N-CSR 1 dncsr.txt 2003 ANNUAL REPORTS FOR ISHARES, INC -------------------------- UNITED STATES OMB APPROVAL SECURITIES AND EXCHANGE COMMISSION -------------------------- Washington, D.C. 20549 OMB Number: 3235-0570 Expires: Nov. 30, 2005 Estimated average burden hours per response: 5.0 --------------------------
FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-09102 --------------------------------------------- iShares, Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 45 Fremont Street, San Francisco, CA 94105 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) CT Corporation 300 East Lombard Street, Baltimore, Maryland 21202 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (415) 597-2000 -------------------------- Date of fiscal year end: 08/31/2003 --------------------------- Date of reporting period: 09/01/2002-08/31/2003 --------------------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507. iShares(R) Item 1. Reports to Stockholders 2003 ANNUAL REPORT TO SHAREHOLDERS AUGUST 31, 2003 [GRAPHIC APPEARS HERE] INDUSTRIAL STRENGTH INVESTMENT TOOLS iSHARES MSCI AUSTRALIA INDEX FUND iSHARES MSCI MEXICO INDEX FUND iSHARES MSCI BRAZIL INDEX FUND iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND iSHARES MSCI CANADA INDEX FUND iSHARES MSCI SINGAPORE INDEX FUND iSHARES MSCI EMERGING MARKETS 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 Table of Contents Shareholder Letter ........................................................ 1 Introduction .............................................................. 3 Managers' Discussion & Analysis ........................................... 6 Schedules of Investments .................................................. 30 iShares MSCI Australia Index Fund ....................................... 30 iShares MSCI Brazil Index Fund .......................................... 33 iShares MSCI Canada Index Fund .......................................... 34 iShares MSCI Emerging Markets Index Fund ................................ 36 iShares MSCI Hong Kong Index Fund ....................................... 41 iShares MSCI Malaysia Index Fund ........................................ 43 iShares MSCI Mexico Index Fund .......................................... 44 iShares MSCI Pacific ex-Japan Index Fund ................................ 45 iShares MSCI Singapore Index Fund ....................................... 49 iShares MSCI South Africa Index Fund .................................... 51 iShares MSCI South Korea Index Fund ..................................... 52 iShares MSCI Taiwan Index Fund .......................................... 54 Financial Statements ...................................................... 56 Financial Highlights ...................................................... 64 Notes to the Financial Statements ......................................... 76 Report of Independent Auditors ............................................ 85 Tax Information (Unaudited) ............................................... 86 Supplemental Information (Unaudited) ...................................... 87 Directors Information (Unaudited) ......................................... 95 iShares Family of Funds ................................................... 98 To Our Shareholders For many investors, the last few years have been difficult and challenging. The collapse of the stock market bubble, a tepid economy, corporate accounting scandals, lackluster company earnings and the geopolitical situation all contributed to a three-year bear market. Stock market gains during the first half of 2003 give some hope that the markets have turned a corner, but there is no guarantee that challenging market conditions will not return. iShares have continued to innovate and expand, offering more tools that help investors tailor their portfolios to achieve diversity and address volatility in a complex market environment. For example, in April of this year, iShares launched an emerging markets exchange traded fund based on the MSCI's Emerging Market Free Index. Last year, iShares launched the first fixed income exchange traded funds, which BUSINESS WEEK named one of the best new products of 2002./1/ We have added a Lehman Aggregate Bond Fund to our fixed income menu, enabling investors to track one of the most well-known U.S. fixed income market indexes. Assets under management for the fixed income iShares funds were $4.3 billion as of August 31, 2003. With the addition of these iShares, investors can achieve even more diversity in their portfolios -- and at lower cost, since iShares fees are, on average, about half those of actively managed funds./2/ With over 80 different iShares to choose from, investors have the ability to build a diverse portfolio that covers a wide swath of market segments such as capitalization, sectors, value and growth, international and fixed income. That is important because market segments do not tend to move in tandem, particularly in volatile markets. 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 result in one market segment outperforming another. 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 an indispensable tool for investors in the current market. And that is also why more and more investors have recognized the benefits of iShares. Assets under management for iShares continue to grow, and as of August 31, 2003, had reached $43.0 billion. 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/ Lee T. Kranefuss Lee T. Kranefuss PRESIDENT AND CHAIRMAN OF THE BOARD 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 5/03. 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 does not guarantee future results. iShares are not sponsored, endorsed, or issued by Lehman Brothers, nor are they sponsored, endorsed, issued, sold or promoted by Morgan Stanley Capital International. 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 the companies listed above. This advertising section does not constitute part of the 2003 Annual Report. 2 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Introduction In this section, Barclays Global Fund Advisors (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 Indexes 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 prohibits a Fund from investing more than 25% of the value of a Fund's total assets in the securities of a single issuer. This constraint applies to all share classes of an issuer. As an example, Samsung Electronics ordinary and preferred shares made up 35.71% of the MSCI South Korea Index as of August 31, 2003. Because of the "Single Issuer Rule", however, the iShares MSCI South Korea Index Fund could not invest more than 25% of its assets in Samsung Electronics. This contributed to the difference between the performance of the iShares MSCI South Korea Index Fund and its benchmark index. The "5/50 Rule" generally precludes the sum of all of the securities weighted over 5% in a Fund's portfolio 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 Indexes 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 75.77% as of August 31, 2003. Therefore, the iShares MSCI Mexico Index Fund had to underweight some of these stocks relative to the benchmark, and therefore overweight its investment in other stocks. This contributed to the difference between the performance of the iShares MSCI Mexico Index Fund and its benchmark index. 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 Fund and the underlying MSCI Index in dividend accruals/reinvestments. The Funds record dividend revenues on the "ex-dividend" 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 twelve-month period. Separately, the Funds might have different dividend rates versus the Indexes due to portfolio sampling or different withholding taxes. Finally, while the sole source of revenues for the MSCI Indexes is dividends, the Funds receive interest on uninvested cash and, in the case of most Funds, revenues from the lending of portfolio securities. INTRODUCTION 3 EFFECT OF UNINVESTED ASSETS: Another factor that causes performance of a Fund to differ from that of its underlying MSCI Index is the "effect of uninvested assets". Uninvested assets held by a Fund affect performance relative to its underlying benchmark index. In contrast, the MSCI Indexes 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 principal "unequitized" asset 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. In these circumstances, the effect of uninvested assets could worsen a loss for the period. SECURITIES LENDING: Finally, securities lending is when a Fund loans securities in its portfolio to another party for a given time period and in return receives cash collateral for the loan. Securities lending income is the income earned on lending the securities, which is split between the Fund and the Fund's securities lending agent. While securities lending is intended to improve the performance of the Fund, it may also contribute to differences between the performance of a Fund and its benchmark index. 4 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS THIS PAGE INTENTIONALLY LEFT BLANK. 5 Managers' Discussion & Analysis iSHARES MSCI AUSTRALIA INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 23.33% 24.49% 23.07% 9.96% 10.34% 9.97% 4.24% 4.36% 4.62% CUMULATIVE TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 23.33% 24.49% 23.07% 60.73% 63.59% 60.83% 36.39% 37.59% 40.12% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI AUSTRALIA INDEX Consumer Discretionary 11.48% Consumer Staples 7.63% Energy 2.62% Financials 45.93% Health Care 2.07% Industrials 6.11% Information Technology 0.25% Materials 20.58% Telecommunications Services 2.33% Utilities 1.00% PERFORMANCE REVIEW The total return of the iShares MSCI Australia Index Fund (the "Fund") was 23.33% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Australia Index (the "Index") over the reporting period was 23.07%. SIGNIFICANT PERFORMANCE FACTORS The Fund outperformed its benchmark by 0.26 percentage points during the reporting period. This was due to the positive impact of revenue differential, portfolio sampling, and, securities lending, which contributed 1.16, 0.02, and 0.01 percentage points, respectively, to 6 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS the Fund's return. Those factors were partially offset by the impact of expenses and uninvested assets, which subtracted 0.84 and 0.09 percentage points, respectively, from the Fund's return. KEY MARKET CONDITIONS During a period when most economies in the world were struggling, Australia continued to flourish. Now in its twelfth year of uninterrupted economic expansion, Australia seemed to sidestep the global downturn that began in 2001. During the past decade it has averaged an annual growth rate of nearly 4%, the fastest pace of any large, industrialized country. Part of Australia's success is due to its predominantly "old economy" revenue base. With relatively smaller technology and telecommunications sectors, the country did not participate in the bursting of the bubble that initiated the downturn for other major markets. Another factor contributing to the Australian market's performance during the past twelve months, from the perspective of a U.S. investor, is a strengthening Australian dollar. As the currency gained against the U.S. dollar during the reporting period, returns for U.S. investors were buoyed. Strong performers during the reporting period were The News Corp. Ltd. and The News Corp. Ltd. PLVO (respectively 4.10% and 4.89% of the Index as of August 31, 2003). Despite slowing export growth due to the strengthening currency, BHP Billiton Ltd. (8.65% of the Index as of August 31, 2003) also logged gains, benefiting from demand for its products in China. [CHART APPEARS HERE] iSHARES MSCI AUSTRALIA INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI Australia Index Fund MSCI Australia Index --------------------------------- -------------------- Mar-1996 $ 10,000 $ 10,000 Aug-1996 $ 10,388 $ 10,368 $ 11,048 $ 11,039 Aug-1997 $ 11,035 $ 10,974 $ 10,799 $ 10,864 Aug-1998 $ 8,485 $ 8,711 $ 10,606 $ 10,978 Aug-1999 $ 11,208 $ 11,455 $ 11,372 $ 11,762 Aug-2000 $ 11,415 $ 11,885 $ 10,773 $ 11,172 Aug-2001 $ 10,870 $ 11,209 $ 11,272 $ 11,623 Aug-2002 $ 11,059 $ 11,385 $ 11,135 $ 11,448 Aug-2003 $ 13,639 $ 14,012 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 7 Managers' Discussion & Analysis iSHARES MSCI BRAZIL INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS CUMULATIVE TOTAL RETURNS ------------------------------------------------- ------------------------- YEAR ENDED 8/31/03 INCEPTION TO 8/31/03 INCEPTION TO 8/31/03 ---------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 48.85% 52.20% 51.33% (12.46)% (12.43)% (9.86)% (34.20)% (34.14)% (27.82)% "Total returns for the period since inception" are calculated from the inception date of the Fund (7/10/00). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 (7/14/00), the NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI BRAZIL INDEX Consumer Discretionary 0.38% Consumer Staples 11.80% Energy 26.02% Financials 14.47% Industrials 3.09% Materials 24.18% Telecommunications Services 14.45% Utilities 5.61% PERFORMANCE REVIEW The total return of the iShares MSCI Brazil Index Fund (the "Fund") was 48.85% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Brazil Index (the "Index") over the reporting period was 51.33%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 2.48 percentage points during the reporting period. This was due to the negative impact of expenses, uninvested assets, portfolio sampling, and revenue differential, which subtracted 0.99, 0.92, 0.41, and 0.16 percentage points, respectively, from the Fund's return. KEY MARKET CONDITIONS During the course of the reporting period, Brazil emerged from the negative impact of political uncertainty, a declining currency, and a volatile stock market to produce one of the strongest stock market and currency performances worldwide. 8 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS As the reporting period opened, much of the uncertainty revolved around the then-upcoming presidential elections. Investors worried that, should leftist candidate Luis Inacio Lula da Silva win the election, he might seek to unwind market-oriented reforms that had been put in place earlier in 2002. This concern led to an exodus of foreign investment, which in turn sparked a decline in the Brazilian currency, the real. The currency devaluation pushed up Brazil's external debt levels, sparking fears of a potential default and leading to further stock market declines. Luiz Inacio Lula da Silva was, indeed, elected in October 2002. Upon his election, he assuaged concerns by pledging to honor the terms of the International Monetary Fund bailout package that Brazil had agreed to earlier in the year, and to maintain fiscal austerity. Since his election, President Luiz Inacio Lula da Silva has successfully reduced government spending in Brazil by 5%, strengthening investors' confidence in the country. In addition, the Brazilian real has appreciated sharply, gaining roughly 20% against the U.S. dollar so far in 2003. The strengthening real helped many Brazilian companies, which have debt denominated in U.S. dollars. Because of the country's 12% inflation rate, the communication ministry indicated that the government might allow phone companies to raise rates in line with inflation. This gave a boost to the share price of Tele Norte Leste Participacoes SA (5.79% of the Index as of August 31, 2003), Brazil's largest phone company. After leaving rates at sky-high levels in an effort to tame inflation, Brazil's central bank in June lowered rates for the first time in a year. The 0.50% rate cut brought rates down to 26.00%. Then, on August 20th, the central bank made an additional cut of 2.50%. This cut, which was more than expected, brought rates down to 22.00% and drove Brazil's main stock index to its highest level in more than two years. [CHART APPEARS HERE] iSHARES MSCI BRAZIL INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI Brazil Index Fund MSCI Brazil Index ------------------------------ ----------------- Jul-2000 $ 10,000 $ 10,000 Aug-2000 $ 9,703 $ 9,697 $ 7,278 $ 7,432 Feb-2001 $ 8,359 $ 8,619 $ 7,381 $ 7,617 Aug-2001 $ 5,965 $ 6,245 $ 5,853 $ 6,096 Feb-2002 $ 7,014 $ 7,363 $ 6,338 $ 6,701 Aug-2002 $ 4,421 $ 4,769 $ 3,968 $ 4,325 Feb-2003 $ 4,022 $ 4,398 $ 5,657 $ 6,202 Aug-2003 $ 6,580 $ 7,218 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 9 Managers' Discussion & Analysis iSHARES MSCI CANADA INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 29.47% 28.37% 30.43% 11.80% 11.74% 12.12% 8.49% 8.55% 9.23% CUMULATIVE TOTAL RETURNS ------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 29.47% 28.37% 30.43% 74.67% 74.21% 77.18% 83.91% 84.58% 93.36% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI CANADA INDEX Consumer Discretionary 6.63% Consumer Staples 3.47% Energy 15.97% Financials 35.74% Health Care 2.13% Industrials 7.13% Information Technology 6.27% Materials 15.77% Telecommunications Services 2.50% Utilities 4.39% PERFORMANCE REVIEW The total return of the iShares MSCI Canada Index Fund (the "Fund") was 29.47% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Canada Index (the "Index") over the reporting period was 30.43%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 0.96 percentage points during the reporting period. This was due to the negative impact of expenses, portfolio sampling, and uninvested assets, which subtracted 0.84, 0.38 and 0.08 percentage points, respectively, from the Fund's 10 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS return. Those factors were partially offset by the impact of revenue differential and securities lending, which contributed 0.32 and 0.02 percentage points, respectively, to the Fund's return. KEY MARKET CONDITIONS The Canadian stock market was one of the few to post solid gains throughout the twelve-month reporting period. Part of the reason for Canada's strong performance during the reporting period was the appreciating Canadian dollar. Its gains relative to the U.S. dollar boosted returns for U.S. dollar-based investors in the Canadian market. Another is the strength of Canada's economy. In general, Canada weathered the world economic slowdown better than most developed economies. The Organization for Economic Cooperation and Development forecasts GDP growth of 2.7% for 2003, and corporate sectors remain healthy. However, unemployment levels are high, and the economy did come under some pressure from the effects of the SARS virus and reduced demand from the U.S. during the reporting period. More than 35% of the Canadian market is comprised of financial stocks, and this sector performed well during the period. Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce (respectively 5.72%, 4.25%, and 3.81% of the Index as of August 31, 2003) contributed significantly to performance. And, as the telecommunications industry rebounded during the reporting period, so did Nortel Networks Corp. (3.20% of the Index as of August 31, 2003), logging triple-digit gains. [CHART APPEARS HERE] iSHARES MSCI CANADA INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI Canada Index Fund MSCI Canada Index ------------------------------ ----------------- Mar-1996 $ 10,000 $ 10,000 Aug-1996 $ 10,463 $ 10,511 $ 12,569 $ 12,701 Aug-1997 $ 13,445 $ 13,733 $ 14,322 $ 14,665 Aug-1998 $ 10,529 $ 10,911 $ 12,717 $ 13,193 Aug-1999 $ 14,710 $ 15,189 $ 18,943 $ 21,113 Aug-2000 $ 24,598 $ 27,422 $ 17,780 $ 18,446 Aug-2001 $ 16,001 $ 16,588 $ 15,971 $ 16,622 Aug-2002 $ 14,205 $ 14,824 $ 14,983 $ 15,675 Aug-2003 $ 18,391 $ 19,336 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 11 Managers' Discussion & Analysis iSHARES MSCI EMERGING MARKETS INDEX FUND Performance as of 8/31/03 TOTAL RETURNS ---------------------- INCEPTION TO 8/31/03 ---------------------- NAV MARKET INDEX 33.72% 35.21% 32.23% "Total returns" represent the total change in value of an investment over the period indicated and is calculated from the inception date of the Fund (4/7/03). 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 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 (4/11/03), the NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI EMERGING MARKETS FREE INDEX Consumer Discretionary 7.17% Consumer Staples 6.21% Energy 10.94% Financials 16.19% Health Care 2.88% Industrials 6.07% Information Technology 18.44% Materials 16.38% Telecommunications Services 11.69% Utilities 4.03% PERFORMANCE REVIEW The total return of the iShares MSCI Emerging Markets Index Fund (the "Fund") was 33.72% from its inception on April 7, 2003 through August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Emerging Markets Free Index (the "Index") over the reporting period was 32.23%. SIGNIFICANT PERFORMANCE FACTORS The Fund outperformed its benchmark by 1.49 percentage points during the reporting period. This was due to the positive impact of portfolio sampling (explained in more detail below), which contributed 1.99 percentage points to the Fund's return. That factor was partially offset by the impact of expenses, uninvested assets, and revenue differential, which subtracted 0.29, 0.12 and 0.09 percentage points, respectively, from the Fund's return. As discussed in the Introduction, the Fund invests in a representative sample of the component securities of the Index. Rather than hold local shares of some of the securities in the Index, the Fund holds American Depositary Receipt ("ADR") shares. During the reporting 12 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS period, a number of these ADRs outperformed their local counterparts, including Samsung Electronics Co. Ltd., AU Optronics Corp., Taiwan Semiconductor Manufacturing Co. Ltd. and United Microelectronics Corp. In this case, portfolio sampling had a positive impact on Fund performance. KEY MARKET CONDITIONS At the time the Fund was launched, markets were beginning to emerge from the double blows of a global economic slowdown and a war in Iraq. And, for many Asian markets, the economic ramifications of the SARS virus were still being felt. As many emerging markets depend on exports to the U.S. and to neighboring countries for their economic livelihood, the slowdown faced by the U.S. and others had a dampening effect. By April, however, the U.S. was beginning to show signs of improved economic health, and this had a positive effect on emerging markets' valuations. A major exporter of electronics, South Korea benefited from signs of recovery in the U.S., although a strong Korean currency relative to the U.S. dollar hindered export demand. Regardless, Samsung Electronics (the Index's largest constituent at 6.58% of the Index as of August 31, 2003) performed well. Steel producer POSCO (1.24% of the Index as of August 31, 2003) actually benefited from the strength of the currency as it converted U.S. dollar earnings back into its home currency. Similarly, with 60.78% of its economy based in the information technology sector, the Taiwanese market (as measured by the Index) was highly vulnerable to the technology bubble that drove down markets in the U.S. and elsewhere. An improving U.S. economic outlook drove up export orders, benefiting Taiwan Semiconductor (2.31% of the Index as of August 31, 2003). In general, valuations in the telecommunications sector improved during the reporting period. Mexican constituents Telefonos de Mexico SA de CV Series L and America Movil SA de CV Series L (respectively 1.63% and 1.26% of the Index as of August 31, 2003) both delivered positive returns. [CHART APPEARS HERE] iSHARES MSCI EMERGING MARKETS INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI Emerging MSCI Emerging Markets Markets Index Fund Free Index --------------------- --------------------- Apr-2003 $ 10,000 $ 10,000 Apr-2003 $ 10,388 $ 10,305 May-2003 $ 11,238 $ 11,042 Jun-2003 $ 11,785 $ 11,668 Jul-2003 $ 12,483 $ 12,394 Aug-2003 $ 13,371 $ 13,223 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 13 Managers' Discussion & Analysis iSHARES MSCI HONG KONG INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS ----------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ---------------------- ------------------------ --------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 15.14% 17.01% 16.87% 9.39% 12.50% 11.09% (1.81)% (1.76)% 0.42% CUMULATIVE TOTAL RETURNS -------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ---------------------- ------------------------- ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 15.14% 17.01% 16.87% 56.67% 80.21% 69.19% (12.79)% (12.42)% 3.16% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI HONG KONG INDEX Consumer Discretionary 9.37% Financials 49.13% Industrials 20.69% Information Technology 0.54% Materials 0.88% Telecommunications Services 2.10% Utilities 17.29% PERFORMANCE REVIEW The total return of the iShares MSCI Hong Kong Index Fund (the "Fund") was 15.14% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Hong Kong Index (the "Index") over the reporting period was 16.87%. 14 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 1.73 percentage points during the reporting period. This was due to the negative impact of expenses, portfolio sampling, revenue differential and uninvested assets, which subtracted 0.84, 0.60, 0.23 and 0.10 percentage points, respectively, from the Fund's return. Those factors were partially offset by the impact of securities lending, which contributed 0.04 percentage points to the Fund's return. KEY MARKET CONDITIONS The Hong Kong market overcame the effects of a global economic slowdown, war in Iraq, and the outbreak of the SARS virus to deliver double-digit gains during the reporting period. Internally, Hong Kong faced economic slowdown. Unemployment reached a record 8.3%, in part due to Hong Kong's lack of competitiveness compared with mainland business centers. The government faced a record budget deficit: in March, it raised taxes for the first time in 20 years. The impact of the SARS virus was brief, but severe. By May, for example, occupancy rates of hotels in Hong Kong stood at 15%, compared with a normal 87% average rate. A key force propelling the Hong Kong market was exports. Because the Hong Kong dollar is pegged to the U.S. dollar, its products became more attractive to foreigners as the U.S. dollar weakened. Although the SARS virus dealt a blow to Hong Kong's export market, the setback was temporary. Another area of strength was the real estate market. The sector boomed on news that the government proposed new measures to reverse deflation in Hong Kong's property market. Hutchison Whampoa Ltd., Cheung Kong Holdings Ltd., and Sun Hung Kai Properties Ltd. (respectively 14.74%, 10.96%, and 8.93% of the Index as of August 31, 2003) all performed well during the reporting period. [CHART APPEARS HERE] iSHARES MSCI HONG KONG INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI Hong Kong Index Fund MSCI Hong Kong Index --------------------------------- -------------------- Mar-1996 $ 10,000 $ 10,000 Aug-1996 $ 10,322 $ 10,398 $ 11,869 $ 12,171 Aug-1997 $ 12,160 $ 12,625 $ 9,197 $ 9,855 Aug-1998 $ 5,566 $ 6,098 $ 7,629 $ 8,747 Aug-1999 $ 10,604 $ 11,913 $ 12,117 $ 14,481 Aug-2000 $ 12,167 $ 13,868 $ 11,068 $ 12,691 Aug-2001 $ 8,409 $ 9,727 $ 8,218 $ 9,505 Aug-2002 $ 7,574 $ 8,827 $ 7,069 $ 8,294 Aug-2003 $ 8,721 $ 10,316 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 15 Managers' Discussion & Analysis iSHARES MSCI MALAYSIA INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS ------------------------------------------------------------------------ YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------- -------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 7.39% 9.07% 8.67% 26.22% 28.05% 28.51% (8.19)% (8.16)% (7.01)% CUMULATIVE TOTAL RETURNS -------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 7.39% 9.07% 8.67% 220.38% 244.21% 250.50% (47.20)% (47.08)% (41.87)% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 Malaysia Fund, the NAV of which is determined PRIOR to the opening of the regular trading day on the American Stock Exchange (the "AMEX"), the market return is calculated using 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI MALAYSIA INDEX Consumer Discretionary 18.23% Consumer Staples 10.98% Energy 0.64% Financials 26.23% Industrials 20.24% Information Technology 1.36% Materials 1.64% Telecommunications Services 9.26% Utilities 11.42% PERFORMANCE REVIEW The total return of the iShares MSCI Malaysia Index Fund (the "Fund") was 7.39% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Malaysia Index (the "Index") over the reporting period was 8.67%. 16 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 1.28 percentage points during the reporting period. This was due to the negative impact of expenses, portfolio sampling, and uninvested assets, which subtracted 0.84, 0.37, and 0.16 percentage points, respectively, from the Fund's return. Those factors were partially offset by the impact of revenue differential, which contributed 0.09 percentage points to the Fund's return. KEY MARKET CONDITIONS While the Malaysian market joined others around the world in grappling with a global economic slowdown during the reporting period, it also had another set of difficulties to overcome. Japan's slowdown led to reduced trade in the region, dampening economic activity. Additionally, both the terrorist bombing in Bali and the SARS virus dealt blows to the economies of Malaysia and some of its Asian neighbors, although the SARS virus was the more severe of the two. The resulting decline in tourism hurt Malaysia perhaps more than some of its Asian neighbors: after placing great emphasis on fostering the country's export business in the past, the government had switched gears in late 2002, working to bolster the country's tourism industry. Companies such as Resorts World Bhd (3.87% of the Index as of August 31, 2003) and its holding Genting Bhd (4.20% of the Index as of August 31, 2003) were expected to be prime beneficiaries of this new effort. For the reporting period, Resorts World posted a loss, although Genting Bhd managed to post gains. While trade with the U.S. was weak, Malaysia did benefit from trade with China during the period. Additionally, the government's measures to stimulate private domestic investment, introduced in the 2003 budget, helped to spur investment. Companies that contributed positively to the market's performance included Malayan Banking Bhd, Public Bank Bhd, and British American Tobacco (Malaysia) Bhd (respectively 10.06%, 3.82%, and 3.58% of the Index as of August 31, 2003). [CHART APPEARS HERE] iSHARES MSCI MALAYSIA INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI Malaysia Index Fund MSCI Malaysia Index -------------------------------- ------------------- Mar-1996 $ 10,000 $ 10,000 Aug-1996 $ 10,428 $ 10,503 $ 11,834 $ 12,152 Aug-1997 $ 6,229 $ 6,378 $ 4,877 $ 4,887 Aug-1998 $ 1,648 $ 1,658 $ 2,428 $ 2,839 Aug-1999 $ 4,711 $ 5,020 $ 6,303 $ 6,711 Aug-2000 $ 5,067 $ 5,359 $ 4,536 $ 4,823 Aug-2001 $ 4,397 $ 4,739 $ 4,709 $ 5,078 Aug-2002 $ 4,917 $ 5,349 $ 4,567 $ 4,996 Aug-2003 $ 5,281 $ 5,813 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 17 Managers' Discussion & Analysis iSHARES MSCI MEXICO INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS -------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ---------------------- ------------------------- ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 14.60% 14.07% 13.02% 15.29% 15.76% 17.93% 8.04% 8.03% 10.37% CUMULATIVE TOTAL RETURNS -------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ---------------------- ------------------------- ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 14.60% 14.07% 13.02% 103.70% 107.90% 128.10% 78.22% 78.13% 109.00% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI MEXICO INDEX Consumer Discretionary 11.91% Consumer Staples 22.86% Financials 6.76% Industrials 3.43% Materials 13.42% Telecommunications Services 41.62% PERFORMANCE REVIEW The total return of the iShares MSCI Mexico Index Fund (the "Fund") was 14.60% over the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Mexico Index (the "Index") over the reporting period was 13.02%. SIGNIFICANT PERFORMANCE FACTORS The Fund outperformed its benchmark by 1.58 percentage points over the reporting period. This was due to the positive impact of portfolio sampling (explained in more detail below), which contributed 2.52 percentage points to the Fund's return. That factor was partially offset by the impact of expenses, uninvested assets, and revenue differential, which subtracted 0.84, 0.09 and 0.01 percentage points, respectively, from the Fund's return. 