated under the laws of the State of Maryland on September 1, 1994. As of August 31, 2002, the Company offered 22 investment portfolios or funds. These financial statements relate only to the iShares MSCI Austria, iShares MSCI Belgium, iShares MSCI EMU, iShares MSCI France, iShares MSCI Germany, iShares MSCI Italy, iShares MSCI Netherlands, iShares MSCI Spain, iShares MSCI Sweden, iShares MSCI Switzerland and iShares MSCI United Kingdom Index Funds (each a "Fund", collectively the "Funds"). The investment objective of each Fund is to seek investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in a particular market, as measured by a particular equity securities index compiled by Morgan Stanley Capital International Inc. ("MSCI"). The investment advisor utilizes a "passive" or index approach to achieve each Fund's investment objective. Each of the Funds is classified as a non-diversified fund under the 1940 Act. Non-diversified funds generally hold stocks in fewer companies than diversified funds and may be more susceptible to the risks associated with these particular companies, or to a single economic, political or regulatory occurrence. Each Fund invests in the securities of foreign issuers of a single country or region, which may involve certain considerations and risks not typically associated with securities of U.S. issuers. Such risks include, but are not limited to: generally less liquid and less efficient securities markets; generally greater price volatility; exchange rate fluctuations and exchange controls; imposition of restrictions on the expatriation of funds or other assets of the Fund; less publicly available information about issuers; the imposition of withholding or other taxes; higher transaction and custody costs; settlement delays and risk of loss attendant in settlement procedures; difficulties in enforcing contractual obligations; less regulation of securities markets; different accounting, disclosure and reporting requirements; more substantial governmental involvement in the economy; higher inflation rates; greater social, economic and political uncertainties; the risk of nationalization of expropriation of assets; and the risk of war. The following significant accounting policies are consistently followed by the Company in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for investment companies. The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. Actual results could differ from those estimates. Certain prior year amounts in the financial statements have been reclassified to be consistent with the current year presentation. SECURITY VALUATION Portfolio securities for which market prices are readily available are valued using the official closing price of the primary exchange on which they are traded. The methodology used to determine such closing prices varies among markets. Such prices are generally the same as those used by MSCI in calculating the benchmark indices used by the Funds. Mutual fund shares are valued at net asset value. Any securities, including restricted securities or other assets for which market quotations are not readily available, or for which a significant event has occurred since the time of the most recent market quotation, are valued in accordance with fair value pricing policies approved by the Company's Board of Directors. SECURITY TRANSACTIONS, INCOME RECOGNITION AND EXPENSES Security transactions are accounted for on trade date. Dividend income is recognized on the ex-dividend date, and interest income is accrued daily. Realized gains and losses on investment transactions are determined using the specific identification method. Common expenses incurred by the Company prior to December 28, 2001 were allocated to the funds based on the ratio of average net assets of each fund to the combined net assets of all funds offered by the Company, or other appropriate method. Other expenses, directly related to a specific fund, were charged to that fund. Additional details of the current expense structure may be found in Note 2. Notes to the Financial Statements 63 Notes to the Financial Statements (Continued) iShares, Inc. FOREIGN CURRENCY TRANSLATION The accounting records of the Funds are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the prevailing rates of exchange on the valuation date. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. Foreign currency and assets and liabilities denominated in foreign currency are generally converted into U.S. dollars using the same exchange rates utilized by MSCI in the calculation of the relevant MSCI Indices (currently, exchange rates as of 4:00 p.m. London time). However, the Company may use a different exchange rate from the rate used by MSCI in the event that the investment advisor concludes that such rate is more appropriate. Each Fund does not isolate the effect of fluctuations in foreign exchange rates from the effect of fluctuations in the market prices of securities. Such fluctuations are reflected by the Funds as a component of realized and unrealized gains and losses from investments for financial reporting purposes. EQUALIZATION Prior to January 1, 2002, the Funds used the accounting practice of equalization. This accounting method was used to keep the continuing shareholders' per share equity in undistributed net investment income from being affected by the continuous sales and redemptions of capital stock. Equalization is calculated on a per share basis whereby a portion of the proceeds from sales and costs of repurchases of capital stock is applied to undistributed net investment income. The amounts of equalization are disclosed in the Statements of Changes in Net Assets as undistributed net investment income included in the price of capital shares issued or redeemed. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders from net investment income, if any, including any net foreign currency gains, are declared and distributed at least annually by each Fund. Distributions of net realized gains, if any, generally are declared and distributed once a year. Distributions are determined on a tax basis and may differ from net investment income and net realized capital gains for financial reporting purposes. In addition, the Company intends to distribute, at least annually, amounts representing the dividend yield on the underlying portfolio securities of each Fund, net of expenses, as if the Fund owned the underlying portfolio securities for the entire dividend period. As a result, some portion of each distribution may result in a return of capital. Dividends and distributions are paid in U.S. dollars and cannot be automatically reinvested in additional shares of the Funds. At August 31, 2002, the components of distributable earnings on a tax basis were as follows:
---------------------------------------------------------------------------------------- Undistributed Undistributed Total Distributable iShares MSCI Index Fund Ordinary Income Long-Term Gain Earnings ---------------------------------------------------------------------------------------- Austria $ 208,682 $ - $ 208,682 Belgium 132,112 - 132,112 EMU 1,485,447 - 1,485,447 France 567,205 - 567,205 Germany 838,725 - 838,725 Italy 733,556 - 733,556 Netherlands 320,678 - 320,678 Spain 163,361 - 163,361 Sweden 100,930 - 100,930 Switzerland 73,589 - 73,589 United Kingdom 2,447,179 - 2,447,179 ----------------------------------------------------------------------------------------
64 2002 iShares Annual Report to Shareholders Notes to the Financial Statements (Continued) iShares, Inc. For the year ended August 31, 2002, the tax characterization of distributions paid was equal to the book characterization of distributions paid for all of the Funds. The total distributions and distributions per share are disclosed in the accompanying Statements of Changes in Net Assets and the Financial Highlights for all Funds. FEDERAL INCOME TAXES Each Fund is treated as a separate entity for federal income tax purposes. It is the policy of each Fund to qualify as a regulated investment company, as defined in Subchapter M of the Internal Revenue Code of 1986, as amended, and to annually distribute all of its net income and any net gains (taking into account any capital loss carryforwards) sufficient to relieve it from all, or substantially all, federal income and excise taxes. Accordingly, no provision for federal income taxes was required for the year ended August 31, 2002. From November 1, 2001 to August 31, 2002, certain of the Funds incurred net foreign exchange losses and net realized capital losses. As permitted by tax regulations, the following Funds have elected to defer those losses and treat them as arising in the year ending August 31, 2003.
----------------------------------------------------------------------- Deferred Net Realized Capital/Net Foreign iShares MSCI Index Fund Currency Losses ----------------------------------------------------------------------- Austria $ 337,355 Belgium 238,131 EMU 170,624 France 342,786 Germany 5,200,467 Italy 885,320 -----------------------------------------------------------------------
----------------------------------------------------------------------- Deferred Net Realized Capital/Net Foreign iShares MSCI Index Fund Currency Losses ----------------------------------------------------------------------- Netherlands $ 1,497,810 Spain 680,138 Sweden 1,551,873 Switzerland 547,493 United Kingdom 6,530,756 -----------------------------------------------------------------------
At August 31, 2002, certain of the Funds had tax basis net capital loss carryforwards. Such losses may be applied against any net realized taxable gains in each succeeding year or until their respective expiration date, whichever occurs first.
--------------------------------------------------------------------------------- Expiring Expiring Expiring Expiring iShares MSCI Index Fund In 2007 In 2008 In 2009 In 2010 Total --------------------------------------------------------------------------------- Austria $ 4,273 $551,208 $336,553 $ 1,291,324 $ 2,183,358 Belgium - 94,675 450,543 1,677,678 2,222,896 EMU - - 443 1,923,552 1,923,995 France - - - 3,807,513 3,807,513 Germany - - 86,860 13,573,336 13,660,196 Italy - - - 3,335,772 3,335,772 Netherlands - - 60,885 3,222,792 3,283,677 Spain - - 20,276 2,081,931 2,102,207 Sweden - - 126,557 3,350,244 3,476,801 Switzerland - - - 2,855,879 2,855,879 United Kingdom - - - 9,945,254 9,945,254 ---------------------------------------------------------------------------------
If any of the Funds own shares in certain foreign investment entities, referred to, under U.S. tax law code, as "passive foreign investment companies", such Funds may elect to mark-to-market annually the shares of the passive foreign investment company, and would be required to distribute to shareholders any such mark-to-market gains. Notes to the Financial Statements 65 Notes to the Financial Statements (Continued) iShares, Inc. For the year ended August 31, 2002, each Fund reclassified certain amounts to paid-in-capital from accumulated net realized gain (loss) on investments and foreign currency transactions and accumulated net investment income (loss), respectively, as a result of permanent book and tax differences primarily attributed to net investment loss, return of capital, passive foreign investment companies, realized foreign currency gains and losses and gains and losses on in-kind redemptions. These reclassifications have no effect on net assets or net asset values per share. 2. AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES Barclays Global Fund Advisors ("BGFA") acts as investment advisor to the Company and is responsible for the investment management of each Fund. BGFA is a California corporation indirectly owned by Barclays Bank PLC. BGFA serves as investment advisor to each Fund pursuant to an Advisory Agreement between the Company and BGFA as amended December 28, 2001. Under this agreement, BGFA is responsible for placing purchase and sale orders, providing continuous supervision of the investment portfolio of each Fund, and the general management of the Company's affairs. Under the Advisory Agreement, BGFA is responsible for all of the expenses ("Covered Expenses") of each of the Funds, other than interest, taxes, brokerage commissions and other expenses connected with the executions of portfolio transactions, extraordinary expenses, distribution fees and advisory fees. Prior to December 28, 2001 and pursuant to the prior advisory agreement, the investment advisory fee earned by and paid to BGFA with respect to each Fund was reduced by the aggregate of such Fund's fees and expenses (subject to the exceptions in the prior sentence). BGFA also agreed to reimburse each Fund to the extent that the expenses of any Fund (subject to the same exceptions) exceeded the investment advisory fee as stated in the advisory fee table below. For its investment management services to the Funds, BGFA is entitled to an annual investment advisory fee based on each Fund's allocable portion of the aggregate net assets of all the funds offered by the Company (except for the iShares MSCI Brazil, iShares MSCI Pacific ex-Japan, iShares MSCI South Korea, and iShares MSCI Taiwan Index Funds) as follows:
------------------------------------------------------------------------------------------------------ Advisory Fee Aggregate Net Assets ------------------------------------------------------------------------------------------------------ 0.59% First $7 billion 0.54 Over $7 billion, up to and including $11 billion 0.49 Over $11 billion ------------------------------------------------------------------------------------------------------
Barclays Global Investors, N.A. ("BGI") has a license agreement with MSCI for the use of the relevant MSCI indices. Under a sub-license agreement between BGI and the Funds, the fees for the use of such MSCI indices are paid directly by BGI to MSCI. Effective May 21, 2002, Investors Bank & Trust Company ("Investors Bank") serves as administrator, custodian, transfer agent and securities lending agent for the Company. As compensation for its services, Investors Bank receives certain out-of-pocket costs, transaction fees, and asset-based fees, which are accrued daily and paid monthly. These fees are Covered Expenses as defined above. Prior to May 21, 2002, PFPC Inc. acted as administration and accounting services agent of the Company, pursuant to a prior administration and accounting services agreement with the Company. For its services to the Company, PFPC Inc. was paid aggregate fees equal to each Fund's allocable portion of 0.15% per annum of the average aggregate daily net assets of the Company up to $3 billion; plus 0.10% per annum of the average aggregate daily net assets of the Company between $3 billion and $4.5 billion and 0.095% of the average aggregate daily net assets of the Company in excess of $4.5 billion. PFPC Inc. received a minimum monthly fee of 0.05% of the aggregate average daily net assets of the Company plus $131,250 for the funds. PFPC Inc. paid Morgan Stanley & Co. Inc. a fee of 0.05% of the average daily net assets 66 2002 iShares Annual Report to Shareholders Notes to the Financial Statements (Continued) iShares, Inc. of the Company for sub-administration services. As of December 28, 2001, the fees paid to PFPC Inc. became Covered Expenses as previously defined. Prior to May 21, 2002, PFPC Inc. served as transfer agent and dividend disbursement agent for the Funds. Prior to May 21, 2002, JPMorgan Chase Bank ("JPMorgan Chase") served as global custodian and securities lending agent to each of the Funds. For its custody services to each Fund, JPMorgan Chase was paid per annum fees based on the aggregate net assets of each Fund as follows: ----------------------------------------------------------------- iShares MSCI Index Fund Custodian Fee ----------------------------------------------------------------- Austria 0.06% Belgium 0.05 France 0.05 Germany 0.04 Italy 0.05 ----------------------------------------------------------------- ----------------------------------------------------------------- iShares MSCI Index Fund Custodian Fee ----------------------------------------------------------------- Netherlands 0.04% Spain 0.05 Sweden 0.05 Switzerland 0.05 United Kingdom 0.01 ----------------------------------------------------------------- JPMorgan Chase was paid a per annum fee for the iShares MSCI EMU Index Fund based on the aggregate net assets of the Fund's investments in each of Austria, Belgium, France, Germany, Italy, Netherlands and Spain at the fees applicable to these countries, plus fees at rates of 0.06%, 0.40%, 0.06% and 0.20% for aggregate net assets of the Fund's investments in each of Finland, Greece, Ireland and Portugal, respectively. JPMorgan Chase also received certain fees for each transaction of each Fund and was reimbursed for certain out-of-pocket expenses. As of December 28, 2001, these fees became Covered Expenses as previously defined. For its services in connection with lending portfolio securities of the Funds, JPMorgan Chase received 40% of the net investment income earned on the collateral for securities loaned from each Fund. SEI Investments Distribution Co. (the "Distributor") serves as each Fund's underwriter and distributor of the shares of each Fund, pursuant to a Distribution Agreement with the Company. The Company has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under the Company's Plan, the Distributor is entitled to receive a distribution fee from each Fund, not to exceed 0.25% of the average daily net assets of such Fund, for distribution-related services. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, each Fund may invest in the institutional shares of the Institutional Money Market Fund ("IMMF") of Barclays Global Investors Funds. The IMMF is a feeder fund in a master/feeder fund structure that invests substantially all of its assets in the Money Market Master Portfolio of Master Investment Portfolio, which is managed by BGFA, the Funds' investment advisor. The IMMF is an open-end money market fund available only to institutional investors, including investment companies managed by BGFA. The IMMF seeks a high level of income consistent with liquidity and the preservation of capital. While the IMMF does not directly charge an advisory fee, the master portfolio in which it invests does charge an advisory fee. Income distributions from the IMMF are declared daily and paid monthly from net investment income. Income distributions earned by the Funds from investment of securities lending collateral are recorded as securities lending income in the accompanying Statements of Operations. As a result of using an index approach to investing, the iShares MSCI United Kingdom Index Fund held shares of Barclays PLC, with a current market value of $3,808,028 as of August 31, 2002. Barclays PLC is an affiliate of BGFA, the Fund's investment advisor. The Company pays each director not affiliated with BGFA an annual retainer and reimburses the directors for travel and out-of-pocket expenses incurred in connection with their attendance at Board of Directors meetings. As of August 31, 2002, certain directors and officers of the Company are also employees of BGFA and its affiliates or employees of Investors Bank. Notes to the Financial Statements 67 Notes to the Financial Statements (Continued) iShares, Inc. 3. INVESTMENT PORTFOLIO TRANSACTIONS Purchases and sales of investments (excluding in-kind transactions and short-term securities) for the fiscal year ended August 31, 2002, were as follows: ---------------------------------------------------------------- iShares MSCI Index Fund Purchases Sales ---------------------------------------------------------------- Austria $4,269,772 $4,050,421 Belgium 1,952,068 1,781,165 EMU 4,618,537 2,946,844 France 2,470,864 1,913,927 Germany 10,378,229 9,564,512 Italy 3,669,109 3,014,235 Netherlands 3,486,288 3,285,770 Spain 3,075,621 2,908,394 Sweden 3,255,324 3,121,767 Switzerland 3,769,278 3,725,457 United Kingdom 19,619,116 17,268,329 ---------------------------------------------------------------- In-kind transactions for the fiscal year ended August 31, 2002, were as follows: ---------------------------------------------------------------- In-Kind In-Kind iShares MSCI Index Fund Purchases Sales ---------------------------------------------------------------- Austria $9,007,970 $4,973,768 Belgium 1,890,893 - EMU 61,881,425 - France 3,422,414 - Germany 8,592,100 8,647,475 Spain 10,981,258 14,742,627 Switzerland 3,444,422 - United Kingdom 27,900,810 4,897,265 ---------------------------------------------------------------- 68 2002 iShares Annual Report to Shareholders Notes to the Financial Statements (Continued) iShares, Inc. At August 31, 2002, the aggregate unrealized appreciation and depreciation based on cost for federal income tax purposes were as follows:
------------------------------------------------------------------------------------- Net Tax Unrealized Unrealized Unrealized iShares MSCI Index Fund Cost Appreciation Depreciation Depreciation ------------------------------------------------------------------------------------- Austria $ 16,566,541 $ - $ (1,876,798) $ (1,876,798) Belgium 13,400,430 - (2,722,119) (2,722,119) EMU 177,686,870 - (41,454,726) (41,454,726) France 70,083,649 3,714,221 (21,138,167) (17,423,946) Germany 160,562,923 - (63,571,340) (63,571,340) Italy 40,826,979 1,863,200 (9,742,127) (7,878,927) Netherlands 27,053,138 28,964 (8,193,205) (8,164,241) Spain 27,342,013 34,932 (7,395,216) (7,360,284) Sweden 15,381,223 370,342 (6,714,803) (6,344,461) Switzerland 40,501,000 1,350,873 (9,319,883) (7,969,010) United Kingdom 158,526,499 2,566,138 (41,918,723) (39,352,585) -------------------------------------------------------------------------------------
4. iSHARES TRANSACTIONS The Company's authorized shares are 10.9 billion shares of $.001 par value capital stock. The number of shares authorized to each Fund are as follows: --------------------------------------------------------------------- iShares MSCI Index Fund Authorized Shares --------------------------------------------------------------------- Austria 19,800,000 Belgium 136,200,000 EMU 500,000,000 France 340,200,000 Germany 382,200,000 Italy 63,600,000 --------------------------------------------------------------------- --------------------------------------------------------------------- iShares MSCI Index Fund Authorized Shares --------------------------------------------------------------------- Netherlands 255,000,000 Spain 127,800,000 Sweden 63,600,000 Switzerland 318,625,000 United Kingdom 943,200,000 --------------------------------------------------------------------- The Company issues and redeems shares ("iShares") of each Fund only in aggregations of a specified number of iShares (each, a "Creation Unit") at net asset value. Except when aggregated in Creation Units, iShares are not redeemable. Transactions in iShares for each Fund are disclosed in detail in the Statements of Changes in Net Assets. The consideration for purchase of Creation Units of a Fund is generally the in-kind deposit of a designated portfolio of equity securities constituting a portfolio sampling representation of the corresponding MSCI Index and an amount of cash. A purchase transaction fee and a redemption transaction fee are charged to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units of iShares. Notes to the Financial Statements 69 Notes to the Financial Statements (Continued) iShares, Inc. 5. LOANS OF PORTFOLIO SECURITIES Each Fund may lend its investment securities to approved borrowers such as brokers, dealers and other financial institutions. The borrower pledges and maintains with the Fund collateral consisting of cash, letters of credit issued by banks approved by BGFA, or securities issued or guaranteed by the U.S. Government. The initial collateral received by each Fund is required to have a value equal to at least 105% of the market value of the loaned securities. The collateral is maintained thereafter, at a value equal to at least 100% of the current market value of the securities on loan. The risks to the Funds of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of August 31, 2002, certain of the Funds had loaned securities which were collateralized by cash. The cash collateral received was invested in money market mutual funds. The market values of the securities on loan at August 31, 2002, and the cash collateral received are disclosed in the Statements of Assets and Liabilities. 6. BORROWINGS For the period from June 25, 2001 to March 22, 2002, the Company had a Line of Credit Agreement with The Chase Manhattan Bank for $25,000,000. Each Fund could borrow under the credit agreement solely for temporary or emergency purposes. Each Fund paid a commitment fee of 0.15% per annum based upon such Fund's pro rata share of the average daily unused amount of the aggregate commitment. Amounts borrowed under the agreement incurred interest at a rate per annum equal to the Federal Funds Rate plus 0.50% per annum.
-------------------------------------------------------------------------------------- Average Advances Average Number of Days Outstanding Interest Outstanding iShares MSCI Index Fund During the Period Rate During the Period -------------------------------------------------------------------------------------- Belgium $ 100,000 2.3750% 7 Spain 100,000 4.1875 6 --------------------------------------------------------------------------------------
7. LEGAL PROCEEDINGS In April 2002, the judge overseeing an ongoing action in the U.S. District Court for the Northern District of Illinois granted leave for a United States patentholder named MOPEX, Inc. to amend its complaint to add the Company, along with seven other parties, as a defendant. There are now a total of twenty defendants, including the Company's investment advisor, other exchange traded funds, various fund service providers and market makers, and the Chicago Stock Exchange, Inc. In the action, the plaintiff alleges that the actions of the parties, now including the Company, infringed their patent, which allegedly covers a mechanism for continuous pricing of exchange traded funds. In addition, the plaintiff alleges that the parties engaged in a "conspiracy" amongst themselves to infringe the patent. Although this is the only case to which the Company has been named as a party, this action is one of two involving related issues. The Company believes that it has valid defenses to all claims raised by the patentholder. However, a resolution of this case may impose increased costs on the Company and thus raise the expense ratios of the Funds, adversely affecting performance. 70 2002 iShares Annual Report to Shareholders Report of Independent Accountants To the Shareholders and Board of Directors of iShares, Inc.: In our opinion, the accompanying statements of assets and liabilities, including the schedules 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 the iShares MSCI Austria Index Fund, iShares MSCI Belgium Index Fund, iShares MSCI EMU Index Fund, iShares MSCI France Index Fund, iShares MSCI Germany Index Fund, iShares MSCI Italy Index Fund, iShares MSCI Netherlands Index Fund, iShares MSCI Spain Index Fund, iShares MSCI Sweden Index Fund, iShares MSCI Switzerland Index Fund and iShares MSCI United Kingdom Index Funds, each a portfolio of the iShares MSCI Index Fund Series (the "Funds"), at August 31, 2002, the results of each of their operations for the periods then ended, and the changes in each of their net assets and the financial highlights for each of the two years in the period then ended, 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 Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits 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 August 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial statements of the Funds as of August 31, 2000 and for the three years then ended, were audited by other auditors, whose report dated October 13, 2000 expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP San Francisco, California October 4, 2002 Report of Independent Accountants 71 Tax Information (Unaudited) iShares, Inc. For the year ended August 31, 2002, certain of the Funds earned foreign source income and paid foreign taxes which they intend to pass through to their shareholders pursuant to Section 853 of the Internal Revenue Code as follows: -------------------------------------------------------------------- Foreign Source Foreign iShares MSCI Index Fund Income Earned Taxes Paid -------------------------------------------------------------------- Austria $ 356,672 $ 53,381 Belgium 345,368 51,665 EMU 2,547,466 317,204 France 1,116,337 116,466 Germany 1,969,109 289,949 Italy 1,025,726 153,448 Netherlands 587,200 88,080 Spain 408,967 61,993 Sweden 203,912 30,587 Switzerland 393,588 60,708 United Kingdom 5,463,624 382,557 -------------------------------------------------------------------- 72 2002 iShares Annual Report to Shareholders Shareholder Meeting Results (Unaudited) iShares, Inc. A special meeting of the shareholders of iShares, Inc. (the "Company") was held on December 19, 2001. At the meeting, the following matters were voted upon by the shareholders. Shareholders of the iShares MSCI Singapore Index Fund did not approve Proposals 2, 3 and 4. Proposals 3 and 4 did not pass in the iShares MSCI South Korea Index Fund and the iShares MSCI Mexico Index Fund. All other proposals were approved and the results of voting are presented below. Proposal 1 * To elect the six nominees specified below as Directors of the Company, each of whom will serve until his respective successor is elected and qualified. ---------------------------------------------------------------------- Votes Votes Votes For Against Abstaining ---------------------------------------------------------------------- Nathan Most 80,031,635 1,585,430 585,419 Richard K. Lyons 80,087,104 1,528,981 586,397 George G.C. Parker 80,206,531 1,411,377 584,576 John B. Carroll 80,213,590 1,399,965 588,928 Garrett F. Bouton 80,212,728 1,398,467 591,287 W. Allen Reed 80,227,345 1,398,033 577,105 ---------------------------------------------------------------------- Messrs. Most, Carroll and Reed previously served as Directors of the Company and were reelected. Messrs. Lyons, Parker and Bouton were newly elected. Proposal 2 To approve a new advisory agreement with Barclays Global Fund Advisors in order to effect a change to the fee structure. ---------------------------------------------------------------------- Votes Votes Votes iShares MSCI Index Fund For Against Abstaining ---------------------------------------------------------------------- Australia 5,218,230 13,528 8,087 Austria 787,639 6,543 1,001 Belgium 460,728 5,727 2,259 Brazil 626,687 1,360 6,695 Canada 1,605,768 24,185 5,550 EMU 848,710 8,509 3,008 France 1,595,574 7,704 4,173 Germany 4,143,547 164,659 15,410 Hong Kong 2,927,240 53,951 45,619 Italy 1,166,484 21,570 352 Japan 30,508,180 639,114 266,321 Malaysia 9,322,460 510,931 46,642 Mexico 1,530,313 59,645 48,721 Netherlands 657,984 8,001 2,143 Singapore 6,262,054 4,186,435 82,725 South Korea 1,496,477 3,741 1,027 Spain 846,086 4,570 1,670 Sweden 451,301 2,276 3,448 Switzerland 1,392,729 8,876 2,472 Taiwan 8,500,275 14,525 8,966 United Kingdom 4,052,606 127,633 9,967 ---------------------------------------------------------------------- Shareholder Meeting Results 73 Shareholder Meeting Results (Unaudited) (Continued) iShares, Inc. Proposal 3 To approve a change to the Company's fundamental investment policy to permit each Index Fund to invest 25% or more of its total assets in a single issuer.
------------------------------------------------------------------------------- VOtes Votes Votes Broker iShares MSCI Index Fund For Against Abstaining Non-Votes ** ------------------------------------------------------------------------------- Australia 4,566,084 128,417 8,164 537,180 Austria 592,395 11,192 1,066 190,530 Belgium 331,114 12,409 1,727 123,464 Brazil 473,313 6,389 7,485 147,555 Canada 1,119,723 78,272 6,105 431,402 EMU 577,349 30,209 1,914 250,755 France 1,089,533 60,793 5,363 451,762 Germany 3,013,609 375,738 13,837 920,432 Hong Kong 2,074,258 164,613 15,969 771,970 Italy 813,326 7,666 1,715 365,699 Japan 21,565,829 1,542,923 227,835 8,077,028 Malaysia 6,780,543 640,697 42,149 2,416,645 Mexico 742,809 151,704 49,759 694,407 Netherlands 455,089 13,140 1,265 198,634 Singapore 2,941,417 4,267,886 71,331 3,250,579 South Korea 894,759 15,352 927 590,207 Spain 593,328 14,664 2,440 241,894 Sweden 317,304 11,441 2,460 125,821 Switzerland 968,175 21,306 4,625 409,971 Taiwan 6,527,685 156,952 8,941 1,830,188 United Kingdom 2,962,892 200,830 10,764 1,015,718 -------------------------------------------------------------------------------
74 2002 iShares Annual Report to Shareholders Shareholder Meeting Results (Unaudited) (Continued) iShares, Inc. PROPOSAL 4 To approve a change to the Company's fundamental investment policy with respect to industry concentration.
------------------------------------------------------------------------------ Votes Votes Votes Broker iShares MSCI Index Fund For Against Abstaining Non-Votes** ------------------------------------------------------------------------------ Australia 4,565,354 129,127 8,184 537,180 Austria 597,765 4,457 2,431 190,530 Belgium 337,214 6,462 1,574 123,464 Brazil 474,421 5,281 7,485 147,555 Canada 1,130,487 66,818 6,795 431,402 EMU 584,673 22,872 1,927 250,755 France 1,090,283 57,340 8,066 451,762 Germany 3,031,995 352,206 18,983 920,432 Hong Kong 2,100,329 133,296 21,215 771,970 Italy 812,824 8,346 1,537 365,699 Japan 21,766,135 1,274,909 295,543 8,077,028 Malaysia 6,840,531 575,134 47,723 2,416,645 Mexico 751,103 142,806 50,363 694,407 Netherlands 455,508 12,709 1,277 198,634 Singapore 3,036,902 4,163,488 80,245 3,250,579 South Korea 896,094 13,479 1,465 590,207 Spain 595,518 12,274 2,640 241,894 Sweden 321,027 6,788 3,389 125,821 Switzerland 971,210 18,605 4,291 409,971 Taiwan 6,531,233 152,645 9,700 1,830,188 United Kingdom 2,965,577 195,398 13,512 1,015,718 ------------------------------------------------------------------------------
Shareholder Meeting Results 75 Shareholder Meeting Results (Unaudited) (Continued) iShares, Inc. Proposal 5 To approve a change of the iShares MSCI Japan Index Fund from diversified to non-diversified. ----------------------------------------------- Votes Votes Votes Broker For Against Abstaining Non-Votes ** ----------------------------------------------- 21,869,940 1,323,934 142,714 8,077,028 ----------------------------------------------- Proposal 6 To approve a change of the iShares MSCI United Kingdom Index Fund from diversified to non-diversified. ----------------------------------------------- Votes Votes Votes Broker For Against Abstaining Non-Votes ** ----------------------------------------------- 2,971,281 190,578 12,627 1,015,718 ----------------------------------------------- * Denotes Company-wide proposal and voting results. ** Broker Non-Votes are proxies received by the Fund from brokers or nominees, who neither has received instructions from the beneficial owner or other persons entitled to vote, nor has discretionary power to vote on a particular matter. 76 2002 iShares Annual Report to Shareholders Supplemental Information (Unaudited) iShares, Inc. The charts that follow present information about the differences between the daily market price on secondary markets for shares of an iShares Fund and that Fund's net asset value. Net asset value, or "NAV", is the price per share at which each Fund issues and redeems shares. It is calculated in accordance with the standard formula for valuing mutual fund shares every day the New York Stock Exchange is open. The "Market Price" of each iShares Fund generally is determined using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of such Fund is listed for trading, as of the time that the Fund's NAV is calculated. Each Fund's Market Price may be at, above or below its NAV. The NAV of each Fund will fluctuate with changes in the market value of its portfolio holdings. The trading price of each Fund will fluctuate in accordance with changes in its NAV, as well as market supply and demand. Premiums or discounts are the differences (expressed as a percentage) between the NAV and Market Price of a Fund on a given day, generally at the time NAV is calculated. A premium is the amount that a Fund is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that a Fund is trading below the reported NAV, expressed as a percentage of the NAV. The following information shows the frequency distributions of premiums and discounts for each of the iShares Funds included in this report. Except for the iShares MSCI EMU Index Fund, the information shown for each Fund is for the five-year period from July 1, 1997 through June 30, 2002, the date of the most recent calendar quarter end. The information shown for the iShares MSCI EMU Index Fund is for each full calendar quarter completed after the launch date of that Fund through June 30, 2002. The specific periods covered for each Fund are disclosed in the chart for such Fund. THE VERTICAL COLUMN OF THE CHART SHOWS THE PREMIUM OR DISCOUNT EXPRESSED AS A PERCENTAGE OF NAV. THE HORIZONTAL COLUMN INDICATES THE NUMBER OF TRADING DAYS IN THE PERIOD COVERED BY THE CHART. PLEASE NOTE THAT THE INTERVALS SHOWING THE NUMBER OF TRADING DAYS MAY BE DIFFERENT FOR EACH CHART. EACH BAR IN THE CHART SHOWS THE NUMBER OF TRADING DAYS IN WHICH THE ISHARES FUND TRADED WITHIN THE PREMIUM/DISCOUNT RANGE INDICATED. ALL DATA PRESENTED HERE REPRESENTS PAST PERFORMANCE, WHICH CANNOT BE USED TO PREDICT FUTURE RESULTS. Supplemental Information 77 Supplemental Information (Unaudited) (Continued) iShares, Inc. iShares MSCI Austria Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 25 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 3 GT 4.50%_LT 5.00% 0 GT 4 00%_LT 4.50% 1 GT 3.50%_LT 4.00% 4 GT 3.00%_LT 3.50% 2 GT 2.50%_LT 3.00% 12 GT 2.00%_LT 2.50% 20 GT 1.50%_LT 2.00% 43 GT 1.00%_LT 1.50% 130 GT 0.50%_LT 1.00% 219 LT 0.50%_GT (0.50)% 612 LT (0.50)%_GT (1.00)% 121 LT (1.00)%_GT (1.50)% 29 LT (1.50)%_GT (2.00)% 17 LT (2.00)%_GT (2.50)% 6 LT (2.50)%_GT (3.00)% 3 LT (3.00)%_GT (3.50)% 3 LT (3.50)%_GT (4.00)% 0 LT (4.00)%_GT (4.50)% 1 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 0 iShares MSCI Belgium Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 7 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT4.50%_LT5.00% 0 GT 4 00%_LT 4.50% 1 GT 3.50%_LT 4.00% 1 GT 3.00%_LT 3.50% 2 GT 2.50%_LT 3.00% 7 GT 2.00%_LT 2.50% 10 GT 1.50%_LT 2.00% 22 GT 1.00%_LT 1.50% 97 GT 0.50%_LT 1.00% 260 LT 0.50%_GT (0.50)% 579 LT (0.50)%_GT (1.00)% 161 LT (1.00)%_GT (1.50)% 69 LT (1.50)%_GT (2.00)% 25 LT (2.00)%_GT (2.50)% 8 LT (2.50)%_GT (3.00)% 3 LT (3.00)%_GT (3.50)% 0 LT (3.50)%_GT (4.00)% 0 LT (4.00)%_GT (4.50)% 1 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 1 78 2002 iShares Annual Report to Shareholders Supplemental Information (Unaudited) (Continued) iShares, Inc. iShares MSCI EMU Index Fund PERIOD COVERED: OCTOBER 1, 2000 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 7 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT 4.50%_LT 5.00% 1 GT 4 00%_LT 4.50% 1 GT 3.50%_LT 4.00% 0 GT 3.00%_LT 3.50% 0 GT 2.50%_LT 3.00% 0 GT 2.00%_LT 2.50% 2 GT 1.50%_LT 2.00% 11 GT 1.00%_LT 1.50% 42 GT 0.50%_LT 1.00% 135 LT 0.50%_GT (0.50)% 208 LT (0.50)%_GT (1.00)% 24 LT (1.00)%_GT (1.50)% 3 LT (1.50)%_GT (2.00)% 1 LT (2.00)%_GT (2.50)% 0 LT (2.50)%_GT (3.00)% 0 LT (3.00)%_GT (3.50)% 0 LT (3.50)%_GT (4.00)% 0 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 1 iShares MSCI France Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 11 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT 4.50%_LT 5.00% 0 GT 4 00%_LT 4.50% 0 GT 3.50%_LT 4.00% 1 GT 3.00%_LT 3.50% 1 GT 2.50%_LT 3.00% 0 GT 2.00%_LT 2.50% 4 GT 1.50%_LT 2.00% 16 GT 1.00%_LT 1.50% 65 GT 0.50%_LT 1.00% 180 LT 0.50%_GT (0.50)% 846 LT (0.50)%_GT (1.00)% 95 LT (1.00)%_GT (1.50)% 28 LT (1.50)%_GT (2.00)% 4 LT (2.00)%_GT (2.50)% 1 LT (2.50)%_GT (3.00)% 0 LT (3.00)%_GT (3.50)% 3 LT (3.50)%_GT (4.00)% 1 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 1 Supplemental Information 79 Supplemental Information (Unaudited) (Continued) iShares, Inc. iShares MSCI Germany Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 1 GT 5.50%_LT 6.00% 2 GT 5.00%_LT 5.50% 0 GT 4.50%_LT 5.00% 0 GT 4 00%_LT 4.50% 0 GT 3.50%_LT 4.00% 0 GT 3.00%_LT 3.50% 1 GT 2.50%_LT 3.00% 6 GT 2.00%_LT 2.50% 11 GT 1.50%_LT 2.00% 42 GT 1.00%_LT 1.50% 102 GT 0.50%_LT 1.00% 243 LT 0.50%_GT (0.50)% 659 LT (0.50)%_GT (1.00)% 130 LT (1.00)%_GT (1.50)% 34 LT (1.50)%_GT (2.00)% 11 LT (2.00)%_GT (2.50)% 6 LT (2.50)%_GT (3.00)% 2 LT (3.00)%_GT (3.50)% 3 LT (3.50)%_GT (4.00)% 0 LT (4.00)%_GT (4.50)% 1 LT (4.50)%_GT (5.00)% 1 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 2 iShares MSCI Italy Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 9 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT 4.50%_LT 5.00% 1 GT 4 00%_LT 4.50% 0 GT 3.50%_LT 4.00% 0 GT 3.00%_LT 3.50% 2 GT 2.50%_LT 3.00% 3 GT 2.00%_LT 2.50% 7 GT 1.50%_LT 2.00% 18 GT 1.00%_LT 1.50% 48 GT 0.50%_LT 1.00% 191 LT 0.50%_GT (0.50)% 825 LT (0.50)%_GT (1.00)% 104 LT (1.00)%_GT (1.50)% 26 LT (1.50)%_GT (2.00)% 14 LT (2.00)%_GT (2.50)% 6 LT (2.50)%_GT (3.00)% 0 LT (3.00)%_GT (3.50)% 2 LT (3.50)%_GT (4.00)% 0 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 0 80 2002 iShares Annual Report to Shareholders Supplemental Information (Unaudited) (Continued) iShares, Inc. iShares MSCI Netherlands Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 8 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT 4.50%_LT 5.00% 0 GT 4 00%_LT 4.50% 0 GT 3.50%_LT 4.00% 1 GT 3.00%_LT 3.50% 3 GT 2.50%_LT 3.00% 3 GT 2.00%_LT 2.50% 5 GT 1.50%_LT 2.00% 21 GT 1.00%_LT 1.50% 58 GT 0.50%_LT 1.00% 280 LT 0.50%_GT (0.50)% 763 LT (0.50)%_GT (1.00)% 77 LT (1.00)%_GT (1.50)% 28 LT (1.50)%_GT (2.00)% 6 LT (2.00)%_GT (2.50)% 2 LT (2.50)%_GT (3.00)% 0 LT (3.00)%_GT (3.50)% 0 LT (3.50)%_GT (4.00)% 1 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 1 iShares MSCI Spain Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 26 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT 4.50%_LT 5.00% 0 GT 4 00%_LT 4.50% 1 GT 3.50%_LT 4.00% 1 GT 3.00%_LT 3.50% 2 GT 2.50%_LT 3.00% 4 GT 2.00%_LT 2.50% 4 GT 1.50%_LT 2.00% 8 GT 1.00%_LT 1.50% 51 GT 0.50%_LT 1.00% 190 LT 0.50%_GT (0.50)% 831 LT (0.50)%_GT (1.00)% 99 LT (1.00)%_GT (1.50)% 26 LT (1.50)%_GT (2.00)% 8 LT (2.00)%_GT (2.50)% 2 LT (2.50)%_GT (3.00)% 2 LT (3.00)%_GT (3.50)% 1 LT (3.50)%_GT (4.00)% 1 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 0 Supplemental Information 81 Supplemental Information (Unaudited) (Continued) iShares, Inc. iShares MSCI Sweden Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 1 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT 4.50%_LT 5.00% 1 GT 4 00%_LT 4.50% 1 GT 3.50%_LT 4.00% 2 GT 3.00%_LT 3.50% 2 GT 2.50%_LT 3.00% 1 GT 2.00%_LT 2.50% 7 GT 1.50%_LT 2.00% 17 GT 1.00%_LT 1.50% 73 GT 0.50%_LT 1.00% 253 LT 0.50%_GT (0.50)% 727 LT (0.50)%_GT (1.00)% 95 LT (1.00)%_GT (1.50)% 45 LT (1.50)%_GT (2.00)% 14 LT (2.00)%_GT (2.50)% 7 LT (2.50)%_GT (3.00)% 3 LT (3.00)%_GT (3.50)% 4 LT (3.50)%_GT (4.00)% 1 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 2 iShares MSCI Switzerland Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 21 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT 4.50%_LT 5.00% 0 GT 4 00%_LT 4.50% 0 GT 3.50%_LT 4.00% 0 GT 3.00%_LT 3.50% 1 GT 2.50%_LT 3.00% 8 GT 2.00%_LT 2.50% 13 GT 1.50%_LT 2.00% 29 GT 1.00%_LT 1.50% 144 GT 0.50%_LT 1.00% 302 LT 0.50%_GT (0.50)% 631 LT (0.50)%_GT (1.00)% 71 LT (1.00)%_GT (1.50)% 22 LT (1.50)%_GT (2.00)% 9 LT (2.00)%_GT (2.50)% 1 LT (2.50)%_GT (3.00)% 2 LT (3.00)%_GT (3.50)% 0 LT (3.50)%_GT (4.00)% 1 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 2 82 2002 iShares Annual Report to Shareholders Supplemental Information (Unaudited) (Continued) iShares, Inc. iShares MSCI United Kingdom Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 [BAR CHART] PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 19 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT 4.50%_LT 5.00% 1 GT 4 00%_LT 4.50% 0 GT 3.50%_LT 4.00% 3 GT 3.00%_LT 3.50% 1 GT 2.50%_LT 3.00% 6 GT 2.00%_LT 2.50% 18 GT 1.50%_LT 2.00% 69 GT 1.00%_LT 1.50% 197 GT 0.50%_LT 1.00% 304 LT 0.50%_GT (0.50)% 553 LT (0.50)%_GT (1.00)% 52 LT (1.00)%_GT (1.50)% 18 LT (1.50)%_GT (2.00)% 7 LT (2.00)%_GT (2.50)% 4 LT (2.50)%_GT (3.00)% 0 LT (3.00)%_GT (3.50)% 2 LT (3.50)%_GT (4.00)% 0 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 1 LT (6.00)% 2 Supplemental Information 83 Directors Information (Unaudited) iShares, Inc. The Board of Directors has responsibility for the overall management and operations of the Company, including general supervision of the duties performed by BGFA and other service providers. Each Director serves until his or her successor is duly elected and qualified. iShares, Inc., iShares Trust, Barclays Global Investors Funds and Master Investment Portfolio are considered to be members of the same fund complex, as defined in Form N-1A under the 1940 Act. Each Director also serves as a Trustee for iShares Trust and oversees 81 portfolios within the fund complex. In addition, Richard K. Lyons serves as a Trustee for Barclays Global Investors Funds and Master Investment Portfolio and oversees 104 portfolios within the fund complex. Additional information about the Funds' Directors may be found in the Funds' Statement of Additional Information, which is available without charge upon request by calling toll-free 1-800-474-2737. Interested Directors
Position(s), Principal Occupation(s) Name, Age and Address Length of Service During Past 5 Years Other Directorships Held ---------------------------------------------------------------------------------------------------------------------- *Garrett F. Bouton (56) Director (since Managing Director and Chief Chairman of the Board of Directors Barclays Global 2001), Chairman Executive Officer (since 1999) for (since 1998) of BGFA; Director Investors (since Barclays Global Investors, N.A. (since 1998) of BGI; Director of 45 Fremont Street February 28, ("BGI") Global Individual Investor various Barclays subsidiaries San Francisco, CA 94105 2002) and Business; Global H.R. Director (since 1997). President. (from 1996-1999) for BGI. *Nathan Most (88) Director (since Consultant to BGI (1998-present), None. P.O. Box 193 1996), Chairman American Stock Exchange (1996-2000) Burlingame, CA 94011 Emeritus (since and the Hong Kong Stock Exchange February 28, 2002) (1998 to present); Consultant to the Amsterdam Stock Exchange (1997-1998); Consultant to the Pacific Stock Exchange (1997-1998); Formerly Senior Vice President American Stock Exchange (New Product Development) (1976-1996).
