-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ECCevlY6A6vqNUhVY9bGjld49frFK0Wy05y24hu8xK12NQEmFQnvA0eqokenh5nW oi+BusAAOaPxBoinvkGPNA== 0001193125-03-003217.txt : 20030502 0001193125-03-003217.hdr.sgml : 20030502 20030502154258 ACCESSION NUMBER: 0001193125-03-003217 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030228 FILED AS OF DATE: 20030502 EFFECTIVENESS DATE: 20030502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISHARES INC CENTRAL INDEX KEY: 0000930667 IRS NUMBER: 510396525 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-09102 FILM NUMBER: 03679740 BUSINESS ADDRESS: STREET 1: 400 BELLEVUE PKWAY CITY: WILMINGTON STATE: DE ZIP: 19809 BUSINESS PHONE: 800-810-93 FORMER COMPANY: FORMER CONFORMED NAME: FOREIGN FUND INC DATE OF NAME CHANGE: 19950524 FORMER COMPANY: FORMER CONFORMED NAME: WEBS INDEX FUND INC DATE OF NAME CHANGE: 19970211 N-30D 1 dn30d.txt SEMI-ANNUAL REPORT FOR ISHARES INC iShares 2003 SEMI-ANNUAL REPORT TO SHAREHOLDERS FEBRUARY 28, 2003 [PHOTO] 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 iShares Family of Funds.................................................... 74 To Our Shareholders For many investors, the last six months was another difficult and challenging period. A tepid economy, corporate accounting scandals and lackluster company earnings all contributed to the major equity indexes declining for the third straight year, a bear market performance not seen in decades. Global geopolitical uncertainties create the possibility that challenging market conditions may continue. However, iShares continued to innovate and expand, offering more tools that help investors tailor their portfolios to address volatility in this complex market environment. For example, iShares launched the first fixed income exchange-traded funds. Based on investor demand for less volatile asset classes, we introduced three bond funds based on Lehman U.S. Treasury indexes. In addition, to provide credit market exposure we introduced a fund based on the GS $ InvesTop(TM) Index. By the end of 2002, the fixed income iShares funds held $3.8 billion in assets and Business Week named them one of the best new products of the year./1/ With the addition of the fixed income iShares, investors can achieve more diversity in their portfolios -- and at lower cost, since iShares fees are, on average, about half those of actively managed funds./2/ With almost 80 different iShares to choose from, investors have the ability to build a diverse portfolio that covers market capitalization, sectors, value and growth, international and now fixed income indexes. It is important for investors to remember that market segments do not tend to move in tandem, particularly during volatile market conditions. Economic conditions such as inflation, interest rate levels, currency valuations or the price of oil, as well as the normal pace of the economic cycle, all may cause investors to favor one market segment over another. The wide range of performance returns for the various iShares funds this year demonstrates that phenomenon clearly. We encourage you to talk with your financial advisor about what blend of investments or asset allocation can best help you meet your financial goals. Throughout the coming year we will continue to work closely with the financial advisor community to introduce innovative strategies and structures for their client's portfolios. To learn more about iShares, we encourage you to visit our web site, www.iShares.com At times like these, the importance of sound, disciplined investing is greater than ever. Such investing should be grounded in two key concepts: keeping the costs associated with investing as low as possible, and maintaining a diversified portfolio. That is why we believe iShares are proving to be an indispensable tool for investors in the current market. And that is also why more and more investors are recognizing the benefits of iShares. In fact, despite the year's difficult markets, assets under management for iShares actually grew in 2002, reaching $31 billion as of December 31. On behalf of the iShares family of funds and our colleagues at Barclays Global Investors, we thank you for making iShares a part of your portfolio. We look forward to meeting your investment needs in the year ahead. /s/ Garrett F. Bouton /s/ Lee Kranefuss - ----------------------------------- ------------------------------ Garrett F. Bouton Lee Kranefuss President and Chairman of the Board Vice President of the Board of Directors for ishares, Inc. of Directors for ishares, Inc. 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. - ---------- /1/ Business Week, 12/16/02. /2/ Morningstar Principia, BGI analysis 6/02. 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. Shareholder Letter 1 There are risks involved with investing, including possible loss of principal. Diversification may not protect against market risk. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The annual management fees of iShares may be substantially less than those of most mutual funds. iShares transactions will result in brokerage commissions, but the savings from lower annual fees can help offset these costs. Past performance does not guarantee future results. iShares are not sponsored, endorsed, or issued by Goldman, Sachs & Co. or Lehman Brothers, nor are they sponsored, endorsed, issued, 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. "$ InvesTop(TM)", "$ InvesTop(TM) Index", "GS $ InvesTop(TM)" and "Goldman Sachs(R)" 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. 2 2003 iShares Semi-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 ordinary and preferred lines made up 32.07% of the MSCI South Korea Index as of February 28th, 2003. 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 81.23% as of February 28th, 2003; 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. Security lending income is the income earned on lending the security, which is split between the fund and the security lending agent. 4 2003 iShares Semi-Annual Report to Shareholders THIS PAGE INTENTIONALLY LEFT BLANK. 5 Managers' Discussion & Analysis iSHARES MSCI AUSTRIA INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - -------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ---------------------- ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ----- ------ ----- ----- ------ ----- 17.02% 15.65% 18.42% (2.70)% (3.10)% (2.85)% (1.21)% (1.34)% (0.06)% Cumulative Total Returns - -------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ---------------------- ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ------ ------ ------ ----- ------ ----- 17.02% 15.65% 18.42% (12.78)% (14.57)% (13.46)% (8.12)% (8.99)% (0.41)% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI AUSTRIA INDEX [CHART] Pie chart Energy 18.03% Financials 22.27% Industrials 13.31% Materials 15.25% Telecomm Services 26.07% Utilities 5.07% Performance Review The total return of the iShares MSCI Austria Index Fund (the "Fund") was 10.01% for the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Austria Index (the "Index") over the reporting period was 10.34%. Significant Performance Factors The Fund underperformed its benchmark by 0.33 percentage points over the reporting period. This was due to the impact of expenses and uninvested assets, which subtracted 0.42 and 0.02 percentage points, respectively, from the Fund's return. Those factors were partially offset by the positive impact of security sampling, which contributed 0.11 percentage points to the Fund's return. 6 2003 iShares Semi-Annual Report to Shareholders Key Market Conditions The Austrian stock market posted a significant gain during the reporting period, even as many neighboring exchanges fell sharply. In recent years, numerous Austrian companies have been buoyed by their expansion in the growing eastern and central European consumer markets of the Czech Republic, Slovenia and Croatia, among others. This factor continued to drive a wide variety of Austrian stocks over the reporting period, including leading companies such as Erste Bank (22.77% of the Index as of February 28, 2003.) Economic weakness elsewhere in Europe -- especially in Germany, Austria's main trading partner -- did, however, put pressure on some segments of the Austrian equity market in late 2002 and early 2003. The weakness of the U.S. economy was another source of concern for many investors, although it did have at least one positive repercussion for some investors: Worries about the U.S. economy led the euro (Austria's currency) to appreciate significantly versus the dollar over the reporting period, enhancing returns for U.S. dollar-based investors in the Austrian stock market. Mergers, acquisitions and consolidation, whether real or merely expected, also continued to fuel the Austrian stock market in late 2002 and early 2003. In the eyes of some investors, the relatively low valuations of many Austrian companies have made them potentially attractive targets to outside firms. Shares of Telekom Austria (26.06% of the Index as of February 28, 2003), for example, rose to record highs in early 2003 based in large part on speculation that the company would be taken over by Swisscom. (No such deal had been finalized by the end of the reporting period.) These hopes were bolstered by the privatization plans of Austria's new rightwing coalition government; it indicated that it intended to sell the government's remaining stakes in both Telekom Austria, as well as Boehler-Uddeholm (3.39% of the Index as of February 28, 2003), Voest-Alpine (5.26% of the Index as of February 28, 2003) and several other leading Austrian companies over the next four years. Managers' Discussion & Analysis 7 Managers' Discussion & Analysis iSHARES MSCI BELGIUM INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - ----------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ----- ------ ------ ----- (19.01)% (17.57)% (24.91)% (7.39)% (7.31)% (7.52)% (1.56)% (1.41)% (1.04)% Cumulative Total Returns - ----------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ----- ------ ------ ----- (19.01)% (17.57)% (24.91)% (31.89)% (31.58)% (32.35)% (10.37)% (9.42)% (7.03)% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI BELGIUM INDEX [CHART] Pie chart Consumer Discretionary 5.94% Consumer Staples 10.21% Financials 53.22% Health Care 4.98% Industrials 1.50% Information Technology 0.91% Materials 6.84% Utilities 16.40% Performance Review The total return of the iShares MSCI Belgium Index Fund (the "Fund") was -17.45% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Belgium Index (the "Index") over the reporting period was -18.82%. Significant Performance Factors The Fund outperformed its benchmark by 1.37 percentage points over the reporting period. This was due to the impact of security sampling (explained in more detail below), revenue differential, uninvested assets and security lending, which contributed 1.73, 0.05, 0.01 8 2003 iShares Semi-Annual Report to Shareholders and 0.01 percentage points, respectively, to the Fund's return. These factors were partially offset by the impact of expenses, which subtracted 0.43 percentage points from the Fund's return. As discussed in the Introduction, portfolio management constraints can restrict the Investment Adviser's ability to hold a given Index component at its benchmark weight, resulting in security mis-weights. To comply with the Single Issuer Rule, for example, the Belgium Fund was obligated to underweight the Index's largest stock, Fortis Group (28.92% of the Index as of February 28, 2003), over the reporting period while overweighting other financial names. These other financial names generally outperformed Fortis during the reporting period. As a result, security sampling had a positive impact on the Fund's returns relative to the Index's over the reporting period. Key Market Conditions Belgium's large number of financial companies left its stock market vulnerable to the global downturn in world equity markets over the reporting period. Financial stocks made up 53.22% of the Index on February 28, 2003. Shares of Fortis, for example, came under pressure in October 2002 after the company reported that its equity portfolio had dropped $2.1 billion below its purchase price. The company, Belgium's largest, later reported a record loss for the third quarter of 2002, due largely to declines in its equity portfolio. These factors put pressure on Fortis's shares. The Belgian stock market rebounded in late 2002, however, as several companies reported results that, while fairly weak in absolute terms, nonetheless met investors' expectations. The financial sector was also buoyed by speculation that Belgian companies such as Dexia (12.75% of the Index as of February 28, 2003) could become the target of a takeover. Although the rally lasted into early 2003, the Belgian stock market again dropped sharply in February. The global economy's continued weakness and the growing likelihood of a war between the United States and Iraq were major factors in the market's decline that month. In addition, alleged accounting irregularities at the Dutch supermarket operator Ahold (a non-Index component) created a ripple effect that pressured the Belgian stock market through the end of the reporting period. Although February's downturn helped drive the Index to a significant decline over the reporting period as a whole, the euro's strength versus that of the U.S. dollar during much of this period did enhance returns for U.S. dollar-based investors. Managers' Discussion & Analysis 9 Managers' Discussion & Analysis iSHARES MSCI EMU INDEX FUND Performance as of 2/28/03 Average Annual Total Returns Cumulative Total Returns - --------------------------------------------------- ------------------------ Year Ended 2/28/03 Inception to 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ------------------------ NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ----- ------ ------ ------ (22.89)% (23.00)% (22.65)% (22.96)% (22.95)% (22.69)% (49.26)% (49.23)% (48.78)% "Total returns for the period since inception" are calculated from the inception date of the Fund (7/25/00). "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 (7/31/00), 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. 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 its future results. Sector Breakout MSCI EMU INDEX [CHART] Pie chart Consumer Discretionary 11.62% Consumer Staples 8.38% Energy 14.59% Financials 24.06% Health Care 5.06% Industrials 6.49% Information Technology 7.45% Materials 6.21% Telecomm Services 9.61% Utilities 6.53% Performance Review The total return of the iShares MSCI EMU Index Fund (the "Fund") was -12.00% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI EMU Index (the "Index") over the reporting period was -11.70%. Significant Performance Factors The Fund underperformed its benchmark by 0.30 percentage points over the reporting period. This was due to the impact of expenses, which subtracted 0.42 percentage points from the Fund's return. That factor was partially offset by the positive impact of security sampling, revenue differential and security lending, which contributed 0.07, 0.03 and 0.02 percentage points, respectively, to the Fund's return. 10 2003 iShares Semi-Annual Report to Shareholders Key Market Conditions The significant decline of the Index over the reporting period reflected a great deal of political and economic uncertainty in European stock markets. On the economic front, many investors were concerned about the possibility of a "double-dip" recession in the United States and persistent weakness in some of Europe's largest countries, particularly Germany. This worry cast a pall over most EMU stocks during the reporting period. The bear market was especially tough on EMU banks and insurers, many of which were forced to declare significant writedowns on their equity portfolios. In addition, the sharp appreciation of the euro and other European currencies versus the U.S. dollar made things more difficult for quite a few of the region's exporters. This trend came at a time, moreover, when consumer demand in many key markets appeared to be slowing. Political concerns also played a role in driving down the Index over the reporting period. The growing threat of a war between the United States and Iraq was one major worry. Heightened tensions between the U.S. and North Korea was another. Although a potential conflict in the Middle East was a negative development for most EMU stocks, one might have expected the ensuing spike in the price of crude oil to benefit Europe's energy stocks (which collectively made up 14.59% of the Index as of February 28, 2003). This was not the case, however. The share prices of both TotalFinaElf and Royal Dutch Petroleum (each with a weighting of 5.35% in the Index as of February 28, 2003), for example, remained fairly muted over the reporting period. Many investors apparently thought the spiraling price of oil was a temporary phenomenon that would reverse itself after the situation in the Middle East became clearer. Others focused on the declining margins that many energy companies have been facing in their downstream refining operations. Managers' Discussion & Analysis 11 Managers' Discussion & Analysis iSHARES MSCI FRANCE INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - ---------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ---- ------ ----- (22.90)% (23.27)% (22.76)% (2.82)% (2.89)% (2.57)% 3.71% 3.65% 3.95% Cumulative Total Returns - ----------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ---- ------ ----- (22.90)% (23.27)% (22.76)% (13.35)% (13.63)% (12.21)% 28.93% 28.42% 31.00% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI FRANCE INDEX [CHART] Pie chart Consumer Discretionary 14.84% Consumer Staples 14.33% Energy 19.04% Financials 15.38% Health Care 12.48% Industrials 7.02% Information Technology 5.55% Materials 5.95% Telecomm Services 2.99% Utilities 2.42% Performance Review The total return of the iShares MSCI France Index Fund (the "Fund") was -11.18% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI France Index (the "Index") over the reporting period was -10.87%. 12 2003 iShares Semi-Annual Report to Shareholders Significant Performance Factors The Fund underperformed its benchmark by 0.31 percentage points over the reporting period. This was due to the impact of expenses and uninvested assets, which subtracted 0.42 and 0.05 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 0.13, 0.02 and 0.01 percentage points, respectively, to the Fund's return. Key Market Conditions A variety of factors combined to drive the Index sharply lower over the reporting period. Like countless other European stocks, shares of many French companies were depressed by the poor economic outlook in parts of Europe and in the United States. Economic and political turmoil in some Latin American countries created further difficulties for French companies with interests in that region. The ensuing equity declines exacerbated the financial difficulties of many French banks and insurance companies. Shares of insurer AXA (3.78% of the Index as of February 28, 2003), for example, were among the French market's weaker performers over the reporting period, as the company grappled with a sharp decline in the value of its equity holdings. The crisis was not confined to the insurance sector. Another French firm facing heavy writedowns on its stock holdings and investments in South America was the utility provider Suez. (Shares of Suez, which had once been among the 10 largest stocks in the Index, had declined to a weighting of 2.40% in the Index by February 28, 2003.) The company's shares were under especially intense pressure in late February, when they lost about one fifth of their value in just one week. The cause of the decline was apparently speculation about Suez's accounting practices, though the company insisted that the rumors are unfounded. Many French stocks came under still more pressure as tensions in the Middle East grew during the reporting period. Although the threat of a war with Iraq led to a spike in the price of crude oil, market leader TotalFinaElf did not benefit from that trend as much as might have been expected. (As of February 28, 2003, TotalFinaElf was the largest stock in the Index, with a weighting of 18.76%). Some investors apparently believed that the rise in the price of oil would be only a temporary phenomenon. Others continued to worry about a significant decline in TotalFinaElf's refining margins, keeping a lid on the company's share price over the reporting period. Managers' Discussion & Analysis 13 Managers' Discussion & Analysis iSHARES MSCI GERMANY INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - ------------------------------------------------------------------------------ Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ------------------------ NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ------ ------ ------ (35.25)% (35.43)% (35.04)% (10.73)% (10.78)% (10.62)% (2.62)% (2.65)% (2.12)% Cumulative Total Returns - ------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ------------------------ NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ------ ------ ------ (35.25)% (35.43)% (35.04)% (43.32)% (43.48)% (42.96)% (16.90)% (17.10)% (13.88)% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI GERMANY INDEX {CHART] Pie chart Consumer Discretionary 18.42% Consumer Staples 2.93% Financials 18.64% Health Care 5.26% Industrials 14.32% Information Technology 7.20% Materials 12.40% Telecomm Services 8.65% Utilities 12.18% Performance Review The total return of the iShares MSCI Germany Index Fund (the "Fund") was -23.87% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Germany Index (the "Index") over the reporting period was -23.62%. 14 2003 iShares Semi-Annual Report to Shareholders Significant Performance Factors The Fund underperformed its benchmark by 0.25 percentage points over the reporting period. This was due to the impact of expenses, which subtracted 0.42 percentage points from the Fund's return. That factor was partially offset by the positive impact of uninvested assets, security sampling, revenue differential and security lending, which contributed 0.06, 0.05, 0.04 and 0.02 percentage points, respectively, to the Fund's return. Key Market Conditions Like many other stock markets, Germany was pressured by the global economic slowdown and weakness in its domestic economy over the reporting period. The threat of a U.S. war with Iraq only added to the uncertainty. What made Germany the weakest performing major stock market in Europe during the reporting period, however, was its contingent of banking and insurance stocks. At a time of declining asset values, the network of cross-shareholdings among Germany's banks and insurers created a snowball effect. Shares of Allianz (4.79% of the Index as of February 28, 2003), for example, declined along with the value of the company's equity portfolio, a rise in its loan-loss provisions and troubles at its Dresdner Bank unit. The drop in Allianz's stock price in turn led to corresponding declines in shares of companies with significant stakes in Allianz, such as Muenchener Rueckversicherung ("Munich Re," 3.43% of the Index as of February 28, 2003). German insurers such as Munich Re also faced heavy claims related to the floods that hit central Europe during the summer. A variety of other German corporations faced more specific challenges over the reporting period. Shares of the pharmaceutical firm Bayer, for example, declined as many investors worried about the company's situation with Baycol, the cholesterol drug it was forced to withdraw from the market in 2001. (Bayer had a weighting of 3.28% in the Index as of February 28, 2003.) Meanwhile, high debt levels at such companies as Deutsche Telekom and the utility E.ON (respectively 8.65% and 9.00% of the Index as of February 28, 2003) put pressure on their shares. Not all German stocks performed poorly over the reporting period, however. Shares of software developer SAP, for example, rose nearly 25% in a single day in mid-October 2002 and remained buoyant after the company reported higher-than-expected profits. (As of February 28, 2003, SAP had a weighting of 6.13% in the Index.) The results reflected SAP's success at cutting costs and gaining market share despite stagnant demand for business software. Managers' Discussion & Analysis 15 Managers' Discussion & Analysis iSHARES MSCI ITALY INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - ---------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ----- ------ ------ ------ ----- ------ ----- (1.96)% (2.34)% (1.85)% (1.67)% (1.82)% (1.75)% 6.84% 6.78% 6.81% Cumulative Total Returns - ---------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ----- ------ ------ ------ ----- ------ ----- (1.96)% (2.34)% (1.85)% (8.07)% (8.77)% (8.45)% 58.58% 57.99% 58.24% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI ITALY INDEX [CHART] Pie chart Consumer Discretionary 6.85% Consumer Staples 0.34% Energy 21.05% Financials 39.11% Health Care 1.06% Industrials 0.66% Information Technology 0.36% Materials 0.37% Telecomm Services 22.27% Utilities 7.93% Performance Review The total return of the iShares MSCI Italy Fund (the "Fund") was 1.21% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Italy Index (the "Index") over the reporting period was 1.92%. Significant Performance Factors The Fund underperformed its benchmark by 0.71 percentage points over the reporting period. This was due to the impact of security sampling, expenses and uninvested assets, which subtracted 0.48, 0.42 and 0.02 percentage points, respectively, from the Fund's return 16 2003 iShares Semi-Annual Report to Shareholders over the reporting period. Those factors were partially offset by the positive impact of revenue differential and security lending, which contributed 0.15 and 0.06 percentage points, respectively, to the Fund's return. Key Market Conditions Italy's equity market was spared the sharper declines that many of its neighbors suffered over the reporting period. To some extent, the Italian market's resilience was due to the fact that many Italian companies are more insulated than their counterparts elsewhere in Europe. Shares of numerous European insurers, for example, fell sharply during the reporting period as investors grew more concerned about these companies' exposure to sinking equity markets. This trend was less of a concern in relation to the large Italian insurer Assicurazioni Generali (13.06% of the Index as of February 28, 2003), given that it had relatively light exposure to equities. Shares of Assicurazioni Generali performed better than those of many other large European insurers in late 2002 and early 2003. A similar dynamic helped to support shares of Telecom Italia. (As of February 28, 2003, Telecom Italia SpA ORD shares made up 8.34% of the Index while Telecom Italia SpA RNC shares made up another 5.10%.) Telecom Italia made progress in reducing what debt it has had while continuing to maintain a fairly high level of profitability, helping to make it one of the better performers over the reporting period among large European telecommunications firms. Although many Italian firms were less acquisitive than European peers when it came to expansion outside Italy, mergers and takeovers continued inside the country. Shares of toll-road operator Autostrade, for example, rose sharply in late 2002 after the company received a takeover offer from a group of investors led by the Benetton family. (Autostrade was one of the Index's 10 largest stocks during the reporting period. Following the takeover, it was removed from the MSCI Italy Index.) Managers' Discussion & Analysis 17 Managers' Discussion & Analysis iSHARES MSCI NETHERLANDS INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - ---------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ----- ------ ----- (31.47)% (31.52)% (28.51)% (11.57)% (11.63)% (9.50)% (1.36)% (1.41)% 0.67% Cumulative Total Returns - ----------------------------------------------------------------------------- YEAR ENDED 2/28/03 FIVE YEARS ENDED 2/28/03 INCEPTION TO 2/28/03 - ------------------------ ------------------------ ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ----- ------ ----- (31.47)% (31.52)% (28.51)% (45.93)% (46.10)% (39.29)% (9.10)% (9.44)% 4.74% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI NETHERLANDS INDEX [CHART] Pie chart Consumer Discretionary 14.90% Consumer Staples 16.84% Energy 33.81% Financials 23.37% Industrials 2.44% Information Technology 1.62% Materials 2.45% Telecomm Services 4.57% Performance Review The total return of the iShares MSCI Netherlands Index Fund (the "Fund") was - -22.42% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Netherlands Index (the "Index") over the reporting period was -19.18%. 18 2003 iShares Semi-Annual Report to Shareholders Significant Performance Factors The Fund underperformed its benchmark by 3.24 percentage points over the reporting period. This was due to the impact of security sampling (explained in more detail below) and expenses, which subtracted 2.90 and 0.43 percentage points, respectively, from the Fund's return. Those factors were partially offset by the positive impact of uninvested assets and revenue differential, which contributed 0.05 and 0.04 percentage points, respectively, to the Fund's return. As discussed in the Introduction, portfolio management constraints can restrict the Investment Adviser's ability to hold a given Index component at its benchmark weight, resulting in security mis-weights. To comply with the Single Issuer Rule, for example, the Netherlands Fund was obligated to underweight Royal Dutch Petroleum Co. ("Royal Dutch") while overweighting other Dutch stocks such as Koninklijke Ahold NV ("Ahold"). (As of February 28, 2003, Royal Dutch had a weighting of 23.65% in the Fund versus a weighting of 33.29% in the Index. As of the same date, Ahold had a weighting of 1.79% in the Fund versus 0.97% in the Index.) During the month of February 2003, shares of Ahold declined sharply in local-currency terms. Largely as a result of Ahold's performance in February, security sampling had a negative impact on the Fund's performance relative to its benchmark over the reporting period. Key Market Conditions Like many other stocks around the world, Dutch equities faced pressure from numerous external factors over the reporting period. But it was the performance of a single stock that caused the greatest impact. In late February 2003, Dutch supermarket operator Koninklijke Ahold NV, revealed what it called "significant accounting irregularities" at its U.S. foodservice unit. In addition, the company's CEO and CFO resigned. The news led Ahold's shares to decline 63% in one day and drop still further in subsequent days. It also created a ripple effect across the Netherlands' equity market, given that many Dutch corporations own significant stakes in Ahold. Financial-services companies such as ING and AEGON (respectively 9.05% and 5.47% of the Index as of February 28, 2003) were among the larger Dutch stocks that dropped sharply after Ahold's disclosure. Unfortunately, their shares had already been depressed by concerns about the declining value of their equity portfolios and potential exposure to corporate defaults. The repercussions from Ahold's disclosures in late February capped off a six-month period in which Dutch shares had generally declined along with investor sentiment. The stagnant U.S. economy and weakness in several other regions created a difficult operating environment for numerous Dutch exporters. The euro's strength versus the U.S. dollar only added to the challenges. Many Dutch stocks were also pressured by the growing threat of a U.S. war with Iraq. In the past, the ensuing spike in the price of crude oil might have been a major boon to market giant Royal Dutch Petroleum Co. (whose shares made up approximately one-third of the Index as of February 28, 2003). This time, however, shares of Royal Dutch remained fairly subdued. The fallout from Ahold's disclosures also weighed on shares of Royal Dutch, which is widely seen as a proxy for the larger Dutch equity market. Managers' Discussion & Analysis 19 Managers' Discussion & Analysis iSHARES MSCI SPAIN INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - ---------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ----- ------ ----- (6.62)% (6.67)% (7.60)% (3.47)% (3.50)% (3.63)% 8.06% 8.02% 8.34% Cumulative Total Returns - ----------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ------------------------ ------------------------ ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ----- ------ ------ ------ ----- ------ ----- (6.62)% (6.67)% (7.60)% (16.20)% (16.33)% (16.88)% 71.60% 71.26% 74.79% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI SPAIN INDEX [CHART] Pie chart Consumer Discretionary 4.33% Consumer Staples 3.91% Energy 7.29% Financials 32.07% Health Care 0.45% Industrials 6.70% Information Technology 1.12% Materials 0.94% Telecomm Services 25.95% Utilities 17.24% Performance Review The total return of the iShares MSCI Spain Index Fund (the "Fund") was 3.05% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Spain Index (the "Index") over the reporting period was 3.60%. 