18 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS As discussed in the Introduction, portfolio management constraints can restrict the Investment Advisor's ability to hold a given Index component at its benchmark weight, resulting in differences between the Fund's holdings and the securities in its benchmark index. As of August 31, 2003, 75.77% of the Index was represented by securities each having a weighting of 5% or more of the Index. To comply with the 5/50 Rule, the Fund was obligated to underweight some of these stocks relative to the benchmark, and overweight its investment in other stocks. The Fund also held small positions in non-index names to mitigate some of the weighting differences caused by the diversification requirements. As a result, portfolio sampling had a positive impact on the Fund's performance relative to its benchmark. KEY MARKET CONDITIONS The Mexican economy limped along during much of the reporting period, adversely affected by weakness in the U.S. and stagnant domestic demand. Through the first few months of 2003, the manufacturing sector remained flat, and, by March, the Mexican peso had hit a record low. In April, though, the market rebounded somewhat, largely due to the improved economic outlook in the U.S. Cemex SA de CV Series CPO (12.18% of the Index as of August 31, 2003) gained ground thanks to the improved economic outlook, effective cost cutting and plans for significant debt reduction. Over the final months of the reporting period, Mexico's economic progress moved in fits and starts. First quarter GDP figures, released in May, revealed growth of 2.3%. Although this was the highest growth rate since July 2002, it was below market consensus. A sluggish manufacturing sector and declining oil prices widened the country's trade deficit. At the end of July, the central bank lowered annual economic growth estimates from 2.40% to 2.00%, due to a slumping manufacturing sector and unemployment levels at five-year highs. This news from the central bank sent an already shaky peso tumbling further. The peso's continued depreciation against the U.S. dollar negatively impacted companies with large amounts of U.S. dollar-denominated debt. Telmex, the largest stock in the Index with a weighting of 23.47% as of August 31, 2003, is one such company. Its debt levels, however, are not as high as other leading telecommunications companies', a fact that helped support Telmex's share price during the reporting period. [CHART APPEARS HERE] iSHARES MSCI MEXICO INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI Mexico Index Fund MSCI Mexico Index ------------------------------ ----------------- Mar-1996 $ 10,000 $ 10,000 Aug-1996 $ 11,593 $ 11,740 $ 12,820 $ 13,258 Aug-1997 $ 15,675 $ 16,326 $ 15,311 $ 16,141 Aug-1998 $ 8,749 $ 9,162 $ 12,107 $ 13,075 Aug-1999 $ 14,604 $ 16,060 $ 19,632 $ 22,178 Aug-2000 $ 18,723 $ 20,892 $ 16,024 $ 18,513 Aug-2001 $ 17,408 $ 20,273 $ 18,125 $ 21,515 Aug-2002 $ 15,551 $ 18,493 $ 13,781 $ 16,335 Aug-2003 $ 17,822 $ 20,900 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 19 Managers' Discussion & Analysis iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS CUMULATIVE TOTAL RETURNS ---------------------------------------------- ------------------------- YEAR ENDED 8/31/03 INCEPTION TO 8/31/03 INCEPTION TO 8/31/03 ---------------------- ---------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 20.15% 20.08% 20.23% 13.66% 14.51% 13.89% 26.77% 28.52% 27.04% "Total returns for the period since inception" are calculated from the inception date of the Fund (10/25/01). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI PACIFIC EX-JAPAN INDEX Consumer Discretionary 10.91% Consumer Staples 5.12% Energy 1.67% Financials 45.97% Health Care 1.49% Industrials 10.79% Information Technology 1.14% Materials 13.82% Telecommunications Services 4.37% Utilities 4.72% PERFORMANCE REVIEW The total return of the iShares MSCI Pacific ex-Japan Index Fund (the "Fund") was 20.15% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Pacific ex-Japan Index (the "Index") over the reporting period was 20.23%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 0.08 percentage points during the reporting period. This was due to the negative impact of expenses, portfolio sampling, and uninvested assets, which subtracted 0.50, 0.39, and 0.12 percentage points, respectively, from the Fund's return. Those factors were partially offset by the impact of revenue differential and securities lending, which contributed 0.92, and 0.01 percentage points, respectively, to the Fund's return. 20 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS KEY MARKET CONDITIONS Although the markets of Hong Kong and Singapore staged a turnaround during the course of the reporting period, it was largely the strength of the Australian market that accounted for the strong returns of the Index. In addition to delivering some positive company returns, Australia also contributed to the Index returns through its currency, which gained strength throughout the period. Although Australia saw its banking sector falter during the course of the year, significant gains came from The News Corp. Ltd. and The News Corp. Ltd. PLVO (respectively 2.62% and 3.13% of the Index as of August 31, 2003). BHP Billiton Ltd., the Index's second largest constituent at 5.53% of the Index, also posted gains. Banks National Australia Bank Ltd., Commonwealth Bank of Australia, and ANZ Banking Group (respectively 6.50%, 4.76%, and 3.59% of the Index as of August 31, 2003) all posted losses for the reporting period. While Hong Kong struggled with a sluggish economy during the reporting period, one bright spot for the economy was the real estate market. The sector boomed when the government proposed new measures to reverse deflation in Hong Kong's property market. Cheung Kong Holdings Ltd., and Sun Hung Kai Properties Ltd. (respectively 2.44% and 1.99% of the Index as of August 31, 2003) both performed well during the reporting period. [CHART APPEARS HERE] iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI Pacific ex-Japan Index Fund MSCI Pacific ex-Japan Index ---------------------------------------- --------------------------- Oct-2001 $ 10,000 $ 10,000 Nov-2001 $ 10,630 $ 10,623 Feb-2002 $ 10,944 $ 10,969 May-2002 $ 11,800 $ 11,831 Aug-2002 $ 10,551 $ 10,567 Nov-2002 $ 10,657 $ 10,666 Feb-2003 $ 10,283 $ 10,296 May-2003 $ 11,511 $ 11,525 Aug-2003 $ 12,676 $ 12,704 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 21 Managers' Discussion & Analysis iSHARES MSCI SINGAPORE INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS ---------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ---------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 9.30% 9.28% 8.86% 12.46% 13.79% 11.04% (8.93)% (8.85)% (8.28)% CUMULATIVE TOTAL RETURNS ---------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ---------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 9.30% 9.28% 8.86% 79.91% 90.79% 68.81% (50.29)% (49.99)% (47.56)% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI SINGAPORE INDEX Consumer Discretionary 8.46% Consumer Staples 2.12% Financials 50.66% Health Care 0.51% Industrials 18.91% Information Technology 7.82% Telecommunications Services 11.52% PERFORMANCE REVIEW The total return of the iShares MSCI Singapore Index Fund (the "Fund") was 9.30% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Singapore Index (the "Index") over the reporting period was 8.86%. SIGNIFICANT PERFORMANCE FACTORS The Fund outperformed its benchmark by 0.44 percentage points during the reporting period. This was due to the positive impact of revenue differential, portfolio sampling, and securities lending, which contributed 0.92, 0.58, and 0.02 percentage points, respectively, to 22 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS the Fund's return. Those factors were partially offset by the impact of expenses and uninvested assets, which subtracted 0.84 and 0.24 percentage points, respectively, from the Fund's return. KEY MARKET CONDITIONS The Singapore market struggled with worldwide economic sluggishness, the U.S. invasion of Iraq, and the economic fallout of the SARS virus during the twelve-month reporting period. After declining for most of the period, however, the market came back in the final months to post positive results. Because the economy relies heavily on electronics exports to the U.S., Singapore was negatively impacted by the slowdown in the U.S. Domestic economic weakness also took its toll on non-exporting companies. Singapore Press Holdings Ltd. (7.44% of the Index as of August 31, 2003) and City Developments Ltd. (2.44% of the Index as of August 31, 2003) struggled during the reporting period. Singapore Airlines Ltd. (6.67% of the Index as of August 31, 2003) also logged negative returns, suffering from the economic impact of the SARS virus. In the final months of the reporting period, though, renewed strength in the U.S. translated into an increase in export orders, and some Singaporean companies rebounded. Venture Corp. Ltd. (4.51% of the Index as of August 31, 2003) was an example of the turnaround, turning a loss into a gain of more than 56%. As part of its semi-annual macroeconomic review, in July the Monetary Authority of Singapore announced that it would maintain the bandwidth in which the Singapore dollar trades, and continue to promote a stable Singapore dollar. However, in an effort to boost exports, the central target exchange rate around which the band is set was realigned downward. [CHART APPEARS HERE] iSHARES MSCI SINGAPORE INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI Singapore Index Fund MSCI Singapore Index --------------------------------- -------------------- Mar-1996 $ 10,000 $ 10,000 Aug-1996 $ 9,327 $ 9,191 $ 9,720 $ 9,665 Aug-1997 $ 7,137 $ 6,958 $ 5,687 $ 5,975 Aug-1998 $ 2,763 $ 3,106 $ 4,914 $ 5,244 Aug-1999 $ 6,756 $ 7,270 $ 6,361 $ 6,948 Aug-2000 $ 6,669 $ 7,047 $ 5,863 $ 6,235 Aug-2001 $ 4,808 $ 5,067 $ 4,938 $ 5,210 Aug-2002 $ 4,548 $ 4,818 $ 3,862 $ 4,100 Aug-2003 $ 4,971 $ 5,244 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 23 Managers' Discussion & Analysis iSHARES MSCI SOUTH AFRICA INDEX FUND Performance as of 8/31/03 TOTAL RETURNS ------------------------- INCEPTION TO 8/31/03 ------------------------- NAV MARKET INDEX 20.89% 20.25% 23.15% "Total returns" represent the total change in value of an investment over the period indicated and is 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI SOUTH AFRICA INDEX Consumer Discretionary 3.54% Consumer Staples 4.20% Energy 7.07% Financials 21.07% Health Care 0.67% Industrials 5.06% Information Technology 0.58% Materials 53.97% Telecommunications Services 3.84% PERFORMANCE REVIEW The total return of the iShares MSCI South Africa Index Fund (the "Fund") was 20.89% from February 3, 2003 (its inception date) through August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI South Africa Index (the "Index") over the reporting period was 23.15%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 2.26 percentage points during the reporting period. This was due to the negative impact of portfolio sampling (explained in more detail below), expenses, revenue differential, and uninvested assets, which subtracted 1.42, 0.57, 0.20, and 0.07 percentage points, respectively, from the Fund's return. As discussed in the Introduction, portfolio management constraints can restrict the Investment Advisor's ability to hold a given Index component at its benchmark weight, resulting in differences between the Fund's holdings and the securities in its benchmark index. To 24 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS comply with the Single Issuer Rule, for example, the Fund was obligated to underweight the Index's largest constituent, Anglo American PLC, which had outperformed the benchmark during the reporting period. In this case, portfolio sampling had a negative impact on the Fund's performance relative to the Index's. KEY MARKET CONDITIONS The launch of the Fund coincided with a time when the world was gearing up for the likelihood of war in Iraq, while grappling with a global economic slowdown. As is usually the case in times of economic and political uncertainty, investors flocked to gold. South African gold mining shares benefited from this phenomenon, although not to the same degree. In general, the companies that hedge their exposure to fluctuations in the price of gold, such as AngloGold Ltd. (4.63% of the Index as of August 31, 2003) generally benefited less in the short term, when gold prices spiked, as compared to unhedged gold mining companies, such as Gold Fields Ltd. (5.50% of the Index as of August 31, 2003). By the end of the reporting period, though, when the environment looked less uncertain and the price of gold drifted back down, AngloGold strongly outperformed its unhedged competitor. In April, the South African market began a rally that would extend through the reporting period. Several factors contributed to the rally, including the UN Economic Commission for Africa announcing that the African economy is set for a rebound in 2003 and listing South Africa as its second best performer in the region. Other positive news included mining companies' mitigation of strikes by offering their employees pay raises ranging from 8.50% to 10%. With an inflation rate of 7.8%, the new offers are expected to help negotiations on pensions, job grading, and holidays. Additionally, Anglo American Platinum Corp. Ltd. signed a deal with Khumama to develop an area in the north east of the country, which is in line with the country's efforts to actively pursue policies promoting black-owned investments as means to redress the legacy of apartheid rule. [CHART APPEARS HERE] iSHARES MSCI SOUTH AFRICA INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI South Africa Index Fund MSCI South Africa Index ------------------------------------ ----------------------- Feb-2003 $ 10,000 $ 10,000 Feb-2003 $ 9,990 $ 10,031 Mar-2003 $ 9,434 $ 9,539 Apr-2003 $ 9,997 $ 10,098 May-2003 $ 10,297 $ 10,416 Jun-2003 $ 10,715 $ 10,836 Jul-2003 $ 11,408 $ 11,563 Aug-2003 $ 12,089 $ 12,315 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 25 Managers' Discussion & Analysis iSHARES MSCI SOUTH KOREA INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS CUMULATIVE TOTAL RETURNS --------------------------------------------- ------------------------- YEAR ENDED 8/31/03 INCEPTION TO 8/31/03 INCEPTION TO 8/31/03 --------------------- ---------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 8.93% 11.69% 12.00% 4.06% 4.27% 3.83% 14.12% 14.86% 13.26% "Total returns for the period since inception" are calculated from the inception date of the Fund (5/9/00). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 South Korea Fund, the NAV of which is determined PRIOR to the opening of the regular trading day on the American Stock Exchange (the "AMEX"), the market return is calculated using 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 (5/12/00), the NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI SOUTH KOREA INDEX Consumer Discretionary 13.44% Consumer Staples 2.84% Energy 0.64% Financials 15.85% Health Care 0.24% Industrials 5.21% Information Technology 40.84% Materials 8.87% Telecommunications Services 9.05% Utilities 3.02% PERFORMANCE REVIEW The total return of the iShares MSCI South Korea Index Fund (the "Fund") was 8.93% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI South Korea Index (the "Index") over the reporting period was 12.00%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 3.07 percentage points during the reporting period. This was due to the negative impact of portfolio sampling (explained in more detail below) and expenses, which subtracted 2.68 and 0.99 percentage points, respectively, from the Fund's return. Those factors were partially offset by the impact of revenue differential and uninvested assets, which contributed 0.41 and 0.19 percentage points, respectively, to the Fund's return. As discussed in the Introduction, portfolio management constraints can restrict the Investment Advisor's ability to hold a given Index component at its benchmark weight, resulting in differences between the Fund's holdings and the securities in its benchmark index. To 26 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS comply with the Single Issuer Rule, for example, the Fund was obligated to underweight the Index's largest constituent, Samsung Electronics Co. Ltd., which outperformed the benchmark during the reporting period. By holding less of Samsung Electronics, the positive performance of the security had a lesser impact on the Fund's performance relative to the Index's. KEY MARKET CONDITIONS In addition to global economic slowdown during the reporting period, the South Korean market struggled with the fallout from the SARS virus and tension between its neighbor North Korea and the United States. A major exporter of electronics, South Korea also suffered from a strengthening currency. As its currency, the won, appreciated against the U.S. dollar, Korean products became less competitive. In an effort to slow the won's rise, the central bank bought U.S. dollars during the reporting period. Despite the abatement of the SARS virus and the efforts of the central bank, exports were further hindered in June, as striking rail workers halted freight services. While Korean officials looked to exports to lead the recovery, the economy shrank for the first two quarters of 2003. Following a clampdown on consumer credit, consumer spending slowed. In July, the government attempted to reverse the trend by cutting sales taxes on electronics items, contributing to a decline in consumer prices for a fourth consecutive month. The strength of the currency did help in some regards. Steel producer POSCO (6.18% of the Index as of August 31, 2003) benefited from the strength of the currency as it converted U.S. dollar earnings back into its home currency. Others, such as Samsung Electronics (32.75% of the Index as of August 31, 2003) performed well despite the adverse conditions. For U.S. investors, the strong won relative to the U.S. dollar enhanced returns from the South Korean market. [CHART APPEARS HERE] iSHARES MSCI SOUTH KOREA INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI South Korea Index Fund MSCI South Korea Index ----------------------------------- ---------------------- May-2000 $ 10,000 $ 10,000 $ 9,455 $ 9,437 Aug-2000 $ 8,919 $ 8,748 $ 6,095 $ 5,804 Feb-2001 $ 6,930 $ 6,608 $ 7,348 $ 6,984 Aug-2001 $ 6,557 $ 6,255 $ 8,042 $ 7,658 Feb-2002 $ 10,318 $ 9,888 $ 11,214 $ 10,747 Aug-2002 $ 10,476 $ 10,113 $ 10,501 $ 10,273 Feb-2003 $ 8,388 $ 8,161 $ 9,071 $ 8,949 Aug-2003 $ 11,412 $ 11,326 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 27 Managers' Discussion & Analysis iSHARES MSCI TAIWAN INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS CUMULATIVE TOTAL RETURNS ------------------------------------------------- ------------------------- YEAR ENDED 8/31/03 INCEPTION TO 8/31/03 INCEPTION TO 8/31/03 ---------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 22.45% 34.91% 23.78% (15.72)% (14.94)% (14.86)% (42.15)% (40.41)% (40.15)% "Total returns for the period since inception" are calculated from the inception date of the Fund (6/20/00). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 Taiwan Fund, the NAV of which is determined PRIOR to the opening of the regular trading day on the American Stock Exchange (the "AMEX"), the market return is calculated using 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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. [CHART APPEARS HERE] SECTOR BREAKOUT MSCI TAIWAN INDEX Consumer Discretionary 4.25% Consumer Staples 1.06% Financials 16.13% Industrials 4.55% Information Technology 60.78% Materials 12.33% Telecommunications Services 0.90% PERFORMANCE REVIEW The total return of the iShares MSCI Taiwan Index Fund (the "Fund") was 22.45% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Taiwan Index (the "Index") over the reporting period was 23.78%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 1.33 percentage points during the reporting period. This was due to the negative impact of expenses, revenue differential and uninvested assets, which subtracted 0.99, 0.28, and 0.17 percentage points, respectively, from the Fund's return. Those factors were partially offset by the impact of portfolio sampling, which contributed 0.11 percentage points to the Fund's return. 28 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS KEY MARKET CONDITIONS After being dragged down at the hands of a global economic slowdown, a war in Iraq, and the SARS virus, the Taiwan market rebounded to finish the reporting period with a healthy gain. With 60.78% of its economy based in the information technology sector, the Taiwanese market was highly vulnerable to the technology bubble that drove down markets in the U.S. and elsewhere. Additionally, the economy is heavily dependent on exports to both the U.S. and China. The difficulties that it faced as the U.S. economy stalled, the U.S. invaded Iraq, and China dealt with the SARS virus, therefore, were not surprising. Following months of decline, the Taiwanese stock market rebounded in May, beginning a broad-based rally that would be sustained through the remainder of the reporting period. Sparking the rebound, the island's economy got a boost from strong export orders from post-war U.S. Following the U.S. Federal Reserve rate cut in June, Taiwan's central bank cut its benchmark interest rate by 0.25% to a record 1.375%. By July, export levels grew at their fastest pace in five months, as China joined the U.S. in export orders. Figures exceeded expectations as the economic recovery from the SARS epidemic turned out to be smoother than originally anticipated. Taiwan Semiconductor Manufacturing Co. Ltd., the Index's largest constituent at 17.06% of the Index, gained during the reporting period. Two other significant performers were AU Optronics Corp. and China Steel Corp. (respectively 2.75% and 2.42% of the Index as of August 31, 2003). [CHART APPEARS HERE] iSHARES MSCI TAIWAN INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION iShares MSCI Taiwan Index Fund MSCI Taiwan Index ------------------------------ ----------------- Jun-2000 $ 10,000 $ 10,000 Aug-2000 $ 8,790 $ 8,785 $ 5,951 $ 5,922 Feb-2001 $ 6,540 $ 6,522 $ 5,555 $ 5,557 Aug-2001 $ 4,826 $ 4,880 $ 4,714 $ 4,779 Feb-2002 $ 5,742 $ 5,838 $ 5,828 $ 5,925 Aug-2002 $ 4,724 $ 4,835 $ 4,542 $ 4,653 Feb-2003 $ 4,205 $ 4,313 $ 4,435 $ 4,563 Aug-2003 $ 5,785 $ 5,985 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 29 Schedule of Investments iSHARES MSCI AUSTRALIA INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 94.64% National Australia Bank Ltd. 430,599 $ 8,664,945 BHP Billiton Ltd. 1,066,299 7,543,471 Commonwealth Bank of Australia 357,201 6,485,114 Westpac Banking Corp. Ltd. 504,270 5,107,984 Australia and New Zealand Banking Group Ltd. 430,872 4,886,011 News Corp. Ltd. (The) 417,612 3,567,952 Woolworths Ltd. 290,082 2,208,006 Telstra Corp. Ltd. 624,585 2,029,398 Wesfarmers Ltd. 108,693 1,983,210 Rio Tinto Ltd. 88,530 1,965,999 AMP Ltd. 403,377 1,741,442 Foster's Group Ltd. 589,875 1,733,357 Coles Myer Ltd. 309,387 1,471,843 Amcor Ltd. 240,318 1,404,579 Westfield Trust 615,849 1,315,407 Insurance Australia Group Ltd. 476,697 1,227,998 Macquarie Bank Ltd. 58,344 1,195,581 Suncorp-Metway Ltd. 150,852 1,191,195 Westfield Holdings Ltd. 120,900 1,165,963 Woodside Petroleum Ltd. 133,341 1,152,171 Macquarie Infrastructure Group 541,398 1,128,352 QBE Insurance Group Ltd. 177,489 1,126,970 Alumina Ltd. 321,750 1,051,676 Stockland Trust Group 321,530 1,017,659 Rinker Group Ltd. 269,178 1,012,250 General Property Trust 553,644 999,786 Brambles Industries Ltd. 275,769 917,446 Australian Gas Light Co. Ltd. 127,296 886,541 WMC Resources Ltd./1/ 321,672 849,465 TABCORP Holdings Ltd. 104,325 777,205 Lend Lease Corp. Ltd. 113,217 776,765 BHP Steel Ltd. 226,498 678,762 Santos Ltd. 166,296 628,589 James Hardie Industries NV 130,065 622,966 Orica Ltd. 78,858 587,480 Boral Ltd. 163,059 562,528 Newcrest Mining Ltd. 93,171 554,805 Mirvac Group 192,309 550,166 Origin Energy Ltd. 186,849 504,312 CSL Ltd. 44,928 491,446 John Fairfax Holdings Ltd. 242,229 490,730 Mayne Group Ltd. 224,484 478,028 Coca-Cola Amatil Ltd. 128,115 469,341 Centro Properties Group 174,447 451,643 Macquarie Goodman Industrial Trust 392,223 396,031 Patrick Corporation Ltd. 46,449 389,330 PaperlinX Ltd. 117,819 385,867 Transurban Group 131,079 371,603 Southcorp Ltd. 178,152 356,304 CSR Ltd. 264,264 345,511 Cochlear Ltd. 15,249 321,759 Investa Property Group 250,146 315,719 Gandel Retail Trust 361,491 308,847 Toll Holdings Ltd. 61,425 286,253 Lion Nathan Ltd. 83,811 285,880 Sonic Healthcare Ltd. 66,651 285,586 Principal Office Fund 270,080 277,947 Commonwealth Property Office Fund 373,230 277,809 TAB Ltd. 127,413 272,145 Publishing & Broadcasting Ltd. 37,713 269,728 Australian Stock Exchange Ltd. 29,445 264,910 Harvey Norman Holdings Ltd. 149,877 259,981 Leighton Holdings Ltd. 38,844 247,646 Deutsche Office Trust 326,313 232,327 Computershare Ltd. 126,867 222,531 Ansell Ltd./1/ 47,360 206,913 OneSteel Ltd. 157,716 201,101 Iluka Resources Ltd. 65,481 174,616 Futuris Corp. Ltd. 157,092 153,533 Aristocrat Leisure Ltd. 80,262 86,756 TOTAL COMMON STOCKS (COST: $71,691,338) 82,853,170 PREFERRED STOCKS - 4.87% News Corp. Ltd. (The) 596,427 4,265,713 TOTAL PREFERRED STOCKS (COST: $4,375,598) 4,265,713 30 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI AUSTRALIA INDEX FUND August 31, 2003 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ SHORT TERM INVESTMENTS - 17.72% MONEY MARKET FUNDS - 11.49% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 6,569,851 $ 6,569,851 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 2,536,537 2,536,537 BlackRock Temp Cash Money Market Fund/2/ 133,468 133,468 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 230,594 230,594 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 586,420 586,420 10,056,870 FLOATING RATE NOTES - 4.32% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 115,297 115,285 1.16%, 08/23/04/2/ 115,297 115,393 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 92,238 92,238 1.37%, 08/26/04/2/ 230,594 230,594 CC USA Inc. 1.06%, 05/24/04/2/ 230,594 230,578 1.07%, 04/19/04/2/ 101,461 101,459 1.11%, 07/15/04/2/ 115,297 115,333 Dorada Finance Inc. 1.07%, 05/20/04/2/ 230,594 230,570 1.24%, 08/09/04/2/ 57,649 57,641 Five Finance Inc. 1.08%, 04/15/04/2/ 115,297 115,297 HBOS Treasury Services PLC 1.27%, 06/24/04/2/ 230,594 230,594 Holmes Financing PLC 1.07%, 04/15/04/2/ 46,119 46,119 K2 USA LLC 1.07%, 08/16/04/2/ 57,649 57,640 1.08%, 04/13/04/2/ 115,297 115,294 1.08%, 05/17/04/2/ 115,297 115,293 Links Finance LLC 1.05%, 07/20/04/2/ 92,238 92,221 1.07%, 05/04/04/2/ 115,297 115,293 1.07%, 06/28/04/2/ 115,297 115,278 1.08%, 03/29/04/2/ 115,297 115,297 Nationwide Building Society 1.08%, 07/23/04/2/ 172,946 172,946 Sigma Finance Inc. 1.05%, 07/20/04/2/ 115,297 115,277 1.06%, 10/15/03/2/ 230,594 230,592 1.06%, 07/01/04/2/ 115,297 115,273 1.24%, 08/06/04/2/ 57,649 57,644 Tango Finance Corp. 1.05%, 07/15/04/2/ 69,178 69,159 1.06%, 07/06/04/2/ 69,178 69,173 Toronto Dominion 1.33%, 08/23/04/2/ 149,886 149,813 White Pine Finance LLC 1.06%, 07/06/04/2/ 138,357 138,345 1.07%, 05/17/04/2/ 138,357 138,357 1.08%, 04/20/04/2/ 115,297 115,297 3,779,293 COMMERCIAL PAPER - 1.65% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 69,178 69,133 CRC Funding LLC 1.05%, 09/25/03/2/ 115,297 115,220 1.06%, 09/16/03/2/ 46,119 46,100 Edison Asset Securitization 1.06%, 09/05/03/2/ 115,297 115,287 1.06%, 09/15/03/2/ 69,178 69,152 1.07%, 10/23/03/2/ 216,759 216,430 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 115,297 115,243 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 57,649 57,649 SCHEDULES OF INVESTMENTS 31 Schedule of Investments (Continued) iSHARES MSCI AUSTRALIA INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ $ 57,649 $ 57,625 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 57,649 57,638 Quincy Capital Corp. 1.06%, 09/17/03/2/ 238,914 238,809 Receivables Capital Corp. 1.06%, 09/17/03/2/ 168,334 168,260 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 115,297 115,297 1,441,843 TIME DEPOSITS - 0.26% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 230,594 230,594 230,594 TOTAL SHORT TERM INVESTMENTS (COST: $15,508,600) 15,508,600 TOTAL INVESTMENTS IN SECURITIES - 117.23% (COST $91,575,536) 102,627,483 OTHER ASSETS, LESS LIABILITIES - (17.23%) (15,086,718) ------------- NET ASSETS - 100.00% $ 87,540,765 ============= /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. 32 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments iSHARES MSCI BRAZIL INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 27.87% Petroleo Brasileiro SA 490,100 $ 10,874,559 Companhia Vale do Rio Doce ADR 163,930 6,139,179 Unibanco Holdings SA 84,955,000 3,283,721 Centrais Eletricas Brasileiras SA 274,332,000 2,038,265 Companhia Siderurgica Nacional 60,333,000 2,027,401 Souza Cruz SA 253,500 2,016,185 Brasil Telecom Participacoes SA 143,988,000 819,385 Companhia de Saneamento Basico do Estado de Sao Paulo 18,590,000 813,038 Companhia Siderurgica de Tubarao 28,730,000 576,347 Tele Norte Leste Participacoes SA 13,520,000 129,629 TOTAL COMMON STOCKS (COST: $24,555,213) 28,717,709 PREFERRED STOCKS - 71.53% Petroleo Brasileiro SA 692,900 14,227,734 Companhia de Bebidas das Americas 42,588,000 9,420,851 Companhia Vale do Rio Doce Class A 270,400 9,269,031 Banco Itau Holding Financeira SA 62,023,000 4,702,521 Banco Bradesco SA 1,085,994,000 4,628,583 Tele Norte Leste Participacoes SA 353,439,000 4,606,286 Brasil Telecom Participacoes SA 495,508,000 3,763,586 Embraer-Empresa Brasileira de Aeronautica SA 574,643 2,940,169 Gerdau SA 160,589 2,406,394 Aracruz Celulose SA Class B 845,000 2,311,550 Companhia Energetica de Minas Gerais 201,955,467 2,209,165 Companhia Brasileira de Distribuicao 69,966,000 1,382,307 Telesp Celular Participacoes SA/1/ 851,864,000 1,372,302 Usinas Siderurgicas de Minas Gerais SA Class A 236,600 1,358,392 Sadia SA 1,690,000 1,312,732 Centrais Eletricas Brasileiras SA Class B 143,143,000 1,189,232 Votorantim Celulose e Papel SA 22,477,000 1,176,608 Tele Centro Oeste Celular Participacoes 522,622,000 1,062,543 Embratel Participacoes SA/1/ 468,017,000 961,007 Duratex SA 36,335,000 773,085 Companhia Paranaense de Energia Class B/1/ 246,779,000 691,749 Companhia de Tecidos Norte de Minas 7,436,400 560,053 Telemig Celular Participacoes SA 487,319,000 551,338 Tele Nordeste Celular Participacoes SA 487,762,000 413,471 Tele Celular Sul Participacoes 472,543,000 406,954 TOTAL PREFERRED STOCKS (COST: $62,634,114) 73,697,643 SHORT TERM INVESTMENTS - 0.36% MONEY MARKET FUNDS - 0.36% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/ 370,023 370,023 370,023 TOTAL SHORT TERM INVESTMENTS (COST: $370,023) 370,023 TOTAL INVESTMENTS IN SECURITIES - 99.76% (COST $87,559,350) 102,785,375 OTHER ASSETS, LESS LIABILITIES - 0.24% 249,236 ------------- NET ASSETS - 100.00% $ 103,034,611 ============= /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 33 Schedule of Investments iSHARES MSCI CANADA INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.78% Royal Bank of Canada 855,742 $ 36,761,465 Bank of Nova Scotia 647,325 28,718,149 EnCana Corp. 609,924 22,837,799 Bank of Montreal 634,584 21,272,505 Canadian Imperial Bank of Commerce 469,773 19,218,987 Manulife Financial Corp. 595,262 18,023,288 Sun Life Financial Inc. 792,408 17,365,969 Nortel Networks Corp./1/ 4,965,702 16,109,043 Alcan Inc. 399,081 14,451,097 Barrick Gold Corp. 697,467 14,209,291 Canadian National Railway Co. 253,998 13,582,937 Petro-Canada 285,645 11,247,471 TransCanada Corp. 614,856 11,076,849 Suncor Energy Inc. 576,633 10,808,102 Thomson Corp. 302,085 9,094,236 Magna International Inc. Class A 119,601 8,759,158 BCE Inc. 387,573 8,390,453 Talisman Energy Inc. 166,455 7,883,858 Enbridge Inc. 207,966 7,653,581 Placer Dome Inc. 525,669 7,169,850 Biovail Corp./1/ 171,798 7,061,905 Bombardier Inc. Class B 1,817,853 6,958,728 Loblaw Companies Ltd. 144,672 6,450,610 Canadian Natural Resources Ltd. 163,994 6,352,159 Imperial Oil Ltd. 173,853 6,252,767 Power Corp. of Canada 205,911 6,078,690 Inco Ltd./1/ 237,969 6,004,336 National Bank of Canada 236,325 5,971,374 Brascan Corp. Class A 208,377 5,407,903 George Weston Ltd. 70,281 5,370,570 Great-West Lifeco Inc. 170,569 5,053,805 Canadian Pacific Railway Ltd. 204,678 5,002,043 Power Financial Corp. 159,468 4,885,838 Potash Corp. of Saskatchewan Inc. 68,637 4,865,921 ATI Technologies Inc./1/ 311,553 4,694,127 Celestica Inc./1/ 248,655 4,366,677 Nexen Inc. 163,173 4,297,091 Abitibi-Consolidated Inc. 484,158 3,657,842 Shell Canada Ltd. 92,064 3,471,108 TransAlta Corp. 245,367 3,362,597 Domtar Inc. 281,946 3,260,220 Shaw Communications Inc. Class B 263,451 3,255,272 Molson Inc. Class A 132,345 3,196,163 Goldcorp Inc. 232,626 3,018,612 Fairfax Financial Holdings Ltd. 18,084 3,014,760 Cognos Inc./1/ 96,996 2,992,776 Investors Group Inc. 140,562 2,847,415 Rogers Communications Inc. Class B 198,102 2,829,111 Fairmont Hotels & Resorts Inc. 106,056 2,806,701 Precision Drilling Corp. Class A/1/ 69,876 2,790,708 Brookfield Properties Corp. 118,374 2,780,251 Shoppers Drug Mart Corp./1/ 146,316 2,769,894 TELUS Corp. 161,757 2,763,682 Kinross Gold Corp./1/ 357,159 2,711,231 Cameco Corp. 73,575 2,545,940 Canadian Tire Corp. Class A 100,710 2,541,073 MDS Inc. 175,908 2,453,822 NOVA Chemicals Corp. 115,080 2,442,386 Husky Energy Inc. 166,457 2,381,986 CP Ships Ltd. 111,381 2,332,565 Dofasco Inc. 103,161 2,331,469 Teck Cominco Ltd. Class B 240,024 2,327,306 Glamis Gold Ltd./1/ 159,057 2,258,893 Noranda Inc. 217,419 2,210,005 Penn West Petroleum Ltd./1/ 67,413 2,194,209 Finning International Inc. 91,242 2,110,113 Agrium Inc. 166,044 1,994,228 SNC-Lavalin Group Inc. 60,006 1,849,300 CGI Group Inc./1/ 331,275 1,815,009 Four Seasons Hotels Inc. 35,763 1,722,729 Meridian Gold Inc./1/ 128,643 1,681,359 C.I. Fund Management Inc. 172,209 1,666,038 Falconbridge Ltd. 109,326 1,599,912 Masonite International Corp./1/ 68,226 1,431,263 Agnico-Eagle Mines Ltd. 97,818 1,415,281 Aliant Inc. 62,472 1,391,619 Onex Corp. 124,536 1,382,586 CAE Inc. 284,823 1,242,244 MI Developments Inc. Class A/1/ 59,801 1,189,845 34 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI CANADA INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ QLT Corp./1/ 85,488 $ 1,167,244 Hudson's Bay Co. 110,970 711,187 Intrawest Corp. 52,608 680,379 TOTAL COMMON STOCKS (COST: $415,923,087) 502,306,965 SHORT TERM INVESTMENTS - 0.06% MONEY MARKET FUNDS - 0.06% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/ 308,015 308,015 308,015 TOTAL SHORT TERM INVESTMENTS (COST: $308,015) 308,015 TOTAL INVESTMENTS IN SECURITIES - 99.84% (COST $416,231,102) 502,614,980 OTHER ASSETS, LESS LIABILITIES - 0.16% 791,834 ------------- NET ASSETS - 100.00% $ 503,406,814 ============= /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 35 Schedule of Investments iSHARES MSCI EMERGING MARKETS INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 95.43% ARGENTINA - 0.43% BBVA Banco Frances SA ADR 147,972 $ 744,299 Petrobras Energia Participaciones SA ADR 71,676 537,570 1,281,869 BERMUDA - 0.14% Brilliance China Automotive Holdings Ltd. 1,320,000 418,881 418,881 BRAZIL - 6.40% Aracruz Celulose SA ADR 10,604 289,807 Banco Bradesco SA ADR 77,308 1,659,803 Banco Itau Holding Financiera SA ADR 62,040 2,349,455 Brasil Telecom Participacoes SA ADR 35,024 1,327,410 Companhia Brasileira de Distribuicao Pao de Acucar ADR 42,636 838,224 Companhia de Bebidas das Americas ADR 128,700 2,855,853 Companhia Vale do Rio Doce ADR 53,636 2,008,668 Companhia Vale do Rio Doce Sponsored ADR 62,304 2,126,435 Empresa Brasiliera de Aeronautica SA ADR 37,840 771,558 Petroleo Brasileiro SA ADR 104,456 2,308,478 Tele Norte Leste Participacoes SA ADR 145,552 1,893,632 Telesp Celular Partcipacoes SA ADR 95,128 385,268 Votorantim Celulose e Papel ADR 9,240 243,012 19,057,603 CHILE - 2.23% Banco Santander Chile SA ADR 86,768 