_____________________ * Garrett F. Bouton and Nathan Most are deemed to be "interested persons" (as defined in the 1940 Act) of the Company due to their affiliations with BGFA, the Funds' investment advisor and BGI, the parent company of BGFA. 84 2002 iShares Annual Report to Shareholders Directors Information (Unaudited) (Continued) iShares, Inc. Independent Directors
Position(s), Principal Occupation(s) Name, Age and Address Length of Service During Past 5 Years Other Directorships Held ----------------------------------------------------------------------------------------------------------------------- John B. Carroll (65) Director Retired Vice President of Trustee and member of the Executive 520 Main Street (since 1996) Investment Management (1984-2000) Committee (since 1991) of The Ridgefield, CT 06877 of Verizon Corporation; Advisory Common Fund Institutional Funds, a Board member of Ibbotson Associates non-profit organization; Member of (1992-1998); former Vice Chairman the Board of Managers of JP Morgan and Executive Committee Member Private Equity Funds. (1994-1998) of the Committee on Investment of Employee Benefit Assets of the Financial Executive Institute. Richard K. Lyons (41) Director Professor, University of Board of Trustees: Matthews Asian Haas School of Business, (since 2001) California, Berkeley: Haas School Funds since 1995 (oversees UC Berkeley of Business (since 1993); 6 portfolios). Berkeley, CA 94720 Consultant for IMF World Bank, Federal Reserve Bank, and Citibank N.A. (since 2000). George G. C. Parker (61) Director Dean Witter Distinguished Professor Board of Directors: Affinity Group Graduate School of (since 2001) of Finance (since 1994); Associate (since 1998); Bailard, Biehl and Business (Room K301) Dean for Academic Affairs, Director Kaiser, Inc. (since 1985); Stanford University of MBA Program, and Professor, California Casualty Group of 521 Memorial Way Stanford University: Graduate Insurance Companies (since 1978); Stanford, CA 94305 School of Business (1993-2001). Continental Airlines, Inc. (since 1996); Community First Financial Group (since 1995); Dresdner/RCM Mutual Funds (oversees 10 portfolios) (1994-2002); Tyon Ranch Company (since 1999). W. Allen Reed (54) Director President and Chief Executive Director (since 1994) of General General Motors Investment (since 1996) Officer (since 1994) of General Motors Investment Management Management Corp. Motors Investment Management Corporation; Director (1995-1998) 767 Fifth Avenue Corporation. of Taubman Centers, Inc. (a real New York, NY 10153 estate investment trust); Director (since 1992) of FLIR Systems (an imaging technology company); Director (since 1994) of General Motors Acceptance Corporation; Director (since 1994) of GMAC Insurance Holdings, Inc.; Director (since 1995) of Global Emerging Markets Fund; Director (since 2000) of Temple Inland Industries; Chairman (since 1995) of the Investment Advisory Committee of Howard Hughes Medical Institute.
Directors Information 85 Directors Information (Unaudited) (Continued) iShares, Inc. OFFICERS WHO ARE NOT DIRECTORS
PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS POSITION DURING PAST 5 YEARS DIRECTORSHIPS HELD BY OFFICERS ---------------------------------------------------------------------------------------------------------------------------------- LEE T. KRANEFUSS (39) Vice President Chief Executive Officer of the Board of Trustees for Barclays Barclays Global Investors Individual Investor Business of Global Investors Funds and Master 45 Fremont Street BGI; The Boston Consulting Group Investment Portfolio (since 2001). San Francisco, CA 94105 (until 1997). MICHAEL LATHAM (36) Secretary, Treasurer Director of Mutual Fund Delivery in None. Barclays Global Investors and Principal the U.S. Individual Investor 45 Fremont Street Financial Officer Business of BGI (since 2000); Head San Francisco, CA 94105 of Operations, BGI Europe (1997-2000). DONNA M. ROGERS (36) Assistant Treasurer Senior Director (formerly None. Investors Bank & Trust Co. Director), Mutual Fund 200 Clarendon Street Administration at Investors Bank & Boston, MA 02116 Trust Company ("IBT") (since 1994). JEFFREY J. GABOURY (33) Assistant Treasurer Director (formerly Manager), Mutual None. Investors Bank & Trust Co. Fund Administration, Reporting and 200 Clarendon Street Compliance, IBT (since 1996). Boston, MA 02116 SUSAN C. MOSHER (47) Assistant Secretary Senior Director & Senior Counsel, None. Investors Bank & Trust Co. Mutual Fund Administration, IBT 200 Clarendon Street (since 1995). Boston, MA 02116 SANDRA I. MADDEN (36) Assistant Secretary Senior Associate Counsel, Mutual None. Investors Bank & Trust Co. Fund Administration, IBT (since 200 Clarendon Street 1999); Associate, Scudder Kemper Boston, MA 02116 Investments, Inc. (1996-1999). LOIS TOWERS (52) Assistant Vice US Compliance Officer, BGI None. Barclays Global Investors President-AML (since 1999). 45 Fremont Street Compliance Officer San Francisco, CA 94105
86 2002 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes: NOTES 87 Notes: 88 2002 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes: NOTES 89 The iShares Family of Funds The following is a list of iShares Funds being offered, along with their respective exchange trading symbols. Please call iShares at 1-800-ISHARES (1-800-474-2737) to obtain a prospectus for any iShares fund. It contains more complete information, including charges and expenses. BROAD MARKET iShares Dow Jones U.S. Total Market Index Fund (IYY) iShares Russell 3000 Index Fund (IWV) iShares Russell 3000 Growth Index Fund (IWZ) iShares Russell 3000 Value Index Fund (IWW) LARGE CAP iShares Russell 1000 Index Fund (IWB) iShares Russell 1000 Growth Index Fund (IWF) iShares Russell 1000 Value Index Fund (IWD) iShares S&P 100 Index Fund (OEF) iShares S&P 500 Index Fund (IVV) iShares S&P 500/BARRA Growth Index Fund (IVW) iShares S&P 500/BARRA Value Index Fund (IVE) MID CAP iShares Russell Midcap Index Fund (IWR) iShares Russell Midcap Growth Index Fund (IWP) iShares Russell Midcap Value Index Fund (IWS) iShares S&P MidCap 400 Index Fund (IJH) iShares S&P MidCap 400/BARRA Growth Index Fund (IJK) iShares S&P MidCap 400/BARRA Value Index Fund (IJJ) SMALL CAP iShares Russell 2000 Index Fund (IWM) iShares Russell 2000 Growth Index Fund (IWO) iShares Russell 2000 Value Index Fund (IWN) iShares S&P SmallCap 600 Index Fund (IJR) iShares S&P SmallCap 600/BARRA Growth Index Fund (IJT) iShares S&P SmallCap 600/BARRA Value Index Fund (IJS) SECTOR & INDUSTRY iShares Cohen & Steers Realty Majors Index Fund (ICF) iShares Dow Jones U.S. Basic Materials Sector Index Fund (IYM) iShares Dow Jones U.S. Chemicals Index Fund (IYD) * iShares Dow Jones U.S. Consumer Cyclical Sector Index Fund (IYC) iShares Dow Jones U.S. Consumer Non-Cyclical Sector Index Fund (IYK) iShares Dow Jones U.S. Energy Sector Index Fund (IYE) iShares Dow Jones U.S. Financial Sector Index Fund (IYF) iShares Dow Jones U.S. Financial Services Index Fund (IYG) iShares Dow Jones U.S. Healthcare Sector Index Fund (IYH) iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ) iShares Dow Jones U.S. Internet Index Fund (IYV) * iShares Dow Jones U.S. Real Estate Index Fund (IYR) iShares Dow Jones U.S. Technology Sector Index Fund (IYW) iShares Dow Jones U.S. Telecommunications Sector Index Fund (IYZ) iShares Dow Jones U.S. Utilities Sector Index Fund (IDU) iShares Goldman Sachs Natural Resources Index Fund (IGE) iShares Goldman Sachs Networking Index Fund (IGN) iShares Goldman Sachs Semiconductor Index Fund (IGW) iShares Goldman Sachs Software Index Fund (IGV) iShares Goldman Sachs Technology Index Fund (IGM) iShares Nasdaq Biotechnology Index Fund (IBB) FIXED INCOME iShares Lehman 1-3 Year Treasury Bond Fund (SHY) iShares Lehman 7-10 Year Treasury Bond Fund (IEF) iShares Lehman 20+ Year Treasury Bond Fund (TLT) iShares GS $ InvesTop-TM- Corporate Bond Fund (LQD) GLOBAL SECTOR iShares S&P Global Energy Sector Index Fund (IXC) iShares S&P Global Financials Sector Index Fund (IXG) iShares S&P Global Healthcare Sector Index Fund (IXJ) iShares S&P Global Technology Sector Index Fund (IXN) iShares S&P Global Telecommunications Sector Index Fund (IXP) INTERNATIONAL/BROAD MARKET iShares MSCI EAFE Index Fund (EFA) INTERNATIONAL/REGIONAL iShares MSCI EMU Index Fund (EZU) iShares MSCI Pacific ex-Japan Index Fund (EPP) iShares S&P Europe 350 Index Fund (IEV) INTERNATIONAL/DEVELOPED COUNTRY iShares MSCI Australia Index Fund (EWA) iShares MSCI Austria Index Fund (EWO) iShares MSCI Belgium Index Fund (EWK) iShares MSCI Canada Index Fund (EWC) iShares MSCI France Index Fund (EWQ) iShares MSCI Germany Index Fund (EWG) iShares MSCI Hong Kong Index Fund (EWH) iShares MSCI Italy Index Fund (EWI) iShares MSCI Japan Index Fund (EWJ) iShares MSCI Netherlands Index Fund (EWN) iShares MSCI Singapore Index Fund (EWS) iShares MSCI Spain Index Fund (EWP) iShares MSCI Sweden Index Fund (EWD) iShares MSCI Switzerland Index Fund (EWL) iShares MSCI United Kingdom Index Fund (EWU) iShares S&P/TOPIX 150 Index Fund (ITF) iShares S&P/TSE 60 Index Fund (IKC) * INTERNATIONAL/EMERGING COUNTRY iShares MSCI Brazil Index Fund (EWZ) iShares MSCI Malaysia Index Fund (EWM) iShares MSCI Mexico Index Fund (EWW) iShares MSCI South Korea Index Fund (EWY) iShares MSCI Taiwan Index Fund (EWT) iShares S&P Latin America 40 Index Fund (ILF) GLOBAL/BROAD MARKET iShares S&P Global 100 Index Fund (IOO) * FUND TERMINATION AND LIQUIDATION ANTICIPATED ON DECEMBER 13, 2002. This advertising section does not constitute part of the 2002 Annual Report. iShares are not sponsored or endorsed by Goldman, Sachs & Co. or Lehman Brothers, nor are they sponsored, endorsed, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., Morgan Stanley Capital International, The Nasdaq Stock Market, Inc., Frank Russell Company, or Standard & Poor's. None of these companies make any representation regarding the advisability of investing in iShares. Neither SEI nor BOI, nor any of their affiliates, are affiliated with Goldman, Sachs & Co. or Lehman Brothers. "GS $ InvesTop-TM-," "GS $ InvesTop-TM- Index," "GS $ Investment Grade Index-TM-" and "Goldman Sachs-Registered Trademark-" are trademarks of Goldman, Sachs & Co. The methodology of the GS $ InvesTop-TM- Index is owned by Goldman, Sachs & Co., may be covered by one or more patents or pending patent applications and is provided under license from Goldman, Sachs & Co. 90 2002 iShares Annual Report to Shareholders iShares are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to iShares. Barclays Global Investors Services (BGIS) assists in the marketing of iShares. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., neither of which is affiliated with SEI. Investors Bank & Trust Co. serves as administrator, custodian, securities lending agent and transfer agent. iShares are not sponsored, endorsed, sold, or promoted by Morgan Stanley Capital International, Inc., nor does this company make any representation regarding the advisability of investing in iShares. Investing involves risk, including possible loss of principal. (C) 2002 Barclays Global Investors. All rights reserved. iShares is a registered trademark of Barclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. This report is intended for the Funds' shareholders. It may not be distributed to prospective investors unless it is preceded or accompanied by the current prospectus. iShares(R) Industrial strength investment tools for BARCLAYS GLOBAL INVESTORS 1-800-iShares (474-2737) www.i Shares.com iShares* 2002 ANNUAL REPORT TO SHAREHOLDERS AUGUST 31, 2002 [PICTURE] INDUSTRIAL STRENGTH INVESTMENT TOOLS iShares MSCI Australia Index Fund iShares MSCI Mexico Index Fund iShares MSCI Brazil Index Fund iShares MSCI Pacific ex-Japan Index Fund iShares MSCI Canada Index Fund iShares MSCI Singapore Index Fund iShares MSCI Hong Kong Index Fund iShares MSCI South Korea Index Fund iShares MSCI Malaysia Index Fund iShares MSCI Taiwan Index Fund Table of Contents Shareholder Letter...................................................... 1 Introduction............................................................ 3 Managers' Discussion & Analysis......................................... 6 Schedules of Investments................................................ 28 iShares MSCI Australia Index Fund..................................... 28 iShares MSCI Brazil Index Fund........................................ 30 iShares MSCI Canada Index Fund........................................ 31 iShares MSCI Hong Kong Index Fund..................................... 33 iShares MSCI Malaysia Index Fund...................................... 34 iShares MSCI Mexico Index Fund........................................ 35 iShares MSCI Pacific ex-Japan Index Fund.............................. 36 iShares MSCI Singapore Index Fund..................................... 39 iShares MSCI South Korea Index Fund................................... 40 iShares MSCI Taiwan Index Fund........................................ 41 Financial Statements.................................................... 43 Financial Highlights.................................................... 51 Notes to the Financial Statements....................................... 61 Report of Independent Accountants....................................... 70 Tax Information (Unaudited)............................................. 71 Shareholder Meeting Results (Unaudited)................................. 72 Supplemental Information (Unaudited).................................... 75 Directors Information (Unaudited)....................................... 81 iShares Family of Funds................................................. 86
To Our Shareholders While the second half of 2001 was a difficult period for us all, the first half of 2002 has also been a time of tumultuous market events. As a whole, the past year has seen scores of layoffs, company closings, and corporate accounting scandals in the wake of the emotional shock of September 11. The past year has been truly remarkable for iShares considering the market environment. By the close of our second fiscal year, most traditional mutual funds had shrunk in size, hundreds had shut down entirely,/1/ and plans for dozens of new ones were quietly put on hold. However, iShares has followed a very different course. Instead of shrinking in size, iShares' assets under management grew to almost $28 billion as of August 31, 2002. In fact, the iShares family of funds became the nation's third fastest growing family of equity funds/2/ during the period June 2001 through June 2002, surpassing some of the most established and best-known mutual fund groups. In July, iShares celebrated another milestone: the launch of the first-ever fixed income exchange traded funds. These four fixed income iShares funds -- three bond funds based on Lehman U.S. Treasury indices, and one based on a Goldman Sachs-Registered Trademark- corporate bond index -- were greeted with an enthusiastic reception from the investment community. These new funds attracted $3 billion in assets in their first week of trading. That is an impressive beginning considering that total inflows for all U.S. bond mutual funds combined was $50 billion for the first six months of 2002./3/ With a total of 81 different funds, iShares now gives its investors nearly four times more ways to structure their portfolios than any other provider of exchange traded funds (ETFs). Total assets under management for all iShares funds have grown tenfold since they were first launched in May 2000. We believe this is a result of investors and their advisors recognizing that iShares are not merely an investment choice, but an important investment tool. At BGI we consider the iShares family of funds "industrial strength" for four simple reasons. We think you should keep these reasons in mind when you and your advisor meet to discuss your investment objectives, and then evaluate, and perhaps rebalance your portfolio. First, iShares strive to obtain a fundamental goal of institutional investing: taking less of a bite out of a fund's returns. iShares seek to achieve this by minimizing capital gains distributions and management fees. These are not insignificant savings. It's estimated that between 1994 and 1999, investors in diversified U.S. stock funds lost, on average, 15% of their annual gains to taxes./4/ iShares, on the other hand, are managed in a way that keeps capital gains distributions to a minimum. For example, during the calendar year 2001 none of the domestic iShares funds distributed any capital gains./5/ Additionally, the fees charged by the iShares Funds are typically about half of other actively managed mutual funds./6/ Second, iShares embody a key tactic of institutional investors: UNCOMPLICATED DIVERSIFICATION. The benefits of diversification, as compared to picking individual stocks are well documented. Although it's possible to diversify a portfolio by hand-selecting a wide variety of securities, to do it effectively is complicated and time-consuming. This is a reason why $1.56 trillion in institutional assets/7/ are invested in index funds. --------------------- /1/John Hechinger, Hey, Where Did My Mutual Fund Go?, THE WALL STREET JOURNAL, April 17, 2002. /2/Financial Research Corporation (FRC) database, BGI analysis. /3/Financial Research Corporation (FRC) database, BGI analysis. /4/Jonathan Clements, Fund Distributions are a Taxing Problem; How the Tax Man Dines on Your Funds, The Wall Street Journal, August 1999. /5/Past performance is no guarantee of future results. There can be no assurance that iShares will not generate capital gains distributions in the future. /6/Source: Morningstar Principia, BGI analysis 6/01. /7/Source: Pensions & Investments, 5/27/02. Shareholder Letter 1 Third, iShares embody a key strategy of institutional investors: MODULAR ASSET ALLOCATION. Each iShare fund focuses on a very specific slice of the equity and fixed income markets. With so many different iShares to choose from, investors have tremendous flexibility in structuring their portfolios to meet specific needs. The fourth reason iShares are "industrial strength" is that they are advised by Barclays Global Investors, one of the world's largest institutional asset managers./8/ BGI manages money for over two thousand institutional clients around the world. Also, BGI has a longer index-based investing track record than any other fund manager. In fact, over thirty years ago it was BGI that created the world's first index strategy. Throughout the coming year we will be working closely with the financial advisor community to introduce innovative strategies and structures that we have developed for their clients' portfolios. And we continue to enhance and improve the tools, data and resources on our Web site. If you haven't visited www.iShares.com in a while, we invite you to do so and learn more about iShares. In fact, Forbes Magazine named iShares.com "Best of the Web" among all ETF sites./9/ We think you'll agree everything about iShares really is industrial strength. On behalf of the iShares family of funds and our colleagues at BGI, we thank you for making iShares a part of your portfolio, and look forward to meeting your needs in the year ahead. /s/ Garrett F. Bouton /s/ Lee T. Kranefuss Garrett F. Bouton Lee T. Kranefuss President and Chairman of the Board Vice President of iShares, Inc. of Directors of iShares, Inc. Garrett F. Bouton and Lee T. Kranefuss are associates of BGIS. iShares are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to iShares. Barclays Global Investors Services (BGIS) assists in the marketing of iShares. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., none of which is affiliated with SEI. FOR COMPLETE INFORMATION, INCLUDING CHARGES AND EXPENSES, REQUEST A PROSPECTUS BY CALLING 1-800-iSHARES (1-800-474-2737). READ IT CAREFULLY BEFORE YOU INVEST. THERE ARE RISKS INVOLVED WITH INVESTING, INCLUDING POSSIBLE LOSS OF PRINCIPAL. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Mutual funds and iShares are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Your own iShares trading, too, will generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well. Diversification may not protect against market risk. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. iShares are not sponsored or endorsed by Goldman, Sachs & Co. or Lehman Brothers, nor are they sponsored, endorsed, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., Morgan Stanley Capital International, The Nasdaq Stock Market, Inc., Frank Russell Company, or Standard & Poor's. None of these companies make any representation regarding the advisability of investing in iShares. Neither SEI nor BGI, nor any of their affiliates, are affiliated with Goldman, Sachs & Co. or Lehman Brothers. "GS $ InvesTop(TM)," "GS $ InvesTop(TM) Index," "GS $ Investment Grade Index(TM)" and "Goldman Sachs-Registered Trademark-" are trademarks of Goldman, Sachs & Co. The methodology of the GS $ InvesTop(TM) Index is owned by Goldman, Sachs & Co., may be covered by one or more patents or pending patent applications and is provided under license from Goldman, Sachs & Co. --------------------- /8/Source: Pensions & Investments, 5/27/02. /9/Forbes, Winter 2001. 2 2002 iShares Annual Report to Shareholders Introduction In this section, the Investment Advisor discusses the performance of the iShares MSCI Index Funds (each, a "Fund," and collectively, the "Funds"). The introduction provides an overview of how each Fund seeks to track its respective index. In addition, the introduction identifies some of the key factors that contribute to a Funds' performance against its benchmark index. Each Fund invests in a representative sample of the component securities in its underlying MSCI Index (using the analytic technique known as "portfolio sampling"), as opposed to a full replication of the component securities of the MSCI Index. Certain Funds may also invest to a limited extent in stocks that are not included in the relevant MSCI Index to permit them additional flexibility. There are several important factors that should be kept in mind when reviewing the performance of each Fund. PORTFOLIO SAMPLING: Portfolio sampling is a disciplined approach to capturing index returns which involves maximizing float and liquidity, reflecting accurately the market's size and industry profiles and minimizing cross-ownership. Because of portfolio sampling, the composition of each Fund will vary from that of its underlying MSCI Index. This may cause performance to vary positively or negatively from that of its underlying MSCI Index during any period. FUND EXPENSES: The MSCI Indices are only statistical composites that track changes in the financial markets of a particular country or region. Since an index does not actually hold a portfolio of securities, it does not bear management, administration, distribution, transaction or other expenses, while a Fund does incur such expenses, thereby negatively impacting the performance of a Fund. CONSTRAINTS ON PORTFOLIO MANAGEMENT: The Investment Advisor is subject to a number of constraints when managing the iShares MSCI Index Funds' portfolios. The "Single Issuer Rule" and the "5/50 Rule" are two constraints in the Internal Revenue Code that affect the performance of a number of the Funds. The "Single Issuer Rule" generally requires that not more than 25% of the value of a Fund's total assets may be invested in the securities of one single issuer. This constraint applies to all share classes of an issuer. As an example, Samsung Electronics made up 30.24% of the MSCI South Korea Index as of August 31, 2002. Because of the "Single Issuer Rule," however, the iShares MSCI South Korea Fund could not hold more than 25% of its assets in Samsung Electronics. The "5/50 Rule" generally precludes the sum of all of the securities weighted over 5% from exceeding 50% of a Fund's total assets. If a security has more than one share class, then all of the share classes must be considered as one security for 5/50 Rule purposes. Many of the benchmark MSCI Indices have a greater than 50% weighting of securities that account for more than 5% of the respective index. For example, the sum of all the stocks with weightings of 5% or greater in the MSCI Mexico Index was 79.37% as of August 31, 2002; so the iShares MSCI Mexico Index Fund had to underweight some of these stocks relative to the benchmark, and therefore overweight in other stocks. REVENUE DIFFERENTIAL: A fourth factor that causes performance of a Fund to differ from that of its underlying MSCI Index is "revenue differential," or differences between a Funds and the underlying MSCI Index in dividend accruals/reinvestments. The Funds record dividend revenues on the "ex" dates of the underlying stocks. Prior to January 1, 2001, for developed markets, MSCI used smoothed dividends as opposed to actual dividends by allocating annual dividend revenues evenly over a 12-month period. Separately, the Funds might have different dividend rates versus the Indices due to portfolio sampling or different withholding taxes. Finally, while the sole source of revenues for the MSCI Indices is dividends, the Funds receive interest on uninvested cash and, in the case of most Funds, revenues from the lending of portfolio securities. EFFECT OF UNINVESTED ASSETS: Fifth, uninvested assets held by a Fund affects performance relative to its underlying benchmark index. In contrast, the MSCI Indices are always fully comprised of the underlying stocks and thus do not reflect any "unequitized" assets. The "effect of uninvested assets" refers to the impact on performance of the portion of a Fund that is not invested in stocks. Cash is the Introduction 3 principal "unequitized" assets of a Fund. The effect of uninvested assets will tend to cause each Fund to outperform its underlying index in falling markets and underperform the underlying index in rising markets. However, even within a period that has a down market return there can be a short period of rising market where the uninvested assets in a Fund have a negative impact on return. This could cause the effect of uninvested assets to worsen a loss for the period. SECURITIES LENDING: Finally, security lending is when a Fund loans a security in its portfolio to another party for a given time period and in return receives cash collateral for the loan. Securities lending income is the income earned on lending the security, which is split between the fund and the securities lending agent. 4 2002 iShares Annual Report to Shareholders THIS PAGE INTENTIONALLY LEFT BLANK. 5 Managers' Discussion & Analysis iShares MSCI Australia Index Fund Performance as of 8/31/02
Average Annual Total Returns ------------------------------------------------------------------------------------------------ Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 -------------------------------- ----------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 1.74% 0.86% 1.57% 0.04% 0.07% 0.74% 1.57% 1.56% 2.02% Cumulative Total Returns ------------------------------------------------------------------------------------------------ Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 -------------------------------- ----------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 1.74% 0.86% 1.57% 0.21% 0.33% 3.74% 10.59% 10.53% 13.85%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Banks 32.89% Materials 18.88% Real Estate 7.58% Media 7.23% Insurance 5.40% Food Beverage & Tobacco 4.55% Food & Drug Retailing 4.28% Diversified Financials 2.83% Capital Goods 2.79% Energy 2.79% PERFORMANCE REVIEW The total return of the iShares MSCI Australia Index Fund (the "Australia Fund") was 1.74% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Australia Index over the same period was 1.57%. SIGNIFICANT PERFORMANCE FACTORS The Australia Fund outperformed its benchmark by 0.17 percentage points over the reporting period. This was due to the positive impact of revenue differential and uninvested assets, which contributed 0.96 and 0.08 percentage points, respectively, to the Fund's return. Those factors were partially offset by the impact of expenses and security sampling, which subtracted 0.83 and 0.04 percentage points, respectively, from the Fund's return. 6 2002 iShares Annual Report to Shareholders KEY MARKET CONDITIONS Australia's equity market overcame an early decline and rallied through much of the reporting period, only to retrace its gains over the summer of 2002. The market began the period with a sharp decline, reflecting investors' concerns about the global economy in the wake of September 11. The events of that day intensified speculation that the U.S. economy in particular, one of Australia's largest export markets, was headed for a deep recession. Over the following months, market sentiment became more optimistic as the U.S. economy showed signs of health. Its resilience helped to boost the profits and shares of numerous Australian exporters and commodity producers such as the mining concern BHP Billiton (7.40% of the Fund as of August 31, 2002). Exporters also profited from the Australian dollar's weakness versus the U.S. dollar in late 2001. Australia's own economy showed strength over much of the reporting period, driven by robust consumer demand. This trend bolstered the shares of retailers such as Woolworths (2.76% of the Fund as of August 31, 2002). In addition, many of Australia's banking stocks benefited from the robust domestic housing and construction market, a consequence of record low interest rates. The Australian central bank decided to rein in some of this exuberance in early 2002 by raising interest rates twice. This drove the Australian dollar up at a time when the U.S. economy was appearing to falter, putting a double dose of pressure on Australian exporters. Higher interest rates also drove the shares of many Australian financial services companies lower even as they were grappling with significant losses in their overseas investments. A decline in domestic consumer confidence added to the uncertainty and sent the Australian market lower as the reporting period ended. iShares MSCI Australia Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI Australia Index Fund MSCI Australia Index* Mar-96 $10,000 $10,000 Aug-96 $10,388 $10,368 $11,048 $11,039 Aug-97 $11,035 $10,974 $10,799 $10,864 Aug-98 $8,485 $8,711 $10,606 $10,978 Aug-99 $11,208 $11,455 $11,372 $11,762 Aug-00 $11,415 $11,885 $10,773 $11,172 Aug-01 $10,870 $11,209 $11,272 $11,623 Aug-02 $11,059 $11,385 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 29, 2001. The index performance shown in the graph reflects the former index up to June 29, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 7 Managers' Discussion & Analysis iShares MSCI Brazil Index Fund Performance as of 8/31/02
Average Annual Total Returns Cumulative Total Returns ------------------------------------------------------------------ ------------------------------- Year Ended 8/31/02 Inception to 8/31/02 Inception to 8/31/02 --------------------------------- ------------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (25.89)% (26.82)% (23.62)% (31.65)% (32.33)% (29.25)% (55.79)% (56.73)% (52.31)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (07/10/00). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. In the case of the iShares MSCI Brazil Index Fund, the NAV of which is determined AFTER the close of the regular trading day on the American Stock Exchange (the "Amex"), the "Market Price" return uses the mid-point of the bid/ask spread as of the CLOSE of regular trading on the Amex. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (07/14/00), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Energy 24.35% Materials 20.72% Telecommunication Services 15.84% Banks 12.96% Food Beverage & Tobacco 10.66% Utilities 9.51% Capital Goods 3.80% Food & Drug Retailing 1.55% Consumer Durables & Apparel 0.52% Media 0.09% PERFORMANCE REVIEW The total return of the iShares MSCI Brazil Index Fund (the "Brazil Fund") was -25.89% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Brazil Index over the same period was -23.62%. SIGNIFICANT PERFORMANCE FACTORS The Brazil Fund underperformed its benchmark by 2.27 percentage points over the reporting period. This was due to the impact of security sampling, expenses, uninvested assets and revenue differential, which subtracted 1.21, 0.93, 0.09 and 0.04 percentage points, respectively, from the Fund's return. As discussed in the Introduction, portfolio management constraints can restrict the Investment Adviser's ability to optimize a Fund's portfolio. To comply with the 5/50 Rule, for example, the Brazil Fund was obligated to underweight such stocks as Petroleo Brasileiro ("Petrobras") and Banco Itau while overweighting other Brazilian stocks. (As of August 31, 2002, preferred shares of Petrobras had a weighting of 14.68% in the Fund versus their Index weighting of 15.06%; Petrobras's common shares made up another 8.83% of the Fund versus their Index weighting of 9.54%. As of the same date Banco Itau had a weighting of 5.02% in the Fund versus an Index weighting of 6.36%.) Over the reporting period, the stocks that the Fund underweighted generally performed better than those it overweighted. As a result, security sampling had a negative impact on the Fund's performance relative to the Index. 8 2002 iShares Annual Report to Shareholders KEY MARKET CONDITIONS The Brazilian equity market faced three key challenges during the reporting period: tough economic conditions in several of Brazil's key export markets, a financial crisis in Argentina and the possibility of a similar meltdown at home. The first factor, weak global demand, translated into generally poor results for Brazilian exporters such as Petrobras. (As of August 31, 2002, preferred shares of Petrobras had a weighting of 14.68% in the Fund, while the company's common stock made up an additional 8.83%.) Investors' concerns about the impact of slowing global growth were intensified by the events of September 11. Optimism returned to the Brazilian market fairly quickly, however, leading to a rally over the fourth quarter of 2001. Banking stocks such as Banco Itau and Banco Bradesco (respectively 5.02% and 4.94% of the Fund as of August 31, 2002) led the market during this period. The rally then came to a halt around the start of the New Year, as many investors became more pessimistic about the global economy. They also began to sell off Brazilian shares as an economic crisis developed in Argentina. The devaluation of the Argentine peso in January 2002 sparked concerns about Brazil's currency, the real. It also had repercussions for Brazilian companies with significant interests in Argentina. While the Brazilian equity market recovered some ground in February, it fell back again during the spring and summer as the country started to face its own economic woes. The crisis began as Brazil's government debt reached what, to many investors, seemed a worrisome level. Among other things, this led U.S credit-rating agencies to downgrade Brazilian sovereign debt to junk-bond level from investment-grade status. During the spring and early summer, many investors also became concerned that a left-wing candidate would win Brazil's presidential election in October 2002 and derail the country's free-market reforms. The worries led to an exodus of capital from the Brazilian equity market and a steep depreciation of Brazil's currency versus the U.S. dollar. The International Monetary Fund eventually stepped in with a $30 billion bailout package for Brazil, but even this move had not ended the rout in the country's equity market by the time the reporting period ended. iShares MSCI Brazil Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI Brazil Index Fund MSCI Brazil Index* Jul-00 $10,000 $10,000 Aug-00 $9,703 $9,697 $7,278 $7,432 Feb-01 $8,359 $8,619 $7,381 $7,617 Aug-01 $5,965 $6,245 $5,853 $6,096 Feb-02 $7,014 $7,363 $6,338 $6,701 Aug-02 $4,421 $4,769 * On December 31, 2000, the Index changed its method of reinvestment from gross dividends to net dividends. On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 29, 2001. The index performance shown in the graph reflects the former index up to June 29, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 9 Managers' Discussion & Analysis iShares MSCI Canada Index Fund Performance as of 8/31/02
Average Annual Total Returns ------------------------------------------------------------------------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 --------------------------------- -------------------------- ---------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (11.23)% (10.94)% (10.63)% 1.11% 1.29% 1.54% 5.57% 5.76% 6.27% Cumulative Total Returns ------------------------------------------------------------------------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 --------------------------------- -------------------------- ---------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (11.23)% (10.94)% (10.63)% 5.65% 6.63% 7.95% 42.05% 43.79% 48.24%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Banks 22.17% Energy 17.79% Materials 14.37% Insurance 9.16% Utilities 4.73% Diversified Financials 4.35% Transportation 4.29% Media 4.04% Technology Hardware & Equipment 3.92% Food & Drug Retailing 2.80% PERFORMANCE REVIEW The total return of the iShares MSCI Canada Index Fund (the "Canada Fund") was -11.23% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Canada Index over the same period was -10.63%. SIGNIFICANT PERFORMANCE FACTORS The Canada Fund underperformed its benchmark by 0.60 percentage points over the reporting period. This was due to the impact of expenses and security sampling, which subtracted 0.83 and 0.10 percentage points, respectively, from the Fund's return. Those factors were partially offset by the positive impact of revenue differential, uninvested assets and security lending, which contributed 0.24, 0.08 and 0.01 percentage points, respectively, to the Fund's return. KEY MARKET CONDITIONS Canada's relatively strong domestic economy could not insulate its equity market from the global downturn over the reporting period. 10 2002 iShares Annual Report to Shareholders As business activity slowed appreciably in the United States and other economies, numerous Canadian companies -- especially commodity producers -- grappled with sluggish demand and depressed prices for their products. Energy company EnCana and aluminum maker Alcan (respectively 4.75% and 2.92% of the Fund as of August 31, 2002) were just two of the companies hurt by this trend. Their earnings, and share prices, declined in concert with demand for oil, natural gas and aluminum in late 2001 and 2002. In addition, Canadian banks faced potential losses from a number of different sources over the reporting period. In some cases, the cause was the general economic downturn; in others, more specific factors were to blame. In early 2002, for example, Bank of Nova Scotia (5.18% of the Fund as of August 31, 2002) was forced to write-down its exposure to the troubled Argentine economy, effectively wiping out the bank's first-quarter profits. Later in the reporting period, several Canadian banks and insurers faced additional losses arising from loans to bankrupt companies and to the struggling telecommunications sector in general. These real and even rumored loan losses led to significant declines in many Canadian banking stocks over the reporting period. Nonetheless, quite a few Canadian banks reported good results from their domestic operations -- a trend that helped to buoy other Canadian companies and their shares as well. Although the country's exporters were significantly affected by the global downturn, domestically oriented firms benefited from robust consumer demand in Canada during much of the reporting period. Demand was so strong, in fact, that the Bank of Canada opted to raise interest rates several times over the spring and summer of 2002. The moves took some of the sheen off the country's equity market. Higher interest rates also bolstered the Canadian dollar versus its U.S. counterpart, making Canadian exports potentially less competitive in the U.S. market. The Canadian stock market was driven down further in July 2002. That month, Standard & Poor's removed several of the country's largest stocks, including Alcan and Barrick Gold (2.97% of the Fund as of August 31, 2002), from the S&P 500 Index. S&P said the move was intended merely to eliminate the overlap between its U.S. and foreign indices. Even though the fundamentals of the companies had not changed significantly, S&P's decision led to significant declines in the affected stocks as indexers adjusted their portfolios. iShares MSCI Canada Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI Canada Index Fund MSCI Canada Index* Mar-96 $10,000 $10,000 Aug-96 $10,463 $10,511 $12,569 $12,701 Aug-97 $13,445 $13,733 $14,322 $14,665 Aug-98 $10,529 $10,911 $12,717 $13,193 Aug-99 $14,710 $15,189 $18,943 $21,113 Aug-00 $24,598 $27,422 $17,780 $18,446 Aug-01 $16,001 $16,588 $15,971 $16,622 Aug-02 $14,205 $14,824 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 29, 2001. The index performance shown in the graph reflects the former index up to June 29, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 11 Managers' Discussion & Analysis iShares MSCI Hong Kong Index Fund Performance as of 8/31/02