20 2003 iShares Semi-Annual Report to Shareholders Significant Performance Factors The Fund underperformed its benchmark by 0.55 percentage points over the reporting period. This was due to the impact of expenses, revenue differential and uninvested assets, which subtracted 0.46, 0.11 and 0.07 percentage points from the Fund's return. Those factors were partially offset by the positive impact of security sampling and security lending, which contributed 0.08 and 0.01 percentage points, respectively, to the Fund's return. Key Market Conditions Latin America continued to be an Achilles heel for many Spanish companies during the reporting period. Several of the largest corporations in the Index, including the financial-services firm Banco Santander Central Hispano (BSCH) and the utility company Endesa (respectively 15.64% and 6.12% of the Index as of February 28, 2003), have had significant holdings in Latin America. In the past this exposure was profitable for many of these companies, but over the reporting period it was generally a liability. Not only did growth in Latin America slow sharply, but the value of many Spanish companies' assets in the region also declined along with the value of currencies such as the Brazilian real. In addition, many investors viewed the popularity, and eventual victory, of the leftwing candidate Luis Inacio Lula da Silva in Brazil's presidential election with alarm, fearing that his administration would seek to unwind free-market reforms. These fears weighed heavily on some Spanish stocks over the autumn. The concerns abated somewhat after Brazil's new president took office in January 2003 and appeared committed to austerity measures. Many investors were also apparently relieved that a number of Spanish companies, including BSCH, had begun to pare down their exposure to Latin America by disposing of certain assets. Nonetheless, the persistent weakness of major world economies, particularly the United States, continued to cast a shadow over many Spanish stocks in early 2003. Concerns about the high level of debt at Spanish companies such as Union Fenosa (1.64% of the Index as of February 28, 2003) also helped pressure the shares in question. The threat of war between the U.S. and Iraq was yet another worry. One Spanish company that did, however, profit indirectly from the concerns about a possible war in the Middle East was Repsol YPF (7.29% of the Index as of February 28, 2003); its share price benefited from the rise in the price of crude oil in early 2003. The euro, Spain's currency, also appreciated versus the U.S. dollar during the reporting period, helping to boost the returns of dollar-based investors. Managers' Discussion & Analysis 21 Managers' Discussion & Analysis iSHARES MSCI SWEDEN INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - -------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - --------------------------- ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ----- ------ ------ ---- ------ ------ (26.32)% (26.39)% (26.38)% (8.17)% (8.18)% (6.54)% 0.95% 0.93% 2.43% Cumulative Total Returns - -------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - -------------------------- ------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ---- ------ ----- (26.32)% (26.39)% (26.38)% (34.69)% (34.75)% (28.69)% 6.80% 6.66% 18.25% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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. 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 its future results. Sector Breakout MSCI SWEDEN INDEX [CHART] Pie chart Consumer Discretionary 17.44% Consumer Staples 2.70% Financials 25.00% Health Care 2.33% Industrials 24.73% Information Technology 10.15% Materials 8.65% Telecomm Services 9.00% Performance Review The total return of the iShares MSCI Sweden Index Fund (the "Fund") was -3.65% for the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Sweden Index (the "Index") over the reporting period was -3.44%. 22 2003 iShares Semi-Annual Report to Shareholders Significant Performance Factors The Fund underperformed its benchmark by 0.21 percentage points over the reporting period. This was due to the impact of expenses and uninvested assets, which subtracted 0.46 and 0.03 percentage points, respectively, from the Fund's return. Those factors were partially offset by the positive impact of security sampling, security lending and revenue differential, which contributed 0.22, 0.04 and 0.02 percentage points, respectively, to the Fund's return. Key Market Conditions Economic and political uncertainty combined to drive the Index lower during the reporting period. The economic slowdown in the United States, Europe and in other regions put a damper on investor sentiment as the reporting period began. Weak overseas demand led to disappointing results for Swedish exporters such as the appliance maker Electrolux (5.38% of the Index as of February 28, 2003) and generally drove down their shares. Many investors were taken by surprise when Ericsson's (9.94% of the Index as of February 28, 2003) credit rating was lowered another notch in September. The news led to a sharp decline in Ericsson's shares. Its stock dropped again later that month when the company ratcheted down its expectations for sales and orders. Many investors then became more optimistic in October and November, as the U.S. economy appeared to be in better health than had been thought. Improving sentiment toward telecommunications stocks in general also helped boost shares of Ericsson. The rally was fleeting, though. In December, the Index again headed south and generally remained weak for the rest of the reporting period. Its decline would have been greater had the krona, Sweden's currency, not strengthened versus the U.S. dollar over the reporting period. The strengthening krona helped to buoy the returns of dollar-based investors in the Swedish market. Managers' Discussion & Analysis 23 Managers' Discussion & Analysis iSHARES MSCI SWITZERLAND INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - -------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - -------------------------- ------------------------ ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ----- ------ ------ ----- ------ ----- (17.10)% (16.17)% (15.42)% (8.16)% (8.18)% (7.24)% (0.17)% (0.08)% 1.60% Cumulative Total Returns - -------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - -------------------------- -------------------------- -------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ----- ------ ----- (17.10)% (16.17)% (15.42)% (34.68)% (34.73)% (31.32)% (1.21)% (0.53)% 11.66% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI SWITZERLAND INDEX [CHART] Pie chart Consumer Discretionary 3.60% Consumer Staples 20.30% Financials 26.51% Health Care 39.58% Industrials 2.24% Information Technology 0.61% Materials 5.16% Telecomm Services 2.00% Performance Review The total return of the iShares MSCI Switzerland Index Fund (the "Fund") was - -12.45% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Switzerland Index (the "Index") over the same period was -11.76%. 24 2003 iShares Semi-Annual Report to Shareholders Significant Performance Factors The Fund underperformed its benchmark by 0.69 percentage points over the reporting period. This was due to the impact of expenses and security sampling, which subtracted 0.42 and 0.31 percentage points, respectively, from the Fund's return. These factors were partially offset by the positive impact of revenue differential and uninvested assets, each of which contributed 0.02 percentage points to the Fund's return. Key Market Conditions The Swiss equity market has traditionally been viewed as a haven for international capital during times of uncertainty, but the performance of the Index during the reporting period appeared to belie that reputation. Somewhat ironically, the market's less-than-stellar performance was in part due to the defensive quality of Switzerland's currency. As concerns grew about a global recession and war in the Middle East, many investors flocked to the perceived safety of the Swiss franc. This influx caused the currency to appreciate sharply versus the U.S. dollar over the reporting period. On the one hand, the Swiss franc's strength helped to buoy the returns of U.S. dollar-based investors in the Swiss stock market. On the other hand, the currency's appreciation generally put Swiss exporters such as the pharmaceutical giant Novartis and the food manufacturer Nestle (respectively 25.63% and 20.30% of the Index as of February 28, 2003) at a competitive disadvantage in the U.S. The strength of the Swiss franc was one of the factors Nestle cited in reporting lower-than-expected results for the first nine months of 2002. A variety of other factors combined to drive the Swiss market lower in late 2002 and early 2003. Heavy investment-related losses hit many of Switzerland's largest companies, including the financial-services firm Credit Suisse and the pharmaceutical maker Roche Holding (respectively 5.67% and 10.74% of the Index as of February 28, 2003). Managers' Discussion & Analysis 25 Managers' Discussion & Analysis iSHARES MSCI UNITED KINGDOM INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - -------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - -------------------------- ------------------------ ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ----- ------ ----- ---- ------ ----- (18.80)% (19.00)% (18.42)% (7.44)% (7.61)% (7.14)% 2.46% 2.36% 3.02% Cumulative Total Returns - -------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - -------------------------- ------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ----- ------ ----- (18.80)% (19.00)% (18.42)% (32.06)% (32.67)% (30.95)% 18.43% 17.62% 23.03% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI UNITED KINGDOM INDEX [CHART] Pie chart Consumer Discretionary 9.20% Consumer Staples 11.26% Energy 15.89% Financials 25.46% Health Care 13.12% Industrials 4.62% Information Technology 0.49% Materials 4.18% Telecomm Services 11.03% Utilities 4.75% Performance Review The total return of the iShares MSCI United Kingdom Index Fund (the "Fund") was - -11.11% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI United Kingdom Index (the "Index") over the reporting period was -10.90%. 26 2003 iShares Semi-Annual Report to Shareholders Significant Performance Factors The Fund underperformed its benchmark by 0.21 percentage points over the reporting period. This was due to the impact of expenses and security sampling, which subtracted 0.44 and 0.12 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 0.34 and 0.01 percentage points, respectively, to the Fund's return. Key Market Conditions Shares of U.K. companies faced a strong headwind from political and economic uncertainties during the reporting period. The threat of recession in both the United States and Europe was one concern; political turmoil in the Middle East was another. The resulting surge in the price of crude oil did not, however, lead to large gains for U.K. oil stocks, a major component of Britain's stock market. (As of February 28, 2003, energy stocks made up 15.89% of the Index.) Like numerous other oil producers, companies such as BP PLC and Shell Transport & Trading Co. PLC (respectively 10.64% and 4.22% of the Index as of February 28, 2003) were weighed down by lower refining margins. BP also surprised investors by lowering its forecast for oil and gas output several times in late 2002, leading to a decline in its share price. Meanwhile, several of the U.K.'s largest pharmaceutical makers, another important component of the British stock market, continued to face growing competition from generic producers. These concerns were one factor that led to a relatively weak performance for shares of GlaxoSmithKline and AstraZeneca (respectively 8.01% and 4.20% of the Index as of February 28, 2003) over the reporting period. The U.K. stock market's decline was compounded in early 2003 when a number of British insurance companies and pension funds were forced to sell off shares in order to maintain their mandated solvency ratios. In February 2003, however, U.K. regulators announced that they were considering relaxing solvency requirements for insurance companies, potentially alleviating a source of downward pressure on the stock market. The Index rose after the news, led by shares of insurers. In addition, not all U.K. stocks turned in weak performances over the reporting period. For example, Vodafone Group PLC (9.19% of the Index as of February 28, 2003) proved to be one of the better performers among the 10 largest holdings in the Index. After having underperformed the market for quite some time, the company's shares moved up sharply over the fall of 2002 as its results surpassed the expectations of many investors and analysts. Vodafone's share price was also lifted by improving sentiment toward telecommunications stocks in general, though the optimism seemed to have dissipated by the start of the new year. Managers' Discussion & Analysis 27 Schedule of Investments (Unaudited) iSHARES MSCI AUSTRIA INDEX FUND February 28, 2003 Security Shares Value - --------------------------------------------------------------- COMMON STOCKS - 99.83% Telekom Austria AG/1/ 282,404 $ 2,976,788 OMV AG 22,015 2,378,709 Erste Bank der Oesterreichischen Sparkassen AG 30,022 2,009,414 Flughafen Wien AG 20,383 738,152 Wienerberger Baustoffindustrie AG 42,432 723,042 Oesterreichische Elektrizitaetswirtschafts AG Class A 8,109 719,379 Boehler-Uddeholm AG 14,382 717,383 Voest-Alpine AG 29,886 713,476 Mayr-Melnhof Karton AG 9,095 711,864 Generali Holding Vienna AG 3,383 568,807 Immofinanz Immobillien Anlage AG/1/ 84,218 537,359 RHI AG/1/ 59,211 523,304 VA Technologie AG 29,240 456,966 Lenzing AG 4,641 437,681 BBAG Oesterreichische Brau-Beteiligungs AG 4,148 339,104 Austrian Airlines AG/1/ 44,455 306,647 BWT AG 24,939 244,601 TOTAL COMMON STOCKS (Cost: $14,714,462) 15,102,676 SHORT TERM INSTRUMENTS - 0.05% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 8,168 $ 8,168 TOTAL SHORT TERM INSTRUMENTS (Cost: $8,168) 8,168 TOTAL INVESTMENTS IN SECURITIES - 99.88% (Cost $14,722,630) 15,110,844 Other Assets, Less Liabilities - 0.12% 17,493 ----------- NET ASSETS - 100.00% $15,128,337 =========== /1/ Non-income earning securities. See notes to financial statements. 28 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI BELGIUM INDEX FUND February 28, 2003 Security Shares Value - --------------------------------------------------------------- COMMON STOCKS - 99.68% Fortis 486,678 $ 6,661,678 Electrabel SA 14,790 3,714,174 Dexia Group 388,716 3,548,575 KBC Bankverzekeringsholding 48,720 1,472,392 AGFA-Gevaert NV 67,164 1,447,063 Solvay SA 23,751 1,407,936 Groupe Bruxelles Lambert SA 37,671 1,400,762 Algemene Maatschappij voor Nijverheidskredit NV 41,064 1,322,010 Interbrew SA 73,254 1,257,724 Colruyt NV 20,706 1,228,547 UCB SA 49,938 1,141,590 Cofinimmo 9,831 1,123,160 Delhaize Group 62,205 948,010 Umicore 18,531 755,768 Bekaert NV 17,313 611,113 SA D'Ieteren NV 3,915 448,542 Barco NV 8,613 445,588 Compagnie Maritime Belge SA 5,568 294,418 Omega Pharma SA 18,966 292,314 TOTAL COMMON STOCKS (Cost: $35,450,887) 29,521,364 SHORT TERM INSTRUMENTS - 0.22% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 63,353 $ 63,353 TOTAL SHORT TERM INSTRUMENTS (Cost: $63,353) 63,353 TOTAL INVESTMENTS IN SECURITIES - 99.90% (Cost $35,514,240) 29,584,717 Other Assets, Lless Liabilities - 0.10% 30,429 ----------- NET ASSETS - 100.00% $29,615,146 =========== See notes to financial statements. Schedules of Investments 29 Schedule of Investments (Unaudited) iSHARES MSCI EMU INDEX FUND February 28, 2003 Security Shares Value - --------------------------------------------------------------- COMMON STOCKS - 98.17% AUSTRIA - 0.53% Boehler-Uddeholm AG 462 $ 23,045 Erste Bank der Oesterreichischen Sparkassen AG 2,112 141,359 Flughafen Wien AG 924 33,462 Mayr-Melnhof Karton AG 396 30,995 Oesterreichische Elektrizitaetswirtschafts AG Class A 660 58,551 OMV AG 1,254 135,494 RHI AG/1/ 1,716 15,166 Telekom Austria AG/1/ 16,038 169,055 VA Technologie AG 792 12,377 Voest-Alpine AG 1,914 45,693 Wienerberger Baustoffindustrie AG 2,310 39,362 704,559 BELGIUM - 3.01% AGFA-Gevaert NV 9,372 201,922 Barco NV 858 44,388 Bekaert NV 1,584 55,912 Colruyt NV 1,980 117,479 Compagnie Maritime Belge SA 396 20,939 Delhaize Group 5,742 87,509 Dexia Group 54,516 497,675 Electrabel SA 2,574 646,402 Fortis 80,718 1,104,873 Groupe Bruxelles Lambert SA 6,468 240,507 Interbrew SA 12,540 215,304 KBC Bankverzekeringsholding 7,722 233,370 Omega Pharma SA 1,716 26,448 SA D'leteren NV 396 45,370 Solvay SA 3,432 203,446 UCB SA 7,194 164,456 Umicore 1,848 75,369 3,981,369 FINLAND - 5.79% Amer Group Ltd. 1,716 61,588 Fortum OYJ 26,004 170,965 Instrumentarium OYJ 3,696 $ 149,383 KCI Konecranes 924 20,465 Kesko OYJ 6,600 73,411 KONE OYJ Class B 2,640 86,500 Metso OYJ 7,854 81,264 Nokia OYJ 398,904 5,331,240 Orion-Yhtyma OYJ Class B 2,310 36,101 Outokumpu OYJ 6,600 55,058 Pohjola Group PLC Class D 1,518 23,887 Rautaruukki OYJ 13,200 50,506 Sampo OYJ Class A 21,912 136,977 Stora Enso OYJ Class R 59,400 581,954 TietoEnator OYJ 7,260 100,158 UPM-Kymmene OYJ 20,460 586,578 Uponor OYJ 3,960 81,008 Wartsila OYJ Class B 2,376 30,756 7,657,799 FRANCE - 27.60% Accor SA 16,170 496,699 Air France 7,194 68,155 Alcatel SA Class A 94,380 680,525 ALSTOM/1/ 21,978 69,405 Altran Technologies SA 5,214 14,499 Atos Origin SA/1/ 1,650 49,279 Autoroutes du Sud de la France/1/ 6,600 169,230 Aventis SA 56,628 2,571,348 AXA 115,764 1,414,897 BNP Paribas SA 67,584 2,797,134 Bouygues SA 13,860 336,709 Business Objects SA/1/ 5,016 85,148 Cap Gemini SA 8,646 226,443 Carrefour SA 47,982 1,817,782 Club Mediterranee SA/1/ 1,254 29,721 Compagnie de Saint-Gobain 25,806 779,618 Compagnie Generale des Etablissements Michelin Class B 10,956 355,432 Dassault Systemes SA 3,300 75,616 Essilor International SA 7,722 299,620 Etablissements Economiques du Casino Guichard - Perrachon SA 2,574 147,036 30 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) (Continued) iSHARES MSCI EMU INDEX FUND February 28, 2003 Security Shares Value - ---------------------------------------------------------------- European Aeronautic Defence and Space Co. 24,750 $ 215,272 France Telecom 34,650 767,829 Groupe Danone 10,626 1,257,507 Imerys SA 858 91,366 Lafarge SA 11,154 649,176 Lagardere S.C.A. 10,692 393,539 L'Air Liquide SA 8,460 1,085,976 L'Oreal SA 28,644 1,849,263 LVMH Moet Hennessy Louis Vuitton SA 18,942 782,329 Pechiney Class A 6,072 153,793 Pernod Ricard 4,867 376,900 Pinault-Printemps-Redoute SA 5,610 359,764 PSA Peugeot Citroen 13,464 594,971 Publicis Groupe 7,458 134,399 Renault SA 12,804 541,242 Sagem SA 990 64,181 Sanofi-Synthelabo SA 33,528 1,793,092 Schneider Electric SA 16,896 734,976 Societe BIC SA 3,432 109,491 Societe Generale Class A 25,542 1,370,953 Societe Television Francaise 1 10,362 236,988 Sodexho Alliance SA 8,712 208,172 Suez SA 69,036 904,045 Technip-Coflexip SA 1,529 98,877 Thales SA 5,214 119,474 Thomson/1/ 14,784 207,144 TotalFinaElf SA 53,526 7,072,834 Unibail Holding 3,366 211,505 Valeo SA 6,204 176,127 Vinci SA 5,148 305,446 Vivendi Universal SA 77,022 1,080,846 Zodiac SA 3,960 74,265 36,506,038 GERMANY - 16.84% adidas-Salomon AG 3,498 281,366 AIXTRON AG 4,488 13,496 Allianz AG 15,510 1,110,990 ALTANA AG 6,072 $ 251,436 BASF AG 43,824 1,597,437 Bayer AG 57,684 761,605 Bayerische Hypo-und Vereinsbank AG 28,710 275,398 Beiersdorf AG 2,706 293,694 Buderus AG 3,300 87,140 Continental AG/1/ 9,900 157,066 DaimlerChrysler AG 72,270 2,212,150 Deutsche Bank AG 46,794 1,901,383 Deutsche Boerse AG 4,950 191,637 Deutsche Lufthansa AG/1/ 15,114 128,038 Deutsche Post AG 31,944 325,012 Deutsche Telekom AG 175,230 2,015,167 Douglas Holding AG 2,442 35,927 E.ON AG 49,038 2,092,985 EPCOS AG/1/ 4,884 53,956 Fresenius Medical Care AG 2,970 125,514 GEHE AG 1,782 67,222 HeidelbergerCement AG 2,640 63,196 Infineon Technologies AG/1/ 29,436 186,867 KarstadtQuelle AG 3,300 42,823 Linde AG 7,326 209,954 MAN AG 9,174 133,188 Merck KGaA 3,432 82,858 METRO AG 11,844 222,119 MLP AG 5,148 39,006 Muenchener Rueckversicherungs- Gesellschaft AG 8,778 790,744 RWE AG 30,162 665,776 SAP AG 17,226 1,439,993 Schering AG 14,718 550,607 Siemens AG 67,254 2,666,048 ThyssenKrupp AG 29,700 285,215 TUI AG 11,946 118,840 Volkswagen AG 19,272 770,617 WCM Beteiligungs-und Grundbesitz AG/1/ 8,452 18,037 22,264,507 Schedules of Investments 31 Schedule of Investments (Unaudited) (Continued) iSHARES MSCI EMU INDEX FUND February 28, 2003 Security Shares Value - ---------------------------------------------------------------- GREECE - 0.69% Hellenic Telecommunications Organization SA ADR 97,614 $ 546,638 National Bank of Greece SA ADR 147,246 362,225 908,863 IRELAND - 2.46% Allied Irish Banks PLC 75,570 965,175 Bank of Ireland 85,932 946,551 CRH PLC 45,540 559,546 DCC PLC 6,600 67,934 Elan Corp. PLC/1/ 28,512 95,264 Greencore Group PLC 11,088 27,845 Independent News & Media PLC 39,600 57,619 Irish Life & Permanent PLC 23,562 231,096 Kerry Group PLC Class A/1/ 11,286 136,846 Ryanair Holdings PLC/1/ 21,760 138,841 Waterford Wedgwood PLC 76,164 23,806 3,250,523 ITALY - 11.89% ACEA SpA 9,636 38,946 Alitalia SpA/1/ 184,602 45,165 Alleanza Assicurazioni SpA 38,148 323,582 Arnoldo Mondadori Editore SpA 13,200 79,671 Assicurazioni Generali SpA 85,140 2,151,863 Autogrill SpA/1/ 9,900 87,496 Banca Fideuram SpA 23,100 94,360 Banca Intesa SpA 308,682 715,300 Banca Monte dei Paschi di Siena SpA 76,296 180,910 Banca Nazionale del Lavoro SpA/1/ 132,000 158,346 Banca Popolare di Milano Scrl/1/ 33,000 128,398 Benetton Group SpA 6,204 42,460 Bulgari SpA 13,200 59,469 Capitalia SpA 113,736 140,237 e.Biscom SpA/1/ 726 20,736 Enel SpA 176,500 1,036,763 ENI SpA 237,006 3,517,479 Fiat SpA 19,800 153,651 Fineco SpA/1/ 168,432 65,898 Gruppo Editoriale L'Espresso SpA 13,662 $ 47,561 Italcementi SpA 9,570 88,499 Luxottica Group SpA 11,748 135,230 Mediaset SpA 51,480 373,970 Mediobanca SpA 39,666 384,768 Mediolanum SpA 19,800 83,868 Parmalat Finanziaria SpA 36,300 59,860 Pirelli SpA 66,000 57,050 Riunione Adriatica di Sicurta SpA 29,700 365,242 Sanpaolo IMI SpA 72,600 508,614 SEAT Pagine Gialle SpA/1/ 419,364 274,810 Snam Rete Gas SpA 63,360 224,672 Snia SpA/1/ 20,130 37,534 Telecom Italia Mobile SpA 320,826 1,445,387 Telecom Italia SpA Class A 201,300 1,399,399 Tiscali SpA/1/ 13,860 61,546 UniCredito Italiano SpA 284,526 1,140,783 15,729,523 LUXEMBOURG - 0.22% Arcelor/1/ 29,436 294,736 294,736 NETHERLANDS - 16.00% ABN AMRO Holding NV 117,348 1,865,546 AEGON NV 107,514 1,152,992 Akzo Nobel NV 23,364 505,901 ASML Holding NV/1/ 37,950 273,638 Burhmann NV 7,326 20,293 Getronics NV/1/ 24,156 3,124 Hagemeyer NV 7,656 37,380 Heineken NV 16,566 591,888 IHC Caland NV 2,376 105,635 ING Groep NV 141,438 1,913,146 Koninklijke Ahold NV 53,262 200,920 Koninklijke KPN NV/1/ 146,322 969,891 Koninklijke Luchtvaart Maatschappij NV 2,970 20,647 Koninklijke Numico NA CVA 11,484 60,649 Koninklijke Philips Electronics NV 109,824 1,832,341 Koninklijke Vendex KBB NV 6,666 47,993 32 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) (Continued) iSHARES MSCI EMU INDEX FUND February 28, 2003 Security Shares Value - ----------------------------------------------------------------- Oce NV 6,072 $ 54,777 QIAGEN NV/1/ 8,712 50,893 Reed Elsevier NV 53,196 546,399 Royal Dutch Petroleum Co. 178,002 7,050,508 TPG NV 28,446 398,568 Unilever NV CVA 47,718 2,705,242 Vedior NV 7,788 33,576 VNU NV 18,678 410,877 Wolters Kluwer NV CVA 22,572 312,130 21,164,954 PORTUGAL - 1.17% Banco BPI SA Registered 40,458 93,752 Banco Comercial Portugues SA Class R 138,353 232,622 Banco Espirito Santo SA 8,316 108,452 Brisa-Auto Estradas de Portugal SA 31,020 168,170 CIMPOR-Cimentos de Portugal SGPS SA 4,620 79,920 Electricidade de Portugal SA 163,350 250,003 Jeronimo Martins SGPS SA/1/ 5,346 35,839 Portugal Telecom SGPS SA 77,682 498,168 PT Multimedia-Servicos de Telecomunicacoes e Multimedia SGPS SA/1/ 4,224 50,079 Sonae SGPS SA/1/ 83,754 33,400 1,550,405 SPAIN - 11.29% Acciona SA 2,244 106,418 Acerinox SA 4,158 161,558 Acesa Infraestructuras SA 10,956 137,804 Actividades de Construccion y Servicios SA 4,554 157,164 Altadis SA 25,014 592,852 Amadeus Global Travel Distribution SA Class A 20,790 95,680 Banco Bilbao Vizcaya Argentaria SA 258,192 2,201,190 Banco Santander Central Hispano SA 358,908 2,301,645 Corporacion Mapfre SA 9,636 78,516 Endesa SA 74,778 $ 894,613 Fomento de Construcciones y Contratas SA 4,158 97,876 Gas Natural SDG SA 18,348 359,914 Grupo Dragados SA 12,342 233,986 Grupo Ferrovial SA 5,016 132,129 Iberdrola SA 64,548 989,283 Iberia Lineas Aereas de Espana SA 33,528 46,977 Industria de Diseno Textil SA 18,817 454,294 Metrovacesa SA 3,779 102,843 NH Hoteles SA/1/ 9,174 78,113 Promotora de Infomaciones SA 4,422 28,024 Repsol YPF SA 79,728 1,117,101 Sociedad General de Aguas de Barcelona SA 5,148 50,824 Sol Melia SA 12,276 40,884 Tele Pizza SA/1/ 15,378 14,917 Telefonica Publicidad e Informacion SA 14,520 51,800 Telefonica SA/1/ 393,889 3,820,802 Terra Networks SA/1/ 34,452 167,467 Union Fenosa SA 20,328 256,999 Vallehermoso SA 9,240 90,526 Zeltia SA 11,682 71,138 14,933,337 SWITZERLAND - 0.68% STMicroelectronics NV 48,774 901,552 901,552 TOTAL COMMON STOCKS (Cost: $182,664,376) 129,848,165 PREFERRED STOCKS - 1.56% GERMANY - 0.80% Fresenius Medical Care AG 1,914 58,814 Henkel KGaA 4,620 282,085 Hugo Boss AG 1,320 16,503 Porsche AG 660 213,120 ProSiebenSat.1 Media AG 6,600 39,836 RWE AG 3,894 78,777 Schedules of Investments 33 Schedule of Investments (Unaudited) (Continued) iSHARES MSCI EMU INDEX FUND February 28, 2003 Security Shares Value - ----------------------------------------------------------------- Volkswagen AG 8,514 $ 249,598 Wella AG 1,980 128,470 1,067,203 ITALY - 0.76% Banca Intesa SpA RNC 71,214 118,969 Fiat SpA 5,676 26,917 Fiat SpA RNC 4,686 22,071 Telecom Italia SpA RNC 170,082 834,080 1,002,037 TOTAL PREFERRED STOCKS (Cost: $2,309,395) 2,069,240 SHORT TERM INSTRUMENTS - 0.02% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 19,935 $ 19,935 TOTAL SHORT TERM INSTRUMENTS (Cost: $19,935) 19,935 TOTAL INVESTMENTS IN SECURITIES - 99.75% (Cost $184,993,706) 131,937,340 Other Assets, Less Liabilities - 0.25% 326,695 ------------ NET ASSETS - 100.00% $132,264,035 ============ /1/ Non-income earning securities. See notes to financial statements. 34 2003 iShares Semi-annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI FRANCE INDEX FUND February 28, 2003 Security Shares Value - ---------------------------------------------------------------- COMMON STOCKS - 99.78% TotalFinaElf SA 61,744 $ 8,158,746 BNP Paribas SA 78,032 3,229,551 Aventis SA 65,696 2,983,105 L'Oreal SA 32,736 2,113,443 Carrefour SA 55,632 2,107,600 Sanofi-Synthelabo SA 39,008 2,086,165 AXA 134,432 1,643,062 Societe Generale Class A 29,136 1,563,859 Groupe Danone 12,336 1,459,872 Vivendi Universal SA 89,568 1,256,904 L'Air Liquide SA 9,754 1,252,082 Suez SA 80,240 1,050,764 STMicroelectronics NV 56,496 1,044,287 Compagnie de Saint-Gobain 30,064 908,255 France Telecom 40,288 892,765 LVMH Moet Hennessy Louis Vuitton SA 21,296 879,552 Schneider Electric SA 19,728 858,168 Alcatel SA Class A 108,240 780,463 Lafarge SA 12,816 745,907 PSA Peugeot Citroen 15,088 666,736 Renault SA 15,216 643,200 Accor SA 18,368 564,215 Lagardere S.C.A. 12,816 471,717 Pinault-Printemps-Redoute SA 6,528 418,635 Compagnie Generale des Etablissements Michelin Class B 12,528 406,431 Bouygues SA 16,608 403,468 Pernod Ricard 5,120 396,492 Vinci SA 6,224 369,288 Essilor International SA 9,296 360,692 Arcelor/1/ 33,360 334,026 Societe Television Francaise 1 12,336 282,136 Unibail Holding 4,080 256,370 Cap Gemini SA 9,632 252,267 Thomson/1/ 17,712 248,170 European Aeronautic Defence and Space Co. 27,440 238,669 Valeo SA 7,632 $ 216,667 Sodexho Alliance SA 8,464 202,246 Autoroutes du Sud de la France/1/ 7,680 196,922 Publicis Groupe 9,568 172,423 Pechiney Class A 6,784 171,827 Etablissements Economiques du Casino Guichard-Perrachon SA 2,704 154,462 Thales SA 6,464 148,116 Technip-Coflexip SA 1,920 124,163 Societe BIC SA 3,466 110,575 Business Objects SA/1/ 6,048 102,667 Dassault Systemes SA 3,936 90,190 Imerys SA 766 81,569 ALSTOM/1/ 24,672 77,913 Zodiac SA 3,888 72,914 Air France 7,360 69,728 Sagem SA 1,040 67,423 Atos Origin SA/1/ 1,952 58,298 Club Mediterranee SA/1/ 1,232 29,199 Altran Technologies SA 6,160 17,129 TOTAL COMMON STOCKS (Cost: $65,506,617) 43,491,493 SHORT TERM INSTRUMENTS - 0.04% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 16,034 16,034 TOTAL SHORT TERM INSTRUMENTS (Cost: $16,034) 16,034 TOTAL INVESTMENTS IN SECURITIES - 99.82% (Cost $65,522,651) 43,507,527 Other Assets, Less Liabilities - 0.18% 80,065 ----------- NET ASSETS - 100.00% $43,587,592 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 35 Schedule of Investments (Unaudited) iSHARES MSCI GERMANY INDEX FUND February 28, 2003 Security Shares Value - ---------------------------------------------------------------- COMMON STOCKS - 92.88% Siemens AG 171,856 $ 6,812,627 DaimlerChrysler AG 178,848 5,474,451 Deutsche Telekom AG 447,925 5,151,194 Deutsche Bank AG 118,795 4,827,004 E.ON AG 109,112 4,656,996 SAP AG 42,205 3,528,092 BASF AG 81,604 2,974,563 Allianz AG 40,365 2,891,369 Bayer AG 177,330 2,341,297 Volkswagen AG 57,270 2,290,020 RWE AG 103,155 2,276,976 Muenchener Rueckversicherungs- Gesellschaft AG 23,529 2,119,552 Schering AG 42,251 1,580,628 Deutsche Post AG 91,954 935,580 adidas-Salomon AG 11,017 886,166 Bayerische Hypo-und Vereinsbank AG 82,478 791,164 Beiersdorf AG 7,015 761,369 ThyssenKrupp AG 78,729 756,050 ALTANA AG 16,790 695,258 METRO AG 34,592 648,729 Deutsche Boerse AG 15,019 581,454 Infineon Technologies AG/1/ 88,803 563,743 Linde AG 19,412 556,323 Deutsche Lufthansa AG/1/ 56,373 477,564 Continental AG/1/ 28,957 459,409 MAN AG 30,199 438,428 Fresenius Medical Care AG 7,981 337,281 Merck KGaA 13,754 332,059 TUI AG 32,430 322,617 Buderus AG 11,638 307,314 GEHE AG 6,877 259,421 QIAGEN NV/1/ 36,317 212,152 HeidelbergerCement AG 8,694 208,117 EPCOS AG/1/ 16,491 182,184 KarstadtQuelle AG 12,650 164,156 MLP AG 21,275 161,199 WCM Beteiligungs-und Grundbesitz AG/1/ 50,163 $ 107,050 Douglas Holding AG 5,221 76,811 AIXTRON AG 18,538 55,745 TOTAL COMMON STOCKS (Cost: $132,517,457) 58,202,112 PREFERRED STOCKS - 6.22% Volkswagen AG 32,430 950,723 Henkel KGaA 13,662 834,166 Porsche AG 1,978 638,714 RWE AG 27,761 561,613 Wella AG 5,888 382,034 Hugo Boss AG 16,353 204,453 Fresenius Medical Care AG 6,279 192,942 ProSiebenSat.1 Media AG 21,643 130,630 TOTAL PREFERRED STOCKS (Cost: $4,330,879) 3,895,275 SHORT TERM INSTRUMENTS - 0.65% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 377,475 377,475 BlackRock Temp Cash Money Market Fund 14,473 14,473 Short Term Investment Co. - Liquid Assets Money Market Portfolio 14,473 14,473 TOTAL SHORT TERM INSTRUMENTS (Cost: $406,421) 406,421 TOTAL INVESTMENTS IN SECURITIES - 99.75% (Cost $137,254,757) 62,503,808 Other Assets, Less Liabilities - 0.25% 156,134 ----------- NET ASSETS - 100.00% $62,659,942 =========== /1/ Non-income earning securities. See notes to financial statements. 