1,817,790 Compania de Telecomunicaciones de Chile SA ADR 150,964 1,967,061 Enersis SA ADR 221,936 1,187,358 Sociedad Quimica y Minera de Chile SA ADR 47,300 1,679,150 6,651,359 CHINA - 3.66% Beijing Capital International Airport Co. Ltd. Class H 176,000 49,645 Beijing Datang Power Generation Co. Ltd. Class H 352,000 190,683 China Petroleum and Chemical Corp. Class H 7,216,000 2,197,363 China Shipping Development Co. Ltd. 792,000 396,033 China Southern Airlines Co. Ltd./1/ 264,000 87,161 China Telecom Corp. Ltd. Class H 3,784,000 1,043,113 Guangshen Railway Co. Ltd. Class H 2,816,000 707,669 Huaneng Power International Inc. Class H 528,000 724,368 Jiangsu Expressway Co. Ltd. Class H 264,000 105,778 Jiangxi Copper Co. Ltd. 792,000 187,862 PetroChina Co. Ltd. Class H 9,328,000 3,259,092 Qingling Motors Co. Ltd. 616,000 101,096 Shandong International Power Development Co. Ltd. 1,496,000 436,370 Sinopec Shanghai Petrochemical Co. Ltd. 1,056,000 255,898 Travelsky Technology Ltd. Class H 88,000 75,596 Tsingtao Brewery Co. Ltd. Class H 176,000 147,807 Yanzhou Coal Mining Co. Ltd. Class H 616,000 367,261 Yizheng Chemical Fibre Co. Ltd. 352,000 56,415 Zhejiang Expressway Co. Ltd. 1,056,000 514,504 10,903,714 CZECH REPUBLIC - 2.15% CEZ AS 439,000 1,999,438 Komercni Banka AS 13,118 1,053,564 36 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI EMERGING MARKETS INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ Philip Morris CR AS 5,632 $ 2,621,461 Unipetrol AS/1/ 338,800 739,242 6,413,705 HONG KONG - 4.39% Beijing Enterprises Holdings Ltd. 176,000 174,886 China Merchants Holdings International Co. Ltd. 176,000 196,324 China Mobile Ltd. 2,068,000 5,316,264 China Overseas Land & Investment Ltd. 440,000 52,466 China Pharmaceutical Group Ltd. 1,232,000 446,242 China Resources Enterprises Ltd. 616,000 596,306 China Resources Land Ltd. 1,408,000 167,891 China Travel International Investment Hong Kong Ltd. 3,080,000 588,408 Citic Pacific Ltd. 484,000 992,903 CNOOC Ltd. 1,254,000 2,347,426 COFCO International Ltd. 264,000 111,702 Cosco Pacific Ltd. 264,000 294,486 Denway Motors Ltd. 968,000 546,097 Legend Group Ltd. 1,496,000 642,566 Shanghai Industrial Holdings Ltd. 176,000 293,358 Shenzhen Investment Ltd. 440,000 63,749 TCL International Holdings Ltd. 880,000 256,688 13,087,762 HUNGARY - 1.46% Gedeon Richter Rt. 23,188 1,973,951 MATAV Rt. 195,096 738,232 OTP Bank Rt./1/ 143,924 1,638,702 4,350,885 INDIA - 4.46% Dr. Reddy's Laboratories Ltd. ADR 69,608 1,764,563 HDFC Bank Ltd. ADR 104,544 2,297,877 ICICI Bank Ltd. ADR 146,331 1,417,947 Infosys Technologies Ltd. ADR 42,592 2,412,837 Mahanagar Telephone Nigam Ltd. ADR 280,896 1,530,883 Satyam Computer Services Ltd. ADR 121,924 1,452,115 Videsh Sanchar Nigam Ltd. ADR 279,796 1,505,302 Wipro Ltd. ADR 34,452 897,475 13,278,999 INDONESIA - 2.14% PT Aneka Tambang Tbk 3,300,000 330,583 PT Astra International Inc. Tbk/1/ 1,210,000 541,897 PT Bank Central Asia Tbk 1,100,000 379,199 PT Bank Mandiri/1/ 2,310,000 231,408 PT Bank Pan Indonesia Tbk 8,272,000 272,971 PT Bhakti Investama Tbk/1/ 4,730,000 197,896 PT Bimantara Citra Tbk 396,000 184,349 PT Gudang Garam Tbk 440,000 477,077 PT Hanjaya Mandala Sampoerna Tbk 1,188,000 567,048 PT Kable Farma Tbk 6,666,000 471,373 PT Matahari Putra Prima Tbk 3,850,000 215,527 PT Ramayana Lestari Sentosa Tbk 880,000 305,952 PT Semen Gresik (Persero) Tbk 37,500 35,136 PT Telekomunikasi Indonesia Tbk 4,026,000 2,170,766 6,381,182 ISRAEL - 3.49% AudioCodes Ltd. 37,576 226,997 Bank Hapoalim Ltd./1/ 508,684 992,415 Bank Leumi Le-Israel/1/ 665,984 932,138 Blue Square-Israel Ltd. 24,552 236,736 Elbit Systems Ltd. 25,608 441,398 Israel Chemicals Ltd. 387,200 468,752 Israel Discount Bank Class A/1/ 542,696 407,999 Makhteshim-Agan Industries Ltd. 154,000 410,644 NICE Systems Ltd./1/ 4,400 65,347 Teva Pharmaceutical Industries Ltd. 96,228 5,671,043 United Mizrahi Bank Ltd./1/ 197,516 548,458 10,401,927 LUXEMBOURG - 0.37% Tenaris SA ADR 43,252 1,091,248 1,091,248 MEXICO - 7.61% Alfa SA de CV Class A 184,800 434,656 SCHEDULES OF INVESTMENTS 37 Schedule of Investments (Continued) iSHARES MSCI EMERGING MARKETS INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ America Movil SA de CV Series L/1/ 3,097,600 $ 3,590,891 Cemex SA de CV Series CPO 387,200 1,929,858 Coca-Cola Femsa SA de CV Series L/1/ 308,000 666,361 Consorcio Ara SA de CV/1/ 308,000 667,198 Controladora Comercial Mexicana SA de CV 426,800 269,240 Fomento Economico Mexicano SA de CV Class UBD 268,400 998,381 Grupo Carso SA de CV Series A1 13,200 39,482 Grupo Continental SA 233,200 334,169 Grupo Elektra SA de CV Series CPO 61,600 189,272 Grupo Financiero Banorte SA de CV Series O 73,000 194,459 Grupo Financiero BBVA Bancomer SA de CV Class B/1/ 1,518,000 1,236,909 Grupo Mexico SA de CV Series B/1/ 198,000 271,346 Grupo Modelo SA de CV Series C 576,400 1,379,222 Grupo Televisa SA Series CPO 906,400 1,695,649 Industrias Penoles SA de CV Series CP 39,600 82,014 Kimberly-Clark de Mexico SA de CV Class A 321,200 742,373 Telefonos de Mexico SA de CV Series L 3,260,400 4,949,850 TV Azteca SA de CV Series CPO 422,400 172,666 Vitro SA de CV Series A 642,400 501,320 Wal-Mart de Mexico SA de CV Series C 330,000 816,550 Wal-Mart de Mexico SA de CV Series V 545,600 1,494,923 22,656,789 PERU - 0.34% Compania de Minas Buenaventura SAu ADR 26,444 1,009,896 1,009,896 PHILIPPINE ISLANDS - 1.66% ABS-CBN Broadcasting Corp./1/ 1,249,796 545,663 Ayala Corp. 3,960,400 306,198 Ayala Land Inc. 1,249,600 131,848 Bank of the Philippine Islands 721,652 538,252 Equitable PCI Bank Inc./1/ 528,000 302,565 Filinvest Land Inc./1/ 5,280,000 93,171 Globe Telecom Inc. 25,080 282,874 Jollibee Foods Corp. 1,892,000 585,119 Manila Electric Co. Class B/1/ 484,000 176,096 Megaworld Corp./1/ 7,501,068 117,353 Metropolitan Bank & Trust Co./1/ 1,126,640 553,380 Petron Corp. 8,803,600 301,087 Philippine Long Distance Telephone Co./1/ 54,560 531,010 SM Prime Holdings Inc. 4,884,000 479,782 4,944,398 RUSSIA - 5.00% JSC MMC Norilsk Nickel ADR 33,924 1,345,087 LUKOIL ADR 70,312 5,486,445 Rostelecom ADR 41,756 436,350 Surgutneftegaz ADR 167,332 3,636,124 Tatneft ADR 11,880 273,240 YUKOS ADR 64,681 3,712,043 14,889,289 SOUTH AFRICA - 14.28% African Bank Investments Ltd. 375,540 371,441 Alexander Forbes Ltd. 386,804 569,916 Anglo American Platinum Corp. Ltd. 23,848 885,922 Anglo American PLC 597,872 11,219,276 AngloGold Ltd. 48,268 1,870,138 Anglovaal Industries Ltd. 178,336 389,274 Barloworld Ltd. 92,532 746,063 Bidvest Group Ltd. 128,568 766,497 Dimension Data Holdings PLC/1/ 555,060 234,746 FirstRand Ltd. 1,258,400 1,304,753 Foschini Ltd. 409,816 978,415 Gold Fields Ltd. 141,284 1,927,476 Harmony Gold Mining Co. Ltd. 20,196 287,786 Impala Platinum Holdings Ltd. 18,744 1,457,557 Imperial Holdings Ltd./1/ 114,444 917,269 Investec Ltd. 38,412 482,115 38 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI EMERGING MARKETS INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ Iscor Ltd. 157,300 $ 444,217 JD Group Ltd. 124,564 537,172 Liberty Group Ltd. 76,164 516,419 Metro Cash & Carry Ltd./1/ 1,312,402 390,319 MTN Group Ltd./1/ 457,028 1,131,659 Nampak Ltd. 337,524 601,833 Naspers Ltd. 171,556 643,628 Nedcor Ltd. 62,700 711,683 Network Healthcare Holdings Ltd./1/ 757,738 415,567 New Africa Capital Ltd. 387,992 322,886 Old Mutual PLC 1,539,912 2,321,423 Pick'n Pay Stores Ltd. 186,296 382,504 Sanlam Ltd. 1,193,808 1,180,779 Sappi Ltd. 85,140 1,086,029 Sasol Ltd. 252,164 2,924,139 Shoprite Holdings Ltd. 510,400 483,940 Standard Bank Group Ltd. 422,268 1,895,309 Telkom South Africa Ltd./1/ 53,064 291,816 Tiger Brands Ltd. 70,444 690,985 Tongaat-Hulett Group Ltd. 36,168 175,166 Truworths International Ltd. 362,208 397,786 Woolworths Holdings Ltd. 640,508 572,350 42,526,253 SOUTH KOREA - 18.00% Kookmin Bank ADR 179,124 6,663,413 Korea Electric Power Corp. ADR 662,816 6,117,792 KT Corp. ADR 218,988 4,127,924 POSCO ADR 311,432 9,342,960 Samsung Electronics Co. Ltd. GDR 123,024 22,820,952 SK Telecom Co. Ltd. ADR 237,996 4,536,204 53,609,245 TAIWAN - 12.69% AU Optronics Corp. ADR 525,800 7,119,332 Chunghwa Telecom Co. Ltd. ADR 98,296 1,387,940 Siliconware Precision Industries Co. ADR 1,619,068 6,961,992 Taiwan Semiconductor Manufacturing Co. Ltd. ADR 1,095,173 12,901,138 United Microelectronics Corp. ADR 1,896,196 9,424,094 37,794,496 THAILAND - 3.67% Advanced Info Service PCL 338,800 457,615 Bangkok Bank PCL/1/ 316,800 651,487 Bangkok Expressway PCL 818,400 458,097 BEC World PCL 52,800 316,106 Charoen Pokphand Food PCL 1,232,000 158,910 Electricity Generating PCL 321,200 492,470 GMM Grammy PCL 255,200 134,773 Industrial Finance Corp. of Thailand/1/ 2,120,800 325,165 Kasikornbank PCL/1/ 629,200 712,042 Kiatnakin Finance PCL 136,400 115,354 Land & House PCL 1,108,800 326,514 National Finance PCL 550,000 196,763 National Petrochemical PCL 176,000 308,396 PTT Exploration and Production PCL 140,800 541,407 PTT PCL 1,491,600 2,649,959 Ratchaburi Electricity Generating Holding PCL 1,447,600 1,021,670 Shin Corp. PCL 519,200 274,194 Siam Cement PCL 132,000 603,943 Siam City Cement PCL 26,400 136,208 Siam Makro PCL 594,000 491,506 Thai Union Frozen Products PCL 528,000 398,345 TISCO Finance PCL/1/ 61,600 45,349 United Broadcasting Corp. PCL/1/ 233,200 98,751 10,915,024 TURKEY - 0.69% Adana Cimento Class A 67,584,000 174,776 Akbank TAS 116,045,998 360,121 Akcansa Cimento AS 13,420,000 36,620 Arcelik AS 42,945,250 148,589 Dogan Yayin Holding AS/1/ 49,020,400 83,580 Eregli Demir ve Celik Fabrikalari TAS/1/ 8,800,000 136,857 Hurriyet Gazetecilik ve Matbaacilik AS/1/ 57,995,440 122,052 SCHEDULES OF INVESTMENTS 39 Schedule of Investments (Continued) iSHARES MSCI EMERGING MARKETS INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ Trakya Cam Sanayii AS 33,968,000 $ 85,420 Tupras-Turkiye Petrol Rafinerileri AS 44,616,000 362,848 Turk Sise ve Cam Fabrikalari AS/1/ 157,916,000 199,402 Turkiye Garanti Bankasi AS/1/ 83,398,323 128,511 Vestel Elektronik Sanayi/1/ 83,556,000 217,571 2,056,347 VENEZUELA - 0.17% Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 38,940 515,176 515,176 TOTAL COMMON STOCKS (COST: $255,996,011) 284,236,047 PREFERRED STOCKS - 1.20% BRAZIL - 1.11% Petroleo Brasileiro SA Pfd ADR 161,348 3,291,499 3,291,499 THAILAND - 0.09% Siam Commercial Bank PCL/1/ 294,800 276,218 276,218 TOTAL PREFERRED STOCKS (COST: $3,269,565) 3,567,717 EXCHANGE TRADED FUNDS - 3.03% iShares MSCI Malaysia Index Fund/2/ 294,800 1,798,280 iShares MSCI South Korea Index Fund/2/ 123,200 2,881,648 iShares MSCI Taiwan Index Fund/2/ 391,600 4,358,508 TOTAL EXCHANGE TRADED FUNDS (COST: $7,767,498) 9,038,436 SHORT TERM INVESTMENTS - 0.30% MONEY MARKET FUNDS - 0.30% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/ 886,486 886,486 886,486 TOTAL SHORT TERM INVESTMENTS (COST: $886,486) 886,486 TOTAL INVESTMENTS IN SECURITIES - 99.96% (COST $267,919,560) 297,728,686 OTHER ASSETS, LESS LIABILITIES - 0.04% 117,523 ------------- NET ASSETS - 100.00% $ 297,846,209 ============= /1/ Non-income earning securities. /2/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. 40 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments iSHARES MSCI HONG KONG INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.55% Hutchison Whampoa Ltd. 5,180,800 $ 38,194,978 Cheung Kong (Holdings) Ltd. 3,330,000 25,830,999 Sun Hung Kai Properties Ltd. 2,960,000 21,347,933 Hang Seng Bank Ltd. 1,887,000 20,928,090 CLP Holdings Ltd. 3,515,200 15,504,225 Swire Pacific Ltd. Class A 2,220,000 12,467,193 Hong Kong & China Gas Co. Ltd. 8,510,663 11,457,617 Hongkong Electric Holdings Ltd. 2,590,000 10,228,032 Bank of East Asia Ltd. 3,626,100 8,554,590 BOC Hong Kong (Holdings) Ltd. 6,660,000 8,539,173 Wharf (Holdings) Ltd. (The) 2,960,000 6,945,194 Li & Fung Ltd. 3,700,000 6,285,780 MTR Corp. Ltd. 4,625,083 5,811,486 Henderson Land Development Co. Ltd. 1,480,000 5,588,414 Cathay Pacific Airways Ltd. 2,590,000 4,483,066 Johnson Electric Holdings Ltd. 2,775,000 4,322,956 Esprit Holdings Ltd. 1,665,000 4,141,499 PCCW Ltd./1/ 7,030,576 4,078,975 Hong Kong Exchanges & Clearing Ltd. 2,220,000 3,984,948 Hang Lung Properties Ltd. 3,330,000 3,842,628 Yue Yuen Industrial (Holdings) Ltd. 1,110,000 3,316,046 Television Broadcasts Ltd. 740,000 3,121,542 Cheung Kong Infrastructure Holdings Ltd. 1,480,000 3,064,614 Hysan Development Co. Ltd. 1,850,000 2,182,233 ASM Pacific Technology Ltd. 555,000 1,864,386 New World Development Co. Ltd. 2,590,000 1,859,642 Shangri-La Asia Ltd. 2,220,000 1,850,154 Sino Land Co. Ltd. 3,700,000 1,731,555 Hopewell Holdings Ltd. 1,480,000 1,679,371 Techtronic Industries Co. Ltd. 740,000 1,660,395 Giordano International Ltd. 3,700,000 1,541,795 SCMP Group Ltd. 2,960,000 1,252,412 Texwinca Holdings Ltd. 1,480,000 1,148,044 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ SmarTone Telecommunications Holdings Ltd. 555,000 $ 697,366 TOTAL COMMON STOCKS (COST: $239,008,766) 249,507,331 SHORT TERM INVESTMENTS - 16.77% MONEY MARKET FUNDS - 10.89% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 17,884,697 17,884,697 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 6,849,455 6,849,455 BlackRock Temp Cash Money Market Fund/2/ 360,406 360,406 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 622,678 622,678 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 1,583,519 1,583,519 27,300,755 FLOATING RATE NOTES - 4.07% Beta Finance Inc. 1.07%, 05/20/04 /2/ $ 311,339 311,306 1.16%, 08/23/04 /2/ 311,339 311,599 Canadian Imperial Bank of Commerce 1.07%, 10/30/03 /2/ 249,071 249,072 1.37%, 08/26/04 /2/ 622,678 622,678 CC USA Inc. 1.06%, 05/24/04 /2/ 622,678 622,633 1.07%, 04/19/04 /2/ 273,978 273,970 1.11%, 07/15/04 /2/ 311,339 311,436 Dorada Finance Inc. 1.07%, 05/20/04 /2/ 622,678 622,611 1.24%, 08/09/04 /2/ 155,669 155,648 Five Finance Inc. 1.08%, 04/15/04 /2/ 311,339 311,339 HBOS Treasury Services PLC 1.27%, 06/24/04 /2/ 622,678 622,678 SCHEDULES OF INVESTMENTS 41 Schedule of Investments (Continued) iSHARES MSCI HONG KONG INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Holmes Financing PLC 1.07%, 04/15/04 /2/ $ 124,536 $ 124,536 K2 USA LLC 1.07%, 08/16/04 /2/ 155,669 155,647 1.08%, 04/13/04 /2/ 311,339 311,330 1.08%, 05/17/04 /2/ 311,339 311,328 Links Finance LLC 1.05%, 07/20/04 /2/ 249,071 249,027 1.07%, 05/04/04 /2/ 311,339 311,329 1.07%, 06/28/04 /2/ 311,339 311,288 1.08%, 03/29/04 /2/ 311,339 311,339 Nationwide Building Society 1.08%, 07/23/04 /2/ 467,008 467,008 Sigma Finance Inc. 1.05%, 07/20/04 /2/ 311,339 311,284 1.06%, 10/15/03 /2/ 622,678 622,670 1.06%, 07/01/04 /2/ 311,339 311,274 1.24%, 08/06/04 /2/ 155,669 155,655 Tango Finance Corp. 1.05%, 07/15/04 /2/ 186,803 186,750 1.06%, 07/06/04 /2/ 186,803 186,788 Toronto Dominion 1.33%, 08/23/04 /2/ 404,741 404,542 White Pine Finance LLC 1.06%, 07/06/04 /2/ 373,607 373,576 1.07%, 05/17/04 /2/ 373,607 373,607 1.08%, 04/20/04 /2/ 311,339 311,339 10,205,287 COMMERCIAL PAPER - 1.56% Corporate Asset Funding Corp. 1.06%, 09/24/03 /2/ 186,803 186,682 CRC Funding LLC 1.05%, 09/25/03 /2/ 311,339 311,131 1.06%, 09/16/03 /2/ 124,536 124,484 Edison Asset Securitization 1.06%, 09/05/03 /2/ 311,339 311,311 1.06%, 09/15/03 /2/ 186,803 186,732 1.07%, 10/23/03 /2/ 585,317 584,430 Eureka Securitization Inc. 1.05%, 09/18/03 /2/ 311,339 311,194 Jupiter Securitization Corp. 1.07%, 09/02/03 /2/ 155,669 155,669 Park Avenue Receivables Corp. 1.06%, 09/16/03 /2/ 155,669 155,605 Preferred Receivables Funding Corp. 1.06%, 09/08/03 /2/ 155,669 155,642 Quincy Capital Corp. 1.06%, 09/17/03 /2/ 645,144 644,860 Receivables Capital Corp. 1.06%, 09/17/03 /2/ 454,555 454,355 UBS Finance (Delaware) Inc. 1.09%, 09/02/03 /2/ 311,339 311,339 3,893,434 TIME DEPOSITS - 0.25% SunTrust Banks Inc. 1.00%, 09/02/03 /2/ 622,678 622,678 622,678 TOTAL SHORT TERM INVESTMENTS (COST: $42,022,154) 42,022,154 TOTAL INVESTMENTS IN SECURITIES - 116.32% (COST $281,030,920) 291,529,485 OTHER ASSETS, LESS LIABILITIES - (16.32%) (40,902,545) ------------- NET ASSETS - 100.00% $ 250,626,940 ============= /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. 42 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments iSHARES MSCI MALAYSIA INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.88% Malayan Banking Bhd 4,084,800 $ 9,943,263 Telekom Malaysia Bhd 2,708,400 5,523,711 Tenaga Nasional Bhd 2,220,000 5,257,895 Sime Darby Bhd 3,640,800 4,934,242 Commerce Asset Holdings Bhd 4,062,600 4,276,421 Genting Bhd 999,000 4,101,158 Resorts World Bhd 1,398,600 3,790,942 Public Bank Bhd 5,395,537 3,762,677 British American Tobacco (Malaysia) Bhd 333,000 3,592,895 Maxis Communications Bhd 2,086,800 3,542,068 Malaysian International Shipping Corp. Bhd 1,332,000 3,487,737 IOI Corp. Bhd 1,998,000 3,102,158 PLUS Expressways Bhd/1/ 4,284,600 2,852,642 Gamuda Bhd 1,354,200 2,262,939 Petronas Gas Bhd 1,132,200 2,189,913 Hong Leong Bank Bhd 1,346,200 1,983,874 Magnum Corp. Bhd 2,397,600 1,779,272 YTL Corp. Bhd 1,465,820 1,728,125 Malakoff Bhd 1,354,200 1,724,823 AMMB Holdings Bhd 1,420,800 1,675,048 OYL Industries Bhd 177,733 1,485,006 Tanj ong PLC 555,000 1,453,224 Berj aya Sports Toto Bhd 1,154,400 1,281,992 Perusahaan Otomobil Nasional Bhd 555,000 1,124,605 Kuala Lumpur Kepong Bhd 710,400 1,121,684 Nestle (Malaysia) Bhd 199,800 1,098,900 SP Setia Bhd 1,177,100 1,034,609 Road Builder (Malaysia) Holdings Bhd 1,021,700 1,016,323 IJM Corp. Bhd 777,000 1,014,189 DRB-Hicom Bhd 1,376,400 956,236 Hong Leong Credit Bhd 733,000 952,900 Malaysian Pacific Industries Bhd 222,000 893,842 Malaysian Airline System Bhd/1/ 710,400 826,307 Star Publications (Malaysia) Bhd 488,400 790,437 PPB Group Bhd 555,333 789,157 UMW Holdings Bhd 310,800 719,747 Malayan Cement Bhd 3,285,600 665,766 Golden Hope Plantations Bhd 732,600 663,196 RHB Capital Bhd 1,287,600 643,800 Petronas Dagangan Bhd 355,200 626,274 Oriental Holdings Bhd 511,000 607,821 Malaysia Mining Corp. Bhd 799,200 584,678 Malaysian Resources Corp. Bhd/1/,/2/ 1,435,600 540,995 IGB Corp. Bhd 1,620,600 537,357 Multi-Purpose Holdings Bhd/1/ 1,487,400 516,676 Malaysian Oxygen Bhd 177,600 514,105 Unisem (Malaysia) Bhd 244,200 494,826 Edaran Otomobil Nasional Bhd 199,800 475,840 Guinness Anchor Bhd 421,800 470,640 Highlands & Lowlands Bhd 421,800 370,740 TA Enterprise Bhd 1,909,200 366,767 Malaysia Airports Holdings Bhd 777,000 333,292 New Straits Times Press Bhd 333,000 333,000 Hong Leong Industries Bhd 244,200 324,529 Tan Chong Motor Holdings Bhd 954,600 316,525 Puncak Niaga Holdings Bhd/1/ 377,400 315,824 Mulpha International Bhd/1/ 2,553,000 315,766 IOI Properties Bhd 177,600 308,463 OSK Holdings Bhd 710,400 297,246 Courts Mammoth Bhd 355,200 277,617 Jaya Tiasa Holdings Bhd 288,600 226,323 TIME Engineering Bhd/1/ 710,400 216,859 WTK Holdings Bhd 155,400 194,659 Hume Industries Bhd 667 751 Media Prima Bhd/1/,/2/ 933,140 - TOTAL COMMON STOCKS (COST: $68,989,018) 99,611,296 SHORT TERM INVESTMENTS - 0.18% MONEY MARKET FUNDS - 0.18% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/3/ 174,468 174,468 174,468 TOTAL SHORT TERM INVESTMENTS (COST: $174,468) 174,468 TOTAL INVESTMENTS IN SECURITIES - 100.06% (COST $69,163,486) 99,785,764 OTHER ASSETS, LESS LIABILITIES - (0.06%) (56,184) ------------- NET ASSETS - 100.00% $ 99,729,580 ============= /1/ Non-income earning securities. /2/ Security valued at fair value in accordance with procedures approved by the Board of Directors. See Note 1. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 43 Schedule of Investments iSHARES MSCI MEXICO INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.95% Telefonos de Mexico SA de CV Series L 8,340,000 $ 12,661,561 America Movil SA de CV Series L/1/ 10,260,000 11,893,900 Cemex SA de CV Series CPO 1,144,000 5,701,854 Grupo Televisa SA Series CPO 1,620,000 3,030,617 Wal-Mart de Mexico SA de CV Series V 1,056,000 2,893,400 Grupo Financiero BBVA Bancomer SA de CV Class B/1/ 3,484,000 2,838,862 Fomento Economico Mexicano SA de CV Class UBD 692,000 2,574,067 Grupo Modelo SA de CV Series C 964,000 2,306,680 Kimberly-Clark de Mexico SA de CV Class A 776,000 1,793,528 Grupo Carso SA de CV Series A1 528,000 1,579,262 TV Azteca SA de CV Series CPO 3,184,000 1,301,535 America Telecom SA de CV Series A1/1/ 1,149,988 1,239,315 Carso Global Telecom SA de CV Class A1/1/ 900,000 1,080,848 Coca-Cola Femsa SA de CV ADR/1/ 44,120 955,198 Alfa SA de CV Class A 360,000 846,733 Consorcio Ara SA de CV/1/ 386,546 837,347 Corporacion Interamericana de Entretenimiento SA de CV Class B/1/ 488,000 834,638 Grupo Financiero Banorte SA de CV Series O 272,000 724,561 Apasco SA de CV 84,000 624,309 Grupo Elektra SA de CV Series CPO 200,020 614,582 Grupo Aeroportuario del Sureste SA de CV ADR 37,360 555,543 Organizacion Soriana SA de CV Series B/1/ 272,000 546,317 Controladora Comercial Mexicana SA de CV 852,000 537,471 Grupo Continental SA 320,000 458,552 Industrias Penoles SA de CV Series CP 204,000 422,496 Grupo Bimbo SA Series A 248,000 372,236 Grupo Mexico SA de CV Series B/1/ 256,000 350,831 Grupo Sanborns SA de CV Series B1/1/ 272,000 314,330 Vitro SA de CV Series A 300,000 234,116 TOTAL COMMON STOCKS (COST: $67,264,948) 60,124,689 SHORT TERM INVESTMENTS - 0.04% MONEY MARKET FUNDS - 0.04% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/ 26,731 26,731 26,731 TOTAL SHORT TERM INVESTMENTS (COST: $26,731) 26,731 TOTAL INVESTMENTS IN SECURITIES - 99.99% (COST $67,291,679) 60,151,420 OTHER ASSETS, LESS LIABILITIES - 0.01% 4,015 ------------- NET ASSETS - 100.00% $ 60,155,435 ============= /1/ Non-income earning securities. /2/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. 44 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 96.38% AUSTRALIA - 60.06% Alumina Ltd. 527,256 $ 1,723,396 Amcor Ltd. 389,412 2,275,984 AMP Ltd. 485,834 2,097,422 Ansell Ltd./1/ 81,870 357,685 Aristocrat Leisure Ltd. 130,320 140,864 Australia and New Zealand Banking Group Ltd. 707,364 8,021,380 Australian Gas Light Co. Ltd. 204,768 1,426,088 Australian Stock Exchange Ltd. 48,816 439,187 BHP Billiton Ltd. 1,744,020 12,337,969 BHP Steel Ltd. 369,049 1,105,954 Boral Ltd. 264,240 911,586 Brambles Industries Ltd. 535,788 1,782,494 Centro Properties Group 248,148 642,455 Coca-Cola Amatil Ltd. 207,900 761,628 Cochlear Ltd. 25,344 534,767 Coles Myer Ltd. 497,628 2,367,359 Commonwealth Bank of Australia 587,412 10,664,678 Commonwealth Property Office Fund 580,032 431,740 Computershare Ltd. 207,504 363,972 CSR Ltd. 443,052 579,266 Deutsche Office Trust 568,944 405,074 Foster's Group Ltd. 964,188 2,833,281 Futuris Corp. Ltd. 254,412 248,649 Gandel Retail Trust 568,587 485,784 General Property Trust 905,148 1,634,541 Harvey Norman Holdings Ltd. 257,508 446,681 Iluka Resources Ltd. 117,360 312,960 Insurance Australia Group Ltd. 773,820 1,993,403 Investa Property Group 393,048 496,081 James Hardie Industries NV 210,636 1,008,873 John Fairfax Holdings Ltd. 393,444 797,075 Leighton Holdings Ltd. 64,044 408,307 Lend Lease Corp. Ltd. 186,732 1,281,140 Macquarie Bank Ltd. 95,436 1,955,668 Macquarie Goodman Industrial Trust 437,580 441,829 Macquarie Infrastructure Group 883,152 1,840,617 Mayne Group Ltd. 407,340 867,411 Mirvac Group 313,200 896,017 National Australia Bank Ltd. 711,180 14,311,077 Newcrest Mining Ltd. 151,092 899,708 News Corp. Ltd. (The) 682,272 5,829,127 OneSteel Ltd. 243,396 310,350 Orica Ltd. 131,112 976,764 Origin Energy Ltd. 298,944 806,860 PaperlinX Ltd. 200,664 657,192 Patrick Corporation Ltd. 80,856 677,726 Principal Office Fund 444,815 457,771 Publishing & Broadcasting Ltd. 63,252 452,385 QBE Insurance Group Ltd. 287,028 1,822,491 Rinker Group Ltd. 435,060 1,636,053 Rio Tinto Ltd. 144,900 3,217,816 Santos Ltd. 271,656 1,026,843 Sonic Healthcare Ltd. 107,172 459,210 Southcorp Ltd. 491,940 983,881 Stockland Trust Group 506,993 1,604,659 Suncorp-Metway Ltd. 247,356 1,953,234 TAB Ltd. 220,608 471,202 TABCORP Holdings Ltd. 171,036 1,274,192 Telstra Corp. Ltd. 1,022,364 3,321,860 Toll Holdings Ltd. 105,012 489,377 Transurban Group 211,968 600,920 Wesfarmers Ltd. 177,228 3,233,698 Westfield Holdings Ltd. 196,560 1,895,630 Westfield Trust 1,014,948 2,167,853 Westpac Banking Corp. Ltd. 827,928 8,386,466 WMC Resources Ltd./1/ 525,636 1,388,089 Woodside Petroleum Ltd. 218,988 1,892,229 Woolworths Ltd. 472,644 3,597,605 134,121,533 HONG KONG - 22.04% ASM Pacific Technology Ltd. 90,000 302,333 Bank of East Asia Ltd. 640,800 1,511,757 BOC Hong Kong (Holdings) Ltd. 1,224,000 1,569,362 Cathay Pacific Airways Ltd. 468,000 810,068 Cheung Kong (Holdings) Ltd. 720,000 5,585,081 SCHEDULES OF INVESTMENTS 45 Schedule of Investments (Continued) iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ Cheung Kong Infrastructure Holdings Ltd. 216,000 $ 447,268 CLP Holdings Ltd. 828,000 3,651,997 Esprit Holdings Ltd. 270,000 671,594 Giordano International Ltd. 792,000 330,028 Hang Lung Properties Ltd. 540,500 623,706 Hang Seng Bank Ltd. 356,400 3,952,714 Henderson Land Development Co. Ltd. 288,000 1,087,475 Hong Kong & China Gas Co. Ltd. 1,728,600 2,327,155 Hong Kong Exchanges & Clearing Ltd. 504,000 904,691 Hongkong Electric Holdings Ltd. 648,000 2,558,982 Hopewell Holdings Ltd. 288,000 326,796 Hutchison Whampoa Ltd. 1,008,000 7,431,389 Hysan Development Co. Ltd. 288,000 339,721 Johnson Electric Holdings Ltd. 702,000 1,093,591 Li & Fung Ltd. 720,000 1,223,179 MTR Corp. Ltd. 594,000 746,370 New World Development Co. Ltd. 504,000 361,876 PCCW Ltd./1/ 600 348 SCMP Group Ltd. 504,000 213,248 Shangri-La Asia Ltd. 504,000 420,035 Sino Land Co. Ltd. 792,000 370,646 SmarTone Telecommunications Holdings Ltd. 198,000 248,790 Sun Hung Kai Properties Ltd. 612,000 4,413,829 Swire Pacific Ltd. Class A 432,000 2,426,048 Techtronic Industries Co. Ltd. 216,000 484,656 Television Broadcasts Ltd. 144,000 607,435 Texwinca Holdings Ltd. 288,000 223,403 Wharf (Holdings) Ltd. (The) 576,000 1,351,497 Yue Yuen Industrial (Holdings) Ltd. 198,000 591,511 49,208,579 NEW ZEALAND - 3.06% Auckland International Airport Ltd. 111,719 406,180 Carter Holt Harvey Ltd. 423,036 419,911 Contact Energy Ltd. 137,556 392,949 Fisher & Paykel Appliances Holdings Ltd. 30,312 255,399 Fisher & Paykel Healthcare Corp. Ltd. 33,516 237,908 Fletcher Building Ltd. 187,848 455,310 Fletcher Challenge Forests Ltd./1/ 99,523 63,753 Independent Newspapers Ltd. 65,556 164,949 Lion Nathan Ltd. 128,304 437,646 NGC Holdings Ltd. 105,840 102,615 Sky City Entertainment Group Ltd. 97,416 504,282 Sky Network Television Ltd./1/ 42,768 117,237 Telecom Corp. of New Zealand Ltd. 880,416 2,565,845 Tower Ltd./1/ 673,761 474,370 Warehouse Group Ltd. (The) 77,436 228,804 6,827,158 SINGAPORE - 11.22% Allgreen Properties Ltd. 180,000 103,714 Capitaland Ltd. 468,000 363,101 Chartered Semiconductor Manufacturing Ltd./1/ 792,000 506,041 City Developments Ltd. 216,000 628,444 ComfortDelGro Corp. Ltd./1/ 756,000 351,498 Creative Technology Ltd. 27,000 278,795 Cycle & Carriage Ltd. 36,000 96,115 Datacraft Asia Ltd./1/ 144,000 152,640 DBS Group Holdings Ltd. 504,000 3,622,797 Fraser & Neave Ltd. 108,700 604,612 Haw Par Corp. Ltd. 36,397 85,547 Keppel Corp. Ltd. 252,000 754,749 Keppel Land Ltd. 180,000 157,111 Neptune Orient Lines Ltd./1/ 396,000 415,677 Oversea-Chinese Banking Corp. Ltd. 432,000 2,710,936 Overseas Union Enterprise Ltd. 36,000 136,574 Parkway Holdings Ltd. 216,000 107,821 SembCorp Industries Ltd. 432,000 322,848 SembCorp Logistics Ltd. 144,000 135,547 SembCorp Marine Ltd. 216,000 118,295 Singapore Airlines Ltd. 252,000 1,610,132 Singapore Exchange Ltd. 360,000 338,867 Singapore Land Ltd. 72,000 159,370 Singapore Post Ltd. 504,000 221,393 Singapore Press Holdings Ltd. 180,000 1,920,246 46 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ Singapore Technologies Engineering Ltd. 612,000 $ 677,323 Singapore Telecommunications Ltd. 2,880,000 2,793,086 SMRT Corp. Ltd. 360,000 118,090 ST Assembly Test Services Ltd./1/ 144,000 184,015 United Overseas Bank Ltd. 540,000 3,912,374 United Overseas Land Ltd. 144,000 156,084 Venture Corp. Ltd. 108,000 1,244,566 Wing Tai Holdings Ltd. 180,000 71,367 25,059,775 TOTAL COMMON STOCKS (COST: $193,682,029) 215,217,045 PREFERRED STOCKS - 3.16% AUSTRALIA - 3.12% News Corp. Ltd. (The) 972,252 6,953,656 6,953,656 NEW ZEALAND - 0.04% Fletcher Challenge Forests Ltd./1/ 142,693 91,406 91,406 TOTAL PREFERRED STOCKS (COST: $5,812,442) 7,045,062 SHORT TERM INVESTMENTS - 16.16% MONEY MARKET FUNDS - 10.53% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 15,491,746 15,491,746 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 5,843,796 5,843,796 BlackRock Temp Cash Money Market Fund/2/ 307,490 307,490 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 531,255 531,255 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 1,351,022 $ 1,351,022 23,525,309 FLOATING RATE NOTES - 3.90% Beta Finance Inc. 1.07%, 05/20/04 /2/ $ 265,627 265,599 1.16%, 08/23/04 /2/ 265,627 265,849 Canadian Imperial Bank of Commerce 1.07%, 10/30/03 /2/ 212,502 212,502 1.37%, 08/26/04 /2/ 531,254 531,255 CC USA Inc. 1.06%, 05/24/04 /2/ 531,254 531,216 1.07%, 04/19/04 /2/ 233,752 233,745 1.11%, 07/15/04 /2/ 265,627 265,710 Dorada Finance Inc. 1.07%, 05/20/04 /2/ 531,254 531,197 1.24%, 08/09/04 /2/ 132,814 132,795 Five Finance Inc. 1.08%, 04/15/04 /2/ 265,627 265,628 HBOS Treasury Services PLC 1.27%, 06/24/04 /2/ 531,254 531,255 Holmes Financing PLC 1.07%, 04/15/04 /2/ 106,251 106,251 K2 USA LLC 1.07%, 08/16/04 /2/ 132,814 132,795 1.08%, 04/13/04 /2/ 265,627 265,619 1.08%, 05/17/04 /2/ 265,627 265,618 Links Finance LLC 1.05%, 07/20/04 /2/ 212,502 212,464 1.07%, 05/04/04 /2/ 265,627 265,618 1.07%, 06/28/04 /2/ 265,627 265,584 1.08%, 03/29/04 /2/ 265,627 265,628 Nationwide Building Society 1.08%, 07/23/04 /2/ 398,441 398,441 Sigma Finance Inc. 1.05%, 07/20/04 /2/ 265,627 265,580 1.06%, 10/15/03 /2/ 531,254 531,248 1.06%, 07/01/04 /2/ 265,627 265,572 1.24%, 08/06/04 /2/ 132,814 132,801 SCHEDULES OF INVESTMENTS 47 Schedule of Investments (Continued) iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND August 31, 2003 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Tango Finance Corp. 1.05%, 07/15/04 /2/ $ 159,376 $ 159,330 1.06%, 07/06/04 /2/ 159,376 159,363 Toronto Dominion 1.33%, 08/23/04 /2/ 345,315 345,146 White Pine Finance LLC 1.06%, 07/06/04 /2/ 318,753 318,727 1.07%, 05/17/04 /2/ 318,753 318,753 1.08%, 04/20/04 /2/ 265,627 265,628 8,706,917 COMMERCIAL PAPER - 1.49% Corporate Asset Funding Corp. 1.06%, 09/24/03 /2/ 159,376 159,273 CRC Funding LLC 1.05%, 09/25/03 /2/ 265,627 265,449 1.06%, 09/16/03 /2/ 106,251 106,207 Edison Asset Securitization 1.06%, 09/05/03 /2/ 265,627 265,604 1.06%, 09/15/03 /2/ 159,376 159,315 1.07%, 10/23/03 /2/ 499,379 498,622 Eureka Securitization Inc. 1.05%, 09/18/03 /2/ 265,627 265,503 Jupiter Securitization Corp. 1.07%, 09/02/03 /2/ 132,814 132,814 Park Avenue Receivables Corp. 1.06%, 09/16/03 /2/ 132,814 132,759 Preferred Receivables Funding Corp. 1.06%, 09/08/03 /2/ 132,814 132,790 Quincy Capital Corp. 1.06%, 09/17/03 /2/ 550,422 550,179 Receivables Capital Corp. 1.06%, 09/17/03 /2/ 387,816 387,645 UBS Finance (Delaware) Inc. 1.09%, 09/02/03 /2/ 265,627 265,628 3,321,788 TIME DEPOSITS - 0.24% SunTrust Banks Inc. 1.00%, 09/02/03 /2/ 531,254 531,255 531,255 TOTAL SHORT TERM INVESTMENTS (COST: $36,085,269) 36,085,269 TOTAL INVESTMENTS IN SECURITIES - 115.70% (COST $235,579,740) 258,347,376 OTHER ASSETS, LESS LIABILITIES - (15.70%) (35,049,851) ------------- NET ASSETS - 100.00% $ 223,297,525 ============= /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. 48 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments iSHARES MSCI SINGAPORE INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.54% United Overseas Bank Ltd. 2,211,000 $ 16,018,997 DBS Group Holdings Ltd. 2,211,000 15,892,863 Singapore Telecommunications Ltd. 10,452,000 10,136,574 Oversea-Chinese Banking Corp. Ltd. 1,608,000 10,090,707 Venture Corp. Ltd. 402,000 4,632,552 Singapore Press Holdings Ltd. 402,000 4,288,550 Keppel Corp. Ltd. 1,407,000 4,214,017 Singapore Technologies Engineering Ltd. 3,618,000 4,004,176 Singapore Airlines Ltd. 603,000 3,852,815 City Developments Ltd. 1,206,000 3,508,814 Fraser & Neave Ltd. 603,000 3,354,013 Singapore Exchange Ltd. 3,015,000 2,838,011 Neptune Orient Lines Ltd./1/ 2,010,000 2,109,875 Capitaland Ltd. 2,613,000 2,027,315 ComfortDelGro Corp. Ltd./1/ 4,020,000 1,869,074 SembCorp Industries Ltd. 2,211,000 1,652,353 Creative Technology Ltd. 150,750 1,556,606 Chartered Semiconductor Manufacturing Ltd./1/ 2,412,000 1,541,126 Haw Par Corp. Ltd. 603,909 1,419,422 SMRT Corp. Ltd. 3,618,000 1,186,805 Cycle & Carriage Ltd. 402,000 1,073,284 Datacraft Asia Ltd./1/ 1,005,000 1,065,300 Singapore Post Ltd. 2,412,000 1,059,524 ST Assembly Test Services Ltd./1/ 804,000 1,027,418 SembCorp Logistics Ltd. 1,005,000 946,004 Allgreen Properties Ltd. 1,608,000 926,510 Parkway Holdings Ltd. 1,809,000 903,004 Singapore Land Ltd. 402,000 889,817 SembCorp Marine Ltd. 1,608,000 880,644 United Overseas Land Ltd. 804,000 871,470 Overseas Union Enterprise Ltd. 201,000 762,537 Keppel Land Ltd. 804,000 701,763 Wing Tai Holdings Ltd. 1,005,000 398,468 TOTAL COMMON STOCKS (COST: $110,978,868) 107,700,408 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ SHORT TERM INVESTMENTS - 9.50% MONEY MARKET FUNDS - 6.17% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 4,371,473 $ 4,371,473 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 1,677,345 1,677,345 BlackRock Temp Cash Money Market Fund/2/ 88,259 88,259 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 152,486 152,486 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 387,784 387,784 6,677,347 FLOATING RATE NOTES - 2.31% Beta Finance Inc. 1.07%, 05/20/04 /2/ $ 76,243 76,235 1.16%, 08/23/04 /2/ 76,243 76,307 Canadian Imperial Bank of Commerce 1.07%, 10/30/03 /2/ 60,994 60,994 1.37%, 08/26/04 /2/ 152,486 152,486 CC USA Inc. 1.06%, 05/24/04 /2/ 152,486 152,475 1.07%, 04/19/04 /2/ 67,094 67,092 1.11%, 07/15/04 /2/ 76,243 76,267 Dorada Finance Inc. 1.07%, 05/20/04 /2/ 152,486 152,470 1.24%, 08/09/04 /2/ 38,121 38,116 Five Finance Inc. 1.08%, 04/15/04 /2/ 76,243 76,243 HBOS Treasury Services PLC 1.27%, 06/24/04 /2/ 152,486 152,486 Holmes Financing PLC 1.07%, 04/15/04 /2/ 30,497 30,497 SCHEDULES OF INVESTMENTS 49 Schedule of Investments (Continued) iSHARES MSCI SINGAPORE INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ K2 USA LLC 1.07%, 08/16/04 /2/ $ 38,121 $ 38,116 1.08%, 04/13/04 /2/ 76,243 76,241 1.08%, 05/17/04 /2/ 76,243 76,240 Links Finance LLC 1.05%, 07/20/04 /2/ 60,994 60,984 1.07%, 05/04/04 /2/ 76,243 76,240 1.07%, 06/28/04 /2/ 76,243 76,230 1.08%, 03/29/04 /2/ 76,243 76,243 Nationwide Building Society 1.08%, 07/23/04 /2/ 114,364 114,364 Sigma Finance Inc. 1.05%, 07/20/04 /2/ 76,243 76,229 1.06%, 10/15/03 /2/ 152,486 152,485 1.06%, 07/01/04 /2/ 76,243 76,227 1.24%, 08/06/04 /2/ 38,121 38,118 Tango Finance Corp. 1.05%, 07/15/04 /2/ 45,746 45,733 1.06%, 07/06/04 /2/ 45,746 45,742 Toronto Dominion 1.33%, 08/23/04 /2/ 99,116 99,067 White Pine Finance LLC 1.06%, 07/06/04 /2/ 91,492 91,484 1.07%, 05/17/04 /2/ 91,492 91,492 1.08%, 04/20/04 /2/ 76,243 76,243 2,499,146 COMMERCIAL PAPER - 0.88% Corporate Asset Funding Corp. 1.06%, 09/24/03 /2/ 45,746 45,716 CRC Funding LLC 1.05%, 09/25/03 /2/ 76,243 76,192 1.06%, 09/16/03 /2/ 30,497 30,485 Edison Asset Securitization 1.06%, 09/05/03 /2/ 76,243 76,236 1.06%, 09/15/03 /2/ 45,746 45,728 1.07%, 10/23/03 /2/ 143,337 143,119 Eureka Securitization Inc. 1.05%, 09/18/03 /2/ 76,243 76,207 Jupiter Securitization Corp. 1.07%, 09/02/03 /2/ 38,121 38,121 Park Avenue Receivables Corp. 1.06%, 09/16/03 /2/ 38,121 38,106 Preferred Receivables Funding Corp. 1.06%, 09/08/03 /2/ 38,121 38,115 Quincy Capital Corp. 1.06%, 09/17/03 /2/ 157,988 157,918 Receivables Capital Corp. 1.06%, 09/17/03 /2/ 111,315 111,266 UBS Finance (Delaware) Inc. 1.09%, 09/02/03 /2/ 76,243 76,243 953,452 TIME DEPOSITS - 0.14% SunTrust Banks Inc. 1.00%, 09/02/03 /2/ 152,486 152,486 152,486 TOTAL SHORT TERM INVESTMENTS (COST: $10,282,431) 10,282,431 TOTAL INVESTMENTS IN SECURITIES - 109.04% (COST $121,261,299) 117,982,839 OTHER ASSETS, LESS LIABILITIES - (9.04%) (9,780,409) ------------- NET ASSETS - 100.00% $ 108,202,430 ============= /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. 