Average Annual Total Returns -------------------------------------------------------------------------------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 -------------------------------- ------------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (9.94)% (11.66)% (9.25)% (9.03)% (9.23)% (6.89)% (4.20)% (4.37)% (1.91)% Cumulative Total Returns -------------------------------------------------------------------------------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 -------------------------------- ------------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (9.94)% (11.66)% (9.25)% (37.71)% (38.40)% (30.08)% (24.26)% (25.15)% (11.73)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Real Estate 28.51% Capital Goods 17.57% Utilities 14.62% Diversified Financials 12.67% Banks 12.51% Transportation 4.12% Retailing 4.03% Telecommunication Services 1.81% Media 1.66% Materials 1.17% PERFORMANCE REVIEW The total return of the iShares MSCI Hong Kong Index Fund (the "Hong Kong Fund") was -9.94% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Hong Kong Index over the same period was -9.25%. SIGNIFICANT PERFORMANCE FACTORS The Hong Kong Fund underperformed its benchmark by 0.69 percentage points over the reporting period. This was due to the impact of expenses, which subtracted 0.84 percentage points from the Fund's return. That factor was partially offset by the positive impact of security sampling, revenue differential, uninvested assets and security lending, which contributed 0.10, 0.03, 0.01 and 0.01 percentage points, respectively, to the Fund's return. 12 2002 iShares Annual Report to Shareholders KEY MARKET CONDITIONS Hong Kong was among the weaker stock markets in Asia over the year ended August 31, 2002. In large part, this weakness reflected the composition of Hong Kong's market, which continues to be dominated by domestically oriented real estate companies (the Fund's largest sector as of August 31, 2002). During the reporting period, shares of these companies were generally out of favor with investors, due to deflation in Hong Kong's property market and poor economic conditions in the territory. Hong Kong's banks also faced significant losses in their investment portfolios and dwindling loan growth in the territory, leaving their shares depressed. The territory's telecommunications-related stocks remained unpopular as well, due to concerns about the roll-out of "third-generation" wireless technology. For Hong Kong's export-oriented companies, the picture was mixed. On the one hand, they were pressured by the economic slowdown in the United States and other major export markets. They also faced growing competition from lower-cost producers in mainland China. On the other hand, Hong Kong's exporters were buoyed by higher volumes shipped to China, whose economy remained fairly healthy despite the downturn in other parts of the world. Yet, in the eyes of many investors, the allure of Hong Kong's exporters still paled in comparison to those in other countries, particularly South Korea and Taiwan. In late 2001 and early 2002, many investors began to anticipate a rapid improvement in the U.S. economy. This optimism drove up shares of Taiwan's and South Korea's electronics makers, among others. As a result, the performance of Hong Kong's stock market relative to these and other markets in Asia was often weak. Toward the end of the reporting period, however, many investors became more pessimistic about the likelihood of a swift economic recovery in the United States. This quelled some of the enthusiasm for high-growth exporters in South Korea and Taiwan, and put Hong Kong on more of an equal footing with other stock markets in Asia. iShares MSCI Hong Kong Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI Hong Kong Index Fund MSCI Hong Kong Index* Mar-96 $10,000 $10,000 Aug-96 $10,322 $10,398 $11,869 $12,171 Aug-97 $12,160 $12,625 $9,197 $9,855 Aug-98 $5,566 $6,098 $7,629 $8,747 Aug-99 $10,604 $11,913 $12,117 $14,481 Aug-00 $12,167 $13,868 $11,068 $12,691 Aug-01 $8,409 $9,727 $8,218 $9,505 Aug-02 $7,574 $8,827 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 22, 2001. The index performance shown in the graph reflects the former index up to June 22, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 13 Managers' Discussion & Analysis iShares MSCI Malaysia Index Fund Performance as of 8/31/02
Average Annual Total Returns ------------------------------------------------------------------------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 --------------------------- --------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 11.82% 14.84% 12.88% (4.62)% (4.73)% (3.45)% (10.38)% (10.56)% (9.21)% Cumulative Total Returns ------------------------------------------------------------------------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 -------------------------- ----------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 11.82% 14.84% 12.88% (21.06)% (21.53)% (16.14)% (50.83)% (51.48)% (46.51)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. In the case of the iShares MSCI Malaysia Index Fund, which has an NAV determined PRIOR to the opening of the regular trading day on the Amex, the "Market Price" return will use the mid-point of the bid/ask spread as of the OPENING of regular trading on the Amex. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Banks 19.24% Hotels Restaurants & Leisure 12.82% Food Beverage & Tobacco 11.82% Utilities 11.76% Telecommunication Services 11.41% Capital Goods 10.47% Transportation 6.50% Diversified Financials 4.29% Materials 2.58% Automobiles & Components 2.51% PERFORMANCE REVIEW The total return of the iShares MSCI Malaysia Index Fund (the "Malaysia Fund") was 11.82% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Malaysia Index over the same period was 12.88%. SIGNIFICANT PERFORMANCE FACTORS The Malaysia Fund underperformed its benchmark by 1.06 percentage points over the reporting period. This was due to the impact of expenses and security sampling, which subtracted 0.84 and 0.44 percentage points, respectively, from the Fund's return. These factors were partially offset by the positive impact of revenue differential and uninvested assets, which contributed 0.19 and 0.03 percentage points, respectively, to the Fund's return. 14 2002 iShares Annual Report to Shareholders KEY MARKET CONDITIONS Malaysia proved to be one of the world's strongest equity markets during the year ended August 31, 2002. Malaysian equities began the reporting period in a downturn, caused largely by investors' concerns about the impact of a global economic slowdown. Weak demand for electronics in particular, one of Malaysia's key export sectors, put pressure on the shares of several Malaysian manufacturers. The market was also depressed by the terrorist attacks on the United States, which led to a sharp decline in tourism to Malaysia and difficult conditions for companies such as Resorts World (3.86% of the Fund as of August 31, 2002). Tourism in Malaysia later recovered, though, sparking a dramatic rebound in shares of Resorts World and its holding company Genting (4.39% of the Fund as of August 31, 2002). Over the next few months, in fact, the Malaysian market as a whole enjoyed a sustained rally. With the U.S. stock market in a prolonged slump, global investors began to take a second look at Southeast Asian markets. Malaysia initially did not attract as much attention as neighboring markets such as the Philippines, Indonesia and Thailand, which many investors regarded as undervalued. Investors also shied away from Malaysia after its prime minister warned in January 2002 that the country's currency, the ringgit, might have to be devalued if the Japanese yen continued to depreciate. Although devaluation did not occur, the prospect alone cast a shadow over the Malaysian market for a while. After neighboring markets had risen sharply in late 2001 and early 2002, investors finally turned their full attention toward Malaysia. The largest and most liquid stocks in the country, such as Malayan Banking (10.06% of the Fund as of August 31, 2002), were prime beneficiaries of this trend. The influx of foreign capital also helped to drive up shares of the country's exporters, which were profiting from stronger demand in China and, to some extent, the United States. Malaysian companies that had shown progress in restructuring also attracted investment dollars. The rally then lost some steam over the summer. In June, the confidence of many investors was shaken by news that Malaysia's longstanding prime minister, Mahathir Mohamad, had decided to step down as leader. Calm returned after Mahathir outlined plans for one of his deputies to take over as prime minister sometime in late 2003. iShares MSCI Malaysia Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI Malaysia Index Fund MSCI Malaysia Index* Mar-96 $10,000 $10,000 Aug-96 $10,428 $10,503 $11,834 $12,152 Aug-97 $6,229 $6,378 $4,877 $4,887 Aug-98 $1,648 $1,658 $2,428 $2,839 Aug-99 $4,711 $5,020 $6,303 $6,711 Aug-00 $5,067 $5,359 $4,536 $4,823 Aug-01 $4,397 $4,739 $4,709 $5,078 Aug-02 $4,917 $5,349 * On May 31, 2000, the Index changed its method of reinvestment from net dividends to gross dividends. The Index subsequently changed its method of reinvestment back to net dividends on December 31, 2000. On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 22, 2001. The index performance shown in the graph reflects the former index up to June 22, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 15 Managers' Discussion & Analysis iShares MSCI Mexico Index Fund Performance as of 8/31/02
Average Annual Total Returns ----------------------------------------------------------------------------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 ------------------------------- ------------------------------ ------------------------------ NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (10.67)% (10.22)% (8.78)% (0.16)% 0.07% 2.52% 7.05% 7.12% 9.96% Cumulative Total Returns ----------------------------------------------------------------------------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 ------------------------------ ------------------------------ ------------------------------ NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (10.67)% (10.22)% (8.78)% (0.79)% 0.36% 13.27% 55.51% 56.15% 84.93%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Telecommunication Services 39.94% Food Beverage & Tobacco 13.70% Materials 12.72% Retailing 9.57% Media 7.61% Banks 4.87% Capital Goods 4.61% Household & Personal Products 4.42% Energy 1.16% Transportation 1.06% PERFORMANCE REVIEW The total return of the iShares MSCI Mexico Index Fund (the "Mexico Fund") was -10.67% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Mexico Index over the same period was -8.78%. 16 2002 iShares Annual Report to Shareholders SIGNIFICANT PERFORMANCE FACTORS The Mexico Fund underperformed its benchmark by 1.89 percentage points over the reporting period. This was due to the impact of security sampling and expenses, which subtracted 1.43 and 0.80 percentage points, respectively, from the Fund's return. Those factors were partially offset by the positive impact of revenue differential, uninvested assets and security lending, which contributed 0.18, 0.09 and 0.07 percentage points, respectively, to the Fund's return. As discussed in the Introduction, portfolio management constraints can restrict the Investment Adviser's ability to optimize a Fund's portfolio. To comply with the Single Issuer and 5/50 Rules, for example, the Mexico Fund was obligated to underweight such stocks as Telefonos de Mexico SA de CV Series L ("Telmex") while overweighting other stocks. (As of August 31, 2002, Telmex had a weighting of 24.69% in the Fund versus a weighting of 26.20% in the Index.) The stocks that the Fund underweighted generally performed better than those it overweighted over the reporting period. As a result, security sampling had a negative impact on the Fund's performance relative to its benchmark. KEY MARKET CONDITIONS Mexico's equity market reflected the country's increasing orientation toward its northern neighbor and away from other economies in Latin America over the year ended August 31, 2002. While Mexico's stock market did post a significant downturn during this time, its decline was much less severe than that of the South American countries with which Mexico was once closely identified. To a large extent, the Mexican equity market reflected investors' shifting expectations for the U.S. economy, given the two countries' post-NAFTA trade links. This orientation enabled the Mexican equity market to withstand much of the downward pressure created by a financial meltdown in Argentina in late 2001 and another crisis in Brazil over the summer of 2002. In fact, Mexico's stock market staged a rally in late 2001 and early 2002 even as Argentina's crisis was sending repercussions across South America and emerging markets even further afield. In large part, the decoupling reflected a significant reappraisal of Mexico by international investors. In early 2002, Standard & Poor's raised Mexico's sovereign debt rating to investment grade, creating a positive ripple effect across the country's equity market. The national upgrade enabled S&P to boost the credit ratings of several of Mexico's largest companies, including Kimberly-Clark de Mexico (4.42% of the Fund as of August 31, 2002). This, in turn, led to an inflow of capital from U.S. and other institutions restricted to holding only investment-grade securities and led to a new appreciation for Mexican investments in general. The attention created a strong updraft for Mexico's largest and most liquid stocks in particular, such as Telefonos de Mexico (24.69% of the Fund as of August 31, 2002). The influx of foreign capital also led the Mexican peso to appreciate, further boosting profits for U.S.-dollar investors. Mexico's link to the U.S. proved to be a double-edged sword, though. As international investors became more pessimistic about the U.S. economy over the spring and summer, they began to sell off Mexican stocks most likely to be affected by the recession. Starting in April, the country's equity market was also pressured by the peso's reversal against the dollar. This trend was a mixed blessing for Mexican companies. On one hand, the peso's weakness made Mexico's exports potentially more competitive in the U.S. market. On the other hand, it created problems for some domestically oriented Mexican companies with a large amount of U.S. dollar debt. They were earning most of their revenues in the increasingly weak peso while still being obligated to service their debt in U.S. dollars. For Mexico's Telecommunications Services companies, the problem was tri-fold: Mobile-phone operators such as America Movil (13.99% of the Fund as of August 31, 2002) faced the considerable challenge of having to translate their peso revenues into U.S. dollars to service most of their debt and pay for capital equipment and wireless handsets. This predicament weighed heavily on shares of the affected companies over the summer. Managers' Discussion & Analysis 17 iShares MSCI Mexico Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI Mexico Index Fund MSCI Mexico Index* Mar-96 $10,000 $10,000 Mar-96 $10,864 $10,916 ` Aug-96 $11,593 $11,740 $12,820 $13,258 Aug-97 $15,675 $16,326 $15,311 $16,141 Aug-98 $8,749 $9,162 $12,107 $13,075 Aug-99 $14,604 $16,060 $19,632 $22,178 Aug-00 $18,723 $20,892 $16,024 $18,513 Aug-01 $17,408 $20,273 $18,125 $21,515 Aug-02 $15,551 $18,493 * On December 31, 2000, the Index changed its method of reinvestment from gross dividends to net dividends. On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 29, 2001. The index performance shown in the graph reflects the former index up to June 29, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. 18 2002 iShares Annual Report to Shareholders THIS PAGE INTENTIONALLY LEFT BLANK. 19 Managers' Discussion & Analysis iShares MSCI Pacific ex-Japan Index Fund Performance as of 8/31/02 Total Returns -------------------------------- Inception to 8/31/02 -------------------------------- NAV MARKET INDEX 5.51% 7.03% 5.67% "Total return" represents the total change in value of an investment over the periods indicated. Returns for the period since inception are calculated from the inception date of the Fund (10/25/01). A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (10/26/01), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Banks 29.08% Materials 12.53% Real Estate 11.85% Capital Goods 6.48% Media 6.01% Utilities 5.27% Diversified Financials 4.32% Telecommunication Services 4.16% Insurance 3.53% Transportation 3.12% PERFORMANCE REVIEW The total return of the iShares MSCI Pacific ex-Japan Index Fund (the "Pacific ex-Japan Fund") was 5.51% over the period from October 25, 2001 (its inception date), through August 31, 2002. The total return of the corresponding MSCI Pacific ex-Japan Index over the same period was 5.67%. SIGNIFICANT PERFORMANCE FACTORS The Pacific ex-Japan Fund underperformed its benchmark by 0.16 percentage points over the reporting period. This was due to the impact of expenses and security sampling, which subtracted 0.45 and 0.36 percentage points, respectively, from the Fund's return. Those factors were partially offset by the positive impact of revenue differential and uninvested assets, which contributed 0.60 and 0.05 percentage points, respectively, to the Fund's return. 20 2002 iShares Annual Report to Shareholders KEY MARKET CONDITIONS The Pacific ex-Japan Fund benefited from its diversification over the reporting period: Weakness in several of its Hong Kong and Singapore holdings was more than offset by strength in its positions in Australia and other markets. Many of the Fund's Australian equities benefited from positive economic conditions Down Under. While U.S. and European economies faced the prospect of a "double-dip" recession, the Australian economy continued to thrive in late 2001 and 2002. Strong consumer demand, fueled by low interest rates, was the main engine of the expansion. Those trends drove up profits and shares of the Index's two largest stocks, National Australia Bank and Commonwealth Bank of Australia (respectively 7.39% and 5.33% of the Fund as of August 31, 2002). In addition, Australian exporters and commodity producers, including BHP Billiton (4.67% of the Fund as of August 31, 2002), benefited from the weakness of Australia's currency versus the U.S. dollar. The strength of these holdings helped to counterbalance the poor performance of stocks such as Hong Kong's Hutchison Whampoa and Cheung Kong Holdings (respectively 3.61% and 2.72% of the Fund as of August 31, 2002). Hong Kong's stock market proved to be one of the weakest in the Asia-Pacific region over the reporting period. Despite low interest rates, the property market there remained sluggish and depressed results for many of Hong Kong's-and the Fund's-largest companies. Equities from Singapore were also generally weak as demand for electronics, Singapore's main export sector, remained slack in the United States and elsewhere. Australia's rally did begin to flag somewhat over the summer of 2002, as many investors became more concerned about the health of the U.S. economy and interest rates rose in Australia. Nonetheless, Australia's equity market and several others in the Pacific Rim continued to post gains. This momentum helped the Pacific ex-Japan Fund end the reporting period on a positive note. iShares MSCI Pacific ex-Japan Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI Pacific ex-Japan Index Fund MSCI Pacific ex-Japan Index* Oct-01 $10,000 $10,000 Oct-01 $9,890 $9,895 Nov-01 $10,630 $10,623 Dec-01 $10,958 $10,961 Jan-02 $11,067 $11,093 Feb-02 $10,944 $10,969 Mar-02 $11,390 $11,419 Apr-02 $11,436 $11,462 May-02 $11,800 $11,831 Jun-02 $11,183 $11,205 Jul-02 $10,508 $10,526 Aug-02 $10,551 $10,567 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. The index performance shown in the graph reflects the new free float index. Past performance is no guarantee of future results. Managers' Discussion & Analysis 21 Managers' Discussion & Analysis iShares MSCI Singapore Index Fund Performance as of 8/31/02
Average Annual Total Returns ------------------------------------------------------------------------------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 ------------------------------- ------------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (5.42)% (3.96)% (4.92)% (8.62)% (8.43)% (7.07)% (11.46)% (11.36)% (10.66)% Cumulative Total Returns ------------------------------------------------------------------------------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 ------------------------------- ------------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (5.42)% (3.96)% (4.92)% (36.28)% (35.65)% (30.76)% (54.52)% (54.23)% (51.82)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. TOP 10 FUND SECTORS (% of Portfolio) [BAR CHART] Banks 41.27% Real Estate 9.96% Capital Goods 8.78% Telecommunication Services 8.09% Transportation 7.53% Technology Hardware & Equipment 6.91% Diversified Financials 5.64% Media 4.49% Hotels Restaurants & Leisure 2.80% Food Beverage & Tobacco 2.65% PERFORMANCE REVIEW The total return of the iShares MSCI Singapore Index Fund (the "Singapore Fund") was -5.42% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Singapore Index over the same period was -4.92%. SIGNIFICANT PERFORMANCE FACTORS The Singapore Fund underperformed its benchmark by 0.50 percentage points over the reporting period. This was due to the impact of expenses and security sampling, which subtracted 0.82 and 0.33 percentage points, respectively, from the Fund's return. Those factors were partially offset by the positive impact of revenue differential, uninvested assets and security lending, which contributed 0.47, 0.17 and 0.01 percentage points, respectively, to the Fund's return. 22 2002 iShares Annual Report to Shareholders KEY MARKET CONDITIONS Singapore's heavy reliance on electronics exports proved to be its Achilles heel over the year ended August 31, 2002. The global downturn in demand for electronics created difficult conditions for the Singapore equity market at the start of the reporting period. Weakness in the U.S. economy in particular weighed on the results of many of Singapore's electronics exporters and, in turn, their shares. Although many investors began to anticipate a strong recovery in the U.S. economy toward the end of 2001, the optimism was unfounded and Singapore's market lost ground in the spring of 2002. The adverse conditions in Singapore's electronics sector led to declines in other areas of the economy as well. Financial companies such as DBS Group Holdings Ltd. (14.94% of the Fund as of August 31, 2002) were hampered by slowing loan growth and a decline in the value of their equity investments both at home and abroad. Facing challenges of a different kind was Singapore Airlines Ltd. (3.97% of the Fund as of August 31, 2002), which suffered a precipitous drop in business after the terrorist attacks of September 11. The company responded with restructuring plans, however, leading investors to drive up its shares in later months. By the end of the reporting period, the uncertain outlook for the global economy was still putting pressure on Singapore's equity market. Some investors even worried that the United States was headed for a "double-dip" recession, which would decrease demand for Singapore's electronics exports still further. iShares MSCI Singapore Index Fund GROWTH OF $10,000 INVESTMENT [GRAPH] iShares MSCI MSCI Singapore Singapore Index Fund Index* Mar-96 $10,000 $10,000 Aug-96 $9,327 $9,191 $9,720 $9,665 Aug-97 $7,137 $6,958 $5,687 $5,975 Aug-98 $2,763 $3,106 $4,914 $5,244 Aug-99 $6,756 $7,270 $6,361 $6,948 Aug-00 $6,669 $7,047 $5,863 $6,235 Aug-01 $4,808 $5,067 $4,938 $5,210 Aug-02 $4,548 $4,818 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 22, 2001. The index performance shown in the graph reflects the former index up to June 22, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 23 Managers' Discussion & Analysis iSHARES MSCI SOUTH KOREA INDEX FUND Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS CUMULATIVE TOTAL RETURNS ----------------------------------------------------------- -------------------------- YEAR ENDED 8/31/02 INCEPTION TO 8/31/02 INCEPTION TO 8/31/02 ------------------------------- -------------------------- -------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 59.77% 56.48% 61.67% 2.03% 1.21% 0.49% 4.77% 2.83% 1.13%
"Total returns for the period since inception" are calculated from the inception date of the Fund (05/09/00). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. In the case of the iShares MSCI South Korea Index Fund, which has an NAV determined PRIOR to the opening of the regular trading day on the Amex, the "Market Price" return will use the mid-point of the bid/ask spread as of the OPENING of regular trading on the Amex. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (05/12/00), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC TOP 10 FUND SECTORS (% of Portfolio) TECHNOLOGY HARDWARE & EQUIPMENT 34.76% BANKS 14.07% TELECOMMUNICATION SERVICES 12.82% MATERIALS 8.58% DIVERSIFIED FINANCIALS 5.00% AUTOMOBILES & COMPONENTS 4.67% CAPITAL GOODS 4.24% CONSUMER DURABLES & APPAREL 3.85% UTILITIES 3.15% INSURANCE 1.95%
PERFORMANCE REVIEW The total return of the iShares MSCI South Korea Index Fund (the "South Korea Fund") was 59.77% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI South Korea Index over the same period was 61.67%. SIGNIFICANT PERFORMANCE FACTORS The South Korea Fund underperformed its benchmark by 1.90 percentage points over the reporting period. This was due to the impact of expenses, security sampling, uninvested assets and revenue differential, which respectively subtracted 1.00, 0.58, 0.17 and 0.15 percentage points from the Fund's return. KEY MARKET CONDITIONS In the context of a global economic downturn and significant declines for many world stock markets, the double-digit return of South Korea's equity market over the year ended August 31, 2002, was remarkable indeed. 24 2002 iSHARES ANNUAL REPORT TO SHAREHOLDERS As in other world markets, however, the reporting period did not begin very auspiciously for South Korea. Faced with declining demand in its key export markets, the country's economy appeared to be facing difficult times ahead. The events of September 11 exacerbated the uncertainty and drove down South Korean equities sharply. The market rebounded within days, however, and remained on an upward path for months afterward. The rally was driven in part by the continued strength of South Korea's economy itself and by the resilience of consumer demand in the United States and other major export markets. One company that benefited from this trend was Hyundai Motor Company (3.39% of the Fund as of August 31, 2002). It reported record profits in February 2002, attributing the results to strong sales of higher-margin cars and sport-utility vehicles in the United States and at home. Hyundai noted that the weakness of South Korea's currency (the won) versus the dollar enhanced the firm's competitiveness in the U.S. market. South Korea's equity market was also buoyed by continued restructuring and consolidation in several different sectors. The country's financial-services industry, for example, attracted more investors as leading banks wrote off long-standing bad loans. Mergers and acquisitions, such as the one between Kookmin Bank (9.05% of the Fund as of August 31, 2002) and a smaller rival during the reporting period, also attracted new investor interest to South Korean banking stocks, as did record low interest rates. Beginning in May, however, political issues and other concerns caused the rally to deflate. Labor unrest and a naval confrontation between South Korea and North Korea put pressure on the market over the summer. Growing uncertainty about the health of the U.S. economy and the appreciation of South Korea's currency also weighed on the shares of many South Korean exporters. The won's strength led to some concerns about market giant Samsung Electronics Co. Ltd. (24.45% of the Fund as of August 31, 2002), for example, even as the company reported record second-quarter profits. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC iSHARES MSCI SOUTH KOREA INDEX FUND GROWTH OF $10,000 INVESTMENT iShares MSCI South Korea Index Fund MSCI South Korea Index* $10,000 $10,000 May 00 $9,455 $9,437 Aug 00 $8,919 $8,748 Nov 00 $6,095 $5,804 Feb 01 $6,930 $6,608 May 01 $7,348 $6,984 Aug 01 $6,557 $6,255 Nov 01 $8,042 $7,658 Feb 02 $10,318 $9,888 May 02 $11,214 $10,747 Aug 02 $10,476 $10,113
* On December 31, 2000, the Index changed its method of reinvestment from gross dividends to net dividends. On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 29, 2001. The index performance shown in the graph reflects the former index up to June 29, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 25 Managers' Discussion & Analysis iSHARES MSCI TAIWAN INDEX FUND Performance as of 8/31/02
AVERAGE ANNUAL TOTAL RETURNS CUMULATIVE TOTAL RETURNS ---------------------------------------------------------------- ------------------------------- YEAR ENDED 8/31/02 INCEPTION TO 8/31/02 INCEPTION TO 8/31/02 ------------------------------- ------------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (2.11)% (7.82)% (0.91)% (28.88)% (31.02)% (28.24)% (52.76)% (55.83)% (51.65)%
Total returns for the period since inception" are calculated from the inception date of the Fund (06/20/00). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. In the case of the iShares MSCI Taiwan Index Fund, which has an NAV determined PRIOR to the opening of the regular trading day on the Amex, the "Market Price" return will use the mid-point of the bid/ask spread as of the OPENING of regular trading on the Amex. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (06/23/00), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC TOP 10 FUND SECTORS (% of Portfolio) TECHNOLOGY HARDWARE & EQUIPMENT 57.04% BANKS 14.54% MATERIALS 12.82% CAPITAL GOODS 3.97% INSURANCE 2.47% DIVERSIFIED FINANCIALS 2.42% CONSUMER DURABLES & APPAREL 2.27% AUTOMOBILES & COMPONENTS 1.65% FOOD BEVERAGE & TOBACCO 0.74% TRANSPORTATION 0.66%
PERFORMANCE REVIEW The total return of the iShares MSCI Taiwan Index Fund (the "Taiwan Fund") was -2.11% for the one-year period ended August 31, 2002. The total return of the corresponding MSCI Taiwan Index over the same period was -0.91%. SIGNIFICANT PERFORMANCE FACTORS The Taiwan Fund underperformed its benchmark by 1.20 percentage points over the reporting period. This was due to the impact of expenses, revenue differential and uninvested assets, which respectively subtracted 0.99, 0.24 and 0.09 percentage points from the Fund's returns. Those factors were partially offset by the positive impact of security sampling, which contributed 0.12 percentage points. 26 2002 iSHARES ANNUAL REPORT TO SHAREHOLDERS KEY MARKET CONDITIONS After a steep decline at the beginning of the reporting period, Taiwan's equity market staged a significant rally through late 2001 and early 2002 -- only to give back much of those gains by the end of the reporting period. The global economic downturn that was already pressuring Taiwan's stock market in early September 2001 was only intensified by the events of September 11. Slack demand from the United States in particular created difficult conditions for leading Taiwanese exporters such as Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC), respectively 14.86% and 8.74% of the Fund as of August 31, 2002. Within weeks, however, the immediate economic effects of September 11 had begun to dissipate, and Taiwan's equity market rallied back. Many investors appeared to be encouraged by signs that Europe and the United States were in less dire economic straits than previously thought. Healthy U.S. consumer demand for electronics helped drive up shares of TSMC in particular. Although the Taiwanese economy itself was in recession, record low interest rates on the island also helped to support the market. By April, Taiwan's stock market had reversed course. Investors became less optimistic that the U.S. economy was strong enough to absorb higher exports of microchips and other goods from Taiwan. This led to a sharp decline in shares of TSMC when, in July, it reported results that disappointed many investors. The company also predicted weak results for the second half of 2002. Toward the end of the reporting period, the Taiwanese equity market was also driven down by renewed political tension between Taiwan and mainland China. Nonetheless, some investors found cause for optimism in a series of mergers between Taiwan's leading banks, part of a larger trend toward consolidation in the island's crowded financial services industry. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC iSHARES MSCI TAIWAN INDEX FUND GROWTH OF $10,000 INVESTMENT iShares MSCI Taiwan Index Fund MSCI Taiwan Index* Jun 00 $10,000 $10,000 Aug 00 $8,790 $8,785 Nov 00 $5,951 $5,922 Feb 01 $6,540 $6,522 May 01 $5,555 $5,557 Aug 01 $4,826 $4,880 Nov 01 $4,714 $4,779 Feb 02 $5,742 $5,838 May 02 $5,828 $5,925 Aug 02 $4,719 $4,835
* On December 31, 2000, the Index changed its method of reinvestment from gross dividends to net dividends. On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 22, 2001. The index performance shown in the graph reflects the former index up to June 22, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 27 Schedule of Investments iSHARES MSCI AUSTRALIA INDEX FUND August 31, 2002
SECURITY SHARES VALUE ---------------------------------------------------------------- COMMON STOCKS - 96.22% National Australia Bank Ltd. 472,812 $ 9,025,366 Commonwealth Bank of Australia 382,858 6,510,998 BHP Billiton Ltd. 1,131,149 5,676,897 Australia and New Zealand Banking Group Ltd. 457,478 4,778,403 Westpac Banking Corp. Ltd. 538,248 4,483,391 AMP Ltd. 346,901 2,662,118 News Corporation Ltd. 447,843 2,326,544 Woolworths Ltd. 320,497 2,118,742 Wesfarmers Ltd. 113,734 1,860,882 Telstra Corp. Ltd. 668,054 1,788,648 Rio Tinto Group 95,120 1,720,350 Foster's Group Ltd. 629,883 1,717,691 WMC Ltd. 339,644 1,437,000 Amcor Ltd. 251,125 1,225,741 Brambles Group 294,954 1,126,046 Suncorp-Metway Ltd. 161,335 1,114,551 Coles Myer Ltd. 343,580 1,107,290 Westfield Trust 603,848 1,087,772 CSR Ltd. 285,811 1,034,464 Woodside Petroleum Ltd. 142,475 1,024,296 Westfield Holdings Ltd. 128,945 954,722 Macquarie Infrastructure Group 579,617 925,996 General Property Trust 576,870 873,958 Macquarie Bank Ltd. 60,598 811,219 TABCORP Holdings Ltd. 112,955 796,502 Lend Lease Corp. Ltd. 120,089 729,048 Australian Gas Light Co. Ltd. 130,544 719,167 Insurance Australia Group Ltd. 397,208 700,238 QBE Insurance Group Ltd. 170,724 693,157 Santos Ltd. 188,887 669,094 CSL Ltd. 48,339 612,489 Stockland Trust Group 250,428 609,792 Southcorp Ltd. 191,552 585,670 Mayne Group Ltd. 246,943 504,702 James Hardie Industries NV(1) 125,132 467,381 Orica Ltd. 85,895 454,745 Coca Cola Amatil Ltd. 126,772 442,079 Patrick Corporation Ltd. 49,077 431,775 SECURITY SHARES VALUE ---------------------------------------------------------------- Mirvac Group 189,133 $ 430,315 Boral Ltd. 174,455 413,266 Origin Energy Ltd. 197,661 405,067 M.I.M. Holdings Ltd. 612,253 401,393 BHP Steel Ltd.(1) 243,688 374,548 John Fairfax Holdings Ltd. 224,967 374,278 Cochlear Ltd. 16,236 346,148 Newcrest Mining Ltd. 86,920 334,234 Goodman Fielder Ltd. 354,445 320,241 PaperlinX Ltd. 109,265 308,794 Transurban Group Ltd. 133,291 296,652 Harvey Norman Holdings Ltd. 162,688 270,664 Leighton Holdings Ltd. 40,836 250,386 TAB Ltd. 137,309 248,117 Aristocrat Leisure Ltd. 84,378 242,182 BRL Hardy Ltd. 47,437 240,425 Deutsche Office Trust 356,372 233,638 BT Office Trust 284,950 226,051 Sonic Healthcare Ltd. 68,224 225,132 Australian Stock Exchange Ltd. 30,955 217,258 Gandel Retail Trust 290,444 203,195 Publishing & Broadcasting Ltd. 39,647 200,289 Colonial First State Property Trust Group 150,593 199,942 Ansell Ltd.(1) 50,198 192,474 AMP Diversified Property Trust 137,145 191,907 Iluka Resources Ltd. 68,716 183,980 Computershare Ltd. 133,373 164,582 OneSteel Ltd. 158,752 144,306 Futuris Corp. Ltd. 185,607 134,973 Sons of Gwalia Ltd. 43,378 112,553 David Jones Ltd. 126,813 76,849 Energy Developments Ltd. 25,461 57,509 TOTAL COMMON STOCKS (COST: $72,973,851) 73,830,272 PREFERRED STOCKS - 3.32% News Corporation Ltd. 588,063 2,552,840 TOTAL PREFERRED STOCKS (COST: $4,405,900) 2,552,840