36 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI ITALY INDEX FUND February 28, 2003 Security Shares Value - ---------------------------------------------------------------- COMMON STOCKS - 94.42% ENI SpA 362,869 $ 5,385,450 Assicurazioni Generali SpA 127,530 3,223,246 Telecom Italia Mobile SpA 538,993 2,428,273 Telecom Italia SpA Class A 295,698 2,055,636 UniCredito Italiano SpA 365,547 1,465,630 Enel SpA 218,621 1,284,182 Banca Intesa SpA 537,381 1,245,257 Snam Rete Gas SpA 331,721 1,176,270 Sanpaolo IMI SpA 149,227 1,045,440 Riunione Adriatica di Sicurta SpA 79,300 975,207 Alleanza Assicurazioni SpA 103,649 879,181 Mediaset SpA 104,351 758,044 Mediobanca SpA 72,826 706,427 SEAT Pagine Gialle SpA/1/ 899,912 589,715 Banca Popolare di Milano Scrl/1/ 108,225 421,088 Luxottica Group SpA 30,901 355,698 Banca Monte dei Paschi di Siena SpA 147,810 350,481 Arnoldo Mondadori Editore SpA 52,598 317,465 Banca Nazionale del Lavoro SpA/1/ 227,071 272,392 Fiat SpA 33,241 257,956 Capitalia SpA 180,414 222,451 Mediolanum SpA 50,765 215,028 Banca Fideuram SpA 45,721 186,764 Italcementi SpA 20,059 185,496 Autogrill SpA/1/ 20,865 184,404 ACEA SpA 45,214 182,744 Pirelli SpA 182,728 157,949 Tiscali SpA/1/ 33,436 148,474 Snia SpA/1/ 76,687 142,990 Parmalat Finanziaria SpA 81,133 133,791 Alitalia SpA/1/ 520,585 127,367 Gruppo Editoriale L'Espresso SpA 27,911 97,166 Bulgari SpA 20,592 92,771 Fineco SpA/1/ 235,859 $ 92,278 Benetton Group SpA 13,052 89,328 e.Biscom SpA/1/ 2,496 71,290 TOTAL COMMON STOCKS (Cost: $34,226,638) 27,523,329 PREFERRED STOCKS - 5.41% Telecom Italia SpA RNC 267,982 1,314,181 Banca Intesa SpA RNC 111,774 186,728 Fiat SpA RNC 9,594 45,188 Fiat SpA 6,851 32,490 TOTAL PREFERRED STOCKS (Cost: $1,719,239) 1,578,587 SHORT TERM INSTRUMENTS - 3.15% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 837,863 837,863 BlackRock Temp Cash Money Market Fund 39,759 39,759 Short Term Investment Co. - Liquid Assets Money Market Portfolio 39,759 39,759 TOTAL SHORT TERM INSTRUMENTS (Cost: $917,381) 917,381 TOTAL INVESTMENTS IN SECURITIES - 102.98% (COST $36,863,258) 30,019,297 Other Assets, Less Liabilities - (2.98%) (868,729) ----------- NET ASSETS - 100.00% $29,150,568 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 37 Schedule of Investments (Unaudited) iSHARES MSCI NETHERLANDS INDEX FUND February 28, 2003 Security Shares Value - ---------------------------------------------------------------- COMMON STOCKS - 99.55% Royal Dutch Petroleum Co. 156,275 $ 6,189,921 Unilever NV CVA 57,622 3,266,722 ING Groep NV 217,422 2,940,935 Heineken NV 37,459 1,338,375 ABN AMRO Holding NV 83,707 1,330,736 Koninklijke KPN NV/1/ 200,643 1,329,956 AEGON NV 117,265 1,257,563 Koninklijke Philips Electronics NV 75,294 1,256,231 Reed Elsevier NV 115,432 1,185,652 Akzo Nobel NV 53,392 1,156,097 TPG NV 80,511 1,128,072 IHC Caland NV 15,322 681,205 VNU NV 26,132 574,849 Wolters Kluwer NV CVA 40,467 559,585 ASML Holding NV/1/ 68,291 492,411 Koninklijke Ahold NV 124,409 469,308 Oce NV 34,921 315,029 Koninklijke Vendex KBB NV 29,751 214,198 Koninklijke Luchtvaart Maatschappij NV 21,855 151,932 Vedior NV 32,759 141,230 Koninklijke Numico NA CVA 18,612 $ 98,294 Hagemeyer NV 11,985 58,516 Burhmann NV 13,959 38,666 TOTAL COMMON STOCKS (Cost: $37,136,836) 26,175,483 SHORT TERM INSTRUMENTS - 0.03% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 7,922 7,922 TOTAL SHORT TERM INSTRUMENTS (Cost: $7,922) 7,922 TOTAL INVESTMENTS IN SECURITIES - 99.58% (Cost $37,144,758) 26,183,405 Other Assets, Less Liabilities - 0.42% 110,886 ----------- NET ASSETS - 100.00% $26,294,291 =========== /1/ Non-income earning securities. See notes to financial statements. 38 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI SPAIN INDEX FUND February 28, 2003 Security Shares Value - ------------------------------------------------------------------ COMMON STOCKS - 99.90% Telefonica SA/1/ 1,350,440 $13,099,538 Banco Santander Central Hispano SA 1,048,086 6,721,281 Banco Bilbao Vizcaya Argentaria SA 714,285 6,089,564 Endesa SA 216,489 2,589,983 Repsol YPF SA 180,102 2,523,481 Iberdrola SA 160,719 2,463,230 Industria de Diseno Textil SA 93,600 2,259,759 Altadis SA 78,546 1,861,605 Union Fenosa SA 127,764 1,615,268 Gas Natural SDG SA 75,192 1,474,963 Acerinox SA 26,013 1,010,727 Bankinter SA 36,972 976,685 Terra Networks SA/1/ 161,538 785,217 FAES FARMA SA 63,024 777,767 NH Hoteles SA/1/ 90,207 768,078 Sociedad General de Aguas de Barcelona SA 73,359 724,248 Actividades de Construccion y Servicios SA 19,500 672,968 Fomento de Construcciones y Contratas SA 26,637 627,012 Grupo Dragados SA 32,292 612,208 Zeltia SA 95,082 579,008 Acesa Infraestructuras SA 42,978 540,574 Viscofan SA 72,735 486,041 Amadeus Global Travel Distribution SA Class A 101,868 468,818 Corporacion Mapfre SA 50,427 410,888 Uralita SA 68,328 408,724 Promotora de Infomaciones SA 63,141 400,154 Telefonica Publicidad e Informacion SA 107,289 382,755 Grupo Ferrovial SA 13,143 346,205 Ebro Puleva SA 40,684 $ 318,345 Vallehermoso SA 30,264 296,503 Acciona SA 5,577 264,480 Grupo Empresarial ENCE SA 15,600 235,392 Sol Melia SA 70,629 235,223 Iberia Lineas Aereas de Espana SA 139,737 195,791 Tele Pizza SA/1/ 193,323 187,527 Metrovacesa SA 4,095 111,443 Prosegur Compania de Seguridad SA 6,942 75,719 TOTAL COMMON STOCKS (Cost: $59,297,427) 53,597,172 SHORT TERM INSTRUMENTS - 7.88% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 3,851,150 3,851,150 BlackRock Temp Cash Money Market Fund 186,536 186,536 Short Term Investment Co. - Liquid Assets Money Market Portfolio 186,536 186,536 TOTAL SHORT TERM INSTRUMENTS (Cost: $4,224,222) 4,224,222 TOTAL INVESTMENTS IN SECURITIES - 107.78% (Cost $63,521,649) 57,821,394 Other Assets, Less Liabilities - (7.78%) (4,171,990) ----------- NET ASSETS - 100.00% $53,649,404 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 39 Schedule of Investments (Unaudited) iSHARES MSCI SWEDEN INDEX FUND February 28, 2003 Security Shares Value - ------------------------------------------------------------------- COMMON STOCKS - 99.86% Telefonaktiebolaget LM Ericsson Class B/1/ 3,309,653 $ 2,158,723 Hennes & Mauritz AB Class B 102,176 2,155,434 Nordea AB 476,284 2,076,641 Svenska Handelsbanken AB Class A 118,544 1,636,963 Telia AB 400,899 1,347,480 Electrolux AB Series B 63,023 1,092,478 Sandvik AB 45,322 1,049,293 Svenska Cellulosa AB Class B 33,232 1,025,197 Skandinaviska Enskilda Banken AB Class A 105,059 932,184 Volvo AB Class B 45,818 802,313 Securitas AB Class B 64,666 653,576 Swedish Match AB 82,460 620,219 ASSA Abloy AB Class B 64,852 590,672 Tele2 AB Class B/1/ 20,460 590,308 Atlas Copco AB Class A 26,071 553,041 SKF AB Class B 19,561 516,094 Skanska AB Class B 86,459 445,047 Skandia Forsakrings AB 189,472 378,543 Volvo AB Class A 20,801 348,354 Atlas Copco AB Class B 16,306 324,817 Holmen AB Class B 11,253 275,076 Nobel Biocare Holding AG/1/ 4,712 266,638 Drott AB Class B 23,188 260,248 Eniro AB 39,215 248,867 Svenskt Stal AB Series A 17,112 208,143 Gambro AB Class A 41,726 174,573 Trelleborg AB Class B 20,305 167,041 SKF AB Class A 5,735 151,648 Svenska Handelsbanken AB Class B 9,145 120,909 Svenskt Stal AB Series B 10,261 $ 116,972 Hoganas AB Class B 7,037 114,954 Gambro AB Class B 24,211 101,010 Sapa AB 5,022 85,284 Modern Times Group AB Class B/1/ 10,912 77,586 SAS AB/1/ 17,701 65,736 WM-Data AB Class B 60,481 50,111 OM AB 10,571 46,712 TOTAL COMMON STOCKS (Cost: $27,560,183) 21,828,885 SHORT TERM INSTRUMENTS - 13.79% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 2,746,396 2,746,396 BlackRock Temp Cash Money Market Fund 133,526 133,526 Short Term Investment Co. - Liquid Assets Money Market Portfolio 133,526 133,526 TOTAL SHORT TERM INSTRUMENTS (Cost: $3,013,448) 3,013,448 TOTAL INVESTMENTS IN SECURITIES - 113.65% (Cost $30,573,631) 24,842,333 Other Assets, Less Liabilities - (13.65%) (2,983,599) ----------- NET ASSETS - 100.00% $21,858,734 =========== /1/ Non-income earning securities. See notes to financial statements. 40 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI SWITZERLAND INDEX FUND February 28, 2003 Security Shares Value - ------------------------------------------------------------------- COMMON STOCKS - 99.77% Novartis AG 160,400 $ 5,890,796 Nestle SA Registered 17,700 3,563,496 Roche Holding AG Genusschein 30,400 1,826,018 UBS AG Registered/1/ 32,720 1,372,985 Credit Suisse Group/1/ 60,792 1,132,004 Swiss Reinsurance Co. 20,360 1,096,077 Zurich Financial Services AG 11,800 1,000,737 Swisscom AG Registered 2,920 867,817 Givaudan SA Registered 1,820 746,254 Holcim Ltd. Class B 4,200 680,642 Ciba Specialty Chemicals AG Registered 10,000 648,599 Compagnie Financiere Richemont AG Class A 40,000 647,493 Syngenta AG 11,440 557,236 Serono SA 1,220 541,622 Synthes-Stratec Inc. 940 519,911 Lonza Group AG Registered 6,680 380,307 Swatch Group (The) AG Class B 4,520 375,000 Schindler Holding AG Participation Certificates 2,620 362,762 Adecco SA Registered 11,320 341,437 Swatch Group (The) AG Registered 20,260 341,402 Societe Generale de Surveillance Holding SA 860 291,740 Julius Baer Holding AG 1,400 256,563 Valora Holding AG Registered 1,460 241,718 Centerpulse AG Registered/1/ 1,180 227,124 Schindler Holding AG Registered 1,280 186,195 Holcim Ltd. Registered 5,900 181,656 Vontobel Holding AG Registered 12,000 $ 149,557 Clariant AG Registered 18,600 136,071 Banque Cantonale Vaudoise/1/ 2,280 129,049 Phonak Holding AG Registered 14,340 115,799 ABB Ltd./1/ 46,100 95,533 Logitech International SA Registered/1/ 2,800 93,849 Tecan AG Registered 2,180 55,625 Georg Fischer AG Registered 600 49,115 Sulzer AG Registered/1/ 400 46,681 Forbo Holding AG 160 44,838 PubliGroupe SA Registered/1/ 200 29,498 Kudelski SA Bearer/1/ 1,660 19,893 Kuoni Reisen Holding AG Registered/1/ 20 3,835 TOTAL COMMON STOCKS (Cost: $34,283,573) 25,246,934 SHORT TERM INSTRUMENTS - 0.02% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 5,873 5,873 TOTAL SHORT TERM INSTRUMENTS (Cost: $5,873) 5,873 TOTAL INVESTMENTS IN SECURITIES - 99.79% (Cost $34,289,446) 25,252,807 Other Assets, Less Liabilities - 0.21% 53,493 ----------- NET ASSETS - 100.00% $25,306,300 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 41 Schedule of Investments (Unaudited) iSHARES MSCI UNITED KINGDOM INDEX FUND February 28, 2003 Security Shares Value - ------------------------------------------------------------------- COMMON STOCKS - 99.22% BP PLC 2,824,920 $17,798,126 Vodafone Group PLC 8,582,148 15,376,431 GlaxoSmithKline PLC 762,736 13,407,462 HSBC Holdings PLC 1,190,464 12,825,683 Royal Bank of Scotland Group PLC 346,408 7,927,964 Shell Transport & Trading Co. PLC 1,220,636 7,070,449 AstraZeneca PLC 217,892 7,028,771 HBOS PLC 479,028 4,994,903 Barclays PLC/2/ 837,140 4,839,186 Diageo PLC 406,676 4,035,499 Lloyds TSB Group PLC 705,432 3,933,386 Unilever PLC 350,512 3,124,838 BT Group PLC 1,098,211 2,828,210 Rio Tinto PLC 135,280 2,738,072 National Grid Transco PLC 393,419 2,528,271 Tesco PLC 877,496 2,239,073 British American Tobacco PLC 208,240 2,033,593 Aviva PLC 287,128 1,789,800 BG Group PLC 449,996 1,734,760 BHP Billiton PLC 299,710 1,557,842 British Sky Broadcasting Group PLC/1/ 151,620 1,500,963 Marks & Spencer Group PLC 293,668 1,413,110 Imperial Tobacco Group PLC 89,224 1,392,016 Scottish Power PLC 236,664 1,358,745 Prudential PLC 254,600 1,355,449 Cadbury Schweppes PLC 262,580 1,327,623 Compass Group PLC 285,532 1,236,789 Centrica PLC 539,676 1,198,562 Reed Elsevier PLC 154,888 1,130,774 Kingfisher PLC 312,132 1,124,624 Scottish & Southern Energy PLC 110,504 1,096,546 Reckitt Benckiser PLC 69,312 1,092,825 Six Continents PLC 112,024 1,092,219 GUS PLC 129,504 1,035,207 Legal & General Group PLC 819,380 964,728 Boots Group PLC 112,480 960,246 BAA PLC 137,104 935,074 WPP Group PLC 148,732 915,401 Pearson PLC 103,284 780,877 Land Securities Group PLC 60,587 710,004 BOC Group PLC 58,824 $ 696,292 Smith & Nephew PLC 120,460 694,436 Smiths Group PLC 72,428 689,051 Rentokil Initial PLC 224,656 646,671 BAE Systems PLC 371,868 644,302 J Sainsbury PLC 170,696 623,763 3i Group PLC 81,320 609,695 United Utilities PLC 65,056 604,571 Wolseley PLC 75,772 597,936 Amersham PLC 87,248 591,612 SABMiller PLC 93,708 577,114 Safeway PLC 119,928 558,195 Next PLC 41,268 520,010 Scottish & Newcastle PLC 96,520 510,816 P&O Princess Cruises PLC 80,864 508,202 Severn Trent PLC 45,600 505,645 British Land Co. PLC 68,856 465,272 Hanson PLC 98,572 462,289 Hilton Group PLC 180,500 423,615 Man Group PLC 29,716 400,188 Bunzl PLC 64,372 390,360 AMVESCAP PLC 83,600 388,122 Reuters Group PLC 184,300 345,446 Kelda Group PLC 53,200 343,561 Dixons Group PLC 231,876 336,010 Imperial Chemical Industries PLC 136,192 326,064 Granada PLC 367,612 314,121 Hammerson PLC 40,204 310,294 Johnson Matthey PLC 23,560 304,853 Rank Group PLC 82,232 302,438 Sage Group PLC 143,336 301,965 Daily Mail & General Trust Class A 39,520 301,280 Rexam PLC 58,672 298,267 Exel PLC 32,832 291,407 Cable & Wireless PLC 306,964 290,099 Associated British Ports Holdings PLC 45,144 285,492 Capita Group PLC 71,744 274,600 Slough Estates PLC 55,784 269,307 Signet Group PLC 220,400 262,100 Whitebread PLC 31,540 258,826 42 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) (Continued) iSHARES MSCI UNITED KINGDOM INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------- BPB PLC 60,800 $ 251,865 Brambles Industries PLC 104,348 247,360 GKN PLC 99,256 246,233 Canary Wharf Group PLC/1/ 65,208 244,448 Misys PLC 79,952 241,160 Peninsular & Oriental Steam Navigation Co. (The) 94,924 235,112 Taylor Woodrow PLC 79,344 225,579 Provident Financial PLC 24,928 225,572 AWG PLC/1/ 27,089 224,433 FirstGroup PLC 59,660 216,132 Hays PLC 190,456 215,991 RMC Group PLC 36,936 214,095 Barratt Developments PLC 32,224 208,100 Electrocomponents PLC 55,176 205,102 Celltech Group PLC/1/ 38,000 193,477 Rolls-Royce PLC 153,976 192,809 LogicaCMG PLC 100,551 190,449 Berkeley Group (The) PLC 19,228 190,348 EMI Group PLC 110,276 184,552 IMI PLC 50,464 184,407 Tate & Lyle PLC 41,800 182,868 Royal & Sun Alliance Insurance Group 153,672 173,065 International Power PLC/1/ 109,972 157,194 BBA Group PLC 67,032 153,358 Wimpey (George) PLC 35,416 151,174 Close Brothers Group PLC 20,064 135,892 Securicor PLC 107,844 135,892 Pilkington PLC 153,596 127,013 ARM Holdings PLC/1/ 142,880 119,277 Corus Group PLC/1/ 426,360 117,523 Chubb PLC 123,804 117,002 Balfour Beatty PLC 45,524 114,548 United Business Media PLC 32,148 110,894 AMEC PLC 37,772 $ 110,065 Schroders PLC 16,264 109,578 Invensys PLC 422,484 106,473 Serco Group PLC 49,704 100,993 Aegis Group PLC 99,864 94,771 Great Portland Estates PLC 23,484 81,377 De La Rue PLC 25,080 80,982 Carlton Communications PLC 58,596 78,450 British Airways PLC/1/ 47,348 77,747 FKI PLC 63,004 63,016 Kidde PLC 59,356 53,524 Stagecoach Group PLC 78,356 48,442 Novar PLC 24,472 44,328 SSL International PLC 11,248 36,585 Aggreko PLC 7,524 15,851 TOTAL COMMON STOCKS (Cost: $219,445,868) 167,193,494 SHORT TERM INSTRUMENTS - 0.18% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 310,579 310,579 TOTAL SHORT TERM INSTRUMENTS (Cost: $310,579) 310,579 TOTAL INVESTMENTS IN SECURITIES - 99.40% (Cost $219,756,447) 167,504,073 Other Assets, Less Liabilities - 0.60% 1,004,106 ------------ NET ASSETS - 100.00% $168,508,179 ============ /1/ Non-income earning securities. /2/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. See notes to financial statements. Schedules of Investments 43 Statements of Assets and Liabilities (Unaudited) iSHARES, INC. February 28, 2003
iShares MSCI ------------------------------------------------------------------------------------ Austria Belgium EMU France Germany Italy Index Fund Index Fund Index Fund Index Fund Index Fund Index Fund - ------------------------------------------------------------------------------------------------------------------ ASSETS Investments at cost $14,722,630 $35,514,240 $184,993,706 $ 65,522,651 $137,254,757 $36,863,258 ----------- ----------- ------------ ------------ ------------ ----------- Foreign currency, at cost $ 10,847 $ 17,027 $ 298,897 $ 53,539 $ 38,327 $ 1,224 ----------- ----------- ------------ ------------ ------------ ----------- Investments in securities, at value (including securities on loan/1/) (Note 1) $15,110,844 $29,584,717 $131,937,340 $ 43,507,527 $ 62,503,808 $30,019,297 Foreign currency, at value 10,928 17,358 298,510 53,766 38,371 1,227 Receivables: Investment securities sold 346,012 227,403 -- -- 1,892,644 -- Dividends and interest 12,444 31,215 218,004 88,708 407,271 54,809 ----------- ---------- ------------ ------------ ------------ ----------- Total Assets 15,480,228 29,860,693 132,453,854 43,650,001 64,842,094 30,075,333 ----------- ---------- ------------ ------------ ------------ ----------- LIABILITIES Payables: Investment securities purchased 329,378 221,305 -- -- 1,767,510 -- Collateral for securities on loan (Note 5) -- -- -- -- 322,373 885,563 Advisory fees (Note 2) 15,855 17,040 133,494 43,918 64,927 27,554 Distribution fees 6,658 7,202 56,325 18,491 27,342 11,648 ----------- ----------- ------------ ------------ ------------ ----------- Total Liabilities 351,891 245,547 189,819 62,409 2,182,152 924,765 ----------- ----------- ------------ ------------ ------------ ----------- NET ASSETS $15,128,337 $29,615,146 $132,264,035 $ 43,587,592 $ 62,659,942 $29,150,568 =========== =========== ============ ============ ============ =========== Net assets consist of: Paid-in capital $17,698,790 $38,155,667 $193,396,288 $ 70,676,346 $166,460,845 $40,904,935 Undistributed (distributions in excess of) net investment income (accumulated net investment loss) (65,693) (96,956) (129,072) (176,225) (73,535) 67,846 Accumulated net realized loss (2,894,736) (2,519,069) (7,978,247) (4,909,779) (29,036,288) (4,985,778) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies 389,976 (5,924,496) (53,024,934) (22,002,750) (74,691,080) (6,836,435) ----------- ----------- ------------ ------------ ------------ ----------- NET ASSETS $15,128,337 $29,615,146 $132,264,035 $ 43,587,592 $ 62,659,942 $29,150,568 =========== =========== ============ ============ ============ =========== iShares outstanding 1,700,000 3,480,000 3,300,000 3,200,000 6,900,000 1,950,000 =========== =========== ============ ============ ============ =========== Net asset value per iShare $ 8.90 $ 8.51 $ 40.08 $ 13.62 $ 9.08 $ 14.95 =========== =========== ============ ============ ============ ===========
/1/ Securities on loan with market values of $--, $--, $--, $--, $306,931 and $834,239, respectively. See Note 5. See notes to financial statements. 44 2003 iShares Semi-Annual Report to Shareholders Statements of Assets and Liabilities (Unaudited) (Continued) iSHARES, INC. February 28, 2003
iShares MSCI ----------------------------------------------------------------------- Netherlands Spain Sweden Switzerland United Kingdom Index Fund Index Fund Index Fund Index Fund Index Fund - --------------------------------------------------------------------------------------------------- ASSETS Investments at cost $ 37,144,758 $63,521,649 $30,573,631 $34,289,446 $219,756,447 ------------ ----------- ----------- ----------- ------------ Foreign currency, at cost $ 39,396 $ 7,012 $ 4,174 $ 40,084 $ 264,864 ------------ ----------- ----------- ----------- ------------ Investments in securities, at value (including securities on loan/1/) (Note 1) $ 26,183,405 $57,821,394 $24,842,333 $25,252,807 $167,504,073 Foreign currency, at value 39,543 7,040 4,139 40,239 257,781 Receivables: Investment securities sold 1,622,128 879,186 248,491 152,155 -- Dividends and interest 7 10,096 -- 41,241 931,051 ------------ ----------- ----------- ----------- ------------ Total Assets 27,845,083 58,717,716 25,094,963 25,486,442 168,692,905 ------------ ----------- ----------- ----------- ------------ LIABILITIES Payables: Investment securities purchased 1,525,802 879,159 246,708 143,382 -- Collateral for securities on loan (Note 5) -- 4,154,794 2,974,082 -- -- Advisory fees (Note 2) 17,587 24,156 10,011 25,870 129,849 Distribution fees 7,403 10,203 4,228 10,890 54,877 Miscellaneous liabilities -- -- 1,200 -- -- ------------ ----------- ----------- ----------- ------------ Total Liabilities 1,550,792 5,068,312 3,236,229 180,142 184,726 ------------ ----------- ----------- ----------- ------------ NET ASSETS $ 26,294,291 $53,649,404 $21,858,734 $25,306,300 $168,508,179 ============ =========== =========== =========== ============ Net assets consist of: Paid-in capital $ 44,164,173 $63,190,148 $33,829,846 $40,500,889 $240,299,128 Undistributed net investment income (accumulated net investment loss) (45,159) 95,686 (34,508) (102,164) 1,004,613 Accumulated net realized loss (6,863,794) (3,937,204) (6,205,254) (6,062,612) (20,529,672) Net unrealized depreciation on investments and translation of assets and liabilities in foreign currencies (10,960,929) (5,699,226) (5,731,350) (9,029,813) (52,265,890) ------------ ----------- ----------- ----------- ------------ NET ASSETS $ 26,294,291 $53,649,404 $21,858,734 $25,306,300 $168,508,179 ============ =========== =========== =========== ============ iShares outstanding 2,350,000 2,925,000 2,325,000 2,500,000 15,200,000 ============ =========== =========== =========== ============ Net asset value per iShare $ 11.19 $ 18.34 $ 9.40 $ 10.12 $ 11.09 ============ =========== =========== =========== ============
/1/ Securities on loan with market values of $--, $3,948,793, $2,793,762, $--, and $--, respectively. See Note 5. See notes to financial statements. Financial Statements 45 Statements of Operations (Unaudited) iSHARES, INC. For the six months ended February 28, 2003
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/ $ -- $ 17,889 $ 389,321 $ 11,879 $ 233,844 $ 168,989 Interest 66 100 604 270 477 1,245 Securities lending income -- 810 26,882 4,345 7,410 14,959 ---------- ----------- ------------ ----------- ------------ --------- Total investment income 66 18,799 416,807 16,494 241,731 185,193 ---------- ----------- ------------ ----------- ------------ --------- EXPENSES (NOTE 2) Advisory fees 46,188 39,202 381,345 135,362 221,437 82,423 Distribution fees 19,571 16,611 161,587 57,357 93,829 34,924 ---------- ----------- ------------ ----------- ------------ --------- Total expenses 65,759 55,813 542,932 192,719 315,266 117,347 ---------- ----------- ------------ ----------- ------------ --------- Net investment income (loss) (65,693) (37,014) (126,125) (176,225) (73,535) 67,846 ---------- ----------- ------------ ----------- ------------ --------- NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (674,217) (273,717) (1,491,570) (593,854) (3,021,807) (483,597) In-kind redemptions 888,964 480,886 -- -- (2,178,837) -- Foreign currency transactions 3,648 651 21,423 8,106 7,182 5,390 ---------- ----------- ------------ ----------- ------------ --------- Net realized gain (loss) 218,395 207,820 (1,470,147) (585,748) (5,193,462) (478,207) ---------- ----------- ------------ ----------- ------------ --------- Net change in unrealized appreciation (depreciation) on: Investments 1,672,594 (3,533,208) (16,018,068) (4,764,910) (16,161,772) 748,487 Translation of assets and liabilities in foreign currencies 695 2,750 12,702 7,400 36,310 7,914 ---------- ----------- ------------ ----------- ------------ --------- Net change in unrealized appreciation (depreciation) 1,673,289 (3,530,458) (16,005,366) (4,757,510) (16,125,462) 756,401 ---------- ----------- ------------ ----------- ------------ --------- Net realized and unrealized gain (loss) 1,891,684 (3,322,638) (17,475,513) (5,343,258) (21,318,924) 278,194 ---------- ----------- ------------ ----------- ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,825,991 $(3,359,652) $(17,601,638) $(5,519,483) $(21,392,459) $ 346,040 ========== =========== ============ =========== ============ =========
/1/ Net of foreign withholding tax of $--, $3,146, $64,481, $2,552, $40,691 and $26,682, respectively. See notes to financial statements. 46 2003 iShares Semi-Annual Report to Shareholders Statements of Operations (Unaudited) (Continued) iSHARES, INC. For the six months ended February 28, 2003
iShares MSCI --------------------------------------------------------------------- Netherlands Spain Sweden Switzerland United Kingdom Index Fund Index Fund Index Fund Index Fund Index Fund - ----------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $ 27,155 $ 178,687 $ -- $ 13,915 $ 1,901,151 Interest 105 102 1,440 84 1,081 Securities lending income 1,433 2,099 357 623 1,000 ----------- ---------- ----------- ----------- ------------ Total investment income 28,693 180,888 1,797 14,622 1,903,232 ----------- ---------- ----------- ----------- ------------ EXPENSES (NOTE 2) Advisory fees 51,872 59,844 25,500 82,028 372,595 Distribution fees 21,980 25,358 10,805 34,758 157,880 ----------- ---------- ----------- ----------- ------------ Total expenses 73,852 85,202 36,305 116,786 530,475 ----------- ---------- ----------- ----------- ------------ Net investment income (loss) (45,159) 95,686 (34,508) (102,164) 1,372,757 ----------- ---------- ----------- ----------- ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss)from: Investments (1,904,393) (941,884) (1,058,070) (2,176,062) (2,033,090) In-kind redemptions -- -- -- (138,970) 914,012 Foreign currency transactions 2,990 4,557 182 21,653 28,132 ----------- ---------- ----------- ----------- ------------ Net realized loss (1,901,403) (937,327) (1,057,888) (2,293,379) (1,090,946) ----------- ---------- ----------- ----------- ------------ Net change in unrealized appreciation (depreciation) on: Investments (2,978,016) 1,442,497 494,471 (1,433,490) (15,862,505) Translation of assets and liabilities in foreign currencies 881 574 (48) (15,759) (15,500) ----------- ---------- ----------- ----------- ------------ Net change in unrealized appreciation (depreciation) (2,977,135) 1,443,071 494,423 (1,449,249) (15,878,005) ----------- ---------- ----------- ----------- ------------ Net realized and unrealized gain (loss) (4,878,538) 505,744 (563,465) (3,742,628) (16,968,951) ----------- ---------- ----------- ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(4,923,697) $ 601,430 $ (597,973) $(3,844,792) $(15,596,194) =========== ========== =========== =========== ============
/1/ Net of foreign withholding tax of $4,792, $31,533, $--, $--; and $211,290, respectively. See notes to financial statements. Financial Statements 47 Statements of Changes in Net Assets iSHARES, INC.
iShares MSCI iShares MSCI Austria Belgium Index Fund Index Fund ----------------------------------- ----------------------------------- For the six For the six months ended For the months ended For the February 28, 2003 year ended February 28, 2003 year ended (Unaudited) August 31, 2002 (Unaudited) August 31, 2002 - ---------------------------------------------------------- --------------- ----------------- --------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss) $ (65,693) $ 202,143 $ (37,014) $ 217,967 Net realized gain (loss) 218,395 422,446 207,820 (245,202) Net change in unrealized appreciation (depreciation) 1,673,289 (1,428,183) (3,530,458) (1,311,491) ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations 1,825,991 (803,594) (3,359,652) (1,338,726) ----------- ----------- ----------- ----------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (208,682) -- (132,112) (58,802) ----------- ----------- ----------- ----------- Total distributions to iShareholders (208,682) -- (132,112) (58,802) ----------- ----------- ----------- ----------- iSHARES TRANSACTIONS: iShares sold 2,399,839 9,081,694 30,257,382 1,907,060 iShares redeemed (3,629,301) (4,984,937) (7,577,348) (337) ----------- ----------- ----------- ----------- Net increase (decrease) in net assets from iShares transactions (1,229,462) 4,096,757 22,680,034 1,906,723 ----------- ----------- ----------- ----------- INCREASE IN NET ASSETS 387,847 3,293,163 19,188,270 509,195 NET ASSETS: Beginning of period 14,740,490 11,447,327 10,426,876 9,917,681 ----------- ----------- ----------- ----------- End of period $15,128,337 $14,740,490 $29,615,146 $10,426,876 =========== =========== =========== =========== Undistributed (distributions in excess of) net investment income (accumulated net investment loss) included in net assets at end of period $ (65,693) $ 208,682 $ (96,956) $ 72,170 =========== =========== =========== =========== iSHARES ISSUED AND REDEEMED: iShares sold 300,000 1,000,000 3,280,000 160,000 iShares redeemed (400,000) (600,030) (800,000) (30) ----------- ----------- ----------- ----------- Net increase (decrease) in iShares outstanding (100,000) 399,970 2,480,000 159,970 =========== =========== =========== =========== iShares MSCI EMU Index Fund ----------------------------------- For the six months ended For the February 28, 2003 year ended (Unaudited) August 31, 2002 - ---------------------------------------------------------- --------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss) $ (126,125) $ 1,434,550 Net realized gain (loss) (1,470,147) (782,880) Net change in unrealized appreciation (depreciation) (16,005,366) (22,502,973) ------------ ------------ Net increase (decrease) in net assets resulting from operations (17,601,638) (21,851,303) ------------ ------------ DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (1,485,447) -- ------------ ------------ Total distributions to iShareholders (1,485,447) -- ------------ ------------ iSHARES TRANSACTIONS: iShares sold 20,183,374 62,239,581 iShares redeemed -- -- ------------ ------------ Net increase (decrease) in net assets from iShares transactions 20,183,374 62,239,581 ------------ ------------ INCREASE IN NET ASSETS 1,096,289 40,388,278 NET ASSETS: Beginning of period 131,167,746 90,779,468 ------------ ------------ End of period $132,264,035 $131,167,746 ============ ============ Undistributed (distributions in excess of) net investment income (accumulated net investment loss) included in net assets at end of period $ (129,072) $ 1,482,500 ============ ============ iSHARES ISSUED AND REDEEMED: iShares sold 450,000 1,250,000 iShares redeemed -- -- ------------ ------------ Net increase (decrease) in iShares outstanding 450,000 1,250,000 ============ ============
See notes to financial statements. 48 2003 iShares Semi-Annual Report to Shareholders Statements of Changes in Net Assets (Continued) iSHARES, INC.
iShares MSCI iShares MSCI France Germany Index Fund Index Fund ----------------------------------- ----------------------------------- For the six For the six months ended For the months ended For the February 28, 2003 year ended February 28, 2003 year ended (Unaudited) August 31, 2002 (Unaudited) August 31, 2002 - ------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss) $ (176,225) $ 549,950 $ (73,535) $ 829,578 Net realized loss (585,748) (401,229) (5,193,462) (8,419,696) Net change in unrealized appreciation (depreciation) (4,757,510) (12,515,478) (16,125,462) (16,716,690) ----------- ------------ ------------- ------------ Net increase (decrease) in net assets resulting from operations (5,519,483) (12,366,757) (21,392,459) (24,306,808) ----------- ------------ ------------- ------------ Undistributed net investment income included in the price of capital shares issued or redeemed -- -- -- 3,178 ----------- ------------ ------------- ------------ DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (567,205) -- (838,725) -- ----------- ------------ ------------- ------------ Total distributions to iShareholders (567,205) -- (838,725) -- ----------- ------------ ------------- ------------ iSHARES TRANSACTIONS: iShares sold -- 3,457,530 -- 8,628,640 iShares redeemed -- (18,419) (9,268,533) (8,690,553) ----------- ------------ ------------- ------------ Net increase (decrease) in net assets from iShares transactions -- 3,439,111 (9,268,533) (61,913) ----------- ------------ ------------- ------------ DECREASE IN NET ASSETS (6,086,688) (8,927,646) (31,499,717) (24,365,543) NET ASSETS: Beginning of period 49,674,280 58,601,926 94,159,659 118,525,202 ----------- ------------ ------------- ------------ End of period $43,587,592 $ 49,674,280 $ 62,659,942 $ 94,159,659 =========== ============ ============= ============ Undistributed net investment income (accumulated net investment loss) included in net assets at end of period $ (176,225) $ 567,205 $ (73,535) $ 838,725 =========== ============ ============= ============ iSHARES ISSUED AND REDEEMED: iShares sold -- 200,000 -- 600,000 iShares redeemed -- (1,000) (900,000) (601,000) ----------- ------------ ------------- ------------ Net increase (decrease) in iShares outstanding -- 199,000 (900,000) (1,000) =========== ============ ============= ============ iShares MSCI Italy Index Fund ----------------------------------- For the six months ended For the February 28, 2003 year ended (Unaudited) August 31, 2002 - ---------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss) $ 67,846 $ 725,762 Net realized loss (478,207) (1,080,970) Net change in unrealized appreciation (depreciation) 756,401 (4,788,096) ----------- ----------- Net increase (decrease) in net assets resulting from operations 346,040 (5,143,304) ----------- ----------- Undistributed net investment income included in the price of capital shares issued or redeemed -- -- ----------- ----------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (733,556) -- ----------- ----------- Total distributions to iShareholders (733,556) -- ----------- ----------- iSHARES TRANSACTIONS: iShares sold -- -- iShares redeemed -- (501) ----------- ----------- Net increase (decrease) in net assets from iShares transactions -- (501) ----------- ----------- DECREASE IN NET ASSETS (387,516) (5,143,805) NET ASSETS: Beginning of period 29,538,084 34,681,889 ----------- ----------- End of period $29,150,568 $29,538,084 =========== =========== Undistributed net investment income (accumulated net investment loss) included in net assets at end of period $ 67,846 $ 733,556 =========== =========== iSHARES ISSUED AND REDEEMED: iShares sold -- -- iShares redeemed -- (30) ----------- ----------- Net increase (decrease) in iShares outstanding -- (30) =========== ===========
See notes to financial statements. Financial Statements 49 Statements of Changes in Net Assets (Continued) iSHARES, INC.