50 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments iSHARES MSCI SOUTH AFRICA INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.67% Anglo American PLC 1,055,285 $ 19,802,790 Sasol Ltd. 517,405 5,999,922 Old Mutual PLC 3,182,445 4,797,547 Impala Platinum Holdings Ltd. 59,645 4,638,070 Standard Bank Group Ltd. 950,740 4,267,305 AngloGold Ltd. 104,720 4,057,364 Gold Fields Ltd. 291,031 3,970,409 FirstRand Ltd. 2,735,355 2,836,112 Sappi Ltd. 214,900 2,741,221 Harmony Gold Mining Co. Ltd. 169,995 2,422,371 MTN Group Ltd./1/ 966,923 2,394,223 Sanlam Ltd. 2,420,495 2,394,078 Anglo American Platinum Corp. Ltd. 56,700 2,106,332 Bidvest Group Ltd. 310,835 1,853,136 Barloworld Ltd. 202,895 1,635,893 Tiger Brands Ltd. 157,150 1,541,485 Nedcor Ltd. 127,395 1,446,011 Imperial Holdings Ltd./1/ 156,765 1,256,473 Nampak Ltd. 574,875 1,025,050 Liberty Group Ltd. 139,020 942,605 Telkom South Africa Ltd./1/ 160,860 884,620 Naspers Ltd. 232,505 872,290 Woolworths Holdings Ltd. 851,935 761,279 Anglovaal Industries Ltd. 322,420 703,782 Network Healthcare Holdings Ltd./1/ 1,101,310 603,993 Dimension Data Holdings PLC/1/ 1,312,185 554,949 Foschini Ltd. 216,125 515,987 JD Group Ltd. 115,010 495,971 Truworths International Ltd. 434,315 476,976 Metro Cash & Carry Ltd./1/ 1,542,203 458,663 Pick'n Pay Stores Ltd. 219,765 451,223 Investec Ltd. 34,825 437,094 Alexander Forbes Ltd. 294,525 433,952 Iscor Ltd. 150,010 423,630 New Africa Capital Ltd. 507,150 422,048 African Bank Investments Ltd. 426,300 421,647 Shoprite Holdings Ltd. 387,115 367,046 Tongaat-Hulett Group Ltd. 47,075 227,989 TOTAL COMMON STOCKS (COST: $69,181,175) 81,641,536 SHORT TERM INVESTMENTS - 0.01% MONEY MARKET FUNDS - 0.01% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/ 13,404 13,404 13,404 TOTAL SHORT TERM INVESTMENTS (COST: $13,404) 13,404 TOTAL INVESTMENTS IN SECURITIES - 99.68% (COST $69,194,579) 81,654,940 OTHER ASSETS, LESS LIABILITIES - 0.32% 258,884 ------------- NET ASSETS - 100.00% $ 81,913,824 ============= /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 51 Schedule of Investments iSHARES MSCI SOUTH KOREA INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS AND RIGHTS - 99.98% Samsung Electronics Co. Ltd. 100,500 $ 37,103,756 Kookmin Bank 329,649 12,016,486 POSCO 95,140 11,223,815 SK Telecom Co. Ltd. 52,260 8,915,137 LG Electronics Inc. 121,946 6,623,844 Samsung SDI Co. Ltd. 69,680 6,534,810 Hyundai Motor Co. Ltd. 180,900 6,018,485 Korea Electric Power Corp. 333,660 5,465,426 KT Corp. 129,980 4,947,679 Samsung Electro-Mechanics Co. Ltd. 116,580 4,195,198 Shinhan Financial Group Ltd. 280,060 3,803,064 LG Corp. 76,380 3,351,450 Hyundai Mobis Co. 72,360 2,548,644 Samsung Fire & Marine Insurance Co. Ltd. 41,540 2,291,619 Shinsegae Department Store Co. Ltd. 12,060 2,139,223 Daeduck Electronics Co. Ltd. 215,781 2,087,760 Hana Bank 110,273 1,605,077 KT&G Corp. 96,480 1,596,741 Samsung Securities Co. Ltd. 61,640 1,564,215 Hyundai Heavy Industries Co. Ltd./1/ 58,960 1,516,221 KT Corp. ADR 77,597 1,462,703 Kangwon Land Inc. 12,998 1,459,483 Kia Motors Corp. 187,600 1,453,671 Daewoo Shipbuilding and Marine Engineering Co. Ltd./1/ 125,960 1,432,518 LG Investments & Securities Co. Ltd. 109,880 1,324,249 Samsung Corp. 176,880 1,276,028 S-Oil Corp. 53,820 1,050,592 Hankook Tire Co. Ltd. 170,180 987,932 NCsoft Corp./1/ 18,484 950,673 Daishin Securities Co. Ltd. 50,920 918,353 Daum Communications Corp./1/ 16,482 916,250 Samsung Heavy Industries Co. Ltd. 210,380 915,977 Humax Co. Ltd. 64,454 875,251 LG Card Co. Ltd. 46,900 837,891 Cheil Jedang Corp. 18,760 827,940 S1 Corp. 41,540 800,304 LG Engineering & Construction Co. Ltd. 46,900 784,154 Honam Petrochemical Corp. 20,100 766,811 Daelim Industrial Co. Ltd. 34,840 765,844 LG Petrochemical Co. Ltd. 37,520 732,408 Cheil Communications Inc. 6,700 727,859 Cheil Industries Inc. 53,600 718,761 Amorepacific Corp. 5,360 673,270 Korea Exchange Bank/1/ 144,720 648,522 Hite Brewery Co. Ltd. 10,720 608,672 Hanjin Shipping Co. Ltd. 49,580 559,655 Good Morning Securities Co. Ltd./1/ 103,684 553,509 Kumgang Korea Chemical Co. Ltd. 6,700 549,306 Hyundai Department Store Co. Ltd. 18,760 525,423 Korean Air Co. Ltd. 40,200 506,658 Nong Shim Co. Ltd. 4,362 481,273 LG Cable Ltd. 26,800 336,635 LG Household & Health Care Ltd. 13,400 330,380 YuHan Corp. 5,364 301,832 Hyosung Corp. 25,460 283,069 Dongwon Financial Holding Co. Ltd./1/ 41,407 237,565 Samsung Fine Chemicals Co. Ltd. 16,080 227,229 Poongsan Corp. 13,400 105,426 Dong-A Pharmaceutical Co. Ltd. 9 132 LG Chem Investment Ltd. 6 46 TriGem Computer Inc./1/ 7 37 TriGem Computer Inc., Rights/1/,/2/ 2 3 TOTAL COMMON STOCKS AND RIGHTS (COST: $108,395,926) 154,462,944 52 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI SOUTH KOREA INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ SHORT TERM INVESTMENTS - 0.16% MONEY MARKET FUNDS - 0.16% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/3/ 246,024 $ 246,024 246,024 TOTAL SHORT TERM INVESTMENTS (COST: $246,024) 246,024 TOTAL INVESTMENTS IN SECURITIES - 100.14% (COST $108,641,950) 154,708,968 OTHER ASSETS, LESS LIABILITIES - (0.14%) (223,453) ------------- NET ASSETS - 100.00% $ 154,485,515 ============= /1/ Non-income earning securities. /2/ Security valued at fair value in accordance with procedures approved by the Board of Directors. See Note 1. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 53 Schedule of Investments iSHARES MSCI TAIWAN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.68% Taiwan Semiconductor Manufacturing Co. Ltd./1/ 20,010,726 $ 39,250,503 United Microelectronics Corp./1/ 19,575,473 16,046,409 Hon Hai Precision Industry Co. Ltd. 2,610,516 10,775,887 Nan Ya Plastic Corp. 6,525,992 7,833,177 Cathay Financial Holdings Co. Ltd. 6,091,055 7,596,432 Formosa Plastic Corp. 4,785,259 7,074,641 Asustek Computer Inc. 2,610,156 7,030,106 AU Optronics Corp./1/ 4,785,800 6,374,902 China Steel Corp. 7,830,684 6,258,495 MediaTek Inc. 569,050 5,664,178 Quanta Computer Inc. 2,175,468 5,381,669 Formosa Chemicals & Fibre Corp. 3,915,964 5,113,063 Mega Financial Holdings Co. Ltd. 10,005,137 4,862,266 Compal Electronics Inc. 3,045,910 4,636,903 Chinatrust Financial Holding Co. Ltd. 5,655,289 4,602,642 Fubon Financial Holding Co. Ltd. 5,220,000 4,538,732 China Development Financial Holding Co./1/ 11,745,939 4,401,546 Acer Inc. 2,610,512 3,859,444 Chunghwa Telecom Co. Ltd. 2,573,000 3,683,462 Benq Corp. 2,175,472 3,216,270 Lite-On Technology Corp. 2,610,632 2,957,768 First Financial Holding Co. Ltd./1/ 4,785,050 2,829,733 Winbond Electronics Corp./1/ 4,785,280 2,787,841 Advanced Semiconductor Engineering Inc./1/ 3,480,792 2,700,421 Hua Nan Financial Holdings Co. Ltd./1/ 3,480,186 2,475,804 CMC Magnetics Corp./1/ 3,045,400 2,282,401 Via Technologies Inc./1/ 1,305,764 2,006,927 Taishin Financial Holdings Co. Ltd. 3,480,441 1,986,902 Taiwan Cellular Corp. 2,701,920 1,937,966 Realtek Semiconductor Corp. 870,700 1,886,287 Pou Chen Corp. 1,740,616 1,875,246 Gigabyte Technology Co. Ltd. 914,116 1,873,299 Siliconware Precision Industries Co. Ltd./1/ 2,175,525 1,808,798 Ritek Corp./1/ 2,610,625 1,796,056 Chang Hwa Commercial Bank Ltd./1/ 3,480,958 1,793,573 Delta Electronics Inc. 1,305,405 1,719,750 Chunghwa Picture Tubes Ltd./1/ 3,045,000 1,586,773 SinoPac Holdings Co. 3,915,393 1,553,181 China Motor Co. Ltd. 870,331 1,528,774 Yulon Motor Co. Ltd. 1,305,331 1,513,294 Uni-President Enterprises Corp. 4,350,637 1,490,206 Tatung Co. Ltd./1/ 5,220,120 1,467,098 Inventec Co. Ltd. 2,175,500 1,324,738 Synnex Technology International Corp. 870,943 1,313,120 Ambit Microsystems Corp. 435,934 1,193,273 President Chain Store Corp. 870,654 1,149,555 Macronix International Co. Ltd./1/ 4,785,200 1,141,735 Far Eastern Textile Ltd. 2,610,975 1,131,285 Yang Ming Marine Transport Corp./1/ 1,305,000 1,115,580 Walsin Lihwa Corp./1/ 4,350,779 1,114,507 Yageo Corp./1/ 3,045,100 1,114,344 Cheng Shin Rubber Industry Co. Ltd. 870,604 1,067,929 International Bank of Taipei 2,175,245 1,018,909 Zyxel Communication Corp. 492,450 965,927 Taiwan Glass Industrial Corp. 1,305,012 878,719 Micro-Star International Co. Ltd. 492,103 871,603 Kinpo Electronics Inc. 1,305,235 802,446 Wan Hai Lines Ltd. 870,368 797,544 Nien Made Enterprise Co. Ltd. 435,000 751,361 Premier Image Technology Corp. 435,340 739,204 Teco Electric & Machinery Co. Ltd. 2,175,092 738,658 Advantech Co. Ltd. 435,567 707,710 Taiwan Styrene Monomer Corp. 870,600 690,710 Accton Technology Corp. 870,260 667,509 Taiwan Cement Corp. 1,771,188 653,345 Evergreen Marine Corp. Ltd. 886,320 609,770 Asia Cement Corp. 1,305,740 588,688 54 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI TAIWAN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ Sampo Corp./1/ 1,305,148 $ 573,137 Formosa Taffeta Co. Ltd. 1,305,763 539,003 Giant Manufacturing Co. Ltd. 435,914 524,506 Phoenixtec Power Co. Ltd. 437,438 512,252 Cathay Real Estate Development Co. Ltd./1/ 1,305,493 498,761 Systex Corp. 870,772 492,005 EVA Airways Corp./1/ 1,305,000 487,111 Nien Hsing Textile Co. Ltd. 435,800 470,783 Oriental Union Chemical Corp. 435,880 469,594 D-Link Corp. 435,585 466,725 Arima Computer Corp./1/ 1,305,600 462,491 Elitegroup Computer Systems Co. Ltd. 435,300 428,189 Prodisc Technology Inc./1/ 435,572 402,953 China Airlines Ltd./1/ 870,188 354,108 Compeq Manufacturing Co. Ltd./1/ 870,200 337,553 Taiwan Secom Co. Ltd. 435,487 336,579 Continental Engineering Corp. 870,572 319,857 Picvue Electronics Ltd./1/ 870,040 287,823 Shihlin Electric & Engineering Corp. 435,080 235,640 Eternal Chemical Co. Ltd. 435,100 221,639 BES Engineering Corp./1/ 1,305,160 182,641 WU'S Printed Circuit Co. Ltd./1/ 435,000 171,285 Aurora Corp. 610 389 Microelectronics Technology Inc./1/ 420 147 Tung Ho Steel Enterprise Corp./1/ 210 75 China Synthetic Rubber Corp./1/ 230 69 Far Eastern Department Stores Co. Ltd./1/ 160 43 Pacific Electric Wire & Cable Co. Ltd./1/ 986 15 TOTAL COMMON STOCKS (COST: $216,475,847) 233,982,367 SHORT TERM INVESTMENTS - 0.10% MONEY MARKET FUNDS - 0.10% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/ 225,566 225,566 225,566 TOTAL SHORT TERM INVESTMENTS (COST: $225,566) 225,566 TOTAL INVESTMENTS IN SECURITIES - 99.78% (COST $216,701,413) 234,207,933 OTHER ASSETS, LESS LIABILITIES - 0.22% 519,347 ------------- NET ASSETS - 100.00% $ 234,727,280 ============= /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 55 Statements of Assets and Liabilities iSHARES, INC. August 31, 2003
iSHARES MSCI -------------------------------------------------------------------------------------------------- Australia Brazil Canada Emerging Markets Hong Kong Malaysia Index Fund Index Fund Index Fund Index Fund Index Fund Index Fund ------------------------------------------------------------------------------------------------------------------------------ ASSETS Investments at cost $ 91,575,536 $ 87,559,350 $ 416,231,102 $ 267,919,560 $ 281,030,920 $ 69,163,486 ------------- ------------- ------------- ---------------- -------------- -------------- Foreign currency, at cost $ 120,041 $ - $ 624,514 $ 322,717 $ 345,364 $ - ------------- ------------- ------------- ---------------- -------------- -------------- Investments in securities, at value (including securities on loan/1/) (Note 1) $ 102,627,483 $ 102,785,375 $ 502,614,980 $ 297,728,686 $ 291,529,485 $ 99,785,764 Foreign currency, at value 119,157 - 620,094 320,323 345,348 - Cash - - - - - 47,804 Receivables: Investment securities sold 260,984 130,260 570,807 833,160 - 1,236,254 Dividends and interest 418,783 588,021 884,890 618,357 949,724 21,835 iShares sold - 5,968,415 - - - - ------------- ------------- ------------- ---------------- -------------- -------------- Total Assets 103,426,407 109,472,071 504,690,771 299,500,526 292,824,557 101,091,657 ------------- ------------- ------------- ---------------- -------------- -------------- LIABILITIES Payables: Investment securities purchased 246,254 6,296,254 479,663 1,393,012 - 1,237,643 Collateral for securities on loan (Note 5) 15,507,114 - - - 41,874,133 - Advisory fees (Note 2) 92,898 105,606 564,752 261,305 227,217 87,119 Distribution fees 39,376 35,600 239,542 - 96,267 37,315 ------------- ------------- ------------- ---------------- -------------- -------------- Total Liabilities 15,885,642 6,437,460 1,283,957 1,654,317 42,197,617 1,362,077 ------------- ------------- ------------- ---------------- -------------- -------------- NET ASSETS $ 87,540,765 $ 103,034,611 $ 503,406,814 $ 297,846,209 $ 250,626,940 $ 99,729,580 ============= ============= ============= ================ ============== ============== NET ASSETS CONSIST OF: Paid-in capital $ 83,942,950 $ 191,568,086 $ 422,716,699 $ 267,817,496 $ 252,878,568 $ 95,322,920 Undistributed net investment income 2,067,131 1,915,236 3,350,221 702,264 3,358,893 976,401 Accumulated net realized loss (9,515,389) (105,650,262) (9,044,147) (480,445) (16,109,002) (27,192,019) Net unrealized appreciation on investments and translation of assets and liabilities in foreign currencies 11,046,073 15,201,551 86,384,041 29,806,894 10,498,481 30,622,278 ------------- ------------- ------------- ---------------- -------------- -------------- NET ASSETS $ 87,540,765 $ 103,034,611 $ 503,406,814 $ 297,846,209 $ 250,626,940 $ 99,729,580 ============= ============= ============= ================ ============== ============== iShares outstanding 7,800,000 8,450,000 41,100,000 2,200,000 27,750,000 16,650,000 ============= ============= ============= ================ ============== ============== Net asset value per iShare $ 11.22 $ 12.19 $ 12.25 $ 135.38 $ 9.03 $ 5.99 ============= ============= ============= ================ ============== ==============
/1/ Securities on loan with market values of $14,725,920, $-, $-, $-, $39,197,690 and $-, respectively. See Note 5. SEE NOTES TO FINANCIAL STATEMENTS. 9 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Assets and Liabilities (Continued) iSHARES, INC. August 31, 2003
iSHARES MSCI ----------------------------------------------------------------------------------------- Mexico Pacific ex-Japan Singapore South Africa South Korea Taiwan Index Fund Index Fund Index Fund Index Fund Index Fund Index Fund -------------------------------------------------------------------------------------------------------------------- ASSETS Investments at cost $ 67,291,679 $ 235,579,740 $ 121,261,299 $ 69,194,579 $ 108,641,950 $ 216,701,413 ------------ ---------------- ------------- ------------ ------------- ------------- Foreign currency, at cost $ 77,919 $ 266,875 $ 229,865 $ 109,797 $ 3,486 $ 1,138,314 ------------ ---------------- ------------- ------------ ------------- ------------- Investments in securities, at value (including securities on loan/1/) (Note 1) $ 60,151,420 $ 258,347,376 $ 117,982,839 $ 81,654,940 $ 154,708,968 $ 234,207,933 Foreign currency, at value 73,619 268,139 230,500 111,228 3,487 1,139,261 Receivables: Investment securities sold 276,254 201,447 2,551,685 2,012,758 - 5,170,914 Dividends and interest 27 948,729 526,875 276,606 151 926,410 iShares sold 1,923 - - - - - ------------ ---------------- ------------- ------------ ------------- ------------- Total Assets 60,503,243 259,765,691 121,291,899 84,055,532 154,712,606 241,444,518 ------------ ---------------- ------------- ------------ ------------- ------------- LIABILITIES Payables: Investment securities purchased 248,110 569,898 2,628,676 2,011,885 - 6,169,813 Collateral for securities on loan (Note 5) - 35,726,039 10,254,445 - - - iShares redeemed - - 14,744 - - - Foreign taxes on stock dividends - - - - - 231,242 Advisory fees (Note 2) 70,055 172,229 98,293 97,069 169,922 236,488 Distribution fees 29,643 - 44,885 32,754 57,169 79,695 Custodian fees - - 7,800 - - - Accrued expenses - - 40,626 - - - ------------ ---------------- ------------- ------------ ------------- ------------- Total Liabilities 347,808 36,468,166 13,089,469 2,141,708 227,091 6,717,238 ------------ ---------------- ------------- ------------ ------------- ------------- NET ASSETS $ 60,155,435 $ 223,297,525 $ 108,202,430 $ 81,913,824 $ 154,485,515 $ 234,727,280 ============ ================ ============= ============ ============= ============= NET ASSETS CONSIST OF: Paid-in capital $ 74,445,440 $ 200,312,457 $ 125,378,746 $ 68,396,211 $ 115,537,342 $ 256,512,465 Undistributed net investment income 597,687 4,181,906 1,491,917 1,587,853 1,142,788 637,002 Accumulated net realized loss (7,743,026) (3,958,380) (15,389,889) (532,342) (8,261,634) (39,935,772) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (7,144,666) 22,761,542 (3,278,344) 12,462,102 46,067,019 17,513,585 ------------ ---------------- ------------- ------------ ------------- ------------- NET ASSETS $ 60,155,435 $ 223,297,525 $ 108,202,430 $ 81,913,824 $ 154,485,515 $ 234,727,280 ============ ================ ============= ============ ============= ============= iShares outstanding 4,000,000 3,600,000 20,100,000 1,750,000 6,700,000 21,750,000 ============ ================ ============= ============ ============= ============= Net asset value per iShare $ 15.04 $ 62.03 $ 5.38 $ 46.81 $ 23.06 $ 10.79 ============ ================ ============= ============ ============= =============
/1/ Securities on loan with market values of $-, $33,887,337, $9,639,408, $-, $- and $-, respectively. See Note 5. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 57 Statements of Operations iSHARES, INC. Year Ended August 31, 2003
iSHARES MSCI ----------------------------------------------------------------------------------------------- Australia Brazil Canada Emerging Markets Hong Kong Malaysia Index Fund Index Fund Index Fund Index Fund/2/ Index Fund Index Fund ------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $ 3,314,025 $ 2,803,978 $ 7,417,740 $ 1,056,076 $ 5,198,103 $ 2,134,672 Interest 1,352 2,371 2,754 829 4,066 2,173 Securities lending income 7,842 - 89,707 - 45,099 - ------------ ------------ ------------- ---------------- ------------- ------------- Total investment income 3,323,219 2,806,349 7,510,201 1,056,905 5,247,268 2,136,845 ------------ ------------ ------------- ---------------- ------------- ------------- EXPENSES (Note 2) Advisory fees 484,058 453,177 2,434,382 322,206 792,826 458,706 Distribution fees 205,109 153,100 1,031,966 - 335,943 194,367 Stock dividend tax expense - - - 27,634 - - ------------ ------------ ------------- ---------------- ------------- ------------- Total expenses 689,167 606,277 3,466,348 349,840 1,128,769 653,073 ------------ ------------ ------------- ---------------- ------------- ------------- Net investment income 2,634,052 2,200,072 4,043,853 707,065 4,118,499 1,483,772 ------------ ------------ ------------- ---------------- ------------- ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (770,694) (37,862,231) (7,488,265) (480,445) (7,620,342) (1,297,328) In-kind redemptions 4,147,809 - 51,216,925 - 6,062,840 - Foreign currency transactions 40,761 (246,836) 144,359 (4,801) (132) (8,856) ------------ ------------ ------------- ---------------- ------------- ------------- Net realized gain (loss) 3,417,876 (38,109,067) 43,873,019 (485,246) (1,557,634) (1,306,184) ------------ ------------ ------------- ---------------- ------------- ------------- Net change in unrealized appreciation (depreciation) on: Investments 12,048,586 52,968,106 100,028,889 29,809,126 32,371,246 4,269,396 Translation of assets and liabilities in foreign currencies (9,724) 103,208 50 (2,232) (84) 58 ------------ ------------ ------------- ---------------- ------------- ------------- Net change in unrealized appreciation (depreciation) 12,038,862 53,071,314 100,028,939 29,806,894 32,371,162 4,269,454 ------------ ------------ ------------- ---------------- ------------- ------------- Net realized and unrealized gain 15,456,738 14,962,247 143,901,958 29,321,648 30,813,528 2,963,270 ------------ ------------ ------------- ---------------- ------------- ------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 18,090,790 $ 17,162,319 $ 147,945,811 $ 30,028,713 $ 34,932,027 $ 4,447,042 ============ ============ ============= ================ ============= =============
/1/ Net of foreign withholding tax of $93,512, $335,086, $1,272,827, $96,581, $- and $568,826, respectively. /2/ For the period from April 7, 2003 (commencement of operations) to August 31, 2003. SEE NOTES TO FINANCIAL STATEMENTS. 58 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Operations (Continued) iSHARES, INC. Year Ended August 31, 2003
iSHARES MSCI --------------------------------------------------------------------------------------------- Mexico Pacific ex-Japan Singapore South Africa South Korea Taiwan Index Fund Index Fund Index Fund Index Fund/2/ Index Fund Index Fund ------------------------------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME Dividends/1/ $ 1,238,496 $ 6,204,389 $ 2,885,211 $ 1,919,874 $ 2,259,677 $ 2,597,193 Interest 18,996 3,549 1,320 292 2,231 879 Securities lending income - 20,489 13,052 - - - ------------- ---------------- ------------ ------------- ------------ ------------ Total investment income 1,257,492 6,228,427 2,899,583 1,920,166 2,261,908 2,598,072 ------------- ---------------- ------------ ------------- ------------ ------------ EXPENSES (Note 2) Advisory fees 327,547 784,366 311,428 292,742 850,510 1,100,203 Administration fee - - 41,335 - - - Distribution fees 138,791 - 206,677 98,900 287,334 371,690 Custodian fees and expenses - - 87,868 - - - Directors' fees - - 6,132 - - - Professional fees - - 29,252 - - - Federal and state registration fees - - 1,974 - - - Insurance - - 3,030 - - - Printing - - 6,119 - - - AMEX listing fee - - 620 - - - Stock dividend tax expense - - - - 791 482,480 ------------- ---------------- ------------ ------------- ------------ ------------ Total expenses 466,338 784,366 694,435 391,642 1,138,635 1,954,373 ------------- ---------------- ------------ ------------- ------------ ------------ Net investment income 791,154 5,444,061 2,205,148 1,528,524 1,123,273 643,699 ------------- ---------------- ------------ ------------- ------------ ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (4,422,733) (3,406,128) (5,564,986) (532,342) (4,761,516) (15,294,689) In-kind redemptions (6,691,435) 3,538,509 922,805 - - - Foreign currency transactions (15,322) 56,348 (3,074) 59,329 28,166 2,747 ------------- ---------------- ------------ ------------- ------------ ------------ Net realized gain (loss) (11,129,490) 188,729 (4,645,255) (473,013) (4,733,350) (15,291,942) ------------- ---------------- ------------ ------------- ------------ ------------ Net change in unrealized appreciation (depreciation) on: Investments 16,150,674 27,857,795 11,587,609 12,460,361 18,288,992 52,060,764 Translation of assets and liabilities in foreign currencies (4,088) (9,586) (538) 1,741 (13) 14,575 ------------- ---------------- ------------ ------------- ------------ ------------ Net change in unrealized appreciation (depreciation) 16,146,586 27,848,209 11,587,071 12,462,102 18,288,979 52,075,339 ------------- ---------------- ------------ ------------- ------------ ------------ Net realized and unrealized gain 5,017,096 28,036,938 6,941,816 11,989,089 13,555,629 36,783,397 ------------- ---------------- ------------ ------------- ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,808,250 $ 33,480,999 $ 9,146,964 $ 13,517,613 $ 14,678,902 $ 37,427,096 ============= ================ ============ ============= ============ ============
/1/ Net of foreign withholding tax of $-, $330,417, $761,796, $-, $446,785 and $638,589, respectively. /2/ For the period from February 3, 2003 (commencement of operations) to August 31, 2003. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 59 Statements of Changes in Net Assets iSHARES, INC.
iSHARES MSCI iSHARES MSCI iSHARES MSCI AUSTRALIA BRAZIL CANADA INDEX FUND INDEX FUND INDEX FUND -------------------------------- -------------------------------- -------------------------------- For the For the For the For the For the For the year ended year ended year ended year ended year ended year ended August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 ------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 2,634,052 $ 1,661,926 $ 2,200,072 $ 3,197,076 $ 4,043,853 $ 256,056 Net realized gain (loss) 3,417,876 (28,752) (38,109,067) (67,653,062) 43,873,019 140,024 Net change in unrealized appreciation (depreciation) 12,038,862 (1,962,887) 53,071,314 (30,760,002) 100,028,939 (8,820,159) --------------- --------------- --------------- --------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations 18,090,790 (329,713) 17,162,319 (95,215,988) 147,945,811 (8,424,079) --------------- --------------- --------------- --------------- --------------- --------------- Undistributed net investment income included in the price of capital shares issued or redeemed - 3,111 - 38,281 - (670) --------------- --------------- --------------- --------------- --------------- --------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (2,180,684) (256,001) (733,550) - (1,067,330) (24,000) --------------- --------------- --------------- --------------- --------------- --------------- Total distributions to iShareholders (2,180,684) (256,001) (733,550) - (1,067,330) (24,000) --------------- --------------- --------------- --------------- --------------- --------------- iSHARES TRANSACTIONS: iShares sold 8,283,804 23,805,539 52,276,580 235,842,533 505,287,212 49,188,050 iShares redeemed (13,383,892) (3,803,959) (49,458,528) (70,880,598) (215,179,302) (3,207,637) --------------- --------------- --------------- --------------- --------------- --------------- Net increase (decrease) in net assets from iShares transactions (5,100,088) 20,001,580 2,818,052 164,961,935 290,107,910 45,980,413 --------------- --------------- --------------- --------------- --------------- --------------- INCREASE IN NET ASSETS 10,810,018 19,418,977 19,246,821 69,784,228 436,986,391 37,531,664 NET ASSETS: Beginning of year 76,730,747 57,311,770 83,787,790 14,003,562 66,420,423 28,888,759 --------------- --------------- --------------- --------------- --------------- --------------- End of year $ 87,540,765 $ 76,730,747 $ 103,034,611 $ 83,787,790 $ 503,406,814 $ 66,420,423 =============== =============== =============== =============== =============== =============== Undistributed net investment income included in net assets at end of year $ 2,067,131 $ 1,354,021 $ 1,915,236 $ 695,550 $ 3,350,221 $ 229,339 =============== =============== =============== =============== =============== =============== iSHARES ISSUED AND REDEEMED: iShares sold 800,000 2,400,000 5,350,000 17,900,000 53,800,000 4,600,000 iShares redeemed (1,200,000) (400,030) (7,000,000) (9,050,000) (19,700,000) (300,030) --------------- --------------- --------------- --------------- --------------- --------------- Net increase (decrease) in iShares outstanding (400,000) 1,999,970 (1,650,000) 8,850,000 34,100,000 4,299,970 =============== =============== =============== =============== =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS. 60 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Changes in Net Assets (Continued) iSHARES, INC.
iSHARES MSCI iSHARES MSCI iSHARES MSCI EMERGING MARKETS HONG KONG MALAYSIA INDEX FUND INDEX FUND INDEX FUND ----------------- -------------------------------- -------------------------------- For the period For the For the For the For the April 7, 2003/1/ year ended year ended year ended year ended to August 31, 2003 August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 ---------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 707,065 $ 4,118,499 $ 1,955,056 $ 1,483,772 $ 1,260,921 Net realized gain (loss) (485,246) (1,557,634) 860,719 (1,306,184) (2,073,441) Net change in unrealized appreciation (depreciation) 29,806,894 32,371,162 (18,574,344) 4,269,454 6,091,302 ---------------- ------------- ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations 30,028,713 34,932,027 (15,758,569) 4,447,042 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 267,817,496 168,140,088 77,492,553 22,654,462 27,772,630 iShares redeemed - (49,620,095) (14,800,647) (19,290,970) (20,205,691) ---------------- ------------- ------------- ------------- ------------- Net increase in net assets from iShares transactions 267,817,496 118,519,993 62,691,906 3,363,492 7,566,939 ---------------- ------------- ------------- ------------- ------------- INCREASE IN NET ASSETS 297,846,209 151,124,818 46,556,030 6,467,723 12,384,391 NET ASSETS: Beginning of period - 99,502,122 52,946,092 93,261,857 80,877,466 ---------------- ------------- ------------- ------------- ------------- End of period $ 297,846,209 $ 250,626,940 $ 99,502,122 $ 99,729,580 $ 93,261,857 ================ ============= ============= ============= ============= Undistributed net investment income included in net assets at end of period $ 702,264 $ 3,358,893 $ 1,567,728 $ 976,401 $ 844,296 ================ ============= ============= ============= ============= iSHARES ISSUED AND REDEEMED: iShares sold 2,200,000 21,525,000 8,100,000 3,975,000 4,575,000 iShares redeemed - (6,225,000) (1,576,000) (3,750,000) (3,975,030) ---------------- ------------- ------------- ------------- ------------- Net increase in iShares outstanding 2,200,000 15,300,000 6,524,000 225,000 599,970 ================ ============= ============= ============= =============
/1/ Commencement of operations. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 61 Statements of Changes in Net Assets (Continued) iSHARES, INC.
iSHARES MSCI iSHARES MSCI iSHARES MSCI MEXICO PACIFIC EX-JAPAN SINGAPORE INDEX FUND INDEX FUND INDEX FUND -------------------------------- ------------------------------------ -------------------------------- For the period For the For the For the October 25, 2001/1/ For the For the year ended year ended year ended to year ended year ended August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 ----------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 791,154 $ 1,946,658 $ 5,444,061 $ 1,360,533 $ 2,205,148 $ 1,198,517 Net realized gain (loss) (11,129,490) (3,016,406) 188,729 182,427 (4,645,255) (2,787,081) Net change in unrealized appreciation (depreciation) 16,146,586 (21,823,385) 27,848,209 (5,086,667) 11,587,071 (3,949,708) ------------ ------------ ------------- ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations 5,808,250 (22,893,133) 33,480,999 (3,543,707) 9,146,964 (5,538,272) ------------ ------------ ------------- ------------- ------------- ------------- Undistributed net investment income included in the price of capital shares issued or redeemed - (39,128) - 2,522 - 17,460 ------------ ------------ ------------- ------------- ------------- ------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (1,985,056) (161,002) (2,734,116) (135,000) (1,331,268) (596,000) ------------ ------------ ------------- ------------- ------------- ------------- Total distributions to iShareholders (1,985,056) (161,002) (2,734,116) (135,000) (1,331,268) (596,000) ------------ ------------ ------------- ------------- ------------- ------------- iSHARES TRANSACTIONS: iShares sold 35,186,944 201,695,400 104,747,751 114,332,732 17,230,968 31,258,149 iShares redeemed (49,848,527) (153,663,820) (17,225,922) (5,627,734) (4,970,610) (10,718,594) ------------ ------------ ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from iShares transactions (14,661,583) 48,031,580 87,521,829 108,704,998 12,260,358 20,539,555 ------------ ------------ ------------- ------------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS (10,838,389) 24,938,317 118,268,712 105,028,813 20,076,054 14,422,743 NET ASSETS: Beginning of period 70,993,824 46,055,507 105,028,813 - 88,126,376 73,703,633 ------------ ------------ ------------- ------------- ------------- ------------- End of period $ 60,155,435 $ 70,993,824 $ 223,297,525 $ 105,028,813 $ 108,202,430 $ 88,126,376 ============ ============ ============= ============= ============= ============= Undistributed net investment income included in net assets at end of period $ 597,687 $ 1,806,911 $ 4,181,906 $ 1,225,006 $ 1,491,917 $ 621,111 ============ ============ ============= ============= ============= ============= iSHARES ISSUED AND REDEEMED: iShares sold 2,500,000 12,200,000 1,900,000 2,100,000 3,500,000 5,700,000 iShares redeemed (3,700,000) (10,000,030) (300,000) (100,000) (1,000,000) (1,900,030) ------------ ------------ ------------- ------------- ------------- ------------- Net increase (decrease) in iShares outstanding (1,200,000) 2,199,970 1,600,000 2,000,000 2,500,000 3,799,970 ============ ============ ============= ============= ============= =============
/1/ Commencement of operations. SEE NOTES TO FINANCIAL STATEMENTS. 62 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Changes in Net Assets (Continued) iSHARES, INC.