28 2002 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iShares MSCI Australia Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------- SHORT TERM INSTRUMENTS - 7.95% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 4,888,508 $ 4,888,508 Dreyfus Money Market Fund 410,918 410,918 Goldman Sachs Financial Square Prime Obligation Fund 203,311 203,311 Providian Temp Cash Money Market Fund 595,123 595,123 TOTAL SHORT TERM INSTRUMENTS (COST: $6,097,860) 6,097,860 TOTAL INVESTMENTS IN SECURITIES - 107.49% (COST $83,477,611) 82,480,972 OTHER ASSETS, LESS LIABILITIES - (7.49%) (5,750,225) ----------- NET ASSETS - 100.00% $76,730,747 =========== /1/ Non-income earning securities. See Notes to Financial Statements. Schedules of Investments 29 Schedule of Investments iShares MSCI Brazil Index Fund August 31, 2002 Security Shares Value -------------------------------------------------------------------- COMMON STOCKS - 24.79% Petroleo Brasileiro SA 464,600 $ 7,396,236 Companhia Vale do Rio Doce ADR 181,800 4,654,080 Unibanco Holdings SA 98,374,000 2,431,790 Centrais Eletricas Brasileiras SA 277,548,000 2,039,986 Souza Cruz SA 242,400 1,182,439 Companhia Siderurgica Nacional 80,396,000 1,073,183 Brasil Telecom Participacoes SA 142,208,000 640,264 Companhia de Saneamento Basico do Estado de Sao Paulo 22,220,000 623,317 Tractebel Energia SA 347,642,000 453,746 Embratel Participacoes SA/1/ 227,250,000 276,386 TOTAL COMMON STOCKS (COST: $30,771,463) 20,771,427 PREFERRED STOCKS - 74.53% Petroleo Brasileiro SA 848,400 12,303,757 Companhia de Bebidas das Americas 51,712,000 7,260,815 Companhia Vale do Rio Doce "A" 303,000 6,890,903 Tele Norte Leste Participacoes SA 484,800,000 4,218,429 Banco Itau SA 86,860,000 4,208,444 Banco Bradesco SA 1,232,200,000 4,142,533 Brasil Telecom Participacoes SA 547,218,000 3,183,386 Embraer-Empresa Brasileira de Aeronautica SA 666,643 2,889,372 Companhia Energetica de Minas Gerais 241,390,467 2,219,774 Telesp Celular Participacoes SA/1/ 1,373,600,000 1,842,629 Aracruz Celulose SA "B" 1,010,000 1,747,693 Gerdau SA 124,836,000 1,351,636 Companhia Brasileira de Distribuicao 83,628,000 1,294,112 Companhia Paranaense de Energia "B" 323,806,000 1,151,571 Centrais Eletricas Brasileiras SA "B" 153,722,000 1,104,528 Votorantim Celulose e Papel SA 26,260,000 848,300 Tele Centro Oeste Celular Participacoes 731,240,000 790,529 Embratel Participacoes SA/1/ 620,140,000 586,621 Tele Nordeste Celular Participacoes SA 699,526,000 576,402 Companhia Brasileira de Petroleo Ipirango 141,400,000 562,990 Telemig Celular Participacoes SA 597,314,000 555,185 Tele Celular Sul Participacoes 606,000,000 511,325 Companhia de Tecidos Norte de Minas 6,666,000 435,026 Sadia SA 1,212,000 423,441 Usinas Siderurgicas de Minas Gerais SA "A" 202,000 382,828 Eletropaulo Metropolitana Eletricidade de Sao Paulo 25,452,000 322,974 Copene Petroquimica do Nordeste SA 2,828,000 293,612 Duratex SA 19,998,000 268,925 Net Servicos de Comunicacao SA/1/ 438,200 75,104 TOTAL PREFERRED STOCKS (COST: $90,184,889) 62,442,844 TOTAL INVESTMENTS IN SECURITIES - 99.32% (COST $120,956,352) 83,214,271 Other Assets, Less Liabilities - (0.68%) 573,519 ----------- NET ASSETS - 100.00% $83,787,790 =========== /1/ Non-income earning securities. See Notes to Financial Statements. 30 2002 iShares Annual Report to Shareholders Schedule of Investments iShares MSCI Canada Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------- COMMON STOCKS - 99.79% RBC Financial Group 152,500 $ 5,474,353 Bank of Nova Scotia 114,193 3,440,430 EnCana Corp. 107,547 3,156,096 Bank of Montreal 111,090 2,663,316 Manulife Financial Corp. 109,241 2,539,853 Sun Life Financial Services of Canada Inc. 139,664 2,511,270 Canadian Imperial Bank of Commerce 82,741 2,288,641 Barrick Gold Corp. 121,806 1,971,540 Alcan Inc. 69,092 1,938,563 Canadian National Railway Co. 43,820 1,910,385 Suncor Energy Inc. 101,920 1,839,136 TransCanada PipeLines Ltd. 108,056 1,603,519 Petro-Canada 50,432 1,489,035 Thomson Corp. 51,192 1,393,011 Talisman Energy Inc. 30,520 1,267,166 BCE Inc. 66,360 1,208,090 Magna International Inc. "B" 18,830 1,194,016 Enbridge Inc. 35,070 1,034,789 Bombardier Inc. "B" 232,610 999,037 Celestica Inc./1/ 42,630 986,501 Loblaw Companies Ltd. 25,270 969,332 Canadian Natural Resources Ltd. 29,125 965,232 Nortel Networks Ltd./1/ 867,860 934,598 George Weston Ltd. 12,040 886,483 Power Corporation of Canada 35,910 880,025 Imperial Oil Ltd. 30,310 856,064 National Bank of Canada 43,540 821,678 Biovail Corp./1/ 29,262 795,326 Canada Life Financial Corp. 36,610 759,189 Inco Ltd./1/ 41,650 752,903 Canadian Pacific Railway Ltd. 35,853 744,638 Edperbrascan Corp. 34,831 741,277 Placer Dome Inc. 74,340 741,014 Potash Corporation of Saskatchewan Inc. 11,830 720,416 Nexen Inc. 27,790 700,986 Abitibi-Consolidated Inc. 90,580 681,669 Power Financial Corp. 27,463 653,128 Shell Canada Ltd. 15,890 506,748 TransAlta Corp. 38,920 495,234 Quebecor World Inc. 19,390 494,693 MDS Inc. 30,049 472,887 Domtar Inc. 43,470 439,716 Fairmont Hotels & Resorts Inc. 17,868 430,092 Shaw Communications Inc. "B" 44,450 427,405 Molson Inc. "A" 22,330 424,413 NOVA Chemicals Corp. 19,600 409,967 Investors Group Inc. 24,290 404,834 Brookfield Properties Corp. 20,020 404,250 Precision Drilling Corp. "A"/1/ 12,110 391,479 Noranda Inc. 34,860 379,883 Onex Corp. 28,770 371,982 Dofasco Inc. 16,590 324,250 Cognos Inc./1/ 17,640 320,348 Canadian Tire Corp. "A" 16,590 320,209 ATI Technologies Inc./1/ 53,200 312,038 Husky Energy Inc. 27,580 294,011 Penn West Petroleum Ltd./1/ 11,480 285,602 Teck Cominco Ltd. "B" 41,790 280,206 Agrium Inc. 28,980 271,966 Rogers Communications Inc. "B"/1/ 31,850 265,416 Fairfax Financial Holdings Ltd. 3,010 258,551 Cameco Corp. 12,530 249,476 CAE Inc. 50,680 218,314 Ballard Power Systems Inc./1/ 14,210 199,487 C.I. Fund Management Inc. 30,520 192,706 CP Ships Ltd. 17,378 189,264 Falconbridge Ltd. 17,570 188,653 Aliant Inc. 10,220 186,711 CGI Group Inc./1/ 46,060 185,719 Four Seasons Hotels Inc. 5,110 181,045 Royal Group Technologies Ltd./1/ 14,070 179,663 Intrawest Corp. 10,570 173,930 Fording Inc. 11,554 173,681 TELUS Corp. 24,360 157,716 QLT Corp./1/ 15,470 129,314 Quebecor Inc. "B" 8,960 98,962 Hudson's Bay Co. 15,540 77,002 TOTAL COMMON STOCKS (COST: $79,925,539) 66,280,528 Schedules of Investments 31 Schedule of Investments (Continued) iShares MSCI Canada Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------- SHORT TERM INSTRUMENTS - 11.21% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 5,967,948 $ 5,967,948 Dreyfus Money Market Fund 501,654 501,654 Goldman Sachs Financial Square Prime Obligation Fund 248,203 248,203 Providian Temp Cash Money Market Fund 726,533 726,533 TOTAL SHORT TERM INSTRUMENTS (COST: $7,444,338) 7,444,338 TOTAL INVESTMENTS IN SECURITIES - 111.00% (COST $87,369,877) 73,724,866 OTHER ASSETS, LESS LIABILITIES - (11.00%) (7,304,443) ----------- NET ASSETS - 100.00% $66,420,423 =========== /1/ Non-income earning securities. See Notes to Financial Statements. 32 2002 iShares Annual Report to Shareholders Schedule of Investments iShares MSCI Hong Kong Index Fund August 31, 2002 Security Shares Value -------------------------------------------------------------------------- COMMON STOCKS - 99.42% Hutchison Whampoa Ltd. a 2,324,800 $15,722,157 Cheung Kong (Holdings) Ltd. 1,660,000 11,864,684 Sun Hung Kai Properties Ltd. 1,494,000 9,672,754 Hang Seng Bank Ltd. 846,600 9,090,114 Hong Kong & China Gas Co. Ltd. 3,682,663 4,933,664 Swire Pacific Ltd. "A" 1,079,000 4,883,122 Hongkong Electric Holdings Ltd. 1,245,000 4,852,263 CLP Holdings Ltd. 1,162,200 4,678,552 Bank of East Asia Ltd. 1,726,500 3,286,911 BOC Hong Kong (Holdings) Ltd./1/ 2,905,000 3,128,394 Wharf (Holdings) Ltd. (The) 1,328,000 2,766,622 Henderson Land Development Co. Ltd. 664,000 2,170,749 Li & Fung Ltd. 1,992,000 2,170,682 Cathay Pacific Airways Ltd. 1,328,000 2,051,627 MTR Corp. Ltd. 1,603,583 2,025,005 Hang Lung Properties Ltd. 1,826,000 1,872,746 PCCW Ltd./1/ 9,960,883 1,787,979 Hong Kong Exchanges & Clearing Ltd. 1,328,000 1,753,624 Johnson Electric Holdings Ltd. 1,577,000 1,657,900 Cheung Kong Infrastructure Holdings Ltd. 664,000 1,157,750 New World Development Co. Ltd. 1,660,000 1,085,308 Esprit Holdings Ltd. 664,000 1,081,125 Television Broadcasts Ltd. 332,000 1,074,750 Hysan Development Co. Ltd. 996,000 881,062 Shangri-La Asia Ltd. 1,328,000 868,246 Giordano International Ltd. 1,660,000 734,218 Sino Land Co. Ltd. 1,992,000 651,185 SCMP Group Ltd. 1,328,000 566,126 ASM Pacific Technology Ltd. 249,000 451,711 TOTAL COMMON STOCKS (Cost: $120,793,711) 98,921,030 TOTAL INVESTMENTS IN SECURITIES - 99.42% (Cost $120,793,711) 98,921,030 Other Assets, Less Liabilities - 0.58% 581,092 ----------- NET ASSETS - 100.00% $99,502,122 =========== /1/ Non-income earning securities. See Notes to Financial Statements. Schedules of Investments 33 Schedule of Investments iShares MSCI Malaysia Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------------------- COMMON STOCKS - 100.13% Malayan Banking Bhd 4,073,400 $ 9,379,539 Tenaga Nasional Bhd 2,190,000 5,676,711 Telekom Malaysia Bhd 2,628,000 5,428,895 Sime Darby Bhd 3,285,000 4,408,816 Genting Bhd 1,095,000 4,091,842 Commerce Asset Holdings Bhd 3,633,000 3,709,484 Resorts World Bhd 1,314,000 3,596,211 Maxis Communications Bhd/1/ 2,190,000 3,227,368 British American Tobacco (Malaysia) Bhd 329,000 3,138,487 Public Bank Bhd 3,942,750 2,925,936 IOI Corp. Bhd 1,752,000 2,697,158 PLUS Expressways Bhd/1/ 4,380,000 2,662,579 Malaysian International Shipping Corp. Bhd 1,314,000 2,506,974 Technology Resources Industries Bhd/1/ 2,847,000 1,798,105 Petronas Gas Bhd 1,095,000 1,743,355 YTL Corp. Bhd 1,533,620 1,711,197 Magnum Corp. Bhd 2,409,000 1,679,961 Tanjong PLC 657,000 1,651,145 Hong Leong Bank Bhd 1,095,000 1,570,461 Malakoff Bhd 1,314,000 1,459,232 AMMB Holdings Bhd 1,095,400 1,406,724 Gamuda Bhd 876,000 1,360,105 Kuala Lumpur Kepong Bhd 657,000 1,192,974 Nestle (Malaysia) Bhd 219,000 1,167,039 RHB Capital Bhd 1,971,000 1,151,479 Perusahaan Otomobil Nasional Bhd 438,000 1,141,105 Road Builder (Malaysia) Holdings Bhd 657,000 959,566 Hong Leong Credit Bhd 767,400 932,997 IJM Corp. Bhd 657,000 881,763 Berjaya Sports Toto Bhd 876,000 866,779 Malaysian Pacific Industries Bhd 219,000 864,474 Malayan Cement Bhd 3,285,000 782,349 Edaran Otomobil Nasional Bhd 219,000 743,447 PPB Group Bhd 657,333 709,228 Star Publications (Malaysia) Bhd 438,000 703,105 Malaysian Resources Corp. Bhd/1/ 2,190,000 691,579 Petronas Dagangan Bhd 438,000 645,474 New Straits Times Press Bhd/1/ 438,000 628,184 SP Setia Bhd 657,000 618,963 Malaysian Oxygen Bhd 219,000 587,842 Unisem (Malaysia) Bhd 219,000 567,671 Malaysian Airline System Bhd/1/ 657,000 567,095 Golden Hope Plantations Bhd 657,000 553,263 Malaysia Mining Corp. Bhd 876,000 534,821 Multi-Purpose Holdings Bhd/1/ 1,533,000 524,447 OYL Industries Bhd 87,600 504,853 UMW Holdings Bhd 219,000 469,697 Oriental Holdings Bhd 438,400 447,629 Courts Mammoth Bhd 438,000 428,779 Malaysia Airports Holdings Bhd 876,000 424,168 Guinness Anchor Bhd 438,000 414,947 Hume Industries Bhd 219,000 371,724 Mulpha International Bhd/1/ 2,847,000 370,859 IOI Properties Bhd 219,000 350,112 TA Enterprise Bhd 1,971,000 350,112 Highlands & Lowlands Bhd 438,000 345,789 IGB Corp. Bhd 1,314,000 326,771 Hong Leong Industries Bhd 219,000 316,974 Puncak Niaga Holdings Bhd/1/ 438,000 310,058 Hap Seng Consolidated Bhd 575,000 301,118 WTK Holdings Bhd 219,000 293,921 OSK Holdings Bhd 657,000 280,089 Tan Chong Motor Holdings Bhd 876,000 272,021 FACB Resorts Bhd/1/ 4,380,000 236,290 JT International Bhd/1/ 219,000 222,458 TIME Engineering Bhd/1/ 657,000 209,203 Jaya Tiasa Holdings Bhd 219,000 195,947 Malayan United Industries Bhd/1/ 1,095,000 86,447 OSK Property Holdings Bhd/2/ 59,727 5,187 TOTAL COMMON STOCKS (Cost: $67,028,200) 93,381,082 TOTAL INVESTMENTS IN SECURITIES - 100.13% (Cost $67,028,200) 93,381,082 Other Assets, Less Liabilities - (0.13%) (119,225) ----------- NET ASSETS - 100.00% $93,261,857 =========== /1/ Non-income earning securities. /2/ Security valued at fair value in accordance with procedures approved by the Board of Directors (Note 1). See Notes to Financial Statements. 34 2002 iShares Annual Report to Shareholders Schedule of Investments iShares MSCI Mexico Index Fund August 31, 2002 Security Shares Value ----------------------------------------------------------------------------- COMMON STOCKS - 99.93% Telefonos de Mexico SA de CV - Series L 11,804,000 $17,530,120 America Movil SA de CV - Series L 14,144,000 9,931,917 Cemex SA de CV 1,326,000 6,323,164 Wal-Mart de Mexico SA de CV - Series V 1,326,000 3,595,714 Grupo Financiero BBVA Bancomer SA de CV - Series B/1/ 4,347,000 3,451,953 Fomento Economico Mexicano SA de CV 910,000 3,415,503 Grupo Televisa SA - Series CPO/1/ 2,080,000 3,341,312 Kimberly-Clark de Mexico SA de CV - Series A 1,305,200 3,138,353 Grupo Modelo SA de CV - Series C 1,040,000 2,616,328 Grupo Carso SA de CV - Series A1/1/ 764,400 2,116,012 Coca-Cola Femsa SA de CV ADR 70,720 1,605,344 Grupo Bimbo SA - Series A 702,000 1,219,163 Corporacion Interamericana de Entretenimiento SA de CV/1/ 644,800 1,172,569 Alfa SA de CV - Series A/1/ 655,200 1,151,776 Grupo Elektra SA de CV - Series CPO 1,367,600 1,088,746 TV Azteca SA de CV - Series CPO 2,080,000 882,544 Tubos de Acero de Mexico SA 452,400 821,785 Apasco SA de CV 135,200 809,997 Grupo Aeroportuario del Sureste SA de CV ADR 62,400 754,416 Controladora Comercial Mexicana SA de CV 1,378,000 751,837 Grupo Sanborns SA de CV - Series B1/1/ 561,600 720,589 Grupo Mexico SA de CV - Series B 598,000 686,923 Vitro SA de CV - Series A 665,600 652,288 Organizacion Soriana SA de CV - Series B/1/ 260,000 630,162 Grupo Continental SA 364,000 593,902 Industrias Penoles SA de CV - Series CP 312,000 551,616 Carso Global Telecom SA de CV - Series A1/1/ 520,000 541,112 America Telecom SA de CV - Series A1/1/ 520,000 328,900 Savia SA de CV - Series A/1/ 402,500 267,984 Consorcio Ara SA de CV/1/ 156,000 249,023 TOTAL COMMON STOCKS (Cost: $94,231,985) 70,941,052 TOTAL INVESTMENTS IN SECURITIES - 99.93% (Cost $94,231,985) 70,941,052 Other Assets, Less Liabilities - 0.07% 52,772 ----------- NET ASSETS - 100.00% $70,993,824 =========== /1/ Non-income earning securities. See Notes to Financial Statements. Schedules of Investments 35 Schedule of Investments iShares MSCI Pacific Ex-Japan Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------------------- COMMON STOCKS - 97.34% AUSTRALIA - 60.33% Amcor Ltd. 214,100 $ 1,045,022 AMP Diversified Property Trust 98,460 137,775 AMP Ltd. 299,480 2,298,210 Ansell Ltd./1/ 48,826 187,214 Aristocrat Leisure Ltd. 75,980 218,078 Australia and New Zealand Banking Group Ltd. 393,700 4,112,236 Australian Gas Light Co. Ltd. 107,400 591,667 Australian Stock Exchange Ltd. 28,060 196,939 BHP Billiton Ltd. 978,000 4,908,289 BHP Steel Ltd./1/ 211,053 324,388 Boral Ltd. 152,320 360,831 Brambles Group 263,360 1,005,430 BRL Hardy Ltd. 45,520 230,709 BT Office Trust 226,960 180,047 Coca Cola Amatil Ltd. 113,760 396,704 Cochlear Ltd. 14,620 311,695 Coles Myer Ltd. 288,400 929,456 Colonial First State Property Trust Group 115,020 152,712 Commonwealth Bank of Australia 329,220 5,598,814 CSL Ltd. 43,540 551,682 CSR Ltd. 255,880 926,132 David Jones Ltd. 95,760 58,031 Deutsche Office Trust 308,980 202,567 Foster's Group Ltd. 538,060 1,467,290 Gandel Retail Trust 248,620 173,935 General Property Trust 488,600 740,229 Goodman Fielder Ltd. 300,220 271,249 Harvey Norman Holdings Ltd. 176,480 293,610 Iluka Resources Ltd. 64,500 172,692 Insurance Australia Group Ltd. 366,700 646,455 James Hardie Industries NV/1/ 106,080 396,219 John Fairfax Holdings Ltd. 199,700 332,241 Leighton Holdings Ltd. 38,480 235,940 Lend Lease Corp. Ltd. 109,740 666,221 M.I.M. Holdings Ltd. 551,920 361,839 Macquarie Bank Ltd. 52,740 706,025 Macquarie Infrastructure Group 510,780 816,022 Mayne Group Ltd. 231,160 472,445 Mirvac Group 157,360 358,025 National Australia Bank Ltd. 406,560 7,760,702 Newcrest Mining Ltd. 81,480 313,315 News Corporation Ltd. 391,180 2,032,180 OneSteel Ltd. 126,180 114,698 Orica Ltd. 74,160 392,618 Origin Energy Ltd. 178,880 366,579 PaperlinX Ltd. 89,060 251,692 Patrick Corporation Ltd. 41,100 361,594 Publishing & Broadcasting Ltd. 36,620 184,997 QBE Insurance Group Ltd. 152,240 618,110 Rio Tinto Group 83,300 1,506,572 Santos Ltd. 166,160 588,589 Southcorp Ltd. 175,520 536,652 Stockland Trust Group 199,800 486,513 Suncorp-Metway Ltd. 136,080 940,081 TAB Ltd. 134,840 243,656 TABCORP Holdings Ltd. 85,920 605,865 Telstra Corp. Ltd. 577,340 1,545,770 Transurban Group Ltd. 127,940 284,743 Wesfarmers Ltd. 97,880 1,601,483 Westfield Holdings Ltd. 112,160 830,444 Westfield Trust 492,440 887,081 Westpac Banking Corp. Ltd. 463,540 3,861,103 WMC Ltd. 300,200 1,270,116 Woodside Petroleum Ltd. 126,840 911,891 Woolworths Ltd. 277,620 1,835,290 63,367,399 HONG KONG - 22.68% ASM Pacific Technology Ltd. 50,000 90,705 Bank of East Asia Ltd. 364,000 692,983 BOC Hong Kong (Holdings) Ltd./1/ 670,000 721,523 Cathay Pacific Airways Ltd. 260,000 401,674 Cheung Kong (Holdings) Ltd. 400,000 2,858,960 Cheung Kong Infrastructure Holdings Ltd. 120,000 209,232 CLP Holdings Ltd. 480,000 1,932,288 Esprit Holdings Ltd. 120,000 195,384 36 2002 iShares Annual Report to Shareholders Schedule of Investments (Continued) iShares MSCI Pacific Ex-Japan Index Fund August 31, 2002 Security Shares Value ----------------------------------------------------------------- Giordano International Ltd. 400,000 $ 176,920 Hang Lung Properties Ltd. 302,500 310,244 Hang Seng Bank Ltd. 198,000 2,125,966 Henderson Land Development Co. Ltd. 160,000 523,072 Hong Kong & China Gas Co. Ltd. 940,600 1,260,122 Hong Kong Exchanges & Clearing Ltd. 280,000 369,740 Hongkong Electric Holdings Ltd. 360,000 1,403,064 Hutchison Whampoa Ltd. 560,000 3,787,168 Hysan Development Co. Ltd. 160,000 141,536 Johnson Electric Holdings Ltd. 400,000 420,520 Li & Fung Ltd. 400,000 435,880 MTR Corp. Ltd. 340,000 429,352 New World Development Co. Ltd. 380,000 248,444 PCCW Ltd./1/ 2,380,000 427,210 SCMP Group Ltd. 320,000 136,416 Shangri-La Asia Ltd. 280,000 183,064 Sino Land Co. Ltd. 440,000 143,836 Sun Hung Kai Properties Ltd. 340,000 2,201,296 Swire Pacific Ltd. "A" 250,000 1,131,400 Television Broadcasts Ltd. 60,000 194,232 Wharf (Holdings) Ltd. (The) 320,000 666,656 23,818,887 NEW ZEALAND - 2.02% Auckland International Airport Ltd. 88,320 168,497 Carter Holt Harvey Ltd. 242,260 195,964 Contact Energy Ltd. 85,140 156,062 Fisher & Paykel Appliances Holdings Ltd. 16,840 80,318 Fletcher Building Ltd. 103,400 138,277 Fletcher Challenge Forests Ltd./1/ 258,060 28,954 Independent Newspapers Ltd. 24,400 39,247 Sky City Entertainment Group Ltd. 54,120 176,891 Telecom Corp. of New Zealand Ltd. 380,560 900,443 Tower Ltd. 55,180 101,917 Warehouse Group Ltd. (The) 37,900 128,841 2,115,411 SINGAPORE - 12.31% Allgreen Properties Ltd. 60,000 39,774 Capitaland Ltd. 280,000 232,008 Chartered Semiconductor Manufacturing Ltd./1/ 160,000 192,016 City Developments Ltd. 120,000 411,456 Cycle & Carriage Ltd. 40,000 98,292 DBS Group Holdings Ltd. 280,000 1,904,112 First Capital Corp. Ltd. 60,000 30,342 Fraser & Neave Ltd. 47,700 209,894 GES International Ltd. 180,000 36,000 Haw Par Corp. Ltd. 20,000 49,146 Hotel Properties Ltd. 60,000 35,316 Keppel Corp. Ltd. 140,000 353,626 Keppel Land Ltd. 120,000 92,580 NatSteel Ltd. 60,000 60,690 Oversea-Chinese Banking Corp. Ltd. 260,000 1,604,668 Overseas Union Enterprise Ltd. 20,000 77,718 Parkway Holdings Ltd. 200,000 88,000 SembCorp Industries Ltd. 220,000 152,130 SembCorp Logistics Ltd. 80,000 87,776 SembCorp Marine Ltd. 80,000 49,832 Singapore Airlines Ltd. 140,000 928,060 Singapore Exchange Ltd. 220,000 153,384 Singapore Land Ltd. 40,000 73,604 Singapore Press Holdings Ltd. 100,000 1,120,060 Singapore Technologies Engineering Ltd. 340,000 338,062 Singapore Telecommunications Ltd. 1,660,000 1,394,400 SMRT Corp. Ltd. 300,000 108,000 United Overseas Bank Ltd. 320,000 2,413,856 United Overseas Land Ltd. 120,000 120,696 Venture Corp. Ltd. 60,000 442,308 Wing Tai Holdings Ltd. 80,000 34,744 12,932,550 TOTAL COMMON STOCKS (Cost: $106,679,328) 102,234,247 Schedules of Investments 37 Schedule of Investments (Continued) iShares MSCI Pacific Ex-Japan Index Fund August 31, 2002 Security Shares Value ----------------------------------------------------------------- PREFERRED STOCKS - 2.17% AUSTRALIA - 2.12% News Corporation Ltd. 513,140 $ 2,227,592 2,227,592 NEW ZEALAND - 0.05% Fletcher Challenge Forests Ltd./1/ 396,380 46,337 46,337 TOTAL PREFERRED STOCKS (Cost: $2,919,007) 2,273,929 SHORT TERM INSTRUMENTS - 5.67% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 4,776,872 4,776,872 Dreyfus Money Market Fund 401,534 401,534 Goldman Sachs Financial Square Prime Obligation Fund 198,668 198,668 Providian Temp Cash Money Market Fund 581,532 581,532 TOTAL SHORT TERM INSTRUMENTS (Cost: $5,958,606) 5,958,606 TOTAL INVESTMENTS IN SECURITIES - 105.18% (Cost $115,556,941) 110,466,782 Other Assets, Less Liabilities - (5.18%) (5,437,969) ------------ NET ASSETS - 100.00% $105,028,813 ============ /1/ Non-income earning securities. See notes to financial statements. 38 2002 iShares Annual Report to Shareholders Schedule of Investments iShares MSCI Singapore Index Fund August 31, 2002 Security Shares Value ---------------------------------------------------------------- COMMON STOCKS - 99.58% United Overseas Bank Ltd. 1,760,000 $13,276,208 DBS Group Holdings Ltd. 1,936,000 13,165,574 Oversea-Chinese Banking Corp. Ltd. 1,584,000 9,776,131 Singapore Telecommunications Ltd. 8,448,000 7,096,320 Singapore Press Holdings Ltd. 352,000 3,942,611 Singapore Airlines Ltd. 528,000 3,500,112 Singapore Technologies Engineering Ltd. 3,344,000 3,324,939 Keppel Corp. Ltd. 1,232,000 3,111,909 City Developments Ltd. 880,000 3,017,344 Venture Corp. Ltd. 352,000 2,594,874 Capitaland Ltd. 2,816,000 2,333,338 Fraser & Neave Ltd. 528,000 2,323,358 Singapore Exchange Ltd. 2,640,000 1,840,608 SembCorp Industries Ltd. 2,112,000 1,460,448 SMRT Corp. Ltd. 4,048,000 1,457,280 Overseas Union Enterprise Ltd. 352,000 1,367,837 Neptune Orient Lines Ltd./1/ 2,464,000 1,070,115 NatSteel Ltd. 1,056,000 1,068,144 Chartered Semiconductor Manufacturing Ltd./1/ 880,000 1,056,088 Creative Technology Ltd. 123,200 1,006,778 SembCorp Marine Ltd. 1,584,000 986,674 Singapore Land Ltd. 528,000 971,573 United Overseas Land Ltd. 880,000 885,104 Haw Par Corp. Ltd. 352,000 864,970 Cycle & Carriage Ltd. 352,000 864,969 Allgreen Properties Ltd. 1,232,000 816,693 Keppel Land Ltd. 1,056,000 814,704 Parkway Holdings Ltd. 1,760,000 774,400 Wing Tai Holdings Ltd. 1,408,000 611,494 SembCorp Logistics Ltd. 528,000 579,322 GES International Ltd. 2,640,000 528,000 ST Assembly Test Services Ltd./1/ 528,000 485,813 Datacraft Asia Ltd. 528,000 393,360 Hotel Properties Ltd. 352,000 207,187 First Capital Corp. Ltd. 352,000 178,006 TOTAL COMMON STOCKS (Cost: $102,618,354) 87,752,285 TOTAL INVESTMENTS IN SECURITIES - 99.58% (Cost $102,618,354) 87,752,285 Other Assets, Less Liabilities - 0.42% 374,091 ----------- NET ASSETS - 100.00% $88,126,376 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 39 Schedule of Investments iSHARES MSCI SOUTH KOREA INDEX FUND August 31, 2002
SECURITY SHARES VALUE ---------------------------------------------------------------- COMMON STOCKS - 100.01% Samsung Electronics Co. Ltd. 85,540 $23,556,504 Kookmin Bank 186,559 8,723,005 SK Telecom Co. Ltd. 36,400 7,162,195 POSCO 60,060 5,396,630 Samsung SDI Co. Ltd. 50,050 3,976,684 Hyundai Motor Co. Ltd. 115,570 3,269,171 Korea Electric Power Corp. 174,720 3,059,908 Shinhan Financial Group Ltd. 216,580 3,045,220 LG Electronics Inc.(1) 75,356 2,814,996 Samsung Electro-Mechanics Co. Ltd. 56,420 2,699,072 KT Corp. 54,320 2,472,069 KT Freetel(1) 72,626 2,084,610 LG Chem Ltd. 51,870 1,877,237 Samsung Fire & Marine Insurance Co. Ltd. 27,300 1,873,830 Hana Bank 82,293 1,280,319 Shinsegae Department Store Co. Ltd. 7,280 1,241,649 Samsung Securities Co. Ltd.(1) 40,950 1,199,251 KT Corp. ADR 52,700 1,196,817 Kia Motors Corp.(1) 125,580 1,044,802 Hyundai Mobis Co. 43,680 1,038,651 LG Investments & Securities Co. Ltd. 63,700 911,552 Cheil Jedang Corp. 17,290 798,365 Samsung Corp. 110,110 776,848 Kookmin Credit Card Co. Ltd. 22,113 750,622 Humax Co. Ltd. 34,216 683,210 Hyundai Heavy Industries Co. Ltd.(1) 31,850 561,770 Samsung Heavy Industries Co. Ltd.(1) 134,680 518,237 Daishin Securities Co. Ltd. 30,030 509,682 Daeduck Electronics Co. Ltd. 52,821 496,591 Korea Exchange Bank(1) 98,280 491,420 LG Chem Investment Ltd. 66,246 485,016 Cheil Industries Inc. 34,580 458,880 S-Oil Corp. 27,520 448,764 Daewoo Securities Co. Ltd.(1) 72,800 419,738 Hyundai Securities Co. Ltd. 60,970 411,387 S1 Corp. 20,020 403,082 Pacific Corp. 3,640 387,637 Hyundai Department Store Co. Ltd. 13,650 379,876 LG Household & Health Care Ltd. 10,920 372,495 SK Global(1) 40,040 371,435 TriGem Computer Inc.(1) 40,237 368,241 Kumgang Korea Chemical Co. Ltd. 3,640 366,438 Cheil Communications Inc. 3,640 361,895 Hite Brewery Co. Ltd. 6,370 357,731 Korean Air Co. Ltd.(1) 27,300 356,595 Good Morning Securities Co. Ltd.(1) 78,260 325,554 NCsoft Corp.(1) 2,912 321,012 LG Engineering & Construction Co. Ltd. 26,390 300,797 Daelim Industrial Co. Ltd. 23,660 300,191 Hankuk Electric Glass Co. Ltd. 5,460 294,362 Dongwon Securities Co. Ltd. 37,310 239,328 LG Cable Ltd. 18,200 189,276 Hyosung Corp. 17,293 188,476 Serome Technology Inc.(1) 35,763 184,773 Hankook Tire Co. Ltd. 88,270 177,722 Nong Shim Co. Ltd. 2,730 176,708 Honam Petrochemical Corp. 8,190 173,755 Poongsan Corp. 15,470 167,320 Asiana Airlines(1) 61,789 166,046 Daum Communications Corp.(1) 6,097 161,055 YuHan Corp. 3,642 160,897 Samsung Fine Chemicals Co. Ltd. 10,920 157,629 Hanwha Chemical Corp.(1) 34,580 132,342 LG Electronics Investment Inc. 9,100 127,950 Hotel Shilla Co. Ltd. 22,750 123,408 Hyundai Merchant Marine Co. Ltd.(1) 40,950 108,341 Hanjin Shipping Co. Ltd. 22,750 108,266 Dong-A Pharmaceutical Co. Ltd. 5,607 92,832 Hanjin Heavy Industries & Construction Co. Ltd. 34,580 86,310 Korea Zinc Co. Ltd. 5,460 85,855 Hansol Paper Co. Ltd.(1) 13,650 80,064 Korea Technology & Banking Network Corp. 26,390 74,650 Doosan Corp.(1) 4,550 52,619 Haansoft Inc.(1) 30,030 44,972 Daou Technology Inc.(1) 25,480 44,624 Green Cross Corp. 1,820 42,701 TOTAL COMMON STOCKS (COST: $68,571,936) 96,349,962 TOTAL INVESTMENTS IN SECURITIES - 100.01% (COST $68,571,936) 96,349,962 OTHER ASSETS, LESS LIABILITIES - (0.01%) (13,938) ----------- NET ASSETS - 100.00% $96,336,024 ===========
(1) Non-income earning securities. SEE NOTES TO FINANCIAL STATEMENTS. 40 2002 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments iSHARES MSCI TAIWAN INDEX FUND August 31, 2002
SECURITY SHARES VALUE ------------------------------------------------------------------ COMMON STOCKS - 99.76% Taiwan Semiconductor Manufacturing Co. Ltd.(1) 14,490,080 $ 21,114,177 United Microelectronics Corp.(1) 15,134,047 12,418,360 Hon Hai Precision Industry Co. Ltd. 1,610,430 6,113,473 Nan Ya Plastic Corp. 6,118,597 5,610,278 Formosa Plastic Corp. 4,508,282 5,410,728 Asustek Computer Inc. 1,932,250 4,655,004 China Development Financial Holding Co.(1) 7,728,750 4,468,660 Chinatrust Financial Holding Co. Ltd.(1) 4,508,657 3,515,291 Cathay Financial Holdings Co. Ltd. 2,898,967 3,504,664 Fubon Financial Holding Co. Ltd. 3,864,000 3,430,153 Quanta Computer Inc. 1,288,063 2,858,600 China Steel Corp. 6,118,043 2,840,616 Formosa Chemicals & Fibre Corp. 2,898,041 2,665,741 Compal Electronics Inc. 2,576,400 2,430,069 Winbond Electronics Corp.(1) 3,864,280 2,279,412 Benq Corp. 1,288,560 2,182,406 Acer Inc. 2,128,117 2,150,178 United World Chinese Commercial Bank 2,898,320 2,048,163 Hua Nan Financial Holdings Co. Ltd. 3,130,488 1,855,713 Realtek Semiconductor Corp. 644,250 1,843,671 AU Optronics Corp.(1) 2,254,000 1,744,225 Via Technologies Inc. 966,200 1,650,539 Advanced Semiconductor Engineering Inc.(1) 2,898,357 1,650,400 First Commercial Bank(1) 2,576,050 1,549,617 CTB Financial Holding Co.(1) 2,898,534 1,498,147 Macronix International Co. Ltd.(1) 3,864,200 1,478,202 International Commercial Bank of China 2,627,724 1,473,275 SinoPac Holdings Co.(1) 3,075,393 1,347,084 Delta Electronics Inc. 966,957 1,338,407 Inventec Co. Ltd. 1,610,000 1,165,951 Chang Hwa Commercial Bank Ltd. 2,576,959 1,083,609 Ritek Corp. 2,254,625 1,073,161 Siliconware Precision Indsustries Co. Ltd.(1) 1,932,525 1,072,214 CMC Magnetics Corp. 2,576,400 1,064,566 Uni-President Enterprises Corp. 3,316,637 1,055,668 Far Eastern Textile Ltd. 3,043,109 1,053,025 Lite-On Technology Corp. 644,401 1,016,138 Pou Chen Corp.(1) 1,549,927 1,009,297 Accton Technology Corp.(1) 644,450 997,397 Tatung Co. Ltd.(1) 4,186,120 990,147 Mosel Vitelic Inc.(1) 3,542,080 941,245 Taishin Financial Holdings Co. Ltd.(1) 1,932,441 914,164 Micro-Star International Co. Ltd. 322,700 914,058 Ambit Microsystems Corp. 322,940 891,162 International Bank of Taipei 2,048,471 849,417 Synnex Technology International Corp. 644,675 849,024 Walsin Lihwa Corp.(1) 3,542,779 837,977 China Motor Co. Ltd. 644,274 827,802 Cheng Shin Rubber Industry Co. Ltd. 644,782 779,500 Yageo Corp.(1) 2,087,100 737,448 Yulon Motor Co. Ltd. 966,331 728,029 Gigabyte Technology Co. Ltd.(1) 322,250 710,465 Taiwan Glass Industrial Corp. 966,189 637,637 Kinpo Electronics Inc. 966,032 637,533 Teco Electric & Machinery Co. Ltd.(1) 1,932,092 623,437 Lite-On Electronics Inc. 644,208 620,787 Nien Hsing Textile Co. Ltd. 644,800 606,295 President Chain Store Corp. 358,776 591,935 Compeq Manufacturing Co. Ltd.(1) 644,200 581,275 Pacific Electric Wire & Cable Co. Ltd.(1) 3,542,440 579,286 Arima Computer Corp.(1) 966,600 508,068 Premier Image Technology Corp. 322,400 451,897 Asia Cement Corp. 1,288,740 427,134 Formosa Taffeta Co. Ltd. 1,005,285 406,576 Evergreen Marine Corp. Ltd. 966,980 385,437 Taiwan Cement Corp.(1) 1,288,537 383,796 Giant Manufacturing Co. Ltd. 322,915 382,839 Sampo Corp. 966,148 366,767 Systex Corp.(1) 644,520 348,186
SCHEDULES OF INVESTMENTS 41 Schedule of Investments (Continued) iSHARES MSCI TAIWAN INDEX FUND August 31, 2002
SECURITY SHARES VALUE ------------------------------------------------------------------ China Airlines(1) 1,009,898 $ 343,563 D-Link Corp. 322,585 325,929 Shihlin Electric & Engineering Corp. 644,080 308,451 Taiwan Styrene Monomer Corp.(1) 322,000 296,189 Cathay Real Estate Development Co. Ltd.(1) 1,288,000 283,966 Taiwan Secom Co. Ltd. 339,045 247,514 Picvue Electronics Ltd.(1) 677,040 233,292 Eternal Chemical Co. Ltd. 322,100 233,263 Phoenixtec Power Co. Ltd. 322,630 224,225 Microelectronics Technology Inc.(1) 322,420 224,079 Yang Ming Marine Transport Corp. 966,000 207,332 Continental Engineering Corp. 673,247 196,597 Far Eastern Department Stores Co. Ltd. 966,160 191,850 Tung Ho Steel Enterprise Corp.(1) 676,200 190,548 Aurora Corp.(1) 644,200 188,115 Prodisc Technology Inc.(1) 322,572 179,913 WUS Printed Circuit Co. Ltd.(1) 322,000 178,654 Taiwan Tea Corp.(1) 1,288,000 148,189 BES Engineering Corp.(1) 1,288,000 112,458 China Synthetic Rubber Corp.(1) 335,230 108,660 Pacific Construction Co. Ltd.(1) 1,288,400 57,563 TOTAL COMMON STOCKS (COST: $176,260,196) 141,705,952 TOTAL INVESTMENTS IN SECURITIES - 99.76% (COST $176,260,196) 141,705,952 OTHER ASSETS, LESS LIABILITIES - 0.24% 337,485 ------------ NET ASSETS - 100.00% $142,043,437 ============
(1) Non-income earning securities. SEE NOTES TO FINANCIAL STATEMENTS. 42 2002 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Assets and Liabilities iSHARES, INC. August 31, 2002
iSHARES MSCI ----------------------------------------------------------------------- Australia Brazil Canada Hong Kong Malaysia Index Fund Index Fund Index Fund Index Fund Index Fund ------------------------------------------------------------------------------------------------------------- ASSETS Investments at cost $83,477,611 $120,956,352 $87,369,877 $120,793,711 $67,028,200 ----------- ----------- ----------- ------------ ----------- Foreign currency, at cost $ 77,728 $ 951 $ 72,869 $ 117,004 $ 58 ----------- ----------- ----------- ------------ ----------- Investments in securities, at value (including securities on loan/1/) (Note 1) $82,480,972 $83,214,271 $73,724,866 $ 98,921,030 $93,381,082 Foreign currency, at value 78,422 996 73,099 117,004 - Cash 54,253 471,970 47,774 85,534 613,456 Receivables: Investment securities sold 888,217 1,894,916 117,961 3,673,660 813,482 Dividends and interest 327,559 539,850 107,893 397,997 15,654 ----------- ----------- ----------- ------------ ----------- Total Assets 83,829,423 86,122,003 74,071,593 103,195,225 94,823,674 ----------- ----------- ----------- ------------ ----------- LIABILITIES Payables: iShares redeemed - 811,860 - - - Investment securities purchased 906,937 1,344,591 126,364 3,554,578 1,448,046 Collateral for securities on loan (Note 5) 6,097,860 - 7,444,338 - - Advisory fees (Note 2) 77,903 155,649 66,598 105,474 93,310 Distribution fees 15,976 18,013 13,870 21,451 20,461 Miscellaneous - 4,100 - 11,600 - ----------- ----------- ----------- ------------ ----------- Total Liabilities 7,098,676 2,334,213 7,651,170 3,693,103 1,561,817 ----------- ----------- ----------- ------------ ----------- NET ASSETS $76,730,747 $83,787,790 $66,420,423 $ 99,502,122 $93,261,857 =========== =========== =========== ============ =========== NET ASSETS CONSIST OF: Paid-in capital $85,316,687 $188,750,035 $81,692,551 $132,159,809 $91,959,428 Undistributed net investment income 1,354,021 695,550 229,339 1,567,728 844,296 Accumulated net realized loss (8,947,172) (67,788,032) (1,856,569) (12,352,734) (25,894,691) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (992,789) (37,869,763) (13,644,898) (21,872,681) 26,352,824 ----------- ----------- ----------- ------------ ----------- NET ASSETS $76,730,747 $83,787,790 $66,420,423 $ 99,502,122 $93,261,857 =========== =========== =========== ============ =========== iShares outstanding 8,200,000 10,100,000 7,000,000 12,450,000 16,425,000 =========== =========== =========== ============ =========== Net asset value per iShare $ 9.36 $ 8.30 $ 9.49 $ 7.99 $ 5.68 =========== =========== =========== ============ ===========
/1/ Securities on loan with market values of $5,708,304, $-, $7,072,765, $- and $-, respectively. See Note 5. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 43 Statements of Assets and Liabilities (Continued) iSHARES, INC. August 31, 2002
iSHARES MSCI --------------------------------------------------------------------------------- Mexico Pacific ex-Japan Singapore South Korea Taiwan Index Fund Index Fund Index Fund Index Fund Index Fund ------------------------------------------------------------------------------------------------------------------------ ASSETS Investments at cost $ 94,231,985 $ 115,556,941 $ 102,618,354 $ 68,571,936 $ 176,260,196 ------------ ------------- ------------- ------------ ------------- Foreign currency, at cost $ 142,760 $ 88,808 $ 246,028 $ 2,559 $ 590,988 ------------ ------------- ------------- ------------ ------------- Investments in securities, at value (including securities on loan(1)) (Note 1) $ 70,941,052 $ 110,466,782 $ 87,752,285 $ 96,349,962 $ 141,705,952 Foreign currency, at value 142,623 89,528 246,717 2,557 585,697 Cash 25,681 135,051 84,206 201,202 75,683 Receivables: Investment securities sold -- 1,524,861 -- 2,294,678 -- Dividends and interest 33 399,678 241,268 21,959 209,101 ------------ ------------- ------------- ------------ ------------- Total Assets 71,109,389 112,615,900 88,324,476 98,870,358 142,576,433 ------------ ------------- ------------- ------------ ------------- LIABILITIES Payables: Investment securities purchased -- 1,540,341 -- 2,390,926 -- Collateral for securities on loan (Note 5) -- 5,958,606 -- -- -- Foreign taxes on stock dividends -- -- -- -- 308,675 Advisory fees (Note 2) 89,894 80,940 135,496 123,631 193,289 Distribution fees 15,871 -- 18,969 19,777 31,032 Custodian fees -- -- 7,513 -- -- Accrued expenses -- -- 36,122 -- -- Miscellaneous 9,800 7,200 -- -- -- ------------ ------------- ------------- ------------ ------------- Total Liabilities 115,565 7,587,087 198,100 2,534,334 532,996 ------------ ------------- ------------- ------------ ------------- NET ASSETS $ 70,993,824 $ 105,028,813 $ 88,126,376 $ 96,336,024 $ 142,043,437 ============ ============= ============= ============ ============= NET ASSETS CONSIST OF: Paid-in capital $ 96,588,220 $ 109,415,356 $ 112,984,525 $ 72,066,753 $ 201,255,718 Undistributed net investment income (accumulated net investment loss) 1,806,911 1,225,006 621,111 (8,651) (9,444) Undistributed net realized gain (loss) (4,110,055) (524,882) (10,613,845) (3,500,118) (24,641,083) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (23,291,252) (5,086,667) (14,865,415) 27,778,040 (34,561,754) ------------ ------------- ------------- ------------ ------------- NET ASSETS $ 70,993,824 $ 105,028,813 $ 88,126,376 $ 96,336,024 $ 142,043,437 ============ ============= ============= ============ ============= iShares outstanding 5,200,000 2,000,000 17,600,000 4,550,000 16,100,000 ============ ============= ============= ============ ============= Net asset value per iShare $ 13.65 $ 52.51 $ 5.01 $ 21.17 $ 8.82 ============ ============= ============= ============ =============
/1/ Securities on loan with market values of $-, $5,602,631, $-, $- and $-, respectively. See Note 5. SEE NOTES TO FINANCIAL STATEMENTS. 44 2002 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Operations iSHARES, INC. Year Ended August 31, 2002
iSHARES MSCI ------------------------------------------------------------------------------ Australia Brazil Canada Hong Kong Malaysia Index Fund Index Fund Index Fund Index Fund Index Fund -------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $ 2,220,301 $ 4,101,193 $ 547,219 $ 2,584,871 $ 1,949,480 Interest 2,143 1,331 863 641 2,555 Securities lending income 5,100 - 16,333 12,077 - ------------ ------------ ------------ ------------ ------------ Total investment income 2,227,544 4,102,524 564,415 2,597,589 1,952,035 ------------ ------------ ------------ ------------ ------------ EXPENSES (NOTE 2) Advisory fees 327,154 637,828 181,343 380,665 394,527 Administration fees 29,879 8,478 13,064 27,994 37,136 Distribution fees 168,339 228,648 91,773 191,230 205,689 Custodian fees and expenses 11,214 14,318 4,012 9,129 19,314 Transfer agent fees 4,907 2,103 4,078 10,638 9,327 Directors' fees 2,774 783 1,214 2,596 3,456 Professional fees 13,903 8,067 9,380 13,349 15,972 Federal and state registration fees 431 2,524 - 970 - Insurance 1,379 478 499 1,658 1,779 Printing 2,358 665 1,032 2,207 2,938 AMEX listing fee 183 53 80 171 228 Interest expense 1,186 133 207 442 589 Miscellaneous expenses 1,911 1,370 1,677 1,484 159 ------------ ------------ ------------ ------------ ------------ Total expenses 565,618 905,448 308,359 642,533 691,114 ------------ ------------ ------------ ------------ ------------ Net investment income 1,661,926 3,197,076 256,056 1,955,056 1,260,921 ------------ ------------ ------------ ------------ ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (855,026) (65,342,395) (330,199) (3,130,363) (2,071,231) In-kind redemptions 841,957 - 472,940 3,991,252 - Foreign currency transactions (15,683) (2,310,667) (2,717) (170) (2,210) ------------ ------------ ------------ ------------ ------------ Net realized gain (loss) (28,752) (67,653,062) 140,024 860,719 (2,073,441) ------------ ------------ ------------ ------------ ------------ Net change in unrealized appreciation (depreciation) on: Investments (1,974,714) (30,639,837) (8,820,582) (18,574,348) 6,091,360 Translation of assets and liabilities in foreign currencies 11,827 (120,165) 423 4 (58) ------------ ------------ ------------ ------------ ------------ Net change in unrealized appreciation (depreciation) (1,962,887) (30,760,002) (8,820,159) (18,574,344) 6,091,302 ------------ ------------ ------------ ------------ ------------ Net realized and unrealized gain (loss) (1,991,639) (98,413,064) (8,680,135) (17,713,625) 4,017,861 ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (329,713) $(95,215,988) $ (8,424,079) $(15,758,569) $ 5,278,782 ============ ============ ============ ============ ============
/1/ Net of foreign withholding tax of $41,903, $348,300, $96,492, $- and $-, respectively. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 45 Statements of Operations (Continued) iSHARES, INC. Year Ended August 31, 2002
iSHARES MSCI ------------------------------------------------------------------------ Mexico Pacific ex-Japan Singapore South Korea Taiwan Index Fund Index Fund/2/ Index Fund Index Fund Index Fund -------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $ 2,640,784 $ 1,595,430 $ 1,845,248 $ 800,622 $ 1,556,248 Interest 252 870 330 1,362 5,414 Securities lending income 101,605 378 52,577 - - ------------ ------------ ------------ ------------ ------------ Total investment income 2,742,641 1,596,678 1,898,155 801,984 1,561,662 ------------ ------------ ------------ ------------ ------------ EXPENSES (NOTE 2) Advisory fees 496,588 205,239 252,406 520,694 914,919 Administration fees 20,157 7,173 96,079 24,489 59,754 Distribution fees 236,900 - 207,777 202,505 371,701 Stock dividend tax expense - - - 8,048 508,725 Custodian fees and expenses 19,135 2,178 59,499 28,262 80,718 Transfer agent fees 5,033 1,364 12,088 2,258 2,068 Directors' fees 1,875 650 11,625 2,259 5,528 Professional fees 11,346 4,871 31,204 12,215 21,637 Federal and state registration fees - 5,952 1,254 4,644 5,092 Insurance 1,242 6,861 5,854 578 2,534 Printing 1,594 552 16,867 1,920 4,698 AMEX listing fee 124 43 1,278 149 364 Interest expense 522 111 1,281 385 942 Miscellaneous expenses 1,467 1,151 2,426 1,564 1,981 ------------ ------------ ------------ ------------ ------------ Total expenses 795,983 236,145 699,638 809,970 1,980,661 ------------ ------------ ------------ ------------ ------------ Net investment income (loss) 1,946,658 1,360,533 1,198,517 (7,986) (418,999) ------------ ------------ ------------ ------------ ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (3,144,990) (524,882) (5,528,850) 178,423 (8,154,107) In-kind redemptions 201,020 707,836 2,719,899 - - Foreign currency transactions (72,436) (527) 21,870 (12,880) (7,827) ------------ ------------ ------------ ------------ ------------ Net realized gain (loss) (3,016,406) 182,427 (2,787,081) 165,543 (8,161,934) ------------ ------------ ------------ ------------ ------------ Net change in unrealized appreciation (depreciation) on: Investments (21,824,037) (5,090,159) (3,942,037) 30,105,298 2,237,980 Translation of assets and liabilities in foreign currencies 652 3,492 (7,671) (18) (9,418) ------------ ------------ ------------ ------------ ------------ Net change in unrealized appreciation (depreciation) (21,823,385) (5,086,667) (3,949,708) 30,105,280 2,228,562 ------------ ------------ ------------ ------------ ------------ Net realized and unrealized gain (loss) (24,839,791) (4,904,240) (6,736,789) 30,270,823 (5,933,372) ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(22,893,133) $ (3,543,707) $ (5,538,272) $ 30,262,837 $ (6,352,371) ============ ============ ============ ============ ============
/1/ Net of foreign withholding tax of $18,033, $50,766, $-, $165,141 and $897,539, respectively. /2/ For the period October 25, 2001 (commencement of operations) to August 31, 2002. SEE NOTES TO FINANCIAL STATEMENTS. 46 2002 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Changes in Net Assets iSHARES, INC.