iShares MSCI iShares MSCI Netherlands Spain Index Fund Index Fund ----------------------------------- ----------------------------------- For the six For the six months ended For the months ended For the February 28, 2003 year ended February 28, 2003 year ended (Unaudited) August 31, 2002 (Unaudited) August 31, 2002 - ------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income(loss) $ (45,159) $ 320,850 $ 95,686 $ 180,995 Net realized loss (1,901,403) (1,566,433) (937,327) (2,148,169) Net change in unrealized appreciation (depreciation) (2,977,135) (3,765,109) 1,443,071 (2,580,215) ----------- ----------- ----------- ------------ Net increase (decrease) in net assets resulting from operations (4,923,697) (5,010,692) 601,430 (4,547,389) ----------- ----------- ----------- ------------ DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (320,678) (52,040) (163,361) -- ----------- ----------- ----------- ------------ Total distributions to iShareholders (320,678) (52,040) (163,361) -- ----------- ----------- ----------- ------------ iSHARES TRANSACTIONS: iShares sold 12,435,251 -- 34,361,557 11,025,560 iShares redeemed -- (17,930) -- (14,825,946) ----------- ----------- ----------- ------------ Net increase (decrease) in net assets from iShares transactions 12,435,251 (17,930) 34,361,557 (3,800,386) ----------- ----------- ----------- ------------ INCREASE (DECREASE) IN NET ASSETS 7,190,876 (5,080,662) 34,799,626 (8,347,775) NET ASSETS: Beginning of period 19,103,415 24,184,077 18,849,778 27,197,553 ----------- ----------- ----------- ------------ End of period $26,294,291 $19,103,415 $53,649,404 $ 18,849,778 =========== =========== =========== ============ Undistributed net investment income (accumulated net investment loss) included in net assets at end of period $ (45,159) $ 320,678 $ 95,686 $ 163,361 =========== =========== =========== ============ iSHARES ISSUED AND REDEEMED: iShares sold 1,050,000 -- 1,875,000 525,000 iShares redeemed -- (1,000) -- (750,030) ----------- ----------- ----------- ------------ Net increase (decrease) in iShares outstanding 1,050,000 (1,000) 1,875,000 (225,030) =========== =========== =========== ============ iShares MSCI Sweden Index Fund ----------------------------------- For the six months ended For the February 28, 2003 year ended (Unaudited) August 31, 2002 - ----------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income(loss) $ (34,508) $ 98,146 Net realized loss (1,057,888) (1,617,301) Net change in unrealized appreciation (depreciation) 494,423 (956,433) ----------- ----------- Net increase (decrease) in net assets resulting from operations (597,973) (2,475,588) ----------- ----------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (100,930) -- ----------- ----------- Total distributions to iShareholders (100,930) -- ----------- ----------- iSHARES TRANSACTIONS: iShares sold 14,403,629 --) iShares redeemed -- (394) ----------- ----------- Net increase (decrease) in net assets from iShares transactions 14,403,629 (394) ----------- ----------- INCREASE (DECREASE) IN NET ASSETS 13,704,726 (2,475,982 NET ASSETS: Beginning of period 8,154,008 10,629,990 ----------- ----------- End of period $21,858,734 $ 8,154,008 =========== =========== Undistributed net investment income (accumulated net investment loss) included in net assets at end of period $ (34,508) $ 100,930 =========== =========== iSHARES ISSUED AND REDEEMED: iShares sold 1,500,000 -- iShares redeemed -- (30) ----------- ----------- Net increase (decrease) in iShares outstanding 1,500,000 (30) =========== ===========
See notes to financial statements. 50 2003 iShares Semi-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 six For the six months ended For the months ended For the February 28, 2003 year ended February 28, 2003 year ended (Unaudited) August 31, 2002 (Unaudited) August 31, 2002 - ------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss) $ (102,164) $ 65,396 $ 1,372,757 $ 4,083,808 Net realized loss (2,293,379) (1,137,054) (1,090,946) (7,051,788) Net change in unrealized appreciation (depreciation) (1,449,249) (2,902,375) (15,878,005) (16,145,045) ----------- ----------- ------------ ------------ Net decrease in net assets resulting from operations (3,844,792) (3,974,033) (15,596,194) (19,113,025) ----------- ----------- ------------ ------------ Undistributed net investment income included in the price of capital shares issued or redeemed -- -- -- 19,118 ----------- ----------- ------------ ------------ DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (73,589) (12,505) (2,770,755) (1,848,220) ----------- ----------- ------------ ------------ Total distributions to iShareholders (73,589) (12,505) (2,770,755) (1,848,220) ----------- ----------- ------------ ------------ iSHARES TRANSACTIONS: iShares sold -- 3,498,837 74,144,684 28,061,954 iShares redeemed (2,658,605) (13,350) (7,336,909) (4,935,208) ----------- ----------- ------------ ------------ Net increase (decrease) in net assets from iShares transactions (2,658,605) 3,485,487 66,807,775 23,126,746 ----------- ----------- ------------ ------------ INCREASE (DECREASE) IN NET ASSETS (6,576,986) (501,051) 48,440,826 2,184,619 NET ASSETS: Beginning of period 31,883,286 32,384,337 120,067,353 117,882,734 ----------- ----------- ------------ ------------ End of period $25,306,300 $31,883,286 $168,508,179 $120,067,353 =========== =========== ============ ============ Undistributed net investment income (accumulated net investment loss) included in net assets at end of period $ (102,164) $ 73,589 $ 1,004,613 $ 2,402,611 =========== =========== ============ ============ iSHARES ISSUED AND REDEEMED: iShares sold -- 250,000 6,400,000 2,000,000 iShares redeemed (250,000) (1,000) (600,000) (401,000) ----------- ----------- ------------ ------------ Net increase (decrease) in iShares outstanding (250,000) 249,000 5,800,000 1,599,000 =========== =========== ============ ============
See notes to financial statements. Financial Statements 51 Financial Highlights iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Austria Index Fund --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 8.19 $ 8.18 $ 7.67 $ 9.13 $ 10.11 $10.51 ------- ------- ------- ------- ------- ------ Income from investment operations: Net investment income (loss)/3/ (0.03) 0.13 0.13 0.04 0.10 0.06 Net realized and unrealized gain (loss) 0.84 (0.12) 0.52 (1.46) (0.98) 0.20 ------- ------- ------- ------- ------- ------ Total from investment operations 0.81 0.01 0.65 (1.42) (0.88) 0.26 ------- ------- ------- ------- ------- ------ Less distributions from: Net investment income (0.10) -- (0.14) (0.04) (0.08) (0.05) Net realized gain -- -- -- -- -- (0.61) Return of capital -- -- (0.00)/5/ -- (0.02) (0.00)/5/ ------- ------- ------- ------- ------- ------ Total distributions (0.10) -- (0.14) (0.04) (0.10) (0.66) ------- ------- ------- ------- ------- ------ Net asset value, end of period $ 8.90 $ 8.19 $ 8.18 $ 7.67 $ 9.13 $10.11 ======= ======= ======= ======= ======= ====== Total return 10.01%/6/ 0.12% 8.41% (15.51)% (8.69)% 2.16% ======= ======= ======= ======= ======= ====== Ratios/Supplemental data: Net assets, end of period (000s) $15,128 $14,740 $11,447 $10,741 $12,776 $8,085 Ratio of expenses to average net assets/7/ 0.84% 0.84% 0.84%/1/ 1.16%/1/ 1.31% 1.41% Ratio of net investment income (loss) to average net assets/7/ (0.84)% 1.57% 1.69%/2/ 0.51%/2/ 1.04% 0.51% Portfolio turnover rate/4/ 12% 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. /6/ Not annualized. /7/ Annualized for periods of less than one year. See notes to financial statements. 52 2003 iShares Semi-Annual Report to Shareholders Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Belgium Index Fund -------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of period $ 10.43 $ 11.81 $13.23 $ 16.07 $ 18.40 $ 15.64 ------- ------- ------ ------- ------- ------- Income from investment operations: Net investment income (loss)/3/ (0.03) 0.25 0.19 0.19 0.08 0.24 Net realized and unrealized gain (loss) (1.78) (1.56) (1.34) (2.67) (0.30) 6.09 ------- ------- ------ ------- ------- ------- Total from investment operations (1.81) (1.31) (1.15) (2.48) (0.22) 6.33 ------- ------- ------ ------- ------- ------- Less distributions from: Net investment income (0.11) (0.07) (0.27) (0.36) (0.01) (1.48) Net realized gain -- -- -- -- (1.19) (1.99) Return of capital -- -- -- -- (0.91) (0.10) ------- ------- ------ ------- ------- ------- Total distributions (0.11) (0.07) (0.27) (0.36) (2.11) (3.57) ------- ------- ------ ------- ------- ------- Net asset value, end of period $ 8.51 $ 10.43 $11.81 $ 13.23 $ 16.07 $ 18.40 ======= ======= ====== ======= ======= ======= Total return (17.45)%/5/ (11.10)% (8.72)% (15.50)% (1.00)% 39.42% ======= ======= ====== ======= ======= ======= Ratios/supplemental data: Net assets, end of period (000s) $29,615 $10,427 $9,918 $13,230 $13,496 $25,765 Ratio of expenses to average net assets/6/ 0.84% 0.84% 0.84%/1/ 1.13% 1.24% 1.04% Ratio of net investment income (loss) to average net assets/6/ (0.56)% 2.26% 1.60%/2/ 1.36% 0.45% 1.28% Portfolio turnover rate/4/ 3% 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. /5/ Not annualized. /6/ Annualized for periods of less than one year. 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 ----------------------------------------------------------------- Six months Period from ended Jul. 25, 2000/8/ Feb. 28, 2003 Year ended Year ended to (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 - -------------------------------------------------------------------------------------------------------- Net asset value, begining of period $ 46.02 $ 56.74 $ 76.02 $ 80.72 -------- -------- ------- ------- Income from investment operations Net investment income (loss)/3/ (0.04) 0.75 0.72 (0.00)/5/ Net realized and unrealized loss (5.45) (11.47) (19.32) (4.70) -------- -------- ------- ------- Total from investment operations (5.49) (10.72) (18.60) (4.70) -------- -------- ------- ------- Less distributions from: Net investment income (0.45) -- (0.42) -- Return of capital -- -- (0.26) -- -------- -------- ------- ------- Total distributions (0.45) -- (0.68) -- -------- -------- ------- ------- Net asset value, end of period $ 40.08 $ 46.02 $ 56.74 $ 76.02 ======== ======== ======= ======= Total return (12.00)%/6/ (18.89)% (24.51)% (5.82)%/6/ ======== ======== ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $132,264 $131,168 $90,779 $41,811 Ratio of expenses to average net assets/7/ 0.84% 0.84% 0.84% 0.84%/1/ Ratio of net investment income (loss) to average net assets/7/ (0.20)% 1.44% 1.13% 0.03%/2/ Portfolio turnover rate/4/ 2% 3% 24% 0%
/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 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. 54 2003 iShares Semi-Annual Report to Shareholders Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI France Index Fund --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 15.52 $ 19.53 $ 26.41 $ 22.90 $ 19.13 $ 14.50 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income (loss)/1/ (0.06) 0.18 0.06 0.10 0.14 0.30 Net realized and unrealized gain (loss) (1.66) (4.19) (6.89) 5.21 3.88 4.76 ------- ------- ------- ------- ------- ------- Total from investment operations (1.72) (4.01) (6.83) 5.31 4.02 5.06 ------- ------- ------- ------- ------- Less distributions from: Net investment income (0.18) -- (0.04) (0.11) (0.12) (0.22) Net realized gain -- -- (0.00)/3/ (1.67) (0.05) (0.14) Return of capital -- -- (0.01) (0.02) (0.08) (0.07) ------- ------- ------- ------- ------- ------- Total distributions (0.18) -- (0.05) (1.80) (0.25) (0.43) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 13.62 $ 15.52 $ 19.53 $ 26.41 $ 22.90 $ 19.13 ======= ======= ======= ======= ======= ======= Total return (11.18)%/4/ (20.53)% (25.86)% 23.45% 21.01% 34.77% ======= ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $43,588 $49,674 $58,602 $95,116 $77,885 $45,922 Ratio of expenses to average net assets/5/ 0.84% 0.84% 0.84% 0.96% 1.06% 1.18% Ratio of net investment income (loss) to average net assets/5/ (0.77)% 1.00% 0.28% 0.36% 0.67% 1.58% Portfolio turnover rate/2/ 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. /4/ Not annualized. /5/ Annualized for periods of less than one year. 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 --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 12.07 $ 15.19 $ 20.46 $ 21.17 $ 20.25 $ 16.31 ------- ------- -------- -------- -------- ------- Income from investment operations: Net investment income (loss)/1/ (0.01) 0.11 0.18 0.18 0.12 0.29 Net realized and unrealized gain (loss) (2.86) (3.23) (5.26) 1.64 1.31 3.92 ------- ------- -------- -------- -------- ------- Total from investment operations (2.87) (3.12) (5.08) 1.82 1.43 4.21 ------- ------- -------- -------- -------- ------- Less distributions from: Net investment income (0.12) -- (0.19) (0.17) (0.11) (0.18) Net realized gain -- -- -- (2.32) (0.39) (0.01) Return of capital -- -- (0.00)/3/ (0.04) (0.01) (0.08) ------- ------- -------- -------- -------- ------- Total distributions (0.12) -- (0.19) (2.53) (0.51) (0.27) ------- ------- -------- -------- -------- ------- Net asset value, end of period $ 9.08 $ 12.07 $ 15.19 $ 20.46 $ 21.17 $ 20.25 ======= ======= ======== ======== ======== ======= Total return (23.87)%/4/ (20.54)% (24.87)% 8.44% 7.04% 25.69% ======= ======= ======== ======== ======== ======= Ratios/Supplemental data: Net assets, end of period (000s) $62,660 $94,160 $118,525 $153,487 $101,645 $72,934 Ratio of expenses to average net assets/5/ 0.84% 0.84% 0.84% 0.94% 1.00% 1.08% Ratio of net investment income (loss) to average net assets/5/ (0.20)% 0.77% 0.99% 0.73% 0.57% 1.43% Portfolio turnover rate/2/ 4% 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. /4/ Not annualized. /5/ Annualized for periods of less than one year. See notes to financial statements. 56 2003 iShares Semi-Annual Report to Shareholders Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Italy Index Fund --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, begining of period $ 15.15 $ 17.79 $ 22.23 $ 21.56 $ 22.89 $ 16.66 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income/1/ 0.03 0.37 0.24 0.39 0.17 0.18 Net realized and unrealized gain (loss) 0.15 (3.01) (4.37) 2.51 1.05 7.94 ------- ------- ------- ------- ------- ------- Total from investment operations 0.18 (2.64) (4.13) 2.90 1.22 8.12 ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income (0.38) -- (0.24) (0.12) (0.06) (1.20) Net realized gain -- -- (0.07) (1.80) (2.24) (0.69) Return of capital -- -- (0.00)/3/ (0.31) (0.25) -- ------- ------- ------- ------- ------- ------- Total distributions (0.38) -- (0.31) (2.23) (2.55) (1.89) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 14.95 $ 15.15 $ 17.79 $ 22.23 $ 21.56 $ 22.89 ======= ======= ======= ======= ======= ======= Total return 1.21%/4/ (14.84)% (18.61)% 13.35 5.14% 47.66% ======= ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $29,151 $29,538 $34,682 $50,008 $58,224 $58,368 Ratio of expenses to average net assets/5/ 0.84% 0.84% 0.84% 0.99% 1.03% 1.02% Ratio of net investment income to average net assets/5/ 0.49% 2.34% 1.16% 1.61% 0.70% 0.76% Portfolio turnover rate /2/ 12% 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. /4/ Not annualized. /5/ Annualized for periods of less than one year. 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 ----------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 14.69 $ 18.59 $ 23.53 $ 23.45 $ 23.50 $ 21.42 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income (loss)/1/ (0.03) 0.25 0.28 0.13 0.53 0.25 Net realized and unrealized gain (loss) (3.22) (4.11) (4.94) 0.18 1.60 3.53 ------- ------- ------- ------- ------- ------- Total from investment operations (3.25) (3.86) (4.66) 0.31 2.13 3.78 ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income (0.25) (0.04) (0.28) (0.08) (0.44) (0.16) Net realized gain -- -- -- (0.11) (1.66) (1.47) Return of capital -- -- -- (0.04) (0.08) (0.07) ------- ------- ------- ------- ------- ------- Total distributions (0.25) (0.04) (0.28) (0.23) (2.18) (1.70) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 11.19 $ 14.69 $ 18.59 $ 23.53 $ 23.45 $ 23.50 ======= ======= ======= ======= ======= ======= Total return (22.42)%/3/ (20.79)% (19.83)% 1.28% 8.98% 17.41% ======= ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $26,294 $19,103 $24,184 $30,613 $31,685 $22,349 Ratio of expenses to average net assets/4/ 0.84% 0.84% 0.84% 1.03% 1.07% 1.12% Ratio of net investment income (loss) to average net assets/4/ (0.51)% 1.48% 1.34% 0.53% 2.20% 1.00% Portfolio turnover rate/2/ 13% 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. /3/ Not annualized. /4/ Annualized for periods of less than one year. See notes to financial statements. 58 2003 iShares Semi-Annual Report to Shareholders Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Spain Index Fund --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 17.95 $ 21.33 $ 24.19 $ 25.59 $ 23.84 $ 18.49 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income/1/ 0.08 0.17 0.19 0.15 0.09 0.16 Net realized and unrealized gain (loss) 0.47 (3.55) (2.89) (0.60) 3.14 5.94 ------- ------- ------- ------- ------- ------- Total from investment operations 0.55 (3.38) (2.70) (0.45) 3.23 6.10 ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income (0.16) -- (0.16) (0.14) (0.09) (0.14) Net realized gain -- -- -- (0.80) (1.35) (0.55) Return of capital -- -- (0.00)/3/ (0.01) (0.04) (0.06) ------- ------- ------- ------- ------- ------- Total distributions (0.16) -- (0.16) (0.95) (1.48) (0.75) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 18.34 $ 17.95 $ 21.33 $ 24.19 $ 25.59 $ 23.84 ======= ======= ======= ======= ======= ======= Total return 3.05%/4/ (15.85)% (11.17)% (1.81)% 13.39% 32.58% ======= ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $53,649 $18,850 $27,198 $39,913 $36,469 $25,029 Ratio of expenses to average net assets/5/ 0.84% 0.84% 0.84% 0.99% 1.04% 1.11% Ratio of net investment income to average net assets/5/ 0.94% 0.85% 0.82% 0.57% 0.31% 0.61% Portfolio turnover rate/2/ 7% 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. /4/ Not annualized. /5/ Annualized for periods of less than one year. 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 ----------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 9.88 $ 12.88 $ 24.38 $ 22.26 $ 18.39 $ 18.32 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income (loss)/1/ (0.04) 0.12 0.07 0.14 0.10 0.10 Net realized and unrealized gain (loss) (0.32) (3.12) (11.52) 8.38 4.52 0.95 ------- ------- ------- ------- ------- ------- Total from investment operations (0.36) (3.00) (11.45) 8.52 4.62 1.05 ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income (0.12) -- (0.05) (0.14) (0.10) (0.09) Net realized gain -- -- -- (6.22) (0.63) (0.87) Return of capital -- -- (0.00)/3/ (0.04) (0.02) (0.02) ------- ------- ------- ------- ------- ------- Total distributions (0.12) -- (0.05) (6.40) (0.75) (0.98) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 9.40 $ 9.88 $ 12.88 $ 24.38 $ 22.26 $ 18.39 ======= ======= ======= ======= ======= ======= Total return (3.65)%/4/ (23.29)% (46.99)% 39.15% 25.09% 5.48% ======= ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $21,859 $ 8,154 $10,630 $23,774 $20,034 $13,791 Ratio of expenses to average net assets/5/ 0.84% 0.84% 0.84% 1.03% 1.13% 1.17% Ratio of net investment income (loss) to average net assets/5/ (0.80)% 0.98% 0.40% 0.46% 0.49% 0.48% Portfolio turnover rate/2/ 9% 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. /4/ Not annualized. /5/ Annualized for periods of less than one year. See notes to financial statements. 60 2003 iShares Semi-Annual Report to Shareholders Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Switzerland Index Fund --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 11.59 $ 12.95 $ 15.54 $ 15.39 $ 15.55 $ 13.79 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income (loss)/1/ (0.04) 0.03 0.04 0.04 0.04 (0.00)/3/ Net realized and unrealized gain (loss) (1.40) (1.38) (2.54) 0.27 0.19 3.01 ------- ------- ------- ------- ------- ------- Total from investment operations (1.44) (1.35) (2.50) 0.31 0.23 3.01 ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income (0.03) (0.01) (0.05) (0.04) (0.07) (0.01) Net realized gain -- -- (0.04) (0.11) (0.31) (1.21) Return of capital -- -- -- (0.01) (0.01) (0.03) ------- ------- ------- ------- ------- ------- Total distributions (0.03) (0.01) (0.09) (0.16) (0.39) (1.25) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.12 $ 11.59 $ 12.95 $ 15.54 $ 15.39 $ 15.55 ======= ======= ======= ======= ======= ======= Total return (12.45)%/4/ (10.47)% (16.08)% 1.96% 1.47% 21.24% ======= ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $25,306 $31,883 $32,384 $44,685 $38,499 $29,163 Ratio of expenses to average net assets/5/ 0.84% 0.84% 0.84% 1.01% 1.09% 1.15% Ratio of net investment income (loss) to average net assets/5/ (0.73)% 0.20% 0.29% 0.23% 0.24% (0.03)% Portfolio turnover rate/2/ 5% 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. /4/ Not annualized. /5/ Annualized for periods of less than one year. 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 --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - -------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 12.77 $ 15.11 $ 18.35 $ 20.25 $ 18.48 $ 16.50 -------- -------- -------- -------- -------- ------- Income from investment operations: Net investment income/1/ 0.13 0.48 0.26 0.27 0.44 0.37 Net realized and unrealized gain (loss) (1.53) (2.60) (3.23) (0.85) 2.40 2.12 -------- -------- -------- -------- -------- ------- Total from investment operations (1.40) (2.12) (2.97) (0.58) 2.84 2.49 -------- -------- -------- -------- -------- ------- Less distributions from: Net investment income (0.28) (0.22) (0.25) (0.25) (0.37) (0.33) Net realized gain -- -- (0.02) (1.03) (0.62) (0.11) Return of capital -- -- -- (0.04) (0.08) (0.07) -------- -------- -------- -------- -------- ------- Total distributions (0.28) (0.22) (0.27) (1.32) (1.07) (0.51) -------- -------- -------- -------- -------- ------- Net asset value, end of period $ 11.09 $ 12.77 $ 15.11 $ 18.35 $ 20.25 $ 18.48 ======== ======== ======== ======== ======== ======= Total return (11.11)%/3/ (14.19)% (16.20)% (3.00)% 15.33% 14.98% ======== ======== ======== ======== ======== ======= Ratios/Supplemental data: Net assets, end of period (000s) $168,508 $120,067 $117,883 $146,803 $113,402 $62,846 Ratio of expenses to average net assets/4/ 0.84% 0.84% 0.84% 0.94% 0.97% 1.03% Ratio of net investment income to average net assets/4/ 2.17% 3.39% 1.57% 1.39% 2.16% 1.90% Portfolio turnover rate/2/ 1% 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. /3/ Not annualized. /4/ Annualized for periods of less than one year. See notes to financial statements. 62 2003 iShares Semi-Annual Report to Shareholders Notes to the Financial Statements (Unaudited) 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 February 28, 2003, the Company offered 23 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, before fees and expenses, 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 period 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 63 Notes to the Financial Statements (Unaudited) (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. 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). 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. Dividends and distributions are paid in U.S. dollars and cannot be automatically reinvested in additional shares of the Funds. 64 2003 iShares Semi-Annual Report to Shareholders Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. At August 31, 2002, the tax year-end of the Funds, 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 - -------------------------------------------------------------------------------- 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 the 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 six months ended February 28, 2003. 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 - ------------------------------------------------------------- Notes to the Financial Statements 65 Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. At August 31, 2002, the tax year-end of the Funds, 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. 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. 66 2003 iShares Semi-Annual Report to Shareholders Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. 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 Africa, 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. Investors Bank & Trust Company ("Investors Bank") serves as administrator, custodian and transfer 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. Effective February 24, 2003, BGI began serving as securities lending agent for the Company. BGI is an affiliate of BGFA, the Funds' investment advisor. The Board of Directors has approved the selection of BGI as securities lending agent subject to the conditions of the exemptive order that was issued by the Securities and Exchange Commission ("SEC"). As securities lending agent, BGI receives a fee based on a share of the income earned on investment of the cash collateral received for the loan of securities. For the period from February 24, 2003 through February 28, 2003, BGI earned $31 in securities lending agent fees from the Funds. Prior to February 24, 2003, Investors Bank served as securities lending agent for the Funds. 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 SEC, 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 temporary cash investments or from investment of securities lending collateral are recorded as either interest income or as securities lending income, respectively, 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 $4,839,186 as of February 28, 2003. Barclays PLC is an affiliate of BGFA, the Fund's investment advisor. Notes to the Financial Statements 67 Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. 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 February 28, 2003, 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 six months ended February 28, 2003, were as follows: - ------------------------------------------------- iShares MSCI Index Fund Purchases Sales - ------------------------------------------------- Austria $1,808,036 $2,051,509 Belgium 458,567 589,713 EMU 2,434,507 3,701,309 France 745,805 1,438,731 Germany 2,708,537 3,713,346 Italy 3,380,495 3,965,151 Netherlands 2,382,828 2,651,382 Spain 1,737,613 1,777,163 Sweden 851,495 1,025,434 Switzerland 1,575,164 1,468,911 United Kingdom 1,448,391 2,935,239 - ------------------------------------------------- In-kind transactions for the six months ended February 28, 2003, were as follows: - -------------------------------------------------- In-kind In-kind iShares MSCI Index Fund Purchases Sales - -------------------------------------------------- Austria $ 2,393,667 $3,624,602 Belgium 30,155,989 7,555,155 EMU 20,102,367 -- Germany -- 9,212,902 Netherlands 12,437,549 -- Spain 34,321,596 -- Sweden 14,412,046 -- Switzerland -- 2,629,522 United Kingdom 73,856,781 7,294,160 - -------------------------------------------------- 68 2003 iShares Semi-Annual Report to Shareholders Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. At February 28, 2003, 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) - ------------------------------------------------------------------------------------ Austria $14,722,630 $1,551,794 $ (1,163,580) $ 388,214 Belgium 35,514,240 154,381 (6,083,904) (5,929,523) EMU 184,993,706 2,029,982 (55,086,348) (53,056,366) France 65,522,651 1,966,990 (23,982,114) (22,015,124) Germany 137,254,757 684,258 (75,435,207) (74,750,949) Italy 36,863,258 1,736,035 (8,579,996) (6,843,961) Netherlands 37,144,758 161,487 (11,122,840) (10,961,353) Spain 63,521,649 885,416 (6,585,671) (5,700,255) Sweden 30,573,631 572,812 (6,304,110) (5,731,298) Switzerland 34,289,446 527,158 (9,563,797) (9,036,639) United Kingdom 219,756,447 2,949,420 (55,201,794) (52,252,374) - ------------------------------------------------------------------------------------
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 (Unaudited) (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 February 28, 2003, 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 February 28, 2003, and the cash collateral received are disclosed in the Statements of Assets and Liabilities. 6. LEGAL PROCEEDINGS The Company is a defendant in an action in the U.S. District Court for the Northern District of Illinois. There are numerous other defendants, including the Company's investment advisor, other exchange traded funds, various fund service providers and market makers, and the Chicago Stock Exchange, Inc. A company named MOPEX, Inc. is the plaintiff in this action. MOPEX claims that the actions of the parties, including the Company, infringe a patent held by MOPEX, and that the parties engaged in a "conspiracy" amongst themselves to infringe the patent. MOPEX's patent, however, was found to be invalid by the judge in a related case in the U.S. District Court for the Southern District of New York. That case has now been settled. Although the Company is not a party to the action in New York, the Company believes that the finding of invalidity of the alleged patent will permit the action in Illinois to be resolved quickly with no effect on the Company. 70 2003 iShares Semi-Annual Report to Shareholders Notes: Notes 71 Notes: 72 2003 iShares Semi-Annual Report to Shareholders Notes: Notes 73 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. 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. 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) International/Emerging Country iShares MSCI Brazil Index Fund (EWZ) iShares MSCI Malaysia Index Fund (EWM) iShares MSCI Mexico Index Fund (EWW) iShares MSCI South Africa Index Fund (EZA) 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) This advertising section does not constitute part of the 2003 Semi-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)" and "Goldman Sachs(R)" are trademarks of Goldman, Sachs & Co. 74 2003 iShares Semi-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. 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) 2003 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. GRAPHIC iShares Industrial strength investment tools from BARCLAYS GLOBAL INVESTORS 1 800 iShares (1 800 474 2737) WWW.iShares.COM iShares 2003 SEMI-ANNUAL REPORT TO SHAREHOLDERS FEBRUARY 28, 2003 [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 iShares Family of Funds ................................................... 22 To Our Shareholders For many investors, the last six months was another difficult and challenging period. A tepid economy, corporate accounting scandals and lackluster company earnings all contributed to the major equity indexes declining for the third straight year, a bear market performance not seen in decades. Global geopolitical uncertainties create the possibility that challenging market conditions may continue. However, iShares continued to innovate and expand, offering more tools that help investors tailor their portfolios to address volatility in this complex market environment. For example, iShares launched the first fixed income exchange-traded funds. Based on investor demand for less volatile asset classes, we introduced three bond funds based on Lehman U.S. Treasury indexes. In addition, to provide credit market exposure we introduced a fund based on the GS $ InvesTop(TM) Index. By the end of 2002, the fixed income iShares funds held $3.8 billion in assets and Business Week named them one of the best new products of the year./1/ With the addition of the fixed income iShares, investors can achieve more diversity in their portfolios -- and at lower cost, since iShares fees are, on average, about half those of actively managed funds./2/ With almost 80 different iShares to choose from, investors have the ability to build a diverse portfolio that covers market capitalization, sectors, value and growth, international and now fixed income indexes. It is important for investors to remember that market segments do not tend to move in tandem, particularly during volatile market conditions. Economic conditions such as inflation, interest rate levels, currency valuations or the price of oil, as well as the normal pace of the economic cycle, all may cause investors to favor one market segment over another. The wide range of performance returns for the various iShares funds this year demonstrates that phenomenon clearly. We encourage you to talk with your financial advisor about what blend of investments or asset allocation can best help you meet your financial goals. Throughout the coming year we will continue to work closely with the financial advisor community to introduce innovative strategies and structures for their client's portfolios. To learn more about iShares, we encourage you to visit our web site, www.iShares.com At times like these, the importance of sound, disciplined investing is greater than ever. Such investing should be grounded in two key concepts: keeping the costs associated with investing as low as possible, and maintaining a diversified portfolio. That is why we believe iShares are proving to be an indispensable tool for investors in the current market. And that is also why more and more investors are recognizing the benefits of iShares. In fact, despite the year's difficult markets, assets under management for iShares actually grew in 2002, reaching $31 billion as of December 31. On behalf of the iShares family of funds and our colleagues at Barclays Global Investors, we thank you for making iShares a part of your portfolio. We look forward to meeting your investment needs in the year ahead. /s/ Garrett F. Bouton /s/ Lee Kranefuss - ------------------------------------- ---------------------------------------- Garrett F. Bouton Lee Kranefuss President and Chairman of the Board Vice President of the Board of Directors of Directors for iShares, Inc. for iShares, Inc. 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. - ---------- /1/ Business week, 12/16/02. /2/ Morningstar Principia, BGI analysis 6/02. Shareholder Letter 1 There are risks involved with investing, including possible loss of principal. Diversification may not protect against market risk. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The annual management fees of iShares may be substantially less than those of most mutual funds. iShares transactions will result in brokerage commissions, but the savings from lower annual fees can help offset these costs. Past performance does not guarantee future results. iShares are not sponsored, endorsed, or issued by Goldman, Sachs & Co. or Lehman Brothers, nor are they sponsored, endorsed, issued, 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. "$InvesTop(TM)", "$ InvesTop(TM) Index", "GS $ InvesTop(TM)" and "Goldman Sachs(R)" 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. 2 2003 iShares Semi-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 ordinary and preferred lines made up 32.07% of the MSCI South Korea Index as of February 28th, 2003. 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 81.23% as of February 28th, 2003; 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. Security lending income is the income earned on lending the security, which is split between the fund and the security lending agent. 4 2003 iShares Semi-Annual Report to Shareholders THIS PAGE INTENTIONALLY LEFT BLANK. 5 Managers' Discussion & Analysis iSHARES MSCI JAPAN INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - --------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ---------------------- ------------------------ ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ----- ------ ----- ------ ------ ----- (9.37)% (8.43)% (9.46)% (8.26)% (8.52)% (7.44)% (10.03)% (9.90)% (9.33)% Cumulative Total Returns - ---------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ---------------------- ------------------------ ------------------------ NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ------ ------ ------ ------ ------ ------ (9.37)% (8.43)% (9.46)% (35.02)% (35.95)% (32.06)% (52.13)% (51.65)% (49.47)% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI JAPAN INDEX [CHART] Pie chart
Consumer Consumer Health Information Telecomm Discretionary Staples Energy Financials Care Industrials Technology Materials Services Utilities - ------------- -------- ------ ---------- ------ ----------- ----------- --------- -------- --------- 24.77% 5.83% 0.93% 12.63% 6.94% 15.62% 14.77% 7.31% 4.86% 6.34%