iSHARES MSCI iSHARES MSCI iSHARES MSCI SOUTH AFRICA SOUTH KOREA TAIWAN INDEX FUND INDEX FUND INDEX FUND ------------------- -------------------------------- -------------------------------- For the period February 3, 2003/1/ For the For the For the For the to year ended year ended year ended year ended August 31, 2003 August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 -------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss) $ 1,528,524 $ 1,123,273 $ (7,986) $ 643,699 $ (418,999) Net realized gain (loss) (473,013) (4,733,350) 165,543 (15,291,942) (8,161,934) Net change in unrealized appreciation (depreciation) 12,462,102 18,288,979 30,105,280 52,075,339 2,228,562 ------------ ------------- ------------ ------------- ------------- Net increase (decrease) in net assets resulting from operations 13,517,613 14,678,902 30,262,837 37,427,096 (6,352,371) ------------ ------------- ------------ ------------- ------------- Undistributed net investment income included in the price of capital shares issued or redeemed - - - - 4,467 ------------ ------------- ------------ ------------- ------------- iSHARES TRANSACTIONS: iShares sold 68,396,211 66,418,682 38,694,565 55,256,747 37,605,113 iShares redeemed - (22,948,093) (10,388,731) - - ------------ ------------- ------------ ------------- ------------- Net increase in net assets from iShares transactions 68,396,211 43,470,589 28,305,834 55,256,747 37,605,113 ------------ ------------- ------------ ------------- ------------- INCREASE IN NET ASSETS 81,913,824 58,149,491 58,568,671 92,683,843 31,257,209 NET ASSETS: Beginning of period - 96,336,024 37,767,353 142,043,437 110,786,228 ------------ ------------- ------------ ------------- ------------- End of period $ 81,913,824 $ 154,485,515 $ 96,336,024 $ 234,727,280 $ 142,043,437 ============ ============= ============ ============= ============= Undistributed net investment income included in net assets at end of period $ 1,587,853 $ 1,142,788 $ (8,651) $ 637,002 $ (9,444) ============ ============= ============ ============= ============= iSHARES ISSUED AND REDEEMED: iShares sold 1,750,000 3,300,000 2,150,000 5,650,000 3,800,000 iShares redeemed - (1,150,000) (450,000) - - ------------ ------------- ------------ ------------- ------------- Net increase in iShares outstanding 1,750,000 2,150,000 1,700,000 5,650,000 3,800,000 ============ ============= ============ ============= =============
/1/ Commencement of operations. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 63 Financial Highlights iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI AUSTRALIA INDEX FUND --------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF YEAR $ 9.36 $ 9.24 $ 9.93 $ 9.99 $ 7.75 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.32 0.23 0.24 0.23 0.20 Net realized and unrealized gain (loss) 1.81 (0.07) (0.71) (0.04) 2.29 ------------- ------------- ------------- ------------- ------------- Total from investment operations 2.13 0.16 (0.47) 0.19 2.49 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.27) (0.04) (0.20) (0.23) (0.19) Return of capital - - (0.02) (0.02) (0.06) ------------- ------------- ------------- ------------- ------------- Total distributions (0.27) (0.04) (0.22) (0.25) (0.25) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 11.22 $ 9.36 $ 9.24 $ 9.93 $ 9.99 ============= ============= ============= ============= ============= TOTAL RETURN 23.33% 1.74% (4.77)% 1.84% 32.09% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 87,541 $ 76,731 $ 57,312 $ 61,574 $ 53,957 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 0.95% 1.00% Ratio of net investment income to average net assets 3.21% 2.47% 2.54% 2.22% 2.03% Portfolio turnover rate/2/ 8% 5% 23% 36% 14%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. SEE NOTES TO FINANCIAL STATEMENTS. 64 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI BRAZIL INDEX FUND ------------------------------------------------------------------ Period from Jul. 10, 2000/7/ Year ended Year ended Year ended to Aug. 31, 2003 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/ 0.32 0.38 0.68 0.02 Net realized and unrealized gain (loss) 3.68 (3.28) (8.09) (0.63) ------------- ------------- ------------- ------------- Total from investment operations 4.00 (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 $ 12.19 $ 8.30 $ 11.20 $ 19.25 ============= ============= ============= ============= TOTAL RETURN 48.85% (25.89)% (38.52)% (2.97)%/5/ ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $ 103,035 $ 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/ 3.59% 3.50% 4.44% 0.77%/2/ Portfolio turnover rate/4/ 85% 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. FINANCIAL HIGHLIGHTS 65 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI CANADA INDEX FUND ---------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 ------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 9.49 $ 10.70 $ 16.94 $ 13.22 $ 9.90 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/3/ 0.10 0.07 0.05 0.70 0.07 Net realized and unrealized gain (loss) 2.69 (1.27) (5.92) 8.08 3.87 ------------- ------------- ------------- ------------- ------------- Total from investment operations 2.79 (1.20) (5.87) 8.78 3.94 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.03) (0.01) (0.02) (0.55) (0.09) Net realized gain - - (0.31) (4.39) (0.53) Return of capital - - (0.04) (0.12) - ------------- ------------- ------------- ------------- ------------- Total distributions (0.03) (0.01) (0.37) (5.06) (0.62) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 12.25 $ 9.49 $ 10.70 $ 16.94 $ 13.22 ============= ============= ============= ============= ============= TOTAL RETURN 29.47% (11.23)% (34.95)% 67.21% 39.71% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 503,407 $ 66,420 $ 28,889 $ 22,028 $ 9,253 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 1.17%/1/ 1.23% Ratio of net investment income to average net assets 0.98% 0.70% 0.44% 4.07%/2/ 0.53% Portfolio turnover rate/4/ 10% 5% 63% 64% 12%
/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. SEE NOTES TO FINANCIAL STATEMENTS. 66 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI EMERGING MARKETS INDEX FUND ---------------------------------------- Period from Apr. 7, 2003/5/ to Aug. 31, 2003 -------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 101.25 ---------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.78 Net realized and unrealized gain 33.35 ---------------- Total from investment operations 34.13 ---------------- NET ASSET VALUE, END OF PERIOD $ 135.38 ================ TOTAL RETURN/2/ 33.72% ================ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $ 297,846 Ratio of expenses to average net assets/3/ 0.78% Ratio of expenses to average net assets exclusive of foreign taxes on stock dividends/3/ 0.72% Ratio of net investment income to average net assets/3/ 1.58% Portfolio turnover rate/4/ 10%
/1/ Based on average shares outstanding throughout the period. /2/ Not annualized. /3/ Annualized for periods of less than one year. /4/ Excludes portfolio securities received or delivered as a result of processing capital shares transactions in Creation Units. /5/ Commencement of operations. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS 67 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI HONG KONG INDEX FUND --------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 ------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 7.99 $ 8.93 $ 13.24 $ 11.83 $ 6.41 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.23 0.23 0.23 0.33 0.29 Net realized and unrealized gain (loss) 0.95 (1.11) (4.30) 1.42 5.49 ------------- ------------- ------------- ------------- ------------- Total from investment operations 1.18 (0.88) (4.07) 1.75 5.78 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.14) (0.06) (0.23) (0.32) (0.36) Return of capital - - (0.01) (0.02) - ------------- ------------- ------------- ------------- ------------- Total distributions (0.14) (0.06) (0.24) (0.34) (0.36) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 9.03 $ 7.99 $ 8.93 $ 13.24 $ 11.83 ============= ============= ============= ============= ============= TOTAL RETURN 15.14% (9.94)% (30.88)% 14.73% 90.51% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 250,627 $ 99,502 $ 52,946 $ 79,479 $ 77,200 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 0.94% 1.01% Ratio of net investment income to average net assets 3.06% 2.56% 2.11% 2.57% 2.84% Portfolio turnover rate/2/ 10% 15% 43% 21% 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. SEE NOTES TO FINANCIAL STATEMENTS. 68 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI MALAYSIA INDEX FUND ------------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 5.68 $ 5.11 $ 5.96 $ 5.59 $ 2.11 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.10 0.08 0.06 0.05 0.01 Net realized and unrealized gain (loss) 0.30 0.52 (0.85) 0.37 3.67 ------------- ------------- ------------- ------------- ------------- Total from investment operations 0.40 0.60 (0.79) 0.42 3.68 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.09) (0.03) (0.06) (0.05) (0.01) Return of capital - - (0.00)/3/ (0.00)/3/ (0.19) ------------- ------------- ------------- ------------- ------------- Total distributions (0.09) (0.03) (0.06) (0.05) (0.20) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 5.99 $ 5.68 $ 5.11 $ 5.96 $ 5.59 ============= ============= ============= ============= ============= TOTAL RETURN 7.39% 11.82% (13.22)% 7.57% 185.81% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 99,730 $ 93,262 $ 80,877 $ 99,206 $ 95,251 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 0.96% 1.43% Ratio of net investment income to average net assets 1.91% 1.53% 1.19% 0.81% 0.33% Portfolio turnover rate/2/ 35% 37% 37% 18% 7%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS 69 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI MEXICO INDEX FUND ----------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 -------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 13.65 $ 15.35 $ 16.72 $ 13.39 $ 8.11 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/3/ 0.19 0.32 0.17 0.06 0.06 Net realized and unrealized gain (loss) 1.72 (1.95) (1.36) 3.69 5.36 ------------- ------------- ------------- ------------- ------------- Total from investment operations 1.91 (1.63) (1.19) 3.75 5.42 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.52) (0.07) (0.15) - (0.07) Net realized gain - - (0.03) (0.42) (0.01) Return of capital - - - - (0.06) ------------- ------------- ------------- ------------- ------------- Total distributions (0.52) (0.07) (0.18) (0.42) (0.14) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 15.04 $ 13.65 $ 15.35 $ 16.72 $ 13.39 ============= ============= ============= ============= ============= TOTAL RETURN 14.60% (10.67)% (7.02)% 28.20% 66.92% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 60,155 $ 70,994 $ 46,056 $ 40,127 $ 21,430 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 1.04%/1/ 1.26% Ratio of net investment income to average net assets 1.43% 2.05% 1.12% 0.35%/2/ 0.52% Portfolio turnover rate/4/ 13% 8% 34% 24% 18%
/1/ Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 1.04%. /2/ Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 0.35%. /3/ Based on average shares outstanding throughout the period. /4/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. SEE NOTES TO FINANCIAL STATEMENTS. 70 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND ---------------------------------------- Period from Oct. 25, 2001/5/ Year ended to Aug. 31, 2003 Aug. 31, 2002 ----------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 52.51 $ 50.03 ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 1.87 1.35 Net realized and unrealized gain 8.53 1.40 ------------- ------------- Total from investment operations 10.40 2.75 ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.88) (0.27) ------------- ------------- Total distributions (0.88) (0.27) ------------- ------------- NET ASSET VALUE, END OF PERIOD $ 62.03 $ 52.51 ============= ============= TOTAL RETURN 20.15% 5.51%/3/ ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $ 223,298 $ 105,029 Ratio of expenses to average net assets/4/ 0.50% 0.50% Ratio of net investment income to average net assets/4/ 3.47% 2.87% Portfolio turnover rate/2/ 8% 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 71 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI SINGAPORE INDEX FUND --------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF YEAR $ 5.01 $ 5.34 $ 7.58 $ 7.93 $ 3.30 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.12 0.07 0.07 0.13 0.05 Net realized and unrealized gain (loss) 0.33 (0.36) (2.16) (0.21) 4.70 ------------- ------------- ------------- ------------- ------------- Total from investment operations 0.45 (0.29) (2.09) (0.08) 4.75 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.08) (0.04) (0.07) (0.11) (0.11) Net realized gain - - (0.06) (0.14) - Return of capital - - (0.02) (0.02) (0.01) ------------- ------------- ------------- ------------- ------------- Total distributions (0.08) (0.04) (0.15) (0.27) (0.12) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 5.38 $ 5.01 $ 5.34 $ 7.58 $ 7.93 ============= ============= ============= ============= ============= TOTAL RETURN 9.30% (5.42)% (27.89)% (1.29)% 144.52% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 108,202 $ 88,126 $ 73,704 $ 88,719 $ 113,438 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 0.94% 0.97% Ratio of net investment income to average net assets 2.67% 1.44% 1.15% 1.60% 0.76% Portfolio turnover rate/2/ 14% 9% 32% 52% 25%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. SEE NOTES TO FINANCIAL STATEMENTS. 72 2003 iSHARES 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 Aug. 31, 2003 ---------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 38.72 ----------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.89 Net realized and unrealized gain 7.20 ----------- Total from investment operations 8.09 ----------- NET ASSET VALUE, END OF PERIOD $ 46.81 =========== TOTAL RETURN/2/ 20.89% =========== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $ 81,914 Ratio of expenses to average net assets/3/ 0.99% Ratio of net investment income to average net assets/3/ 3.86% Portfolio turnover rate/4/ 17%
/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 73 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI SOUTH KOREA INDEX FUND ------------------------------------------------------------------ Period from May 9, 2000/8/ Year ended Year ended Year ended to Aug. 31, 2003 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/ 0.19 (0.00)/5/ 0.09 (0.04) Net realized and unrealized gain (loss) 1.70 7.92 (4.90) (2.16) ------------- ------------- ------------- ------------- Total from investment operations 1.89 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 $ 23.06 $ 21.17 $ 13.25 $ 18.16 ============= ============= ============= ============= TOTAL RETURN 8.93% 59.77% (26.49)% (10.81)%/6/ ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $ 154,486 $ 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/ 0.98% (0.01)% 0.64% (0.63)%/2/ Portfolio turnover rate/4/ 39% 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. 74 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI TAIWAN INDEX FUND ------------------------------------------------------------------- Period from Jun. 20, 2000/7/ Year ended Year ended Year ended to Aug. 31, 2003 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 income (loss)/3/ 0.04 (0.03) (0.03) (0.01) Net realized and unrealized gain (loss) 1.93 (0.16) (7.37) (2.31) ------------- ------------- ------------- ------------- Total from investment operations 1.97 (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 $ 10.79 $ 8.82 $ 9.01 $ 16.41 ============= ============= ============= ============= TOTAL RETURN 22.45% (2.11)% (45.09)% (12.10)%/5/ ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $ 234,727 $ 142,043 $ 110,786 $ 42,667 Ratio of expenses to average net assets/6/ 1.31% 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 income (loss) to average net assets/6/ 0.43% (0.28)% (0.23)% (0.28)%/2/ Portfolio turnover rate/4/ 15% 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 75 Notes to the Financial Statements iSHARES, INC. 1. SIGNIFICANT ACCOUNTING POLICIES iShares, Inc. (the "Company") is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company was incorporated under the laws of the State of Maryland on September 1, 1994. As of August 31, 2003, the Company offered 24 investment portfolios or funds. These financial statements relate only to the iShares MSCI Australia, iShares MSCI Brazil, iShares MSCI Canada, iShares MSCI Emerging Markets, 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. Under the Funds' organizational documents, their officers and directors are indemnified against certain liabilities that may arise out of the performance of their duties to the Funds. Additionally, in the normal course of business, the Funds enter into contracts with service providers that contain general indemnification clauses. The Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, based on experience, the Funds expect the risk of loss to be remote. 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. Those reclassifications had no impact on prior year net assets, net income or distributions. 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. Short-term investments are valued at amortized cost, 76 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements (Continued) iSHARES, INC. which approximates market value. Mutual fund shares are valued at net asset value. Any securities, including restricted securities or other assets for which market quotations are not readily available, or for which a significant event has occurred since the time of the most recent market quotation, are valued in accordance with fair value pricing policies approved by the Company's Board of Directors. SECURITY TRANSACTIONS, INCOME RECOGNITION AND EXPENSES Security transactions are accounted for on trade date. Dividend income is recognized on the ex-dividend date, and interest income is accrued daily. Realized gains and losses on investment transactions are determined using the specific identification method. Common expenses incurred by the Company prior to December 28, 2001 were allocated to the Funds based on the ratio of average net assets of each Fund to the combined net assets of all funds offered by the Company, or other appropriate method. Other expenses, directly related to a specific fund, were charged to that fund. 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 Emerging Markets, iShares MSCI South Korea and iShares MSCI Taiwan Index Funds. 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 77 Notes to the Financial Statements (Continued) iSHARES, INC. At August 31, 2003, 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 $ 2,821,102 $ - $ 2,821,102 Brazil 1,915,236 - 1,915,236 Canada 3,350,221 - 3,350,221 Emerging Markets 702,264 - 702,264 Hong Kong 3,456,795 - 3,456,795 Malaysia 976,401 - 976,401 Mexico 597,687 - 597,687 Pacific ex-Japan 5,183,483 - 5,183,483 Singapore 1,698,638 - 1,698,638 South Africa 1,587,853 - 1,587,853 South Korea 1,142,789 - 1,142,789 Taiwan 637,002 - 637,002 ----------------------------------------------------------------------------- For the year ended August 31, 2003, the tax characterization of distributions paid was equal to the book characterization of distributions paid for all of the Funds. The total distributions and distributions per share are disclosed in the accompanying Statements of Changes in Net Assets and the Financial Highlights for all Funds. FEDERAL INCOME TAXES Each Fund is treated as a separate entity for federal income tax purposes. It is the policy of each Fund to qualify as a regulated investment company, as defined in Subchapter M of the Internal Revenue Code of 1986, as amended, and to annually distribute all of its net income and any net gains (taking into account any capital loss carryforwards) sufficient to relieve it from all, or substantially all, federal income and excise taxes. Accordingly, no provision for federal income taxes was required for the year ended August 31, 2003. From November 1, 2002 to August 31, 2003, the Funds incurred net realized capital losses and net foreign exchange losses. As permitted by tax regulations, the Funds have elected to defer those losses and treat them as arising in the year ending August 31, 2004, as follows: DEFERRED NET REALIZED CAPITAL/NET FOREIGN iSHARES MSCI INDEX FUND CURRENCY LOSSES --------------------------------------------- Australia $ 603,906 Brazil 1,169,403 Canada 259,289 Emerging Markets 470,743 Hong Kong 2,330,007 Malaysia 889,726 Mexico 3,516,601 Pacific ex-Japan 1,940,878 Singapore 4,245,784 South Africa 345,024 South Korea 3,370,831 Taiwan 9,179,727 --------------------------------------------- 78 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements (Continued) iSHARES, INC. The Funds had tax basis net capital loss carryforwards at August 31, 2003, the tax year-end of the Funds, as follows:
EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING iSHARES MSCI INDEX FUND 2007 2008 2009 2010 2011 TOTAL ---------------------------------------------------------------------------------------------------- Australia $ 674,889 $ 630,985 $ 1,971,994 $ 3,625,203 $ 650,082 $ 7,553,153 Brazil - - 94,163 1,993,420 90,139,850 92,227,433 Canada - - - 780,114 21,276 801,390 Hong Kong 4,085,707 - - 4,971,970 2,870,602 11,928,279 Malaysia 8,654,333 - - 9,819,029 2,898,105 21,371,467 Mexico - - - 1,319,032 2,329,290 3,648,322 Pacific ex-Japan - - - - 329,461 329,461 Singapore - - - 4,810,766 4,428,316 9,239,082 South Korea - - 556,540 666,642 504,041 1,727,223 Taiwan - - - 12,532,361 8,689,663 21,222,024 ----------------------------------------------------------------------------------------------------
Net capital loss carryforwards may be applied against any net realized taxable gains in each succeeding year, or until their respective expiration dates, whichever occurs first. 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, 2003, 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 79 Notes to the Financial Statements (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 Emerging Markets, 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%. For its investment management services to the iShares MSCI Emerging Markets Index Fund, BGFA is entitled to an annual investment advisory fee based on the average net assets of the Fund excluding any investments in other iShares Funds, of 0.75%. 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. Prior to February 24, 2003, Investors Bank served as securities lending agent for the Company. 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 80 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements (Continued) iSHARES, INC. the cash collateral received for the loan of securities. For the period from February 24, 2003 through August 31, 2003, BGI earned securities lending agent fees as follows: SECURITIES LENDING iSHARES MSCI INDEX FUND AGENT FEES ------------------------------------------- Australia $ 7,233 Hong Kong 48,013 Pacific ex-Japan Index 21,578 Singapore 13,921 ------------------------------------------- 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 and iShares MSCI Emerging Markets Index Funds), 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") and Prime Money Market Fund ("PMMF") of Barclays Global Investors Funds. The IMMF and PMMF are feeder funds in a master/feeder fund structure that invests substantially all of its assets in the Money Market Master Portfolio and Prime Money Market Master Portfolio, respectively, which are managed by BGFA, the Funds' investment advisor. The IMMF and PMMF are open-end money market funds available only to institutional investors, including other investment companies managed by BGFA. The IMMF and PMMF seek a high level of income consistent with liquidity and the preservation of capital. While the IMMF and PMMF do not directly charge an advisory fee, the master portfolios in which they invest do charge an advisory fee. Income distributions from the IMMF and PMMF 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 securities lending income, respectively, in the accompanying Statements of Operations. As of August 31, 2003, certain directors and officers of the Company are also employees of BGFA and its affiliates or employees of Investors Bank. The iShares MSCI Emerging Markets Index Fund, in order to improve its portfolio liquidity and its ability to track the MSCI Emerging Markets Free Index, may invest in the shares of other iShares Funds that invest in securities in the Fund's benchmark index. As of August 31, 2003, the iShares MSCI Emerging Markets Index Fund held shares of the iShares MSCI Malaysia, iShares MSCI South Korea NOTES TO THE FINANCIAL STATEMENTS 81 Notes to the Financial Statements (Continued) iSHARES, INC. and iShares MSCI Taiwan Index Funds. Transactions in shares of these affiliated Exchange Traded Funds ("ETFs"), including dividend income and net realized capital gains (losses) during the period ended August 31, 2003 were as follows:
NUMBER OF SHARES HELD NUMBER OF NET AFFILIATED BEGINNING GROSS GROSS SHARES HELD DIVIDEND REALIZED ETF OF PERIOD ADDITIONS REDUCTIONS END OF PERIOD INCOME GAIN ----------------------------------------------------------------------------------------------------------- iShares MSCI Malaysia Index Fund - 987,300 692,500 294,800 $ - $ 6,520 iShares MSCI South Korea Index Fund - 208,200 85,000 123,000 - 43,501 iShares MSCI Taiwan Index Fund - 514,000 122,400 391,600 - 48,278 -----------------------------------------------------------------------------------------------------------
3. INVESTMENT PORTFOLIO TRANSACTIONS Purchases and sales of investments (excluding in-kind transactions and short-term securities) for the year ended August 31, 2003, were as follows: iSHARES MSCI INDEX FUND PURCHASES SALES --------------------------------------------------- Australia $ 7,311,522 $ 6,895,938 Brazil 58,180,200 54,084,994 Canada 44,842,334 41,126,471 Emerging Markets 15,503,297 14,423,553 Hong Kong 15,946,704 13,921,103 Malaysia 31,308,903 28,050,757 Mexico 7,402,364 8,496,455 Pacific ex-Japan 15,587,912 12,764,086 Singapore 12,276,557 11,448,889 South Africa 13,681,035 12,281,301 South Korea 89,034,865 44,449,359 Taiwan 78,737,248 23,226,908 --------------------------------------------------- 82 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements (Continued) iSHARES, INC. In-kind transactions for the year ended August 31, 2003, were as follows: IN-KIND IN-KIND iSHARES MSCI INDEX FUND PURCHASES SALES ----------------------------------------------------- Australia $ 8,245,559 $ 13,351,073 Canada 503,263,739 214,710,714 Emerging Markets 266,433,775 - Hong Kong 167,279,218 49,532,262 Mexico 35,036,042 49,794,820 Pacific ex-Japan 104,076,256 17,136,327 Singapore 17,111,161 4,936,134 South Africa 68,313,783 - ----------------------------------------------------- At August 31, 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 $ 93,687,838 $ 12,767,198 $ (3,827,553) $ 8,939,645 Brazil 99,812,776 3,805,754 (833,155) 2,972,599 Canada 424,214,570 79,370,303 (969,893) 78,400,410 Emerging Markets 267,929,262 31,182,473 (1,383,049) 29,799,424 Hong Kong 282,979,539 13,970,316 (5,420,370) 8,549,946 Malaysia 74,094,311 26,906,823 (1,215,370) 25,691,453 Mexico 67,869,782 1,885,225 (9,603,587) (7,718,362) Pacific ex-Japan 238,269,358 21,972,571 (1,894,553) 20,078,018 Singapore 123,373,042 4,889,956 (10,280,159) (5,390,203) South Africa 69,381,897 12,563,143 (290,100) 12,273,043 South Korea 111,805,530 44,542,198 (1,638,760) 42,903,438 Taiwan 226,235,435 24,604,506 (16,632,007) 7,972,499 -------------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS 83 Notes to the Financial Statements (Continued) iSHARES, INC. 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 Emerging Markets 500,000,000 Hong Kong 191,400,000 Malaysia 127,800,000 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. 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, an irrevocable letter of credit issued by a bank, or securities issued or guaranteed by the U.S. Government. The initial collateral received is required to have a value of at least 102% of the market value of the loaned securities denominated in U.S. dollars and a value of at least 105% for all other 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 a Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of August 31, 2003, certain of the Funds had loaned securities which were collateralized by cash. The cash collateral received was invested in a joint account which invests in securities with remaining maturities of 397 days or less and money market mutual funds. Income from the joint account is allocated daily to each Fund, based on each Fund's portion of the total cash collateral received. The market value of the securities on loan at August 31, 2003, and the value of the related collateral received are disclosed in the Statements of Assets and Liabilities. 6. LEGAL PROCEEDINGS The Company has reached a settlement in an action in the U.S. District Court for the Northern District of Illinois. In the action, a company named Mopex, Inc. and a company named Realtimemutualfunds.com alleged that the actions of the Company and others infringed a patent held by Mopex, and that the parties engaged in a "conspiracy" amongst themselves to infringe the patent. The patent itself was found to be invalid in a related action to which the Company was not a party. In the settlement, the plaintiffs' claims and allegations are dismissed with prejudice, and neither the Company nor any other defendant will pay any compensation to the plaintiffs. 84 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Report of Independent Auditors To the Shareholders and Board of Directors of iShares, Inc. In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the iShares MSCI Australia Index Fund, iShares MSCI Brazil Index Fund, iShares MSCI Canada Index Fund, iShares MSCI Emerging Markets Index Fund, iShares MSCI Hong Kong Index Fund, iShares MSCI Malaysia Index Fund, iShares MSCI Mexico Index Fund, iShares MSCI Pacific ex-Japan Index Fund, iShares MSCI Singapore Index Fund, iShares MSCI South Africa Index Fund, iShares MSCI South Korea Index Fund and iShares MSCI Taiwan Index Fund, each a portfolio of the iShares MSCI Index Fund Series (the "Funds"), at August 31, 2003, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial statements of the Funds as of August 31, 2000 and for the two years then ended were audited by other auditors, whose report dated October 13, 2000 expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP San Francisco, California October 3, 2003 REPORT OF INDEPENDENT AUDITORS 85 Tax Information (Unaudited) iSHARES, INC. For the year ended August 31, 2003, certain of the Funds earned foreign source income and paid foreign taxes which they intend to pass through to their shareholders pursuant to Section 853 of the Internal Revenue Code as follows: FOREIGN SOURCE FOREIGN iSHARES MSCI INDEX FUND INCOME EARNED TAXES PAID ----------------------------------------------------- Australia $ 3,407,537 $ 80,503 Brazil 3,139,064 300,928 Canada 8,690,567 1,167,185 Emerging Markets 1,152,657 118,487 Malaysia 2,703,498 568,826 Pacific ex-Japan 6,534,806 316,661 Singapore 3,647,007 761,350 South Africa 1,919,874 - South Korea 2,706,462 446,599 Taiwan 3,718,262 1,097,970 ----------------------------------------------------- The following are estimates of qualified dividend income received by the Funds through August 31, 2003 that qualify for a reduced tax rate pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003: QUALIFIED DIVIDEND iSHARES MSCI INDEX FUND INCOME ------------------------------------- Australia $ 3,034,223 Canada 8,690,567 Emerging Markets 948,854 Mexico 1,238,496 Pacific ex-Japan Index 3,316,630 South Africa 1,919,874 South Korea 2,706,462 ------------------------------------- 86 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Supplemental Information (Unaudited) iSHARES, INC. The tables that follow present information about the differences between the daily market price on secondary markets for shares of an iShares Fund and that Fund's net asset value. Net asset value, or "NAV", is the price per share at which each Fund issues and redeems shares. It is calculated in accordance with the standard formula for valuing mutual fund shares. The "Market Price" of each iShares Fund generally is determined using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of such Fund is listed for trading, as of the time that the Fund's NAV is calculated. In the case of the iShares MSCI Malaysia, iShares MSCI South Korea and iShares MSCI Taiwan Index Funds, the NAVs of which are determined PRIOR to the opening of the regular trading day on the American Stock Exchange (the "AMEX"), the Market Price is determined using the midpoint of the bid/ask spread as of the OPENING of regular trading on the AMEX. Each Fund's Market Price may be at, above or below its NAV. The NAV of each Fund will fluctuate with changes in the market value of its portfolio holdings. The Market Price of each Fund will fluctuate in accordance with changes in its NAV, as well as market supply and demand. Premiums or discounts are the differences (expressed as a percentage) between the NAV and Market Price of a Fund on a given day, generally at the time NAV is calculated. A premium is the amount that a Fund is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that a Fund is trading below the reported NAV, expressed as a percentage of the NAV. The following information shows the frequency distributions of premiums and discounts for each of the iShares Funds included in this report. The information shown for each Fund is generally for the five-year period from July 1, 1998 through June 30, 2003, the date of the most recent calendar quarter-end. The information shown for the iShares MSCI Brazil, iShares MSCI Pacific ex-Japan, iShares MSCI South Africa, iShares MSCI South Korea and iShares MSCI Taiwan Index Funds is for each full calendar quarter completed after the inception date of each Fund through June 30, 2003. Information for the iShares MSCI Emerging Markets Index Fund is not presented, as the Fund commenced operations on April 7, 2003 and did not have a full quarter of information as of June 30, 2003. Each line in the table shows the number of trading days in which the iShares Fund traded within the premium/discount range indicated. The number of trading days in each premium/discount range is also shown as a percentage of the total number of trading days in the period covered by each table. All data presented here represents past performance, which cannot be used to predict future results. SUPPLEMENTAL INFORMATION 87 Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI AUSTRALIA INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 3.0% .................................. 4 0.32% Greater than 2.5% and Less than 3.0% ............... 9 0.72 Greater than 2.0% and Less than 2.5% ............... 23 1.83 Greater than 1.5% and Less than 2.0% ............... 70 5.57 Greater than 1.0% and Less than 1.5% ............... 148 11.77 Greater than 0.5% and Less than 1.0% ............... 272 21.64 BETWEEN 0.5% AND -0.5% ............................. 553 43.99 Less than -0.5% and Greater than -1.0% ............. 99 7.87 Less than -1.0% and Greater than -1.5% ............. 41 3.26 Less than -1.5% and Greater than -2.0% ............. 23 1.83 Less than -2.0% and Greater than -2.5% ............. 7 0.56 Less than -2.5% .................................... 8 0.64 ------- ------------- 1257 100.00% ======= ============= iSHARES MSCI BRAZIL INDEX FUND PERIOD COVERED: OCTOBER 1, 2000 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 3.5% .................................. 2 0.29% Greater than 3.0% and Less than 3.5% ............... 5 0.73 Greater than 2.5% and Less than 3.0% ............... 14 2.03 Greater than 2.0% and Less than 2.5% ............... 19 2.76 Greater than 1.5% and Less than 2.0% ............... 35 5.09 Greater than 1.0% and Less than 1.5% ............... 61 8.87 Greater than 0.5% and Less than 1.0% ............... 105 15.26 BETWEEN 0.5% AND -0.5% ............................. 253 36.76 Less than -0.5% and Greater than -1.0% ............. 68 9.88 Less than -1.0% and Greater than -1.5% ............. 31 4.51 Less than -1.5% and Greater than -2.0% ............. 31 4.51 Less than -2.0% and Greater than -2.5% ............. 25 3.63 Less than -2.5% and Greater than -3.0% ............. 11 1.60 Less than -3.0% and Greater than -3.5% ............. 7 1.02 Less than -3.5% and Greater than -4.0% ............. 7 1.02 Less than -4.0% and Greater than -4.5% ............. 6 0.87 Less than -4.5% and Greater than -5.0% ............. 5 0.73 Less than -5.0% .................................... 3 0.44 ------- ------------- 688 100.00% ======= ============= 88 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI CANADA INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 3.0% .................................. 7 0.56% Greater than 2.5% and Less than 3.0% ............... 17 1.35 Greater than 2.0% and Less than 2.5% ............... 27 2.15 Greater than 1.5% and Less than 2.0% ............... 61 4.85 Greater than 1.0% and Less than 1.5% ............... 124 9.86 Greater than 0.5% and Less than 1.0% ............... 234 18.62 BETWEEN 0.5% AND -0.5% ............................. 587 46.69 Less than -0.5% and Greater than -1.0% ............. 128 10.18 Less than -1.0% and Greater than -1.5% ............. 50 3.98 Less than -1.5% and Greater than -2.0% ............. 11 0.88 Less than -2.0% .................................... 11 0.88 ------- ------------- 1257 100.00% ======= ============= iSHARES MSCI HONG KONG INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 4.0% .................................. 10 0.80% Greater than 3.5% and Less than 4.0% ............... 7 0.56 Greater than 3.0% and Less than 3.5% ............... 11 0.88 Greater than 2.5% and Less than 3.0% ............... 15 1.19 Greater than 2.0% and Less than 2.5% ............... 29 2.31 Greater than 1.5% and Less than 2.0% ............... 55 4.38 Greater than 1.0% and Less than 1.5% ............... 99 7.88 Greater than 0.5% and Less than 1.0% ............... 168 13.37 BETWEEN 0.5% AND -0.5% ............................. 397 31.56 Less than -0.5% and Greater than -1.0% ............. 159 12.65 Less than -1.0% and Greater than -1.5% ............. 99 7.88 Less than -1.5% and Greater than -2.0% ............. 76 6.05 Less than -2.0% and Greater than -2.5% ............. 50 3.98 Less than -2.5% and Greater than -3.0% ............. 29 2.31 Less than -3.0% and Greater than -3.5% ............. 14 1.11 Less than -3.5% and Greater than -4.0% ............. 14 1.11 Less than -4.0% and Greater than -6.0% ............. 12 0.95 Less than -6.0% .................................... 13 1.03 ------- ------------- 1257 100.00% ======= ============= SUPPLEMENTAL INFORMATION 89 Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI MALAYSIA INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 6.0% .................................. 182 14.49% Greater than 5.5% and Less than 6.0% ............... 11 0.88 Greater than 5.0% and Less than 5.5% ............... 8 0.64 Greater than 4.5% and Less than 5.0% ............... 6 0.48 Greater than 4.0% and Less than 4.5% ............... 12 0.96 Greater than 3.5% and Less than 4.0% ............... 19 1.51 Greater than 3.0% and Less than 3.5% ............... 19 1.51 Greater than 2.5% and Less than 3.0% ............... 21 1.67 Greater than 2.0% and Less than 2.5% ............... 19 1.51 Greater than 1.5% and Less than 2.0% ............... 31 2.47 Greater than 1.0% and Less than 1.5% ............... 47 3.74 Greater than 0.5% and Less than 1.0% ............... 83 6.61 BETWEEN 0.5% AND -0.5% ............................. 209 16.62 Less than -0.5% and Greater than -1.0% ............. 86 6.85 Less than -1.0% and Greater than -1.5% ............. 84 6.69 Less than -1.5% and Greater than -2.0% ............. 82 6.53 Less than -2.0% and Greater than -2.5% ............. 79 6.29 Less than -2.5% and Greater than -3.0% ............. 62 4.94 Less than -3.0% and Greater than -3.5% ............. 47 3.74 Less than -3.5% and Greater than -4.0% ............. 28 2.23 Less than -4.0% and Greater than -4.5% ............. 27 2.15 Less than -4.5% and Greater than -5.0% ............. 15 1.19 Less than -5.0% and Greater than -5.5% ............. 6 0.48 Less than -5.5% and Greater than -6.0% ............. 10 0.80 Less than -6.0% .................................... 63 5.02 ------- ------------- 1256 100.00% ======= ============= 90 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI MEXICO INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 3.5% .................................. 4 0.32% Greater than 2.5% and Less than 3.5% ............... 12 0.95 Greater than 2.0% and Less than 2.5% ............... 24 1.91 Greater than 1.5% and Less than 2.0% ............... 53 4.22 Greater than 1.0% and Less than 1.5% ............... 123 9.79 Greater than 0.5% and Less than 1.0% ............... 177 14.08 BETWEEN 0.5% AND -0.5% ............................. 480 38.18 Less than -0.5% and Greater than -1.0% ............. 178 14.16 Less than -1.0% and Greater than -1.5% ............. 106 8.43 Less than -1.5% and Greater than -2.0% ............. 48 3.82 Less than -2.0% and Greater than -2.5% ............. 21 1.67 Less than -2.5% and Greater than -3.0% ............. 16 1.27 Less than -3.0% and Greater than -3.5% ............. 9 0.72 Less than -3.5% .................................... 6 0.48 ------- ------------- 1257 100.00% ======= ============= iSHARES MSCI PACIFIC EX-JAPAN INDEX FUND PERIOD COVERED: JANUARY 1, 2002 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 3.0% .................................. 4 1.06% Greater than 2.5% and Less than 3.0% ............... 4 1.06 Greater than 2.0% and Less than 2.5% ............... 9 2.39 Greater than 1.5% and Less than 2.0% ............... 31 8.24 Greater than 1.0% and Less than 1.5% ............... 97 25.80 Greater than 0.5% and Less than 1.0% ............... 99 26.33 BETWEEN 0.5% AND -0.5% ............................. 122 32.46 Less than -0.5% and Greater than -1.0% ............. 7 1.86 Less than -1.0% .................................... 3 0.80 ------- ------------- 376 100.00% ======= ============= SUPPLEMENTAL INFORMATION 91 Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI SINGAPORE INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 4.5% .................................. 7 0.56% Greater than 4.0% and Less than 4.5% ............... 7 0.56 Greater than 3.5% and Less than 4.0% ............... 6 0.48 Greater than 3.0% and Less than 3.5% ............... 12 0.95 Greater than 2.5% and Less than 3.0% ............... 19 1.51 Greater than 2.0% and Less than 2.5% ............... 31 2.47 Greater than 1.5% and Less than 2.0% ............... 42 3.34 Greater than 1.0% and Less than 1.5% ............... 95 7.56 Greater than 0.5% and Less than 1.0% ............... 105 8.35 BETWEEN 0.5% AND -0.5% ............................. 308 24.50 Less than -0.5% and Greater than -1.0% ............. 171 13.60 Less than -1.0% and Greater than -1.5% ............. 152 12.09 Less than -1.5% and Greater than -2.0% ............. 89 7.08 Less than -2.0% and Greater than -2.5% ............. 79 6.28 Less than -2.5% and Greater than -3.0% ............. 46 3.66 Less than -3.0% and Greater than -3.5% ............. 31 2.47 Less than -3.5% and Greater than -4.0% ............. 26 2.07 Less than -4.0% and Greater than -4.5% ............. 11 0.88 Less than -4.5% and Greater than -5.0% ............. 8 0.64 Less than -5.0% .................................... 12 0.95 ------- ------------- 1257 100.00% ======= ============= iSHARES MSCI SOUTH AFRICA INDEX FUND PERIOD COVERED: APRIL 1, 2003 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 1.5% .................................. 1 1.59% Greater than 1.0% and Less than 1.5% ............... 1 1.59 Greater than 0.5% and Less than 1.0% ............... 15 23.81 BETWEEN 0.5% AND -0.5% ............................. 44 69.84 Less than -0.5% .................................... 2 3.17 ------- ------------- 63 100.00% ======= ============= 92 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI SOUTH KOREA INDEX FUND PERIOD COVERED: JULY 1, 2000 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 5.0% .................................. 5 0.67% Greater than 4.5% and Less than 5.0% ............... 5 0.67 Greater than 4.0% and Less than 4.5% ............... 3 0.40 Greater than 3.5% and Less than 4.0% ............... 5 0.67 Greater than 3.0% and Less than 3.5% ............... 8 1.07 Greater than 2.5% and Less than 3.0% ............... 17 2.26 Greater than 2.0% and Less than 2.5% ............... 29 3.86 Greater than 1.5% and Less than 2.0% ............... 60 7.99 Greater than 1.0% and Less than 1.5% ............... 74 9.85 Greater than 0.5% and Less than 1.0% ............... 112 14.91 BETWEEN 0.5% AND -0.5% ............................. 218 29.04 Less than -0.5% and Greater than -1.0% ............. 70 9.32 Less than -1.0% and Greater than -1.5% ............. 52 6.92 Less than -1.5% and Greater than -2.0% ............. 39 5.19 Less than -2.0% and Greater than -2.5% ............. 22 2.93 Less than -2.5% and Greater than -3.0% ............. 11 1.46 Less than -3.0% and Greater than -3.5% ............. 11 1.46 Less than -3.5% and Greater than -4.0% ............. 4 0.53 Less than -4.0% .................................... 6 0.80 ------- ------------- 751 100.00% ======= ============= SUPPLEMENTAL INFORMATION 93 Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI TAIWAN INDEX FUND PERIOD COVERED: JULY 1, 2000 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 6.0% .................................. 8 1.07% Greater than 5.0% and Less than 6.0% ............... 5 0.67 Greater than 4.5% and Less than 5.0% ............... 9 1.20 Greater than 4.0% and Less than 4.5% ............... 4 0.53 Greater than 3.5% and Less than 4.0% ............... 12 1.60 Greater than 3.0% and Less than 3.5% ............... 19 2.53 Greater than 2.5% and Less than 3.0% ............... 36 4.79 Greater than 2.0% and Less than 2.5% ............... 36 4.79 Greater than 1.5% and Less than 2.0% ............... 73 9.72 Greater than 1.0% and Less than 1.5% ............... 99 13.18 Greater than 0.5% and Less than 1.0% ............... 105 13.98 BETWEEN 0.5% AND -0.5% ............................. 164 21.85 Less than -0.5% and Greater than -1.0% ............. 54 7.19 Less than -1.0% and Greater than -1.5% ............. 46 6.13 Less than -1.5% and Greater than -2.0% ............. 33 4.39 Less than -2.0% and Greater than -2.5% ............. 11 1.46 Less than -2.5% and Greater than -3.0% ............. 16 2.13 Less than -3.0% and Greater than -3.5% ............. 11 1.46 Less than -3.5% and Greater than -4.5% ............. 4 0.53 Less than -4.5% .................................... 6 0.80 ------- ------------- 751 100.00% ======= ============= 94 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Directors Information (Unaudited) iSHARES, INC. The Board of Directors has responsibility for the overall management and operations of the Company, including general supervision of the duties performed by BGFA and other service providers. Each Director serves until his or her successor is duly elected or appointed and qualified. iShares, Inc., iShares Trust, Barclays Global Investors Funds and Master Investment Portfolio are considered to be members of the same fund complex, as defined in Form N-1A under the 1940 Act. Each Director of iShares, Inc. also serves as a Trustee for iShares Trust and oversees 81 portfolios within the fund complex. In addition, Lee T. Kranefuss and Richard K. Lyons each serves as a Trustee for Barclays Global Investors Funds and Master Investment Portfolio and oversees 106 portfolios within the fund complex. Additional information about the Funds' Directors may be found in the Funds' Statement of Additional Information, which is available without charge upon request by calling toll-free 1-800-474-2737. INTERESTED DIRECTORS+
POSITION(S), PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS LENGTH OF SERVICE DURING PAST 5 YEARS OTHER DIRECTORSHIPS HELD ---------------------------------------------------------------------------------------------------------------------- *LEE T. KRANEFUSS (41) Director, Chief Executive Officer of the Trustee (since June 18, 2003) of Barclays Global Chairman, and Individual Investor Business of iShares Trust; Board of Trustees Investors President (since Barclays Global Investors, N.A.; for Barclays Global Investors Funds 45 Fremont Street June 18, 2003) The Boston Consulting Group (until and Master Investment Portfolio San Francisco, CA 94105 1997). (since 2001). *NATHAN MOST (89) Director (since Consultant to BGI (1998-2002), Trustee (since 2000) and President P.O. Box 193 1996) American Stock Exchange (1996-2000) (2000-2002) of iShares Trust Burlingame, CA 94011 and the Hong Kong Stock Exchange (1998 to present); Consultant to the Amsterdam Stock Exchange (1997-1998); Consultant to the Pacific Stock Exchange (1997-1998).
---------- + Garrett F. Bouton served as Chairman, President and interested Director of the Board through June 17, 2003. * Lee T. Kranefuss and Nathan Most are deemed to be "interested persons" (as defined in the 1940 Act) of the Company due to their affiliations with BGFA, the Funds' investment advisor and BGI, the parent company of BGFA. DIRECTORS INFORMATION 95 Directors Information (Unaudited) (Continued) iSHARES, INC. INDEPENDENT DIRECTORS
POSITION(S), PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS LENGTH OF SERVICE DURING PAST 5 YEARS OTHER DIRECTORSHIPS HELD --------------------------------------------------------------------------------------------------------------------------- JOHN B. CARROLL (67) Director (since Retired Vice President of Trustee (since 2001) of iShares 520 Main Street 1996) Investment Management (1984-2000) Trust; Trustee and member of the Ridgefield, CT 06877 of Verizon Corporation; Advisory Executive Committee (since 1991) of Board member of Ibbotson The Common Fund Institutional Funds, Associates (1992-1998); former a non-profit organization; Member of Vice Chairman and Executive the Board of Managers of JP Morgan Committee Member (1994-1998) Private Equity Funds. of the Committee on Investment of Employee Benefit Assets of the Financial Executive Institute. RICHARD K. LYONS (42) Director (since Professor, University of Trustee (since 2000) of iShares Haas School of Business, 2001) California, Berkeley: Haas School Trust; Trustee (since 2001) of UC Berkeley of Business (since 1993); Barclays Global Investors Funds and Berkeley, CA 94720 Consultant for IMF World Bank, Master Investment Portfolio; Board Federal Reserve Bank, and Citibank of Trustees: Matthews Asian Funds N.A. (since 2000). since 1995 (oversees 6 portfolios). GEORGE C. PARKER (64) Director (since Dean Witter Distinguished Professor Trustee (since 2000) of iShares Graduate School of 2001) of Finance (since 1994); Associate Trust; Bailard, Biehl and Business Dean for Academic Affairs, Director Kaiser, Inc. (since 1985); (Room K301) of MBA Program, and Professor, California Casualty Group of Stanford University Stanford University: Graduate Insurance Companies (since 1978); 521 Memorial Way School of Business (1993-2001). Continental Airlines, Inc. (since Stanford, CA 94305 1996); Community First Financial Group (since 1995); Dresdner/RCM Mutual Funds (1994-2002); Tyon Ranch Company (since 1999). W. ALLEN REED (56) Director (since President and Chief Executive Trustee (since 2001) of iShares General Motors Investment 1996) Officer (since 1994) of General Trust; Director (since 1994) of Management Corp. Motors Investment Management General Motors Investment 767 Fifth Avenue Corporation. Management Corporation; Director New York, NY 10153 (1995-1998) of Taubman Centers, Inc. (a real estate investment trust); Director (since 1992) of FLIR Systems (an imaging technology company); Director (since 1994) of General Motors Acceptance Corporation; Director (since 1994) of GMAC Insurance Holdings, Inc.; Director (since 1995) of Global Emerging Markets Fund; Director (since 2000) of Temple Inland Industries; Chairman (since 1995) of the Investment Advisory Committee of Howard Hughes Medical Institute.