iSHARES MSCI iSHARES MSCI iSHARES MSCI AUSTRALIA BRAZIL CANADA INDEX FUND INDEX FUND INDEX FUND -------------------------------- --------------------------------- -------------------------------- For the For the For the For the For the For the year ended year ended year ended year ended year ended year ended August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 1,661,926 $ 1,387,393 $ 3,197,076 $ 729,605 $ 256,056 $ 91,912 Net realized gain (loss) (28,752) (4,317,217) (67,653,062) (1,935,015) 140,024 (795,189) Net change in unrealized appreciation (depreciation) (1,962,887) 188,166 (30,760,002) (6,758,566) (8,820,159) (8,092,003) ------------- ------------- ------------- ------------- ------------- ------------- Net decrease in net assets resulting from operations (329,713) (2,741,658) (95,215,988) (7,963,976) (8,424,079) (8,795,280) ------------- ------------- ------------- ------------- ------------- ------------- Undistributed net investment income included in the price of capital shares issued or redeemed 3,111 89,256 38,281 124,481 (670) 92,157 ------------- ------------- ------------- ------------- ------------- ------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (256,001) (1,236,366) - (694,519) (24,000) (49,958) In excess of net realized gain - - - - - (437,259) Return of capital - (140,041) - (107,731) - (94,894) ------------- ------------- ------------- ------------- ------------- ------------- Total distributions to iShareholders (256,001) (1,376,407) - (802,250) (24,000) (582,111) ------------- ------------- ------------- ------------- ------------- ------------- iSHARES TRANSACTIONS: iShares sold 23,805,539 13,148,099 235,842,533 4,362,129 49,188,050 16,145,798 iShares redeemed (3,803,959) (13,382,010) (70,880,598) - (3,207,637) - ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from iShares transactions 20,001,580 (233,911) 164,961,935 4,362,129 45,980,413 16,145,798 ------------- ------------- ------------- ------------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS 19,418,977 (4,262,720) 69,784,228 (4,279,616) 37,531,664 6,860,564 NET ASSETS: Beginning of year 57,311,770 61,574,490 14,003,562 18,283,178 28,888,759 22,028,195 ------------- ------------- ------------- ------------- ------------- ------------- End of year $ 76,730,747 $ 57,311,770 $ 83,787,790 $ 14,003,562 $ 66,420,423 $ 28,888,759 ============= ============= ============= ============= ============= ============= Undistributed net investment income (accumulated net investment loss) included in net assets at end of year $ 1,354,021 $ (49,100) $ 695,550 $ (190,859) $ 229,339 $ - ============= ============= ============= ============= ============= ============= iSHARES ISSUED AND REDEEMED: iShares sold 2,400,000 1,400,000 17,900,000 300,000 4,600,000 1,400,000 iShares redeemed (400,030) (1,400,000) (9,050,000) - (300,030) - ------------- ------------- ------------- ------------- ------------- ------------- Net increase in iShares outstanding 1,999,970 - 8,850,000 300,000 4,299,970 1,400,000 ============= ============= ============= ============= ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 47 Statements of Changes in Net Assets (Continued) iSHARES, INC.
iSHARES MSCI iSHARES MSCI iSHARES MSCI HONG KONG MALAYSIA MEXICO INDEX FUND INDEX FUND INDEX FUND -------------------------------- -------------------------------- -------------------------------- For the For the For the For the For the For the year ended year ended year ended year ended year ended year ended August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 -------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 1,955,056 $ 1,379,407 $ 1,260,921 $ 1,010,369 $ 1,946,658 $ 435,614 Net realized gain (loss) 860,719 (3,303,349) (2,073,441) (13,093,046) (3,016,406) 3,261,577 Net change in unrealized appreciation (depreciation) (18,574,344) (22,064,345) 6,091,302 (3,810,341) (21,823,385) (6,058,723) ----------- ----------- ----------- ----------- ------------ ----------- Net increase (decrease) in net assets resulting from operations (15,758,569) (23,988,287) 5,278,782 (15,893,018) (22,893,133) (2,361,532) ----------- ----------- ----------- ----------- ------------ ----------- Undistributed net investment income included in the price of capital shares issued or redeemed 9,753 13,700 (49,579) (142,105) (39,128) 85,413 ----------- ----------- ----------- ----------- ------------ ----------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (387,060) (1,363,022) (411,751) (1,010,369) (161,002) (430,999) In excess of net investment income - - - (4,201) - - From net realized gain - - - - - (84,506) Return of capital - (34,163) - (3,031) - - ----------- ----------- ----------- ----------- ------------ ----------- Total distributions to iShareholders (387,060) (1,397,185) (411,751) (1,017,601) (161,002) (515,505) ----------- ----------- ----------- ----------- ------------ ----------- iSHARES TRANSACTIONS: iShares sold 77,492,553 2,395,228 27,772,630 13,044,226 201,695,400 24,022,185 iShares redeemed (14,800,647) (3,556,433) (20,205,691) (14,319,891) (153,663,820) (15,301,836) ----------- ----------- ----------- ----------- ------------ ----------- Net increase (decrease) in net assets from iShares transactions 62,691,906 (1,161,205) 7,566,939 (1,275,665) 48,031,580 8,720,349 ----------- ----------- ----------- ----------- ------------ ----------- INCREASE (DECREASE) IN NET ASSETS 46,556,030 (26,532,977) 12,384,391 (18,328,389) 24,938,317 5,928,725 NET ASSETS: Beginning of year 52,946,092 79,479,069 80,877,466 99,205,855 46,055,507 40,126,782 ----------- ----------- ----------- ----------- ------------ ----------- End of year $99,502,122 $52,946,092 $93,261,857 $80,877,466 $ 70,993,824 $46,055,507 =========== =========== =========== =========== ============ =========== Undistributed net investment income (accumulated net investment loss) included in net assets at end of year $ 1,567,728 $ (98) $ 844,296 $ (2,667) $ 1,806,911 $ 93,695 =========== =========== =========== =========== ============ =========== iSHARES ISSUED AND REDEEMED: iShares sold 8,100,000 225,000 4,575,000 2,550,000 12,200,000 1,600,000 iShares redeemed (1,576,000) (300,000) (3,975,030) (3,375,000) (10,000,030) (1,000,000) ----------- ----------- ----------- ----------- ------------ ----------- Net increase (decrease) in iShares outstanding 6,524,000 (75,000) 599,970 (825,000) 2,199,970 600,000 =========== =========== =========== =========== ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS. 48 2002 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Changes in Net Assets (Continued) iSHARES, INC.
iSHARES MSCI iSHARES MSCI iSHARES MSCI PACIFIC EX-JAPAN SINGAPORE SOUTH KOREA INDEX FUND INDEX FUND INDEX FUND ------------------- ---------------------------------- ----------------------------------- For the period For the For the For the For the October 25, 2001/1/ year ended year ended year ended year ended to August 31, 2002 August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001 -------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss) $ 1,360,533 $ 1,198,517 $ 756,108 $ (7,986) $ 123,192 Net realized gain (loss) 182,427 (2,787,081) (1,508,642) 165,543 (2,900,366) Net change in unrealized appreciation (depreciation) (5,086,667) (3,949,708) (20,518,141) 30,105,280 (1,648,141) -------------- ------------- ------------- ------------ ------------- Net increase (decrease) in net assets resulting from operations (3,543,707) (5,538,272) (21,270,675) 30,262,837 (4,425,315) -------------- ------------- ------------- ------------ ------------- Undistributed net investment income included in the price of capital shares issued or redeemed 2,522 17,460 255,605 - 196,369 -------------- ------------- ------------- ------------ ------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (135,000) (596,000) (748,996) - (99,405) In excess of net realized gain - - (632,262) - - Return of capital - - (255,146) - (196,995) -------------- ------------- ------------- ------------ ------------- Total distributions to iShareholders (135,000) (596,000) (1,636,404) - (296,400) -------------- ------------- ------------- ------------ ------------- iSHARES TRANSACTIONS: iShares sold 114,332,732 31,258,149 19,756,633 38,694,565 28,671,126 iShares redeemed (5,627,734) (10,718,594) (12,120,688) (10,388,731) - -------------- ------------- ------------- ------------ ------------- Net increase in net assets from iShares transactions 108,704,998 20,539,555 7,635,945 28,305,834 28,671,126 -------------- ------------- ------------- ------------ ------------- INCREASE (DECREASE) IN NET ASSETS 105,028,813 14,422,743 (15,015,529) 58,568,671 24,145,780 NET ASSETS: Beginning of period - 73,703,633 88,719,162 37,767,353 13,621,573 -------------- ------------- ------------- ------------ ------------- End of period $ 105,028,813 $ 88,126,376 $ 73,703,633 $ 96,336,024 $ 37,767,353 ============== ============= ============= ============ ============= Undistributed net investment income (accumulated net investment loss) included in net assets at end of period $ 1,225,006 $ 621,111 $ (3,575) $ (8,651) $ (41,734) ============== ============= ============= ============ ============= iSHARES ISSUED AND REDEEMED: iShares sold 2,100,000 5,700,000 3,900,000 2,150,000 2,100,000 iShares redeemed (100,000) (1,900,030) (1,800,000) (450,000) - -------------- ------------- ------------- ------------ ------------- Net increase in iShares outstanding 2,000,000 3,799,970 2,100,000 1,700,000 2,100,000 ============== ============= ============= ============ =============
/1/ Commencement of operations. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 49 Statements of Changes in Net Assets (Continued) iShares, Inc.
iShares MSCI Taiwan Index Fund -------------------------------- For the For the year ended year ended August 31, 2002 August 31, 2001 -------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment loss $ (418,999) $ (220,980) Net realized loss (8,161,934) (15,112,187) Net change in unrealized appreciation (depreciation) 2,228,562 (33,745,530) ------------ ------------ Net decrease in net assets resulting from operations (6,352,371) (49,078,697) ------------ ------------ Undistributed net investment income included in the price of capital shares issued or redeemed 4,467 223,684 ------------ ------------ iSHARES TRANSACTIONS: iShares sold 37,605,113 116,973,966 ------------ ------------ Net increase in net assets from iShares transactions 37,605,113 116,973,966 ------------ ------------ INCREASE IN NET ASSETS 31,257,209 68,118,953 NET ASSETS: Beginning of year 110,786,228 42,667,275 ------------ ------------ End of year $142,043,437 $110,786,228 ============ ============ Accumulated net investment loss included in net assets at end of year $ (9,444) $ (11,996) ============ ============ iSHARES ISSUED AND REDEEMED: iShares sold 3,800,000 9,700,000 ------------ ------------ Net increase in iShares outstanding 3,800,000 9,700,000 ============ ============
See notes to financial statements. 50 2002 iShares Annual Report to Shareholders Financial Highlights iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Australia Index Fund ------------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 9.24 $ 9.93 $ 9.99 $ 7.75 $ 10.35 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(1) 0.23 0.24 0.23 0.20 0.23 Net realized and unrealized gain (loss) (0.07) (0.71) (0.04) 2.29 (2.60) ------- ------- ------- ------- ------- Total from investment operations 0.16 (0.47) 0.19 2.49 (2.37) ------- ------- ------- ------- ------- LESS DISTRIBUTIONS FROM: Net investment income (0.04) (0.20) (0.22) (0.19) (0.23) In excess of net investment income -- -- (0.01) (0.00)(3) (0.00)(3) Return of capital -- (0.02) (0.02) (0.06) -- ------- ------- ------- ------- ------- Total distributions (0.04) (0.22) (0.25) (0.25) (0.23) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF YEAR $ 9.36 $ 9.24 $ 9.93 $ 9.99 $ 7.75 ======= ======= ======= ======= ======= TOTAL RETURN 1.74% (4.77) % 1.84% 32.09% (23.11)% ======= ======= ======= ======= ======= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $76,731 $57,312 $61,574 $53,957 $34,099 Ratio of expenses to average net assets 0.84% 0.84% 0.95% 1.00% 1.05% Ratio of net investment income to average net assets 2.47% 2.54% 2.22% 2.03% 2.38% Portfolio turnover rate(2) 5% 23% 36% 14% 1%
(1) Based on average shares outstanding throughout the period. (2) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3) Rounds to less than $0.01. See notes to financial statements. Financial Highlights 51 Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Brazil Index Fund -------------------------------------------------- Period from Jul. 10, 2000(7) Year ended Year ended to Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 ----------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.20 $ 19.25 $ 20.22 ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(3) 0.38 0.68 0.02 Net realized and unrealized loss (3.28) (8.09) (0.63) ------- ------- ------- Total from investment operations (2.90) (7.41) (0.61) ------- ------- ------- LESS DISTRIBUTIONS FROM: Net investment income -- (0.56) (0.02) In excess of net realized gain -- -- (0.34) Return of capital -- (0.08) -- ------- ------- ------- Total distributions -- (0.64) (0.36) ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.30 $ 11.20 $ 19.25 ======= ======= ======= TOTAL RETURN (25.89)% (38.52)% (2.97)%(5) ======= ======= ======= RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $83,788 $14,004 $18,283 Ratio of expenses to average net assets(6) 0.99% 0.99% 0.99%(1) Ratio of net investment income to average net assets(6) 3.50% 4.44% 0.77%(2) Portfolio turnover rate(4) 103% 43% 64%
(1) Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the period ended August 31, 2000 was 1.40%. (2) Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the period ended August 31, 2000 was 0.37%. (3) Based on average shares outstanding throughout the period. (4) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (5) Not annualized. (6) Annualized for periods of less than one year. (7) Commencement of operations. See notes to financial statements. 52 2002 iShares Annual Report to Shareholders Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Canada Index Fund ------------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 10.70 $ 16.94 $ 13.22 $ 9.90 $ 13.43 ------- ------- ------- ------ ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(3) 0.07 0.05 0.70 0.07 0.07 Net realized and unrealized gain (loss) (1.27) (5.92) 8.08 3.87 (2.89) ------- ------- ------- ------ ------- Total from investment operations (1.20) (5.87) 8.78 3.94 (2.82) ------- ------- ------- ------ ------- LESS DISTRIBUTIONS FROM: Net investment income (0.01) (0.02) (0.52) (0.08) (0.13) In excess of net investment income -- -- (0.03) (0.01) (0.00)(5) Net realized gain -- -- (4.08) (0.53) (0.58) In excess of net realized gain -- (0.31) (0.31) -- -- Return of capital -- (0.04) (0.12) -- -- ------- ------- ------- ------ ------- Total distributions (0.01) (0.37) (5.06) (0.62) (0.71) ------- ------- ------- ------ ------- NET ASSET VALUE, END OF YEAR $ 9.49 $ 10.70 $ 16.94 $13.22 $ 9.90 ======= ======= ======= ====== ======= TOTAL RETURN (11.23)% (34.95)% 67.21% 39.71% (21.69)% ======= ======= ======= ====== ======= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $66,420 $28,889 $22,028 $9,253 $ 6,932 Ratio of expenses to average net assets 0.84% 0.84% 1.17%(1) 1.23% 1.14% Ratio of net investment income to average net assets 0.70% 0.44% 4.07%(2) 0.53% 0.46% Portfolio turnover rate(4) 5% 63% 64% 12% 4%
(1) Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 1.19%. (2) Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 4.05%. (3) Based on average shares outstanding throughout the period. (4) Excludes portfolio securities received or delivered as a result of processing captial share transactions in Creation Units. (5) Rounds to less than $0.01. See notes to financial statements. Financial Highlights 53 Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Hong Kong Index Fund ---------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 8.93 $ 13.24 $ 11.83 $ 6.41 $ 14.73 ------ ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(1) 0.23 0.23 0.33 0.29 0.35 Net realized and unrealized gain (loss) (1.11) (4.30) 1.42 5.49 (8.27) ------ ------- ------- ------- ------- Total from investment operations (0.88) (4.07) 1.75 5.78 (7.92) ------ ------- ------- ------- ------- LESS DISTRIBUTIONS FROM: Net investment income (0.06) (0.23) (0.32) (0.31) (0.28) In excess of net investment income -- -- -- (0.05) (0.00)(3) Return of capital -- (0.01) (0.02) -- (0.12) ------ ------- ------- ------- ------- Total distributions (0.06) (0.24) (0.34) (0.36) (0.40) ------ ------- ------- ------- ------- NET ASSET VALUE, END OF YEAR $ 7.99 $ 8.93 $ 13.24 $ 11.83 $ 6.41 ====== ======= ======= ======= ======= TOTAL RETURN (9.94)% (30.88)% 14.73% 90.51% (54.22)% ====== ======= ======= ======= ======= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $9,502 $52,946 $79,479 $77,200 $49,973 Ratio of expenses to average net assets 0.84% 0.84% 0.94% 1.01% 1.09% Ratio of net investment income to average net assets 2.56% 2.11% 2.57% 2.84% 3.76% Portfolio turnover rate(2) 15% 43% 21% 43% 22%
(1) Based on average shares outstanding throughout the period. (2) Excludes portfolio securities recevied or delivered as a result of processing capital share transactions in Creation Units. (3) Rounds to less than $0.01. See notes to financial statements. 54 2002 iShares Annual Report to Shareholders Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Malaysia Index Fund ------------------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ---------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 5.11 $ 5.96 $ 5.59 $ 2.11 $ 8.23 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(1) 0.08 0.06 0.05 0.01 0.06 Net realized and unrealized gain (loss) 0.52 (0.85) 0.37 3.67 (6.10) ------- ------- ------- ------- ------- Total from investment operations 0.60 (0.79) 0.42 3.68 (6.04) ------- ------- ------- ------- ------- LESS DISTRIBUTIONS FROM: Net investment income (0.03) (0.06) (0.05) (0.01) (0.05) In excess of net investment income -- (0.00)(3) (0.00)(3) -- -- Return of capital -- (0.00)(3) (0.00)(3) (0.19) (0.03) ------- ------- ------- ------- ------- Total distributions (0.03) (0.06) (0.05) (0.20) (0.08) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF YEAR $ 5.68 $ 5.11 $ 5.96 $ 5.59 $ 2.11 ======= ======= ======= ======= ======= TOTAL RETURN 11.82% (13.22)% 7.57% 185.81% (73.57)% ======= ======= ======= ======= ======= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $93,262 $80,877 $99,206 $95,251 $35,867 Ratio of expenses to average net assets 0.84% 0.84% 0.96% 1.43% 1.09% Ratio of net investment income to average net assets 1.53% 1.19% 0.81% 0.33% 1.40% Portfolio turnover rate(2) 37% 37% 18% 7% 2%
(1) Based on average shares outstanding throughout the period. (2) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creations Units. (3) Rounds to less than $0.01. See notes to financial statements. Financial Highlights 55 Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Mexico Index Fund ------------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 15.35 $ 16.72 $ 13.39 $ 8.11 $ 15.11 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(3) 0.32 0.17 0.06 0.06 0.09 Net realized and unrealized gain (loss) (1.95) (1.36) 3.69 5.36 (6.71) ------- ------- ------- ------- ------- Total from investment operations (1.63) (1.19) 3.75 5.42 (6.62) ------- ------- ------- ------- ------- LESS DISTRIBUTIONS FROM: Net investment income (0.07) (0.15) -- (0.06) (0.09) In excess of net investment income -- -- -- (0.01) -- Net realized gain -- (0.03) (0.42) -- (0.29) In excess of net realized gain -- -- -- (0.01) -- Return of capital -- -- -- (0.06) -- ------- ------- ------- ------- ------- Total distributions (0.07) (0.18) (0.42) (0.14) (0.38) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF YEAR $ 13.65 $ 15.35 $ 16.72 $ 13.39 $ 8.11 ======= ======= ======= ======= ======= TOTAL RETURN (10.67)% (7.02) % 28.20% 66.92% (44.18)% ======= ======= ======= ======= ======= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $70,994 $46,056 $40,127 $21,430 $ 7,296 Ratio of expenses to average net assets 0.84% 0.84% 1.04%(1) 1.26% 1.34% Ratio of net investment income to average net assets 2.05% 1.12% 0.35%(2) 0.52% 0.60% Portfolio turnover rate(4) 8% 34% 24% 18% 14%
(1) Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 1.04%. (2) Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 0.35%. (3) Based on average shares outstanding throughout the period. (4) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. See notes to financial statements. 56 2002 iShares Annual Report to Shareholders Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Pacific Ex-Japan Index Fund ---------------------------------------- Period from Oct. 25, 2001(5) to Aug. 31, 2002 -------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 50.03 -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(1) 1.35 Net realized and unrealized gain 1.40 -------- Total from investment operations 2.75 -------- LESS DISTRIBUTIONS FROM: Net investment income (0.27) -------- Total distributions (0.27) -------- NET ASSET VALUE, END OF PERIOD $ 52.51 ======== TOTAL RETURN(3) 5.51% ======== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $105,029 Ratio of expenses to average net assets(4) 0.50% Ratio of net investment income to average net assets(4) 2.87% Portfolio turnover rate(2) 5%
(1) Based on average shares outstanding throughout the period. (2) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3) Not annualized. (4) Annualized for periods of less than one year. (5) Commencement of operations. See notes to financial statements. Financial Highlights 57 Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Singapore Index Fund ----------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 -------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 5.34 $ 7.58 $ 7.93 $ 3.30 $ 8.66 ------- ------- ------- -------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(1) 0.07 0.07 0.13 0.05 0.07 Net realized and unrealized gain (loss) (0.36) (2.16) (0.21) 4.70 (5.37) ------- ------- ------- -------- ------- Total from investment operations (0.29) (2.09) (0.08) 4.75 (5.30) ------- ------- ------- -------- ------- LESS DISTRIBUTIONS FROM: Net investment income (0.04) (0.07) (0.11) (0.05) (0.04) In excess of net investment income -- -- -- (0.06) (0.01) Net realized gain -- -- (0.14) -- -- In excess of net realized gain -- (0.06) -- -- -- Return of capital -- (0.02) (0.02) (0.01) (0.01) ------- ------- ------- -------- ------- Total distributions (0.04) (0.15) (0.27) (0.12) (0.06) ------- ------- ------- -------- ------- NET ASSET VALUE, END OF YEAR $ 5.01 $ 5.34 $ 7.58 $ 7.93 $ 3.30 ======= ======= ======= ======== ======= TOTAL RETURN (5.42) % (27.89) % (1.29) 144.52% (61.29)% ======= ======= ======= ======== ======= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $88,126 $73,704 $88,719 $113,438 $47,248 Ratio of expenses to average net assets 0.84% 0.84% 0.94% 0.97% 1.08% Ratio of net investment income to average net assets 1.44% 1.15% 1.60% 0.76% 1.17% Portfolio turnover rate(2) 9% 32% 52% 25% 67%
(1) Based on average shares outstanding throughout the period. (2) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. See notes to financial statements. 58 2002 iShares Annual Report to Shareholders Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI South Korea Index Fund ------------------------------------------------ Period from May 9, 2000(8) Year ended Year ended to Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 ------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.25 $ 18.16 $ 20.36 ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)(3) (0.00)(5) 0.09 (0.04) Net realized and unrealized gain (loss) 7.92 (4.90) (2.16) ------- ------- ------- Total from investment operations 7.92 (4.81) (2.20) ------- ------- ------- LESS DISTRIBUTIONS FROM: Net investment income -- (0.03) -- Return of capital -- (0.07) -- ------- ------- ------- Total distributions -- (0.10) -- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 21.17 $ 13.25 $ 18.16 ======= ======= ======= TOTAL RETURN 59.77% (26.49)% (10.81)%(6) ======= ======= ======= RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $96,336 $37,767 $13,622 Ratio of expenses to average net assets(7) 1.00% 1.01% 0.99%(1) Ratio of expenses to average net assets exclusive of foreign taxes on stock dividends(7) 0.99% 0.99% 0.99% Ratio of net investment income (loss) to average net assets(7) (0.01)% 0.64% (0.63)%(2) Portfolio turnover rate(4) 25% 39% 55%
(1) Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the period ended August 31, 2000 was 1.38%. (2) Ratio of net investment loss to average net assets prior to waived fees and reimbursed expenses for the period ended August 31, 2000 was (1.02)%. (3) Based on average shares outstanding throughout the period. (4) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (5) Rounds to less than $0.01. (6) Not annualized. (7) Annualized for periods of less than one year. (8) Commencement of operations. See notes to financial statements. Financial Highlights 59 Financial Highlights (Continued) iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Taiwan Index Fund ---------------------------------------------------- Period from Jun. 20, 2000(7) Year ended Year ended to Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 -------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.01 $ 16.41 $ 19.59 -------- -------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment loss(3) (0.03) (0.03) (0.01) Net realized and unrealized gain (loss) (0.16) (7.37) 2.31 -------- -------- ------- Total from investment operations (0.19) (7.40) (2.32) -------- -------- ------- LESS DISTRIBUTIONS FROM: Net investment income -- -- (0.32) In excess of net realized gain -- -- (0.10) Return of capital -- -- (0.44) -------- -------- ------- Total distributions -- -- (0.86) -------- -------- ------- NET ASSET VALUE, END OF PERIOD $ 8.82 $ 9.01 $ 16.41 ======== ======== ======= TOTAL RETURN (2.11)% (45.09)% (12.10)%(5) ======== ======== ======= RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $142,043 $110,786 $42,667 Ratio of expenses to average net assets(6) 1.33% 1.60% 1.56%(1) Ratio of expenses to average net assets exclusive of foreign taxes on stock dividends(6) 0.99% 0.99% 0.99% Ratio of net investment loss to average net assets(6) (0.28)% (0.23)% (0.28)%(2) Portfolio turnover rate(4) 11% 30% 52%
(1) Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the period ended August 31, 2000 was 2.16%. (2) Ratio of net investment loss to average net assets prior to waived fees and reimbursed expenses for the period ended August 31, 2000 was (0.89)%. (3) Based on average shares outstanding throughout the period. (4) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (5) Not annualized. (6) Annualized for periods of less than one year. (7) Commencement of operations. See notes to financial statements. 60 2002 iShares Annual Report to Shareholders Notes to the Financial Statements iShares, Inc. 1. SIGNIFICANT ACCOUNTING POLICIES iShares, Inc. (the "Company") is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company was incorporated under the laws of the State of Maryland on September 1, 1994. As of August 31, 2002, the Company offered 22 investment portfolios or funds. These financial statements relate only to the iShares MSCI Australia, iShares MSCI Brazil, iShares MSCI Canada, iShares MSCI Hong Kong, iShares MSCI Malaysia, iShares MSCI Mexico, iShares MSCI Pacific ex-Japan, iShares MSCI Singapore, iShares MSCI South Korea and iShares MSCI Taiwan Index Funds (each a "Fund", collectively the "Funds"). The investment objective of each Fund is to seek investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in a particular market, as measured by a particular equity securities index compiled by Morgan Stanley Capital International Inc. ("MSCI"). The investment advisor utilizes a "passive" or index approach to achieve each Fund's investment objective. Each of the Funds is classified as a non-diversified fund under the 1940 Act. Non-diversified funds generally hold stocks in fewer companies than diversified funds and may be more susceptible to the risks associated with these particular companies, or to a single economic, political or regulatory occurrence. Each Fund invests in the securities of foreign issuers of a single country or region, which may involve certain considerations and risks not typically associated with securities of U.S. issuers. Such risks include, but are not limited to: generally less liquid and less efficient securities markets; generally greater price volatility; exchange rate fluctuations and exchange controls; imposition of restrictions on the expatriation of funds or other assets of the Fund; less publicly available information about issuers; the imposition of withholding or other taxes; higher transaction and custody costs; settlement delays and risk of loss attendant in settlement procedures; difficulties in enforcing contractual obligations; lesser regulation of securities markets; different accounting, disclosure and reporting requirements; more substantial governmental involvement in the economy; higher inflation rates; greater social, economic and political uncertainties; the risk of nationalization or expropriation of assets; and the risk of war. The following significant accounting policies are consistently followed by the Company in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for investment companies. The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. Actual results could differ from those estimates. Certain prior year amounts in the financial statements have been reclassified to be consistent with the current year presentation. SECURITY VALUATION Portfolio securities for which market prices are readily available are valued using the official closing price of the primary exchange on which they are traded. The methodology used to determine such closing prices varies among markets. Such prices are generally the same as those used by MSCI in calculating the benchmark indices used by the Funds. Mutual fund shares are valued at net asset value. Any securities, including restricted securities or other assets for which market quotations are not readily available, or for which a significant event has occurred since the time of the most recent market quotation, are valued in accordance with fair value pricing policies approved by the Company's Board of Directors. SECURITY TRANSACTIONS, INCOME RECOGNITION AND EXPENSES Security transactions are accounted for on trade date. Dividend income is recognized on the ex-dividend date, and interest income is accrued daily. Realized gains and losses on investment transactions are determined using the specific identification method. Common Notes to the Financial Statements 61 Notes to the Financial Statements (Continued) iShares, Inc. expenses incurred by the Company prior to December 28, 2001 were allocated to the funds based on the ratio of average net assets of each fund to the combined net assets of all funds offered by the Company, or other appropriate method. Other expenses, directly related to a specific fund, were charged to that fund. The expenses for the iShares MSCI Singapore Index Fund are still allocated to that Fund using this methodology. Additional details of the current expense structure may be found in Note 2. FOREIGN CURRENCY TRANSLATION The accounting records of the Funds are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the prevailing rates of exchange on the valuation date. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. Foreign currency and assets and liabilities denominated in foreign currency are generally converted into U.S. dollars using the same exchange rates utilized by MSCI in the calculation of the relevant MSCI Indices (currently, exchange rates as of 4:00 p.m. London time, except for the exchange rate for the MSCI Mexico Index, which is as of 3:00 p.m. Eastern time). However, the Company may use a different exchange rate from the rate used by MSCI in the event that the investment advisor concludes that such rate is more appropriate. Each Fund does not isolate the effect of fluctuations in foreign exchange rates from the effect of fluctuations in the market prices of securities. Such fluctuations are reflected by the Funds as a component of realized and unrealized gains and losses from investments for financial reporting purposes. FOREIGN TAXES South Korea and Taiwan levy taxes at rates of 16.5% and up to 20.0%, respectively, based on the par value of stock dividends received by the iShares MSCI South Korea and iShares MSCI Taiwan Index Funds, respectively. These taxes are paid by the Funds receiving the stock dividends and are disclosed in their respective Statements of Operations. EQUALIZATION Prior to January 1, 2002, the Funds used the accounting practice of equalization. This accounting method was used to keep the continuing shareholders' per share equity in undistributed net investment income from being affected by the continuous sales and redemptions of capital stock. Equalization is calculated on a per share basis whereby a portion of the proceeds from sales and costs of repurchases of capital stock is applied to undistributed net investment income. The amounts of equalization are disclosed in the Statements of Changes in Net Assets as undistributed net investment income included in the price of capital shares issued or redeemed. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders from net investment income, if any, including any net foreign currency gains, are declared and distributed at least annually by each Fund. Distributions of net realized gains, if any, generally are declared and distributed once a year. Distributions are determined on a tax basis and may differ from net investment income and net realized capital gains for financial reporting purposes. In addition, the Company intends to distribute, at least annually, amounts representing the dividend yield on the underlying portfolio securities of each Fund, net of expenses, as if the Fund owned the underlying portfolio securities for the entire dividend period. As a result, some portion of each distribution may result in a return of capital. Dividends and distributions are paid in U.S. dollars and cannot be automatically reinvested in additional shares of the Funds. 62 2002 iShares Annual Report to Shareholders Notes to the Financial Statements (Continued) iShares, Inc. At August 31, 2002, the components of distributable earnings on a tax basis were as follows:
------------------------------------------------------------------------------------- Undistributed Undistributed Total Distributable iShares MSCI Index Fund Ordinary Income Long-term Gain Earnings ------------------------------------------------------------------------------------- Australia $1,552,055 $ - $1,552,055 Brazil 695,551 - 695,551 Canada 229,339 - 229,339 Hong Kong 1,567,885 - 1,567,885 Malaysia 844,296 - 844,296 Mexico 1,806,911 - 1,806,911 Pacific ex-Japan 1,353,822 - 1,353,822 Singapore 621,111 - 621,111 -------------------------------------------------------------------------------------
For the year ended August 31, 2002, the tax characterization of distributions paid was equal to the book characterization of distributions paid for all of the Funds. The total distributions and distributions per share are disclosed in the accompanying Statements of Changes in Net Assets and the Financial Highlights for all Funds. FEDERAL INCOME TAXES Each Fund is treated as a separate entity for federal income tax purposes. It is the policy of each Fund to qualify as a regulated investment company, as defined in Subchapter M of the Internal Revenue Code of 1986, as amended, and to annually distribute all of its net income and any net gains (taking into account any capital loss carryforwards) sufficient to relieve it from all, or substantially all, federal income and excise taxes. Accordingly, no provision for federal income taxes was required for the year ended August 31, 2002. From November 1, 2001 to August 31, 2002, certain of the Funds incurred net foreign exchange losses and net realized capital losses. As permitted by tax regulations, the following Funds have elected to defer those losses and treat them as arising in the year ending August 31, 2003.
----------------------------------------------------------------------- Deferred Net Realized Capital/Net Foreign iShares MSCI Index Fund Currency Losses ----------------------------------------------------------------------- Australia $ 606,510 Brazil 58,741,760 Canada 82,489 Hong Kong 2,860,088 Malaysia 1,581,826 -----------------------------------------------------------------------
----------------------------------------------------------------------- Deferred Net Realized Capital/Net Foreign iShares MSCI Index Fund Currency Losses ----------------------------------------------------------------------- Mexico $2,314,024 Pacific ex-Japan 329,251 Singapore 3,777,338 South Korea 483,156 Taiwan 6,891,085 -----------------------------------------------------------------------
Notes to the Financial Statements 63 Notes to the Financial Statements (Continued) iShares, Inc. At August 31, 2002, certain of the Funds had tax basis net capital loss carryforwards. Such losses may be applied against any net realized taxable gains in each succeeding year or until their respective expiration date, whichever occurs first.