Performance Review The total return of the iShares MSCI Japan Index Fund (the "Fund") was - 12.87% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Japan Index (the "Index") over the reporting period was - 13.05%. Significant Performance Factors The Fund outperformed its benchmark by 0.18 percentage points over the reporting period. This was due to the positive impact of security sampling, revenue differential and security lending, which contributed 0.54, 0.04 and 0.02 percentage points, respectively, to the Fund's return. Those factors were partially offset by the impact of expenses, which subtracted 0.42 percentage points from the Fund's return. 6 2003 iShares Semi-Annual Report to Shareholders Key Market Conditions Japan's stock market was depressed over the reporting period by many of the same factors it has grappled with in the past - and by some new concerns. Once again, the market's financial sector came under heavy pressure as many investors remained concerned about the extent of bad loans Japan's banks had yet to reveal. At certain times during the reporting period, many were concerned that Prime Minister Junichiro Koizumi was taking too harsh a stance toward the banks, particularly after he appointed a new overseer for the banking industry at the end of September that some viewed as a hardline watchdog. At other times, many worried that Prime Minister Koizumi was not doing enough to rectify the situation. The threat of a war in the Middle East added to the pressure on Japanese stocks, as did heightened tensions between the United States and North Korea in early 2003. These factors drove the Japanese stock market down to levels not seen for decades. Waning consumer demand at home and in Japan's key export markets, particularly the United States, was another source of concern for many investors. The yen's strength versus the U.S. dollar only made the situation more difficult for many Japanese companies in overseas markets. Yet the same trend was somewhat beneficial for U.S. dollar-based investors, by boosting their returns from Japan's stock market and thereby helping to offset some of its decline in local-currency terms. In addition, some of Japan's largest exporters fared comparatively well despite the challenging environment. Shares of Canon Inc. (2.79% of the Index as of February 28, 2003) were especially strong, as the electronics maker profited from strong worldwide sales of its digital cameras. Automaker Toyota Motor Corp. and entertainment company Sony Corp. (respectively 5.11% and 3.08% of the Index as of February 28, 2003) were also among the better performers in the MSCI Japan Index's top 10 holdings, though their shares did post a decline over the reporting period. Managers' Discussion & Analysis 7 Schedule of Investments (Unaudited) iSHARES MSCI JAPAN INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 99.96% Toyota Motor Corp. 1,126,600 $26,443,773 NTT DoCoMo Inc./1/ 8,908 16,802,571 Sony Corp. 419,200 15,920,558 Takeda Chemical Industries Ltd. 393,000 14,493,381 Canon Inc. 393,000 14,194,206 Tokyo Electric Power Co. Inc. (The) 589,500 11,343,730 Honda Motor Co. Ltd. 301,300 11,009,651 Nomura Holdings Inc. 917,000 10,781,391 Matsushita Electic Industrial Co. Ltd. 1,048,015 9,298,945 Nippon Telegraph & Telephone Corp. 2,489 9,010,717 Nissan Motors Co. Ltd. 1,139,700 8,550,763 Fuji Photo Film Co. Ltd. 262,000 8,310,425 Mitsubishi Tokyo Financial Group Inc. 1,703 7,548,082 East Japan Railway Co. 1,441 6,642,800 Rohm Co. Ltd. 52,400 6,005,667 Chubu Electric Power Co. Inc. 301,300 5,530,311 Kao Corp. 262,000 5,529,203 Hitachi Ltd. 1,310,000 5,429,478 Kansai Electric Power Co. Inc. (The) 353,700 5,364,213 Shin-Etsu Chemical Co. Ltd. 144,100 4,716,997 Millea Holdings Inc./1/ 655 4,537,492 Murata Manufacturing Co. Ltd. 117,900 4,467,685 Sharp Corp. 393,000 4,268,234 Nintendo Co. Ltd. 52,400 4,179,590 Kyocera Corp. 78,600 4,128,619 Sumitomo Mitsui Financial Group Inc./1/ 1,755 4,097,103 Tokyo Gas Co. Ltd. 1,310,000 3,966,843 Ricoh Co. Ltd. 262,000 3,957,978 Mitsubishi Heavy Industries Ltd. 1,441,000 3,936,925 Denso Corp. 262,000 3,920,305 Toshiba Corp./1/ 1,310,000 3,811,715 Secom Co. Ltd. 131,000 3,723,070 Nippon Steel Corp. 2,620,000 3,590,104 Tokyo Electron Ltd. 78,652 3,585,826 Yamanouchi Pharmaceutical Co. Ltd. 131,000 3,567,942 Security Shares Value - -------------------------------------------------------------------------------- Mitsui & Co. Ltd. 655,000 $3,518,080 Mitsubishi Corp. 524,000 3,505,891 Ito-Yokado Co. Ltd. 131,000 3,468,217 Hoya Corp. 52,400 3,364,060 JFE Holdings Inc./1/ 222,750 3,235,033 Tohoku Electric Power Co. Inc. 222,700 3,226,772 Seven-Eleven Japan Co. Ltd. 131,000 3,063,777 Bridgestone Corp. 262,000 2,958,511 Kirin Brewery Co. Ltd. 393,000 2,908,649 Kyushu Electric Power Co. Inc. 196,500 2,888,704 Nippon Oil Corp. 655,500 2,788,890 Ajinomoto Co. Inc. 262,000 2,776,790 Mitsubishi Estate Co. Ltd. 393,000 2,722,495 Osaka Gas Co. Ltd. 1,048,000 2,668,200 Dai Nippon Printing Co. Ltd. 262,000 2,646,039 Aeon Co. Ltd. 131,000 2,637,175 Mitsui Fudosan Co. Ltd. 393,000 2,576,232 Fujisawa Pharmaceutical Co. Ltd. 131,000 2,570,692 Eisai Co. Ltd. 131,000 2,548,530 Daiwa Securities Group Inc. 524,000 2,530,801 Asahi Glass Co. Ltd. 393,000 2,483,155 Shizuoka Bank Ltd. (The) 393,000 2,456,562 Mitsui Sumitomo Insurance Co. Ltd. 524,000 2,455,454 NEC Corp. 655,000 2,437,725 Central Japan Railway Co. 393 2,393,402 Fujitsu Ltd. 786,000 2,373,457 Nikko Cordial Corp. 655,000 2,354,620 Japan Tobacco Inc. 393 2,343,540 Mizuho Holdings Inc. 2,620 2,326,919 Fanuc Ltd. 52,400 2,282,597 TDK Corp. 52,400 2,229,410 ORIX Corp. 39,300 2,167,359 SANYO Electric Co. Ltd. 786,000 2,154,062 Keyence Corp. 13,100 2,128,577 Olympus Optical Co. Ltd. 131,000 2,116,388 Omron Corp. 131,000 2,116,388 Mitsubishi Electric Corp./1/ 786,000 2,100,875 Daikin Industries Ltd. 131,000 2,094,227 SMC Corp. 26,200 2,005,583 Pioneer Corp. 91,700 1,985,638 Toyota Industries Corp. 131,000 1,957,936 8 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) (Continued) iSHARES MSCI JAPAN INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- Takefuji Corp. 39,300 $1,947,964 Sompo Japan Insurance Inc. 393,000 1,944,639 Bank of Yokohama Ltd. (The) 524,000 1,923,586 Taisho Pharmaceutical Co. Ltd. 131,000 1,914,722 Nippon Yusen Kabushiki Kaisha 524,000 1,905,858 Shionogi & Co. Ltd. 131,000 1,902,533 Sekisui House Ltd. 262,000 1,848,239 NTT Data Corp. 655 1,844,914 Nitto Denko Corp. 65,500 1,839,374 Asahi Kasei Corp. 655,000 1,833,834 Toppan Printing Co. Ltd. 262,000 1,803,916 Kinki Nippon Railway Co. Ltd./1/ 786,000 1,781,755 Sumitomo Chemical Co. Ltd. 524,000 1,772,891 Daiichi Pharmaceutical Co. Ltd. 131,000 1,755,162 Sankyo Co. Ltd. 131,000 1,748,513 Advantest Corp. 39,300 1,705,299 West Japan Railway Co. 524 1,697,543 UFJ Holdings Inc. 1,441 1,694,219 Sumitomo Electric Industries Ltd. 262,000 1,684,246 Yamato Transport Co. Ltd. 131,000 1,662,085 OJI Paper Co. Ltd. 393,000 1,628,843 Stanley Electric Co. Ltd. 131,000 1,617,763 Tostem Inax Holding Corp. 131,000 1,616,655 Yakult Honsha Co. Ltd. 131,000 1,607,790 Alps Electric Co. Ltd. 131,000 1,600,034 Itochu Corp. 655,000 1,562,360 Nippon Unipac Holding 393 1,559,036 Nippon Express Co. Ltd. 393,000 1,552,387 Shiseido Co. Ltd. 131,000 1,519,146 Matsushita Electric Works Ltd. 262,000 1,511,389 Komatsu Ltd. 393,000 1,509,173 Daiwa House Industry Co. Ltd. 262,000 1,489,228 Yamaha Corp. 131,000 1,474,823 Toyo Seikan Kaisha Ltd. 131,000 1,451,554 Mitsubishi Chemical Corp./1/ 786,000 1,449,338 Toray Industries Inc. 655,000 1,429,393 Terumo Corp. 91,700 1,420,972 Sumitomo Trust & Banking Co. Ltd. (The) 393,000 1,372,882 Oriental Land Co. Ltd. 26,200 1,340,749 Nippon Meat Packers Inc. 131,000 1,325,236 Security Shares Value - -------------------------------------------------------------------------------- JSR Corp. 131,000 $1,324,128 Tokyu Corp. 393,000 1,286,454 Promise Co. Ltd. 39,300 1,283,130 Banyu Pharmaceutical Co. Ltd. 104,800 1,237,478 Sumitomo Corp. 262,000 1,227,727 Keihin Electric Express Railway Co. Ltd. 262,000 1,216,646 Keio Electric Railway Co. Ltd. 262,000 1,216,646 Softbank Corp. 91,700 1,211,549 Chugai Pharmaceutical Co. Ltd. 131,000 1,193,377 Credit Saison Co. Ltd. 65,500 1,169,000 Trend Micro Inc./1/ 65,500 1,087,558 Toho Co. Ltd. 117,900 1,085,009 Joyo Bank Ltd. 393,000 1,083,679 NTN Corp. 262,000 1,077,031 Marui Co. Ltd. 131,000 1,075,923 Tobu Railway Co. Ltd./1/ 393,000 1,073,707 Bank of Fukuoka Ltd. 262,000 1,061,518 Konica Corp. 131,000 1,051,546 UNY Co. Ltd. 131,000 1,033,817 Nikon Corp./1/ 131,000 1,013,872 Kubota Corp. 393,000 1,007,224 Mitsui Chemicals Inc. 262,000 1,006,115 Uni-Charm Corp. 26,200 995,035 Mabuchi Motor Co. Ltd. 13,100 993,927 Teijin Ltd. 393,000 977,306 Sumitomo Metal Mining Co. Ltd. 262,000 972,874 Mitsui O.S.K. Lines Ltd. 393,000 964,009 Nisshin Seifun Group Inc. 131,000 940,740 Hirose Electric Co. Ltd. 13,100 927,443 Yokogawa Electric Corp. 131,000 893,094 JGC Corp. 131,000 885,337 Kikkoman Corp. 131,000 878,689 Asahi Breweries Ltd. 131,000 874,257 Isetan Co. Ltd. 131,000 866,500 ACOM Co. Ltd. 26,200 859,852 Resona Holdings Inc./1/ 1,703,000 821,070 Yamada Denki Co. Ltd. 40,700 821,057 Chiba Bank Ltd. (The) 262,000 815,530 Konami Corp. 39,300 809,435 TonenGeneral Sekiyu K.K. 131,000 795,585 Schedule of Investments 9 Schedule of Investments (Unaudited) (Continued) iSHARES MSCI JAPAN INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- Kajima Corp. 393,000 $787,828 Nissin Food Products Co. Ltd. 39,300 787,828 Daito Trust Construction Co. Ltd. 39,300 766,221 Kuraray Co. Ltd. 131,000 762,343 Casio Computer Co. Ltd. 131,000 761,235 NSK Ltd. 262,000 746,830 Toyoda Gosei Co. Ltd. 39,300 744,614 AIFUL Corp. 19,650 739,628 Taisei Corp. 393,000 737,966 Nidec Corp. 13,100 723,561 Mitsui Mining & Smelting Co. Ltd. 262,000 709,156 Fast Retailing Co. Ltd. 26,200 698,076 Denki Kagaku Kogyo Kabushiki Kaisha 262,000 682,563 Shimamura Co. Ltd. 13,100 680,347 Citizen Watch Co. Ltd. 131,000 673,699 Takara Holdings Inc. 131,000 660,402 NGK Insulators Ltd. 131,000 657,078 Sekisui Chemical Co. Ltd. 262,000 655,969 Taiheiyo Cement Corp. 393,000 654,861 Shimizu Corp. 262,000 644,889 Marubeni Corp./1/ 655,000 642,673 Suzuken Co. Ltd. 26,200 636,025 Sumitomo Metal Industries Ltd./1/ 1,441,000 633,808 Lawson Inc. 26,200 632,700 Obayashi Corp. 262,000 624,944 Kaneka Corp. 131,000 623,836 Nippon Shokubai Co. Ltd. 131,000 619,404 Tosoh Corp. 262,000 616,080 Toto Ltd. 131,000 616,079 Mitsubishi Rayon Co. Ltd. 262,000 613,863 Kamigumi Co. Ltd. 131,000 608,323 Furkukawa Electric Co. Ltd. 262,000 600,567 Dainippon Screen Manufacturing Co. Ltd./1/ 131,000 592,810 Kawasaki Kisen Kaisha Ltd. 262,000 578,406 Japan Airlines System Corp./1/ 262,000 576,190 Kawasaki Heavy Industries Ltd./1/ 655,000 570,649 Suruga Bank Ltd. (The) 131,000 566,217 Kyowa Hakko Kogyo Co. Ltd. 131,000 555,136 Showa Denko K.K./1/ 393,000 555,136 Security Shares Value - -------------------------------------------------------------------------------- Oki Electric Industry Co. Ltd./1/ 262,000 $540,732 Takashimaya Co. Ltd. 131,000 538,516 Minebea Co. Ltd. 131,000 535,191 Nissan Chemical Industries Ltd. 131,000 535,191 Anritsu Corp. 131,000 530,759 Gunma Bank Ltd. 131,000 529,651 Sumitomo Bakelite Co. Ltd. 131,000 528,543 Ishikawajima-Harima Heavy Industries Co. Ltd. 524,000 527,435 Hino Motors Ltd. 131,000 517,462 Shimano Inc. 39,300 515,246 Sumitomo Realty & Development Co. Ltd. 131,000 507,490 Nippon Kayaku Co. Ltd. 131,000 500,842 Teikoku Oil Co. Ltd. 131,000 499,734 CSK Corp. 26,200 498,625 Dowa Mining Co. Ltd. 131,000 491,977 Nisshinbo Industries Inc. 131,000 488,653 All Nippon Airways Co. Ltd./1/ 262,000 485,329 Okumura Corp. 131,000 484,221 Gunze Ltd. 131,000 479,789 Shimachu Co. Ltd. 26,200 476,464 77 Bank Ltd. (The) 131,000 473,140 Ube Industries Ltd./1/ 393,000 472,032 Dainippon Ink & Chemicals Inc./1/ 262,000 467,600 Fuji Electric Co. Ltd. 262,000 465,384 Mitsui Trust Holdings Inc. 262,000 465,384 Fuji Television Network Inc. 131 459,844 Kinden Corp. 131,000 456,519 Daimaru Inc. (The) 131,000 443,223 Mitsubishi Materials Corp./1/ 393,000 438,790 Coca-Cola West Japan Co. Ltd. 26,200 430,369 Daicel Chemical Industries Ltd. 131,000 426,602 FamilyMart Co. Ltd. 26,200 425,494 Ebara Corp. 131,000 422,170 Namco Ltd. 26,200 418,845 Katokichi Co. Ltd. 26,200 416,186 Meiji Dairies Corp. 131,000 411,089 Aeon Credit Service Co. Ltd. 14,390 410,187 Ito En Ltd. 13,100 407,765 Meiji Seika Kaisha Ltd. 131,000 403,333 10 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) (Continued) iSHARES MSCI JAPAN INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- Toyobo Co. Ltd. 262,000 $401,117 Amada Co. Ltd. 131,000 398,900 THK Co. Ltd. 39,300 398,900 Nichirei Corp. 131,000 393,360 Nippon Sanso Corp. 131,000 387,820 Nishimatsu Construction Co. Ltd. 131,000 380,063 Aoyama Trading Co. Ltd. 26,200 370,091 Oracle Corp. 13,100 365,659 Hokuriku Bank Ltd. (The)/1/ 262,000 354,578 Fujikura Ltd. 131,000 329,093 Nippon Mining Holdings Inc./1/ 196,500 325,769 Mitsukoshi Ltd. 131,000 320,228 Ariake Japan Co. Ltd. 13,100 314,134 Benesse Corp. 26,200 310,256 Meitec Corp. 13,100 309,148 Mitsui Engineering & Shipbuilding Co. Ltd./1/ 393,000 305,824 Seiyu Ltd. (The)/1/ 131,000 294,743 Hitachi Cable Ltd. 131,000 290,311 Kanebo Ltd./1/ 262,000 281,446 Autobacs Seven Co. Ltd. 13,100 280,338 Ashikaga Bank Ltd. (The)/1/ 262,000 279,230 Nippon Sheet Glass Co. Ltd. 131,000 268,150 Hitachi Software Engineering Co. Ltd. 13,100 257,069 Sapporo Breweries Ltd. 131,000 254,853 World Co. Ltd. 13,100 248,205 Aderans Co. Ltd. 13,100 246,543 SEGA Corp./1/ 39,300 245,989 Itochu Techno-Science Corp. 13,100 233,800 Fuji Soft ABC Inc. 13,100 227,152 Asatsu-DK Inc. 13,100 219,395 Mitsubishi Gas Chemical Co. Inc. 131,000 219,395 Toda Corp. 131,000 214,963 Bellsystem24 Inc. 1,310 207,096 Sumitomo Osaka Cement Co. Ltd. 131,000 203,882 Sumitomo Heavy Industries Ltd./1/ 262,000 183,937 TIS Inc. 13,100 182,386 Security Shares Value - -------------------------------------------------------------------------------- Mitsubishi Paper Mills Ltd./1/ 131,000 $ 166,208 Nippon System Development Co. Ltd. 13,100 164,325 Ishihara Sangyo Kaisha Ltd./1/ 131,000 157,344 Capcom Co. Ltd. 13,100 151,693 Daiei Inc. (The)/1/ 131,000 142,939 Fujitsu Support & Service Inc. 13,100 136,402 Paris Miki Inc. 13,100 136,291 Saizeriya Co. Ltd. 13,190 133,992 Sanrio Co. Ltd. 26,200 133,632 Trans Cosmos Inc. 13,100 129,643 Fuji Machine Manufacturing Co. Ltd. 13,100 106,263 Snow Brand Milk Products Co. Ltd./1/ 65,500 105,819 Hitachi Zosen Corp./1/ 196,500 93,077 TOTAL COMMON STOCKS (COST: $823,118,485) 532,123,819 SHORT TERM INSTRUMENTS - 4.78% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 23,203,491 23,203,491 BlackRock Temp Cash Money Market Fund 1,119,181 1,119,181 Short Term Investment Co. - Liquid Assets Money Market Portfolio 1,119,181 1,119,181 TOTAL SHORT TERM INSTRUMENTS (COST: $25,441,853) 25,441,853 TOTAL INVESTMENTS IN SECURITIES - 104.74% (COST $848,560,338) 557,565,672 Other Assets, Less Liabilities - (4.74%) (25,257,680) ------------ NET ASSETS - 100.00% $532,307,992 ============ /1/ Non-income earning securities. See notes to financial statements. Schedule of Investments 11 Statement of Assets and Liabilities (Unaudited) iSHARES, INC. February 28, 2003 iShares MSCI Japan Index Fund - -------------------------------------------------------------------------------- ASSETS Investments at cost $ 848,560,338 ------------- Foreign currency, at cost $ 140,400 ------------- Investments in securities, at value (including securities on loan/1/) (Note 1) $ 557,565,672 Foreign currency, at value 140,620 Receivables: Dividends and interest 262,797 ------------- Total Assets 557,969,089 ------------- LIABILITIES Payables: Collateral for securities on loan (Note 5) 24,928,050 Advisory fees (Note 2) 515,644 Distribution fees 217,403 ------------- Total Liabilities 25,661,097 ------------- NET ASSETS $ 532,307,992 ============= Net assets consist of: Paid-in capital $ 903,408,091 Accumulated net investment loss (552,949) Accumulated net realized loss (79,554,950) Net unrealized depreciation on investments and translation of assets and liabilities in foreign currencies (290,992,200) ------------- NET ASSETS $ 532,307,992 ============= iShares outstanding 78,600,000 ============= Net asset value per iShare $ 6.77 ============= /1/ Securities on loan with market value of $23,538,206. See Note 5. See notes to financial statements. 12 2003 iShares Semi-Annual Report to Shareholders Statement of Operations (Unaudited) iSHARES, INC. For the six months ended February 28, 2003 iShares MSCI Japan Index Fund - -------------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $ 2,234,793 Interest 8,127 Securities lending income 118,437 ------------ Total investment income 2,361,357 ------------ EXPENSES (NOTE 2) Advisory fees 1,662,781 Distribution fees 704,568 ------------ Total expenses 2,367,349 ------------ Net investment loss (5,992) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (1,299,926) In-kind redemptions (5,916,907) Foreign currency transactions 52,441 ------------ Net realized loss (7,164,392) ------------ Net change in unrealized appreciation (depreciation) on: Investments (75,231,967) Translation of assets and liabilities in foreign currencies 2,486 ------------ Net change in unrealized appreciation (depreciation) (75,229,481) ------------ Net realized and unrealized loss (82,393,873) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(82,399,865) ============ /1/ Net of foreign withholding tax of $394,375. See notes to financial statements. Financial Statements 13 Statements of Changes in Net Assets iSHARES, INC. iShares MSCI Japan Index Fund ----------------------------------- For the six months ended For the February 28, 2003 year ended (Unaudited) August 31, 2002 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment loss $ (5,992) $ (665,377) Net realized loss (7,164,392) (5,680,904) Net change in unrealized appreciation (depreciation) (75,229,481) (101,966,848) ------------- ------------- Net decrease in net assets resulting from operations (82,399,865) (108,313,129) ------------- ------------- Undistributed net investment income included in the price of capital shares issued or redeemed -- 88 ------------- ------------- iSHARES TRANSACTIONS: iShares sold 8,419,599 316,156,642 iShares redeemed (60,087,263) (69,366,813) ------------- ------------- Net increase (decrease) in net assets from iShares transactions (51,667,664) 246,789,829 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS (134,067,529) 138,476,788 NET ASSETS: Beginning of period 666,375,521 527,898,733 ------------- ------------- End of period $ 532,307,992 $ 666,375,521 ============= ============= Accumulated net investment loss included in net assets at end of period $ (552,949) $ (546,957) ============= ============= iSHARES ISSUED AND REDEEMED: iShares sold 1,200,000 36,600,000 iShares redeemed (8,400,000) (9,001,000) ------------- ------------- Net increase (decrease) in iShares outstanding (7,200,000) 27,599,000 ============= ============= See notes to financial statements. 14 2003 iShares Semi-Annual Report to Shareholders Financial Highlights iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Japan Index Fund ---------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - ---------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 7.77 $ 9.07 $ 13.82 $ 13.22 $ 8.39 $ 12.61 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment loss/1/ (0.00)/3/ (0.01) (0.01) (0.05) (0.03) (0.02) Net realized and unrealized gain (loss) (1.00) (1.29) (4.74) 1.21 4.91 (4.19) -------- -------- -------- -------- -------- -------- Total from investment operations (1.00) (1.30) (4.75) 1.16 4.88 (4.21) -------- -------- -------- -------- -------- -------- Less distributions from: 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 period $ 6.77 $ 7.77 $ 9.07 $ 13.82 $ 13.22 $ 8.39 ======== ======== ======== ======== ======== ======== Total return (12.87)%/4/ (14.33)% (34.37)% 8.75% 58.14% (33.38)% ======== ======== ======== ======== ======== ======== Ratios/Supplemental data: Net assets, end of period (000s) $532,308 $666,376 $527,899 $787,790 $713,653 $201,485 Ratio of expenses to average net assets/5/ 0.84% 0.84% 0.84% 0.88% 0.94% 1.04% Ratio of net investment loss to average net assets/5/ (0.00)%/6/ (0.12)% (0.11)% (0.32)% (0.27)% (0.21)% Portfolio turnover rate/2/ 0%/7/ 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. /4/ Not annualized. /5/ Annualized for periods of less than one year. /6/ Rounds to less than 0.01%. /7/ Rounds to less than 1%. See notes to financial statements. Financial Highlights 15 Notes to the Financial Statements (Unaudited) 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 February 28, 2003, the Company offered 23 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, before fees and expenses, 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 period 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 16 2003 iShares Semi-Annual Report to Shareholders Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. 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. 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. Dividends and distributions are paid in U.S. dollars and cannot be automatically reinvested in additional shares of the Fund. At August 31, 2002, the tax year-end of the Fund, 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 six months ended February 28, 2003. 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 tax year-end of the Fund, 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 (Unaudited) (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 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 Africa, 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. Investors Bank & Trust Company ("Investors Bank") serves as administrator, custodian and transfer 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. Effective February 24, 2003, BGI began serving as securities lending agent for the Company. BGI is an affiliate of BGFA, the Fund's investment advisor. The Board of Directors has approved the selection of BGI as securities lending agent subject to the conditions of the exemptive order that was issued by the Securities and Exchange Commission ("SEC"). As securities lending agent, BGI receives a fee 18 2003 iShares Semi-Annual Report to Shareholders Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. based on a share of the income earned on investment of the cash collateral received for the loan of securities. For the period from February 24, 2003 through February 28, 2003, BGI earned $160 in securities lending agent fees from the Fund. Prior to February 24, 2003, Investors Bank served as securities lending agent for 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 SEC, 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 temporary cash investments or from investment of securities lending collateral are recorded as either interest income or securities lending income, respectively, 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 February 28, 2003, 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 six months ended February 28, 2003, aggregated $1,110,376 and $1,650,821, respectively. In-kind purchases and sales for the six months ended February 28, 2003, aggregated $8,412,510 and $59,641,504, respectively. At February 28, 2003, the cost of investments for federal income tax purposes was $848,560,338. Net unrealized depreciation aggregated $290,994,666, of which $5,195,494 represented gross unrealized appreciation on securities and $296,190,160 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 February 28, 2003, 2,124,600,000 shares were authorized to the Fund. 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 Notes to the Financial Statements 19 Notes to the Financial Statements (Unaudited)(Continued) iSHARES, INC. 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 February 28, 2003, 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 February 28, 2003, and the value of the related collateral are disclosed in the Statement of Assets and Liabilities. 6. LEGAL PROCEEDINGS The Company is a defendant in an action in the U.S. District Court for the Northern District of Illinois. There are numerous other defendants, including the Company's investment advisor, other exchange traded funds, various fund service providers and market makers, and the Chicago Stock Exchange, Inc. A company named MOPEX, Inc. is the plaintiff in this action. MOPEX claims that the actions of the parties, including the Company, infringe a patent held by MOPEX, and that the parties engaged in a "conspiracy" amongst themselves to infringe the patent. MOPEX's patent, however, was found to be invalid by the judge in a related case in the U.S. District Court for the Southern District of New York. That case has now been settled. Although the Company is not a party to the action in New York, the Company believes that the finding of invalidity of the alleged patent will permit the action in Illinois to be resolved quickly with no effect on the Company. 20 2003 iShares Semi-Annual Report to Shareholders Notes: Notes 21 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. 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. 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) International/Emerging Country iShares MSCI Brazil Index Fund (EWZ) iShares MSCI Malaysia Index Fund (EWM) iShares MSCI Mexico Index Fund (EWW) iShares MSCI South Africa Index Fund (EZA) 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) This advertising section does not constitute part of the 2003 Semi-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)" and "Goldman Sachs(R)" are trademarks of Goldman, Sachs & Co. 22 2003 iShares Semi-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. 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) 2003 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. [GRAPHIC] iShares Industrial strength investment tools from BARCLAYS GLOBAL INVESTORS 1 8oo iShares (1 8oo 474 2737) www.iShares.com iShares 2003 SEMI-ANNUAL REPORT TO SHAREHOLDERS FEBRUARY 28, 2003 [PHOTO] INDUSTRIAL STRENGTH INVESTMENT TOOLS iShares MSCI AUSTRALIA INDEX FUND iShares MSCI PACIFIC EX-JAPAN INDEX FUND iShares MSCI BRAZIL INDEX FUND iShares MSCI SINGAPORE INDEX FUND iShares MSCI CANADA INDEX FUND iShares MSCI SOUTH AFRICA INDEX FUND iShares MSCI HONG KONG INDEX FUND iShares MSCI SOUTH KOREA INDEX FUND iShares MSCI MALAYSIA INDEX FUND iShares MSCI TAIWAN INDEX FUND iShares MSCI MEXICO 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 Africa Index Fund ................................... 40 iShares MSCI South Korea Index Fund .................................... 41 iShares MSCI Taiwan Index Fund ......................................... 43 Financial Statements ...................................................... 45 Financial Highlights ...................................................... 53 Notes to the Financial Statements ......................................... 64 iShares Family of Funds ................................................... 74 To Our Shareholders For many investors, the last six months was another difficult and challenging period. A tepid economy, corporate accounting scandals and lackluster company earnings all contributed to the major equity indexes declining for the third straight year, a bear market performance not seen in decades. Global geopolitical uncertainties create the possibility that challenging market conditions may continue. However, iShares continued to innovate and expand, offering more tools that help investors tailor their portfolios to address volatility in this complex market environment. For example, iShares launched the first fixed income exchange-traded funds. Based on investor demand for less volatile asset classes, we introduced three bond funds based on Lehman U.S. Treasury indexes. In addition, to provide credit market exposure we introduced a fund based on the GS $ InvesTop(TM) Index. By the end of 2002, the fixed income iShares funds held $3.8 billion in assets and Business Week named them one of the best new products of the year./1/ With the addition of the fixed income iShares, investors can achieve more diversity in their portfolios -- and at lower cost, since iShares fees are, on average, about half those of actively managed funds./2/ With almost 80 different iShares to choose from, investors have the ability to build a diverse portfolio that covers market capitalization, sectors, value and growth, international and now fixed income indexes. It is important for investors to remember that market segments do not tend to move in tandem, particularly during volatile market conditions. Economic conditions such as inflation, interest rate levels, currency valuations or the price of oil, as well as the normal pace of the economic cycle, all may cause investors to favor one market segment over another. The wide range of performance returns for the various iShares funds this year demonstrates that phenomenon clearly. We encourage you to talk with your financial advisor about what blend of investments or asset allocation can best help you meet your financial goals. Throughout the coming year we will continue to work closely with the financial advisor community to introduce innovative strategies and structures for their client's portfolios. To learn more about iShares, we encourage you to visit our web site, www.iShares.com At times like these, the importance of sound, disciplined investing is greater than ever. Such investing should be grounded in two key concepts: keeping the costs associated with investing as low as possible, and maintaining a diversified portfolio. That is why we believe iShares are proving to be an indispensable tool for investors in the current market. And that is also why more and more investors are recognizing the benefits of iShares. In fact, despite the year's difficult markets, assets under management for iShares actually grew in 2002, reaching $31 billion as of December 31. On behalf of the iShares family of funds and our colleagues at Barclays Global Investors, we thank you for making iShares a part of your portfolio. We look forward to meeting your investmentneeds in the year ahead. /s/ Garrett F. Bouton /s/ Lee Kranefuss - -------------------------------------- ------------------------------ Garrett F. Bouton Lee Kranefuss President and Chairman of the Board of Vice President of the Board of Directors for iShares, Inc. Directors for iShares, Inc. 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. - ---------- /1/ Business Week, 12/16/02. /2/ Morningstar Principia, BGI analysis 6/02. Shareholder Letter 1 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. Diversification may not protect against market risk. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The annual management fees of iShares may be substantially less than those of most mutual funds. iShares transactions will result in brokerage commissions, but the savings from lower annual fees can help offset these costs. Past performance dsoes not guarantee future results. iShares are not sponsored, endorsed, or issued by Goldman, Sachs & Co. or Lehman Brothers, nor are they sponsored, endorsed, issued, 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. "$ InvesTop(TM)", "$ InvesTop(TM) Index", "GS $ InvesTop(TM)" and "Goldman Sachs(R)" 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. 2 2003 iShares Semi-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 ordinary and preferred lines made up 32.07 % of the MSCI South Korea Index as of February 28th, 2003. 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 81.23% as of February 28th, 2003; 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. Security lending income is the income earned on lending the security, which is split between the fund and the security lending agent. 4 2003 iShares Semi-annual Report to Shareholders THIS PAGE INTENTIONALLY LEFT BLANK. 5 Managers' Discussion & Analysis iSHARES MSCI AUSTRALIA INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - -------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ---------------------- ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ---- ------ ----- ----- ------ ----- (1.21)% (1.01)% (1.51)% 0.61% 0.72% 1.05% 1.55% 1.62% 1.96% Cumulative Total Returns - -------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ---------------------- ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ---- ------ ----- ----- ------ ----- (1.21)% (1.01)% (1.51)% 3.11% 3.66% 5.36% 11.35% 11.87% 14.48% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI AUSTRALIA INDEX [CHART] Pie Chart Consumer Discretionary 10.18% Consumer Staples 8.85% Energy 2.74% Financials 45.75% Health Care 2.15% Industrials 6.17% Materials 20.85% Telecomm Services 2.13% Utilities 1.18% Performance Review The total return of the iShares MSCI Australia Index Fund (the "Fund") was 0.69% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Australia Index (the "Index") over the reporting period was 0.55%. Significant Performance Factors The Fund outperformed its benchmark by 0.14 percentage points over the reporting period. This was due to the positive impact of revenue differential and uninvested assets, which contributed 0.56 and 0.01 percentage points, respectively, to the Fund's return. Those factors 6 2003 iShares Semi-Annual Report to Shareholders were partially offset by the impact of expenses and security sampling, which subtracted 0.42 and 0.01 percentage points, respectively, from the Fund's return. Key Market Conditions While numerous stock exchanges in the United States, Europe, Asia and other parts of the world suffered significant declines over the reporting period, Australia's stock market managed to end the reporting period with a slight gain. To a large extent, however, this apparent resilience owed much to the strength of the Australian dollar versus its U.S. counterpart. This factor helped to buoy the returns of the Index in U.S. dollar terms. The Index was significantly weaker in local currency terms. As in other markets around the world, concerns about a war between the United States and Iraq depressed investor sentiment in Australia. The global economic slowdown was another concern for many investors in late 2002, particularly in regard to shares of Australia's exporters. Yet even as the U.S. and European economies remained weak, Australia's domestic economy continued to grow. This helped to create a divergence in the country's stock market, with shares of exporters generally underperforming while those of many domestically oriented companies performed relatively well. One exception to this trend was BHP Billiton (8.27% of the Index as of February 28, 2003), which benefited from booming demand for some of its products in China. Managers' Discussion & Analysis 7 Managers' Discussion & Analysis iSHARES MSCI BRAZIL INDEX FUND Performance as of 2/28/03
Average Annual Total Returns Cumulative Total Returns - -------------------------------------------------------- -------------------------- Year Ended 2/28/03 Inception to 2/28/03 Inception to 2/28/03 - -------------------------- -------------------------- -------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ------ ------ ------ (42.67)% (44.01)% (40.27)% (29.17)% (29.08)% (26.74)% (59.78)% (59.65)% (56.02)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (7/10/00). "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 (7/14/00), 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. 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 its future results. Sector Breakout MSCI BRAZIL INDEX [CHART] Pie chart Consumer Discretionary 0.50% Consumer Staples 12.34% Energy 22.83% Financials 14.86% Industrials 2.43% Materials 27.54% Telecomm Services 13.53% Utilities 5.97% Performance Review The total return of the iShares MSCI Brazil Index Fund (the "Fund") was -9.03% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Brazil Index (the "Index") over the reporting period was -7.79%. Significant Performance Factors The Fund underperformed its benchmark by 1.24 percentage points over the reporting period. This was due to the impact of expenses, uninvested assets, revenue differential and security sampling, which subtracted 0.50, 0.26, 0.25 and 0.23 percentage points, respectively, from the Fund's return. Key Market Conditions The key issues affecting the Brazilian equity market during the reporting period were political developments both inside and outside Brazil. Investor sentiment toward the market waxed and waned in September and October 2002 along with the perceived outcome of the country's 8 2003 iShares Semi-Annual Report to Shareholders presidential election specifically, whether the leftist candidate, Luis Inacio Lula da Silva, would win. Many investors were concerned that Luis Inacio Lula da Silva might seek to unwind market-oriented reforms. Global economic weakness and investors' general aversion to riskier assets only added to the pressure on Brazilian equities during this time. During this period and indeed, most of the reporting period, the political situation in Brazil generally overshadowed the results of individual Brazilian companies. As in the past, the market's largest and most liquid stocks, such as Petroleo Brasileiro SA ("Petrobras"), tended to rise and fall along with investor sentiment toward the market as a whole. (As of February 28, 2003, preferred shares of Petrobras had a weighting of 13.78% of the Index, while common shares of Petrobras made up an additional 8.91%.) As a result of the exodus of foreign capital from the Brazilian equity market in September and October 2002, the real (Brazil's currency) depreciated sharply versus the U.S. dollar during this period. This increased the already-high level of Brazil's external debt, sparking fears of a potential default and leading to further declines in Brazilian stocks. The real's depreciation also weighed on the returns of U.S. dollar-based investors in Brazil's stock market. In an effort to bolster the real and bring spiraling inflation back under control, the Brazilian central bank repeatedly raised interest rates over the reporting period. Although higher interest rates further depressed domestic demand, investors generally responded positively to the monetary tightening as a sign that the government was taking steps to quell inflation. In addition, investors' concerns about Luis Inacio Lula da Silva, who ultimately was elected in late October 2002, abated somewhat after he pledged to honor the terms of a $30 billion International Monetary Fund bailout package Brazil had agreed to earlier in 2002 as well as to maintain fiscal austerity. As a result, the Brazilian stock market and the country's currency recovered some ground in late 2002. It rose still higher in early 2003. Both the market and the real lost ground in late January, however, and remained weak through the close of the reporting period as the threat of a war between the United States and Iraq grew. Managers' Discussion & Analysis 9 Managers' Discussion & Analysis iSHARES MSCI CANADA INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - ---------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ----------------------- ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ---- ------ ----- ----- ------ ----- (6.19)% (6.62)% (5.69)% 0.91% 0.76% 1.34% 5.97% 5.98% 6.66% Cumulative Total Returns - ---------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ----------------------- ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ---- ------ ----- ----- ------ ----- (6.19)% (6.62)% (5.69)% 4.62% 3.88% 6.88% 49.83% 49.92% 56.75% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI CANADA INDEX [CHART] Pie chart Consumer Discretionary 6.95% Consumer Staples 3.10% Energy 17.88% Financials 37.88% Health Care 2.31% Industrials 5.86% Information Technology 5.08% Materials 13.91% Telecomm Services 2.62% Utilities 4.41% Performance Review The total return of the iShares MSCI Canada Index Fund (the "Fund") was 5.48% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Canada Index (the "Index") over the reporting period was 5.74%. Significant Performance Factors The Fund underperformed its benchmark by 0.26 percentage points over the reporting period. This was due to the impact of expenses, security sampling and uninvested assets, which subtracted 0.43, 0.07 and 0.03 percentage points, respectively, from the Fund's return. 10 2003 iShares Semi-Annual Report to Shareholders Those factors were partially offset by the positive impact of revenue differential and security lending, which contributed 0.24 and 0.03 percentage points, respectively, to the Fund's return. Key Market Conditions Canada was one of the few major world stock markets to post a gain in U.S. dollar terms over the reporting period. A few key factors helped support the Index even as economic weakness in many parts of the world and the threat of war in the Middle East depressed other markets. Among the most important factors was the appreciation of the Canadian dollar versus its U.S. counterpart in late 2002 and early 2003. This trend helped to boost returns for U.S. dollar-based investors in the Canadian stock market. The resilience of Canada's own economy was another positive factor for the country's stock market. The robust housing market was particularly beneficial for many Canadian banks. Financials were the largest sector in the Index with a weighting of 37.88% as of February 28, 2003. Some banking stocks performed better than others over the reporting period, however. Shares of Royal Bank of Canada ("RBC") (8.50% of the Index as of February 28, 2003) were among the sector's stronger performers, thanks largely to profit growth in the company's retail banking segment. Managers' Discussion & Analysis 11 Managers' Discussion & Analysis iSHARES MSCI HONG KONG INDEX FUND Performance as of 2/28/03
Average Annual Total Returns - -------------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception To 2/28/03 - -------------------------- -------------------------- -------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ------ ------ ------ (13.98)% (13.36)% (12.75) % (5.13)% (5.21)% (3.39)% (4.85)% (4.73)% (2.65)%