96 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Directors Information (Unaudited) (Continued) iSHARES, INC. OFFICERS WHO ARE NOT DIRECTORS
PRINCIPAL OCCUPATION(S) DIRECTORSHIPS HELD BY NAME, AGE AND ADDRESS POSITION DURING PAST 5 YEARS OFFICERS ----------------------------------------------------------------------------------------------------------------------- MICHAEL A. LATHAM (37) Secretary, Treasurer Director of Mutual Fund Delivery in None. Barclays Global Investors and Principal the U.S. Individual Investor 45 Fremont Street Financial Officer Business of BGI (since 2000); Head San Francisco, CA 94105 of Operations, BGI Europe (1997-2000). JEFFREY J. GABOURY (34) Assistant Treasurer Director (formerly Manager), Mutual None. Investors Bank & Trust Co. Fund Administration, Reporting and 200 Clarendon Street Compliance, IBT (since 1996). Boston, MA 02116 DANELL J. DOTY (40) Assistant Secretary Head of Mutual Fund Administration, None. Barclays Global Investors BGI (since 1999); Vice President of 45 Fremont Street Operations, Berkeley Capital San Francisco, CA 94105 Management (1994-1999); Vice President and Secretary, The Berkeley Funds (1997-1999). SUSAN C. MOSHER (48) Assistant Secretary Senior Director & Senior Counsel, None. Investors Bank & Trust Co. Mutual Fund Administration, IBT 200 Clarendon Street (since 1995). Boston, MA 02116 SANDRA I. MADDEN (37) Assistant Secretary Senior Associate Counsel, Mutual None. Investors Bank & Trust Co. Fund Administration, IBT (since 200 Clarendon Street 1999); Associate, Scudder Kemper Boston, MA 02116 Investments, Inc. (1996-1999). THEDA HABER (49) Chief Legal Officer Attorney/Managing Director, Deputy None. Barclays Global Investors General Counsel and Head of U.S. 45 Fremont Street Legal, BGI (since 1997); Attorney/ San Francisco, CA 94105 Senior Counsel, BGI (1994-2000). LOIS TOWERS (51) Assistant Vice U.S. Compliance Officer, BGI (since None. Barclays Global Investors President -- AML 1999). 45 Fremont Street Compliance Officer San Francisco, CA 94105
DIRECTORS INFORMATION 97 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. The prospectus 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 Lehman Aggregate Bond Fund (AGG) 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) iShares MSCI Emerging Markets Index Fund (EEM) 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 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. 98 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS iShares are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Funds 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., a wholly owned subsidiary of Barclays Bank PLC, none 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. iSHARES(R) INDUSTRIAL STRENGTH INVESTMENT TOOLS FROM BARCLAYS GLOBAL INVESTORS 1 800 iSHARES (1 800 474 2737) WWW.iSHARES.COM BARCLAYS BGI-F-005-09002 iShares(R) 2003 ANNUAL REPORT TO SHAREHOLDERS AUGUST 31, 2003 [GRAPHIC APPEARS HERE] 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 30 iShares MSCI EMU Index Fund 32 iShares MSCI France Index Fund 38 iShares MSCI Germany Index Fund 40 iShares MSCI Italy Index Fund 42 iShares MSCI Netherlands Index Fund 44 iShares MSCI Spain Index Fund 46 iShares MSCI Sweden Index Fund 48 iShares MSCI Switzerland Index Fund 50 iShares MSCI United Kingdom Index Fund 52 Financial Statements 55 Financial Highlights 63 Notes to Financial Statements 74 Report of Independent Auditors 82 Tax Information (Unaudited) 83 Supplemental Information (Unaudited) 84 Directors Information (Unaudited) 90 iShares Family of Funds 94 To Our Shareholders For many investors, the last few years have been difficult and challenging. The collapse of the stock market bubble, a tepid economy, corporate accounting scandals, lackluster company earnings and the geopolitical situation all contributed to a three-year bear market. Stock market gains during the first half of 2003 give some hope that the markets have turned a corner, but there is no guarantee that challenging market conditions will not return. iShares have continued to innovate and expand, offering more tools that help investors tailor their portfolios to achieve diversity and address volatility in a complex market environment. For example, in April of this year, iShares launched an emerging markets exchange traded fund based on the MSCI's Emerging Market Free Index. Last year, iShares launched the first fixed income exchange traded funds, which BUSINESS WEEK named one of the best new products of 2002.(1) We have added a Lehman Aggregate Bond Fund to our fixed income menu, enabling investors to track one of the most well-known U.S. fixed income market indexes. Assets under management for the fixed income iShares funds were $4.3 billion as of August 31, 2003. With the addition of these iShares, investors can achieve even more diversity in their portfolios -- and at lower cost, since iShares fees are, on average, about half those of actively managed funds.(2) With over 80 different iShares to choose from, investors have the ability to build a diverse portfolio that covers a wide swath of market segments such as capitalization, sectors, value and growth, international and fixed income. That is important because market segments do not tend to move in tandem, particularly in volatile markets. 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 result in one market segment outperforming another. 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 an indispensable tool for investors in the current market. And that is also why more and more investors have recognized the benefits of iShares. Assets under management for iShares continue to grow, and as of August 31, 2003, had reached $43.0 billion. 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/ Lee T. Kranefuss Lee T. Kranefuss PRESIDENT AND CHAIRMAN OF THE BOARD 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 5/03. 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 does not guarantee future results. iShares are not sponsored, endorsed, or issued by Lehman Brothers, nor are they sponsored, endorsed, issued, sold or promoted by Morgan Stanley Capital International. 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 the companies listed above. This advertising section does not constitute part of the 2003 Annual Report. 2 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Introduction In this section, Barclays Global Fund Advisors (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 Indexes 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 prohibits a Fund from investing more than 25% of the value of a Fund's total assets in the securities of a single issuer. This constraint applies to all share classes of an issuer. As an example, Samsung Electronics ordinary and preferred shares made up 35.71% of the MSCI South Korea Index as of August 31, 2003. Because of the "Single Issuer Rule", however, the iShares MSCI South Korea Index Fund could not invest more than 25% of its assets in Samsung Electronics. This contributed to the difference between the performance of the iShares MSCI South Korea Index Fund and its benchmark index. The "5/50 Rule" generally precludes the sum of all of the securities weighted over 5% in a Fund's portfolio 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 Indexes 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 75.77% as of August 31, 2003. Therefore, the iShares MSCI Mexico Index Fund had to underweight some of these stocks relative to the benchmark, and therefore overweight its investment in other stocks. This contributed to the difference between the performance of the iShares MSCI Mexico Index Fund and its benchmark index 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 Fund and the underlying MSCI Index in dividend accruals/reinvestments. The Funds record dividend revenues on the "ex-dividend" 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 twelve-month period. Separately, the Funds might have different dividend rates versus the Indexes due to portfolio sampling or different withholding taxes. Finally, while the sole source of revenues for the MSCI Indexes is dividends, the Funds receive interest on uninvested cash and, in the case of most Funds, revenues from the lending of portfolio securities. INTRODUCTION 3 EFFECT OF UNINVESTED ASSETS: Another factor that causes performance of a Fund to differ from that of its underlying MSCI Index is the "effect of uninvested assets". Uninvested assets held by a Fund affect performance relative to its underlying benchmark index. In contrast, the MSCI Indexes 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 principal "unequitized" asset 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. In these circumstances, the effect of uninvested assets could worsen a loss for the period. SECURITIES LENDING: Finally, securities lending is when a Fund loans securities in its portfolio to another party for a given time period and in return receives cash collateral for the loan. Securities lending income is the income earned on lending the securities, which is split between the Fund and the Fund's securities lending agent. While securities lending is intended to improve the performance of the Fund, it may also contribute to differences between the performance of a Fund and its benchmark index. 4 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS THIS PAGE INTENTIONALLY LEFT BLANK. 5 Managers' Discussion & Analysis iSHARES MSCI AUSTRIA INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS -------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 --------------------------- -------------------------- ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 31.15% 32.92% 29.46% 1.89% 2.75% 1.66% 1.23% 1.22% 2.11% CUMULATIVE TOTAL RETURNS -------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 --------------------------- -------------------------- ----------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 31.15% 32.92% 29.46% 9.82% 14.55% 8.58% 9.54% 9.48% 16.84% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 AUSTRIA INDEX [CHART APPEARS HERE] Energy 13.96% Financials 38.95% Industrials 11.14% Materials 13.92% Telecommunications Services 18.38% Utilities 3.65% PERFORMANCE REVIEW The total return of the iShares MSCI Austria Index Fund (the "Fund") was 31.15% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Austria Index (the "Index") over the reporting period was 29.46%. SIGNIFICANT PERFORMANCE FACTORS The Fund outperformed its benchmark by 1.69 percentage points during the reporting period. This was due to the positive impact of portfolio sampling (explained in more detail below), revenue differential, and securities lending, which contributed 2.50, 0.08, and 0.02 percentage points, respectively, to the Fund's return. Those factors were partially offset by the impact of expenses and uninvested assets, which subtracted 0.84 and 0.07 percentage points, respectively, from the Fund's return. 6 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS As discussed in the Introduction, portfolio management constraints can restrict the Investment Advisor's ability to hold a given Index component at its benchmark weight, resulting in differences between the Fund's holdings and the securities in its benchmark index. To comply with the Single Issuer Rule, for example, the Fund was obligated to underweight the Index's largest stock, Erste Bank der Oesterreichischen Sparkassen AG. This underweight had a negative impact on the Fund's performance relative to the Index's, as Erste Bank outperformed the overall benchmark. The Fund held an overweight position in other Index names, including VA Technologie AG and RHI AG, and also held non-Index names BBAG Oesterreichishe Brau-Beteiligungs AG and Lenzing AG. Because all of these performed particularly well, the net impact of portfolio sampling in this case was positive for the Fund's return relative to the Index's return. KEY MARKET CONDITIONS The Austrian market overcame global slowdown and a U.S.-led war in Iraq to deliver healthy returns during the twelve-month reporting period. In the past several years, many Austrian companies have been supported by their expansion into the emerging central and eastern European markets, including the Czech Republic and Slovenia. Companies such as Erste Bank (the largest constituent at 19.40% of the Index as of August 31, 2003) continued to benefit from expansion into these markets. Although sluggishness in the U.S. economy did place a drag on some Austrian markets, the corresponding strength of the euro against the U.S. dollar countered this, by enhancing returns for U.S. dollar-based investors. Germany, Austria's main trading partner, struggled with a slow economy during the first half of the period, and this weakness negatively impacted the Austrian market. When Germany's market began to improve in the second half of the period, though, the Austrian market was also buoyed. During the reporting period, Austria's new government indicated that it would sell the government's remaining stakes in Telekom Austria AG and Voest-Alpine AG (respectively 18.38% and 6.11% of the Index as of August 31, 2003), among others. In response, the share prices of these companies climbed. iSHARES MSCI AUSTRIA INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI Austria Index Fund MSCI Austria Index $ 10,000 $ 10,000 8/31/96 $ 9,661 $ 10,066 $ 9,401 $ 9,841 8/31/97 $ 9,764 $ 9,922 $ 10,535 $ 11,506 8/31/98 $ 9,975 $ 10,763 $ 9,402 $ 10,346 8/31/99 $ 9,108 $ 9,900 $ 7,622 $ 8,242 8/31/2000 $ 7,695 $ 8,331 $ 8,498 $ 9,147 8/31/2001 $ 8,342 $ 8,821 $ 7,852 $ 8,410 8/31/2002 $ 8,352 $ 9,025 $ 9,188 $ 9,960 8/31/2003 $ 10,954 $ 11,684 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 7 Managers' Discussion & Analysis iSHARES MSCI BELGIUM INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS -------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------- ---------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 8.25% 8.78% 4.54% (5.98)% (5.47)% (7.42)% 2.19% 2.14% 2.44% CUMULATIVE TOTAL RETURNS -------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------- ---------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 8.25% 8.78% 4.54% (26.52)% (24.52)% (31.99)% 17.55% 17.16% 19.73% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 BELGIUM INDEX [CHART APPEARS HERE] Consumer Discretionary 4.83% Consumer Staples 12.72% Financials 53.34% Health Care 4.85% Industrials 1.37% Information Technology 0.88% Materials 8.13% Telecommunications Services 1.61% Utilities 12.27% PERFORMANCE REVIEW The total return of the iShares MSCI Belgium Index Fund (the "Fund") was 8.25% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Belgium Index (the "Index") over the reporting period was 4.54%. SIGNIFICANT PERFORMANCE FACTORS The Fund outperformed its benchmark by 3.71 percentage points during the reporting period. This was due to the positive impact of portfolio sampling (explained in more detail below), securities lending, and revenue differential, which contributed 4.33, 0.26, and 0.13 percentage points, respectively, to the Fund's return. Those factors were partially offset by the impact of expenses and uninvested assets, which subtracted 0.84 and 0.17 percentage points, respectively, from the Fund's return. 8 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS As discussed in the Introduction, portfolio management constraints can restrict the Investment Advisor's ability to hold a given Index component at its benchmark weight, resulting in differences between the Fund's holdings and the securities in its benchmark Index. To comply with the Single Issuer Rule, for example, the Fund was obligated to underweight the Index's largest stock, Fortis (28.34% of the Index as of August 31, 2003), over the reporting period. By holding less of Fortis, the negative performance of the security over the reporting period had a lesser impact on the Fund's performance relative to the Index's. In addition, the Fund held two non-index names, Almanij and Cofinimmo (Cofinimmo was added to the Index in May 2003), which outperformed the Index for the period. As a result, portfolio sampling had a positive impact on the Fund's returns relative to the Index's over the reporting period. KEY MARKET CONDITIONS Because more than half of Belgium's stock market is represented by financial stocks (53.34% of the Index as of August 31, 2003), their performance to a large extent dictates the performance of the market. During much of the reporting period, financial companies struggled with a global economic downturn, as well as the war in Iraq. Early in the period, financial companies suffered losses as their equity portfolios declined in value. This was true of Fortis, Belgium's largest company, which reported a record loss for the third quarter of 2002, attributing the loss largely to declines in its equity portfolio. The second largest constituent in the Index, Dexia Group (13.18% of the Index as of August 31, 2003) came under similar pressure, but speculation that the company might be the target of a takeover briefly buoyed its share price. As war in Iraq became imminent, financial stocks, particularly insurers, struggled against a backdrop of risk and uncertainty. An official outcome to the war, combined with indications of an improving economic environment in the U.S. and elsewhere, eventually helped many stocks to recoup some of the losses of the year, though not many were able to finish the reporting period in positive territory. One firm that bucked this trend, however, was Delhaize Group (4.66% of the Index as of August 31, 2003). The food chain overcame the ripple effects of its Dutch counterpart, Ahold, whose disclosure of accounting irregularities contributed to investor concerns about corporate irregularities, to log a return of 15.73% for the reporting period. iSHARES MSCI BELGIUM INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI Belgium Index Fund MSCI Belgium Index $ 10,000 $ 10,000 8/31/96 $ 10,501 $ 10,479 $ 11,204 $ 11,576 8/31/97 $ 11,474 $ 11,643 $ 13,161 $ 13,745 8/31/98 $ 15,997 $ 17,603 $ 16,753 $ 19,604 8/31/99 $ 15,837 $ 18,153 $ 12,329 $ 14,154 8/31/2000 $ 13,382 $ 15,183 $ 13,025 $ 14,752 8/31/2001 $ 12,215 $ 14,016 $ 11,067 $ 12,382 8/31/2002 $ 10,859 $ 11,453 $ 8,964 $ 9,298 8/31/2003 $ 11,755 $ 11,973 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 9 Managers' Discussion & Analysis iSHARES MSCI EMU INDEX FUND Performance as of 8/31/03
AVERAGE ANNUAL TOTAL RETURNS CUMULATIVE TOTAL RETURNS ------------------------------------------------------------- ---------------------------- YEAR ENDED 8/31/03 INCEPTION TO 8/31/03 INCEPTION TO 8/31/03 ---------------------------- ------------------------------- ---------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 10.05% 11.04% 10.51% (13.63)% (13.49)% (13.37)% (36.54)% (36.23)% (35.90)%
"Total returns for the period since inception" are calculated from the inception date of the Fund (7/25/00). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 EMU INDEX [CHART APPEARS HERE] Consumer Discretionary 11.71% Consumer Staples 8.00% Energy 12.64% Financials 25.97% Health Care 4.16% Industrials 6.93% Information Technology 8.25% Materials 6.83% Telecommunications Services 9.27% Utilities 6.24% PERFORMANCE REVIEW The total return of the iShares MSCI EMU Index Fund (the "Fund") was 10.05% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI EMU (European Monetary Union) Index (the "Index") over the reporting period was 10.51%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 0.46 percentage points during the reporting period. This was due to the negative impact of expenses and uninvested assets, which subtracted 0.84 and 0.15 percentage points, respectively, from the Fund's return. Those factors were partially offset by the impact of revenue differential, securities lending, and portfolio sampling, which contributed 0.27, 0.15, and 0.11 percentage points, respectively, to the Fund's return. 10 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS KEY MARKET CONDITIONS Underlying the performance of the EMU market during the twelve-month reporting period was a seesaw performance pattern in which markets declined, then rebounded. Driving the declines was an economic slowdown that included weakness across Europe, as well as fears of a "double-dip" recession in the United States. Compounding investor concerns, geopolitical tensions grew during the first half of the reporting period, ultimately culminating in war in Iraq. Declines were felt most severely among EMU banks and insurance companies, many of which were forced to declare write-downs on their equity portfolios. Financial company ING Groep NV (1.64% of the Index as of August 31, 2003) experienced significant declines during the first half of the reporting period. Exporters faced their own set of challenges, as the euro's rise against the U.S. dollar sapped demand from the U.S. As the war drove the price of crude oil to unsustainable levels, many oil companies such as Royal Dutch Petroleum Co. (4.66% of the Index as of August 31, 2003) saw their share price drop. During the second half of the reporting period, however, signs of economic growth began to emerge. The U.S. experienced a healthier GDP growth level and markets began to log positive returns, helping the outlook for financial companies and exporters. The technology and telecommunications groups also delivered impressive gains. Nokia OYJ and Telefonica SA (respectively 3.90% and 2.81% of the Index as of August 31, 2003) posted positive results. iSHARES MSCI EMU INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI EMU Index Fund MSCI EMU Index $ 10,000 $ 10,000 8/31/2000 $ 9,418 $ 9,422 $ 8,496 $ 8,523 2/28/2001 $ 8,213 $ 8,256 $ 7,689 $ 7,712 8/31/2001 $ 7,109 $ 7,137 $ 6,794 $ 6,830 2/28/2002 $ 6,581 $ 6,621 $ 6,859 $ 6,901 8/31/2002 $ 5,766 $ 5,800 $ 5,756 $ 5,800 2/28/2003 $ 5,074 $ 5,122 $ 6,112 $ 6,169 8/31/2003 $ 6,345 $ 6,410 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 11 Managers' Discussion & Analysis iSHARES MSCI FRANCE INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS -------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 10.22% 10.84% 10.50% (0.61)% 0.13% (0.30)% 6.49% 6.51% 6.71% CUMULATIVE TOTAL RETURNS -------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------------- ------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 10.22% 10.84% 10.50% (2.99)% 0.64% (1.49)% 59.98% 60.21% 62.42% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 FRANCE INDEX [CHART APPEARS HERE] Consumer Discretionary 14.97% Consumer Staples 13.11% Energy 17.45% Financials 17.57% Health Care 9.86% Industrials 6.92% Information Technology 6.90% Materials 6.00% Telecommunications Services 4.24% Utilities 2.98% PERFORMANCE REVIEW The total return of the iShares MSCI France Index Fund (the "Fund") was 10.22% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI France Index (the "Index") over the reporting period was 10.50%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 0.28 percentage points during the reporting period. This was due to the negative impact of expenses and uninvested assets, which subtracted 0.84 and 0.19 percentage points, respectively, from the Fund's return. Those factors 12 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS were partially offset by the impact of revenue differential, portfolio sampling, and securities lending, which contributed 0.43, 0.25, and 0.07 percentage points, respectively, to the Fund's return. KEY MARKET CONDITIONS During the course of the past twelve months, France has seen its economy dragged down by the global slowdown and hurt even further by a strengthening euro. The country faces its lowest levels of economic growth in a decade and a growing public deficit. President Chirac upset EU constituents by pleading for an easing of the Stability and Growth Pact rules, which restrict a country's public deficit to a maximum 3% of national economic output. Meanwhile, the French unions vowed to fight the government's plans to fully privatize France Telecom, and the French Parliament backed pension reforms that will increase the number of years public sector employees must work to earn a full pension. The country's financial sector, which at 17.57% of the Index at August 31, 2003, represents its largest industry group, struggled with the same conflicts as their counterparts around the world. As equity prices declined, many financial companies grappled with losses in their own portfolios. For insurance companies, the losses were compounded by the risks associated with war. French insurer AXA (4.28% of the Index as of August 31, 2003) was a good example of this phenomenon. The company was one of the worst performers among the ten largest constituents in the Index for the first half of the year. Then, as the war in Iraq came to an official conclusion and as markets delivered positive performance, the stock gained ground, finishing the reporting period with a healthy 15.60% gain. France Telecom also experienced a reversal in performance during the reporting period. Participating in the global technology and telecommunications slowdown, the company's share price languished early in the reporting period, and it saw its credit rating lowered. By late 2002, however, its share price began to climb as investors became more confident about the company's ability to trim its enormous debt. The French government extended a 9 billion euro loan to the company. Additionally, Thierry Breton was appointed as the new CEO, replacing Michel Bon. For the twelve-month reporting period, France Telecom returned 104.52%. iSHARES MSCI FRANCE INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI France Index Fund MSCI France Index $ 10,000 $ 10,000 8/31/96 $ 10,495 $ 10,363 $ 12,177 $ 12,201 8/31/97 $ 12,237 $ 12,184 $ 14,879 $ 14,921 8/31/98 $ 16,492 $ 16,487 $ 18,010 $ 18,089 8/31/99 $ 19,958 $ 19,821 $ 24,562 $ 24,744 8/31/2000 $ 24,637 $ 24,749 $ 20,505 $ 20,704 8/31/2001 $ 18,266 $ 18,437 $ 16,723 $ 16,962 8/31/2002 $ 14,516 $ 14,698 $ 12,894 $ 13,099 8/31/2003 $ 15,999 $ 16,242 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 13 Managers' Discussion & Analysis iSHARES MSCI GERMANY INDEX FUND Performance as of 8/31/03
AVERAGE ANNUAL TOTAL RETURNS ----------------------------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------------------- ---------------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 5.39% 5.49% 5.73% (6.09)% (5.43)% (5.82)% 1.89% 1.90% 2.38%
CUMULATIVE TOTAL RETURNS ----------------------------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------------------- ---------------------------------- ------------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 5.39% 5.49% 5.73% (26.97)% (24.34)% (25.90)% 15.04% 15.11% 19.22%
"Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 GERMANY INDEX [CHART APPEARS HERE] Consumer Discretionary 15.97% Consumer Staples 3.62% Financials 21.39% Health Care 4.48% Industrials 15.60% Information Technology 8.14% Materials 12.53% Telecommunications Services 7.69% Utilities 10.58% PERFORMANCE REVIEW The total return of the iShares MSCI Germany Index Fund (the "Fund") was 5.39% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Germany Index (the "Index") over the reporting period was 5.73%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 0.34 percentage points during the reporting period. This was due to the negative impact of expenses and uninvested assets, which subtracted 0.84 and 0.25 percentage points, respectively, from the Fund's return. Those factors were partially offset by the impact of portfolio sampling, securities lending and revenue differential, which contributed 0.55, 0.15, and 0.05 percentage points, respectively, to the Fund's return. 14 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS KEY MARKET CONDITIONS Underlying the German market's single-digit return for the year were two distinct six-month periods in which it first logged declines that earned it the status of the worst-performing market in Europe, and then rebounded fairly sharply. At the core of the German market decline in the first half of the reporting period were its financial stocks, which represented 21.39% of the Index as of August 31, 2003. Against a backdrop of declining asset values, the cross-shareholdings among the banks and insurers in Germany created a snowball effect. For example, insurance company Allianz AG (6.26% of the Index as of August 31, 2003) suffered declines in its share price as a result of losses in its own equity portfolio, as well as difficulties with its Dresdner bank unit. Its decline, in turn, contributed to losses for companies with significant stakes in Allianz. And, as war with Iraq became imminent, insurers' share prices were hurt further. The share prices of insurers, such as Allianz and Munich Re, rose as news of progress in Iraq contributed to optimism about a brief war. Although Allianz finished the reporting period with a 30.84% decline and Munich Re declined 49.81%, these losses actually reflected a rebound from sharper lows reached during the period. Siemens AG, the largest weighting at 12.73% of the Index climbed 17.35% during the reporting period. After struggling early in the reporting period, the company enjoyed gains after reporting profits above analysts' forecasts. Deutsche Telekom AG, which had been dragged down early in the year by France Telecom's lowered credit rating as well as a decline in technology share prices worldwide, rebounded to finish the year with a 13.64% gain. iSHARES MSCI GERMANY INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI Germany Index Fund MSCI Germany Index $ 10,000 $ 10,000 8/31/96 $ 10,399 $ 10,443 $ 11,292 $ 11,467 8/31/97 $ 12,532 $ 12,769 $ 14,661 $ 15,096 8/31/98 $ 15,753 $ 16,091 $ 16,117 $ 16,630 8/31/99 $ 16,862 $ 17,099 $ 21,975 $ 22,820 8/31/2000 $ 18,286 $ 18,831 $ 16,588 $ 17,220 8/31/2001 $ 13,737 $ 14,166 $ 12,833 $ 13,257 8/31/2002 $ 10,916 $ 11,276 $ 8,310 $ 8,612 8/31/2003 $ 11,504 $ 11,922 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 15 Managers' Discussion & Analysis iSHARES MSCI ITALY INDEX FUND Performance as of 8/31/03
AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ------------------------------ ------------------------------- ---------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 12.79% 12.96% 12.34% (1.40)% (1.09)% (1.82)% 7.92% 7.89% 7.73%
CUMULATIVE TOTAL RETURNS --------------------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ------------------------------ ------------------------------- ---------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 12.79% 12.96% 12.34% (6.83)% (5.31)% (8.77)% 76.71% 76.42% 74.42%
"Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 ITALY INDEX [CHART APPEARS HERE] Consumer Discretionary 8.00% Consumer Staples 0.58% Energy 17.68% Financials 41.22% Health Care 0.25% Industrials 2.47% Information Technology 0.69% Materials 0.41% Telecommunications Services 21.44% Utilities 7.26% PERFORMANCE REVIEW The total return of the iShares MSCI Italy Index Fund (the "Fund") was 12.79% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Italy Index (the "Index") over the reporting period was 12.34%. SIGNIFICANT PERFORMANCE FACTORS The Fund outperformed its benchmark by 0.45 percentage points during the reporting period. This was due to the positive impact of revenue differential, securities lending, and portfolio sampling, which contributed 0.71, 0.37, and 0.25 percentage points, respectively, to the Fund's return. Those factors were partially offset by the impact of expenses and uninvested assets, which subtracted 0.84 and 0.04 percentage points, respectively, from the Fund's return. 16 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS KEY MARKET CONDITIONS Italy's market was one of the more stable performers in Europe over the course of the reporting period. To a large degree, this was due to the insular nature of Italy's financial companies, which represented 41.22% of the Index at August 31, 2003. During much of the twelve-month period, financial companies suffered losses due to declines in the values of their own portfolios. Unlike their other European counterparts, though, Italian insurer Assicurazioni Generali SpA and bank UniCredito Italiano SpA (respectively 9.25% and 7.87% of the Index as of August 31, 2003) did not have the same level of exposure to equities, and their share prices were not as adversely affected. News on individual companies was also a driver of performance during the year. Banca Intesa SpA (4.79% of the Index as of August 31, 2003) saw its share price climb on news that it planned to dispose of real estate assets. The electric utility Enel SpA and the oil and gas company ENI SpA (respectively 5.82% and 17.68% of the Index as of August 31, 2003) both were driven up on the announcement that the Italian Government would join the two companies in a separately traded company that would be sold to investors. iSHARES MSCI ITALY INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI Italy Index Fund MSCI Italy Index $ 10,000 $ 10,000 8/31/96 $ 10,411 $ 10,325 $ 11,151 $ 11,093 8/31/97 $ 12,845 $ 12,852 $ 17,249 $ 17,284 8/31/98 $ 18,966 $ 19,115 $ 21,325 $ 21,650 8/31/99 $ 19,941 $ 19,948 $ 24,732 $ 24,619 8/31/2000 $ 22,604 $ 22,723 $ 21,017 $ 20,883 8/31/2001 $ 18,398 $ 18,294 $ 16,174 $ 16,123 8/31/2002 $ 15,668 $ 15,527 $ 15,858 $ 15,825 8/31/2003 $ 17,672 $ 17,442 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 17 Managers' Discussion & Analysis iSHARES MSCI NETHERLANDS INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS ----------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ----------------------- ---------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (0.78)% (0.58)% 0.80% (7.01)% (6.63)% (4.91)% 2.03% 2.01% 3.64% CUMULATIVE TOTAL RETURNS ----------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ----------------------- ---------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX (0.78)% (0.58)% 0.80% (30.46)% (29.05)% (22.25)% 16.25% 16.04% 30.64% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 NETHERLANDS INDEX [CHART APPEARS HERE] Consumer Discretionary 16.17% Consumer Staples 15.28% Energy 30.10% Financials 25.59% Industrials 2.46% Information Technology 2.60% Materials 3.98% Telecommunications Services 3.82% PERFORMANCE REVIEW The total return of the iShares MSCI Netherlands Index Fund (the "Fund") was -0.78% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Netherlands Index (the "Index") over the reporting period was 0.80%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 1.58 percentage points during the reporting period. This was due to the negative impact of expenses, portfolio sampling, uninvested assets, and revenue differential, which subtracted 0.84, 0.68, 0.11 and 0.01 percentage points, 18 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS respectively, from the Fund's return. Those factors were partially offset by the impact of securities lending, which contributed 0.06 percentage points to the Fund's return. KEY MARKET CONDITIONS Dutch equities across the board struggled with sluggish conditions worldwide and a war in Iraq. But one Dutch company significantly impacted the performance of the entire Index during the reporting period. In February 2003, Dutch supermarket chain Koninklijke Ahold NV ("Ahold") revealed what it described as "significant accounting irregularities" at its U.S. foodservice unit. In addition, the company's CEO and CFO resigned. The news caused Ahold shares to decline 63% in one day, dropping further in subsequent trading days. The news from Ahold also created a ripple effect throughout the Netherlands' market, because many Dutch corporations owned significant stakes in Ahold. Financial services companies such as ING Groep NV and AEGON NV (respectively 10.44% and 5.29% of the Index as of August 31, 2003) were among the larger Dutch stocks that declined significantly after Ahold's disclosure. Their share prices had already been depressed by concerns about the declining value of their equity positions and potential exposure to corporate defaults. ING and AEGON finished the reporting period with losses of 20.22% and 19.65%, respectively. Aside from the Ahold disclosure and its repercussions, the market moved in sync with the global economy. Because the life-blood of Dutch prosperity is foreign trade, the Dutch economy is sensitive to the strength of its trading partners. During the reporting period, the combined effects of the economic slowdown in the U.S. and Europe, and the war in Iraq, produced a nearly stagnant market for the Netherlands, whose GDP declined by 0.9% (year-over-year) in the second quarter of 2003. As GDP growth and market performance improved in the U.S. during the final months of the reporting period, markets lifted somewhat in the Netherlands, generally mitigating the severity of losses experienced earlier in the period. Royal Dutch Petroleum Co. (the largest weighting at 29.61% of the Index as of August 31, 2003), like many of its other European counterparts, was directly affected by the war in Iraq. As the war drove the price of crude oil to unsustainable levels, Royal Dutch Petroleum Co. saw its share price drop, although the company retraced some of its losses as oil prices stabilized. iSHARES MSCI NETHERLANDS INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI Netherlands Index Fund MSCI Netherlands Index $ 10,000 $ 10,000 8/31/96 $ 11,119 $ 10,960 $ 12,934 $ 12,932 8/31/97 $ 14,236 $ 14,661 $ 16,810 $ 17,251 8/31/98 $ 16,715 $ 16,803 $ 16,958 $ 17,551 8/31/99 $ 18,216 $ 18,838 $ 18,076 $ 19,133 8/31/2000 $ 18,449 $ 19,706 $ 16,881 $ 18,192 8/31/2001 $ 14,791 $ 16,320 $ 13,264 $ 14,651 8/31/2002 $ 11,716 $ 12,960 $ 9,090 $ 10,473 8/31/2003 $ 11,624 $ 13,064 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 19 Managers' Discussion & Analysis iSHARES MSCI SPAIN INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS ----------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ---------------------- -------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 25.81% 26.56% 27.13% 0.92% 1.71% 0.85% 10.40% 10.43% 10.76% CUMULATIVE TOTAL RETURNS ----------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ---------------------- -------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 25.81% 26.56% 27.13% 4.70% 8.83% 4.32% 109.49% 109.96% 114.50% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 SPAIN INDEX [CHART APPEARS HERE] Consumer Discretionary 3.63% Consumer Staples 3.15% Energy 7.10% Financials 35.78% Health Care 0.46% Industrials 5.72% Information Technology 1.36% Materials 0.96% Telecommunications Services 25.96% Utilities 15.88% PERFORMANCE REVIEW The total return of the iShares MSCI Spain Index Fund (the "Fund") was 25.81% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Spain Index (the "Index") over the reporting period was 27.13%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 1.32 percentage points during the reporting period. This was due to the negative impact of expenses, portfolio sampling, revenue differential, and uninvested assets, which subtracted 0.84, 0.28, 0.18, and 0.09 percentage points, 20 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS respectively, from the Fund's return. Those factors were partially offset by the impact of securities lending, which contributed 0.07 percentage points to the Fund's return. KEY MARKET CONDITIONS The Spanish market performed well on multiple fronts during the reporting period. Spain enjoyed a healthy economy over the course of the past twelve months. While its forecasted GDP growth rate for the year of 1.8% seems low, it is among the highest of any EU country for the time period. Its currency, the euro, strengthened against the U.S. dollar for most of the reporting period, boosting returns for U.S. investors. In addition, some companies in the Index have significant holdings in Latin America, and their share prices were affected by the performance of those Latin American companies. Two companies in the Index that had significant Latin American holdings include Banco Santander Central Hispano SA ("BSCH") and the utility company Endesa SA (respectively 16.81% and 6.43% of the Index as of August 31, 2003). In late 2002 and early 2003, Brazil and other Latin American markets declined and the Brazilian currency slid, causing the value of these holdings to decline. In the final months of the reporting period, however, the Brazilian market and its currency rebounded along with its neighboring markets. Companies such as BSCH and Endesa then saw their share prices bounce back to post solid gains for the reporting period. The largest weighting at 25.96% of the Index as of August 31, 2003, Telefonica SA, also logged positive returns. The telephone company participated in a general resurgence of the telecommunications sector worldwide. iSHARES MSCI SPAIN INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI Spain Index Fund MSCI Spain Index $ 10,000 $ 10,000 8/31/96 $ 10,845 $ 10,901 $ 12,893 $ 13,047 8/31/97 $ 15,091 $ 15,357 $ 20,476 $ 21,024 8/31/98 $ 20,008 $ 20,559 $ 24,387 $ 24,935 8/31/99 $ 22,686 $ 23,674 $ 24,902 $ 27,501 8/31/2000 $ 22,274 $ 24,240 $ 22,578 $ 23,557 8/31/2001 $ 19,786 $ 20,349 $ 18,376 $ 18,917 8/31/2002 $ 16,651 $ 16,872 $ 17,159 $ 17,480 8/31/2003 $ 20,949 $ 21,450 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 21 Managers' Discussion & Analysis iSHARES MSCI SWEDEN INDEX FUND Performance as of 8/31/03