------------------------------------------------------------------------------------ Expiring Expiring Expiring Expiring iShares MSCI Index Fund 2007 2008 2009 2010 Total ------------------------------------------------------------------------------------ Australia $ 0074,889 $ 630,985 $1,971,994 $ 3,625,203 $ 6,903,071 Brazil - - 94,163 1,993,420 2,087,583 Canada - - - 781,961 781,961 Hong Kong 4,085,707 - - 4,971,970 9,057,677 Malaysia 8,654,333 - - 9,819,029 18,473,362 Mexico - - - 1,319,032 1,319,032 Singapore - - - 4,810,766 4,810,766 South Korea - - 556,540 666,642 1,223,182 Taiwan - - - 12,532,361 12,532,361 ------------------------------------------------------------------------------------
If any of the Funds own shares in certain foreign investment entities, referred to, under U.S. tax law code, as "passive foreign investment companies", such Funds may elect to mark-to-market annually the shares of the passive foreign investment company, and would be required to distribute to shareholders any such mark-to-market gains. For the year ended August 31, 2002, each Fund reclassified certain amounts to paid-in-capital from accumulated net realized gain (loss) on investments and foreign currency transactions and accumulated net investment income (loss), respectively, as a result of permanent book and tax differences primarily attributed to net investment loss, return of capital, passive foreign investment companies, realized foreign currency gains and losses and gains and losses on in-kind redemptions. These reclassifications have no effect on net assets or net asset values per share. 2. AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES Barclays Global Fund Advisors ("BGFA") acts as investment advisor to the Company and is responsible for the investment management of each Fund. BGFA is a California corporation indirectly owned by Barclays Bank PLC. BGFA serves as investment advisor to each Fund pursuant to an Advisory Agreement between the Company and BGFA as amended December 28, 2001. Under this agreement, BGFA is responsible for placing purchase and sale orders, providing continuous supervision of the investment portfolio of each Fund, and the general management of the Company's affairs. Under the Advisory Agreement, except for the iShares MSCI Singapore Index Fund, BGFA is responsible for all of the expenses ("Covered Expenses") of each of the Funds, other than interest, taxes, brokerage commissions and other expenses connected with the executions of portfolio transactions, extraordinary expenses, distribution fees and advisory fees. Prior to December 28, 2001 and pursuant to the prior advisory agreement, the investment advisory fee earned by and paid to BGFA with respect to each Fund was reduced by the aggregate of such Fund's fees and expenses (subject to the exceptions in the prior sentence). BGFA also agreed to reimburse each Fund to the extent that the expenses of any Fund (subject to the same exceptions) exceeded the investment advisory fee as stated in the advisory fee tables below. These fee reduction and reimbursement provisions still apply to the iShares MSCI Singapore Index Fund. For its investment management services to the iShares MSCI Australia, iShares MSCI Canada, iShares MSCI Hong Kong, iShares MSCI Malaysia, iShares MSCI Mexico and iShares MSCI Singapore Index Funds, BGFA is entitled to an annual investment advisory fee based on 64 2002 iShares Annual Report to Shareholders Notes to the Financial Statements (Continued) iShares, Inc. each Fund's allocable portion of the aggregate net assets of all the funds offered by the Company (except for the iShares MSCI Brazil, iShares MSCI Pacific ex-Japan, iShares MSCI South Korea and iShares MSCI Taiwan Index Funds) as follows:
----------------------------------------------------------------------------------------- Advisory Fee Aggregate Net Assets ----------------------------------------------------------------------------------------- 0.59% First $7 billion 0.54 Over $7 billion, up to and including $11 billion 0.49 Over $11 billion -----------------------------------------------------------------------------------------
For its investment management services to the iShares MSCI Brazil, iShares MSCI South Korea and iShares MSCI Taiwan Index Funds, BGFA is entitled to an annual investment advisory fee based on each Fund's allocable portion of the aggregate net assets of these three Funds as follows:
----------------------------------------------------------------------------------------- Advisory Fee Aggregate Net Assets ----------------------------------------------------------------------------------------- 0.74% First $2 billion 0.69 Over $2 billion, up to and including $4 billion 0.64 Over $4 billion -----------------------------------------------------------------------------------------
For its investment management services to the iShares MSCI Pacific ex-Japan Index Fund, BGFA is entitled to an annual investment advisory fee based on the average net assets of the Fund of 0.50%. Barclays Global Investors, N.A. ("BGI") has a license agreement with MSCI for the use of the relevant MSCI indices. Under a sub-license agreement between BGI and the Funds, the fees for the use of such MSCI indices are paid directly by BGI to MSCI. Effective May 21, 2002, Investors Bank & Trust Company ("Investors Bank") serves as administrator, custodian, transfer agent and securities lending agent for the Company. As compensation for its services, Investors Bank receives certain out-of-pocket costs, transaction fees, and asset-based fees, which are accrued daily and paid monthly. These fees are Covered Expenses as defined above. Prior to May 21, 2002, PFPC Inc. acted as administration and accounting services agent of the Company, pursuant to a prior administration and accounting services agreement with the Company. For its services to the Company, PFPC Inc. was paid aggregate fees equal to each Fund's allocable portion of 0.15% per annum of the average aggregate daily net assets of the Company up to $3 billion; plus 0.10% per annum of the average aggregate daily net assets of the Company between $3 billion and $4.5 billion and 0.095% of the average aggregate daily net assets of the Company in excess of $4.5 billion. PFPC Inc. received a minimum monthly fee of 0.05% of the aggregate average daily net assets of the Company plus $131,250 for the Funds. PFPC Inc. paid Morgan Stanley & Co. Inc. a fee of 0.05% of the average daily net assets of the Company for sub-administration services. As of December 28, 2001, the fees paid to PFPC Inc. became Covered Expenses as previously defined. Prior to May 21, 2002, PFPC Inc. served as transfer agent and dividend disbursement agent for the Funds. Notes to the Financial Statements 65 Notes to the Financial Statements (Continued) iShares, Inc. Prior to May 21, 2002, JPMorgan Chase Bank ("JPMorgan Chase") served as global custodian and securities lending agent to each of the Funds. For its custody services to each Fund, JPMorgan Chase was paid per annum fees based on the aggregate net assets of each Fund as follows:
----------------------------------------------------------------- iShares MSCI Index Fund Custodian Fee ----------------------------------------------------------------- Australia 0.05% Brazil 0.20 Canada 0.02 Hong Kong 0.04 Malaysia 0.07 -----------------------------------------------------------------
----------------------------------------------------------------- iShares MSCI Index Fund Custodian Fee ----------------------------------------------------------------- Mexico 0.15% Singapore 0.05 South Korea 0.15 Taiwan 0.20 -----------------------------------------------------------------
JPMorgan Chase was paid a per annum fee for the iShares MSCI Pacific ex-Japan Index Fund based on the aggregate net assets of the Fund's investments in Australia, Hong Kong and Singapore at the fees applicable to these countries, plus a fee at the rate of 0.04% for the aggregate net assets of the Fund's investments in New Zealand. JPMorgan Chase also received certain fees for each transaction of each Fund and was reimbursed for certain out-of-pocket expenses. As of December 28, 2001, these fees became Covered Expenses as previously defined. For its services in connection with lending portfolio securities of the Funds, JPMorgan Chase received 40% of the net investment income earned on the collateral for securities loaned from each Fund. SEI Investments Distribution Co. (the "Distributor") serves as each Fund's underwriter and distributor of the shares of each Fund, pursuant to a Distribution Agreement with the Company. The Company has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under the Company's Plan, the Distributor is entitled to receive a distribution fee from each Fund other than the iShares MSCI Pacific ex-Japan Index Fund, not to exceed 0.25% of the average daily net assets of such Fund, for distribution-related services. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, each Fund may invest in the institutional shares of the Institutional Money Market Fund ("IMMF") of Barclays Global Investors Funds. The IMMF is a feeder fund in a master/feeder fund structure that invests substantially all of its assets in the Money Market Master Portfolio of Master Investment Portfolio, which is managed by BGFA, the Funds' investment advisor. The IMMF is an open-end money market fund available only to institutional investors, including investment companies managed by BGFA. The IMMF seeks a high level of income consistent with liquidity and the preservation of capital. While the IMMF does not directly charge an advisory fee, the master portfolio in which it invests does charge an advisory fee. Income distributions from the IMMF are declared daily and paid monthly from net investment income. Income distributions earned by the Funds from investment of securities lending collateral are recorded as securities lending income in the accompanying Statements of Operations. The Company pays each director not affiliated with BGFA an annual retainer and reimburses the directors for travel and out-of-pocket expenses incurred in connection with their attendance at Board of Directors meetings. As of August 31, 2002, certain directors and officers of the Company are also employees of BGFA and its affiliates or employees of Investors Bank. 66 2002 iShares Annual Report to Shareholders Notes to the Financial Statements (Continued) iShares, Inc. 3. INVESTMENT PORTFOLIO TRANSACTIONS Purchases and sales of investments (excluding in-kind transactions and short-term securities) for the fiscal year ended August 31, 2002, were as follows:
----------------------------------------------------------------- iShares MSCI Index Fund Purchases Sales ----------------------------------------------------------------- Australia $ 4,390,816 $ 3,133,246 Brazil 256,409,642 91,046,357 Canada 2,341,970 1,998,521 Hong Kong 12,650,039 10,860,322 Malaysia 38,844,775 30,150,746 Mexico 8,974,724 7,396,762 Pacific ex-Japan 3,920,771 2,666,008 Singapore 8,403,142 7,673,909 South Korea 47,682,188 19,327,007 Taiwan 53,315,728 16,027,694 -----------------------------------------------------------------
In-kind transactions for the fiscal year ended August 31, 2002, were as follows:
------------------------------------------------------------------- In-Kind In-Kind iShares MSCI Index Fund Purchases Sales ------------------------------------------------------------------- Australia $ 23,693,258 $ 3,797,973 Canada 48,972,074 3,203,058 Hong Kong 76,911,246 14,703,449 Mexico 201,268,776 152,887,532 Pacific ex-Japan 113,777,816 5,617,198 Singapore 31,204,085 10,694,244 -------------------------------------------------------------------
Notes to the Financial Statements 67 Notes to the Financial Statements (Continued) iShares, Inc. At August 31, 2002, the aggregate unrealized appreciation and depreciation based on cost for federal income tax purposes were as follows:
--------------------------------------------------------------------------------------- Net Unrealized Tax Unrealized Unrealized Appreciation iShares MSCI Index Fund Cost Appreciation Depreciation (Depreciation) --------------------------------------------------------------------------------------- Australia $ 85,113,236 $ 4,665,582 $ (7,297,846) $ (2,632,264) Brazil 127,915,041 - (44,700,770) (44,700,770) Canada 88,361,996 499,243 (15,136,373) (14,637,130) Hong Kong 121,228,680 1,424,140 (23,731,790) (22,307,650) Malaysia 72,867,703 22,995,353 (2,481,974) 20,513,379 Mexico 94,708,984 - (23,767,932) (23,767,932) Pacific ex-Japan 115,881,388 2,052,418 (7,467,024) (5,414,606) Singapore 104,644,095 1,573,499 (18,465,309) (16,891,810) South Korea 70,374,367 26,911,854 (936,259) 25,975,595 Taiwan 181,487,277 996,130 (40,777,455) (39,781,325) ---------------------------------------------------------------------------------------
4. iShares Transactions The Company's authorized shares are 10.9 billion shares of $.001 par value capital stock. The number of shares authorized to each Fund are as follows:
--------------------------------------------------------------------- iShares MSCI Index Fund Authorized Shares --------------------------------------------------------------------- Australia 127,800,000 Brazil 500,000,000 Canada 340,200,000 Hong Kong 191,400,000 Malaysia 127,800,000 ---------------------------------------------------------------------
--------------------------------------------------------------------- iShares MSCI Index Fund Authorized Shares --------------------------------------------------------------------- Mexico 255,000,000 Pacific ex-Japan 500,000,000 Singapore 191,400,000 South Korea 200,000,000 Taiwan 200,000,000 ---------------------------------------------------------------------
The Company issues and redeems shares ("iShares") of each Fund only in aggregations of a specified number of iShares (each, a "Creation Unit") at net asset value. Except when aggregated in Creation Units, iShares are not redeemable. Transactions in iShares for each Fund are disclosed in detail in the Statements of Changes in Net Assets. The consideration for purchase of Creation Units of a Fund is generally the in-kind deposit of a designated portfolio of equity securities constituting a portfolio sampling representation of the corresponding MSCI Index and an amount of cash (except for the iShares MSCI Brazil, iShares MSCI Malaysia, iShares MSCI South Korea and iShares MSCI Taiwan Index Funds which are offered in Creation Units solely for cash in U.S. dollars). A purchase transaction fee and a redemption transaction fee are charged to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units of iShares. 68 2002 iShares Annual Report to Shareholders Notes to the Financial Statements (Continued) iShares, Inc. 5. LOANS OF PORTFOLIO SECURITIES Each Fund may lend its investment securities to approved borrowers such as brokers, dealers and other financial institutions. The borrower pledges and maintains with the Fund collateral consisting of cash, letters of credit issued by banks approved by BGFA, or securities issued or guaranteed by the U.S. Government. The initial collateral received by each Fund is required to have a value equal to at least 105% of the market value of the loaned securities. The collateral is maintained thereafter, at a value equal to at least 100% of the current market value of the securities on loan. The risks to the Funds of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of August 31, 2002, certain of the Funds had loaned securities which were collateralized by cash. The cash collateral received was invested in money market mutual funds. The market value of the securities on loan at August 31, 2002, and the value of the related collateral received are disclosed in the Statements of Assets and Liabilities. 6. BORROWINGS For the period from June 25, 2001 to March 22, 2002, the Company had a Line of Credit Agreement with The Chase Manhattan Bank for $25,000,000. Each Fund could borrow under the credit agreement solely for temporary or emergency purposes. Each Fund paid a commitment fee of 0.15% per annum based upon such Fund's pro rata share of the average daily unused amount of the aggregate commitment. Amounts borrowed under the agreement incurred interest at a rate per annum equal to the Federal Funds Rate plus 0.50% per annum.
-------------------------------------------------------------------------------------- Average Advances Average Number of Days Outstanding Interest Outstanding iShares MSCI Index Fund During the Period Rate During the Period -------------------------------------------------------------------------------------- Australia $ 320,833 4.0938% 18 Mexico 150,000 3.2115 13 Singapore 200,000 4.1875 6 --------------------------------------------------------------------------------------
7. LEGAL PROCEEDINGS In April 2002, the judge overseeing an ongoing action in the U.S. District Court for the Northern District of Illinois granted leave for a United States patentholder named MOPEX, Inc. to amend its complaint to add the Company, along with seven other parties, as a defendant. There are now a total of twenty defendants, including the Company's investment advisor, other exchange traded funds, various fund service providers and market makers, and the Chicago Stock Exchange, Inc. In the action, the plaintiff alleges that the actions of the parties, now including the Company, infringed their patent, which allegedly covers a mechanism for continuous pricing of exchange traded funds. In addition, the plaintiff alleges that the parties engaged in a "conspiracy" amongst themselves to infringe the patent. Although this is the only case to which the Company has been named as a party, this action is one of two involving related issues. The Company believes that it has valid defenses to all claims raised by the patentholder. However, a resolution of this case may impose increased costs on the Company and thus raise the expense ratios of the Funds, adversely affecting performance. Notes to the Financial Statements 69 Report of Independent Accountants To the Shareholders and Board of Directors of iShares, Inc.: In our opinion, the accompanying statements of assets and liabilities, including the schedules 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 the iShares MSCI Australia Index Fund, iShares MSCI Brazil Index Fund, iShares MSCI Canada Index Fund, iShares MSCI Hong Kong Index Fund, iShares MSCI Malaysia Index Fund, iShares MSCI Mexico Index Fund, iShares MSCI Pacific ex-Japan Index Fund, iShares MSCI Singapore Index Fund, iShares MSCI South Korea Index Fund and iShares MSCI Taiwan Index Fund, each a portfolio of the iShares MSCI Index Fund Series (the "Funds"), at August 31, 2002, the results of each of their operations for the year then ended, and the changes in each of their net assets and the financial highlights for each of the two years in the period then ended, 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 Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits 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 August 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial statements of the Funds as of August 31, 2000 and for the three years then ended were audited by other auditors, whose report dated October 13, 2000 expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP San Francisco, California October 4, 2002 70 2002 iShares Annual Report to Shareholders Tax Information (Unaudited) iShares, Inc. For the year ended August 31, 2002, certain of the Funds earned foreign source income and paid foreign taxes which they intend to pass through to their shareholders pursuant to Section 853 of the Internal Revenue Code as follows:
-------------------------------------------------------------------- Foreign Source Foreign iShares MSCI Index Fund Income Earned Taxes Paid -------------------------------------------------------------------- Australia $ 2,262,204 $ 41,903 Brazil 4,449,493 347,000 Canada 643,711 96,436 Hong Kong 2,584,871 - Malaysia 1,949,480 - Mexico 2,658,817 18,033 Pacific ex-Japan 1,646,196 50,627 Singapore 1,845,248 - South Korea 957,715 165,141 Taiwan 1,945,062 890,251 --------------------------------------------------------------------
Tax Information 71 Shareholder Meeting Results (Unaudited) iShares, Inc. A special meeting of the shareholders of iShares, Inc. (the "Company") was held on December 19, 2001. At the meeting, the following matters were voted upon by the shareholders. Shareholders of the iShares MSCI Singapore Index Fund did not approve Proposals 2, 3 and 4. Proposals 3 and 4 did not pass in the iShares MSCI South Korea Index Fund and the iShares MSCI Mexico Index Fund. All other proposals were approved and the results of voting are presented below. Proposal 1 * To elect the six nominees specified below as Directors of the Company, each of whom will serve until his respective successor is elected and qualified.
---------------------------------------------------------------------- Votes Votes Votes For Against Abstaining ---------------------------------------------------------------------- Nathan Most 80,031,635 1,585,430 585,419 Richard K. Lyons 80,087,104 1,528,981 586,397 George G.C. Parker 80,206,531 1,411,377 584,576 John B. Carroll 80,213,590 1,399,965 588,928 Garrett F. Bouton 80,212,728 1,398,467 591,287 W. Allen Reed 80,227,345 1,398,033 577,105 ----------------------------------------------------------------------
Messrs. Most, Carroll and Reed previously served as Directors of the Company and were reelected. Messrs. Lyons, Parker and Bouton were newly elected. Proposal 2 To approve a new advisory agreement with Barclays Global Fund Advisors in order to effect a change to the fee structure.
---------------------------------------------------------------------- Votes Votes Votes iShares MSCI Index Fund For Against Abstaining ---------------------------------------------------------------------- Australia 5,218,230 13,528 8,087 Austria 787,639 6,543 1,001 Belgium 460,728 5,727 2,259 Brazil 626,687 1,360 6,695 Canada 1,605,768 24,185 5,550 EMU 848,710 8,509 3,008 France 1,595,574 7,704 4,173 Germany 4,143,547 164,659 15,410 Hong Kong 2,927,240 53,951 45,619 Italy 1,166,484 21,570 352 Japan 30,508,180 639,114 266,321 Malaysia 9,322,460 510,931 46,642 Mexico 1,530,313 59,645 48,721 Netherlands 657,984 8,001 2,143 Singapore 6,262,054 4,186,435 82,725 South Korea 1,496,477 3,741 1,027 Spain 846,086 4,570 1,670 Sweden 451,301 2,276 3,448 Switzerland 1,392,729 8,876 2,472 Taiwan 8,500,275 14,525 8,966 United Kingdom 4,052,606 127,633 9,967 ----------------------------------------------------------------------
72 2002 iShares Annual Report to Shareholders Shareholder Meeting Results (Unaudited) (Continued) iShares, Inc. Proposal 3 To approve a change to the Company's fundamental investment policy to permit each Index Fund to invest 25% or more of its total assets in a single issuer.
------------------------------------------------------------------------------ Votes Votes Votes Broker iShares MSCI Index Fund For Against Abstaining Non-votes** ------------------------------------------------------------------------------ Australia 4,566,084 128,417 8,164 537,180 Austria 592,395 11,192 1,066 190,530 Belgium 331,114 12,409 1,727 123,464 Brazil 473,313 6,389 7,485 147,555 Canada 1,119,723 78,272 6,105 431,402 EMU 577,349 30,209 1,914 250,755 France 1,089,533 60,793 5,363 451,762 Germany 3,013,609 375,738 13,837 920,432 Hong Kong 2,074,258 164,613 15,969 771,970 Italy 813,326 7,666 1,715 365,699 Japan 21,565,829 1,542,923 227,835 8,077,028 Malaysia 6,780,543 640,697 42,149 2,416,645 Mexico 742,809 151,704 49,759 694,407 Netherlands 455,089 13,140 1,265 198,634 Singapore 2,941,417 4,267,886 71,331 3,250,579 South Korea 894,759 15,352 927 590,207 Spain 593,328 14,664 2,440 241,894 Sweden 317,304 11,441 2,460 125,821 Switzerland 968,175 21,306 4,625 409,971 Taiwan 6,527,685 156,952 8,941 1,830,188 United Kingdom 2,962,892 200,830 10,764 1,015,718 ------------------------------------------------------------------------------
Shareholder Meeting Results 73 Shareholder Meeting Results (Unaudited) (Continued) iShares, Inc. Proposal 4 To approve a change to the Company's fundamental investment policy with respect to industry concentration.
------------------------------------------------------------------------------ Votes Votes Votes Broker iShares MSCI Index Fund For Against Abstaining Non-votes** ------------------------------------------------------------------------------ Australia 4,565,354 129,127 8,184 537,180 Austria 597,765 4,457 2,431 190,530 Belgium 337,214 6,462 1,574 123,464 Brazil 474,421 5,281 7,485 147,555 Canada 1,130,487 66,818 6,795 431,402 EMU 584,673 22,872 1,927 250,755 France 1,090,283 57,340 8,066 451,762 Germany 3,031,995 352,206 18,983 920,432 Hong Kong 2,100,329 133,296 21,215 771,970 Italy 812,824 8,346 1,537 365,699 Japan 21,766,135 1,274,909 295,543 8,077,028 Malaysia 6,840,531 575,134 47,723 2,416,645 Mexico 751,103 142,806 50,363 694,407 Netherlands 455,508 12,709 1,277 198,634 Singapore 3,036,902 4,163,488 80,245 3,250,579 South Korea 896,094 13,479 1,465 590,207 Spain 595,518 12,274 2,640 241,894 Sweden 321,027 6,788 3,389 125,821 Switzerland 971,210 18,605 4,291 409,971 Taiwan 6,531,233 152,645 9,700 1,830,188 United Kingdom 2,965,577 195,398 13,512 1,015,718 ------------------------------------------------------------------------------
Proposal 5 To approve a change of the iShares MSCI Japan Index Fund from diversified to non-diversified. ---------------------------------------------- Votes Votes Votes Broker for Against Abstaining Non-votes** ---------------------------------------------- 21,869,940 1,323,934 142,714 8,077,028 ---------------------------------------------- Proposal 6 To approve a change of the iShares MSCI United Kingdom Index Fund from diversified to non-diversified. --------------------------------------------- Votes Votes Votes Broker for Against Abstaining Non-votes** --------------------------------------------- 2,971,281 190,578 12,627 1,015,718 --------------------------------------------- *Denotes company-wide proposal and voting results. **Broker non-votes are proxies received by the fund from brokers or nominees, who neither has received instructions from the beneficial owner or other persons entitled to vote, nor has discretionary power to vote on a particular matter. 74 2002 iShares Annual Report to Shareholders Supplemental Information (Unaudited) iShares, Inc. The charts that follow present information about the differences between the daily market price on secondary markets for shares of an iShares Fund and that Fund's net asset value. Net asset value, or "NAV", is the price per share at which each Fund issues and redeems shares. It is calculated in accordance with the standard formula for valuing mutual fund shares every day the New York Stock Exchange is open. The "Market Price" of each iShares Fund generally is determined using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of such Fund is listed for trading, as of the time that the Fund's NAV is calculated. Each Fund's Market Price may be at, above or below its NAV. The NAV of each Fund will fluctuate with changes in the market value of its portfolio holdings. The trading price of each Fund will fluctuate in accordance with changes in its NAV, as well as market supply and demand. Premiums or discounts are the differences (expressed as a percentage) between the NAV and Market Price of a Fund on a given day, generally at the time NAV is calculated. A premium is the amount that a Fund is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that a Fund is trading below the reported NAV, expressed as a percentage of the NAV. The following information shows the frequency distributions of premiums and discounts for each of the iShares Funds included in this report. Except for the iShares MSCI Brazil, iShares MSCI Pacific ex-Japan, iShares MSCI South Korea and iShares MSCI Taiwan Index Funds, the information shown for each Fund is for the five-year period from July 1, 1997 through June 30, 2002, the date of the most recent calendar quarter end. The information shown for the other Funds is for each full calendar quarter completed after the launch date of that Fund through June 30, 2002. The specific periods covered for each Fund are disclosed in the chart for such Fund. The vertical column of the chart shows the premium or discount expressed as a percentage of NAV. The horizontal column indicates the number of trading days in the period covered by the chart. Please note that the intervals showing the number of trading days may be different for each chart. Each bar in the chart shows the number of trading days in which the iShares Fund traded within the premium/discount range indicated. All data presented here represents past performance, which cannot be used to predict future results. Supplemental Information 75 Supplemental Information (Unaudited) (Continued) iShares, Inc. Edgar Representation of Data Points Used in Printed Graphic iShares MSCI Australia Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 26 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT4.50%_LT5.00% 0 GT 4.00%_LT 4.50% 0 GT 3.50%_LT 4.00% 0 GT 3.00%_LT 3.50% 3 GT 2.50%_LT 3.00% 9 GT 2.00%_LT 2.50% 25 GT 1.50%_LT 2.00% 71 GT 1.00%_LT 1.50% 160 GT 0.50%_LT 1.00% 271 LT 0.50%_GT (0.50)% 542 LT (0.50)%_GT (1.00)% 92 LT (1.00)%_GT (1.50)% 31 LT (1.50)%_GT (2.00)% 14 LT (2.00)%_GT (2.50)% 3 LT (2.50)%_GT (3.00)% 2 LT (3.00)%_GT (3.50)% 4 LT (3.50)%_GT (4.00)% 0 LT (4.00)%_GT (4.50)% 1 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 0 Edgar Representation of Data Points Used in Printed Graphic iShares MSCI Brazil Index Fund PERIOD COVERED: OCTOBER 1, 2000 THROUGH JUNE 30, 2002 PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 13 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 1 GT4.50%_LT5.00% 1 GT 4.00%_LT 4.50% 0 GT 3.50%_LT 4.00% 1 GT 3.00%_LT 3.50% 6 GT 2.50%_LT 3.00% 14 GT 2.00%_LT 2.50% 17 GT 1.50%_LT 2.00% 28 GT 1.00%_LT 1.50% 44 GT 0.50%_LT 1.00% 71 LT 0.50%_GT (0.50)% 153 LT (0.50)%_GT (1.00)% 45 LT (1.00)%_GT (1.50)% 12 LT (1.50)%_GT (2.00)% 17 LT (2.00)%_GT (2.50)% 4 LT (2.50)%_GT (3.00)% 2 LT (3.00)%_GT (3.50)% 1 LT (3.50)%_GT (4.00)% 0 LT (4.00)%_GT (4.50)% 1 LT (4.50)%_GT (5.00)% 1 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 0 76 2002 iShares Annual Report to Shareholders Supplemental Information (Unaudited) (Continued) iShares, Inc. Edgar Representation of Data Points Used in Printed Graphic iShares MSCI Canada Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 19 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT4.50%_LT5.00% 0 GT 4.00%_LT 4.50% 0 GT 3.50%_LT 4.00% 0 GT 3.00%_LT 3.50% 4 GT 2.50%_LT 3.00% 15 GT 2.00%_LT 2.50% 23 GT 1.50%_LT 2.00% 59 GT 1.00%_LT 1.50% 106 GT 0.50%_LT 1.00% 222 LT 0.50%_GT (0.50)% 594 LT (0.50)%_GT (1.00)% 138 LT (1.00)%_GT (1.50)% 54 LT (1.50)%_GT (2.00)% 11 LT (2.00)%_GT (2.50)% 9 LT (2.50)%_GT (3.00)% 1 LT (3.00)%_GT (3.50)% 0 LT (3.50)%_GT (4.00)% 0 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 0 Edgar Representation of Data Points Used in Printed Graphic iShares MSCI Hong Kong Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 29 GT 5.50%_LT 6.00% 1 GT 5.00%_LT 5.50% 3 GT4.50%_LT5.00% 4 GT 4.00%_LT 4.50% 5 GT 3.50%_LT 4.00% 15 GT 3.00%_LT 3.50% 22 GT 2.50%_LT 3.00% 35 GT 2.00%_LT 2.50% 42 GT 1.50%_LT 2.00% 68 GT 1.00%_LT 1.50% 108 GT 0.50%_LT 1.00% 166 LT 0.50%_GT (0.50)% 371 LT (0.50)%_GT (1.00)% 141 LT (1.00)%_GT (1.50)% 82 LT (1.50)%_GT (2.00)% 53 LT (2.00)%_GT (2.50)% 44 LT (2.50)%_GT (3.00)% 20 LT (3.00)%_GT (3.50)% 12 LT (3.50)%_GT (4.00)% 11 LT (4.00)%_GT (4.50)% 2 LT (4.50)%_GT (5.00)% 3 LT (5.00)%_GT (5.50)% 4 LT (5.50)%_GT (6.00)% 3 LT (6.00)% 13 Supplemental Information 77 Supplemental Information (Unaudited) (Continued) iShares, Inc. Edgar Representation of Data Points Used in Printed Graphic iShares MSCI Malaysia Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 201 GT 5.50%_LT 6.00% 14 GT 5.00%_LT 5.50% 9 GT4.50%_LT5.00% 10 GT 4.00%_LT 4.50% 13 GT 3.50%_LT 4.00% 32 GT 3.00%_LT 3.50% 23 GT 2.50%_LT 3.00% 27 GT 2.00%_LT 2.50% 39 GT 1.50%_LT 2.00% 60 GT 1.00%_LT 1.50% 62 GT 0.50%_LT 1.00% 90 LT 0.50%_GT (0.50)% 171 LT (0.50)%_GT (1.00)% 70 LT (1.00)%_GT (1.50)% 56 LT (1.50)%_GT (2.00)% 67 LT (2.00)%_GT (2.50)% 71 LT (2.50)%_GT (3.00)% 48 LT (3.00)%_GT (3.50)% 50 LT (3.50)%_GT (4.00)% 26 LT (4.00)%_GT (4.50)% 23 LT (4.50)%_GT (5.00)% 13 LT (5.00)%_GT (5.50)% 6 LT (5.50)%_GT (6.00)% 10 LT (6.00)% 64 Edgar Representation of Data Points Used in Printed Graphic iShares MSCI Mexico Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 10 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT4.50%_LT5.00% 1 GT 4.00%_LT 4.50% 3 GT 3.50%_LT 4.00% 1 GT 3.00%_LT 3.50% 8 GT 2.50%_LT 3.00% 5 GT 2.00%_LT 2.50% 26 GT 1.50%_LT 2.00% 54 GT 1.00%_LT 1.50% 114 GT 0.50%_LT 1.00% 174 LT 0.50%_GT (0.50)% 460 LT (0.50)%_GT (1.00)% 177 LT (1.00)%_GT (1.50)% 99 LT (1.50)%_GT (2.00)% 51 LT (2.00)%_GT (2.50)% 26 LT (2.50)%_GT (3.00)% 22 LT (3.00)%_GT (3.50)% 13 LT (3.50)%_GT (4.00)% 9 LT (4.00)%_GT (4.50)% 1 LT (4.50)%_GT (5.00)% 2 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 0 78 2002 iShares Annual Report to Shareholders Supplemental Information (Unaudited) (Continued) iShares, Inc. Edgar Representation of Data Points Used in Printed Graphic iShares MSCI Pacific Ex-Japan Index Fund PERIOD COVERED: JANUARY 1, 2002 THROUGH JUNE 30, 2002 PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 0 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT4.50%_LT5.00% 0 GT 4.00%_LT 4.50% 0 GT 3.50%_LT 4.00% 0 GT 3.00%_LT 3.50% 0 GT 2.50%_LT 3.00% 0 GT 2.00%_LT 2.50% 0 GT 1.50%_LT 2.00% 6 GT 1.00%_LT 1.50% 20 GT 0.50%_LT 1.00% 23 LT 0.50%_GT (0.50)% 72 LT (0.50)%_GT (1.00)% 2 LT (1.00)%_GT (1.50)% 0 LT (1.50)%_GT (2.00)% 0 LT (2.00)%_GT (2.50)% 0 LT (2.50)%_GT (3.00)% 0 LT (3.00)%_GT (3.50)% 0 LT (3.50)%_GT (4.00)% 0 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 0 Edgar Representation of Data Points Used in Printed Graphic iShares MSCI Singapore Index Fund PERIOD COVERED: JULY 1, 1997 THROUGH JUNE 30, 2002 PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 20 GT 5.50%_LT 6.00% 4 GT 5.00%_LT 5.50% 8 GT4.50%_LT5.00% 9 GT 4.00%_LT 4.50% 17 GT 3.50%_LT 4.00% 19 GT 3.00%_LT 3.50% 28 GT 2.50%_LT 3.00% 37 GT 2.00%_LT 2.50% 47 GT 1.50%_LT 2.00% 80 GT 1.00%_LT 1.50% 119 GT 0.50%_LT 1.00% 107 LT 0.50%_GT (0.50)% 282 LT (0.50)%_GT (1.00)% 147 LT (1.00)%_GT (1.50)% 110 LT (1.50)%_GT (2.00)% 64 LT (2.00)%_GT (2.50)% 61 LT (2.50)%_GT (3.00)% 33 LT (3.00)%_GT (3.50)% 22 LT (3.50)%_GT (4.00)% 18 LT (4.00)%_GT (4.50)% 9 LT (4.50)%_GT (5.00)% 5 LT (5.00)%_GT (5.50)% 6 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 5 Supplemental Information 79 Supplemental Information (Unaudited) (Continued) iShares, Inc. Edgar Representation of Data Points Used in Printed Graphic iShares MSCI South Korea Index Fund PERIOD COVERED: JULY 1, 2000 THROUGH JUNE 30, 2002 PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 7 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 3 GT4.50%_LT5.00% 4 GT 4.00%_LT 4.50% 2 GT 3.50%_LT 4.00% 3 GT 3.00%_LT 3.50% 5 GT 2.50%_LT 3.00% 13 GT 2.00%_LT 2.50% 20 GT 1.50%_LT 2.00% 44 GT 1.00%_LT 1.50% 55 GT 0.50%_LT 1.00% 85 LT 0.50%_GT (0.50)% 148 LT (0.50)%_GT (1.00)% 42 LT (1.00)%_GT (1.50)% 26 LT (1.50)%_GT (2.00)% 17 LT (2.00)%_GT (2.50)% 9 LT (2.50)%_GT (3.00)% 5 LT (3.00)%_GT (3.50)% 8 LT (3.50)%_GT (4.00)% 1 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 1 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 1 Edgar Representation of Data Points Used in Printed Graphic iShares MSCI Taiwan Index Fund PERIOD COVERED: JULY 1, 2000 THROUGH JUNE 30, 2002 PERCENT PREMIUMS/DISCOUNTS NUMBER OF DAYS GT 6.00% 16 GT 5.50%_LT 6.00% 2 GT 5.00%_LT 5.50% 1 GT4.50%_LT5.00% 6 GT 4.00%_LT 4.50% 1 GT 3.50%_LT 4.00% 9 GT 3.00%_LT 3.50% 14 GT 2.50%_LT 3.00% 30 GT 2.00%_LT 2.50% 29 GT 1.50%_LT 2.00% 54 GT 1.00%_LT 1.50% 79 GT 0.50%_LT 1.00% 76 LT 0.50%_GT (0.50)% 99 LT (0.50)%_GT (1.00)% 31 LT (1.00)%_GT (1.50)% 22 LT (1.50)%_GT (2.00)% 16 LT (2.00)%_GT (2.50)% 6 LT (2.50)%_GT (3.00)% 4 LT (3.00)%_GT (3.50)% 2 LT (3.50)%_GT (4.00)% 1 LT (4.00)%_GT (4.50)% 0 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 0 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 1 80 2002 iShares Annual Report to Shareholders Directors Information (Unaudited) iShares, Inc. The Board of Directors has responsibility for the overall management and operations of the Company, including general supervision of the duties performed by BGFA and other service providers. Each Director serves until his or her successor is duly elected and qualified. iShares, Inc., iShares Trust, Barclays Global Investors Funds and Master Investment Portfolio are considered to be members of the same fund complex, as defined in Form N-1A under the 1940 Act. Each Director also serves as a Trustee for iShares Trust and oversees 81 portfolios within the fund complex. In addition, Richard K. Lyons serves as a Trustee for Barclays Global Investors Funds and Master Investment Portfolio and oversees 104 portfolios within the fund complex. Additional information about the Funds' Directors may be found in the Funds' Statement of Additional Information, which is available without charge upon request by calling toll-free 1-800-474-2737. Interested Directors
Position(s), Principal Occupation(s) Name, Age and Address Length of Service During Past 5 Years Other Directorships Held ---------------------------------------------------------------------------------------------------------------------- *Garrett F. Bouton (56) Director (since Managing Director and Chief Chairman of the Board of Directors Barclays Global 2001), Chairman Executive Officer (since 1999) for (since 1998) of BGFA; Director Investors (since Barclays Global Investors, N.A. (since 1998) of BGI; Director of 45 Fremont Street February 28, 2002) ("BGI") Global Individual Investor various Barclays subsidiaries San Francisco, CA 94105 and President. Business; Global H.R. Director (since 1997). (from 1996-1999) for BGI. *Nathan Most (88) Director (since Consultant to BGI (1998-present), None. P.O. Box 193 1996), Chairman American Stock Exchange (1996-2000) Burlingame, CA 94011 Emeritus (since and the Hong Kong Stock Exchange February 28, 2002) (1998 to present); Consultant to the Amsterdam Stock Exchange (1997-1998); Consultant to the Pacific Stock Exchange (1997-1998); Formerly Senior Vice President American Stock Exchange (New Product Development) (1976-1996).
_____________________ * Garrett F. Bouton and Nathan Most are deemed to be "interested persons" (as defined in the 1940 Act) of the Company due to their affiliations with BGFA, the Funds' investment advisor and BGI, the parent company of BGFA. Directors Information 81 Directors Information (Unaudited) (Continued) iShares, Inc. Independent Directors
Position(s), Principal Occupation(s) Name, Age and Address Length of Service During Past 5 Years Other Directorships Held ---------------------------------------------------------------------------------------------------------------------- John B. Carroll (65) Director (since Retired Vice President of Trustee and member of the Executive 520 Main Street 1996) Investment Management (1984-2000) Committee (since 1991) of The Ridgefield, CT 06877 of Verizon Corporation; Advisory Common Fund Institutional Funds, a Board member of Ibbotson Associates non-profit organization; Member of (1992-1998); former Vice Chairman the Board of Managers of JP Morgan and Executive Committee Member Private Equity Funds. (1994-1998) of the Committee on Investment of Employee Benefit Assets of the Financial Executive Institute. Richard K. Lyons (41) Director (since Professor, University of Board of Trustees: Matthews Asian Haas School of Business, 2001) California, Berkeley: Haas School Funds since 1995 (oversees 6 UC Berkeley of Business (since 1993); portfolios). Berkeley, CA 94720 Consultant for IMF World Bank, Federal Reserve Bank, and Citibank N.A. (since 2000). George G. C. Parker (61) Director (since Dean Witter Distinguished Professor Board of Directors: Affinity Group Graduate School of 2001) of Finance (since 1994); Associate (since 1998); Bailard, Biehl and Business (Room K301) Dean for Academic Affairs, Director Kaiser, Inc. (since 1985); Stanford University of MBA Program, and Professor, California Casualty Group of 521 Memorial Way Stanford University: Graduate Insurance Companies (since 1978); Stanford, CA 94305 School of Business (1993-2001). Continental Airlines, Inc. (since 1996); Community First Financial Group (since 1995); Dresdner/RCM Mutual Funds (oversees 10 portfolios) (1994-2002); Tyon Ranch Company (since 1999). W. Allen Reed (54) Director (since President and Chief Executive Director (since 1994) of General General Motors Investment 1996) Officer (since 1994) of General Motors Investment Management Management Corp. Motors Investment Management Corporation; Director (1995-1998) 767 Fifth Avenue Corporation. of Taubman Centers, Inc. (a real New York, NY 10153 estate investment trust); Director (since 1992) of FLIR Systems (an imaging technology company); Director (since 1994) of General Motors Acceptance Corporation; Director (since 1994) of GMAC Insurance Holdings, Inc.; Director (since 1995) of Global Emerging Markets Fund; Director (since 2000) of Temple Inland Industries; Chairman (since 1995) of the Investment Advisory Committee of Howard Hughes Medical Institute.