Cumulative Total Returns - -------------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - -------------------------- -------------------------- -------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ------ ------ ------ (13.98)% (13.36)% (12.75)% (23.14)% (23.48)% (15.84)% (29.31)% (28.66)% (17.07)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI HONG KONG INDEX [CHART] Pie chart Consumer Discretionary 5.86% Financials 50.44% Industrials 20.39% Information Technology 0.47% Materials 0.97% Telecomm Services 1.44% Utilities 20.43% Performance Review The total return of the iShares MSCI Hong Kong Index Fund (the "Fund") was - -6.66% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Hong Kong Index (the "Index") over the reporting period was -6.05%. Significant Performance Factors The Fund underperformed its benchmark by 0.61 percentage points over the reporting period. This was due to the impact of expenses and security sampling, which subtracted 0.42 and 0.22 percentage points, respectively, from the Fund's return. Those factors were partially 12 2003 iShares Semi-Annual Report to Shareholders offset by the positive impact of uninvested assets and revenue differential, which contributed 0.02 and 0.01 percentage points, respectively, to the Fund's return. Key Market Conditions Hong Kong was among the stronger Asian stock markets during the reporting period. While the Index did decline by roughly 6% over the reporting period, several neighboring markets dropped more than twice as much in U.S. dollar terms. (In the case of South Korea, the decline was more than three times as large.) Nonetheless, Hong Kong's stock market was quite volatile over the reporting period. Early in the reporting period, shares of many Hong Kong companies dropped sharply along with other stocks in the region. A key cause was investors' anxiety about economic weakness both at home and abroad. By mid-October, the Index had declined nearly 10% from its level at the beginning of September. Hong Kong's stock market then staged a rally. For a while, the territory's influential real-estate developers led the gains as Hong Kong's government proposed new measures to reverse deflation in the territory's property market. Later, shares of exporters outperformed the overall Index as the weakness of the U.S. dollar (to which Hong Kong's currency is pegged) made Hong Kong's goods more competitive in overseas markets. The rally was fairly short-lived. Hong Kong's stock market dropped again in late 2002. It remained subdued through the end of the reporting period as many investors became more concerned about the global economy and about a potential war between the United States and Iraq. Hong Kong's market was also pressured by growing concerns about the territory's rising budget deficit. The trend prompted Hong Kong's leader to warn in January 2003 that the territory might not be able to keep its currency pegged to the U.S. dollar indefinitely. In general, stocks of small and medium-sized Hong Kong companies outperformed those of Hong Kong's larger corporations over the reporting period. However, shares of Hong Kong's two large electricity generators, CLP Holdings Ltd. and Hongkong Electric Holdings Ltd. (respectively 8.77% and 6.27% of the Index as of February 28, 2003), were also among the market's better performers. Although both companies were forced to freeze electricity rates for 2003, their relatively high dividend yields continued to attract investors. Managers' Discussion & Analysis 13 Managers' Discussion & Analysis iSHARES MSCI MALAYSIA INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - ------------------------------------------------------------------------------ Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ----------------------- ------------------------ ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ----- ------ ----- ------ ------ ----- (3.04)% (5.79)% (1.62)% (1.31)% (1.56)% 0.44% (10.64)% (11.06)% (9.48)% Cumulative Total Returns - ------------------------------------------------------------------------------ Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - ----------------------- ------------------------ ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ----- ------ ----- ------ ------ ------ (3.04)% (5.79)% (1.62)% (6.37)% (7.55)% 2.22% (54.34)% (55.83)% (50.04)% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 midpoint 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 (3/18/96), 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. 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. Sector Breakout MSCI MALAYSIA INDEX [CHART] Pie chart Consumer Discretionary 17.14% Consumer Staples 11.60% Energy 0.59% Financials 24.05% Industrials 19.16% Information Technology 1.16% Materials 1.81% Telecomm Services 12.13% Utilities 12.36% Performance Review The total return of the iShares MSCI Malaysia Index Fund (the "Fund") was -7.13% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Malaysia Index (the "Index") over the reporting period was - 6.60%. Significant Performance Factors The Fund underperformed its benchmark by 0.53 percentage points over the reporting period. This was due to the impact of expenses and security sampling, which subtracted 0.41 and 0.32 percentage points, respectively, from the Fund's return. Those factors were partially 14 2003 iShares Semi-Annual Report to Shareholders offset by the positive impact of revenue differential and uninvested assets, which contributed 0.17 and 0.03 percentage points, respectively, to the Fund's return. Key Market Conditions Like many emerging markets around the world, Malaysia posted a decline over the reporting period. Yet its decline was less severe, for several reasons. While Malaysia's export-oriented economy was vulnerable to weakness in the United States and other countries, demand from China helped to take up some of the slack. A variety of Malaysian shares also benefited from a trend toward restructuring, which attracted new investors to the country's stock market during the reporting period. Nonetheless, these factors were not enough to fully overcome the other issues weighing on Malaysia's stock market over the reporting period. The ongoing possibility of a U.S. strike on Iraq led some investors to seek out more defensive markets. A number of investors also had lingering concerns about the upcoming transfer of power from longtime Prime Minister Mahathir Mohamad to his chosen successor. In the meantime, the Malaysian government was seeking to steer the country's economy through a U-Turn: After having placed great emphasis on fostering Malaysia's export sector in the past, Mahathir's administration proposed new initiatives in late 2002 to reduce the economy's dependence on exports. The plan involved bolstering the country's service sector, particularly the tourism industry. Companies such as Resorts World and its holding company, Genting (respectively 3.62% and 4.76% of the Index as of February 28, 2003) were expected to be prime beneficiaries of these new initiatives. Their stocks also benefited as tourism in Malaysia recovered in 2002, after having dropped immediately following the September 11, 2001, terrorist attacks on the United States. Managers' Discussion & Analysis 15 Managers' Discussion & Analysis iSHARES MSCI MEXICO INDEX FUND Performance as of 2/28/03 Average Annual Total Returns - ------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - -------------------------- ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------- ------ ------ ------ ------ ----- ----- ------ ----- (23.97)% (24.90)% (24.07)% (2.08)% (2.21)% 0.24% 4.71% 4.67% 7.30% Cumulative Total Returns - ------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - -------------------------- ------------------------ ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------- ------ ------ ------ ------ ----- ----- ------ ----- (23.97)% (24.90)% (24.07)% (10.00)% (10.57)% 1.21% 37.81% 37.48% 63.37% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI MEXICO INDEX [CHART] Pie chart Consumer Discretionary 21.05% Consumer Staples 13.75% Financials 7.27% Industrials 2.79% Materials 12.33% Telecomm Services 42.81% Performance Review The total return of the iShares MSCI Mexico Index Fund (the "Fund") was - 11.38% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Mexico Index (the "Index") over the reporting period was - 11.66%. Significant Performance Factors The Fund outperformed its benchmark by 0.28 percentage points over the reporting period. This was due to the impact of security sampling (explained in more detail below) and revenue differential, which contributed 0.60 and 0.11 percentage points, respectively, to the 16 2003 iShares Semi-Annual Report to Shareholders Fund's return. Those factors were partially offset by the impact of expenses and uninvested assets, which subtracted 0.41 and 0.02 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 Single Issuer Rule, the Mexico Fund was obligated to underweight such stocks as Telefonos de Mexico SA de CV Series L ("Telmex") while overweighting other Mexican stocks. (As of February 28, 2003, Telmex had a weighting of 24.67% in the Fund versus a weighting of 28.97% in the Index.) The stocks that the Fund overweighted generally performed better than those it underweighted over the reporting period. As a result, security sampling had a positive impact on the Fund's performance relative to its benchmark. Key Market Conditions The underlying decline in Mexican stocks over the reporting period was less severe than it might appear. In U.S. dollar terms, the drop in the Index was indeed quite significant. In local-currency terms, however, it was milder. This divergence was due to the Mexican peso's depreciation against the U.S. dollar over the reporting period. The trend magnified losses for U.S. dollar-based investors in Mexico's equity market. To be sure, the Mexican stock market did face many challenges in late 2002 and early 2003. Mexican equities came under increasing pressure as a war between the U.S. and Iraq loomed. Sluggish demand in the United States also cast a long shadow over the Mexican economy, which has become increasingly integrated with that of its northern neighbor. The impact was felt by a variety of Mexican exporters, such as the cement manufacturer Cemex (11.08% of the Index as of February 28, 2003). The peso's weakness was positive for some Mexican exporters because it made their goods more competitive in foreign markets. For Mexican companies with large amounts of U.S. dollar-denominated debt, however, it was a problem. One such company was Telefonos de Mexico ("Telmex"), the largest stock in the MSCI Mexico Index with a weighting of 28.97% as of February 28, 2003. On the plus side, Telmex's overall level of debt was not as heavy as many other leading telecommunications firms', an advantage that lent some support to Telmex shares over the reporting period. Managers' Discussion & Analysis 17 Managers' Discussion & Analysis iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND Performance as of 2/28/03 Average Annual Total Returns Cumulative Total Returns - ------------------------------------------------ ------------------------ Year Ended 2/28/03 Inception to 2/28/03 Inception to 2/28/03 - ----------------------- --------------------- ------------------------ NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ----- ------ ----- ---- ------ ----- ---- ------ ----- (6.04)% (4.92)% (6.14)% 2.09% 3.13% 2.18% 2.83% 4.24% 2.95% "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. 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 its future results. Sector Breakout MSCI PACIFIC EX-JAPAN INDEX [CHART] Pie chart Consumer Discretionary 9.56% Consumer Staples 5.95% Energy 1.77% Financials 46.50% Health Care 1.55% Industrials 10.21% Information Technology 0.80% Materials 14.19% Telecomm Services 4.05% Utilities 5.42% Performance Review The total return of the iShares MSCI Pacific ex-Japan Index Fund (the "Fund") was - 2.54% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Pacific ex-Japan Index (the "Index") over the reporting period was - 2.57%. Significant Performance Factors The Fund outperformed its benchmark by 0.03 percentage points over the reporting period. This was due to the impact of revenue differential and uninvested assets, which contributed 0.45 and 0.01 percentage points, respectively, to the Fund's returns. Those factors were partially offset by the impact of expenses and security sampling, which subtracted 0.25 and 0.18 percentage points, respectively, from the Fund's return. Key Market Conditions Once again, the Australian component of the Index helped to buoy the Index's performance in an otherwise difficult environment. 18 2003 iShares Semi-Annual Report to Shareholders Over the reporting period, the Index's Hong Kong and Singapore stocks generally posted significant declines. In contrast, several of the Index's Australian stocks managed to eke out a small gain. In large part, this performance was due to the strength of the Australian dollar versus its U.S. counterpart, a trend that helped to boost returns of the Index in U.S. dollar terms. But many domestically oriented Australian stocks simply didn't have poor performance to begin with. Stocks such as National Australia Bank, Commonwealth Bank of Australia, Australia and New Zealand Banking Group and Westpac Banking, for example, benefited from Australia's relatively strong domestic economy over the reporting period. As of February 28, 2003, these were among the five largest stocks in the Index, with weightings of 7.03%, 4.84%, 3.89% and 3.88%, respectively. New Zealand stocks, though a much smaller component of the Index, were also comparatively strong performers during the reporting period. The strength of the Index's Australian stocks was generally tempered by its holdings from Hong Kong and Singapore. Hong Kong stocks such as Hutchison Whampoa and Cheung Kong Holdings (respectively 3.31% and 2.46% of the Index as of February 28, 2003) remained weak in the face of Hong Kong's depressed property prices and domestic economic downturn. Shares of Singapore's exporters were under pressure as well, given slack demand in key markets abroad. In addition, the uncertainty about a war between the United States and Iraq left many investors seeking out more defensive markets toward the end of the reporting period. Managers' Discussion & Analysis 19 Managers' Discussion & Analysis iSHARES MSCI SINGAPORE INDEX FUND Performance as of 2/28/03
Average Annual Total Returns - -------------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - --------------------------- --------------------------- -------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------- ------ ------ ------- ------ ------ ------ (21.79)% (23.60)% (21.30)% (7.45)% (7.68)% (7.26)% (12.76)% (12.84)% (12.01)%
Cumulative Total Returns - -------------------------------------------------------------------------------------- Year Ended 2/28/03 Five Years Ended 2/28/03 Inception to 2/28/03 - --------------------------- --------------------------- -------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------- ------- ------- ------ ------ ------- ------ ------ ------ (21.79)% (23.60)% (21.30)% (32.08)% (32.92)% (31.40)% (61.38)% (61.64)% (59.00)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "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 (3/18/96), 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. 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 its future results. Sector Breakout MSCI SINGAPORE INDEX [CHART] [Pie Chart] Consumer Discretionary 10.88% Consumer Staples 2.08% Financials 53.83% Health Care 0.48% Industrials 14.91% Information Technology 6.53% Telecomm Services 11.29% Performance Review The total return of the iShares MSCI Singapore Index Fund (the "Fund") was - -15.08% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Singapore Index (the "Index") over the reporting period was -14.90%. Significant Performance Factors The Fund underperformed its benchmark by 0.18 percentage points over the reporting period. This was due to the impact of expenses and revenue differential, which subtracted 0.41 and 0.06 percentage points, respectively, from the Fund's return. Those factors were partially 20 2003 iShares Semi-Snnual Report to Shareholders offset by the positive impact of security sampling and uninvested assets, which contributed 0.27 and 0.02 percentage points, respectively, to the Fund's return. Key Market Conditions Singapore's stock market was depressed over much of the reporting period by weakness in its chief export markets and in its domestic economy. Lackluster U.S. demand for electronics in particular, a linchpin of Singapore's economy, continued to weigh heavily on the shares of companies such as Venture Corp. (3.75% of the Index as of February 28, 2003). Meanwhile, Singapore's domestically oriented companies felt the effects of economic weakness at home. Singapore's financial-service stocks, such as United Overseas Bank and DBS Group Holdings Ltd. (respectively 17.07% and 14.73% of the Index as of February 28, 2003), generally bore the brunt of these declines over the reporting period. Singapore's stock market did stage a brief rally in mid-October 2002, as some investors were encouraged by signs that the U.S. economy might be on the road to recovery. The rally was short-lived, however. For the remainder of the reporting period, Singapore's stock market generally declined along with expectations for a quick turnaround in the global economy. Like many other equity markets around the world, Singapore's stock market was also weighed down by the possibility of a war in the Middle East. Managers' Discussion & Analysis 21 Managers' Discussion & Analysis iSHARES MSCI SOUTH AFRICA INDEX FUND Performance as of 2/28/03 Total Returns - --------------------- Inception TO 2/28/03 - --------------------- NAV MARKET INDEX - ----- ------ ----- (0.11)% (0.34)% 0.31% "Total returns for the period since inception" are calculated from the inception date of the Fund (2/3/03). 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 (2/7/03), 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. 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 its future results. Sector Breakout MSCI SOUTH AFRICA INDEX [CHART] [Pie Chart] Consumer Discretionary 3.13% Consumer Staples 3.72% Financials 23.72% Industrials 4.91% Information Technology 0.79% Materials 62.63% Telecomm Services 1.10% Performance Review The total return of the iShares MSCI South Africa Index Fund (the "Fund") was - -0.11% over the period from February 3, 2003 (its inception date), through February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI South Africa Index (the "Index") over the reporting period was 0.31%. Key Market Conditions The performance of the Index over the short period from the Fund's inception through the end of February owed much to the strength of the rand, South Africa's currency. In local currency terms, the South African market actually posted as significant decline over the reporting period; like many other stocks around the world, numerous South African shares were depressed by the growing likelihood of a war in the Middle East. Investors' concerns about the global economy also put pressure on the MSCI South Africa Index during February. That month, a variety of South African exporters, such as the paper and pulp producer Sappi (4.18% of the Index as of February 28, 2003), reported weaker-than-expected earnings partially as a result of the economic slowdown in Europe and in other regions. The rand's sharp appreciation versus the 22 2003 iShares Semi-Annual Report To Shareholders euro and the U.S. dollar also put many South African exporters at a disadvantage abroad and contributed to declines in their share prices in February 2003. As in the past, however, the economic and political uncertainty was generally positive for one important segment of the South African market: gold stocks. (In times of greater uncertainty, the price of gold, and hence the price of gold-mining stocks, generally increases.) South African gold-mining stocks did not benefit uniformly from the rise in gold prices, though. Shares of gold-mining companies that hedge their exposure to fluctuations in the price of gold, such as AngloGold (4.99% of the Index as of February 28, 2003), generally benefited less from the spike in gold prices than those of unhedged mining companies such as Gold Fields (6.59% of the Index as of February 28, 2003). Furthermore, South African gold-mining shares in general did not appreciate as much as might have been expected, given the corresponding rise in the price of gold itself (which reached a six-year high in early 2003). Some analysts attributed this subdued performance to a belief on the part of many investors that the price of gold would stabilize or drop once uncertainty regarding military action in the Middle East was dispelled. Managers' Discussion & Analysis 23 Managers' Discussion & Analysis iSHARES MSCI SOUTH KOREA INDEX FUND Performance as of 2/28/03
Average Annual Total Returns Cumulative Total Returns - ------------------------------------------------------ -------------------------- Year Ended 2/28/03 Inception to 2/28/03 Inception to 2/28/03 - -------------------------- ------------------------ -------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ----- ------ ----- ------ ------ ------ (18.70)% (18.68)% (17.46)% (6.06)% (5.49)% (6.98)% (16.12)% (14.69)% (18.39)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (5/09/00). "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 mid-point 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 (5/12/00), 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. 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 its future results. Sector Breakout MSCI SOUTH KOREA INDEX [CHART] Pie chart Consumer Discretionary 11.32% Consumer Staples 2.45% Energy 0.59% Financials 16.78% Health Care 0.43% Industrials 5.34% Information Technology 37.56% Materials 10.19% Telecomm Services 11.59% Utilities 3.75% Performance Review The total return of the iShares MSCI South Korea Index Fund (the "Fund") was - -19.93% over the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI South Korea Index (the "Index") over the reporting period was -19.30%. Significant Performance Factors The Fund underperformed its benchmark by 0.63 percentage points over the reporting period. This was due to the impact of security sampling and expenses, which subtracted 0.72 and 0.51 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 0.43 and 0.17 percentage points, respectively, to the Fund's return. 24 2003 iShares Semi-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 South Korea Fund was obligated to underweight Samsung Electronics Co. Ltd. during the reporting period while overweighting other stocks in the Index. (As of February 28, 2003, ordinary shares of Samsung Electronics Co. Ltd. had a weighting of 24.01% in the Fund versus an Index weighting of 29.63%. As of that date, preferred shares of Samsung Electronics Co. Ltd. made up an additional 2.48% of the Index.) During the month of October 2002, Samsung Electronics Co. Ltd. performed significantly better than the stocks the Fund was overweighting. As a result, security sampling had a negative impact on the Fund's performance relative to the Index's over the reporting period. Key Market Conditions South Korea's stock market was pressured over much of the reporting period by political and economic developments both at home and abroad. South Korean stocks were generally weak in September 2002, as the outlook for the global economy remained uncertain. Lackluster growth in the United States created difficult conditions for South Korea's exporters, particularly its semiconductor manufacturers. The global economic picture appeared to brighten in October 2002, however, with some encouraging data about the U.S. economy. The news helped to spark a rally in South Korea's stock market that lasted through November. Technology, steel and banking stocks were especially strong during this time. Much of the optimism began to fade in December 2002, as doubts resurfaced about the health of the U.S. and European economies. Investors' concerns about South Korea's domestic economy further weakened the market; shares of several South Korean banks came under pressure as they dramatically increased their loan-loss provisions. The growing likelihood of a war between the U.S. and Iraq also put significant pressure on the South Korean stock market in early 2003, as did heightened political tensions with North Korea. The appreciation of South Korea's currency, the won, versus the U.S. dollar over the reporting period was a mixed blessing. Some South Korean companies, such as steel producer POSCO (7.39% of the Index as of February 28, 2003), benefited from the won's strength as they translated their U.S. dollar earnings back into their home currency. Others, such as Hyundai Motor Co. Ltd. (3.14% of the Index as of February 28, 2003), found that the won's appreciation made its goods less competitive in the U.S. market. The won's strength did, however, help to enhance U.S. dollar-based investors' overall returns from the South Korean stock market over the reporting period. Managers' Discussion & Analysis 25 Managers' Discussion & Analysis iSHARES MSCI TAIWAN INDEX FUND Performance as of 2/28/03
Average Annual Total Returns Cumulative Total Returns - ------------------------------------------------------- -------------------------- Year Ended 2/28/03 Inception to 2/28/03 Inception to 2/28/03 - -------------------------- ------------------------- -------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX - ------ ------ ------ ------ ------ ------ ------ ------ ------ (26.77)% (29.95)% (26.13)% (27.48)% (27.94)% (26.85)% (57.95)% (58.67)% (56.87)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (6/20/00). "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 midpoint 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 (6/23/00), 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. 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 its future results. Sector Breakout MSCI TAIWAN INDEX [CHART] Pie chart Consumer Discretionary 5.31% Consumer Staples 1.45% Financials 20.75% Industrials 5.42% Information Technology 50.34% Materials 15.53% Telecomm Services 1.20% Performance Review The total return of the iShares MSCI Taiwan Index Fund (the "Fund") was -11.00% for the six-month period ended February 28, 2003 (the "reporting period"). The total return of the corresponding MSCI Taiwan Index (the "Index") over the reporting period was -10.81%. Significant Performance Factors The Fund underperformed its benchmark by 0.19 percentage points over the reporting period. This was due to the impact of expenses, uninvested assets and revenue differential, which respectively subtracted 0.49, 0.05 and 0.04 percentage points from the Fund's returns. Those factors were partially offset by the positive impact of security sampling, which contributed 0.39 percentage points. Key Market Conditions The Index was quite volatile over the reporting period, largely due to investors' shifting expectations for Taiwan's export-dependent economy. 26 2003 iShares Semi-Annual Report to Shareholders The Index began the reporting period on a down note. In the face of weak economic growth in many countries, particularly the United States, many investors sold off the shares of Taiwan's exporters during September 2002. The country's stock market then rallied in October 2002, as investors generally began to expect better economic conditions for the island's corporations, especially for chipmakers such as Taiwan Semiconductor Manufacturing Corporation and United Microelectronics Corporation (respectively 13.50% and 6.58% of the Index as of February 28, 2003). Meanwhile, the government's moves to reform the country's financial sector boosted investor sentiment toward Taiwan's banks. An apparent softening of China's opposition to direct transportation links between the island and mainland China also helped to bolster Taiwan's airline and shipping stocks during this time. The rally was fairly short-lived, however. In November and December 2002, investors' confidence waned as Taiwan's government appeared to back down from its plans to reform the country's financial sector. Worries about poor sales of personal computers and other electronics over the Christmas holiday also led to declines in many of Taiwan's leading technology shares. The island's stock market rallied once again in January 2003. Leading the way were the shares of companies such as Nan Ya Plastic Corporation and Formosa Plastic Corporation (respectively 4.61% and 4.28% of the Index as of February 28, 2003). These companies, along with several others in Taiwan, had been benefiting from solid demand for their products in mainland China, even as growth in the United States and Europe remained lackluster. Taiwan's leading technology stock, Taiwan Semiconductor Manufacturing Corporation, also rebounded in January after the company received the Taiwanese government's approval to build a new manufacturing plant in China. Much of the optimism dissipated in February 2003, as reform of Taiwan's financial sector appeared to be progressing more slowly than many investors had hoped. The threat of a war between the United States and Iraq, as well as continued economic woes around the world, put additional pressure on the Taiwanese stock market. Managers' Discussion & Analysis 27 Schedule of Investments (Unaudited) iSHARES MSCI AUSTRALIA INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 95.60% National Australia Bank Ltd. 463,464 $8,128,885 BHP Billiton Ltd. 1,113,888 6,185,570 Commonwealth Bank of Australia 375,765 5,596,391 Australia and New Zealand Banking Group Ltd 451,369 4,498,027 Westpac Banking Corp. Ltd. 526,276 4,487,527 News Corp. Ltd. (The) 440,422 2,723,707 Woolworths Ltd. 316,602 2,223,126 Rio Tinto Ltd. 93,357 1,898,055 Wesfarmers Ltd. 111,971 1,730,819 Foster's Group Ltd. 615,861 1,614,669 Telstra Corp. Ltd. 657,845 1,596,984 AMP Ltd. 340,669 1,447,264 Amcor Ltd. 246,451 1,232,466 Westfield Trust 614,795 1,208,906 Coles Myer Ltd. 337,143 1,160,151 CSR Ltd. 280,891 1,108,073 Macquarie Infrastructure Group 567,030 1,097,776 Suncorp-Metway Ltd. 157,358 974,106 Westfield Holdings Ltd. 126,608 964,322 General Property Trust 571,253 960,341 Alumina Ltd. 333,207 930,227 Insurance Australia Group Ltd. 497,535 923,979 Woodside Petroleum Ltd. 139,810 920,630 Macquarie Bank Ltd. 60,639 913,053 Australian Gas Light Co. Ltd. 129,847 852,661 QBE Insurance Group Ltd. 170,970 840,470 WMC Resources Ltd./1/ 333,166 792,618 Brambles Industries Ltd. 289,542 750,337 Stockland Trust Group 249,198 735,018 TABCORP Holdings Ltd. 110,987 673,580 Lend Lease Corp. Ltd. 117,096 618,981 Santos Ltd. 174,291 618,797 M.I.M. Holdings Ltd. 597,985 515,342 Origin Energy Ltd. 193,848 505,879 BHP Steel Ltd./1/ 237,292 496,843 James Hardie Industries NV 122,836 493,515 Mirvac Group 199,096 489,367 Mayne Group Ltd. 242,310 464,703 Security Shares Value - -------------------------------------------------------------------------------- Boral Ltd. 171,052 $ 460,923 Coca-Cola Amatil Ltd. 123,984 428,149 Orica Ltd. 83,558 417,354 CSL Ltd. 47,519 403,462 John Fairfax Holdings Ltd. 220,170 394,182 Goodman Fielder Ltd. 345,220 370,840 Southcorp Ltd. 188,108 364,179 Newcrest Mining Ltd. 94,628 341,707 PaperlinX Ltd. 107,338 338,746 Patrick Corporation Ltd. 48,913 336,038 Transurban Group 129,601 334,283 Cochlear Ltd. 15,703 316,020 BRL Hardy Ltd. 47,068 294,511 Gandel Retail Trust 364,121 287,281 TAB Ltd. 137,309 261,665 Commonwealth Property Office Fund 366,089 257,728 Sonic Healthcare Ltd. 65,887 245,519 Principal Office Fund 284,950 238,652 Deutsche Office Trust 343,006 226,906 Leighton Holdings Ltd. 40,836 222,802 AMP Diversified Property Trust 140,507 220,859 Harvey Norman Holdings Ltd. 157,440 214,988 Australian Stock Exchange Ltd. 30,955 208,531 Publishing & Broadcasting Ltd. 39,647 185,276 Ansell Ltd./1/ 51,756 179,983 Iluka Resources Ltd. 71,627 179,533 Futuris Corp. Ltd. 185,607 165,588 OneSteel Ltd. 152,561 157,402 Computershare Ltd. 133,373 144,080 Aristocrat Leisure Ltd. 84,378 91,152 David Jones Ltd. 113,529 76,480 Sons of Gwalia Ltd. 43,378 36,857 Energy Developments Ltd. 24,272 25,926 TOTAL COMMON STOCKS (Cost: $71,450,320) 71,800,767 PREFERRED STOCKS - 3.98% News Corp. Ltd. (The) 577,321 2,992,212 TOTAL PREFERRED STOCKS (Cost: $4,223,964) 2,992,212 28 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) (Continued) iSHARES MSCI AUSTRALIA INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- SHORT TERM INSTRUMENTS - 4.16% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 2,851,710 $ 2,851,710 BlackRock Temp Cash Money Market Fund 136,750 136,750 Short Term Investment Co. - Liquid Assets Money Market Portfolio 136,750 136,750 TOTAL SHORT TERM INSTRUMENTS (Cost: $3,125,210) 3,125,210 TOTAL INVESTMENTS IN SECURITIES - 103.74% (Cost $78,799,494) 77,918,189 Other Assets, Less Liabilities - (3.74%) (2,809,924) ----------- NET ASSETS - 100.00% $75,108,265 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 29 Schedule of Investments (Unaudited) iSHARES MSCI BRAZIL INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 25.91% Petroleo Brasileiro SA 305,900 $ 4,097,809 Companhia Vale do Rio Doce ADR 119,700 3,471,300 Unibanco Holdings SA 59,701,000 1,364,810 Souza Cruz SA 199,500 1,114,047 Centrais Eletricas Brasileiras SA 180,792,000 851,024 Companhia Siderurgica Nacional 47,481,000 824,831 Brasil Telecom Participacoes SA 113,316,000 441,326 Companhia de Saneamento Basico do Estado de Sao Paulo 14,630,000 315,186 Tractebel Energia SA 272,740,000 236,899 Embratel Participacoes SA/1/ 106,461,000 120,511 TOTAL COMMON STOCKS (Cost: $16,733,158) 12,837,743 PREFERRED STOCKS - 72.76% Petroleo Brasileiro SA 545,300 6,522,515 Companhia Vale do Rio Doce Class A 199,500 5,478,005 Companhia de Bebidas das Americas 29,260,000 4,115,584 Banco Bradesco SA 864,101,000 2,467,129 Banco Itau SA 55,062,000 2,422,172 Tele Norte Leste Participacoes SA 345,860,000 2,296,690 Brasil Telecom Participacoes SA 360,297,000 1,775,742 Aracruz Celulose SA Class B 665,000 1,306,150 Embraer-Empresa Brasileira de Aeronautica SA 438,943 1,125,337 Companhia Energetica de Minas Gerais 158,935,467 1,010,882 Gerdau SA 97,223,000 905,217 Companhia Brasileira de Distribuicao 55,062,000 683,454 Votorantim Celulose e Papel SA 17,689,000 671,032 Telesp Celular Participacoes SA/1/ 660,183,000 628,923 Centrais Eletricas Brasileiras SA Class B 112,651,000 561,835 Duratex SA 33,383,000 509,678 Security Shares Value - -------------------------------------------------------------------------------- Tele Centro Oeste Celular Participacoes 411,310,000 $ 495,555 Sadia SA 1,330,000 458,364 Companhia Paranaense de Energia Class B 194,219,000 429,906 Usinas Siderurgicas de Minas Gerais SA Class A 186,200 394,938 Embratel Participacoes SA/1/ 368,333,000 357,084 Companhia de Tecidos Norte de Minas 5,852,400 355,834 Telemig Celular Participacoes SA 383,531,000 278,325 Tele Nordeste Celular Participacoes SA 383,866,000 245,225 Tele Celular Sul Participacoes 371,887,000 227,156 Companhia Brasileira de Petroleo Ipirango/1/ 71,143,000 143,522 Braskem SA Class A 2,128,000 98,446 Eletropaulo Metropolitana Eletricidade de Sao Paulo 13,082,000 85,405 TOTAL PREFERRED STOCKS (Cost: $48,754,249) 36,050,105 SHORT TERM INSTRUMENTS - 0.20% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 100,844 100,844 TOTAL SHORT TERM INSTRUMENTS (COST: $100,844) 100,844 TOTAL INVESTMENTS IN SECURITIES - 98.87% (Cost $65,588,251) 48,988,692 Other Assets, Less Liabilities - 1.13% 561,686 ----------- NET ASSETS - 100.00% $49,550,378 =========== /1/ Non-income earning securities. See notes to financial statements. 30 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI CANADA INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 99.72% Royal Bank of Canada 1,015,240 $39,592,861 Bank of Nova Scotia 766,090 27,073,861 EnCana Corp. 723,327 23,605,960 Bank of Montreal 749,141 21,119,561 Canadian Imperial Bank of Commerce 552,233 17,625,640 Sun Life Financial Services of Canada Inc. 939,508 17,342,241 Manulife Financial Corp. 707,954 17,283,049 Barrick Gold Corp. 822,940 13,273,760 Alcan Inc. 464,344 13,140,518 Canadian National Railway Co. 303,608 12,844,954 Nortel Networks Corp./1/ 5,839,022 12,541,865 Suncor Energy Inc. 681,943 12,359,015 Petro-Canada 340,294 12,119,747 TransCanada PipeLines Ltd. 728,058 10,853,919 Thomson Corp. 344,526 9,236,386 BCE Inc. 457,256 8,523,291 Talisman Energy Inc. 203,980 8,105,528 Magna International Inc. Class A 136,288 7,565,457 Canada Life Financial Corp. 243,460 7,116,850 Biovail Corp./1/ 189,876 6,990,669 Enbridge Inc. 244,367 6,971,135 Canadian Natural Resources Ltd. 193,163 6,631,956 Imperial Oil Ltd. 201,160 6,400,177 Loblaw Companies Ltd. 168,730 6,342,382 Power Corp. of Canada 240,640 6,178,333 National Bank of Canada 280,120 6,110,820 Placer Dome Inc. 616,640 6,084,446 Inco Ltd./1/ 278,234 5,929,608 George Weston Ltd. 80,840 5,043,682 Canadian Pacific Railway Ltd. 240,650 5,038,175 Bombardier Inc. Class B 1,567,393 4,997,393 Power Financial Corp. 184,263 4,871,875 Potash Corp. of Saskatchewan Inc. 78,960 4,849,007 Brascan Corp. Class A 239,729 4,722,813 Abitibi-Consolidated Inc. 601,130 4,418,293 Nexen Inc. 186,584 4,005,206 Celestica Inc./1/ 284,350 3,416,475 Security Shares Value - -------------------------------------------------------------------------------- Shell Canada Ltd. 105,280 $3,392,026 Quebecor World Inc. 142,398 3,248,831 Domtar Inc. 293,738 3,225,637 Molson Inc. Class A 151,331 3,175,330 Precision Drilling Corp. Class A/1/ 82,244 2,974,983 MDS Inc. 202,583 2,886,855 TransAlta Corp. 258,970 2,882,080 Cognos Inc./1/ 117,500 2,848,772 Investors Group Inc. 160,740 2,814,946 Shaw Communications Inc. Class B 300,785 2,673,106 Brookfield Properties Corp. 135,354 2,543,907 Fairmont Hotels & Resorts Inc. 119,868 2,445,957 NOVA Chemicals Corp. 131,130 2,353,615 Canadian Tire Corp. Class A 115,135 2,310,737 Teck Cominco Ltd. Class B 274,480 2,210,874 Husky Energy Inc. 190,317 2,165,306 TELUS Corp. 198,104 2,115,609 Noranda Inc. 235,461 2,084,663 Penn West Petroleum Ltd./1/ 77,077 2,077,220 Agrium Inc. 193,170 2,074,587 Dofasco Inc. 113,258 2,045,760 Cameco Corp. 85,064 2,041,239 Rogers Communications Inc. Class B/1/ 216,188 1,995,291 Onex Corp. 194,571 1,815,369 CGI Group Inc./1/ 378,799 1,779,832 CP Ships Ltd. 133,486 1,662,079 Falconbridge Ltd. 120,772 1,411,358 ATI Technologies Inc./1/ 359,535 1,397,307 C.I. Fund Management Inc. 200,220 1,346,627 Aliant Inc. 68,620 1,287,373 Ballard Power Systems Inc./1/ 110,450 1,137,269 Fairfax Financial Holdings Ltd. 20,210 1,087,688 CAE Inc. 334,640 1,055,718 QLT Corp./1/ 103,870 945,414 Four Seasons Hotels Inc. 35,244 920,962 Quebecor Inc. Class B/1/ 62,498 778,603 Intrawest Corp. 71,904 772,227 Schedules of Investments 31 Schedule of Investments (Unaudited) (Continued) iSHARES MSCI CANADA INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- Royal Group Technologies Ltd./1/ 99,619 $ 682,047 Hudson's Bay Co. 104,340 588,304 TOTAL COMMON STOCKS (Cost: $441,874,588) 467,582,416 SHORT TERM INSTRUMENTS - 0.11% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 519,012 519,012 TOTAL SHORT TERM INSTRUMENTS (Cost: $519,012) 519,012 TOTAL INVESTMENTS IN SECURITIES - 99.83% (Cost $442,393,600) 468,101,428 Other Assets, Less Liabilities - 0.17% 809,471 ------------ NET ASSETS - 100.00% $468,910,899 ============ /1/ Non-income earning securities. See notes to financial statements. 