AVERAGE ANNUAL TOTAL RETURNS ---------------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ------------------------------ ---------------------------- -------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 29.04% 29.12% 29.06% (1.80)% (1.16)% (0.34)% 4.91% 4.90% 6.32%
CUMULATIVE TOTAL RETURNS ---------------------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 ------------------------------ ---------------------------- -------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 29.04% 29.12% 29.06% (8.66)% (5.67)% (1.69)% 43.05% 42.97% 58.06%
"Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 SWEDEN INDEX [CHART APPEARS HERE] Consumer Discretionary 14.77% Consumer Staples 2.03% Financials 23.20% Health Care 3.47% Industrials 24.07% Information Technology 17.00% Materials 8.00% Telecommunications Services 7.46% PERFORMANCE REVIEW The total return of the iShares MSCI Sweden Index Fund (the "Fund") was 29.04% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Sweden Index (the "Index") over the reporting period was 29.06%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 0.02 percentage points during the reporting period. This was due to the negative impact of expenses and uninvested assets, which subtracted 0.84 and 0.20 percentage points, respectively, from the Fund's return. Those factors 22 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS were partially offset by the impact of portfolio sampling, securities lending, and revenue differential, which contributed 0.82, 0.16 and 0.04 percentage points, respectively, to the Fund's return. KEY MARKET CONDITIONS The Swedish market overcame losses posted early in the year to deliver one of the best performances in Europe during the reporting period. From an economic standpoint, little changed for the country during the twelve-month period. Economic growth remained slow, hemmed in for much of the reporting period by weak external demand. At its latest monetary policy meeting on August 14th, the Riksbank (the central bank) left the benchmark interest rate unchanged at 2.75%, but left the door open for a rate cut at its next meeting. What accounted for the bulk of Sweden's performance was the renewed strength of the telecommunications industry during the reporting period. Despite having its credit rating lowered in September 2002, cellular phone maker LM Ericsson (Class B shares were the largest weighting at 16.68% of the Index at August 31, 2003), climbed 79.02% for the reporting period. The newly formed TeliaSonera AB (4.81% of the Index as of August 31, 2003), the result of a merger between telecommunications companies Telia AB and Sonera Corporation, also contributed positively to performance. After struggling with a global slowdown early in the reporting period, some Swedish exporters began to post better results as the economic outlook improved. A decline in Sweden's currency, the krona, also helped external demand, as it made Swedish products less expensive to foreigners. Increasing demand helped drive up share prices for both appliance maker Electrolux AB (its Series B shares were 4.94% of the Index as of August 31, 2003) and automobile maker Volvo AB (5.77% of the Index as of August 31, 2003). iSHARES MSCI SWEDEN INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI Sweden Index Fund MSCI Sweden Index $ 10,000 $ 10,000 8/31/96 $ 11,413 $ 11,192 $ 13,357 $ 13,335 8/31/97 $ 14,848 $ 14,845 $ 16,354 $ 16,584 8/31/98 $ 15,661 $ 16,081 $ 16,750 $ 17,404 8/31/99 $ 19,590 $ 20,831 $ 31,615 $ 37,466 8/31/2000 $ 27,260 $ 31,604 $ 18,896 $ 21,499 8/31/2001 $ 14,451 $ 16,238 $ 14,496 $ 16,063 8/31/2002 $ 11,085 $ 12,247 $ 10,680 $ 11,828 8/31/2003 $ 14,305 $ 15,806 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 23 Managers' Discussion & Analysis iSHARES MSCI SWITZERLAND INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS ----------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------- ------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 5.89% 6.14% 6.68% (3.82)% (2.99)% (2.85)% 2.41% 2.44% 4.10% CUMULATIVE TOTAL RETURNS ----------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------- ------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 5.89% 6.14% 6.68% (17.68)% (14.07)% (13.46)% 19.49% 19.75% 34.99% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 SWITZERLAND INDEX [CHART APPEARS HERE] Consumer Discretionary 3.54% Consumer Staples 19.58% Financials 31.14% Health Care 34.27% Industrials 3.90% Information Technology 0.74% Materials 5.22% Telecommunications Services 1.61% PERFORMANCE REVIEW The total return of the iShares MSCI Switzerland Index Fund (the "Fund") was 5.89% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Switzerland Index (the "Index") over the reporting period was 6.68%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 0.79 percentage points during the reporting period. This was due to the negative impact of expenses and uninvested assets, which subtracted 0.84 and 0.10 percentage points, respectively, from the Fund's return. Those factors 24 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS were partially offset by the impact of revenue differential, portfolio sampling, and securities lending, which contributed 0.07, 0.07, and 0.01 percentage points, respectively, to the Fund's return. KEY MARKET CONDITIONS Ironically, Switzerland struggled with the repercussions of its own strength during the reporting period. In the first few months of the reporting period, many investors sought the relative stability of Switzerland's currency as a safe haven from the global economic slowdown and growing geopolitical unease. The influx to the Swiss franc caused the currency to appreciate, which in turn put Swiss exporters at a competitive disadvantage in other countries, particularly the U.S. Because the U.S. is one of Switzerland's main trading partners, the slowdown in the U.S. has also contributed significantly to a slower Swiss economy, which slipped into recession during the first quarter of 2003. Swiss companies that rely on exports were hurt during the reporting period. For example, Novartis AG and Nestle SA, the two largest constituents at 19.67% and 19.58% of the Index declined 15.44% and 5.28%, respectively. Financial companies, on the other hand, were not as susceptible to the appreciation of the currency, and in fact benefited from the influx of funds. Credit Suisse Group (8.28% of the Index as of August 31, 2003) gained 25.36%, and Zurich Financial Services AG (4.12% of the Index as of August 31, 2003) climbed 59.28%. Toward the end of the reporting period, export-driven Swiss companies did regain some ground after the release of a government report that showed the U.S. economy growing at a faster rate than estimated. iSHARES MSCI SWITZERLAND INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI Switzerland Index Fund MSCI Switzerland Index $ 10,000 $ 10,000 8/31/96 $ 10,260 $ 10,314 $ 10,210 $ 10,342 8/31/97 $ 11,972 $ 11,992 $ 15,123 $ 16,262 8/31/98 $ 14,515 $ 15,601 $ 15,019 $ 16,698 8/31/99 $ 14,728 $ 15,966 $ 13,560 $ 14,302 8/31/2000 $ 15,017 $ 16,037 $ 14,988 $ 15,902 8/31/2001 $ 12,603 $ 13,728 $ 11,917 $ 13,201 8/31/2002 $ 11,284 $ 12,654 $ 9,879 $ 11,165 8/31/2003 $ 11,949 $ 13,499 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 25 Managers' Discussion & Analysis iSHARES MSCI UNITED KINGDOM INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS -------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------- ---------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 4.20% 3.87% 5.14% (3.47)% (2.35)% (2.78)% 4.49% 4.43% 5.12% CUMULATIVE TOTAL RETURNS -------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------- ---------------------------- ---------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 4.20% 3.87% 5.14% (16.18)% (11.19)% (13.15)% 38.83% 38.28% 45.17% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 UNITED KINGDOM INDEX [CHART APPEARS HERE] Consumer Discretionary 10.68% Consumer Staples 10.55% Energy 14.52% Financials 27.20% Health Care 12.60% Industrials 5.47% Information Technology 0.80% Materials 4.22% Telecommunications Services 9.86% Utilities 4.10% PERFORMANCE REVIEW The total return of the iShares MSCI United Kingdom Index Fund (the "Fund") was 4.20% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI United Kingdom Index (the "Index") over the reporting period was 5.14%. SIGNIFICANT PERFORMANCE FACTORS The Fund underperformed its benchmark by 0.94 percentage points during the reporting period. This was due to the negative impact of expenses, uninvested assets, and portfolio sampling, which subtracted 0.84, 0.22, and 0.22 percentage points, respectively, from the Fund's 26 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS return. Those factors were partially offset by the impact of revenue differential and securities lending, which contributed 0.33 and 0.01 percentage points, respectively, to the Fund's return. KEY MARKET CONDITIONS The U.K. market overcame economic slowdown and turmoil in the Middle East during the reporting period to deliver a positive return. The spike and subsequent decline in oil prices associated with the war in Iraq, in addition to weaker demand for oil due to the economic slowdown, translated into declines in share prices for many oil companies. U.K. oil stocks, a major component of the British market, were negatively impacted during the year. Both BP PLC, the largest weighting at 9.68% of the Index as of August 31, 2003, and Shell Transport & Trading Co. PLC suffered losses. Pharmaceutical companies also struggled during the year, largely due to growing competition from generic producers. GlaxoSmithKline PLC (7.33% of the Index as of August 31, 2003) lost ground for the reporting period. AstraZeneca PLC (4.24% of the Index as of August 31, 2003), however, experienced higher revenues from its popular prescription drug Nexium, and logged gains of 33.37%. As the technology and telecommunications industry sector quietly gained ground during the reporting period, so did the share price of Vodafone Group PLC (7.97% of the Index as of August 31, 2003). Although the telecommunications company retraced some of its gains in June when it announced plans to invest an additional $92 million in its unprofitable Hungarian unit, it still returned 11.84% for the reporting period. Following months of speculation and market encouragement, in July the Monetary Policy Committee moved to lower the Bank of England's benchmark interest rate by 0.25%. At 3.50%, the rate now stands at its lowest level since Winston Churchill was Prime Minister in 1955. This easing of rates resulted in a return to the sterling depreciation trend, which, for U.S. dollar-based investors, erased some gains. iSHARES MSCI UNITED KINGDOM INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI United Kingdom Index Fund MSCI United Kingdom Index $10,000 $10,000 8/31/96 $11,041 $11,059 $12,768 $12,973 8/31/97 $14,405 $14,576 $17,432 $17,820 8/31/98 $16,564 $16,714 $18,581 $18,939 8/31/99 $19,102 $19,428 $18,007 $18,520 8/31/2000 $18,528 $18,909 $16,727 $17,105 8/31/2001 $15,526 $16,003 $14,585 $15,081 8/31/2002 $13,323 $13,808 $11,843 $12,304 8/31/2003 $13,883 $14,517 Past performance is no guarantee of future results. MANAGERS' DISCUSSION & ANALYSIS 27 Schedule of Investments iSHARES MSCI AUSTRIA INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.85% Telekom Austria AG/1/ 374,997 $ 3,915,354 Erste Bank der Oesterreichischen Sparkassen AG 41,559 3,828,158 OMV AG 20,496 2,407,999 Voest-Alpine AG 27,720 1,079,486 Immofinanz Immobillien Anlage AG/1/ 155,883 1,076,495 Wienerberger Baustoffindustrie AG 55,860 1,064,053 Bank Austria Creditanstalt/1/ 34,230 1,042,876 Oesterreichische Elektrizitaetswirtschafts AG Class A 10,836 973,281 Mayr-Melnhof Karton AG 11,235 959,656 Boehler-Uddeholm AG 17,766 938,399 Flughafen Wien AG 25,179 937,962 VA Technologie AG/1/ 30,786 865,279 RHI AG/1/ 50,967 679,314 Generali Holding Vienna AG 28,392 670,501 BBAG Oesterreichische Brau-Beteiligungs AG 4,935 661,013 Lenzing AG 5,250 659,975 Austrian Airlines AG/1/ 42,567 298,632 BWT AG 16,401 195,012 TOTAL COMMON STOCKS (COST: $18,945,421) 22,253,445 SHORT TERM INVESTMENTS - 8.63% MONEY MARKET FUNDS - 5.61% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 821,679 821,679 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 312,764 312,764 BlackRock Temp Cash Money Market Fund/2/ 16,457 16,457 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 28,433 28,433 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/(2)/ 72,308 $ 72,308 1,251,641 FLOATING RATE NOTES - 2.09% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 14,217 14,215 1.16%, 08/23/04/2/ 14,217 14,228 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 11,373 11,373 1.37%, 08/26/04/2/ 28,433 28,433 CC USA Inc. 1.06%, 05/24/04/2/ 28,433 28,431 1.07%, 04/19/04/2/ 12,511 12,510 1.11%, 07/15/04/2/ 14,217 14,221 Dorada Finance Inc. 1.07%, 05/20/04/2/ 28,433 28,430 1.24%, 08/09/04/2/ 7,108 7,107 Five Finance Inc. 1.08%, 04/15/04/2/ 14,217 14,217 HBOS Treasury Services PLC 1.27%, 06/24/04/2/ 28,433 28,433 Holmes Financing PLC 1.07%, 04/15/04/2/ 5,687 5,687 K2 USA LLC 1.07%, 08/16/04/2/ 7,108 7,107 1.08%, 04/13/04/2/ 14,217 14,217 1.08%, 05/17/04/2/ 14,217 14,216 Links Finance LLC 1.05%, 07/20/04/2/ 11,373 11,371 1.07%, 05/04/04/2/ 14,217 14,216 1.07%, 06/28/04/2/ 14,217 14,215 1.08%, 03/29/04/2/ 14,217 14,217 Nationwide Building Society 1.08%, 07/23/04/2/ 21,325 21,325 Sigma Finance Inc. 1.05%, 07/20/04/2/ 14,217 14,214 1.06%, 10/15/03/2/ 28,433 28,433 1.06%, 07/01/04/2/ 14,217 14,214 1.24%, 08/06/04/2/ 7,108 7,108 28 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI AUSTRIA INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Tango Finance Corp. 1.05%, 07/15/04/2/ $ 8,530 $ 8,527 1.06%, 07/06/04/2/ 8,530 8,529 Toronto Dominion 1.33%, 08/23/04/2/ 18,481 18,472 White Pine Finance LLC 1.06%, 07/06/04/2/ 17,060 17,058 1.07%, 05/17/04/2/ 17,060 17,060 1.08%, 04/20/04/2/ 14,217 14,217 466,001 COMMERCIAL PAPER - 0.80% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 8,530 8,524 CRC Funding LLC 1.05%, 09/25/03/2/ 14,217 14,207 1.06%, 09/16/03/2/ 5,687 5,684 Edison Asset Securitization 1.06%, 09/05/03/2/ 14,217 14,215 1.06%, 09/15/03/2/ 8,530 8,527 1.07%, 10/23/03/2/ 26,727 26,687 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 14,217 14,210 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 7,108 7,108 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 7,108 7,105 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 7,108 7,107 Quincy Capital Corp. 1.06%, 09/17/03/2/ 29,459 29,446 Receivables Capital Corp. 1.06%, 09/17/03/2/ 20,756 20,747 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 14,217 14,217 177,784 TIME DEPOSITS - 0.13% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 28,433 28,433 28,433 TOTAL SHORT TERM INVESTMENTS (COST: $1,923,859) 1,923,859 TOTAL INVESTMENTS IN SECURITIES - 108.48% (COST $20,869,280) 24,177,304 OTHER ASSETS, LESS LIABILITIES - (8.48%) (1,889,000) ------------ NET ASSETS - 100.00% $ 22,288,304 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 29 Schedule of Investments iSHARES MSCI BELGIUM INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.75% Fortis 278,761 $ 4,685,652 Dexia Group 218,932 2,728,148 Electrabel SA 6,468 1,621,918 Delhaize Group 33,075 1,282,214 Interbrew SA 45,962 1,134,379 Solvay SA 16,562 1,089,187 KBC Bankverzekeringsholding 27,440 1,067,076 Groupe Bruxelles Lambert SA 22,932 1,049,127 UCB SA 36,456 969,006 Algemene Maatschappij voor Nijverheidskredit NV 23,863 961,772 AGFA-Gevaert NV 40,131 898,820 Colruyt NV 11,662 848,886 Umicore 11,760 659,122 Cofinimmo 5,537 651,069 Bekaert NV 9,751 467,943 Omega Pharma SA 14,063 439,261 Mobistar SA/1/ 8,967 406,790 SA D'Ieteren NV 2,205 367,488 Barco NV 5,684 352,586 Compagnie Maritime Belge SA 3,136 137,376 TOTAL COMMON STOCKS (COST: $23,503,476) 21,817,820 SHORT TERM INVESTMENTS - 38.04% MONEY MARKET FUNDS - 24.69% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 3,532,479 3,532,479 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 1,358,244 1,358,244 BlackRock Temp Cash Money Market Fund/2/ 71,468 71,468 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 123,477 123,477 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 314,011 $ 314,011 5,399,679 FLOATING RATE NOTES - 9.25% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 61,738 61,732 1.16%, 08/23/04/2/ 61,738 61,790 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 49,391 49,391 1.37%, 08/26/04/2/ 123,477 123,477 CC USA Inc. 1.06%, 05/24/04/2/ 123,477 123,468 1.07%, 04/19/04/2/ 54,330 54,328 1.11%, 07/15/04/2/ 61,738 61,758 Dorada Finance Inc. 1.07%, 05/20/04/2/ 123,477 123,464 1.24%, 08/09/04/2/ 30,869 30,865 Five Finance Inc. 1.08%, 04/15/04/2/ 61,738 61,738 HBOS Treasury Services PLC 1.27%, 06/24/04/2/ 123,477 123,477 Holmes Financing PLC 1.07%, 04/15/04/2/ 24,695 24,695 K2 USA LLC 1.07%, 08/16/04/2/ 30,869 30,865 1.08%, 04/13/04/2/ 61,738 61,737 1.08%, 05/17/04/2/ 61,738 61,737 Links Finance LLC 1.05%, 07/20/04/2/ 49,391 49,382 1.07%, 05/04/04/2/ 61,738 61,736 1.07%, 06/28/04/2/ 61,738 61,728 1.08%, 03/29/04/2/ 61,738 61,738 Nationwide Building Society 1.08%, 07/23/04/2/ 92,608 92,608 30 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI BELGIUM INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Sigma Finance Inc. 1.05%, 07/20/04/2/ $ 61,738 $ 61,727 1.06%, 10/15/03/2/ 123,477 123,475 1.06%, 07/01/04/2/ 61,738 61,726 1.24%, 08/06/04/2/ 30,869 30,866 Tango Finance Corp. 1.05%, 07/15/04/2/ 37,043 37,032 1.06%, 07/06/04/2/ 37,043 37,040 Toronto Dominion 1.33%, 08/23/04/2/ 80,260 80,221 White Pine Finance LLC 1.06%, 07/06/04/2/ 74,086 74,080 1.07%, 05/17/04/2/ 74,086 74,086 1.08%, 04/20/04/2/ 61,738 61,738 2,023,705 COMMERCIAL PAPER - 3.53% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 37,043 37,019 CRC Funding LLC 1.05%, 09/25/03/2/ 61,738 61,697 1.06%, 09/16/03/2/ 24,695 24,685 Edison Asset Securitization 1.06%, 09/05/03/2/ 61,738 61,733 1.06%, 09/15/03/2/ 37,043 37,029 1.07%, 10/23/03/2/ 116,068 115,892 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 61,738 61,710 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 30,869 30,869 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 30,869 30,856 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 30,869 30,864 Quincy Capital Corp. 1.06%, 09/17/03/2/ 127,932 127,875 Receivables Capital Corp. 1.06%, 09/17/03/2/ 90,138 90,098 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 61,738 61,738 772,065 TIME DEPOSITS - 0.57% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 123,477 123,477 123,477 TOTAL SHORT TERM INVESTMENTS (COST: $8,318,926) 8,318,926 TOTAL INVESTMENTS IN SECURITIES - 137.79% (COST $31,822,402) 30,136,746 OTHER ASSETS, LESS LIABILITIES - (37.79%) (8,265,533) ------------ NET ASSETS - 100.00% $ 21,871,213 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 31 Schedule of Investments iSHARES MSCI EMU INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 98.37% AUSTRIA - 0.59% Bank Austria Creditanstalt/1/ 2,508 $ 76,411 Boehler-Uddeholm AG 462 24,403 Erste Bank der Oesterreichischen Sparkassen AG 2,112 194,544 Flughafen Wien AG 924 34,421 Immofinanz Immobillien Anlage AG/1/ 10,890 75,204 Mayr-Melnhof Karton AG 462 39,462 Oesterreichische Elektrizitaetswirtschafts AG Class A 528 47,425 OMV AG 1,188 139,574 RHI AG/1/ 2,838 37,826 Telekom Austria AG/1/ 16,038 167,453 VA Technologie AG/1/ 792 22,260 Voest-Alpine AG 1,914 74,536 Wienerberger Baustoffindustrie AG 2,310 44,002 977,521 BELGIUM - 3.11% AGFA-Gevaert NV 9,372 209,906 Barco NV 858 53,223 Bekaert NV 1,584 76,015 Cofinimmo 396 46,564 Colruyt NV 1,518 110,496 Compagnie Maritime Belge SA 462 20,238 Delhaize Group 5,742 222,599 Dexia Group 52,998 660,417 Electrabel SA 2,508 628,907 Fortis 85,140 1,431,105 Groupe Bruxelles Lambert SA 5,940 271,752 Interbrew SA 13,134 324,158 KBC Bankverzekeringsholding 7,722 300,290 Mobistar SA/1/ 1,650 74,853 Omega Pharma SA 1,716 53,600 SA D'Ieteren NV 264 43,999 Solvay SA 5,148 338,554 UCB SA 7,194 191,218 Umicore 1,452 81,381 5,139,275 FINLAND - 5.66% Amer Group Ltd. 1,716 53,976 Elisa OYJ Class A/1/ 10,626 103,830 Fortum OYJ 30,228 244,922 Instrumentarium OYJ 4,092 159,802 KCI Konecranes OYJ 924 27,096 Kesko OYJ 6,600 85,287 KONE OYJ Class B 2,640 119,271 Metso OYJ 7,854 81,055 Nokia OYJ 391,578 6,414,309 Nokian Renkaat OYJ 396 21,912 Orion-Yhtyma OYJ Class B 2,310 39,564 Outokumpu OYJ 7,920 80,432 Pohjola Group PLC Class D 1,518 27,116 Rautaruukki OYJ/1/ 9,570 50,223 Sampo OYJ Class A 21,912 168,881 Stora Enso OYJ Class R 54,054 703,842 TietoEnator OYJ 7,260 129,206 UPM-Kymmene OYJ 40,920 741,280 Uponor OYJ 3,498 78,729 Wartsila OYJ Class B 2,376 32,295 9,363,028 FRANCE - 27.94% Accor SA 15,774 614,626 Air France 7,194 113,340 Alcatel SA Class A/1/ 99,924 1,086,095 Atos Origin SA/1/ 1,650 69,019 Autoroutes du Sud de la France 6,072 171,661 Aventis SA 55,704 2,705,604 AXA 115,962 2,056,132 BNP Paribas SA 66,066 3,291,587 Bouygues SA 16,434 432,668 Business Objects SA/1/ 5,016 133,822 Cap Gemini SA/1/ 8,778 360,919 Carrefour SA 47,058 2,345,590 CNP Assurances 2,706 107,696 32 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI EMU INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ Compagnie de Saint-Gobain 25,410 $ 992,877 Compagnie Generale des Etablissements Michelin Class B 10,956 444,817 Credit Agricole SA 26,598 505,194 Dassault Systemes SA 3,300 119,199 Essilor International SA 7,722 313,685 Etablissements Economiques du Casino Guichard-Perrachon SA 2,970 236,405 European Aeronautic Defence and Space Co. 24,750 391,292 France Telecom/1/ 64,086 1,590,136 Gecina SA 1,188 134,343 Groupe Danone 10,164 1,393,766 Groupe Wanadoo SA/1/ 31,482 207,039 Hermes International 726 113,982 Imerys SA 792 130,517 Klepierre 1,716 84,347 Lafarge SA 13,534 908,627 Lagardere S.C.A 10,560 479,752 L'Air Liquide SA 8,328 1,195,945 L'Oreal SA 27,786 1,931,046 LVMH Moet Hennessy Louis Vuitton SA 18,216 1,094,964 Pechiney Class A 6,072 307,790 Pernod Ricard 4,405 377,953 Pinault-Printemps-Redoute SA 5,610 481,959 PSA Peugeot Citroen 15,048 686,786 Publicis Groupe 8,052 235,859 Renault SA 13,530 815,517 Sagem SA 1,650 148,636 Sanofi-Synthelabo SA 30,096 1,691,771 Schneider Electric SA 16,236 876,658 Societe BIC SA 3,102 127,713 Societe Generale Class A 26,202 1,737,537 Societe Television Francaise 1 10,032 304,761 Sodexho Alliance SA 7,986 233,926 Suez SA 66,330 1,046,477 Technip-Coflexip SA 1,529 137,569 Thales SA 6,402 183,521 Thomson 14,784 268,954 Total SA 53,460 8,199,515 Unibail Holding 3,366 252,035 Valeo SA 6,204 235,401 Veolia Environnement 19,272 375,567 Vinci SA 5,478 355,445 Vivendi Universal SA/1/ 74,844 1,258,042 Zodiac SA 3,960 105,170 46,201,254 GERMANY - 18.58% adidas-Salomon AG 3,762 315,018 Allianz AG 22,435 2,000,315 ALTANA AG 5,940 304,620 BASF AG 44,814 2,063,502 Bayer AG 54,318 1,161,108 Bayerische Hypo-und Vereinsbank AG/1/ 28,710 449,485 Beiersdorf AG 2,112 268,281 Celesio AG 2,046 83,360 Commerzbank AG 34,518 482,433 Continental AG 9,900 258,035 DaimlerChrysler AG 70,686 2,692,158 Deutsche Bank AG 42,966 2,483,154 Deutsche Boerse AG 8,118 392,428 Deutsche Lufthansa AG 15,114 206,591 Deutsche Post AG 31,944 512,041 Deutsche Telekom AG/1/ 172,194 2,457,673 Douglas Holding AG 2,442 59,654 E.ON AG 48,246 2,494,853 EPCOS AG/1/ 4,884 82,309 Fresenius Medical Care AG 2,970 150,321 HeidelbergerCement AG/1/ 4,000 147,119 Infineon Technologies AG/1/ 34,122 499,750 KarstadtQuelle AG 3,300 86,809 Linde AG 7,326 306,527 MAN AG 9,174 201,443 Merck KGaA 3,432 99,362 METRO AG 11,844 428,336 Muenchener Rueckversicherungs-Gesellschaft AG 9,372 958,983 Puma AG 1,056 119,880 SCHEDULES OF INVESTMENTS 33 Schedule of Investments (Continued) iSHARES MSCI EMU INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ RWE AG 30,162 $ 812,308 SAP AG 16,830 2,019,608 Schering AG 13,992 562,857 Siemens AG 65,670 4,066,389 Suedzucker AG 3,960 62,128 ThyssenKrupp AG 26,466 358,564 TUI AG 10,890 173,364 Volkswagen AG 18,612 912,588 30,733,354 GREECE - 0.78% Hellenic Telecommunications Organization SA ADR 97,614 587,636 National Bank of Greece SA ADR 161,970 699,710 1,287,346 IRELAND - 2.24% Allied Irish Banks PLC 70,620 985,453 Bank of Ireland 82,566 980,824 CRH PLC 43,626 831,013 DCC PLC 6,600 78,621 Fyffes PLC 25,806 40,799 Grafton Group PLC/1/ 12,672 65,111 Greencore Group PLC 11,088 35,181 Independent News & Media PLC 39,600 73,911 Irish Life & Permanent PLC 23,562 279,900 Kerry Group PLC Class A/1/ 11,286 179,296 Ryanair Holdings PLC/1/ 21,760 148,837 Waterford Wedgwood PLC 30,690 10,445 3,709,391 ITALY - 10.75% Alleanza Assicurazioni SpA 38,148 344,276 Arnoldo Mondadori Editore SpA 13,200 95,794 Assicurazioni Generali SpA 78,672 1,690,339 Autogrill SpA/1/ 9,900 113,366 Banca Fideuram SpA 23,100 132,387 Banca Intesa SpA 294,107 883,132 Banca Monte dei Paschi di Siena SpA 84,084 220,635 Banca Nazionale del Lavoro SpA/1/ 132,000 205,356 Banca Popolare di Milano Scrl 36,102 165,284 Banca Popolare di Verona e Novaro Scrl 29,898 393,900 Banche Popolari Unite Scrl/1/ 24,354 371,394 Benetton Group SpA 4,488 45,578 Bulgari SpA 13,200 87,823 Capitalia SpA/1/ 107,004 216,163 Enel SpA 176,500 1,075,475 ENI SpA 213,114 3,219,535 Fiat SpA/1/ 35,244 238,357 Fineco SpA/1/ 168,432 97,084 Finmeccanica SpA 462,594 326,568 Gruppo Editoriale L'Espresso SpA 16,236 69,698 Italcementi SpA 8,514 98,616 Luxottica Group SpA 11,748 175,673 Mediaset SpA 49,038 430,711 Mediobanca SpA 38,412 379,131 Mediolanum SpA 19,800 120,213 Parmalat Finanziaria SpA 29,700 96,029 Pirelli SpA 128,787 92,614 Riunione Adriatica di Sicurta SpA 25,476 366,408 Sanpaolo IMI SpA 81,576 783,670 SEAT Pagine Gialle SpA/1/ 281,202 241,737 Snam Rete Gas SpA 72,270 264,220 Snia SpA 20,130 37,350 Telecom Italia Media SpA/1/ 115,325 32,287 Telecom Italia Mobile SpA 310,266 1,369,377 Telecom Italia SpA/1/ 752,497 1,767,996 Tiscali SpA/1/ 13,860 88,258 UniCredito Italiano SpA 309,342 1,436,620 17,773,054 LUXEMBOURG - 0.23% Arcelor 29,436 379,734 379,734 34 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI EMU INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ NETHERLANDS - 15.87% ABN AMRO Holding NV 124,014 $ 2,171,672 AEGON NV 109,687 1,358,398 Akzo Nobel NV 22,704 744,312 ASML Holding NV/1/ 37,950 597,897 Corio NV 3,432 105,165 DSM NV 6,534 297,349 Euronext NV 6,930 173,625 Heineken NV 16,566 633,118 IHC Caland NV 2,376 119,996 ING Groep NV 139,062 2,711,529 Koninklijke Ahold NV/1/ 52,734 497,911 Koninklijke KPN NV/1/ 145,332 1,006,824 Koninklijke Numico NA CVA 11,484 222,788 Koninklijke Philips Electronics NV 108,174 2,636,566 Koninklijke Vendex KBB NV 6,666 75,455 Oce NV 6,072 78,264 QIAGEN NV/1/ 10,428 134,639 Reed Elsevier NV 52,074 574,007 Rodamco Europe NV 3,564 178,312 Royal Dutch Petroleum Co. 172,128 7,682,010 TPG NV 28,446 530,925 Unilever NV CVA 46,860 2,608,393 Vedior NV 7,788 96,449 VNU NV 18,414 572,133 Wereldhave NV 1,518 88,497 Wolters Kluwer NV CVA 22,572 351,158 26,247,392 PORTUGAL - 1.07% Banco BPI SA Registered 35,574 93,345 Banco Comercial Portugues SA Class R 171,089 304,299 Banco Espirito Santo SA 9,438 131,390 Brisa-Auto Estradas de Portugal SA 24,354 131,017 CIMPOR-Cimentos de Portugal SGPS SA 17,094 64,373 Electricidade de Portugal SA 153,120 332,859 Jeronimo Martins SGPS SA/1/ 3,894 29,841 Portugal Telecom SGPS SA 77,682 561,189 PT Multimedia-Servicos de Telecomunicacoes e Multimedia SGPS SA/1/ 4,950 81,084 Sonae SGPS SA/1/ 83,754 44,138 1,773,535 SPAIN - 10.82% Abertis Infraestructuras SA 17,094 224,272 Acciona SA 2,508 129,416 Acerinox SA 4,158 176,212 ACS, Actividades de Construccion y Servicios SA 3,432 143,824 Altadis SA 24,156 570,199 Amadeus Global Travel Distribution SA Class A 20,790 139,235 Banco Bilbao Vizcaya Argentaria SA 249,084 2,666,326 Banco Popular Espanol SA 12,672 570,416 Banco Santander Central Hispano SA 351,912 3,002,050 Corporacion Mapfre SA 8,118 89,128 Endesa SA 74,778 1,164,160 Fomento de Construcciones y Contratas SA 4,158 123,257 Gas Natural SDG SA 17,094 316,608 Grupo Dragados SA 9,966 201,874 Grupo Ferrovial SA 5,016 134,813 Iberdrola SA 63,360 1,076,834 Iberia Lineas Aereas de Espana SA 33,528 69,572 Indra Sistemas SA 8,976 99,336 Industria de Diseno Textil SA 18,025 448,236 NH Hoteles SA/1/ 7,260 80,106 Promotora de Infomaciones SA 6,534 67,146 Repsol YPF SA 75,570 1,276,053 Sacyr Vallehermoso SA 9,240 101,446 Sociedad General de Aguas de Barcelona SA 5,148 65,846 Telefonica Publicidad e Informacion SA 14,520 67,273 SCHEDULES OF INVESTMENTS 35 Schedule of Investments (Continued) iSHARES MSCI EMU INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ Telefonica SA 386,719 $ 4,551,485 Union Fenosa SA 17,028 266,591 Zeltia SA 11,682 77,852 17,899,566 SWITZERLAND - 0.73% STMicroelectronics NV 48,774 1,212,884 1,212,884 TOTAL COMMON STOCKS (COST: $181,320,072) 162,697,334 PREFERRED STOCKS - 1.29% GERMANY - 0.73% Fresenius Medical Care AG 1,914 71,279 Henkel KGaA 4,884 310,683 Porsche AG 660 281,150 ProSiebenSat.1 Media AG 6,600 71,375 RWE AG 3,894 92,430 Volkswagen AG 8,514 283,230 Wella AG 1,320 98,098 1,208,245 ITALY - 0.56% Banca Intesa SpA RNC 71,214 159,108 Telecom Italia SpA RNC/1/ 482,432 761,654 920,762 TOTAL PREFERRED STOCKS (COST: $2,037,448) 2,129,007 SHORT TERM INVESTMENTS - 25.05% MONEY MARKET FUNDS - 16.26% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 17,583,558 17,583,558 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 6,768,877 6,768,877 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ BlackRock Temp Cash Money Market Fund/2/ 356,166 $ 356,166 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 615,352 615,352 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 1,564,891 1,564,891 26,888,844 FLOATING RATE NOTES - 6.10% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 307,676 307,644 1.16%, 08/23/04/2/ 307,676 307,933 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 246,141 246,141 1.37%, 08/26/04/2/ 615,352 615,352 CC USA Inc. 1.06%, 05/24/04/2/ 615,352 615,308 1.07%, 04/19/04/2/ 270,755 270,747 1.11%, 07/15/04/2/ 307,676 307,772 Dorada Finance Inc. 1.07%, 05/20/04/2/ 615,352 615,287 1.24%, 08/09/04/2/ 153,838 153,817 Five Finance Inc. 1.08%, 04/15/04/2/ 307,676 307,676 HBOS Treasury Services PLC 1.27%, 06/24/04/2/ 615,352 615,352 Holmes Financing PLC 1.07%, 04/15/04/2/ 123,070 123,070 K2 USA LLC 1.07%, 08/16/04/2/ 153,838 153,816 1.08%, 04/13/04/2/ 307,676 307,667 1.08%, 05/17/04/2/ 307,676 307,665 Links Finance LLC 1.05%, 07/20/04/2/ 246,141 246,098 1.07%, 05/04/04/2/ 307,676 307,667 1.07%, 06/28/04/2/ 307,676 307,626 1.08%, 03/29/04/2/ 307,676 307,676 Nationwide Building Society 1.08%, 07/23/04/2/ 461,514 461,514 36 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI EMU INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Sigma Finance Inc. 1.05%, 07/20/04/2/ $ 307,676 $ 307,622 1.06%, 10/15/03/2/ 615,352 615,346 1.06%, 07/01/04/2/ 307,676 307,613 1.24%, 08/06/04/2/ 153,838 153,824 Tango Finance Corp. 1.05%, 07/15/04/2/ 184,606 184,553 1.06%, 07/06/04/2/ 184,606 184,590 Toronto Dominion 1.33%, 08/23/04/2/ 399,979 399,783 White Pine Finance LLC 1.06%, 07/06/04/2/ 369,211 369,182 1.07%, 05/17/04/2/ 369,211 369,211 1.08%, 04/20/04/2/ 307,676 307,676 10,085,228 COMMERCIAL PAPER - 2.32% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 184,606 184,486 CRC Funding LLC 1.05%, 09/25/03/2/ 307,676 307,470 1.06%, 09/16/03/2/ 123,070 123,020 Edison Asset Securitization 1.06%, 09/05/03/2/ 307,676 307,649 1.06%, 09/15/03/2/ 184,606 184,535 1.07%, 10/23/03/2/ 578,431 577,554 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 307,676 307,533 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 153,838 153,839 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 153,838 153,775 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 153,838 153,811 Quincy Capital Corp. 1.06%, 09/17/03/2/ 637,554 637,273 Receivables Capital Corp. 1.06%, 09/17/03/2/ 449,207 449,010 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 307,676 307,676 3,847,631 TIME DEPOSITS - 0.37% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 615,352 615,352 615,352 TOTAL SHORT TERM INVESTMENTS (COST: $41,437,055) 41,437,055 TOTAL INVESTMENTS IN SECURITIES - 124.71% (COST $224,794,575) 206,263,396 OTHER ASSETS, LESS LIABILITIES - (24.71%) (40,874,930) ------------ NET ASSETS - 100.00% $165,388,466 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 37 Schedule of Investments iSHARES MSCI FRANCE INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.82% Total SA 60,336 $ 9,254,132 BNP Paribas SA 74,480 3,710,795 Aventis SA 62,640 3,042,493 Carrefour SA 52,864 2,634,988 AXA 130,320 2,310,715 L'Oreal SA 31,216 2,169,421 Societe Generale Class A 29,664 1,967,114 Sanofi-Synthelabo SA 33,760 1,897,733 France Telecom/1/ 71,712 1,779,357 Groupe Danone 11,424 1,566,547 Vivendi Universal SA/1/ 83,792 1,408,447 STMicroelectronics NV 54,000 1,342,841 L'Air Liquide SA 9,338 1,340,986 Alcatel SA Class A/1/ 113,104 1,229,351 LVMH Moet Hennessy Louis Vuitton SA 20,416 1,227,206 Suez SA 74,176 1,170,262 Compagnie de Saint-Gobain 28,368 1,108,459 Lafarge SA 15,120 1,015,105 Schneider Electric SA 18,288 987,455 Renault SA 15,536 936,428 PSA Peugeot Citroen 16,640 759,445 Accor SA 17,856 695,750 Credit Agricole SA 30,400 577,408 Pinault-Printemps-Redoute SA 6,256 537,457 Lagardere S.C.A 11,632 528,455 Bouygues SA 18,912 497,908 Compagnie Generale des Etablissements Michelin Class B 12,240 496,948 Veolia Environnement 