82 2002 iShares Annual Report to Shareholders Directors Information (Unaudited) (Continued) iShares, Inc. Officers Who are Not Directors
Principal Occupation(s) Directorships Held By Name, Age and Address Position During Past 5 Years Officers ---------------------------------------------------------------------------------------------------------------------------------- Lee T. Kranefuss (39) Vice President Chief Executive Officer of the Board of Trustees for Barclays Barclays Global Investors Individual Investor Business of Global Investors Funds and Master 45 Fremont Street BGI; The Boston Consulting Group Investment Portfolio (since 2001). San Francisco, CA 94105 (until 1997). Michael Latham (36) Secretary, Treasurer Director of Mutual Fund Delivery in None. Barclays Global Investors and Principal the U.S. Individual Investor 45 Fremont Street Financial Officer Business of BGI (since 2000); Head San Francisco, CA 94105 of Operations, BGI Europe (1997-2000). Donna M. Rogers (36) Assistant Treasurer Senior Director (formerly None. Investors Bank & Trust Co. Director), Mutual Fund 200 Clarendon Street Administration at Investors Bank & Boston, MA 02116 Trust Company ("IBT")(since 1994). Jeffrey J. Gaboury (33) Assistant Treasurer Director (formerly Manager), Mutual None. Investors Bank & Trust Co. Fund Administration, Reporting and 200 Clarendon Street Compliance, IBT (since 1996). Boston, MA 02116 Susan C. Mosher (47) Assistant Secretary Senior Director & Senior Counsel, None. Investors Bank & Trust Co. Mutual Fund Administration, IBT 200 Clarendon Street (since 1995). Boston, MA 02116 Sandra I. Madden (36) Assistant Secretary Senior Associate Counsel, Mutual None. Investors Bank & Trust Co. Fund Administration, IBT (since 200 Clarendon Street 1999); Associate, Scudder Kemper Boston, MA 02116 Investments, Inc. (1996-1999). Lois Towers (52) Assistant Vice US Compliance Officer, BGI (since None. Barclays Global Investors President-AML 1999). 45 Fremont Street Compliance Officer San Francisco, CA 94105
Directors Information 83 Notes: 84 2002 iShares Annual Report to Shareholders Notes: Notes 85 The iShares Family of Funds The following is a list of iShares Funds being offered, along with their respective exchange trading symbols. Please call iShares at 1-800-iSHARES (1-800-474-2737) to obtain a prospectus for any iShares fund. It contains more complete information, including charges and expenses. Broad Market iShares Dow Jones U.S. Total Market Index Fund (IYY) iShares Russell 3000 Index Fund (IWV) iShares Russell 3000 Growth Index Fund (IWZ) iShares Russell 3000 Value Index Fund (IWW) Large Cap iShares Russell 1000 Index Fund (IWB) iShares Russell 1000 Growth Index Fund (IWF) iShares Russell 1000 Value Index Fund (IWD) iShares S&P 100 Index Fund (OEF) iShares S&P 500 Index Fund (IVV) iShares S&P 500/BARRA Growth Index Fund (IVW) iShares S&P 500/BARRA Value Index Fund (IVE) Mid Cap iShares Russell Midcap Index Fund (IWR) iShares Russell Midcap Growth Index Fund (IWP) iShares Russell Midcap Value Index Fund (IWS) iShares S&P MidCap 400 Index Fund (IJH) iShares S&P MidCap 400/BARRA Growth Index Fund (IJK) iShares S&P MidCap 400/BARRA Value Index Fund (IJJ) Small Cap iShares Russell 2000 Index Fund (IWM) iShares Russell 2000 Growth Index Fund (IWO) iShares Russell 2000 Value Index Fund (IWN) iShares S&P SmallCap 600 Index Fund (IJR) iShares S&P SmallCap 600/BARRA Growth Index Fund (IJT) iShares S&P SmallCap 600/BARRA Value Index Fund (IJS) Sector & Industry iShares Cohen & Steers Realty Majors Index Fund (ICF) iShares Dow Jones U.S. Basic Materials Sector Index Fund (IYM) iShares Dow Jones U.S. Chemicals Index Fund (IYD) * iShares Dow Jones U.S. Consumer Cyclical Sector Index Fund (IYC) iShares Dow Jones U.S. Consumer Non-Cyclical Sector Index Fund (IYK) iShares Dow Jones U.S. Energy Sector Index Fund (IYE) iShares Dow Jones U.S. Financial Sector Index Fund (IYF) iShares Dow Jones U.S. Financial Services Index Fund (IYG) iShares Dow Jones U.S. Healthcare Sector Index Fund (IYH) iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ) iShares Dow Jones U.S. Internet Index Fund (IYV) * iShares Dow Jones U.S. Real Estate Index Fund (IYR) iShares Dow Jones U.S. Technology Sector Index Fund (IYW) iShares Dow Jones U.S. Telecommunications Sector Index Fund (IYZ) iShares Dow Jones U.S. Utilities Sector Index Fund (IDU) iShares Goldman Sachs Natural Resources Index Fund (IGE) iShares Goldman Sachs Networking Index Fund (IGN) iShares Goldman Sachs Semiconductor Index Fund (IGW) iShares Goldman Sachs Software Index Fund (IGV) iShares Goldman Sachs Technology Index Fund (IGM) iShares Nasdaq Biotechnology Index Fund (IBB) Fixed Income iShares Lehman 1-3 Year Treasury Bond Fund (SHY) iShares Lehman 7-10 Year Treasury Bond Fund (IEF) iShares Lehman 20+ Year Treasury Bond Fund (TLT) iShares GS $ InvesTop-TM- Corporate Bond Fund (LQD) Global Sector iShares S&P Global Energy Sector Index Fund (IXC) iShares S&P Global Financials Sector Index Fund (IXG) iShares S&P Global Healthcare Sector Index Fund (IXJ) iShares S&P Global Technology Sector Index Fund (IXN) iShares S&P Global Telecommunications Sector Index Fund (IXP) International/broad Market iShares MSCI EAFE Index Fund (EFA) International/regional iShares MSCI EMU Index Fund (EZU) iShares MSCI Pacific ex-Japan Index Fund (EPP) iShares S&P Europe 350 Index Fund (IEV) International/developed Country iShares MSCI Australia Index Fund (EWA) iShares MSCI Austria Index Fund (EWO) iShares MSCI Belgium Index Fund (EWK) iShares MSCI Canada Index Fund (EWC) iShares MSCI France Index Fund (EWQ) iShares MSCI Germany Index Fund (EWG) iShares MSCI Hong Kong Index Fund (EWH) iShares MSCI Italy Index Fund (EWI) iShares MSCI Japan Index Fund (EWJ) iShares MSCI Netherlands Index Fund (EWN) iShares MSCI Singapore Index Fund (EWS) iShares MSCI Spain Index Fund (EWP) iShares MSCI Sweden Index Fund (EWD) iShares MSCI Switzerland Index Fund (EWL) iShares MSCI United Kingdom Index Fund (EWU) iShares S&P/TOPIX 150 Index Fund (ITF) iShares S&P/TSE 60 Index Fund (IKC) * International/emerging Country iShares MSCI Brazil Index Fund (EWZ) iShares MSCI Malaysia Index Fund (EWM) iShares MSCI Mexico Index Fund (EWW) iShares MSCI South Korea Index Fund (EWY) iShares MSCI Taiwan Index Fund (EWT) iShares S&P Latin America 40 Index Fund (ILF) Global/broad Market iShares S&P Global 100 Index Fund (IOO) * Fund Termination and Liquidation Anticipated On December 13, 2002. This advertising section does not constitute part of the 2002 Annual Report. iShares are not sponsored or endorsed by Goldman, Sachs & Co. or Lehman Brothers, nor are they sponsored, endorsed, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., Morgan Stanley Capital International, The Nasdaq Stock Market, Inc., Frank Russell Company, or Standard & Poor's. None of these companies make any representation regarding the advisability of investing in iShares. Neither SEI nor BGI, nor any of their affiliates, are affiliated with Goldman, Sachs & Co. or Lehman Brothers. "GS $ InvesTop(TM)," "GS $ InvesTop(TM) Index," "GS $ Investment Grade Index(TM)" and "Goldman Sachs-Registered Trademark-" are trademarks of Goldman, Sachs & Co. The methodology of the GS $ InvesTop(TM) Index is owned by Goldman, Sachs & Co., may be covered by one or more patents or pending patent applications and is provided under license from Goldman, Sachs & Co. 86 2002 iShares Annual Report to Shareholders iShares are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to iShares. Barclays Global Investors Services (BGIS) assists in the marketing of iShares. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., neither of which is affiliated with SEI. Investors Bank & Trust Co. serves as administrator, custodian, securities lending agent and transfer agent. iShares are not sponsored, endorsed, sold, or promoted by Morgan Stanley Capital International, Inc., nor does this company make any representation regarding the advisability of investing in iShares. Investing involves risk, including possible loss of principal. (c) 2002 Barclays Global Investors. All rights reserved. iShares is a registered trademark of Barclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. This report is intended for the Funds' shareholders. It may not be distributed to prospective investors unless it is preceded or accompanied by the current prospectus. iShares(R) Industrial strength investment tools from BARCLAYS GLOBAL INVESTORS 1-800-iShares (474-2737) www.iShares.com IShares(R) 2002 ANNUAL REPORT TO SHAREHOLDERS AUGUST 31, 2002 [PHOTO] INDUSTRIAL STRENGTH INVESTMENT TOOLS iShares msci japan index fund Table of Contents Shareholder Letter............................................... 1 Introduction..................................................... 3 Managers' Discussion & Analysis.................................. 6 Schedule of Investments.......................................... 8 Financial Statements............................................. 12 Financial Highlights............................................. 15 Notes to the Financial Statements................................ 16 Report of Independent Accountants................................ 21 Tax Information (Unaudited)...................................... 22 Shareholder Meeting Results (Unaudited).......................... 22 Supplemental Information (Unaudited)............................. 27 Directors Information (Unaudited)................................ 29 iShares Family of Funds.......................................... 34 To Our Shareholders While the second half of 2001 was a difficult period for us all, the first half of 2002 has also been a time of tumultuous market events. As a whole, the past year has seen scores of layoffs, company closings, and corporate accounting scandals in the wake of the emotional shock of September 11. The past year has been truly remarkable for iShares considering the market environment. By the close of our second fiscal year, most traditional mutual funds had shrunk in size, hundreds had shut down entirely,/1/ and plans for dozens of new ones were quietly put on hold. However, iShares has followed a very different course. Instead of shrinking in size, iShares' assets under management grew to almost $28 billion as of August 31, 2002. In fact, the iShares family of funds became the nation's third fastest growing family of equity funds/2/ during the period June 2001 through June 2002, surpassing some of the most established and best-known mutual fund groups. In July, iShares celebrated another milestone: the launch of the first-ever fixed income exchange traded funds. These four fixed income iShares funds -- three bond funds based on Lehman U.S. Treasury indices, and one based on a Goldman Sachs-Registered Trademark- corporate bond index -- were greeted with an enthusiastic reception from the investment community. These new funds attracted $3 billion in assets in their first week of trading. That is an impressive beginning considering that total inflows for all U.S. bond mutual funds combined was $50 billion for the first six months of 2002./3/ With a total of 81 different funds, iShares now gives its investors nearly four times more ways to structure their portfolios than any other provider of exchange traded funds (ETFs). Total assets under management for all iShares funds have grown tenfold since they were first launched in May 2000. We believe this is a result of investors and their advisors recognizing that iShares are not merely an investment choice, but an important investment tool. At BGI we consider the iShares family of funds "industrial strength" for four simple reasons. We think you should keep these reasons in mind when you and your advisor meet to discuss your investment objectives, and then evaluate, and perhaps rebalance your portfolio. First, iShares strive to obtain a fundamental goal of institutional investing: taking less of a bite out of a fund's returns. iShares seek to achieve this by minimizing capital gains distributions and management fees. These are not insignificant savings. It's estimated that between 1994 and 1999, investors in diversified U.S. stock funds lost, on average, 15% of their annual gains to taxes./4/ iShares, on the other hand, are managed in a way that keeps capital gains distributions to a minimum. For example, during the calendar year 2001 none of the domestic iShares funds distributed any capital gains./5/ Additionally, the fees charged by the iShares Funds are typically about half of other actively managed mutual funds./6/ Second, iShares embody a key tactic of institutional investors: uncomplicated diversification. The benefits of diversification, as compared to picking individual stocks are well documented. Although it's possible to diversify a portfolio by hand-selecting a wide variety of securities, to do it effectively is complicated and time-consuming. This is a reason why $1.56 trillion in institutional assets/7/ are invested in index funds. ____________________ /1/John Hechinger, Hey, Where Did My Mutual Fund Go?, The Wall Street Journal, April 17, 2002. /2/Financial Research Corporation (FRC) database, BGI analysis. /3/Financial Research Corporation (FRC) database, BGI analysis. /4/Jonathan Clements, Fund Distributions are a Taxing Problem; How the Tax Man Dines on Your Funds, The Wall Street Journal, August 1999. /5/Past performance is no guarantee of future results. There can be no assurance that iShares will not generate capital gains distributions in the future. /6/Source: Morningstar Principia, BGI analysis 6/01. /7/Source: Pensions & Investments, 5/27/02. Shareholder Letter 1 Third, iShares embody a key strategy of institutional investors: modular asset allocation. Each iShare fund focuses on a very specific slice of the equity and fixed income markets. With so many different iShares to choose from, investors have tremendous flexibility in structuring their portfolios to meet specific needs. The fourth reason iShares are "industrial strength" is that they are advised by Barclays Global Investors, one of the world's largest institutional asset managers./8/ BGI manages money for over two thousand institutional clients around the world. Also, BGI has a longer index-based investing track record than any other fund manager. In fact, over thirty years ago it was BGI that created the world's first index strategy. Throughout the coming year we will be working closely with the financial advisor community to introduce innovative strategies and structures that we have developed for their clients' portfolios. And we continue to enhance and improve the tools, data and resources on our Web site. If you haven't visited www.iShares.com in a while, we invite you to do so and learn more about iShares. In fact, Forbes Magazine named iShares.com "Best of the Web" among all ETF sites./9/ We think you'll agree everything about iShares really is industrial strength. On behalf of the iShares family of funds and our colleagues at BGI, we thank you for making iShares a part of your portfolio, and look forward to meeting your needs in the year ahead. /s/ Garrett F. Bouton /s/ Lee T. Kranefuss Garrett F. Bouton President and Chairman Lee T. Kranefuss of the Board of Directors of iShares, Inc. Vice President of iShares, Inc. Garrett F. Bouton and Lee T. Kranefuss are associates of BGIS. iShares are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to iShares. Barclays Global Investors Services (BGIS) assists in the marketing of iShares. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., none of which is affiliated with SEI. For complete information, including charges and expenses, request a prospectus by calling 1-800-IShares (1-800-474-2737). Read it carefully before you invest. There are risks involved with investing, including possible loss of principal. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Mutual funds and iShares are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Your own iShares trading, too, will generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well. Diversification may not protect against market risk. Past performance does not guarantee future results. iShares are not sponsored or endorsed by Goldman, Sachs & Co. or Lehman Brothers, nor are they sponsored, endorsed, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., Morgan Stanley Capital International, The Nasdaq Stock Market, Inc., Frank Russell Company, or Standard & Poor's. None of these companies make any representation regarding the advisability of investing in iShares. Neither SEI nor BGI, nor any of their affiliates, are affiliated with Goldman, Sachs & Co. or Lehman Brothers. "GS $ InvesTop(TM)," "GS $ InvesTop(TM) Index," "GS $ Investment Grade Index(TM)" and "Goldman Sachs-Registered Trademark-" are trademarks of Goldman, Sachs & Co. The methodology of the GS $ InvesTop(TM) Index is owned by Goldman, Sachs & Co., may be covered by one or more patents or pending patent applications and is provided under license from Goldman, Sachs & Co. _________________ /8/Source: Pensions & Investments, 5/27/02. /9/Forbes, Winter 2001. 2 2002 iShares Annual Report to Shareholders Introduction In this section, the Investment Advisor discusses the performance of the iShares MSCI Index Funds, including the MSCI Japan Index Fund, (each, a "Fund," and collectively, the "Funds"). The introduction provides an overview of how each Fund seeks to track its respective index. In addition, the introduction identifies some of the key factors that contribute to a Funds' performance against its benchmark index. Each Fund invests in a representative sample of the component securities in its underlying MSCI Index (using the analytic technique known as "portfolio sampling"), as opposed to a full replication of the component securities of the MSCI Index. Certain Funds may also invest to a limited extent in stocks that are not included in the relevant MSCI Index to permit them additional flexibility. There are several important factors that should be kept in mind when reviewing the performance of each Fund. Portfolio Sampling: Portfolio sampling is a disciplined approach to capturing index returns which involves maximizing float and liquidity, reflecting accurately the market's size and industry profiles and minimizing cross-ownership. Because of portfolio sampling, the composition of each Fund will vary from that of its underlying MSCI Index. This may cause performance to vary positively or negatively from that of its underlying MSCI Index during any period. Fund Expenses: The MSCI Indices are only statistical composites that track changes in the financial markets of a particular country or region. Since an index does not actually hold a portfolio of securities, it does not bear management, administration, distribution, transaction or other expenses, while a Fund does incur such expenses, thereby negatively impacting the performance of a Fund. Constraints on Portfolio Management: The Investment Advisor is subject to a number of constraints when managing the iShares MSCI Index Funds' portfolios. The "Single Issuer Rule" and the "5/50 Rule" are two constraints in the Internal Revenue Code that affect the performance of a number of the Funds. The "Single Issuer Rule" generally requires that not more than 25% of the value of a Fund's total assets may be invested in the securities of one single issuer. This constraint applies to all share classes of an issuer. As an example, Samsung Electronics made up 30.24% of the MSCI South Korea Index as of August 31, 2002. Because of the "Single Issuer Rule," however, the iShares MSCI South Korea Fund could not hold more than 25% of its assets in Samsung Electronics. The "5/50 Rule" generally precludes the sum of all of the securities weighted over 5% from exceeding 50% of a Fund's total assets. If a security has more than one share class, then all of the share classes must be considered as one security for 5/50 Rule purposes. Many of the benchmark MSCI Indices have a greater than 50% weighting of securities that account for more than 5% of the respective index. For example, the sum of all the stocks with weightings of 5% or greater in the MSCI Mexico Index was 79.37% as of August 31, 2002; so the iShares MSCI Mexico Index Fund had to underweight some of these stocks relative to the benchmark, and therefore overweight in other stocks. Revenue Differential: A fourth factor that causes performance of a Fund to differ from that of its underlying MSCI Index is "revenue differential," or differences between a Funds and the underlying MSCI Index in dividend accruals/reinvestments. The Funds record dividend revenues on the "ex" dates of the underlying stocks. Prior to January 1, 2001, for developed markets, MSCI used smoothed dividends as opposed to actual dividends by allocating annual dividend revenues evenly over a 12-month period. Separately, the Funds might have different dividend rates versus the Indices due to portfolio sampling or different withholding taxes. Finally, while the sole source of revenues for the MSCI Indices is dividends, the Funds receive interest on uninvested cash and, in the case of most Funds, revenues from the lending of portfolio securities. Effect of Uninvested Assets: Fifth, uninvested assets held by a Fund affects performance relative to its underlying benchmark index. In contrast, the MSCI Indices are always fully comprised of the underlying stocks and thus do not reflect any "unequitized" assets. The "effect of uninvested assets" refers to the impact on performance of the portion of a Fund that is not invested in stocks. Cash is the Introduction 3 principal "unequitized" assets of a Fund. The effect of uninvested assets will tend to cause each Fund to outperform its underlying index in falling markets and underperform the underlying index in rising markets. However, even within a period that has a down market return there can be a short period of rising market where the uninvested assets in a Fund have a negative impact on return. This could cause the effect of uninvested assets to worsen a loss for the period. Securities Lending: Finally, security lending is when a Fund loans a security in its portfolio to another party for a given time period and in return receives cash collateral for the loan. Securities lending income is the income earned on lending the security, which is split between the fund and the securities lending agent. 4 2002 iShares Annual Report to Shareholders THIS PAGE INTENTIONALLY LEFT BLANK. 5 Managers' Discussion & Analysis iShares MSCI Japan Index Fund Performance as of 8/31/02
Average Annual Total Returns Cumulative Total Returns ------------------------------------------------------------ -------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 --------------------------- --------------------------- -------------------------- Nav Market Index Nav Market Index Nav Market Index (14.33)% (14.14)% (13.71)% (8.42)% (8.21)% (7.51)% (8.84)% (8.72)% (8.04)% Average Annual Total Returns Cumulative Total Returns ------------------------------------------------------------ -------------------------- Year Ended 8/31/02 Five Years Ended 8/31/02 Inception to 8/31/02 --------------------------- --------------------------- -------------------------- Nav Market Index Nav Market Index Nav Market Index (14.33)% (14.14)% (13.71)% (35.58)% (34.84)% (32.38)% (45.06)% (44.65)% (41.89)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (03/12/96). "Average annual total return" represents the average annual change in value of an investment over the periods indicated. "Cumulative total return" represents the total change in value of an investment over the periods indicated. A Fund's per share net asset value or "NAV" is the value of one share of a Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV per share of the Fund, and the market return is based on the market price per share of the Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund are listed for trading, as of the time that the Fund's NAV is calculated. Since Fund shares typically do not trade in the secondary market until several days after Fund inception, for the period from inception to the first day of secondary market trading in Fund shares (03/18/96), the net asset value of the Fund is used as a proxy for secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gains distributions have been reinvested in the Fund at market price and net asset value, respectively. Further discussion of Market Price and NAV can be found under the heading "Supplemental Information," located elsewhere in this report. An Index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the Index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC TOP 10 FUND SECTORS (% of Portfolio) Technology Hardware & Equipment 13.59% Consumer Durables & Apparel 10.64% Automobiles & Components 9.96% Capital Goods 8.65% Materials 7.11% Banks 6.65% Pharmaceuticals & Biotechnology 5.97% Utilities 5.85% Diversified Financials 5.29% Telecommunication Services 4.70% Performance Review The total return of the iShares MSCI Japan Index Fund (the "Japan Fund") was -14.33% over the one-year period ended August 31, 2002. The total return of the corresponding MSCI Japan Index over the same period was -13.71%. Significant Performance Factors The Japan Fund underperformed its benchmark by 0.62 percentage points over the reporting period. This was due in part to the impact of expenses, which subtracted 0.83 percentage points from the Fund's return. This factor was partially offset by the positive impact of security sampling, revenue differential and security lending, which contributed 0.11, 0.09 and 0.01 percentage points, respectively, to the Fund's return. 6 2002 iShares Annual Report to Shareholders Key Market Conditions The Japanese equity market was extremely volatile over the reporting period, reflecting investors' rapidly shifting views of the domestic and world economy, among other factors. The first part of the reporting period, from September 1, 2001, through February 28, 2002, was marked by a major decline in the Japanese stock market. Numerous factors contributed to the downturn, but none were more important than the apparently negative outlook for the global economy. The U.S. economy, already facing a significant slowdown, was depressed further by the terrorist attacks of September 11. Despite the seemingly poor outlook for many economies around the world, consumer demand remained robust in countries such as the United States. This trend benefited Japan's consumer-oriented exporters such as Sony (2.99% of the Fund as of August 31, 2002). Other beneficiaries were Japanese automakers, especially turnaround story Nissan Motors (1.41% of the Fund as of August 31, 2002). The nation's car makers also profited from the weakness of the Japanese yen versus the U.S. dollar in late 2001 and early 2002. In general, the shares of Japanese companies with more of a domestic focus did not perform as well. Unlike their counterparts abroad, Japanese consumers were reluctant to spend as the country's unemployment rate reached near-record levels in the spring of 2002. Meanwhile, the nation's banks remained mired in bad debts. They, along with many other Japanese firms, also faced significant losses in their investment portfolios both at home and abroad. Although the Japanese government proposed several new initiatives to stimulate the economy, investors generally responded with skepticism. Nonetheless, many international investors apparently viewed the Japanese equity market as an attractive alternative to the flagging U.S. market and the corporate accounting scandals emerging there. Capital flows out of the United States and into Japan helped to drive up the value of the yen versus the U.S. dollar, though, making Japanese goods less competitive overseas. This factor, as well as concerns about renewed weakness in the U.S. economy, drove down the Japanese equity market once again as the reporting period ended. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC iShares MSCI Japan Index Fund Growth of $10,000 Investment iShares MSCI Japan Index Fund MSCI Japan Index* Mar-96 $10,000 $10,000 Aug-96 $ 9,689 $ 9,718 $ 8,060 $ 8,115 Aug-97 $ 8,529 $ 8,593 $ 7,366 $ 7,436 Aug-98 $ 5,682 $ 5,783 $ 6,868 $ 7,029 Aug-99 $ 8,986 $ 9,406 $10,297 $10,739 Aug-00 $ 9,772 $10,274 $ 7,418 $ 7,813 Aug-01 $ 6,413 $ 6,735 $ 5,282 $ 5,580 Aug-02 $ 5,494 $ 5,811 * On May 31, 2002, MSCI completed its plan to adjust the Index for free float and to increase the market representation in the Index from 60% to 85% coverage. MSCI defines free float as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management, and shares subject to foreign ownership restrictions. In preparation for this change in methodology, the Fund restructured its portfolio to benchmark the new free float index on June 22, 2001. The index performance shown in the graph reflects the former index up to June 22, 2001 and the new free float index thereafter. Past performance is no guarantee of future results. Managers' Discussion & Analysis 7 Schedule of Investments iShares MSCI Japan Index Fund August 31, 2002 Security Shares Value ------------------------------------------------------------------- COMMON STOCKS - 100.00% Toyota Motor Corp. 1,229,800 $ 30,442,961 NTT DoCoMo Inc. 9,724 20,667,549 Sony Corp. 457,600 19,953,556 Takeda Chemical Industries Ltd. 429,000 18,127,524 Canon Inc. 429,000 14,690,161 Honda Motor Co. Ltd. 328,900 13,925,494 Tokyo Electric Power Co. Inc. (The) 643,500 13,270,000 Nomura Holdings Inc. 1,001,000 13,195,783 Mitsubishi Tokyo Financial Group Inc. 1,859 12,841,235 Matsushita Electic Industrial Co. Ltd. 1,001,000 12,047,636 Nippon Telegraph & Telephone Corp. 2,717 10,678,716 Sumitomo Mitsui Banking Corp. 1,859,000 9,548,568 Nissan Motors Co Ltd. 1,287,000 9,400,248 Fuji Photo Film Co. Ltd. 286,000 8,732,095 Rohm Co. Ltd. 57,200 7,805,809 Hitachi Ltd. 1,430,000 7,634,484 East Japan Railway Co. 1,573 7,562,181 Murata Manufacturing Co. Ltd. 128,700 7,294,433 Nintendo Co. Ltd. 57,200 6,918,128 Secom Co. Ltd. 143,000 6,597,305 Kao Corp. 286,000 6,549,057 Chubu Electric Power Co. Inc. 328,900 6,158,291 Mizuho Holdings Inc. 2,860 6,126,935 Ito-Yokado Co. Ltd. 143,000 6,090,756 Kansai Electric Power Co. Inc. (The) 386,100 6,024,434 Kyocera Corp. 85,800 5,955,670 Shin-Etsu Chemical Co. Ltd. 157,300 5,678,263 Toshiba Corp./1/ 1,573,000 5,373,053 Seven-Eleven Japan Co. Ltd. 143,000 5,246,484 Ricoh Co. Ltd. 286,000 5,113,823 Millea Holdings Inc./1/ 572 4,641,032 Fujitsu Ltd. 858,000 4,631,398 Sharp Corp. 429,000 4,559,026 Mitsubishi Heavy Industries Ltd. 1,573,000 4,550,532 Denso Corp. 286,000 4,546,971 Nippon Steel Corp. 3,003,000 4,229,725 Tokyo Gas Co. Ltd. 1,430,000 4,076,644 NEC Corp. 715,000 3,986,125 Tokyo Electron Ltd. 85,852 3,960,782 Mitsubishi Corp. 572,000 3,830,512 Mitsui & Co. Ltd. 715,000 3,775,057 Eisai Co. Ltd. 143,000 3,714,754 Aeon Co. Ltd. 143,000 3,702,699 Bridgestone Corp. 286,000 3,678,561 Hoya Corp. 57,200 3,589,323 UFJ Holdings Inc. 1,573 3,542,285 Tohoku Electric Power Co. Inc. 243,100 3,471,249 SANYO Electric Co. Ltd. 858,000 3,408,405 Yamanouchi Pharmaceutical Co. Ltd. 143,000 3,358,956 Mitsui Fudosan Co. Ltd. 429,000 3,292,618 Dai Nippon Printing Co. Ltd. 286,000 3,287,799 Mitsubishi Estate Co. Ltd. 429,000 3,180,477 Kyushu Electric Power Co. Inc. 214,500 3,165,977 Nippon Oil Corp. 715,500 3,162,152 ORIX Corp. 42,900 3,050,199 Fujisawa Pharmaceutical Co. Ltd. 143,000 3,039,351 Nikko Cordial Corp. 715,000 2,985,053 Daiwa Securities Group Inc. 572,000 2,971,826 Mitsubishi Electric Corp./1/ 858,000 2,966,964 Ajinomoto Co. Inc. 286,000 2,950,090 Takefuji Corp. 42,900 2,927,179 Japan Tobacco Inc. 429 2,912,706 SMC Corp. 28,600 2,860,844 Mitsui Sumitomo Insurance Co. Ltd. 572,000 2,851,191 Kirin Brewery Co. Ltd. 429,000 2,796,908 Osaka Gas Co. Ltd. 1,144,000 2,788,500 Shizuoka Bank Ltd. (The) 429,000 2,786,055 Central Japan Railway Co. 429 2,767,975 NTT Data Corp. 715 2,665,458 TDK Corp. 57,200 2,614,801 Fanuc Ltd. 57,200 2,600,329 Asahi Glass Co. Ltd. 429,000 2,590,688 Fire & Marine Insurance Co. Ltd. (The) 429,000 2,583,438 Toppan Printing Co. Ltd. 286,000 2,571,369 Daikin Industries Ltd. 143,000 2,526,753 Keyence Corp. 14,300 2,495,399 8 2002 iShares Annual Report to Shareholders Schedule of Investments (Continued) iShares MSCI Japan Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------------- Kinki Nippon Railway Co. Ltd./1/ 858,000 $ 2,453,194 Yamato Transport Co. Ltd. 143,000 2,430,271 Bank of Yokohama Ltd. (The) 572,000 2,315,685 Daiichi Pharmaceutical Co. Ltd. 143,000 2,309,664 Taisho Pharmaceutical Co. Ltd. 143,000 2,296,394 Sumitomo Chemical Co. Ltd. 572,000 2,286,742 Toyota Industries Corp. 143,000 2,236,091 Nippon Unipac Holding 429 2,192,671 Tostem Inax Holding Corp. 143,000 2,164,934 Asahi Kasei Corp. 715,000 2,104,602 West Japan Railway Co. 572 2,093,771 Sekisui House Ltd. 286,000 2,091,346 Advantest Corp. 42,900 2,069,650 Olympus Optical Co. Ltd. 143,000 2,039,495 Promise Co. Ltd. 42,900 1,993,666 Nippon Express Co. Ltd. 429,000 1,993,649 OJI Paper Co. Ltd. 429,000 1,986,442 Omron Corp. 143,000 1,965,921 Sankyo Co. Ltd. 143,000 1,930,943 Oriental Land Co. Ltd. 28,600 1,920,095 Itochu Corp. 715,000 1,911,624 Nitto Denko Corp. 71,500 1,899,591 Shiseido Co. Ltd. 143,000 1,886,327 Trend Micro Inc./1/ 71,500 1,869,439 Sumitomo Trust & Banking Co. Ltd. 429,000 1,852,551 Sumitomo Electric Industries Ltd. 286,000 1,840,496 Toray Industries Inc. 715,000 1,827,254 Nippon Yusen Kabushiki Kaisha 572,000 1,770,512 Pioneer Corp. 100,100 1,764,513 Matsushita Electric Works Ltd. 286,000 1,712,654 Credit Saison Co. Ltd. 71,500 1,703,602 Marui Co. Ltd. 143,000 1,687,314 Mitsubishi Chemical Corp./1/ 858,000 1,686,142 ACOM Co. Ltd. 28,600 1,686,113 Daiwa House Industry Co. Ltd. 286,000 1,664,406 Toyo Seikan Kaisha Ltd. 143,000 1,652,336 Alps Electric Co. Ltd. 143,000 1,643,899 Kubota Corp. 572,000 1,640,267 Tokyu Corp. 429,000 1,581,165 UNY Co. Ltd. 143,000 1,551,035 Sumitomo Corp. 286,000 1,546,202 Stanley Electric Co. Ltd. 143,000 1,538,966 Kawasaki Steel Corp./1/ 1,287,000 1,508,879 Shionogi & Co. Ltd. 143,000 1,491,933 Keio Electric Railway Co. Ltd. 286,000 1,490,718 Yakult Honsha Co. Ltd. 143,000 1,484,698 Matsushita Communication Industries Co. Ltd. 42,900 1,483,491 Komatsu Ltd. 429,000 1,458,171 Toho Co. Ltd. 128,700 1,455,636 Teijin Ltd. 429,000 1,447,317 Terumo Corp. 100,100 1,447,066 Chugai Pharmaceutical Co. Inc. 143,000 1,441,283 AIFUL Corp. 21,450 1,411,125 NKK Corp./1/ 1,573,000 1,393,049 Yamaha Corp. 143,000 1,372,528 Daiwa Bank Holdings Inc./1/ 1,859,000 1,364,134 Banyu Pharmaceutical Co. Ltd. 114,400 1,345,035 Keihin Electric Express Railway Co. Ltd. 286,000 1,321,863 Isetan Co. Ltd. 143,000 1,286,900 Mitsui Chemicals Inc. 286,000 1,285,684 Mabuchi Motor Co. Ltd. 14,300 1,274,836 Nikon Corp. 143,000 1,226,597 Kajima Corp. 429,000 1,215,743 Joyo Bank Ltd. 429,000 1,194,036 Sumitomo Metal Mining Co. Ltd. 286,000 1,186,786 Tobu Railway Co. Ltd. 429,000 1,154,225 Asahi Breweries Ltd. 143,000 1,139,753 Nippon Meat Packers Inc. 143,000 1,124,080 JSR Corp. 143,000 1,122,865 Bank of Fukuoka Ltd. 286,000 1,119,261 Hirose Electric Co. Ltd. 14,300 1,085,480 Konami Corp. 42,900 1,072,817 Uni-Charm Corp. 28,600 1,061,357 Nishin Seifun Group Inc. 143,000 1,057,742 Softbank Corp. 100,100 1,045,194 CSK Corp. 28,600 1,034,825 SEGA Corp./1/ 42,900 1,029,398 Yamada Denki Co. Ltd. 14,300 1,025,176 NSK Ltd. 286,000 1,010,695 NTN Corp. 286,000 988,988 Schedule of Investments 9 Schedule of Investments (Continued) iShares MSCI Japan Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------------- Shimamura Co. Ltd. 14,300 $ 984,169 NGK Insulators Ltd. 143,000 968,496 Chiba Bank Ltd. 286,000 955,211 Yokogawa Electric Corp. 143,000 933,518 JGC Corp. 143,000 931,102 Kuraray Co. Ltd. 143,000 923,866 Kaneka Corp. 143,000 913,012 Taisei Corp. 429,000 908,193 Kikkoman Corp. 143,000 906,977 TonenGeneral Sekiyu K.K. 143,000 904,561 Konica Corp. 143,000 892,506 Sumitomo Bakelite Co. Ltd. 143,000 880,451 Lawson Inc. 28,600 880,445 Daito Trust Construction Co. Ltd. 42,900 877,429 Shimizu Corp. 286,000 875,618 Citizen Watch Co. Ltd. 143,000 868,382 Nissin Food Products Co. Ltd. 42,900 864,765 Ishikawajima-Harima Heavy Industries Co. Ltd. 572,000 863,548 Marubeni Corp./1/ 715,000 862,361 Mitsui O.S.K. Lines Ltd. 429,000 850,278 Sekisui Chemical Co. Ltd. 286,000 849,077 Takara Holdings Inc. 143,000 843,057 Fast Retailing Co. Ltd. 28,600 827,378 Minebea Co. Ltd. 143,000 822,550 Furkukawa Electric Co. Ltd. 286,000 815,329 Takashimaya Co. Ltd. 143,000 815,315 Taiheiyo Cement Corp. 429,000 810,510 Aeon Credit Service Co. Ltd. 14,300 802,050 Anritsu Corp. 143,000 797,225 Mitsubishi Rayon Co. Ltd. 286,000 793,593 Nidec Corp. 14,300 783,957 Sumitomo Realty & Development Co. Ltd. 143,000 756,213 Obayashi Corp. 286,000 755,011 Kawasaki Heavy Industries Ltd./1/ 715,000 753,824 Denki Kagaku Kogyo Kabushiki Kaisha 286,000 752,609 Kyowa Hakko Kogyo Co. Ltd. 143,000 748,977 Casio Computer Co. Ltd. 143,000 747,776 Mitsui Mining & Smelting Co. Ltd. 286,000 745,373 Tosoh Corp. 286,000 740,540 Suruga Bank Ltd. 143,000 717,617 Nippon Shokubai Co. Ltd. 143,000 707,979 Fuji Electric Co. Ltd. 286,000 701,930 All Nippon Airways Co. Ltd./1/ 286,000 697,125 THK Company Ltd. 42,900 692,535 Japan Airlines Co. Ltd./1/ 286,000 692,292 FamilyMart Co. Ltd. 28,600 689,883 Fuji Television Network Inc. 143 688,677 Nissan Chemical Industries Ltd. 143,000 677,820 Mitsubishi Materials Corp./1/ 429,000 676,619 Mitsui Trust Holding Inc. 294,000 671,996 Dainippon Screen Manufacturing Co. Ltd./1/ 143,000 671,785 Suzuken Co. Ltd. 28,600 670,587 Nisshinbo Industries Inc. 143,000 663,348 Showa Denko K.K./1/ 429,000 662,162 Kamigumi Co. Ltd. 143,000 659,730 Daimaru Inc. (The) 143,000 654,911 Sumitomo Metal Industries Ltd./1/ 1,573,000 650,121 Dowa Mining Co. Ltd. 143,000 642,842 Gunma Bank Ltd. 143,000 631,988 Amada Co. Ltd. 143,000 621,135 Ebara Corp. 143,000 617,517 Toyoda Gosei Co. Ltd. 42,900 616,555 Kinden Corp. 143,000 609,080 Toto Ltd. 143,000 605,462 Shimano Inc. 42,900 597,014 Oki Electric Industry Co. Ltd./1/ 286,000 578,921 Nippon Kayaku Co. Ltd. 143,000 576,504 Gunze Ltd. 143,000 574,102 Teikoku Oil Co. Ltd. 143,000 565,651 Ube Industries Ltd./1/ 429,000 549,978 Benesse Corp. 28,600 530,679 Dainippon Ink & Chemicals Inc./1/ 286,000 528,271 Ito En Ltd. 14,300 522,237 Namco Ltd. 28,600 522,236 Japan Energy Corp. 429,000 513,813 77 Bank Ltd. (The) 143,000 513,799 Coca-Cola West Japan Co. Ltd. 28,600 508,968 10 2002 iShares Annual Report to Shareholders Schedule of Investments (Continued) iShares MSCI Japan Index Fund August 31, 2002 Security Shares Value --------------------------------------------------------------------- Mitsui Engineering & Shipbuilding Co. Ltd./1/ 429,000 $ 506,563 Hitachi Cable Ltd. 143,000 495,709 Shimachu Co. Ltd. 28,600 492,086 Oracle Corp. 14,300 492,084 Meiji Seika Kaisha Ltd. 143,000 481,224 Okumura Corp. 143,000 475,203 Katokichi Co. Ltd. 28,600 472,787 Ariake Japan Co. Ltd. 14,300 467,963 Nichirei Corp. 143,000 464,350 Kanebo Ltd./1/ 286,000 458,315 Seiyu Ltd. (The)/1/ 143,000 458,315 Hitachi Software Engineering Co. Ltd. 14,300 457,108 Fujikura Ltd. 143,000 442,628 Nippon Sanso Corp. 143,000 436,608 Toyobo Co. Ltd. 286,000 436,608 Fuji Soft ABC Inc. 14,300 435,398 Mitsukoshi Ltd. 143,000 426,955 Nippon Sheet Glass Co. 143,000 411,282 Nishimatsu Construction Co. Ltd. 143,000 408,866 Daicel Chemical Industries Ltd. 143,000 404,046 Autobacs Seven Co. Ltd. 14,300 404,039 Meitec Corp. 14,300 390,773 Nippon System Development Co. Ltd. 14,300 388,361 World Co. Ltd. 14,300 388,361 Itochu Techno-Science Corp. 14,300 385,948 Meiji Dairies Corp. 143,000 377,506 Kawasaki Kisen Kaisha Ltd. 286,000 369,054 Hokuriku Bank Ltd. (The)/1/ 286,000 366,652 Capcom Co. Ltd. 14,300 365,445 Hino Motors Ltd. 143,000 354,597 Sapporo Breweries Ltd. 143,000 347,347 Aoyama Trading Co. Ltd. 28,600 340,117 Saizeriya Co Ltd. 18,590 331,614 Ashikaga Bank Ltd./1/ 286,000 318,404 TIS Inc. 14,300 313,583 Bellsystem24 Inc. 1,430 308,156 Fujitsu Support & Service Inc. 14,300 297,905 Aderans Co. Ltd. 14,300 288,255 Gen-Probe Inc./1,2/ 12,470 283,655 Toda Construction 143,000 272,572 Trans Cosmos Inc. 14,300 271,973 Asatsu-DK Inc. 14,300 271,370 Paris Miki Inc. 14,300 265,943 Sumitomo Heavy Industries Ltd./1/ 286,000 260,517 Mitsubishi Gas Chemical Co. Inc. 143,000 242,428 Daiei Inc. (The)/1/ 143,000 236,393 Sanrio Co. Ltd. 28,600 226,020 Ishihara Sangyo Kaisha Ltd./1/ 143,000 219,505 Hitachi Zosen Corp.1 429,000 217,117 Sumitomo Osaka Cement Co. Ltd. 143,000 212,269 Fuji Machine Manufacturing Co. Ltd. 14,300 179,707 Mitsubishi Paper Mills Ltd./1/ 143,000 173,673 Snow Brand Milk Product Co. Ltd./1/ 71,500 121,815 TOTAL COMMON STOCKS (COST: $882,104,757) 666,342,058 SHORT TERM INSTRUMENTS - 14.88% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 82,788,674 82,788,674 Dreyfus Money Market Fund 6,683,931 6,683,931 Goldman Sachs Financial Square Prime Obligation Fund 34,075 34,075 Providian Temp Cash Money Market Fund 9,680,177 9,680,177 TOTAL SHORT TERM INSTRUMENTS (COST: $99,186,857) 99,186,857 TOTAL INVESTMENTS IN SECURITIES - 114.88% (COST $981,291,614) 765,528,915 OTHER ASSETS, LESS LIABILITIES - (14.88%) (99,153,394) ------------ NET ASSETS - 100.00% $666,375,521 ============ /1/ Non-income earning securities. /2/ Security valued at fair value in accordance with procedures approved by the Board of Directors (Note 1). See notes to financial statements. Schedule of Investments 11 Statement of Assets and Liabilities iShares, Inc. August 31, 2002 iShares MSCI Japan Index Fund ---------------------------------------------------------------- ASSETS Investments at cost $981,291,614 ------------ Foreign currency, at cost $ 186,039 ------------ Investments in securities, at value (including securities on loan/1/) (Note 1) $765,528,915 Foreign currency, at value 184,480 Cash 509,235 Receivables: Dividends and interest 229,979 ------------ Total Assets 766,452,609 ------------ LIABILITIES Payables: Collateral for securities on loan (Note 5) 99,186,857 Advisory fees (Note 2) 705,156 Distribution fees 143,575 Miscellaneous 41,500 ------------ Total Liabilities 100,077,088 ------------ NET ASSETS $666,375,521 ============ NET ASSETS CONSIST OF: Paid-in capital $955,075,755 Accumulated net investment loss (546,957) Accumulated net realized loss (72,390,558) Net unrealized depreciation on investments and translation of assets and liabilities in foreign currencies (215,762,719) ------------ NET ASSETS $666,375,521 ============ iShares outstanding 85,800,000 ============ Net asset value per iShare $ 7.77 ============ /1/ Securities on loan with market value of $93,407,222. See Note 5. See notes to financial statements. 12 2002 iShares Annual Report to Shareholders Statement of Operations iShares, Inc. Year ended August 31, 2002 iShares MSCI Japan Index Fund ---------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $ 3,710,322 Interest 11,038 Securities lending income 232,710 ------------- Total investment income 3,954,070 ------------- EXPENSES (NOTE 2) Advisory fees 2,733,089 Administration fees 266,690 Distribution fees 1,374,835 Custodian fees and expenses 44,537 Transfer agent fees 37,957 Directors' fees 24,810 Professional fees 78,415 Federal and state registration fees 4,985 Insurance 16,463 Printing 21,088 AMEX listing fee 1,635 Interest expense 4,229 Miscellaneous expenses 10,714 ------------- Total expenses 4,619,447 ------------- Net investment loss (665,377) ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (5,285,261) In-kind redemptions (478,014) Foreign currency transactions 82,371 ------------- Net realized loss (5,680,904) ------------- Net change in unrealized appreciation (depreciation) on: Investments (101,954,272) Translation of assets and liabilities in foreign currencies (12,576) ------------- Net change in unrealized appreciation (depreciation) (101,966,848) ------------- Net realized and unrealized loss (107,647,752) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(108,313,129) ============= /1/ Net of foreign withholding tax of $716,617. See notes to financial statements. Financial Statements 13 Statements of Changes in Net Assets iShares, Inc. iShares MSCI Japan Index Fund -------------------------------- For the For the year ended year ended August 31, 2002 August 31, 2001 ----------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment loss $ (665,377) $ (709,605) Net realized loss (5,680,904) (57,092,192) Net change in unrealized appreciation (depreciation) (101,966,848) (218,815,571) ------------- ------------- Net decrease in net assets resulting from operations (108,313,129) (276,617,368) ------------- ------------- Undistributed net investment income included in the price of capital shares issued or redeemed 88 191,307 ------------- ------------- iSHARES TRANSACTIONS: iShares sold 316,156,642 131,888,867 iShares redeemed (69,366,813) (115,354,281) ------------- ------------- Net increase in net assets from iShares transactions 246,789,829 16,534,586 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS 138,476,788 (259,891,475) NET ASSETS: Beginning of year 527,898,733 787,790,208 ------------- ------------- End of year $ 666,375,521 $ 527,898,733 ============= ============= Accumulated net investment loss included in net assets at end of year $ (546,957) $ (843,085) ============= ============= iSHARES ISSUED AND REDEEMED: iShares sold 36,600,000 12,000,000 iShares redeemed (9,001,000) (10,800,000) ------------- ------------- Net increase in iShares outstanding 27,599,000 1,200,000 ============= ============= See notes to financial statements. 14 2002 iShares Annual Report to Shareholders Financial Highlights iShares, Inc. (For a share outstanding throughout each period)