32 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI HONG KONG INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 99.84% Hutchison Whampoa Ltd. 2,996,800 $17,944,450 Cheung Kong (Holdings) Ltd. 2,140,000 13,445,141 Hang Seng Bank Ltd. 1,112,800 12,163,737 Sun Hung Kai Properties Ltd. 1,926,000 10,841,174 Hongkong Electric Holdings Ltd. 1,498,000 5,714,185 Hong Kong & China Gas Co. Ltd. 4,494,663 5,532,531 Swire Pacific Ltd. Class A 1,284,000 5,432,935 CLP Holdings Ltd. 1,284,200 5,269,121 BOC Hong Kong (Holdings) Ltd./1/ 3,852,000 3,951,225 Wharf (Holdings) Ltd. (The) 1,926,000 3,951,225 Bank of East Asia Ltd. 2,097,300 3,912,723 MTR Corp. Ltd. 2,568,083 2,848,267 Esprit Holdings Ltd. 1,284,000 2,543,601 Henderson Land Development Co. Ltd. 856,000 2,431,101 Cathay Pacific Airways Ltd. 1,712,000 2,392,686 Johnson Electric Holdings Ltd. 2,140,000 2,387,199 Li & Fung Ltd. 2,140,000 2,099,088 Hong Kong Exchanges & Clearing Ltd. 1,712,000 1,997,564 Cheung Kong Infrastructure Holdings Ltd. 1,070,000 1,948,174 Hang Lung Properties Ltd. 2,140,000 1,948,173 PCCW Ltd./1/ 2,568,576 1,696,114 Television Broadcasts Ltd. 428,000 1,303,355 Shangri-La Asia Ltd. 1,712,000 1,229,270 New World Development Co. Ltd. 1,926,000 876,678 Security Shares Value - -------------------------------------------------------------------------------- Hysan Development Co. Ltd. 1,070,000 $ 823,172 Sino Land Co. Ltd. 2,568,000 773,782 Giordano International Ltd. 2,140,000 644,818 SCMP Group Ltd. 1,712,000 620,123 ASM Pacific Technology Ltd. 214,000 491,159 TOTAL COMMON STOCKS (Cost: $145,083,141) 117,212,771 SHORT TERM INSTRUMENTS - 6.65% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 7,123,650 7,123,650 BlackRock Temp Cash Money Market Fund 343,458 343,458 Short Term Investment Co. - Liquid Assets Money Market Portfolio 343,458 343,458 TOTAL SHORT TERM INSTRUMENTS (Cost: $7,810,566) 7,810,566 TOTAL INVESTMENTS IN SECURITIES - 106.49% (Cost $152,893,707) 125,023,337 Other Assets, Less Liabilities - (6.49%) (7,614,189) ------------ NET ASSETS - 100.00% $117,409,148 ============ /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 33 Schedule of Investments (Unaudited) iSHARES MSCI MALAYSIA INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 99.81% Malayan Banking Bhd 3,477,600 $7,275,505 Tenaga Nasional Bhd 1,890,000 4,675,263 Telekom Malaysia Bhd 2,268,000 4,625,526 Sime Darby Bhd 2,835,000 3,804,868 Genting Bhd 945,000 3,481,579 Resorts World Bhd 1,134,000 2,820,079 Commerce Asset Holdings Bhd 3,213,000 2,638,042 British American Tobacco (Malaysia) Bhd 264,600 2,541,553 Maxis Communications Bhd/1/ 1,701,000 2,417,210 IOI Corp. Bhd 1,512,000 2,367,474 Public Bank Bhd 3,402,750 2,319,243 Malaysian International Shipping Corp. Bhd 1,134,000 2,148,632 PLUS Expressways Bhd/1/ 3,591,000 2,097,900 Petronas Gas Bhd 945,000 1,740,789 Celcom Malaysia Bhd/1/ 2,457,000 1,629,379 Gamuda Bhd 1,134,000 1,626,395 Magnum Corp. Bhd 2,079,000 1,296,639 YTL Corp. Bhd 1,323,620 1,212,157 Malakoff Bhd 1,134,000 1,205,621 AMMB Holdings Bhd 1,134,400 1,074,695 Nestle (Malaysia) Bhd 189,000 974,842 Kuala Lumpur Kepong Bhd 567,000 932,566 OYL Industries Bhd 151,333 915,963 Hong Leong Bank Bhd 756,000 911,179 Tanjong PLC 378,000 875,368 Road Builder (Malaysia) Holdings Bhd 945,500 816,116 Berjaya Sports Toto Bhd 945,000 800,763 Perusahaan Otomobil Nasional Bhd 378,000 795,789 IJM Corp. Bhd 567,000 704,274 Hong Leong Credit Bhd 567,400 588,304 Star Publications (Malaysia) Bhd 378,000 586,895 PPB Group Bhd 567,333 585,249 Malaysian Pacific Industries Bhd 189,000 542,132 Malayan Cement Bhd 2,835,000 540,888 Malaysian Airline System Bhd/1/ 567,000 537,158 Petronas Dagangan Bhd 378,000 537,158 Malaysian Oxygen Bhd 189,000 517,263 SP Setia Bhd 756,500 479,780 RHB Capital Bhd 1,134,000 462,553 Golden Hope Plantations Bhd 567,000 447,632 Multi-Purpose Holdings Bhd/1/ 1,323,000 431,716 Security Shares Value - -------------------------------------------------------------------------------- Malaysian Resources Corp. Bhd/1/ 1,701,000 $ 405,107 Edaran Otomobil Nasional Bhd 189,000 387,947 Malaysia Mining Corp. Bhd 756,000 385,958 UMW Holdings Bhd 189,000 385,461 New Straits Times Press Bhd 378,000 383,968 Guinness Anchor Bhd 378,000 350,147 Oriental Holdings Bhd 378,400 332,594 IOI Properties Bhd 189,000 298,421 Highlands & Lowlands Bhd 378,000 292,453 OSK Holdings Bhd 756,000 276,537 Tan Chong Motor Holdings Bhd 945,000 261,118 Mulpha International Bhd/1/ 2,457,000 252,166 Unisem (Malaysia) Bhd 189,000 236,747 WTK Holdings Bhd 189,000 236,747 IGB Corp. Bhd 1,134,000 235,753 Puncak Niaga Holdings Bhd/1/ 378,000 224,811 TA Enterprise Bhd 1,701,000 221,578 Malaysia Airports Holdings Bhd 567,000 220,832 JT International Bhd 189,000 198,947 Jaya Tiasa Holdings Bhd 189,000 154,184 Hong Leong Industries Bhd 189,000 149,210 Courts Mammoth Bhd 189,000 139,263 TIME Engineering Bhd/1/ 567,000 120,114 FACB Resorts Bhd/1/ 2,268,000 83,558 Malayan United Industries Bhd/1/ 945,000 57,197 Hume Industries Bhd 667 455 TOTAL COMMON STOCKS (Cost: $52,514,932) 73,273,410 SHORT TERM INSTRUMENTS - 0.30% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 220,576 220,576 TOTAL SHORT TERM INSTRUMENTS (Cost: $220,576) 220,576 TOTAL INVESTMENTS IN SECURITIES - 100.11% (Cost $52,735,508) 73,493,986 Other Assets, Less Liabilities - (0.11%) (78,892) ----------- NET ASSETS - 100.00% $73,415,094 =========== /1/ Non-income earning securities. See notes to financial statements. 34 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI MEXICO INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 100.03% Telefonos de Mexico SA de CV Series L 6,425,100 $9,369,259 America Movil SA de CV Series L/1/ 8,464,500 5,903,254 Cemex SA de CV Series CPO 943,800 3,393,673 Fomento Economico Mexicano SA de CV Class UBD 577,500 1,872,555 Grupo Financiero BBVA Bancomer SA de CV Class B/1/ 2,428,800 1,830,267 Grupo Televisa SA Series CPO/1/ 1,511,400 1,827,512 Wal-Mart de Mexico SA de CV Series V 815,100 1,817,600 Grupo Modelo SA de CV Series C 795,300 1,642,348 Kimberly-Clark de Mexico SA de CV Class A 656,700 1,415,609 TV Azteca SA de CV Series CPO 3,415,500 1,008,490 Grupo Carso SA de CV Series A1/1/ 435,600 998,178 Carso Global Telecom SA de CV Class A1/1/ 742,500 755,896 Coca-Cola Femsa SA de CV ADR 36,399 658,458 Corporacion Interamericana de Entretenimiento SA de CV Class B/1/ 402,600 614,431 Consorcio Ara SA de CV/1/ 352,346 556,883 Grupo Bimbo SA Series A 366,300 500,972 America Telecom SA de CV Series A1/1/ 861,288 493,021 Apasco SA de CV 78,900 434,419 Alfa SA de CV Class A 297,000 432,018 Organizacion Soriana SA de CV Series B/1/ 224,400 356,900 Grupo Sanborns SA de CV Series B1/1/ 353,100 354,993 Security Shares Value - -------------------------------------------------------------------------------- Grupo Elektra SA de CV Series CPO 165,020 $ 349,745 Grupo Continental SA 264,000 334,758 Controladora Comercial Mexicana SA de CV 702,900 326,596 Grupo Aeroportuario del Sureste SA de CV ADR 30,822 312,843 Industrias Penoles SA de CV Series CP 168,300 296,790 Grupo Mexico SA de CV Series B/1/ 211,200 245,234 Vitro SA de CV Series A 319,300 231,360 Savia SA de CV Class A/1/ 128,301 48,807 TOTAL COMMON STOCKS (Cost: $57,002,366) 38,382,869 SHORT TERM INSTRUMENTS - 0.10% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 37,811 37,811 TOTAL SHORT TERM INSTRUMENTS (Cost: $37,811) 37,811 TOTAL INVESTMENTS IN SECURITIES - 100.13% (Cost $57,040,177) 38,420,680 Other Assets, Less Liabilities - (0.13%) (50,371) ----------- NET ASSETS - 100.00% $38,370,309 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 35 Schedule of Investments (Unaudited) iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 97.03% AUSTRALIA - 61.86% Alumina Ltd. 453,096 $1,264,926 Amcor Ltd. 331,855 1,659,559 AMP Diversified Property Trust 159,898 251,339 AMP Ltd. 458,583 1,948,198 Ansell Ltd./1/ 71,151 247,430 Aristocrat Leisure Ltd. 117,769 127,224 Australia and New Zealand Banking Group Ltd. 606,670 6,045,647 Australian Gas Light Co. Ltd. 172,112 1,130,201 Australian Stock Exchange Ltd. 43,493 292,995 BHP Billiton Ltd. 1,497,858 8,317,808 BHP Steel Ltd./1/ 327,125 684,936 Boral Ltd. 236,096 636,193 Brambles Industries Ltd. 394,754 1,022,990 BRL Hardy Ltd. 67,177 420,336 Coca-Cola Amatil Ltd. 171,616 592,635 Cochlear Ltd. 21,824 439,204 Coles Myer Ltd. 459,265 1,580,387 Commonwealth Bank of Australia 505,393 7,526,983 Commonwealth Property Office Fund 429,443 302,330 Computershare Ltd. 152,148 164,363 CSL Ltd. 65,193 553,523 CSR Ltd. 381,517 1,505,027 David Jones Ltd. 185,628 125,050 Deutsche Office Trust 478,919 316,815 Energy Developments Ltd. 16,461 17,583 Foster's Group Ltd. 829,777 2,175,516 Futuris Corp. Ltd. 189,534 169,091 Gandel Retail Trust 501,242 395,465 General Property Trust 757,330 1,273,157 Goodman Fielder Ltd. 465,341 499,875 Harvey Norman Holdings Ltd. 222,456 303,769 Iluka Resources Ltd. 99,975 250,587 Insurance Australia Group Ltd. 640,491 1,189,465 James Hardie Industries NV 164,424 660,603 John Fairfax Holdings Ltd. 304,637 545,408 Leighton Holdings Ltd. 56,699 309,351 Lend Lease Corp. Ltd. 160,084 846,220 Security Shares Value - -------------------------------------------------------------------------------- M.I.M. Holdings Ltd. 820,756 $ 707,326 Macquarie Bank Ltd. 80,755 1,215,943 Macquarie Infrastructure Group 769,947 1,490,626 Mayne Group Ltd. 334,242 641,011 Mirvac Group 243,908 599,512 National Australia Bank Ltd. 622,976 10,926,632 Newcrest Mining Ltd. 126,294 456,055 News Corp. Ltd. (The) 592,348 3,663,264 OneSteel Ltd. 195,579 201,785 Orica Ltd. 114,948 574,141 Origin Energy Ltd. 267,561 698,246 PaperlinX Ltd. 138,043 435,647 Patrick Corporation Ltd. 68,572 471,097 Principal Office Fund 351,788 294,630 Publishing & Broadcasting Ltd. 56,761 265,252 QBE Insurance Group Ltd. 232,996 1,145,383 Rio Tinto Ltd. 126,108 2,563,921 Santos Ltd. 238,452 846,592 Sonic Healthcare Ltd. 74,927 279,205 Sons of Gwalia Ltd. 45,229 38,429 Southcorp Ltd. 258,416 500,296 Stockland Trust Group 315,177 929,625 Suncorp-Metway Ltd. 210,924 1,305,700 TAB Ltd. 189,968 362,016 TABCORP Holdings Ltd. 146,909 891,591 Telstra Corp. Ltd. 886,321 2,151,633 Transurban Group 180,978 466,801 Wesfarmers Ltd. 150,815 2,331,259 Westfield Holdings Ltd. 171,988 1,309,963 Westfield Trust 797,010 1,567,205 Westpac Banking Corp. Ltd. 707,606 6,033,717 WMC Resources Ltd./1/ 457,622 1,088,705 Woodside Petroleum Ltd. 189,968 1,250,914 Woolworths Ltd. 426,312 2,993,492 96,489,803 HONG KONG - 21.84% ASM Pacific Technology Ltd. 77,500 177,874 Bank of East Asia Ltd. 558,000 1,041,005 BOC Hong Kong (Holdings) Ltd./1/ 1,069,500 1,097,050 Cathay Pacific Airways Ltd. 403,000 563,232 36 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) (Continued) iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- Cheung Kong (Holdings) Ltd. 620,000 $ 3,895,321 Cheung Kong Infrastructure Holdings Ltd. 186,000 338,654 CLP Holdings Ltd. 728,500 2,989,063 Esprit Holdings Ltd. 186,000 368,466 Giordano International Ltd. 620,000 186,817 Hang Lung Properties Ltd. 465,500 423,773 Hang Seng Bank Ltd. 310,000 3,388,532 Henderson Land Development Co. Ltd. 248,000 704,338 Hong Kong & China Gas Co. Ltd. 1,488,600 1,832,334 Hong Kong Exchanges & Clearing Ltd. 434,000 506,392 Hongkong Electric Holdings Ltd. 558,000 2,128,515 Hutchison Whampoa Ltd. 868,000 5,197,471 Hysan Development Co. Ltd. 248,000 190,791 Johnson Electric Holdings Ltd. 589,000 657,037 Li & Fung Ltd. 620,000 608,147 MTR Corp. Ltd. 511,500 567,306 New World Development Co. Ltd. 589,000 268,101 PCCW Ltd./1/ 731,600 483,099 SCMP Group Ltd. 372,000 134,746 Shangri-La Asia Ltd. 372,000 267,108 Sino Land Co. Ltd. 682,000 205,498 Sun Hung Kai Properties Ltd. 527,000 2,966,406 Swire Pacific Ltd. Class A 372,000 1,574,028 Television Broadcasts Ltd. 93,000 283,206 Wharf (Holdings) Ltd. (The) 496,000 1,017,553 34,061,863 NEW ZEALAND - 2.59% Auckland International Airport Ltd. 84,641 257,227 Carter Holt Harvey Ltd. 375,503 361,579 Contact Energy Ltd. 123,318 302,011 Fisher & Paykel Appliances Holdings Ltd. 26,102 140,054 Fisher & Paykel Healthcare Corp. Ltd. 26,350 142,264 Fletcher Building Ltd. 151,001 297,527 Fletcher Challenge Forests Ltd./1/ 63,569 36,444 Independent Newspapers Ltd. 52,793 92,561 Sky City Entertainment Group Ltd. 83,886 408,546 Telecom Corp. of New Zealand Ltd. 735,723 1,724,009 Security Shares Value - -------------------------------------------------------------------------------- Tower Ltd. 85,529 $ 96,639 Warehouse Group Ltd. (The) 58,745 181,798 4,040,659 SINGAPORE - 10.74% Allgreen Properties Ltd. 155,000 75,308 Capitaland Ltd. 434,000 257,026 Chartered Semiconductor Manufacturing Ltd./1/ 403,000 164,518 City Developments Ltd. 186,000 397,838 Creative Technology Ltd. 18,600 117,640 Cycle & Carriage Ltd. 31,000 64,524 Datacraft Asia Ltd./1/ 62,000 41,540 DBS Group Holdings Ltd. 434,000 2,395,584 First Capital Corp. Ltd. 93,000 37,698 Fraser & Neave Ltd. 62,700 288,408 GES International Ltd. 217,000 36,183 Haw Par Corp. Ltd. 31,397 62,462 Hotel Properties Ltd. 93,000 51,601 Keppel Corp. Ltd. 217,000 516,548 Keppel Land Ltd. 155,000 114,967 Neptune Orient Lines Ltd./1/ 248,000 126,909 Oversea-Chinese Banking Corp. Ltd. 403,000 2,039,098 Overseas Union Enterprise Ltd. 31,000 105,163 Parkway Holdings Ltd. 217,000 91,706 SembCorp Industries Ltd. 372,000 209,614 SembCorp Logistics Ltd. 124,000 121,205 SembCorp Marine Ltd. 186,000 97,321 Singapore Airlines Ltd. 217,000 1,179,077 Singapore Exchange Ltd. 310,000 221,021 Singapore Land Ltd. 62,000 114,788 Singapore Press Holdings Ltd. 155,000 1,622,010 Singapore Technologies Engineering Ltd. 527,000 512,092 Singapore Telecommunications Ltd. 2,511,000 1,876,897 SMRT Corp. Ltd. 372,000 114,432 ST Assembly Test Services Ltd./1/ 62,000 44,204 United Overseas Bank Ltd. 465,000 2,780,589 United Overseas Land Ltd. 124,000 119,066 Schedules of Investments 37 Schedule of Investments (Unaudited) (Continued) iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- Venture Corp. Ltd. 93,000 $ 716,536 Wing Tai Holdings Ltd. 155,000 43,670 16,757,243 TOTAL COMMON STOCKS (COST: $160,526,784) 151,349,568 PREFERRED STOCKS - 2.63% AUSTRALIA - 2.58% News Corp. Ltd. (The) 777,635 4,030,424 4,030,424 NEW ZEALAND - 0.05% Fletcher Challenge Forests Ltd./1/ 122,878 70,446 70,446 TOTAL PREFERRED STOCKS (COST: $4,351,430) 4,100,870 Security Shares Value - -------------------------------------------------------------------------------- SHORT TERM INSTRUMENTS - 0.92% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 1,312,465 $ 1,312,465 BlackRock Temp Cash Money Market Fund 59,448 59,448 Short Term Investment Co. - Liquid Assets Money Market Portfolio 59,448 59,448 TOTAL SHORT TERM INSTRUMENTS (Cost: $1,431,361) 1,431,361 TOTAL INVESTMENTS IN SECURITIES - 100.58% (Cost $166,309,575) 156,881,799 Other Assets, Less Liabilities - (0.58%) (901,944) ------------ NET ASSETS - 100.00% $155,979,855 ============ /1/ Non-income earning securities. See notes to financial statements. 38 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI SINGAPORE INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 99.99% DBS Group Holdings Ltd. 1,881,000 $10,382,705 United Overseas Bank Ltd. 1,710,000 10,225,391 Oversea-Chinese Banking Corp. Ltd. 1,539,000 7,787,028 Singapore Telecommunications Ltd. 8,208,000 6,135,235 Singapore Press Holdings Ltd. 342,000 3,578,887 Singapore Airlines Ltd. 624,000 3,390,524 Keppel Corp. Ltd. 1,197,000 2,849,344 Singapore Technologies Engineering Ltd. 2,907,000 2,824,765 Venture Corp. Ltd. 342,000 2,635,005 City Developments Ltd. 1,197,000 2,560,280 Fraser & Neave Ltd. 513,000 2,359,706 Singapore Exchange Ltd. 2,565,000 1,828,772 Capitaland Ltd. 3,078,000 1,822,873 SembCorp Industries Ltd. 2,565,000 1,445,320 SMRT Corp. Ltd. 3,933,000 1,209,841 Neptune Orient Lines Ltd./1/ 1,881,000 962,563 United Overseas Land Ltd. 855,000 820,981 SembCorp Marine Ltd. 1,539,000 805,249 Chartered Semiconductor Manufacturing Ltd./1/ 1,881,000 767,887 Creative Technology Ltd. 111,150 702,996 Haw Par Corp. Ltd. 342,909 682,190 SembCorp Logistics Ltd. 684,000 668,583 Parkway Holdings Ltd. 1,539,000 650,394 Keppel Land Ltd. 855,000 634,171 Singapore Land Ltd. 342,000 633,188 Allgreen Properties Ltd. 1,197,000 581,569 Overseas Union Enterprise Ltd. 171,000 580,094 Security Shares Value - -------------------------------------------------------------------------------- ST Assembly Test Services Ltd./1/ 684,000 $ 487,672 Cycle & Carriage Ltd. 171,000 355,922 Datacraft Asia Ltd./1/ 513,000 343,710 Wing Tai Holdings Ltd. 684,000 192,709 Hotel Properties Ltd. 342,000 189,760 GES International Ltd. 1,026,000 171,079 First Capital Corp. Ltd. 342,000 138,633 TOTAL COMMON STOCKS (Cost: $96,174,628) 71,405,026 SHORT TERM INSTRUMENTS - 1.73% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 1,131,186 1,131,186 BlackRock Temp Cash Money Market Fund 51,797 51,797 Short Term Investment Co. - Liquid Assets Money Market Portfolio 51,797 51,797 TOTAL SHORT TERM INSTRUMENTS (Cost: $1,234,780) 1,234,780 TOTAL INVESTMENTS IN SECURITIES - 101.72% (Cost $97,409,408) 72,639,806 Other Assets, Less Liabilities - (1.72%) (1,231,214) ----------- NET ASSETS - 100.00% $71,408,592 =========== /1/ Non-income earning securities. See notes to financial statements. Schedules of Investments 39 Schedule of Investments (Unaudited) iSHARES MSCI SOUTH AFRICA INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 99.77% Anglo American PLC 1,137,290 $16,505,659 Sasol Ltd. 565,250 6,654,659 Old Mutual PLC 3,755,080 4,837,545 Gold Fields Ltd. 384,090 4,809,995 Sappi Ltd. 220,570 3,060,320 Standard Bank Group Ltd. 845,145 3,012,724 Anglo American Platinum Corp. Ltd. 82,775 2,955,847 AngloGold Ltd. 91,735 2,942,422 Impala Platinum Holdings Ltd. 41,265 2,508,103 FirstRand Ltd. 2,776,585 2,427,115 Sanlam Ltd. 2,661,330 2,342,865 Nedcor Ltd. 145,075 1,726,848 Bidvest Group Ltd. 333,830 1,670,164 Tiger Brands Ltd. 161,280 1,265,827 Barloworld Ltd. 181,160 1,161,296 Imperial Holdings Ltd./1/ 177,275 1,088,035 Liberty Group Ltd. 143,010 957,526 Nampak Ltd. 543,235 838,585 MTN Group Ltd./1/ 520,660 823,104 Naspers Ltd. 238,280 676,571 Woolworths Holdings Ltd. 847,595 541,235 Iscor Ltd. 231,595 509,704 Dimension Data Holdings PLC/1/ 1,374,205 451,531 Metro Cash & Carry Ltd./1/ 1,566,180 390,326 Investec Ltd. 35,175 371,154 New Africa Capital Ltd. 457,835 334,928 African Bank Investments Ltd. 415,940 331,098 Alexander Forbes Ltd. 239,330 329,390 Security Shares Value - -------------------------------------------------------------------------------- Pick'n Pay Stores Ltd. 203,735 $ 314,503 Truworths International Ltd. 404,600 311,034 Shoprite Holdings Ltd. 377,895 304,561 JD Group Ltd. 99,330 251,247 Foschini Ltd. 158,025 227,287 Coronation Holdings Ltd. 30,380 203,410 Tongaat-Hulett Group Ltd. 40,425 185,456 Comparex Holdings Ltd./1/ 161,210 121,930 DataTec Ltd./1/ 140,420 87,054 TOTAL COMMON STOCKS (Cost: $68,378,144) 67,531,058 SHORT TERM INSTRUMENTS - 0.12% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 82,428 82,428 TOTAL SHORT TERM INSTRUMENTS (Cost: $82,428) 82,428 TOTAL INVESTMENTS IN SECURITIES - 99.89% (Cost $68,460,572) 67,613,486 Other Assets, Less Liabilities - 0.11% 71,411 ----------- NET ASSETS - 100.00% $67,684,897 =========== /1/ Non-income earning securities. See notes to financial statements. 40 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI SOUTH KOREA INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 98.25% Samsung Electronics Co. Ltd. 103,320 $24,192,971 Kookmin Bank 258,309 7,898,696 POSCO 83,160 7,698,387 SK Telecom Co. Ltd. 50,400 6,966,866 Samsung SDI Co. Ltd. 65,520 3,732,551 Korea Electric Power Corp. 241,920 3,637,971 Samsung Electro-Mechanics Co. Ltd. 109,620 3,563,235 LG Electronics Inc. 103,326 3,488,491 Hyundai Motor Co. Ltd. 165,060 3,470,872 Shinhan Financial Group Ltd. 299,880 3,152,929 KT Corp. 74,340 2,718,503 KT Freetel/1/ 113,310 2,325,719 LG Chem Ltd. 71,820 2,226,231 Daeduck Electronics Co. Ltd. 254,561 1,859,651 Samsung Fire & Marine Insurance Co. Ltd. 37,800 1,805,052 Hana Bank 120,093 1,609,758 KT Corp. ADR 72,965 1,349,852 Samsung Securities Co. Ltd./1/ 56,700 1,301,537 Shinsegae Department Store Co. Ltd. 10,080 1,300,482 Kia Motors Corp. 173,880 1,099,815 KT&G Corp./1/ 73,080 1,025,502 LG Investments & Securities Co. Ltd. 88,200 931,027 Anam Semiconductor Inc./1/ 330,120 898,831 Samsung Corp. 152,460 789,346 Hyundai Mobis Co. 37,800 701,437 Hyundai Heavy Industries Co. Ltd./1/ 44,100 679,797 Samsung Heavy Industries Co. Ltd. 186,480 649,122 Humax Co. Ltd. 47,376 577,490 Cheil Industries Inc. 47,880 571,600 Cheil Jedang Corp. 16,380 557,138 Daishin Securities Co. Ltd. 41,580 550,382 LG Chem Investment Ltd. 91,446 534,741 S-Oil Corp./1/ 38,020 509,630 Daelim Industrial Co. Ltd. 32,760 461,080 Kookmin Credit Card Co. Ltd./1/ 30,618 456,583 S1 Corp. 27,720 454,007 Kumgang Korea Chemical Co. Ltd. 5,040 443,346 Security Shares Value - -------------------------------------------------------------------------------- LG Engineering & Construction Co. Ltd. 36,540 $ 431,629 Korean Air Co. Ltd. 37,800 427,512 Cheil Communications Inc. 5,040 422,234 Korea Exchange Bank/1/ 136,080 410,412 Hite Brewery Co. Ltd./1/ 8,820 386,450 Amorepacific Corp. 5,040 384,233 SK Global/1/ 55,448 366,975 Hyundai Securities Co. Ltd. 84,420 347,256 NCsoft Corp./1/ 4,032 331,370 Daewoo Securities Co. Ltd./1/ 100,800 316,254 Good Morning Securities Co. Ltd./1/ 97,524 285,958 Daum Communications Corp./1/ 8,442 272,288 Honam Petrochemical Corp. 11,340 271,708 Hankook Tire Co. Ltd. 122,220 266,731 Dongwon Securities Co. Ltd. 51,660 256,645 Hyundai Department Store Co. Ltd. 15,120 255,241 TriGem Computer Inc./1/ 55,637 250,766 LG Household & Health Care Ltd. 11,340 242,257 LG Cable Ltd. 25,200 226,951 Nong Shim Co. Ltd. 3,780 226,423 Hankuk Electric Glass Co. Ltd. 5,040 218,295 Hyosung Corp. 23,940 214,601 YuHan Corp. 5,044 211,285 Hanjin Shipping Co. Ltd. 31,500 196,603 Samsung Fine Chemicals Co. Ltd. 15,120 175,438 Poongsan Corp. 21,420 174,066 Asiana Airlines/1/ 85,554 164,851 Hanwha Chemical Corp./1/ 47,880 154,833 Dong-A Pharmaceutical Co. Ltd. 7,938 131,009 Hanjin Heavy Industries & Construction Co. Ltd. 47,880 113,718 Hotel Shilla Co. Ltd. 31,500 111,364 Korea Zinc Co. Ltd. 7,560 111,153 Hansol Paper Co. Ltd. 18,900 85,977 Hyundai Merchant Marine Co. Ltd./1/ 56,700 77,665 Korea Technology & Banking Network Corp./1/ 36,540 68,571 Green Cross Corp. 2,520 54,574 Daou Technology Inc./1/ 35,280 43,152 Haansoft Inc./1/ 41,580 28,216 Schedules of Investments 41 Schedule of Investments (Unaudited) (Continued) iSHARES MSCI SOUTH KOREA INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- Hyundai Department Store H&S Co. Ltd./1/ 2,870 $ 23,852 TOTAL COMMON STOCKS (Cost: $99,450,721) 104,929,144 SHORT TERM INSTRUMENTS - 0.14% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 150,361 150,361 TOTAL SHORT TERM INSTRUMENTS (Cost: $150,361) 150,361 TOTAL INVESTMENTS IN SECURITIES - 98.39% (Cost $99,601,082) 105,079,505 Other Assets, Less Liabilities - 1.61% 1,714,511 ------------ NET ASSETS - 100.00% $106,794,016 ============ /1/ Non-income earning securities. See notes to financial statements. 42 2003 iShares Semi-Annual Report to Shareholders Schedule of Investments (Unaudited) iSHARES MSCI TAIWAN INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS - 99.99% Taiwan Semiconductor Manufacturing Co. Ltd./1/ 15,180,080 $18,347,147 United Microelectronics Corp./1/ 15,870,047 8,996,832 Nan Ya Plastic Corp. 6,555,597 6,489,569 Formosa Plastic Corp. 4,485,282 5,640,484 Hon Hai Precision Industry Co. Ltd. 1,725,430 5,561,098 Cathay Financial Holdings Co. Ltd. 4,141,055 4,433,014 China Steel Corp. 6,555,043 4,074,502 Chinatrust Financial Holding Co. Ltd./1/ 4,830,657 3,878,427 Mega Financial Holdings Co. Ltd./1/ 7,935,747 3,859,399 China Development Financial Holding Co./1/ 10,005,939 3,772,023 Fubon Financial Holding Co. Ltd. 4,140,000 3,252,432 Formosa Chemicals & Fibre Corp. 3,105,041 3,091,638 Asustek Computer Inc. 1,725,250 2,929,201 Compal Electronics Inc. 2,760,400 2,661,105 Quanta Computer Inc. 1,380,062 2,382,841 Acer Inc. 2,415,117 2,140,593 Lite-On Technology Corp. 1,725,717 2,021,200 Hua Nan Financial Holdings Co. Ltd. 3,105,186 1,894,387 AU Optronics Corp./1/ 2,760,000 1,779,108 First Financial Holding Co. Ltd./1/ 2,760,050 1,723,542 Advanced Semiconductor Engineering Inc./1/ 3,105,357 1,671,084 Winbond Electronics Corp./1/ 4,140,280 1,668,027 Pou Chen Corp./1/ 1,725,927 1,589,343 Realtek Semiconductor Corp. 690,250 1,529,475 Benq Corp. 1,380,560 1,501,732 Taiwan Cellular Corp./1/ 2,070,000 1,471,338 CMC Magnetics Corp. 2,760,400 1,437,791 Taishin Financial Holdings Co. Ltd./1/ 2,760,441 1,358,375 SinoPac Holdings Co./1/ 3,450,393 1,320,582 Chang Hwa Commercial Bank Ltd. 2,760,958 1,239,452 Yulon Motor Co. Ltd. 1,035,331 1,224,521 Macronix International Co. Ltd./1/ 4,140,200 1,185,467 China Motor Co. Ltd. 690,274 1,171,976 Security Shares Value - -------------------------------------------------------------------------------- Ritek Corp. 2,415,625 $ 1,140,036 Far Eastern Textile Ltd. 3,105,108 1,139,284 Walsin Lihwa Corp./1/ 3,795,779 1,119,618 Delta Electronics Inc. 1,035,957 1,085,146 Uni-President Enterprises Corp. 3,450,637 1,077,393 Ambit Microsystems Corp. 345,940 1,065,197 International Bank of Taipei 2,415,471 1,042,649 Via Technologies Inc. 1,035,764 1,028,313 Siliconware Precision Industries Co. Ltd./1/ 2,070,525 1,001,002 Inventec Co. Ltd. 1,725,000 992,806 Synnex Technology International Corp. 690,675 965,951 Cheng Shin Rubber Industry Co. Ltd. 690,782 868,696 Tatung Co. Ltd./1/ 4,485,120 864,757 Taiwan Glass Industrial Corp. 1,035,189 670,266 Yageo Corp./1/ 2,415,100 660,243 Teco Electric & Machinery Co. Ltd./1/ 2,070,092 628,474 Accton Technology Corp./1/ 690,450 596,072 Mosel Vitelic Inc./1/ 3,795,080 556,976 Yang Ming Marine Transport Corp./1/ 1,035,000 545,050 Micro-Star International Co. Ltd. 345,700 542,177 President Chain Store Corp. 345,775 522,394 Kinpo Electronics Inc. 1,035,032 488,476 Taiwan Cement Corp./1/ 1,380,537 486,664 Asia Cement Corp. 1,380,740 484,749 Evergreen Marine Corp. Ltd. 690,980 469,270 Premier Image Technology Corp. 345,400 469,148 Gigabyte Technology Co. Ltd. 345,587 467,413 Formosa Taffeta Co. Ltd. 1,035,284 431,989 Giant Manufacturing Co. Ltd. 345,914 412,111 China Airlines Ltd. 1,035,898 405,416 Systex Corp./1/ 690,520 357,679 Sampo Corp. 1,035,148 357,461 Pacific Electric Wire & Cable Co. Ltd./1/ 3,795,986 355,020 Shihlin Electric & Engineering Corp. 690,080 337,593 Compeq Manufacturing Co. Ltd./1/ 690,200 333,679 Arima Computer Corp./1/ 1,035,600 318,875 Cathay Real Estate Development Co. Ltd./1/ 1,380,000 315,712 Schedule of Investiments 43 Schedule of Investments (Unaudited) (Continued) iSHARES MSCI TAIWAN INDEX FUND February 28, 2003 Security Shares Value - -------------------------------------------------------------------------------- Nien Hsing Textile Co. Ltd. 345,800 $ 312,464 Taiwan Styrene Monomer Corp./1/ 345,000 296,849 Taiwan Secom Co. Ltd. 345,045 271,071 D-Link Corp. 345,585 248,622 Far Eastern Department Stores Co. Ltd. 1,035,160 244,268 Picvue Electronics Ltd./1/ 690,040 239,280 Tung Ho Steel Enterprise Corp./1/ 690,200 231,391 Phoenixtec Power Co. Ltd. 345,630 221,800 Continental Engineering Corp. 690,247 205,584 Eternal Chemical Co. Ltd. 345,100 198,619 BES Engineering Corp./1/ 1,380,160 190,641 Prodisc Technology Inc./1/ 345,572 182,979 Taiwan Tea Corp./1/ 1,380,000 166,791 WU'S Printed Circuit Co. Ltd./1/ 345,000 148,921 Microelectronics Technology Inc./1/ 345,420 138,168 Aurora Corp./1/ 345,610 137,250 China Synthetic Rubber Corp./1/ 345,230 108,785 TOTAL COMMON STOCKS (Cost: $181,446,797) 135,444,943 Security Shares Value - -------------------------------------------------------------------------------- SHORT TERM INSTRUMENTS - 0.12% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares 161,922 $ 161,922 TOTAL SHORT TERM INSTRUMENTS (Cost: $161,922) 161,922 TOTAL INVESTMENTS IN SECURITIES - 100.11% (Cost $181,608,719) 135,606,865 Other Assets, Less Liabilities - (0.11%) (149,894) ------------ NET ASSETS - 100.00% $135,456,971 ============ /1/ Non-income earning securities. See notes to financial statements. 44 2003 iShares Semi-Annual Report to Shareholders Statements of Assets and Liabilities (Unaudited) iSHARES, INC. February 28, 2003
iShares MSCI --------------------------------------------------------------------------------------- Australia Brazil Canada Hong Kong Malaysia Mexico Index Fund Index Fund Index Fund Index Fund Index Fund Index Fund - --------------------------------------------------------------------------------------------------------------------- ASSETS Investments at cost $78,799,494 $ 65,588,251 $442,393,600 $152,893,707 $ 52,735,508 $ 57,040,177 ----------- ------------- ------------ ------------ ------------ ------------ Foreign currency, at cost $ 43,356 $ -- $ 792,113 $ 22,332 $ -- $ 7,544 ----------- ------------- ------------ ------------ ------------ ------------ Investments in securities, at value (including securities on loan/1/) (Note 1) $77,918,189 $ 48,988,692 $468,101,428 $125,023,337 $ 73,493,986 $ 38,420,680 Foreign currency, at value 42,472 -- 799,634 22,332 -- 7,492 Receivables: Investment securities sold -- 975,794 2,189,132 1,989,800 548,432 1,611,161 Dividends and interest 297,309 587,906 829,072 92,435 100,039 14 iShares sold -- -- 19,139 -- -- -- ----------- ------------- ------------ ------------ ------------ ------------ Total Assets 78,257,970 50,552,392 471,938,405 127,127,904 74,142,457 40,039,347 ----------- ------------- ------------ ------------ ------------ ------------ LIABILITIES Payables: Investment securities purchased -- 918,279 2,466,138 1,904,102 626,187 1,606,403 Collateral for securities on loan (Note 5) 3,045,900 -- -- 7,650,000 -- -- Advisory fees (Note 2) 72,902 62,648 394,440 115,658 70,783 44,023 Distribution fees 30,903 21,087 166,928 48,996 30,393 18,612 ----------- ------------- ------------ ------------ ------------ ------------ Total Liabilities 3,149,705 1,002,014 3,027,506 9,718,756 727,363 1,669,038 ----------- ------------- ------------ ------------ ------------ ------------ NET ASSETS $75,108,265 $ 49,550,378 $468,910,899 $117,409,148 $ 73,415,094 $ 38,370,309 =========== ============= ============ ============ ============ ============ Net assets consist of: Paid-in capital $85,316,687 $ 170,682,238 $441,298,675 $161,469,280 $ 80,483,402 $ 72,908,327 Undistributed (distributions in excess of) net investment income 278,785 682,449 935,358 (42,464) 204,537 27,351 Undistributed net realized gain (accumulated net realized loss) (9,614,118) (105,143,144) 953,849 (16,147,296) (28,031,323) (15,945,820) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (873,089) (16,671,165) 25,723,017 (27,870,372) 20,758,478 (18,619,549) ----------- ------------- ------------ ------------ ------------ ----------- NET ASSETS $75,108,265 $ 49,550,378 $468,910,899 $117,409,148 $ 73,415,094 $ 38,370,309 =========== ============= ============ ============ ============ ============ iShares outstanding 8,200,000 6,650,000 47,000,000 16,050,000 14,175,000 3,300,000 =========== ============= ============ ============ ============ ============ Net asset value per iShare $ 9.16 $ 7.45 $ 9.98 $ 7.32 $ 5.18 $ 11.63 =========== ============= ============ ============ ============ ============
/1/ Securities on loan with market values of $2,886,162, $--, $--, $7,137,957, $-- and $--, respectively. See Note 5. See notes to financial statements. Financial Statements 45 Statements of Assets and Liabilities (Unaudited) (Continued) iSHARES, INC. February 28, 2003
iShares MSCI ---------------------------------------------------------------------------- Pacific ex-Japan Singapore South Africa South Korea Taiwan Index Fund Index Fund Index Fund Index Fund Index Fund - ---------------------------------------------------------------------------------------------------------- ASSETS Investments at cost $166,309,575 $ 97,409,408 $68,460,572 $ 99,601,082 $181,608,719 ------------ ------------ ----------- ------------ ------------ Foreign currency, at cost $ 120,807 $ 100,469 $ 102,107 $ -- $ 85,334 ------------ ------------ ----------- ------------ ------------ Investments in securities, at value (including securities on loan/1/) (Note 1) $156,881,799 $ 72,639,806 $67,613,486 $105,079,505 $135,606,865 Foreign currency, at value 123,358 100,921 103,410 -- 85,439 Receivables: Investment securities sold -- 328,853 464,387 -- -- Dividends and interest 427,442 94 75,009 1,898,070 36 ------------ ------------ ----------- ------------ ------------ Total Assets 157,432,599 73,069,674 68,256,292 106,977,575 135,692,340 ------------ ------------ ----------- ------------ ------------ LIABILITIES Payables: Investment securities purchased -- 341,321 534,568 -- -- Collateral for securities on loan (Note 5) 1,324,110 1,153,707 -- -- -- Advisory fees (Note 2) 128,634 65,505 27,527 137,383 176,082 Distribution fees -- 29,898 9,300 46,176 59,287 Custodian fees -- 13,912 -- -- -- Accrued expenses -- 56,739 -- -- -- ------------ ------------ ----------- ------------ ------------ Total Liabilities 1,452,744 1,661,082 571,395 183,559 235,369 ------------ ------------ ----------- ------------ ------------ NET ASSETS $155,979,855 $ 71,408,592 $67,684,897 $106,794,016 $135,456,971 ============ ============ =========== ============ ============ Net assets consist of: Paid-in capital $166,489,054 $110,689,295 $68,396,211 $105,348,151 $210,899,092 Undistributed (distributions in excess of) net investment income (accumulated net investment loss) 163,194 (504,984) 135,306 1,357,156 (671,847) Accumulated net realized loss (1,257,845) (14,006,314) (4,017) (5,372,864) (28,768,524) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (9,414,548) (24,769,405) (842,603) 5,461,573 (46,001,750) ------------ ------------ ----------- ------------ ------------ NET ASSETS $155,979,855 $ 71,408,592 $67,684,897 $106,794,016 $135,456,971 ============ ============ =========== ============ ============ iShares outstanding 3,100,000 17,100,000 1,750,000 6,300,000 17,250,000 ============ ============ =========== ============ ============ Net asset value per iShare $ 50.32 $ 4.18 $ 38.68 $ 16.95 $ 7.85 ============ ============ =========== ============ ============
/1/ Securities on loan with market values of $1,246,337, $1,067,473, $--, $-- and $--, respectively. See Note 5. See notes to ninancial statements. 46 2003 iShares Semi-Annual Report to Shareholders Statements of Operations (Unaudited) iSHARES, INC. For the six months ended February 28, 2003
iShares MSCI ---------------------------------------------------------------------------------- Australia Brazil Canada Hong Kong Malaysia Mexico Index Fund Index Fund Index Fund Index Fund Index Fund Index Fund - ---------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $1,420,240 $ 971,521 $ 2,930,933 $ 1,152,924 $ 1,031,578 $ 414,632 Interest 486 1,140 1,402 789 1,151 18,849 Securities lending income 1,428 -- 90,255 30 -- -- ---------- ------------ ----------- ----------- ----------- ------------ Total investment income 1,422,154 972,661 3,022,590 1,153,743 1,032,729 433,481 ---------- ------------ ----------- ----------- ----------- ------------ EXPENSES (NOTE 2) Advisory fees 222,448 188,522 877,443 306,753 231,559 160,132 Distribution fees 94,258 63,690 371,798 129,980 98,118 67,853 ---------- ------------ ----------- ----------- ----------- ------------ Total expenses 316,706 252,212 1,249,241 436,733 329,677 227,985 ---------- ------------ ----------- ----------- ----------- ------------ Net investment income 1,105,448 720,449 1,773,349 717,010 703,052 205,496 ---------- ------------ ----------- ----------- ----------- ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (679,343) (37,102,693) (1,914,416) (3,779,888) (2,133,080) (3,625,163) In-kind redemptions -- -- 4,679,393 (14,496) -- (8,199,592) Foreign currency transactions 12,397 (252,419) 45,441 (178) (3,552) (11,010) ---------- ------------ ----------- ----------- ----------- ------------ Net realized gain (loss) (666,946) (37,355,112) 2,810,418 (3,794,562) (2,136,632) (11,835,765) ---------- ------------ ----------- ----------- ----------- ------------ Net change in unrealized appreciation (depreciation) on: Investments 115,334 21,142,522 39,352,839 (5,997,689) (5,594,404) 4,671,436 Translation of assets and liabilities in foreign currencies 4,366 56,076 15,076 (2) 58 267 ---------- ------------ ----------- ----------- ----------- ------------ Net change in unrealized appreciation (depreciation) 119,700 21,198,598 39,367,915 (5,997,691) (5,594,346) 4,671,703 ---------- ------------ ----------- ----------- ----------- ------------ Net realized and unrealized gain (loss) (547,246) (16,156,514) 42,178,333 (9,792,253) (7,730,978) (7,164,062) ---------- ------------ ----------- ----------- ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 558,202 $(15,436,065) $43,951,682 $(9,075,243) $(7,027,926) $ (6,958,566) ========== ============ =========== =========== =========== ============
/1/ Net of foreign withholding tax of $12,974, $137,685, $480,988, $--, $300,783 and $--, respectively. See notes to financial statements. Financial Statements 47 Statements of Operations (Unaudited) (Continued) iSHARES, INC. For the six months ended February 28, 2003
iShares MSCI ----------------------------------------------------------------------------- Pacific ex-Japan Singapore South Africa South Korea Taiwan Index Fund Index Fund Index Fund/2/ Index Fund Index Fund - ----------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends /1/ $ 2,004,081 $ 532,326 $ 172,084 $ 1,914,820 $ 68,969 Interest 871 406 49 1,031 301 Securities lending income 1,178 -- -- -- -- ----------- ------------ --------- ------------ ------------ Total investment income 2,006,130 532,732 172,133 1,915,851 69,270 ----------- ------------ --------- ------------ ------------ EXPENSES (NOTE 2) Advisory fees 333,826 141,299 27,527 411,144 508,617 Administration fee -- 19,498 -- -- -- Distribution fees -- 97,488 9,300 138,900 171,830 Stock dividend tax expense -- -- -- -- 51,226 Custodian fees and expenses -- 40,744 -- -- -- Directors' fees -- 3,908 -- -- -- Professional fees -- 15,337 -- -- -- Federal and state registration fees -- 987 -- -- -- Insurance -- 2,087 -- -- -- Printing -- 4,222 -- -- -- AMEX listing fee -- 348 -- -- -- Miscellaneous expenses -- 1,641 -- -- -- ----------- ------------ --------- ------------ ------------ Total expenses 333,826 327,559 36,827 550,044 731,673 ----------- ------------ --------- ------------ ------------ Net investment income (loss) 1,672,304 205,173 135,306 1,365,807 (662,403) ----------- ------------ --------- ------------ ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (752,784) (3,588,821) (6,550) (1,995,239) (4,120,853) In-kind redemptions -- 199,232 -- -- -- Foreign currency transactions 19,821 (2,880) 2,533 122,493 (6,588) ----------- ------------ --------- ------------ ------------ Net realized loss (732,963) (3,392,469) (4,017) (1,872,746) (4,127,441) ----------- ------------ --------- ------------ ------------ Net change in unrealized appreciation (depreciation) on: Investments (4,337,617) (9,903,533) (847,086) (22,299,603) (11,447,610) Translation of assets and liabilities in foreign currencies 9,736 (457) 4,483 (16,864) 7,614 ----------- ------------ --------- ------------ ------------ Net change in unrealized appreciation (depreciation) (4,327,881) (9,903,990) (842,603) (22,316,467) (11,439,996) ----------- ------------ --------- ------------ ------------ Net realized and unrealized loss (5,060,844) (13,296,459) (846,620) (24,189,213) (15,567,437) ----------- ------------ --------- ------------ ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(3,388,540) $(13,091,286) $(711,314) $(22,823,406) $(16,229,840) =========== ============ ========= ============ ============
/1/ Net of foreign withholding tax of $63,472, $140,182, $--, $378,378 and $15,245, respectively. /2/ For the period from February 3, 2003 (commencement of operations) to February 28, 2003. See notes to financial statements. 48 2003 iShares Semi-Annual Report to Shareholders Statements of Changes in Net Assets iSHARES, INC.
iShares MSCI iShares MSCI Australia Brazil Index Fund Index Fund ----------------------------------- ----------------------------------- For the six For the six months ended For the months ended For the February 28, 2003 year ended February 28, 2003 year ended (Unaudited) August 31, 2002 (Unaudited) August 31, 2002 - ---------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 1,105,448 $ 1,661,926 $ 720,449 $ 3,197,076 Net realized gain (loss) (666,946) (28,752) (37,355,112) (67,653,062) Net change in unrealized appreciation (depreciation) 119,700 (1,962,887) 21,198,598 (30,760,002) ----------- ----------- ------------ ------------ Net increase (decrease) in net assets resulting from operations 558,202 (329,713) (15,436,065) (95,215,988) ----------- ----------- ------------ ------------ Undistributed net investment income included in the price of capital shares issued or redeemed -- 3,111 -- 38,281 ----------- ----------- ------------ ------------ DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (2,180,684) (256,001) (733,550) -- ----------- ----------- ------------ ------------ Total distributions to iShareholders (2,180,684) (256,001) (733,550) -- ----------- ----------- ------------ ------------ iSHARES TRANSACTIONS: iShares sold -- 23,805,539 15,866,427 235,842,533 iShares redeemed -- (3,803,959) (33,934,224) (70,880,598) ----------- ----------- ------------ ------------ Net increase (decrease) in net assets from iShares transactions -- 20,001,580 (18,067,797) 164,961,935 ----------- ----------- ------------ ------------ INCREASE (DECREASE) IN NET ASSETS (1,622,482) 19,418,977 (34,237,412) 69,784,228 NET ASSETS: Beginning of period 76,730,747 57,311,770 83,787,790 14,003,562 ----------- ----------- ------------ ------------ End of period $75,108,265 $76,730,747 $ 49,550,378 $ 83,787,790 =========== =========== ============ ============ Undistributed net investment income included in net assets at end of period $ 278,785 $ 1,354,021 $ 682,449 $ 695,550 =========== =========== ============ ============ iSHARES ISSUED AND REDEEMED: iShares sold -- 2,400,000 2,100,000 17,900,000 iShares redeemed -- (400,030) (5,550,000) (9,050,000) ----------- ----------- ------------ ------------ Net increase (decrease) in iShares outstanding -- 1,999,970 (3,450,000) 8,850,000 =========== =========== ============ ============ iShares MSCI Canada Index Fund ----------------------------------- For the six months ended For the February 28, 2003 year ended (Unaudited) August 31, 2002 - -------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 1,773,349 $ 256,056 Net realized gain (loss) 2,810,418 140,024 Net change in unrealized appreciation (depreciation) 39,367,915 (8,820,159) ------------ ----------- Net increase (decrease) in net assets resulting from operations 43,951,682 (8,424,079) ------------ ----------- Undistributed net investment income included in the price of capital shares issued or redeemed -- (670) ------------ ----------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (1,067,330) (24,000) ------------ ----------- Total distributions to iShareholders (1,067,330) (24,000) ------------ ----------- iSHARES TRANSACTIONS: iShares sold 400,545,999 49,188,050 iShares redeemed (40,939,875) (3,207,637) ------------ ----------- Net increase (decrease) in net assets from iShares transactions 359,606,124 45,980,413 ------------ ----------- INCREASE (DECREASE) IN NET ASSETS 402,490,476 37,531,664 NET ASSETS: Beginning of period 66,420,423 28,888,759 ------------ ----------- End of period $468,910,899 $66,420,423 ============ =========== Undistributed net investment income included in net assets at end of period $ 935,358 $ 229,339 ============ =========== iSHARES ISSUED AND REDEEMED: iShares sold 44,400,000 4,600,000 iShares redeemed (4,400,000) (300,030) ------------ ----------- Net increase (decrease) in iShares outstanding 40,000,000 4,299,970 ============ ===========
See notes to financial statements. Financial Statements 49 Statements of Changes in Net Assets (Continued) iSHARES, INC.
iShares MSCI iShares MSCI Hong Kong Malaysia Index Fund Index Fund ----------------------------------- ----------------------------------- For the six For the six months ended For the months ended For the February 28, 2003 year ended February 28, 2003 year ended (Unaudited) August 31, 2002 (Unaudited) August 31, 2002 - ------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 717,010 $ 1,955,056 $ 703,052 $ 1,260,921 Net realized gain (loss) (3,794,562) 860,719 (2,136,632) (2,073,441) Net change in unrealized appreciation (depreciation) (5,997,691) (18,574,344) (5,594,346) 6,091,302 ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations (9,075,243) (15,758,569) (7,027,926) 5,278,782 ------------ ------------ ------------ ------------ Undistributed net investment income included in the price of capital shares issued or redeemed -- 9,753 -- (49,579) ------------ ------------ ------------ ------------ DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (2,327,202) (387,060) (1,342,811) (411,751) ------------ ------------ ------------ ------------ Total distributions to iShareholders (2,327,202) (387,060) (1,342,811) (411,751) ------------ ------------ ------------ ------------ iSHARES TRANSACTIONS: iShares sold 39,291,441 77,492,553 4,803,785 27,772,630 iShares redeemed (9,981,970) (14,800,647) (16,279,811) (20,205,691) ------------ ------------ ------------ ------------ Net increase (decrease) in net assets from iShares transactions 29,309,471 62,691,906 (11,476,026) 7,566,939 ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN NET ASSETS 17,907,026 46,556,030 (19,846,763) 12,384,391 NET ASSETS: Beginning of period 99,502,122 52,946,092 93,261,857 80,877,466 ------------ ------------ ------------ ------------ End of period $117,409,148 $ 99,502,122 $ 73,415,094 $ 93,261,857 ============ ============ ============ ============ Undistributed (distributions in excess of) net investment income included in net assets at end of period $ (42,464) $ 1,567,728 $ 204,537 $ 844,296 ============ ============ ============ ============ iSHARES ISSUED AND REDEEMED: iShares sold 4,950,000 8,100,000 900,000 4,575,000 iShares redeemed (1,350,000) (1,576,000) (3,150,000) (3,975,030) ------------ ------------ ------------ ------------ Net increase (decrease) in iShares outstanding 3,600,000 6,524,000 (2,250,000) 599,970 ============ ============ ============ ============ iShares MSCI Mexico Index Fund ----------------------------------- For the six months ended For the February 28, 2003 year ended (Unaudited) August 31, 2002 - ----------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 205,496 $ 1,946,658 Net realized gain (loss) (11,835,765) (3,016,406) Net change in unrealized appreciation (depreciation) 4,671,703 (21,823,385) ------------ ------------- Net increase (decrease) in net assets resulting from operations (6,958,566) (22,893,133) ------------ ------------- Undistributed net investment income included in the price of capital shares issued or redeemed -- (39,128) ------------ ------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (1,985,056) (161,002) ------------ ------------- Total distributions to iShareholders (1,985,056) (161,002) ------------ ------------- iSHARES TRANSACTIONS: iShares sold 1,305,630 201,695,400 iShares redeemed (24,985,523) (153,663,820) ------------ ------------- Net increase (decrease) in net assets from iShares transactions (23,679,893) 48,031,580 ------------ ------------- INCREASE (DECREASE) IN NET ASSETS (32,623,515) 24,938,317 NET ASSETS: Beginning of period 70,993,824 46,055,507 ------------ ------------- End of period $ 38,370,309 $ 70,993,824 ============ ============= Undistributed (distributions in excess of) net investment income included in net assets at end of period $ 27,351 $ 1,806,911 ============ ============= iSHARES ISSUED AND REDEEMED: iShares sold 100,000 12,200,000 iShares redeemed (2,000,000) (10,000,030) ------------ ------------- Net increase (decrease) in iShares outstanding (1,900,000) 2,199,970 ============ =============
See notes to financial statements. 50 2003 iShares Semi-Annual Report to Shareholders Statements of Changes in Net Assets (Continued) iSHARES, INC.
iShares MSCI iShares MSCI iShares MSCI Pacific ex-Japan Singapore South Africa Index Fund Index Fund Index Fund -------------------------------------- ---------------------------------- ------------------- For the six For the period For the six For the period months ended October 25, 2001/1/ months ended For the February 3, 2003/1/ February 28, 2003 to February 28, 2003 year ended to February 28, (Unaudited) August 31, 2002 (Unaudited) August 31, 2002 2003 (Unaudited) - ---------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 1,672,304 $ 1,360,533 $ 205,173 $ 1,198,517 $ 135,306 Net realized gain (loss) (732,963) 182,427 (3,392,469) (2,787,081) (4,017) Net change in unrealized appreciation (depreciation) (4,327,881) (5,086,667) (9,903,990) (3,949,708) (842,603) ------------ ------------ ------------ ------------ ----------- Net decrease in net assets resulting from operations (3,388,540) (3,543,707) (13,091,286) (5,538,272) (711,314) ------------ ------------ ------------ ------------ ----------- Undistributed net investment income included in the price of capital shares issued or redeemed -- 2,522 -- 17,460 -- ------------ ------------ ------------ ------------ ----------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (2,734,116) (135,000) (1,331,268) (596,000) -- ------------ ------------ ------------ ------------ ----------- Total distributions to iShareholders (2,734,116) (135,000) (1,331,268) (596,000) -- ------------ ------------ ------------ ------------ ----------- iSHARES TRANSACTIONS: iShares sold 57,073,698 114,332,732 -- 31,258,149 68,396,211 iShares redeemed -- (5,627,734) (2,295,230) (10,718,594) -- ------------ ------------ ------------ ------------ ----------- Net increase (decrease) in net assets from iShares transactions 57,073,698 108,704,998 (2,295,230) 20,539,555 68,396,211 ------------ ------------ ------------ ------------ ----------- INCREASE (DECREASE) IN NET ASSETS 50,951,042 105,028,813 (16,717,784) 14,422,743 67,684,897 NET ASSETS: Beginning of period 105,028,813 -- 88,126,376 73,703,633 -- ------------ ------------ ------------ ------------ ----------- End of period $155,979,855 $105,028,813 $ 71,408,592 $ 88,126,376 $67,684,897 ============ ============ ============ ============ =========== Undistributed (distributions in excess of) net investment income included in net assets at end of period $ 163,194 $ 1,225,006 $ (504,984) $ 621,111 $ 135,306 ============ ============ ============ ============ =========== ISHARES ISSUED AND REDEEMED: iShares sold 1,100,000 2,100,000 -- 5,700,000 1,750,000 iShares redeemed -- (100,000) (500,000) (1,900,030) -- ------------ ------------ ------------ ------------ ----------- Net increase (decrease) in iShares outstanding 1,100,000 2,000,000 (500,000) 3,799,970 1,750,000 ============ ============ ============ ============ ===========
/1/ Commencement of operations. See notes to financial statements. Financial Statements 51 Statements of Changes in Net Assets (Continued) iSHARES, INC.
iShares MSCI iShares MSCI South Korea Taiwan Index Fund Index Fund ----------------------------------- ----------------------------------- For the six For the six months ended For the months ended For the February 28, 2003 year ended February 28, 2003 year ended (Unaudited) August 31, 2002 (Unaudited) August 31, 2002 - ------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss) $ 1,365,807 $ (7,986) $ (662,403) $ (418,999) Net realized gain (loss) (1,872,746) 165,543 (4,127,441) (8,161,934) Net change in unrealized appreciation (depreciation) (22,316,467) 30,105,280 (11,439,996) 2,228,562 ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations (22,823,406) 30,262,837 (16,229,840) (6,352,371) ------------ ------------ ------------ ------------ Undistributed net investment income included in the price of capital shares issued or redeemed -- -- -- 4,467 ------------ ------------ ------------ ------------ iSHARES TRANSACTIONS: iShares sold 53,666,878 38,694,565 9,643,374 37,605,113 iShares redeemed (20,385,480) (10,388,731) -- -- ------------ ------------ ------------ ------------ Net increase in net assets from iShares transactions 33,281,398 28,305,834 9,643,374 37,605,113 ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN NET ASSETS 10,457,992 58,568,671 (6,586,466) 31,257,209 NET ASSETS: Beginning of period 96,336,024 37,767,353 142,043,437 110,786,228 ------------ ------------ ------------ ------------ End of period $106,794,016 $ 96,336,024 $135,456,971 $142,043,437 ============ ============ ============ ============ Undistributed (distributions in excess of) net investment income included in net assets at end of period $ 1,357,156 $ (8,651) $ (671,847) $ (9,444) ============ ============ ============ ============ iSHARES ISSUED AND REDEEMED: iShares sold 2,750,000 2,150,000 1,150,000 3,800,000 iShares redeemed (1,000,000) (450,000) -- -- ------------ ------------ ------------ ------------ Net increase in iShares outstanding 1,750,000 1,700,000 1,150,000 3,800,000 ============ ============ ============ ============
See notes to financial statements. 52 2003 iShares Semi-Annual Report to Shareholders Financial Highlights iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Australia Index Fund --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 9.36 $ 9.24 $ 9.93 $ 9.99 $ 7.75 $ 10.35 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income/1/ 0.13 0.23 0.24 0.23 0.20 0.23 Net realized and unrealized gain (loss) (0.06) (0.07) (0.71) (0.04) 2.29 (2.60) ------- ------- ------- ------- ------- ------- Total from investment operations 0.07 0.16 (0.47) 0.19 2.49 (2.37) ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income (0.27) (0.04) (0.20) (0.23) (0.19) (0.23) Return of capital -- -- (0.02) (0.02) (0.06) -- ------- ------- ------- ------- ------- ------- Total distributions (0.27) (0.04) (0.22) (0.25) (0.25) (0.23) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 9.16 $ 9.36 $ 9.24 $ 9.93 $ 9.99 $ 7.75 ======= ======= ======= ======= ======= ======= Total return 0.69%/3/ 1.74% (4.77)% 1.84% 32.09% (23.11)% ======= ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $75,108 $76,731 $57,312 $61,574 $53,957 $34,099 Ratio of expenses to average net assets/4/ 0.84% 0.84% 0.84% 0.95% 1.00% 1.05% Ratio of net investment income to average net assets/4/ 2.93% 2.47% 2.54% 2.22% 2.03% 2.38% Portfolio turnover rate/2/ 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/ Not annualized. /4/ Annualized for periods of less than one year. See notes to financial statements. Financial Highlights 53 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Brazil Index Fund ---------------------------------------------------------------- Six months Period from ended Jul. 10, 2000/7/ Feb. 28, 2003 Year ended Year ended to (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 - -------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 8.30 $ 11.20 $ 19.25 $ 20.22 ------- ------- ------- ------- Income from investment operations: Net investment income/3/ 0.10 0.38 0.68 0.02 Net realized and unrealized loss (0.84) (3.28) (8.09) (0.63) ------- ------- ------- ------- Total from investment operations (0.74) (2.90) (7.41) (0.61) ------- ------- ------- ------- Less distributions from: Net investment income (0.11) -- (0.56) (0.02) Net realized gain -- -- -- (0.34) Return of capital -- -- (0.08) -- ------- ------- ------- ------- Total distributions (0.11) -- (0.64) (0.36) ------- ------- ------- ------- Net asset value, end of period $ 7.45 $ 8.30 $ 11.20 $ 19.25 ======= ======= ======= ======= Total return (9.03)%/5/ (25.89)% (38.52)% (2.97)%/5/ ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $49,550 $83,788 $14,004 $18,283 Ratio of expenses to average net assets/6/ 0.99% 0.99% 0.99% 0.99%/1/ Ratio of net investment income to average net assets/6/ 2.83% 3.50% 4.44% 0.77%/2/ Portfolio turnover rate/4/ 33% 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. 54 2003 iShares Semi-Annual Report to Shareholders Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Canada Index Fund --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 9.49 $ 10.70 $ 16.94 $ 13.22 $ 9.90 $ 13.43 -------- ------- -------- -------- ------ ------- Income from investment operations: Net investment income/3/ 0.06 0.07 0.05 0.70 0.07 0.07 Net realized and unrealized gain (loss) 0.46 (1.27) (5.92) 8.08 3.87 (2.89) -------- ------- -------- -------- ------ ------- Total from investment operations 0.52 (1.20) (5.87) 8.78 3.94 (2.82) -------- ------- -------- -------- ------ ------- Less distributions from: Net investment income (0.03) (0.01) (0.02) (0.55) (0.09) (0.13) Net realized gain - - (0.31) (4.39) (0.53) (0.58) Return of capital - - (0.04) (0.12) - - -------- ------- -------- -------- ------ ------- Total distributions (0.03) (0.01) (0.37) (5.06) (0.62) (0.71) -------- ------- -------- -------- ------ ------- Net asset value, end of period $ 9.98 $ 9.49 $ 10.70 $ 16.94 $13.22 $ 9.90 ======== ======= ======== ======== ====== ======= Total return 5.48%/5/ (11.23)% (34.95)% 67.21% 39.71% (21.69)% ======== ======= ======== ======== ====== ======= Ratios/Supplemental data: Net assets, end of period (000s) $468,911 $66,420 $ 28,889 $ 22,028 $9,253 $ 6,932 Ratio of expenses to average net assets/6/ 0.84% 0.84% 0.84% 1.17%/1/ 1.23% 1.14% Ratio of net investment income to average net assets/6/ 1.19% 0.70% 0.44% 4.07%/2/ 0.53% 0.46% Portfolio turnover rate/4/ 2% 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 capital share transactions in Creation Units. /5/ Not annualized. /6/ Annualized for periods of less than one year. See notes to financial statements. Financial Highlights 55 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Hong Kong Index Fund --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 7.99 $ 8.93 $ 13.24 $ 11.83 $ 6.41 $ 14.73 -------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income/1/ 0.05 0.23 0.23 0.33 0.29 0.35 Net realized and unrealized gain (loss) (0.58) (1.11) (4.30) 1.42 5.49 (8.27) -------- ------- ------- ------- ------- ------- Total from investment operations (0.53) (0.88) (4.07) 1.75 5.78 (7.92) -------- ------- ------- ------- ------- ------- Less distributions from: Net investment income (0.14) (0.06) (0.23) (0.32) (0.36) (0.28) Return of capital -- -- (0.01) (0.02) -- (0.12) -------- ------- ------- ------- ------- ------- Total distributions (0.14) (0.06) (0.24) (0.34) (0.36) (0.40) -------- ------- ------- ------- ------- ------- Net asset value, end of period $ 7.32 $ 7.99 $ 8.93 $ 13.24 $ 11.83 $ 6.41 ======== ======= ======= ======= ======= ======= Total return (6.66)%/3/ (9.94)% (30.88)% 14.73% 90.51% (54.22)% ======== ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $117,409 $99,502 $52,946 $79,479 $77,200 $49,973 Ratio of expenses to average net assets/4/ 0.84% 0.84% 0.84% 0.94% 1.01% 1.09% Ratio of net investment income to average net assets/4/ 1.38% 2.56% 2.11% 2.57% 2.84% 3.76% Portfolio turnover rate/2/ 5% 15% 43% 21% 43% 22%
/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. See notes to financial statements. 56 2003 iShares Semi-Annual Report to Shareholders Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Malaysia Index Fund --------------------------------------------------------------------------------------------- Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 5.68 $ 5.11 $ 5.96 $ 5.59 $ 2.11 $ 8.23 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income/1/ 0.05 0.08 0.06 0.05 0.01 0.06 Net realized and unrealized gain (loss) (0.46) 0.52 (0.85) 0.37 3.67 (6.10) ------- ------- ------- ------- ------- ------- Total from investment operations (0.41) 0.60 (0.79) 0.42 3.68 (6.04) ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income (0.09) (0.03) (0.06) (0.05) (0.01) (0.05) Return of capital -- -- (0.00)/3/ (0.00)/3/ (0.19) (0.03) ------- ------- ------- ------- ------- ------- Total distributions (0.09) (0.03) (0.06) (0.05) (0.20) (0.08) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 5.18 $ 5.68 $ 5.11 $ 5.96 $ 5.59 $ 2.11 ======= ======= ======= ======= ======= ======= Total return (7.13)%/4/ 11.82% (13.22)% 7.57% 185.81% (73.57)% ======= ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $73,415 $93,262 $80,877 $99,206 $95,251 $35,867 Ratio of expenses to average net assets/5/ 0.84% 0.84% 0.84% 0.96% 1.43% 1.09% Ratio of net investment income to average net assets/5/ 1.79% 1.53% 1.19% 0.81% 0.33% 1.40% Portfolio turnover rate/2/ 10% 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 Creation Units. /3/ Rounds to less than $0.01. /4/ Not annualized. /5/ Annualized for periods of less than one year. See notes to financial statements. Financial Highlights 57 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Mexico Index Fund ------------------------------------------------------------------------------------------------ Six months ended Feb. 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 13.65 $ 15.35 $ 16.72 $ 13.39 $ 8.11 $ 15.11 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income/3/ 0.05 0.32 0.17 0.06 0.06 0.09 Net realized and unrealized gain (loss) (1.55) (1.95) (1.36) 3.69 5.36 (6.71) ------- ------- ------- ------- ------- ------- Total from investment operations (1.50) (1.63) (1.19) 3.75 5.42 (6.62) ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income (0.52) (0.07) (0.15) -- (0.07) (0.09) Net realized gain -- -- (0.03) (0.42) (0.01) (0.29) Return of capital -- -- -- -- (0.06) -- ------- ------- ------- ------- ------- ------- Total distributions (0.52) (0.07) (0.18) (0.42) (0.14) (0.38) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 11.63 $ 13.65 $ 15.35 $ 16.72 $ 13.39 $ 8.11 ======= ======= ======= ======= ======= ======= Total return (11.38)%/5/ (10.67)% (7.02)% 28.20% 66.92% (44.18)% ======= ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $38,370 $70,994 $46,056 $40,127 $21,430 $ 7,296 Ratio of expenses to average net assets/6/ 0.84% 0.84% 0.84% 1.04%/1/ 1.26% 1.34% Ratio of net investment income to average net assets/6/ 0.76% 2.05% 1.12% 0.35%/2/ 0.52% 0.60% Portfolio turnover rate/4/ 9% 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. /5/ Not annualized. /6/ Annualized for periods of less than one year. See notes to financial statements. 58 2003 iShares Semi-Annual Report to Shareholders Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period) iShares MSCI Pacific ex-Japan Index Fund ---------------------------------------- Six months Period from ended Oct. 25, 2001/5/ Feb. 28, 2003 to (Unaudited) Aug. 31, 2002 - ------------------------------------------------------------------------------- Net asset value, beginning of period $ 52.51 $ 50.03 -------- -------- Income from investment operations: Net investment income/1/ 0.64 1.35 Net realized and unrealized gain (loss) (1.95) 1.40 -------- -------- Total from investment operations (1.31) 2.75 -------- -------- Less distributions from: Net investment income (0.88) (0.27) -------- -------- Total distributions (0.88) (0.27) -------- -------- Net asset value, end of period $ 50.32 $ 52.51 ======== ======== Total return/3/ (2.54)% 5.51% ======== ======== Ratios/Supplemental data: Net assets, end of period (000s) $155,980 $105,029 Ratio of expenses to average net assets/4/ 0.50% 0.50% Ratio of net investment income to average net assets/4/ 2.50% 2.87% Portfolio turnover rate/2/ 4% 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 59 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Singapore Index Fund ------------------------------------------------------------------------------------------------- Six months ended February 28, 2003 Year ended Year ended Year ended Year ended Year ended (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 5.01 $ 5.34 $ 7.58 $ 7.93 $ 3.30 $ 8.66 ------- ------- ------- ------- -------- ------- Income from investment operations: Net investment income/1/ 0.01 0.07 0.07 0.13 0.05 0.07 Net realized and unrealized gain (loss) (0.76) (0.36) (2.16) (0.21) 4.70 (5.37) ------- ------- ------- ------- -------- ------- Total from investment operations (0.75) (0.29) (2.09) (0.08) 4.75 (5.30) ------- ------- ------- ------- -------- ------- Less distributions from: Net investment income (0.08) (0.04) (0.07) (0.11) (0.11) (0.05) Net realized gain -- -- (0.06) (0.14) -- -- Return of capital -- -- (0.02) (0.02) (0.01) (0.01) ------- ------- ------- ------- -------- ------- Total distributions (0.08) (0.04) (0.15) (0.27) (0.12) (0.06) ------- ------- ------- ------- -------- ------- Net asset value, end of period $ 4.18 $ 5.01 $ 5.34 $ 7.58 $ 7.93 $ 3.30 ======= ======= ======= ======= ======== ======= Total return (15.08)%/3/ (5.42)% (27.89)% (1.29)% 144.52% (61.29)% ======= ======= ======= ======= ======== ======= Ratios/Supplemental data: Net assets, end of period (000s) $71,409 $88,126 $73,704 $88,719 $113,438 $47,248 Ratio of expenses to average net assets/4/ 0.84% 0.84% 0.84% 0.94% 0.97% 1.08% Ratio of net investment income to average net assets/4/ 0.53% 1.44% 1.15% 1.60% 0.76% 1.17% Portfolio turnover rate/2/ 6% 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. /3/ Not annualized. /4/ Annualized for periods of less than one year. See notes to financial statements. 60 2003 iShares Semi-Annual Report to Shareholders Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI South Africa Index Fund ------------------------------------ Period from Feb. 3, 2003/5/ to Feb. 28, 2003 (Unaudited) - --------------------------------------------------------------------------------------- Net asset value, beginning of period $ 38.72 ------- Income from investment operations: Net investment income/1/ 0.10 Net realized and unrealized loss (0.14) ------- Total from investment operations (0.04) ------- Net asset value, end of period $ 38.68 ======= Total return/2/ (0.11)% ======= Ratios/Supplemental data: Net assets, end of period (000s) $67,685 Ratio of expenses to average net assets/3/ 0.99% Ratio of net investment income to average net assets/3/ 3.64% Portfolio turnover rate/4/ 1%
/1/ Based on average shares outstanding throughout the period. /2/ Not annualized. /3/ Annualized for periods less than one year. /4/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /5/ Commencement of operations. See notes to financial statements. Financial Highlights 61 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI South Korea Index Fund -------------------------------------------------------------- Six months Period from ended May 9, 2000/8/ Feb. 28, 2003 Year ended Year ended to (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 - ------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 21.17 $ 13.25 $ 18.16 $ 20.36 -------- ------- ------- ------- Income from investment operations: Net investment income (loss)/3/ 0.23 (0.00)/5/ 0.09 (0.04) Net realized and unrealized gain (loss) (4.45) 7.92 (4.90) (2.16) -------- ------- ------- ------- Total from investment operations (4.22) 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 $ 16.95 $ 21.17 $ 13.25 $ 18.16 ======== ======= ======= ======= Total return (19.93)%/6/ 59.77% (26.49)% (10.81)%/6/ ======== ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s) $106,794 $96,336 $37,767 $13,622 Ratio of expenses to average net assets/7/ 0.99% 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% 0.99% Ratio of net investment income (loss) to average net assets/7/ 2.46% (0.01)% 0.64% (0.63)%/2/ Portfolio turnover rate/4/ 27% 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. 62 2003 iShares Semi-Annual Report to Shareholders Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iShares MSCI Taiwan Index Fund ---------------------------------------------------------------- Six months Period from ended Jun. 20, 2000/7/ Feb. 28, 2003 Year ended Year ended to (Unaudited) Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 - -------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 8.82 $ 9.01 $ 16.41 $ 19.59 -------- -------- -------- ------- Income from investment operations: Net investment loss/3/ (0.04) (0.03) (0.03) (0.01) Net realized and unrealized loss (0.93) (0.16) (7.37) (2.31) -------- -------- -------- ------- Total from investment operations (0.97) (0.19) (7.40) (2.32) -------- -------- -------- ------- Less distributions from: Net investment income -- -- -- (0.32) Net realized gain -- -- -- (0.10) Return of capital -- -- -- (0.44) -------- -------- -------- ------- Total distributions -- -- -- (0.86) -------- -------- -------- ------- Net asset value, end of period $ 7.85 $ 8.82 $ 9.01 $ 16.41 ======== ======== ======== ======= Total return (11.00)%/5/ (2.11)% (45.09)% (12.10)%/5/ ======== ======== ======== ======= Ratios/Supplemental data: Net assets, end of period (000s) $135,457 $142,043 $110,786 $42,667 Ratio of expenses to average net assets/6/ 1.06% 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% 0.99% Ratio of net investment loss to average net assets/6/ (0.96)% (0.28)% (0.23)% (0.28)%/2/ Portfolio turnover rate/4/ 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. Financial Highlights 63 Notes to the Financial Statements (Unaudited) 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 February 28, 2003, the Company offered 23 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 Africa, 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, before fees and expenses, 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 period 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 64 2003 iShares Semi-Annual Report to Shareholders Notes to the Financial Statements (Unaudited) (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). 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. Dividends and distributions are paid in U.S. dollars and cannot be automatically reinvested in additional shares of the Funds. Notes to the Financial Statements 65 Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. At August 31, 2002, the tax year-end of the Funds, 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 six months ended February 28, 2003. 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 - --------------------------------------------- 66 2003 iShares Semi-Annual Report to Shareholders Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. At August 31, 2002, the tax year-end of the Funds, 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 $ 674,889 $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. Notes to the Financial Statements 67 Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. 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 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 Africa, 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 Africa, 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 four 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. Investors Bank & Trust Company ("Investors Bank") serves as administrator, custodian and transfer 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. Effective February 24, 2003, BGI began serving as securities lending agent for the Company. BGI is an affiliate of BGFA, the Funds' investment advisor. The Board of Directors has approved the selection of BGI as securities lending agent subject to the conditions of the exemptive order that was issued by the Securities and Exchange Commission ("SEC"). As securities lending agent, BGI receives a fee based on a share of the income earned on investment of the cash collateral received for the loan of securities. For the period from February 24, 2003 through February 28, 2003, BGI earned $86 in securities lending agent fees from the Funds. Prior to February 24, 2003, Investors Bank served as securities lending agent for the Funds. 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. 68 2003 iShares Semi-Annual Report to Shareholders Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. Pursuant to an exemptive order issued by the SEC, 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 temporary cash investments or from investment of securities lending collateral are recorded as either interest income or as securities lending income, respectively, 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 February 28, 2003, 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 six months ended February 28, 2003, were as follows: - --------------------------------------------------- iShares MSCI Index Fund Purchases Sales - --------------------------------------------------- Australia $ 1,315,440 $ 2,341,564 Brazil 17,335,036 35,701,288 Canada 5,181,239 4,588,953 Hong Kong 5,068,102 6,206,549 Malaysia 7,978,639 20,358,827 Mexico 4,982,969 6,733,011 Pacific ex-Japan 4,893,340 5,616,247 Singapore 4,759,055 5,537,693 South Africa 541,382 470,471 South Korea 62,108,487 29,234,463 Taiwan 14,836,322 5,528,868 - --------------------------------------------------- In-kind transactions for the six months ended February 28, 2003, were as follows: - ---------------------------------------------------- In-kind In-kind iShares MSCI Index Fund Purchases Sales - ---------------------------------------------------- Canada $399,401,956 $40,810,170 Hong Kong 39,157,983 9,935,722 Mexico 1,304,881 24,959,703 Pacific ex-Japan 56,755,570 -- Singapore -- 2,275,499 South Africa 68,313,783 -- - ---------------------------------------------------- Notes to the Financial Statements 69 Notes to the Financial Statements (Unaudited) (Continued) iSHARES, INC. At February 28, 2003, 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 $ 78,799,494 $ 7,592,173 $ (8,473,478) $ (881,305) Brazil 65,588,251 1,032,320 (17,631,879) (16,599,559) Canada 442,393,600 35,337,617 (9,629,789) 25,707,828 Hong Kong 152,893,707 1,073,818 (28,944,188) (27,870,370) Malaysia 52,735,508 23,245,175 (2,486,697) 20,758,478 Mexico 57,040,177 -- (18,619,497) (18,619,497) Pacific ex-Japan 166,309,575 5,313,575 (14,741,351) (9,427,776) Singapore 97,409,408 795,317 (25,564,919) (24,769,602) South Africa 68,460,572 1,167,712 (2,014,798) (847,086) South Korea 99,601,082 13,481,155 (8,002,732) 5,478,423 Taiwan 181,608,719 7,405,812 (53,407,666) (46,001,854) - -------------------------------------------------------------------------------------
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 Africa 200,000,000 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. 70 2003 iShares Semi-Annual Report to Shareholders Notes to the Financial Statements (Unaudited) (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 February 28, 2003, 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 February 28, 2003, and the value of the related collateral received are disclosed in the Statements of Assets and Liabilities. 6. LEGAL PROCEEDINGS The Company is a defendant in an action in the U.S. District Court for the Northern District of Illinois. There are numerous other defendants, including the Company's investment advisor, other exchange traded funds, various fund service providers and market makers, and the Chicago Stock Exchange, Inc. A company named MOPEX, Inc. is the plaintiff in this action. MOPEX claims that the actions of the parties, including the Company, infringe a patent held by MOPEX, and that the parties engaged in a "conspiracy" amongst themselves to infringe the patent. MOPEX's patent, however, was found to be invalid by the judge in a related case in the U.S. District Court for the Southern District of New York. That case has now been settled. Although the Company is not a party to the action in New York, the Company believes that the finding of invalidity of the alleged patent will permit the action in Illinois to be resolved quickly with no effect on the Company. Notes to the Financial Statements 71 Notes: 72 2003 iShares Semi-Annual Report to Shareholders Notes: Notes 73 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. 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. 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) International/Emerging Country iShares MSCI Brazil Index Fund (EWZ) iShares MSCI Malaysia Index Fund (EWM) iShares MSCI Mexico Index Fund (EWW) iShares MSCI South Africa Index Fund (EZA) 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) This advertising section does not constitute part of the 2003 Semi-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-" and "Goldman Sachs-Registered Trademark-" are trademarks of Goldman, Sachs & Co. 74 2003 iShares Semi-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. 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) 2003 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. [GRAPHIC] iShares Industrial strength investment tools from BARCLAYS GLOBAL INVESTORS 1 800 iShares (1 800 474 2737) www.iShares.com -----END PRIVACY-ENHANCED MESSAGE-----