iShares MSCI Japan Index Fund ----------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ---------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 9.07 $ 13.82 $ 13.22 $ 8.39 $ 12.61 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment loss/1/ (0.01) (0.01) (0.05) (0.03) (0.02) Net realized and unrealized gain (loss) (1.29) (4.74) 1.21 4.91 (4.19) ------------- ------------- ------------- ------------- ------------- Total from investment operations (1.30) (4.75) 1.16 4.88 (4.21) ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: In excess of net investment income -- -- (0.00)/3/ (0.04) -- Net realized gain -- -- (0.53) -- (0.00)/3/ Return of capital -- -- (0.03) (0.01) (0.01) ------------- ------------- ------------- ------------- ------------- Total distributions -- -- (0.56) (0.05) (0.01) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 7.77 $ 9.07 $ 13.82 $ 13.22 $ 8.39 ============= ============= ============= ============= ============= TOTAL RETURN (14.33)% (34.37)% 8.75% 58.14% (33.38)% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 666,376 $ 527,899 $ 787,790 $ 713,653 $ 201,485 Ratio of expenses to average net assets 0.84% 0.84% 0.88% 0.94% 1.04% Ratio of net investment loss to average net assets (0.12)% (0.11)% (0.32)% (0.27)% (0.21)% Portfolio turnover rate/2/ 2% 21% 22% 0% 0%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. See notes to financial statements. Financial Highlights 15 Notes to the Financial Statements iShares, Inc. 1. SIGNIFICANT ACCOUNTING POLICIES iShares, Inc. (the "Company") is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company was incorporated under the laws of the State of Maryland on September 1, 1994. As of August 31, 2002, the Company offered 22 investment portfolios or funds. These financial statements relate only to the iShares MSCI Japan Index Fund (the "Fund"). The Fund's investment objective is to seek investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Japanese market, as measured by the MSCI Japan Index compiled by Morgan Stanley Capital International Inc. ("MSCI"). The investment advisor utilizes a "passive" or index approach to achieve the Fund's investment objective. The Fund is classified as a non-diversified fund under the 1940 Act. Non-diversified funds generally hold stocks in fewer companies than diversified funds and may be more susceptible to the risks associated with these particular companies, or to a single economic, political or regulatory occurrence. The Fund invests in the securities of foreign issuers of a single country, which may involve certain considerations and risks not typically associated with securities of U.S. issuers. Such risks include, but are not limited to: generally less liquid and less efficient securities markets; generally greater price volatility; exchange rate fluctuations and exchange controls; imposition of restrictions on the expatriation of funds or other assets of the Fund; less publicly available information about issuers; the imposition of withholding or other taxes; higher transaction and custody costs; settlement delays and risk of loss attendant in settlement procedures; difficulties in enforcing contractual obligations; lesser regulation of securities markets; different accounting, disclosure and reporting requirements; more substantial governmental involvement in the economy; higher inflation rates; greater social, economic and political uncertainties; the risk of nationalization or expropriation of assets; and the risk of war. The following significant accounting policies are consistently followed by the Company in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for investment companies. The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. Actual results could differ from those estimates. Certain prior year amounts in the financial statements have been reclassified to be consistent with the current year presentation. SECURITY VALUATION Portfolio securities for which market prices are readily available are valued using the official closing price of the primary exchange on which they are traded. The methodology used to determine such closing prices varies among markets. Such prices are generally the same as those used by MSCI in calculating the benchmark index used by the Fund. Mutual fund shares are valued at net asset value. Any securities, including restricted securities or other assets for which market quotations are not readily available, or for which a significant event has occurred since the time of the most recent market quotation, are valued in accordance with fair value pricing policies approved by the Company's Board of Directors. SECURITY TRANSACTIONS, INCOME RECOGNITION AND EXPENSES Security transactions are accounted for on trade date. Dividend income is recognized on the ex-dividend date, and interest income is accrued daily. Realized gains and losses on investment transactions are determined using the specific identification method. Common expenses incurred by the Company prior to December 28, 2001 were allocated to the funds based on the ratio of average net assets of each fund to the combined net assets of all funds offered by the Company, or other appropriate method. Other expenses, directly related to the Fund, were charged to the Fund. Additional details of the current expense structure may be found in Note 2. 16 2002 iShares Annual Report to Shareholders Notes to the Financial Statements (Continued) iShares, Inc. FOREIGN CURRENCY TRANSLATION The Fund's accounting records are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the prevailing rates of exchange on the valuation date. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of such transactions. Foreign currency and assets and liabilities denominated in foreign currency are generally converted into U.S. dollars using the same exchange rate utilized by MSCI in the calculation of the MSCI Japan Index (currently, exchange rate as of 4:00 p.m. London time). However, the Company may use a different exchange rate from the rate used by MSCI in the event that the investment advisor concludes that such rate is more appropriate. The Fund does not isolate the effect of fluctuations in foreign exchange rates from the effect of fluctuations in the market prices of securities. Such fluctuations are reflected by the Fund as a component of realized and unrealized gains and losses from investments for financial reporting purposes. EQUALIZATION Prior to January 1, 2002, the Fund used the accounting practice of equalization. This accounting method was used to keep the continuing shareholders' per share equity in undistributed net investment income from being affected by the continuous sales and redemptions of capital stock. Equalization is calculated on a per share basis whereby a portion of the proceeds from sales and costs of repurchases of capital stock is applied to undistributed net investment income. The amounts of equalization are disclosed in the Statements of Changes in Net Assets as undistributed net investment income included in the price of capital shares issued or redeemed. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders from net investment income, if any, including any net foreign currency gains, are declared and distributed at least annually. Distributions of net realized gains, if any, generally are declared and distributed once a year. Distributions are determined on a tax basis and may differ from net investment income and net realized capital gains for financial reporting purposes. In addition, the Company intends to distribute, at least annually, amounts representing the dividend yield on the underlying portfolio securities of the Fund, net of expenses, as if the Fund owned the underlying portfolio securities for the entire dividend period. As a result, some portion of each distribution may result in a return of capital. Dividends and distributions are paid in U.S. dollars and cannot be automatically reinvested in additional shares of the Fund. At August 31, 2002, there were no distributable earnings on a tax basis. FEDERAL INCOME TAXES The Fund is treated as an entity separate from the Company's other funds for federal income tax purposes. It is the policy of the Fund to qualify as a regulated investment company, as defined in Subchapter M of the Internal Revenue Code of 1986, as amended, and to annually distribute all of its net income and any net gains (taking into account any capital loss carryforwards) sufficient to relieve it from all, or substantially all, federal income and excise taxes. Accordingly, no provision for federal income taxes was required for the year ended August 31, 2002. From November 1, 2001 to August 31, 2002, the Fund incurred net realized capital losses of $2,395,530. As permitted by tax regulations, the Fund has elected to defer those losses and treat them as arising in the year ended August 31, 2003. At August 31, 2002, the Fund had tax basis net capital loss carryforwards of $2,959,030 and $62,572,173, expiring in 2009 and 2010, respectively. Such losses may be applied against any net realized taxable gains in each succeeding year or until their respective expiration date, whichever occurs first. Notes to the Financial Statements 17 Notes to the Financial Statements (Continued) iShares, Inc. If the Fund owns shares in certain foreign investment entities, referred to, under U.S. tax law code, as "passive foreign investment companies", the Fund may elect to mark-to-market annually the shares of the passive foreign investment company, and would be required to distribute to shareholders any such mark-to-market gains. For the year ended August 31, 2002, the Fund reclassified certain amounts to paid-in-capital from accumulated net realized gain (loss) on investments and foreign currency transactions and accumulated net investment income (loss), respectively, as a result of permanent book and tax differences primarily attributed to net investment loss, return of capital, passive foreign investment companies, realized foreign currency gains and losses and gains and losses on in-kind redemptions. These reclassifications have no effect on net assets or net asset value per share. 2. AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES Barclays Global Fund Advisors ("BGFA") acts as investment advisor to the Company and is responsible for the investment management of the Fund. BGFA is a California corporation indirectly owned by Barclays Bank PLC. BGFA serves as investment advisor to the Fund pursuant to an Advisory Agreement between the Company and BGFA as amended December 28, 2001. Under this agreement, BGFA is responsible for placing purchase and sale orders, providing continuous supervision of the investment portfolio of the Fund, and the general management of the Company's affairs. Under the Advisory Agreement, BGFA is responsible for all of the expenses ("Covered Expenses") of the Fund, other than interest, taxes, brokerage commissions and other expenses connected with the executions of portfolio transactions, extraordinary expenses, distribution fees and advisory fees. Prior to December 28, 2001 and pursuant to the prior advisory agreement, the investment advisory fee earned by and paid to BGFA with respect to the Fund was reduced by the aggregate of the Fund's fees and expenses (subject to the exceptions in the prior sentence). BGFA also agreed to reimburse the Fund to the extent that the expenses of the Fund (subject to the same exceptions) exceeded the investment advisory fee as stated in the advisory fee table below. For its investment management services to the Fund, BGFA is entitled to an annual investment advisory fee based on the Fund's allocable portion of the aggregate net assets of all the funds offered by the Company (except for the iShares MSCI Brazil, iShares MSCI Pacific ex-Japan, iShares MSCI South Korea, and iShares MSCI Taiwan Index Funds) as follows: ---------------------------------------------------------------------------- ADVISORY FEE AGGREGATE NET ASSETS ---------------------------------------------------------------------------- 0.59% First $7 billion 0.54 Over $7 billion, up to and including $11 billion 0.49 Over $11 billion ---------------------------------------------------------------------------- Barclays Global Investors, N.A. ("BGI") has a license agreement with MSCI for the use of the MSCI Japan Index. Under a sub-license agreement between BGI and the Fund, the fee for the use of the MSCI Japan Index is paid directly by BGI to MSCI. Effective May 21, 2002, Investors Bank & Trust Company ("Investors Bank") serves as administrator, custodian, transfer agent and securities lending agent for the Company. As compensation for its services, Investors Bank receives certain out-of-pocket costs, transaction fees, and asset-based fees, which are accrued daily and paid monthly. These fees are Covered Expenses as defined above. Prior to May 21, 2002, PFPC Inc. acted as administration and accounting services agent of the Company, pursuant to a prior administration and accounting services agreement with the Company. For its services to the Company, PFPC Inc. was paid aggregate fees equal to the Fund's allocable portion of 0.15% per annum of the average aggregate daily net assets of the Company up to $3 billion; plus 0.10% per annum of the average aggregate daily net assets of the Company between $3 billion and $4.5 billion and 0.095% of the average aggregate daily net 18 2002 iShares Annual Report to Shareholders Notes to the Financial Statements (Continued) iShares, Inc. assets of the Company in excess of $4.5 billion. PFPC Inc. received a minimum monthly fee of 0.05% of the aggregate average daily net assets of the Company plus $131,250 for the funds. PFPC Inc. paid Morgan Stanley & Co. Inc. a fee of 0.05% of the average daily net assets of the Company for sub-administration services. As of December 28, 2001, these fees became Covered Expenses as previously defined. Prior to May 21, 2002, PFPC Inc. served as transfer agent and dividend disbursement agent for the Fund. Prior to May 21, 2002, JPMorgan Chase Bank ("JPMorgan Chase") served as global custodian and securities lending agent to the Fund. For its custody services to the Fund, JPMorgan Chase was paid per annum fees of 0.026% based on the aggregate net assets of the Fund. JPMorgan Chase also received certain fees for each transaction of the Fund and was reimbursed for certain out-of-pocket expenses. As of December 28, 2001, these fees became Covered Expenses as previously defined. For its services in connection with lending portfolio securities of the Fund, JPMorgan Chase received 40% of the net investment income earned on the collateral for securities loaned from the Fund. SEI Investments Distribution Co. (the "Distributor") serves as the Fund's underwriter and distributor of the shares of the Fund, pursuant to a Distribution Agreement with the Company. The Company has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under the Company's Plan, the Distributor is entitled to receive a distribution fee from the Fund, not to exceed 0.25% of the average daily net assets of the Fund, for distribution-related services. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund may invest in the institutional shares of the Institutional Money Market Fund ("IMMF") of Barclays Global Investors Funds. The IMMF is a feeder fund in a master/feeder fund structure that invests substantially all of its assets in the Money Market Master Portfolio of Master Investment Portfolio, which is managed by BGFA, the Fund's investment advisor. The IMMF is an open-end money market fund available only to institutional investors, including investment companies managed by BGFA. The IMMF seeks a high level of income consistent with liquidity and the preservation of capital. While the IMMF does not directly charge an advisory fee, the master portfolio in which it invests does charge an advisory fee. Income distributions from the IMMF are declared daily and paid monthly from net investment income. Income distributions earned by the Fund from investment of securities lending collateral are recorded as securities lending income in the accompanying Statement of Operations. The Company pays each director not affiliated with BGFA an annual retainer and reimburses the directors for travel and out-of-pocket expenses incurred in connection with their attendance at Board of Directors meetings. As of August 31, 2002, certain directors and officers of the Company are also employees of BGFA and its affiliates or employees of Investors Bank. 3. INVESTMENT PORTFOLIO TRANSACTIONS Purchases and sales of investments (excluding in-kind transactions and short-term securities) for the fiscal year ended August 31, 2002, aggregated $14,517,906 and $11,621,878, respectively. In-kind purchases and sales for the fiscal year ended August 31, 2002, aggregated $312,733,257 and $69,293,253, respectively. At August 31, 2002, the cost of investments for federal income tax purposes was $986,302,396. Net unrealized depreciation aggregated $220,773,481, of which $610,094 represented gross unrealized appreciation on securities and $221,383,575 represented gross unrealized depreciation on securities. 4. iSHARES TRANSACTIONS The Company's authorized shares are 10.9 billion shares of $.001 par value capital stock. At August 31, 2002, 2,124,600,000 shares were authorized to the Fund. Notes to the Financial Statements 19 Notes to the Financial Statements (Continued) iShares, Inc. The Company issues and redeems shares ("iShares") of the Fund only in aggregations of a specified number of iShares (each, a "Creation Unit") at net asset value. Except when aggregated in Creation Units, iShares are not redeemable. Transactions in iShares for the Fund are disclosed in detail in the Statements of Changes in Net Assets. The consideration for purchase of Creation Units of the Fund is generally the in-kind deposit of a designated portfolio of equity securities constituting a portfolio sampling representation of the MSCI Japan Index and an amount of cash. A purchase transaction fee and a redemption transaction fee are charged to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units of iShares. 5. LOANS OF PORTFOLIO SECURITIES The Fund may lend its investment securities to approved borrowers such as brokers, dealers and other financial institutions. The borrower pledges and maintains with the Fund collateral consisting of cash, letters of credit issued by banks approved by BGFA, or securities issued or guaranteed by the U.S. Government. The initial collateral received is required to have a value equal to at least 105% of the market value of the loaned securities. The collateral is maintained thereafter, at a value equal to at least 100% of the current market value of the securities on loan. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of August 31, 2002, the Fund had loaned securities which were collateralized by cash. The cash collateral received was invested in money market mutual funds. The market value of the securities on loan at August 31, 2002, and the value of the related collateral are disclosed in the Statement of Assets and Liabilities. 6. BORROWINGS For the period from June 25, 2001 to March 22, 2002, the Company had a Line of Credit Agreement with The Chase Manhattan Bank for $25,000,000. The Fund could borrow under the credit agreement solely for temporary or emergency purposes. The Fund paid a commitment fee of 0.15% per annum based upon the Fund's pro rata share of the average daily unused amount of the aggregate commitment. Amounts borrowed under the agreement would incur interest at a rate per annum equal to the Federal Funds Rate plus 0.50% per annum. The Fund did not draw any advances under this agreement during the fiscal year. 7. LEGAL PROCEEDINGS In April 2002, the judge overseeing an ongoing action in the U.S. District Court for the Northern District of Illinois granted leave for a United States patentholder named MOPEX, Inc. to amend its complaint to add the Company, along with seven other parties, as a defendant. There are now a total of twenty defendants, including the Company's investment advisor, other exchange traded funds, various fund service providers and market makers, and the Chicago Stock Exchange, Inc. In the action, the plaintiff alleges that the actions of the parties, now including the Company, infringed their patent, which allegedly covers a mechanism for continuous pricing of exchange traded funds. In addition, the plaintiff alleges that the parties engaged in a "conspiracy" amongst themselves to infringe the patent. Although this is the only case to which the Company has been named as a party, this action is one of two involving related issues. The Company believes that it has valid defenses to all claims raised by the patentholder. However, a resolution of this case may impose increased costs on the Company and thus raise the expense ratio of the Fund, adversely affecting performance. 20 2002 iShares Annual Report to Shareholders Report of Independent Accountants To the Shareholders and Board of Directors of iShares, Inc.: In our opinion, the accompanying statement of assets and liabilities, including the schedule 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 the iShares MSCI Japan Index Fund (the "Fund") at August 31, 2002, the results of its operations for the year then ended, and the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial statements of the Fund as of August 31, 2000 and for the three years then ended were audited by other auditors, whose report dated October 13, 2000 expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP San Francisco, California October 4, 2002 Report of Independent Accountants 21 Tax Information (Unaudited) iShares, Inc. For the year ended August 31, 2002, the iShares MSCI Japan Index Fund earned foreign source income of $4,426,939 and paid foreign taxes of $716,617 which it intends to pass through to its shareholders pursuant to Section 853 of the Internal Revenue Code. Shareholder Meeting Results (Unaudited) iShares, Inc. A special meeting of the shareholders of iShares, Inc. (the "Company") was held on December 19, 2001. At the meeting, the following matters were voted upon by the shareholders. Shareholders of the iShares MSCI Singapore Index Fund did not approve Proposals 2, 3 and 4. Proposals 3 and 4 did not pass in the iShares MSCI South Korea Index Fund and the iShares MSCI Mexico Index Fund. All other proposals were approved and the results of voting are presented below. Proposal 1 * To elect the six nominees specified below as Directors of the Company, each of whom will serve until his respective successor is elected and qualified. ---------------------------------------------------------------------- Votes Votes Votes for Against Abstaining ---------------------------------------------------------------------- Nathan Most 80,031,635 1,585,430 585,419 Richard K. Lyons 80,087,104 1,528,981 586,397 George G.C. Parker 80,206,531 1,411,377 584,576 John B. Carroll 80,213,590 1,399,965 588,928 Garrett F. Bouton 80,212,728 1,398,467 591,287 W. Allen Reed 80,227,345 1,398,033 577,105 ---------------------------------------------------------------------- Messrs. Most, Carroll and Reed previously served as Directors of the Company and were reelected. Messrs. Lyons, Parker and Bouton were newly elected. 22 2002 iShares Annual Report to Shareholders Shareholder Meeting Results (Unaudited) (Continued) iShares, Inc. Proposal 2 To approve a new advisory agreement with Barclays Global Fund Advisors in order to effect a change to the fee structure. ---------------------------------------------------------------------- Votes Votes Votes iShares MSCI Index Fund For Against Abstaining ---------------------------------------------------------------------- Australia 5,218,230 13,528 8,087 Austria 787,639 6,543 1,001 Belgium 460,728 5,727 2,259 Brazil 626,687 1,360 6,695 Canada 1,605,768 24,185 5,550 EMU 848,710 8,509 3,008 France 1,595,574 7,704 4,173 Germany 4,143,547 164,659 15,410 Hong Kong 2,927,240 53,951 45,619 Italy 1,166,484 21,570 352 Japan 30,508,180 639,114 266,321 Malaysia 9,322,460 510,931 46,642 Mexico 1,530,313 59,645 48,721 Netherlands 657,984 8,001 2,143 Singapore 6,262,054 4,186,435 82,725 South Korea 1,496,477 3,741 1,027 Spain 846,086 4,570 1,670 Sweden 451,301 2,276 3,448 Switzerland 1,392,729 8,876 2,472 Taiwan 8,500,275 14,525 8,966 United Kingdom 4,052,606 127,633 9,967 ---------------------------------------------------------------------- Shareholder Meeting Results 23 Shareholder Meeting Results (Unaudited) (Continued) iShares, Inc. Proposal 3 To approve a change to the Company's fundamental investment policy to permit each Index Fund to invest 25% or more of its total assets in a single issuer.
------------------------------------------------------------------------------ Votes Votes Votes Broker iShares MSCI Index Fund for Against Abstaining Non-votes** ------------------------------------------------------------------------------ Australia 4,566,084 128,417 8,164 537,180 Austria 592,395 11,192 1,066 190,530 Belgium 331,114 12,409 1,727 123,464 Brazil 473,313 6,389 7,485 147,555 Canada 1,119,723 78,272 6,105 431,402 EMU 577,349 30,209 1,914 250,755 France 1,089,533 60,793 5,363 451,762 Germany 3,013,609 375,738 13,837 920,432 Hong Kong 2,074,258 164,613 15,969 771,970 Italy 813,326 7,666 1,715 365,699 Japan 21,565,829 1,542,923 227,835 8,077,028 Malaysia 6,780,543 640,697 42,149 2,416,645 Mexico 742,809 151,704 49,759 694,407 Netherlands 455,089 13,140 1,265 198,634 Singapore 2,941,417 4,267,886 71,331 3,250,579 South Korea 894,759 15,352 927 590,207 Spain 593,328 14,664 2,440 241,894 Sweden 317,304 11,441 2,460 125,821 Switzerland 968,175 21,306 4,625 409,971 Taiwan 6,527,685 156,952 8,941 1,830,188 United Kingdom 2,962,892 200,830 10,764 1,015,718 ------------------------------------------------------------------------------
24 2002 iShares Annual Report to Shareholders Shareholder Meeting Results (Unaudited) (Continued) iShares, Inc. Proposal 4 To approve a change to the Company's fundamental investment policy with respect to industry concentration.
------------------------------------------------------------------------------ Votes Votes Votes Broker iShares MSCI Index Fund for Against Abstaining Non-votes** ------------------------------------------------------------------------------ Australia 4,565,354 129,127 8,184 537,180 Austria 597,765 4,457 2,431 190,530 Belgium 337,214 6,462 1,574 123,464 Brazil 474,421 5,281 7,485 147,555 Canada 1,130,487 66,818 6,795 431,402 EMU 584,673 22,872 1,927 250,755 France 1,090,283 57,340 8,066 451,762 Germany 3,031,995 352,206 18,983 920,432 Hong Kong 2,100,329 133,296 21,215 771,970 Italy 812,824 8,346 1,537 365,699 Japan 21,766,135 1,274,909 295,543 8,077,028 Malaysia 6,840,531 575,134 47,723 2,416,645 Mexico 751,103 142,806 50,363 694,407 Netherlands 455,508 12,709 1,277 198,634 Singapore 3,036,902 4,163,488 80,245 3,250,579 South Korea 896,094 13,479 1,465 590,207 Spain 595,518 12,274 2,640 241,894 Sweden 321,027 6,788 3,389 125,821 Switzerland 971,210 18,605 4,291 409,971 Taiwan 6,531,233 152,645 9,700 1,830,188 United Kingdom 2,965,577 195,398 13,512 1,015,718 ------------------------------------------------------------------------------
Proposal 5 To approve a change of the iShares MSCI Japan Index Fund from diversified to non-diversified. ---------------------------------------------- Votes Votes Votes Broker for Against Abstaining Non-votes** ---------------------------------------------- 21,869,940 1,323,934 142,714 8,077,028 ---------------------------------------------- Shareholder Meeting Results 25 Shareholder Meeting Results (Unaudited) (Continued) iShares, Inc. Proposal 6 To approve a change of the iShares MSCI United Kingdom Index Fund from diversified to non-diversified. --------------------------------------------- Votes Votes Votes Broker for Against Abstaining Non-votes** --------------------------------------------- 2,971,281 190,578 12,627 1,015,718 --------------------------------------------- * Denotes company-wide proposal and voting results. ** Broker non-votes are proxies received by the Fund from brokers or nominees, who neither has received instructions from the beneficial owner or other persons entitled to vote, nor has discretionary power to vote on a particular matter. 26 2002 iShares Annual Report to Shareholders Supplemental Information (Unaudited) iShares, Inc. The chart that follows presents information about the differences between the daily market price on secondary markets for shares of the iShares MSCI Japan Index Fund (the "Fund") and the Fund's net asset value. Net asset value, or "NAV", is the price per share at which the Fund issues and redeems shares. It is calculated in accordance with the standard formula for valuing mutual fund shares every day the New York Stock Exchange is open. The "Market Price" of the Fund generally is determined using the midpoint between the highest bid and the lowest offer on the Exchange on which the Fund is listed for trading, as of the time that the Fund's NAV is calculated. The Fund's Market Price may be at, above or below its NAV. The NAV of the Fund will fluctuate with changes in the market value of its portfolio holdings. The trading price of the Fund will fluctuate in accordance with changes in its NAV, as well as market supply and demand. Premiums or discounts are the differences (expressed as a percentage) between the NAV and Market Price of the Fund on a given day, generally at the time NAV is calculated. A premium is the amount that the Fund is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that the Fund is trading below the reported NAV, expressed as a percentage of the NAV. The following information shows the frequency distributions of premiums and discounts for the Fund. The information shown for the Fund is for the five-year period from July 1, 1997 through June 30, 2002, the date of the most recent calendar quarter end. The vertical column of the chart shows the premium or discount expressed as a percentage of NAV. The horizontal column indicates the number of trading days in the period covered by the chart. Each bar in the chart shows the number of trading days in which the iShares Fund traded within the premium/discount range indicated. All data presented here represents past performance, which cannot be used to predict future results. Supplemental Information 27 Supplemental Information (Unaudited) (Continued) iShares, Inc. Edgar Representation of Data Points Used in Printed Graphic iShares MSCI Japan Index Fund Period Covered: July 1, 1997 through June 30, 2002 Percent Premiums/Discounts Number of Days GT 6.00% 1 GT 5.50%_LT 6.00% 0 GT 5.00%_LT 5.50% 0 GT 4.50%_LT 5.00% 2 GT 4.00%_LT 4.50% 4 GT 3.50%_LT 4.00% 3 GT 3.00%_LT 3.50% 3 GT 2.50%_LT 3.00% 19 GT 2.00%_LT 2.50% 42 GT 1.50%_LT 2.00% 72 GT 1.00%_LT 1.50% 155 GT 0.50%_LT 1.00% 232 LT 0.50%_GT (0.50)% 450 LT (0.50)%_GT (1.00)% 135 LT (1.00)%_GT (1.50)% 72 LT (1.50)%_GT (2.00)% 36 LT (2.00)%_GT (2.50)% 8 LT (2.50)%_GT (3.00)% 7 LT (3.00)%_GT (3.50)% 5 LT (3.50)%_GT (4.00)% 3 LT (4.00)%_GT (4.50)% 5 LT (4.50)%_GT (5.00)% 0 LT (5.00)%_GT (5.50)% 1 LT (5.50)%_GT (6.00)% 0 LT (6.00)% 2 28 2002 iShares Annual Report to Shareholders Directors Information (Unaudited) iShares, Inc. The Board of Directors has responsibility for the overall management and operations of the Company, including general supervision of the duties performed by BGFA and other service providers. Each Director serves until his or her successor is duly elected and qualified. iShares, Inc., iShares Trust, Barclays Global Investors Funds and Master Investment Portfolio are considered to be members of the same fund complex, as defined in Form N-1A under the 1940 Act. Each Director also serves as a Trustee for iShares Trust and oversees 81 portfolios within the fund complex. In addition, Richard K. Lyons serves as a Trustee for Barclays Global Investors Funds and Master Investment Portfolio and oversees 104 portfolios within the fund complex. Additional information about the Funds' Directors may be found in the Funds' Statement of Additional Information, which is available without charge upon request by calling toll-free 1-800-474-2737. Interested Directors
Position(s), Principal Occupation(s) Name, Age and Address Length of Service During Past 5 Years Other Directorships Held --------------------------------------------------------------------------------------------------------------------- *Garrett F. Bouton (56) Director (since Managing Director and Chief Chairman of the Board of Directors Barclays Global 2001), Executive Officer (since 1999) for (since 1998) of BGFA; Director Investors Chairman (since Barclays Global Investors, N.A. (since 1998) of BGI; Director of 45 Fremont Street February 28, 2002) ("BGI") Global Individual Investor various Barclays subsidiaries San Francisco, CA 94105 and President. Business; Global H.R. Director (since 1997). (from 1996-1999) for BGI. *Nathan Most (88) Director (since Consultant to BGI (1998-present), None. P.O. Box 193 1996), American Stock Exchange (1996-2000) Burlingame, CA 94011 Chairman Emeritus and the Hong Kong Stock Exchange (since February 28, (1998 to present); Consultant to 2002). the Amsterdam Stock Exchange (1997-1998); Consultant to the Pacific Stock Exchange (1997-1998); Formerly Senior Vice President American Stock Exchange (New Product Development) (1976-1996).
_______________________ * Garrett F. Bouton and Nathan Most are deemed to be "interested persons" (as defined in the 1940 Act) of the Company due to their affiliations with BGFA, the Funds' investment advisor and BGI, the parent company of BGFA. Directors Information 29 Directors Information (Unaudited) (Continued) iShares, Inc. Independent Directors
Position(s), Principal Occupation(s) Name, Age and Address Length of Service During Past 5 Years Other Directorships Held ---------------------------------------------------------------------------------------------------------------------- John B. Carroll (65) Director (since Retired Vice President of Trustee and member of the Executive 520 Main Street 1996) Investment Management (1984-2000) Committee (since 1991) of The Ridgefield, CT 06877 of Verizon Corporation; Advisory Common Fund Institutional Funds, a Board member of Ibbotson Associates non-profit organization; Member of (1992-1998); former Vice Chairman the Board of Managers of JP Morgan and Executive Committee Member Private Equity Funds. (1994-1998) of the Committee on Investment of Employee Benefit Assets of the Financial Executive Institute. Richard K. Lyons (41) Director (since Professor, University of Board of Trustees: Matthews Asian Haas School of Business, 2001) California, Berkeley: Haas School Funds since 1995 (oversees 6 UC Berkeley of Business (since 1993); portfolios). Berkeley, CA 94720 Consultant for IMF World Bank, Federal Reserve Bank, and Citibank N.A. (since 2000). George G. C. Parker (61) Director (since Dean Witter Distinguished Professor Board of Directors: Affinity Group Graduate School of 2001) of Finance (since 1994); Associate (since 1998); Bailard, Biehl and Business (Room K301) Dean for Academic Affairs, Director Kaiser, Inc. (since 1985); Stanford University of MBA Program, and Professor, California Casualty Group of 521 Memorial Way Stanford University: Graduate Insurance Companies (since 1978); Stanford, CA 94305 School of Business (1993-2001). Continental Airlines, Inc. (since 1996); Community First Financial Group (since 1995); Dresdner/RCM Mutual Funds (oversees 10 portfolios) (1994-2002); Tyon Ranch Company (since 1999). W. Allen Reed (54) Director (since President and Chief Executive Director (since 1994) of General General Motors Investment 1996) Officer (since 1994) of General Motors Investment Management Management Corp. Motors Investment Management Corporation; Director (1995-1998) 767 Fifth Avenue Corporation. of Taubman Centers, Inc. (a real New York, NY 10153 estate investment trust); Director (since 1992) of FLIR Systems (an imaging technology company); Director (since 1994) of General Motors Acceptance Corporation; Director (since 1994) of GMAC Insurance Holdings, Inc.; Director (since 1995) of Global Emerging Markets Fund; Director (since 2000) of Temple Inland Industries; Chairman (since 1995) of the Investment Advisory Committee of Howard Hughes Medical Institute.
30 2002 iShares Annual Report to Shareholders Directors Information (Unaudited) (Continued) iShares, Inc. Officers Who are Not Directors
Principal Occupation(s) Name, Age and Address Position During Past 5 Years Directorships Held By Officers ---------------------------------------------------------------------------------------------------------------------------------- Lee T. Kranefuss (39) Vice President Chief Executive Officer of the Board of Trustees for Barclays Barclays Global Investors Individual Investor Business of Global Investors Funds and Master 45 Fremont Street BGI; The Boston Consulting Group Investment Portfolio (since 2001). San Francisco, CA 94105 (until 1997). Michael Latham (36) Secretary, Treasurer Director of Mutual Fund Delivery in None. Barclays Global Investors and Principal the U.S. Individual Investor 45 Fremont Street Financial Officer Business of BGI (since 2000); Head San Francisco, CA 94105 of Operations, BGI Europe (1997-2000). Donna M. Rogers (36) Assistant Treasurer Senior Director (formerly None. Investors Bank & Trust Co. Director), Mutual Fund 200 Clarendon Street Administration at Investors Bank & Boston, MA 02116 Trust Company ("IBT") (since 1994). Jeffrey J. Gaboury (33) Assistant Treasurer Director (formerly Manager), Mutual None. Investors Bank & Trust Co. Fund Administration, Reporting and 200 Clarendon Street Compliance, IBT (since 1996). Boston, MA 02116 Susan C. Mosher (47) Assistant Secretary Senior Director & Senior Counsel, None. Investors Bank & Trust Co. Mutual Fund Administration, IBT 200 Clarendon Street (since 1995). Boston, MA 02116 Sandra I. Madden (36) Assistant Secretary Senior Associate Counsel, Mutual None. Investors Bank & Trust Co. Fund Administration, IBT (since 200 Clarendon Street 1999); Associate, Scudder Kemper Boston, MA 02116 Investments, Inc. (1996-1999). Lois Towers (52) Assistant Vice US Compliance Officer, BGI (since None. Barclays Global Investors President-AML 1999). 45 Fremont Street Compliance Officer San Francisco, CA 94105
Directors Information 31 Notes: 32 2002 iShares Annual Report to Shareholders Notes: Notes 33 The iShares Family of Funds The following is a list of iShares Funds being offered, along with their respective exchange trading symbols. Please call iShares at 1-800-ISHARES (1-800-474-2737) to obtain a prospectus for any iShares fund. It contains more complete information, including charges and expenses. Broad Market iShares Dow Jones U.S. Total Market Index Fund (IYY) iShares Russell 3000 Index Fund (IWV) iShares Russell 3000 Growth Index Fund (IWZ) iShares Russell 3000 Value Index Fund (IWW) Large Cap iShares Russell 1000 Index Fund (IWB) iShares Russell 1000 Growth Index Fund (IWF) iShares Russell 1000 Value Index Fund (IWD) iShares S&P 100 Index Fund (OEF) iShares S&P 500 Index Fund (IVV) iShares S&P 500/BARRA Growth Index Fund (IVW) iShares S&P 500/BARRA Value Index Fund (IVE) Mid Cap iShares Russell Midcap Index Fund (IWR) iShares Russell Midcap Growth Index Fund (IWP) iShares Russell Midcap Value Index Fund (IWS) iShares S&P MidCap 400 Index Fund (IJH) iShares S&P MidCap 400/BARRA Growth Index Fund (IJK) iShares S&P MidCap 400/BARRA Value Index Fund (IJJ) Small Cap iShares Russell 2000 Index Fund (IWM) iShares Russell 2000 Growth Index Fund (IWO) iShares Russell 2000 Value Index Fund (IWN) iShares S&P SmallCap 600 Index Fund (IJR) iShares S&P SmallCap 600/BARRA Growth Index Fund (IJT) iShares S&P SmallCap 600/BARRA Value Index Fund (IJS) Sector & Industry iShares Cohen & Steers Realty Majors Index Fund (ICF) iShares Dow Jones U.S. Basic Materials Sector Index Fund (IYM) iShares Dow Jones U.S. Chemicals Index Fund (IYD) * iShares Dow Jones U.S. Consumer Cyclical Sector Index Fund (IYC) iShares Dow Jones U.S. Consumer Non-Cyclical Sector Index Fund (IYK) iShares Dow Jones U.S. Energy Sector Index Fund (IYE) iShares Dow Jones U.S. Financial Sector Index Fund (IYF) iShares Dow Jones U.S. Financial Services Index Fund (IYG) iShares Dow Jones U.S. Healthcare Sector Index Fund (IYH) iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ) iShares Dow Jones U.S. Internet Index Fund (IYV) * iShares Dow Jones U.S. Real Estate Index Fund (IYR) iShares Dow Jones U.S. Technology Sector Index Fund (IYW) iShares Dow Jones U.S. Telecommunications Sector Index Fund (IYZ) iShares Dow Jones U.S. Utilities Sector Index Fund (IDU) iShares Goldman Sachs Natural Resources Index Fund (IGE) iShares Goldman Sachs Networking Index Fund (IGN) iShares Goldman Sachs Semiconductor Index Fund (IGW) iShares Goldman Sachs Software Index Fund (IGV) iShares Goldman Sachs Technology Index Fund (IGM) iShares Nasdaq Biotechnology Index Fund (IBB) Fixed Income iShares Lehman 1-3 Year Treasury Bond Fund (SHY) iShares Lehman 7-10 Year Treasury Bond Fund (IEF) iShares Lehman 20+ Year Treasury Bond Fund (TLT) iShares GS $InvesTop-TM- Corporate Bond Fund (LQD) Global Sector iShares S&P Global Energy Sector Index Fund (IXC) iShares S&P Global Financials Sector Index Fund (IXG) iShares S&P Global Healthcare Sector Index Fund (IXJ) iShares S&P Global Technology Sector Index Fund (IXN) iShares S&P Global Telecommunications Sector Index Fund (IXP) International/Broad Market iShares MSCI EAFE Index Fund (EFA) International/Regional iShares MSCI EMU Index Fund (EZU) iShares MSCI Pacific ex-Japan Index Fund (EPP) iShares S&P Europe 350 Index Fund (IEV) International/Developed Country iShares MSCI Australia Index Fund (EWA) iShares MSCI Austria Index Fund (EWO) iShares MSCI Belgium Index Fund (EWK) iShares MSCI Canada Index Fund (EWC) iShares MSCI France Index Fund (EWQ) iShares MSCI Germany Index Fund (EWG) iShares MSCI Hong Kong Index Fund (EWH) iShares MSCI Italy Index Fund (EWI) iShares MSCI Japan Index Fund (EWJ) iShares MSCI Netherlands Index Fund (EWN) iShares MSCI Singapore Index Fund (EWS) iShares MSCI Spain Index Fund (EWP) iShares MSCI Sweden Index Fund (EWD) iShares MSCI Switzerland Index Fund (EWL) iShares MSCI United Kingdom Index Fund (EWU) iShares S&P/TOPIX 150 Index Fund (ITF) iShares S&P/TSE 60 Index Fund (IKC) * International/Emerging Country iShares MSCI Brazil Index Fund (EWZ) iShares MSCI Malaysia Index Fund (EWM) iShares MSCI Mexico Index Fund (EWW) iShares MSCI South Korea Index Fund (EWY) iShares MSCI Taiwan Index Fund (EWT) iShares S&P Latin America 40 Index Fund (ILF) Global/Broad Market iShares S&P Global 100 Index Fund (IOO) * Fund Termination and Liquidation Anticipated On December 13, 2002. This advertising section does not constitute part of the 2002 Annual Report. iShares are not sponsored or endorsed by Goldman, Sachs & Co. or Lehman Brothers, nor are they sponsored, endorsed, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., Morgan Stanley Capital International, The Nasdaq Stock Market, Inc., Frank Russell Company, or Standard & Poor's. None of these companies make any representation regarding the advisability of investing in iShares. Neither SEI nor BGI, nor any of their affiliates, are affiliated with Goldman, Sachs & Co. or Lehman Brothers. "GS $ InvesTop(TM)," "GS $ InvesTop(TM) Index," "GS $ Investment Grade Index(TM)" and "Goldman Sachs-Registered Trademark-" are trademarks of Goldman, Sachs & Co. The methodology of the GS $ InvesTop(TM) Index is owned by Goldman, Sachs & Co., may be covered by one or more patents or pending patent applications and is provided under license from Goldman, Sachs & Co. 34 2002 iShares Annual Report to Shareholders iShares are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to iShares. Barclays Global Investors Services (BGIS) assists in the marketing of iShares. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., neither of which is affiliated with SEI. Investors Bank & Trust Co. serves as administrator, custodian, securities lending agent and transfer agent. iShares are not sponsored, endorsed, sold, or promoted by Morgan Stanley Capital International, Inc., nor does this company make any representation regarding the advisability of investing in iShares. Investing involves risk, including possible loss of principal. (C)2002 Barclays Global Investors. All rights reserved. iShares is a registered trademark of Barclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. This report is intended for the Fund's shareholders. It may not be distributed to prospective investors unless it is preceded or accompanied by the current prospectus. iShares(R) Industrial strength investment tools from BARCLAYS GLOBAL INVESTORS 1-800-iShares (474-2737 ) www.iShares.com