22,144 431,536 Pernod Ricard 4,960 425,572 European Aeronautic Defence and Space Co. 26,336 416,366 Arcelor 31,984 412,604 Cap Gemini SA/1/ 9,920 407,874 Vinci SA 6,224 403,850 Essilor International SA 9,296 377,625 Pechiney Class A 6,992 354,425 Societe Television Francaise 1 10,944 332,467 Thomson 16,848 306,502 Unibail Holding 3,984 298,309 Etablissements Economiques du Casino Guichard-Perrachon SA 3,456 275,090 Valeo SA 7,248 275,014 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Publicis Groupe 9,024 $ 264,331 Sodexho Alliance SA 8,816 258,238 Groupe Wanadoo SA/1/ 34,576 227,386 Euronext NV 8,272 207,247 Thales SA 6,976 199,975 Autoroutes du Sud de la France 6,752 190,885 Gecina SA 1,392 157,413 Sagem SA 1,712 154,222 Technip-Coflexip SA 1,712 154,034 Business Objects SA/1/ 5,632 150,256 Dassault Systemes SA 3,856 139,282 Societe BIC SA 3,322 136,771 Hermes International 864 135,648 CNP Assurances 3,024 120,352 Imerys SA 702 115,686 Air France 6,608 104,108 Klepierre 2,080 102,238 Zodiac SA 3,840 101,984 Atos Origin SA/1/ 1,952 81,652 ALSTOM/1/ 26,576 65,358 TOTAL COMMON STOCKS (COST: $63,967,864) 53,977,506 SHORT TERM INVESTMENTS - 12.31% MONEY MARKET FUNDS - 8.02% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 2,851,203 2,851,203 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 1,079,748 1,079,748 BlackRock Temp Cash Money Market Fund/2/ 56,814 56,814 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 98,159 98,159 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 249,626 249,626 4,335,550 FLOATING RATE NOTES - 2.98% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 49,079 49,074 1.16%, 08/23/04/2/ 49,079 49,120 38 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI FRANCE INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ $ 39,264 $ 39,264 1.37%, 08/26/04/2/ 98,159 98,159 CC USA Inc. 1.06%, 05/24/04/2/ 98,159 98,152 1.07%, 04/19/04/2/ 43,190 43,189 1.11%, 07/15/04/2/ 49,079 49,095 Dorada Finance Inc. 1.07%, 05/20/04/2/ 98,159 98,148 1.24%, 08/09/04/2/ 24,540 24,536 Five Finance Inc. 1.08%, 04/15/04/2/ 49,079 49,079 HBOS Treasury Services PLC 1.27%, 06/24/04/2/ 98,159 98,159 Holmes Financing PLC 1.07%, 04/15/04/2/ 19,632 19,632 K2 USA LLC 1.07%, 08/16/04/2/ 24,540 24,536 1.08%, 04/13/04/2/ 49,079 49,078 1.08%, 05/17/04/2/ 49,079 49,078 Links Finance LLC 1.05%, 07/20/04/2/ 39,264 39,257 1.07%, 05/04/04/2/ 49,079 49,078 1.07%, 06/28/04/2/ 49,079 49,071 1.08%, 03/29/04/2/ 49,079 49,079 Nationwide Building Society 1.08%, 07/23/04/2/ 73,619 73,619 Sigma Finance Inc. 1.05%, 07/20/04/2/ 49,079 49,071 1.06%, 10/15/03/2/ 98,159 98,158 1.06%, 07/01/04/2/ 49,079 49,069 1.24%, 08/06/04/2/ 24,540 24,537 Tango Finance Corp. 1.05%, 07/15/04/2/ 29,448 29,440 1.06%, 07/06/04/2/ 29,448 29,445 Toronto Dominion 1.33%, 08/23/04/2/ 63,803 63,773 White Pine Finance LLC 1.06%, 07/06/04/2/ 58,895 58,891 1.07%, 05/17/04/2/ 58,895 58,895 1.08%, 04/20/04/2/ 49,079 49,079 1,608,761 COMMERCIAL PAPER - 1.13% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 29,448 29,429 CRC Funding LLC 1.05%, 09/25/03/2/ 49,079 49,047 1.06%, 09/16/03/2/ 19,632 19,624 Edison Asset Securitization 1.06%, 09/05/03/2/ 49,079 49,076 1.06%, 09/15/03/2/ 29,448 29,436 1.07%, 10/23/03/2/ 92,269 92,129 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 49,079 49,057 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 24,540 24,540 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 24,540 24,530 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 24,540 24,535 Quincy Capital Corp. 1.06%, 09/17/03/2/ 101,700 101,656 Receivables Capital Corp. 1.06%, 09/17/03/2/ 71,656 71,624 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 49,079 49,079 613,762 TIME DEPOSITS - 0.18% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 98,159 98,159 98,159 TOTAL SHORT TERM INVESTMENTS (COST: $6,656,232) 6,656,232 TOTAL INVESTMENTS IN SECURITIES - 112.13% (COST $70,624,096) 60,633,738 OTHER ASSETS, LESS LIABILITIES - (12.13%) (6,558,562) ------------ NET ASSETS - 100.00% $ 54,075,176 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 39 Schedule of Investments iSHARES MSCI GERMANY INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 95.00% Siemens AG 206,577 $ 12,791,570 DaimlerChrysler AG 222,507 8,474,435 Deutsche Bank AG 139,455 8,059,586 Deutsche Telekom AG/1/ 533,952 7,620,937 E.ON AG 128,088 6,623,570 SAP AG 51,867 6,224,064 BASF AG 106,245 4,892,149 Allianz AG 53,271 4,749,667 Bayer AG 194,238 4,152,053 Muenchener Rueckversicherungs-Gesellschaft AG 31,239 3,196,508 RWE AG 114,831 3,092,570 Volkswagen AG 59,022 2,893,979 Schering AG 46,170 1,857,283 Deutsche Post AG 112,617 1,805,176 Commerzbank AG 119,664 1,672,456 Infineon Technologies AG/1/ 112,239 1,643,851 Bayerische Hypo-und Vereinsbank AG/1/ 96,822 1,515,850 METRO AG 41,607 1,504,710 Deutsche Boerse AG 31,023 1,499,668 ThyssenKrupp AG 92,421 1,252,128 ALTANA AG 20,196 1,035,710 adidas-Salomon AG 12,123 1,015,142 Linde AG 23,382 978,326 Beiersdorf AG 7,317 929,457 Deutsche Lufthansa AG 66,177 904,564 Continental AG 33,993 885,999 MAN AG 33,048 725,668 TUI AG 38,070 606,057 Puma AG 4,860 551,721 QIAGEN NV/1/ 42,066 543,127 HeidelbergerCement AG/1/ 13,078 481,004 Fresenius Medical Care AG 9,450 478,295 Celesio AG 9,693 394,923 Merck KGaA 12,717 368,178 KarstadtQuelle AG 13,014 342,342 EPCOS AG/1/ 16,659 280,750 MLP AG/1/ 18,765 261,853 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Suedzucker AG 16,686 $ 261,786 Douglas Holding AG 6,129 149,721 TOTAL COMMON STOCKS (COST: $138,837,473) 96,716,833 PREFERRED STOCKS - 4.88% Henkel KGaA 20,277 1,289,867 Volkswagen AG 29,106 968,251 Porsche AG 2,106 897,125 RWE AG 32,589 773,552 Wella AG 6,750 501,639 ProSiebenSat.1 Media AG 25,407 274,759 Fresenius Medical Care AG 7,020 261,430 TOTAL PREFERRED STOCKS (COST: $4,605,958) 4,966,623 SHORT TERM INVESTMENTS - 36.45% MONEY MARKET FUNDS - 23.66% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 15,751,912 15,751,912 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 6,059,551 6,059,551 BlackRock Temp Cash Money Market Fund/2/ 318,843 318,843 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 550,868 550,868 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 1,400,902 1,400,902 24,082,076 FLOATING RATE NOTES - 8.87% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 275,434 275,405 1.16%, 08/23/04/2/ 275,434 275,664 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 220,347 220,347 1.37%, 08/26/04/2/ 550,868 550,868 40 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI GERMANY INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ CC USA Inc. 1.06%, 05/24/04/2/ $ 550,868 $ 550,829 1.07%, 04/19/04/2/ 242,382 242,374 1.11%, 07/15/04/2/ 275,434 275,520 Dorada Finance Inc. 1.07%, 05/20/04/2/ 550,868 550,809 1.24%, 08/09/04/2/ 137,717 137,698 Five Finance Inc. 1.08%, 04/15/04/2/ 275,434 275,434 HBOS Treasury Services PLC 1.27%, 06/24/04/2/ 550,868 550,868 Holmes Financing PLC 1.07%, 04/15/04/2/ 110,174 110,174 K2 USA LLC 1.07%, 08/16/04/2/ 137,717 137,697 1.08%, 04/13/04/2/ 275,434 275,426 1.08%, 05/17/04/2/ 275,434 275,424 Links Finance LLC 1.05%, 07/20/04/2/ 220,347 220,308 1.07%, 05/04/04/2/ 275,434 275,425 1.07%, 06/28/04/2/ 275,434 275,389 1.08%, 03/29/04/2/ 275,434 275,434 Nationwide Building Society 1.08%, 07/23/04/2/ 413,151 413,151 Sigma Finance Inc. 1.05%, 07/20/04/2/ 275,434 275,386 1.06%, 10/15/03/2/ 550,868 550,862 1.06%, 07/01/04/2/ 275,434 275,377 1.24%, 08/06/04/2/ 137,717 137,704 Tango Finance Corp. 1.05%, 07/15/04/2/ 165,260 165,213 1.06%, 07/06/04/2/ 165,260 165,246 Toronto Dominion 1.33%, 08/23/04/2/ 358,064 357,889 White Pine Finance LLC 1.06%, 07/06/04/2/ 330,521 330,494 1.07%, 05/17/04/2/ 330,521 330,521 1.08%, 04/20/04/2/ 275,434 275,434 9,028,370 COMMERCIAL PAPER - 3.38% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 165,260 165,153 CRC Funding LLC 1.05%, 09/25/03/2/ 275,434 275,249 1.06%, 09/16/03/2/ 110,174 110,128 Edison Asset Securitization 1.06%, 09/05/03/2/ 275,434 275,410 1.06%, 09/15/03/2/ 165,260 165,197 1.07%, 10/23/03/2/ 517,816 517,031 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 275,434 275,306 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 137,717 137,717 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 137,717 137,660 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 137,717 137,693 Quincy Capital Corp. 1.06%, 09/17/03/2/ 570,744 570,491 Receivables Capital Corp. 1.06%, 09/17/03/2/ 402,134 401,957 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 275,434 275,434 3,444,426 TIME DEPOSITS - 0.54% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 550,868 550,868 550,868 TOTAL SHORT TERM INVESTMENTS (COST: $37,105,740) 37,105,740 TOTAL INVESTMENTS IN SECURITIES - 136.33% (COST $180,549,171) 138,789,196 OTHER ASSETS, LESS LIABILITIES - (36.33%) (36,988,986) ------------ NET ASSETS - 100.00% $101,800,210 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 41 Schedule of Investments iSHARES MSCI ITALY INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 95.58% ENI SpA 334,176 $ 5,048,432 Telecom Italia SpA/1/ 1,179,216 2,770,575 Assicurazioni Generali SpA 120,120 2,580,887 Telecom Italia Mobile SpA 497,532 2,195,886 UniCredito Italiano SpA 313,452 1,455,708 Banca Intesa SpA 477,793 1,434,696 Enel SpA 232,956 1,419,481 Sanpaolo IMI SpA 137,748 1,323,293 Riunione Adriatica di Sicurta SpA 58,140 836,198 Mediaset SpA 90,180 792,069 Alleanza Assicurazioni SpA 87,552 790,134 Snam Rete Gas SpA 194,244 710,157 Mediobanca SpA 67,224 663,509 Banca Popolare di Verona e Novaro Scrl 42,288 557,136 Banche Popolari Unite Scrl/1/ 35,040 534,354 Finmeccanica SpA 650,904 459,506 Banca Popolare di Milano Scrl 99,900 457,367 Banca Monte dei Paschi di Siena SpA 161,172 422,912 Luxottica Group SpA 27,576 412,355 SEAT Pagine Gialle SpA/1/ 476,620 409,729 Capitalia SpA/1/ 166,536 336,425 Fiat SpA/1/ 49,094 332,026 Banca Nazionale del Lavoro SpA/1/ 209,604 326,086 Mediolanum SpA 46,860 284,505 Parmalat Finanziaria SpA 74,892 242,150 Banca Fideuram SpA 42,204 241,873 Autogrill SpA/1/ 19,260 220,548 Italcementi SpA 18,516 214,468 Arnoldo Mondadori Editore SpA 25,896 187,930 Tiscali SpA/1/ 27,204 173,230 Pirelli SpA 224,895 161,728 Snia SpA 70,788 131,344 Bulgari SpA 19,008 126,465 Fineco SpA/1/ 217,716 125,491 Benetton Group SpA 12,048 122,354 Gruppo Editoriale L'Espresso SpA 25,764 110,599 Telecom Italia Media SpA/1/ 211,675 59,262 TOTAL COMMON STOCKS (COST: $33,270,860) 28,670,868 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ PREFERRED STOCKS - 4.09% Telecom Italia SpA RNC/1/ 778,117 $ 1,228,475 TOTAL PREFERRED STOCKS (COST: $1,121,571) 1,228,475 SHORT TERM INVESTMENTS - 41.83% MONEY MARKET FUNDS - 27.16% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 5,330,375 5,330,375 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 2,047,734 2,047,734 BlackRock Temp Cash Money Market Fund/2/ 107,748 107,748 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 186,158 186,158 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 473,414 473,414 8,145,429 FLOATING RATE NOTES - 10.17% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 93,079 93,069 1.16%, 08/23/04/2/ 93,079 93,157 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 74,463 74,464 1.37%, 08/26/04/2/ 186,158 186,158 CC USA Inc. 1.06%, 05/24/04/2/ 186,158 186,144 1.07%, 04/19/04/2/ 81,809 81,907 1.11%, 07/15/04/2/ 93,079 93,108 Dorada Finance Inc. 1.07%, 05/20/04/2/ 186,158 186,138 1.24%, 08/09/04/2/ 46,539 46,533 Five Finance Inc. 1.08%, 04/15/04/2/ 93,079 93,079 HBOS Treasury Services PLC 1.27%, 06/24/04/2/ 186,158 186,158 42 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI ITALY INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Holmes Financing PLC 1.07%, 04/15/04/2/ $ 37,232 $ 37,232 K2 USA LLC 1.07%, 08/16/04/2/ 46,539 46,533 1.08%, 04/13/04/2/ 93,079 93,077 1.08%, 05/17/04/2/ 93,079 93,076 Links Finance LLC 1.05%, 07/20/04/2/ 74,463 74,450 1.07%, 05/04/04/2/ 93,079 93,076 1.07%, 06/28/04/2/ 93,079 93,064 1.08%, 03/29/04/2/ 93,079 93,079 Nationwide Building Society 1.08%, 07/23/04/2/ 139,618 139,618 Sigma Finance Inc. 1.05%, 07/20/04/2/ 93,079 93,062 1.06%, 10/15/03/2/ 186,158 186,155 1.06%, 07/01/04/2/ 93,079 93,060 1.24%, 08/06/04/2/ 46,539 46,535 Tango Finance Corp. 1.05%, 07/15/04/2/ 55,847 55,831 1.06%, 07/06/04/2/ 55,847 55,842 Toronto Dominion 1.33%, 08/23/04/2/ 121,002 120,943 White Pine Finance LLC 1.06%, 07/06/04/2/ 111,695 111,686 1.07%, 05/17/04/2/ 111,695 111,695 1.08%, 04/20/04/2/ 93,079 93,079 3,051,008 COMMERCIAL PAPER - 3.88% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 55,847 55,811 CRC Funding LLC 1.05%, 09/25/03/2/ 93,079 93,016 1.06%, 09/16/03/2/ 37,232 37,216 Edison Asset Securitization 1.06%, 09/05/03/2/ 93,079 93,071 1.06%, 09/15/03/2/ 55,847 55,826 1.07%, 10/23/03/2/ 174,988 174,723 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 93,079 93,035 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 46,539 46,539 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 46,539 46,520 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 46,539 46,531 Quincy Capital Corp. 1.06%, 09/17/03/2/ 192,874 192,789 Receivables Capital Corp. 1.06%, 09/17/03/2/ 135,895 135,835 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 93,079 93,079 1,163,991 TIME DEPOSITS - 0.62% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 186,158 186,158 186,158 TOTAL SHORT TERM INVESTMENTS (COST: $12,546,586) 12,546,586 TOTAL INVESTMENTS IN SECURITIES - 141.50% (COST $46,939,017) 42,445,929 OTHER ASSETS, LESS LIABILITIES - (41.50%) (12,448,702) ------------ NET ASSETS - 100.00% $ 29,997,227 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 43 Schedule of Investments iSHARES MSCI NETHERLANDS INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.06% Royal Dutch Petroleum Co. 94,796 $ 4,230,711 ING Groep NV 124,150 2,420,764 Unilever NV CVA 34,268 1,907,478 Koninklijke Philips Electronics NV 38,922 948,661 Akzo Nobel NV 28,184 923,964 AEGON NV 69,031 854,901 TPG NV 44,538 831,271 ABN AMRO Holding NV 46,540 814,986 Heineken NV 20,722 791,951 Koninklijke KPN NV/1/ 107,900 747,504 Reed Elsevier NV 63,856 703,879 ASML Holding NV/1/ 34,086 537,020 VNU NV 14,456 449,156 IHC Caland NV 8,476 428,067 Koninklijke Ahold NV/1/ 37,492 353,997 Wolters Kluwer NV CVA 22,386 348,264 Koninklijke Numico NA CVA 16,640 322,814 Oce NV 19,318 248,996 Vedior NV 18,122 224,429 Koninklijke Vendex KBB NV 16,458 186,294 DSM NV 1,768 80,458 Rodamco Europe NV 884 44,228 Hagemeyer NV 6,630 24,094 TOTAL COMMON STOCKS (COST: $23,826,868) 18,423,887 SHORT TERM INVESTMENTS - 8.06% MONEY MARKET FUNDS - 5.23% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 635,304 635,304 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 245,188 245,188 BlackRock Temp Cash Money Market Fund/2/ 12,901 12,901 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 22,290 22,290 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 56,685 $ 56,685 972,368 FLOATING RATE NOTES - 1.96% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 11,145 11,144 1.16%, 08/23/04/2/ 11,145 11,154 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 8,916 8,916 1.37%, 08/26/04/2/ 22,290 22,290 CC USA Inc. 1.06%, 05/24/04/2/ 22,290 22,288 1.07%, 04/19/04/2/ 9,808 9,808 1.11%, 07/15/04/2/ 11,145 11,148 Dorada Finance Inc. 1.07%, 05/20/04/2/ 22,290 22,287 1.24%, 08/09/04/2/ 5,572 5,572 Five Finance Inc. 1.08%, 04/15/04/2/ 11,145 11,145 HBOS Treasury Services PLC 1.27%, 06/24/04/2/ 22,290 22,290 Holmes Financing PLC 1.07%, 04/15/04/2/ 4,458 4,458 K2 USA LLC 1.07%, 08/16/04/2/ 5,572 5,572 1.08%, 04/13/04/2/ 11,145 11,145 1.08%, 05/17/04/2/ 11,145 11,145 Links Finance LLC 1.05%, 07/20/04/2/ 8,916 8,914 1.07%, 05/04/04/2/ 11,145 11,145 1.07%, 06/28/04/2/ 11,145 11,143 1.08%, 03/29/04/2/ 11,145 11,145 Nationwide Building Society 1.08%, 07/23/04/2/ 16,717 16,717 Sigma Finance Inc. 1.05%, 07/20/04/2/ 11,145 11,143 1.06%, 10/15/03/2/ 22,290 22,290 1.06%, 07/01/04/2/ 11,145 11,143 1.24%, 08/06/04/2/ 5,572 5,572 44 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI NETHERLANDS INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Tango Finance Corp. 1.05%, 07/15/04/2/ $ 6,687 $ 6,685 1.06%, 07/06/04/2/ 6,687 6,686 Toronto Dominion 1.33%, 08/23/04/2/ 14,488 14,481 White Pine Finance LLC 1.06%, 07/06/04/2/ 13,374 13,373 1.07%, 05/17/04/2/ 13,374 13,374 1.08%, 04/20/04/2/ 11,145 11,145 365,318 COMMERCIAL PAPER - 0.75% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 6,687 6,683 CRC Funding LLC 1.05%, 09/25/03/2/ 11,145 11,137 1.06%, 09/16/03/2/ 4,458 4,456 Edison Asset Securitization 1.06%, 09/05/03/2/ 11,145 11,144 1.06%, 09/15/03/2/ 6,687 6,684 1.07%, 10/23/03/2/ 20,952 20,921 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 11,145 11,140 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 5,572 5,572 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 5,572 5,570 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 5,572 5,571 Quincy Capital Corp. 1.06%, 09/17/03/2/ 23,094 23,084 Receivables Capital Corp. 1.06%, 09/17/03/2/ 16,272 16,265 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 11,145 11,145 139,372 TIME DEPOSITS - 0.12% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 22,290 22,290 22,290 TOTAL SHORT TERM INVESTMENTS (COST: $1,499,348) 1,499,348 TOTAL INVESTMENTS IN SECURITIES - 107.12% (COST $25,326,216) 19,923,235 OTHER ASSETS, LESS LIABILITIES - (7.12%) (1,323,979) ------------ NET ASSETS - 100.00% $ 18,599,256 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 45 Schedule of Investments iSHARES MSCI SPAIN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.95% Telefonica SA 1,027,865 $ 12,097,445 Banco Santander Central Hispano SA 825,900 7,045,491 Banco Bilbao Vizcaya Argentaria SA 482,910 5,169,322 Repsol YPF SA 145,380 2,454,843 Iberdrola SA 143,760 2,443,272 Endesa SA 156,270 2,432,846 Banco Popular Espanol SA 39,960 1,798,755 Altadis SA 67,650 1,596,868 Industria de Diseno Textil SA 59,190 1,471,904 Union Fenosa SA 76,680 1,200,506 Gas Natural SDG SA 57,840 1,071,288 Bankinter SA 28,440 955,463 Abertis Infraestructuras SA 58,650 769,482 Sociedad General de Aguas de Barcelona SA 56,430 721,770 NH Hoteles SA/1/ 63,210 697,453 FAES FARMA SA 53,866 686,018 Acerinox SA 15,270 647,126 ACS, Actividades de Construccion y Servicios SA 15,000 628,603 Fomento de Construcciones y Contratas SA 20,490 607,391 Amadeus Global Travel Distribution SA Class A 78,360 524,792 Grupo Dragados SA 24,840 503,165 Promotora de Infomaciones SA 47,310 486,174 Corporacion Mapfre SA 43,320 475,610 Zeltia SA 68,760 458,234 Viscofan SA 55,950 419,550 Telefonica Publicidad e Informacion SA 82,530 382,373 Indra Sistemas SA 33,930 375,498 Sacyr Vallehermoso SA 33,330 365,930 Acciona SA 7,020 362,241 Grupo Ferrovial SA 12,960 348,321 Uralita SA 52,560 343,926 Ebro Puleva SA 31,297 283,478 Iberia Lineas Aereas de Espana SA 107,490 223,045 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Grupo Empresarial ENCE SA 12,000 $ 212,114 Prosegur Compania de Seguridad SA 5,340 87,062 TOTAL COMMON STOCKS (COST: $46,941,613) 50,347,359 SHORT TERM INVESTMENTS - 25.63% MONEY MARKET FUNDS - 16.66% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 5,503,339 5,503,339 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 2,101,468 2,101,468 BlackRock Temp Cash Money Market Fund/2/ 110,575 110,575 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 191,043 191,043 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 485,837 485,837 8,392,262 FLOATING RATE NOTES - 6.22% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 95,521 95,511 1.16%, 08/23/04/2/ 95,521 95,601 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 76,417 76,417 1.37%, 08/26/04/2/ 191,043 191,043 CC USA Inc. 1.06%, 05/24/04/2/ 191,043 191,029 1.07%, 04/19/04/2/ 84,059 84,056 1.11%, 07/15/04/2/ 95,521 95,551 Dorada Finance Inc. 1.07%, 05/20/04/2/ 191,043 191,022 1.24%, 08/09/04/2/ 47,761 47,754 Five Finance Inc. 1.08%, 04/15/04/2/ 95,521 95,521 46 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI SPAIN INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ HBOS Treasury Services PLC 1.27%, 06/24/04/2/ $ 191,043 $ 191,043 Holmes Financing PLC 1.07%, 04/15/04/2/ 38,209 38,209 K2 USA LLC 1.07%, 08/16/04/2/ 47,761 47,754 1.08%, 04/13/04/2/ 95,521 95,518 1.08%, 05/17/04/2/ 95,521 95,518 Links Finance LLC 1.05%, 07/20/04/2/ 76,417 76,404 1.07%, 05/04/04/2/ 95,521 95,519 1.07%, 06/28/04/2/ 95,521 95,506 1.08%, 03/29/04/2/ 95,521 95,521 Nationwide Building Society 1.08%, 07/23/04/2/ 143,282 143,282 Sigma Finance Inc. 1.05%, 07/20/04/2/ 95,521 95,504 1.06%, 10/15/03/2/ 191,043 191,040 1.06%, 07/01/04/2/ 95,521 95,502 1.24%, 08/06/04/2/ 47,761 47,757 Tango Finance Corp. 1.05%, 07/15/04/2/ 57,313 57,296 1.06%, 07/06/04/2/ 57,313 57,308 Toronto Dominion 1.33%, 08/23/04/2/ 124,178 124,117 White Pine Finance LLC 1.06%, 07/06/04/2/ 114,626 114,616 1.07%, 05/17/04/2/ 114,626 114,626 1.08%, 04/20/04/2/ 95,521 95,521 3,131,066 COMMERCIAL PAPER - 2.37% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 57,313 57,276 CRC Funding LLC 1.05%, 09/25/03/2/ 95,521 95,457 1.06%, 09/16/03/2/ 38,209 38,193 Edison Asset Securitization 1.06%, 09/05/03/2/ 95,521 95,513 1.06%, 09/15/03/2/ 57,313 57,291 1.07%, 10/23/03/2/ 179,580 179,308 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 95,521 95,477 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 47,761 47,761 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 47,761 47,741 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 47,761 47,752 Quincy Capital Corp. 1.06%, 09/17/03/2/ 197,935 197,848 Receivables Capital Corp. 1.06%, 09/17/03/2/ 139,461 139,400 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 95,521 95,521 1,194,538 TIME DEPOSITS - 0.38% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 191,043 191,043 191,043 TOTAL SHORT TERM INVESTMENTS (COST: $12,908,909) 12,908,909 TOTAL INVESTMENTS IN SECURITIES - 125.58% (COST $59,850,522) 63,256,268 OTHER ASSETS, LESS LIABILITIES - (25.58%) (12,884,316) ------------ NET ASSETS - 100.00% $ 50,371,952 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 47 Schedule of Investments iSHARES MSCI SWEDEN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.95% Telefonaktiebolaget LM Ericsson Class B/1/ 1,860,480 $ 2,848,173 Nordea AB 294,876 1,498,855 Hennes & Mauritz AB Class B 59,328 1,248,831 Svenska Handelsbanken AB Class A 68,832 1,090,781 Electrolux AB Series B 37,944 846,356 Telia AB 207,421 813,688 Svenska Cellulosa AB Class B 22,716 786,524 Sandvik AB 28,818 773,769 Volvo AB Class B 26,604 642,732 Skandinaviska Enskilda Banken AB Class A 61,560 589,006 Securitas AB Class B 38,214 468,466 Tele2 AB Class B/1/ 11,844 445,503 Atlas Copco AB Class A 14,202 424,640 SKF AB Class B 11,358 353,189 ASSA Abloy AB Class B 38,754 342,989 Skandia Forsakrings AB 106,290 339,418 Skanska AB Class B 50,202 327,227 Swedish Match AB 45,684 308,705 Atlas Copco AB Class B 8,640 237,669 Volvo AB Class A 10,332 236,638 Nobel Biocare Holding AG 2,592 204,912 Holmen AB Class B 6,534 199,665 Eniro AB 21,402 175,338 Drott AB Class B 12,132 168,315 Gambro AB Class A 24,228 163,718 Trelleborg AB Class B 11,790 146,649 Getinge AB Class B 4,698 144,965 Svenskt Stal AB Series A 9,036 123,201 Svenska Handelsbanken AB Class B 7,560 115,282 Modern Times Group AB Class B/1/ 6,300 100,213 Alfa Laval AB 8,226 94,940 Gambro AB Class B 14,058 94,155 SKF AB Class A 2,934 90,885 Billerud AB 6,768 84,993 SAS AB/1/ 10,548 84,523 Hoganas AB Class B 4,086 79,656 Svenskt Stal AB Series B 4,716 61,198 OM AB 5,886 52,093 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Castellum AB 3,078 $ 50,986 WM-Data AB Class B/1/ 27,594 46,863 Sapa AB 2,106 39,545 Axfood AB 2,340 38,621 TOTAL COMMON STOCKS (COST: $18,208,385) 16,983,875 SHORT TERM INVESTMENTS - 25.58% MONEY MARKET FUNDS - 16.60% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 1,844,126 1,844,126 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 709,930 709,930 BlackRock Temp Cash Money Market Fund/2/ 37,355 37,355 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 64,539 64,539 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 164,128 164,128 2,820,078 FLOATING RATE NOTES - 6.23% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 32,270 32,266 1.16%, 08/23/04/2/ 32,270 32,297 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 25,816 25,816 1.37%, 08/26/04/2/ 64,539 64,539 CC USA Inc. 1.06%, 05/24/04/2/ 64,539 64,534 1.07%, 04/19/04/2/ 28,397 28,397 1.11%, 07/15/04/2/ 32,270 32,280 Dorada Finance Inc. 1.07%, 05/20/04/2/ 64,539 64,532 1.24%, 08/09/04/2/ 16,135 16,133 Five Finance Inc. 1.08%, 04/15/04/2/ 32,270 32,270 48 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI SWEDEN INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ HBOS Treasury Services PLC 1.27%, 06/24/04/2/ $ 64,539 $ 64,539 Holmes Financing PLC 1.07%, 04/15/04/2/ 12,908 12,908 K2 USA LLC 1.07%, 08/16/04/2/ 16,135 16,132 1.08%, 04/13/04/2/ 32,270 32,269 1.08%, 05/17/04/2/ 32,270 32,269 Links Finance LLC 1.05%, 07/20/04/2/ 25,816 25,811 1.07%, 05/04/04/2/ 32,270 32,268 1.07%, 06/28/04/2/ 32,270 32,264 1.08%, 03/29/04/2/ 32,270 32,270 Nationwide Building Society 1.08%, 07/23/04/2/ 48,404 48,405 Sigma Finance Inc. 1.05%, 07/20/04/2/ 32,270 32,264 1.06%, 10/15/03/2/ 64,539 64,538 1.06%, 07/01/04/2/ 32,270 32,263 1.24%, 08/06/04/2/ 16,135 16,133 Tango Finance Corp. 1.05%, 07/15/04/2/ 19,362 19,356 1.06%, 07/06/04/2/ 19,362 19,360 Toronto Dominion 1.33%, 08/23/04/2/ 41,950 41,930 White Pine Finance LLC 1.06%, 07/06/04/2/ 38,720 38,720 1.07%, 05/17/04/2/ 38,723 38,723 1.08%, 04/20/04/2/ 38,723 32,270 1,057,756 COMMERCIAL PAPER - 2.37% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 19,362 19,349 CRC Funding LLC 1.05%, 09/25/03/2/ 32,270 32,248 1.06%, 09/16/03/2/ 12,908 12,902 Edison Asset Securitization 1.06%, 09/05/03/2/ 32,270 32,267 1.06%, 09/15/03/2/ 19,362 19,354 1.07%, 10/23/03/2/ 60,667 60,575 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 32,270 32,254 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 16,135 16,135 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 16,135 16,128 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 16,132 16,132 Quincy Capital Corp. 1.06%, 09/17/03/2/ 66,868 66,838 Receivables Capital Corp. 1.06%, 09/17/03/2/ 47,114 47,093 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 32,270 32,270 403,545 TIME DEPOSITS - 0.38% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 64,539 64,539 64,539 TOTAL SHORT TERM INVESTMENTS (COST: $4,345,918) 4,345,918 TOTAL INVESTMENTS IN SECURITIES - 125.53% (COST $22,554,303) 21,329,793 OTHER ASSETS, LESS LIABILITIES - (25.53%) (4,337,872) ------------ NET ASSETS - 100.00% $ 16,991,921 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 49 Schedule of Investments iSHARES MSCI SWITZERLAND INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.67% Novartis AG 170,154 $ 6,256,778 Nestle SA Registered 19,470 4,240,013 UBS AG Registered 48,761 2,630,319 Roche Holding AG Genusschein 33,440 2,560,737 Zurich Financial Services AG/1/ 13,189 1,695,063 Credit Suisse Group 53,869 1,682,745 Swiss Reinsurance Co. 25,075 1,539,717 Holcim Ltd. Registered 29,590 1,172,571 Swisscom AG Registered 3,454 944,545 Synthes-Stratec Inc. 1,144 930,360 Ciba Specialty Chemicals AG Registered/1/ 13,095 900,863 Compagnie Financiere Richemont AG Class A 44,000 841,955 Givaudan SA Registered 2,002 829,074 Serono SA 1,276 808,120 Syngenta AG 12,584 691,848 Adecco SA Registered 12,452 629,468 Lonza Group AG Registered 12,586 617,370 Schindler Holding AG Participation Certificates/1/ 2,882 586,462 Swatch Group (The) AG Class B 4,972 482,805 Julius Baer Holding AG 1,644 464,835 Societe Generale de Surveillance Holding SA 946 448,498 Swatch Group (The) AG Registered 22,286 435,998 ABB Ltd./1/ 62,898 358,827 Banque Cantonale Vaudoise/1/ 4,998 349,544 Valora Holding AG Registered 1,606 309,607 Schindler Holding AG Registered/1/ 1,408 307,125 Clariant AG Registered/1/ 19,382 262,938 Vontobel Holding AG Registered 13,200 247,403 Logitech International SA Registered/1/ 3,080 98,961 Sulzer AG Registered 440 90,793 Geberit AG Registered 176 60,319 Kudelski SA Bearer/1/ 1,826 50,847 Kuoni Reisen Holding AG Registered 22 6,024 TOTAL COMMON STOCKS (COST: $36,792,303) 33,532,532 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ SHORT TERM INVESTMENTS - 2.64% MONEY MARKET FUNDS - 1.72% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 378,497 $ 378,497 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 144,859 144,859 BlackRock Temp Cash Money Market Fund/2/ 7,622 7,622 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 13,169 13,169 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 33,490 33,490 577,637 FLOATING RATE NOTES - 0.64% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 6,585 6,584 1.16%, 08/23/04/2/ 6,585 6,590 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 5,268 5,268 1.37%, 08/26/04/2/ 13,169 13,169 CC USA Inc. 1.06%, 05/24/04/2/ 13,169 13,168 1.07%, 04/19/04/2/ 5,794 5,794 1.11%, 07/15/04/2/ 6,585 6,587 Dorada Finance Inc. 1.07%, 05/20/04/2/ 13,169 13,168 1.24%, 08/09/04/2/ 3,292 3,292 Five Finance Inc. 1.08%, 04/15/04/2/ 6,585 6,585 HBOS Treasury Services PLC 1.27%, 06/24/04/2/ 13,169 13,169 Holmes Financing PLC 1.07%, 04/15/04/2/ 2,634 2,634 50 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI SWITZERLAND INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ K2 USA LLC 1.07%, 08/16/04/2/ $ 3,292 $ 3,292 1.08%, 04/13/04/2/ 6,585 6,584 1.08%, 05/17/04/2/ 6,585 6,584 Links Finance LLC 1.05%, 07/20/04/2/ 5,268 5,267 1.07%, 05/04/04/2/ 6,585 6,584 1.07%, 06/28/04/2/ 6,585 6,583 1.08%, 03/29/04/2/ 6,585 6,585 Nationwide Building Society 1.08%, 07/23/04/2/ 9,877 9,877 Sigma Finance Inc. 1.05%, 07/20/04/2/ 6,585 6,583 1.06%, 10/15/03/2/ 13,169 13,169 1.06%, 07/01/04/2/ 6,585 6,583 1.24%, 08/06/04/2/ 3,292 3,292 Tango Finance Corp. 1.05%, 07/15/04/2/ 3,951 3,950 1.06%, 07/06/04/2/ 3,951 3,950 Toronto Dominion 1.33%, 08/23/04/2/ 8,560 8,556 White Pine Finance LLC 1.06%, 07/06/04/2/ 7,901 7,901 1.07%, 05/17/04/2/ 7,901 7,901 1.08%, 04/20/04/2/ 6,585 6,585 215,834 COMMERCIAL PAPER - 0.24% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 3,951 3,948 CRC Funding LLC 1.05%, 09/25/03/2/ 6,585 6,580 1.06%, 09/16/03/2/ 2,634 2,633 Edison Asset Securitization 1.06%, 09/05/03/2/ 6,585 6,584 1.06%, 09/15/03/2/ 3,951 3,949 1.07%, 10/23/03/2/ 12,379 12,360 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 6,585 6,581 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 3,292 3,292 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 3,292 3,291 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 3,292 3,292 Quincy Capital Corp. 1.06%, 09/17/03/2/ 13,644 13,638 Receivables Capital Corp. 1.06%, 09/17/03/2/ 9,613 9,609 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 6,585 6,585 82,342 TIME DEPOSITS - 0.04% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 13,169 13,169 13,169 TOTAL SHORT TERM INVESTMENTS (COST: $888,982) 888,982 TOTAL INVESTMENTS IN SECURITIES - 102.31% (COST $37,681,285) 34,421,514 OTHER ASSETS, LESS LIABILITIES - (2.31%) (778,226) ------------ NET ASSETS - 100.00% $ 33,643,288 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. SCHEDULES OF INVESTMENTS 51 Schedule of Investments iSHARES MSCI UNITED KINGDOM INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS - 99.14% BP PLC 2,110,794 $ 14,323,231 HSBC Holdings PLC 1,032,748 13,280,755 Vodafone Group PLC 6,505,918 11,911,527 GlaxoSmithKline PLC 571,764 10,915,960 Royal Bank of Scotland Group PLC 265,814 6,617,903 AstraZeneca PLC 163,560 6,286,678 Shell Transport & Trading Co. PLC 922,084 5,782,978 Barclays PLC/3/ 624,370 4,542,947 HBOS PLC 360,876 4,018,542 Lloyds TSB Group PLC 531,164 3,486,700 Diageo PLC 297,076 3,185,922 BT Group PLC 827,845 2,409,377 Tesco PLC 686,024 2,343,856 Rio Tinto PLC 102,022 2,244,703 Unilever PLC 262,624 2,137,261 National Grid Transco PLC 294,161 1,801,832 Aviva PLC 213,904 1,696,788 British American Tobacco PLC 155,092 1,567,574 BHP Billiton PLC 235,754 1,549,416 BG Group PLC 338,604 1,460,813 Prudential PLC 190,704 1,316,685 British Sky Broadcasting Group PLC/1/ 120,466 1,261,422 Cadbury Schweppes PLC 197,606 1,193,992 Compass Group PLC 211,874 1,173,799 Centrica PLC 405,246 1,139,374 Imperial Tobacco Group PLC 69,716 1,089,500 Reckitt Benckiser PLC 57,304 1,078,623 Marks & Spencer Group PLC 215,938 1,040,050 GUS PLC 96,106 1,039,787 WPP Group PLC 112,346 1,024,459 Scottish Power PLC 177,016 1,014,282 Legal & General Group PLC 625,322 984,158 Kingfisher PLC 218,428 939,756 Reed Elsevier PLC 121,220 929,938 Boots Group PLC 79,228 828,358 Scottish & Southern Energy PLC 82,882 825,921 BAE Systems PLC 291,450 787,159 Pearson PLC 76,792 750,658 BAA PLC 102,660 740,464 Wolseley PLC 55,854 640,516 BOC Group PLC 46,690 637,711 Land Securities Group PLC 45,197 611,242 J Sainsbury PLC 138,330 603,351 Smiths Group PLC 53,592 596,775 3i Group PLC 59,392 590,903 Rentokil Initial PLC 177,712 590,301 Smith & Nephew PLC 88,914 570,997 SABMiller PLC 74,704 558,616 InterContinental Hotels Group PLC/1/ 70,739 547,149 Amersham PLC 66,584 537,128 Reuters Group PLC 134,386 526,099 Carnival PLC 15,937 518,032 Man Group PLC 25,984 504,710 AMVESCAP PLC 63,800 500,794 Hanson PLC 71,804 468,501 Next PLC 27,144 461,981 Hilton Group PLC 149,872 461,082 Scottish & Newcastle PLC 76,618 455,676 Safeway PLC 98,078 439,807 Cable & Wireless PLC 229,854 432,650 Granada PLC 266,510 432,091 Dixons Group PLC 184,208 401,363 United Utilities PLC 52,896 390,312 British Land Co. PLC 47,444 372,784 Rolls-Royce Group PLC 136,532 366,591 Imperial Chemical Industries PLC 111,940 343,499 Severn Trent PLC 33,234 336,434 Whitebread PLC 28,246 333,522 Bunzl PLC 45,820 333,389 Friends Provident PLC 152,482 329,825 EMAP PLC 24,012 324,547 Johnson Matthey PLC 20,706 321,458 Sage Group PLC 114,202 305,280 Exel PLC 28,130 300,339 Tomkins PLC 71,572 297,457 Royal & Sun Alliance Insurance Group 135,662 297,198 GKN PLC 70,296 291,598 Signet Group PLC 168,200 290,660 Rexam PLC 44,776 290,203 Mitchells & Butlers PLC/1/ 70,740 281,970 Hays PLC 154,512 281,059 Peninsular & Oriental Steam Navigation Co. (The) 67,164 273,294 Daily Mail & General Trust Class A 30,160 266,078 Rank Group PLC 58,696 263,440 Electrocomponents PLC 42,108 253,096 Slough Estates PLC 42,572 251,845 International Power PLC/1/ 104,632 248,252 Provident Financial PLC 24,418 246,802 52 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI UNITED KINGDOM INDEX FUND August 31, 2003 SECURITY SHARES VALUE ------------------------------------------------------------------------------ Kelda Group PLC 38,048 $ 246,447 Misys PLC 54,810 244,048 Liberty International PLC 22,910 241,526 Hammerson PLC 27,608 239,524 BPB PLC 46,400 235,409 Capita Group PLC 61,016 232,835 RMC Group PLC 25,694 225,662 Associated British Ports Holdings PLC 34,452 221,929 Tate & Lyle PLC 39,382 220,204 LogicaCMG PLC 68,675 217,525 Persimmon PLC 23,954 216,726 United Business Media PLC 31,088 216,363 Wimpey (George) PLC 34,916 215,391 Brambles Industries PLC 72,268 213,188 Enterprise Inns PLC 15,486 208,575 Barratt Developments PLC 24,592 201,883 Taylor Woodrow PLC 54,752 197,457 Yell Group PLC/1/ 38,628 195,519 Cobham PLC 10,672 193,281 FirstGroup PLC 40,774 185,260 EMI Group PLC 75,052 183,709 IMI PLC 34,684 182,688 Close Brothers Group PLC 15,312 182,254 BBA Group PLC 45,646 180,501 Alliance Unichem PLC 22,040 177,795 Kesa Electricals PLC/1/ 49,929 176,510 William Hill PLC 35,786 175,757 Canary Wharf Group PLC/1/ 43,210 174,628 Berkeley Group (The) PLC 12,238 172,185 ARM Holdings PLC/1/ 92,974 166,180 MFI Furniture Group PLC 58,000 165,135 Invensys PLC 322,422 164,472 Cattles PLC 29,232 163,681 Carlton Communications PLC 58,290 160,889 Aegis Group PLC 102,022 157,339 British Airways PLC/1/ 50,634 149,769 Pilkington PLC 99,702 139,568 Schroders PLC 12,412 139,147 Celltech Group PLC/1/ 25,346 133,804 Balfour Beatty PLC 38,222 130,437 Davis Service Group PLC 19,024 125,330 AMEC PLC 28,826 121,398 Kidde PLC 78,938 121,114 SHARES OR SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Stagecoach Group PLC 94,714 $ 115,357 Serco Group PLC 37,932 104,398 FKI PLC 48,082 86,701 Novar PLC 41,818 85,659 SSL International PLC 16,762 83,517 De La Rue PLC 19,140 81,439 Securicor PLC 55,711 75,343 Great Portland Estates PLC 17,922 66,193 Aggreko PLC 22,620 55,816 United Utilities PLC Rights/1/ 29,893 50,830 TOTAL COMMON STOCKS (COST: $181,025,891) 149,519,850 SHORT TERM INVESTMENTS - 0.65% MONEY MARKET FUNDS - 0.44% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/2/,/3/ 461,840 461,840 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/2/,/3/ 145,716 145,716 BlackRock Temp Cash Money Market Fund/2/ 7,667 7,667 Short Term Investment Co. - Liquid Assets Money Market Portfolio/2/ 13,247 13,247 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/2/ 33,688 33,688 662,158 FLOATING RATE NOTES - 0.14% Beta Finance Inc. 1.07%, 05/20/04/2/ $ 6,623 6,623 1.16%, 08/23/04/2/ 6,623 6,629 Canadian Imperial Bank of Commerce 1.07%, 10/30/03/2/ 5,299 5,299 1.37%, 08/26/04/2/ 13,247 13,247 CC USA Inc. 1.06%, 05/24/04/2/ 13,247 13,246 1.07%, 04/19/04/2/ 5,829 5,828 1.11%, 07/15/04/2/ 6,623 6,626 SCHEDULES OF INVESTMENTS 53 Schedule of Investments (Continued) iSHARES MSCI UNITED KINGDOM INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ------------------------------------------------------------------------------ Dorada Finance Inc. 1.07%, 05/20/04/2/ $ 13,247 $ 13,245 1.24%, 08/09/04/2/ 3,312 3,311 Five Finance Inc. 1.08%, 04/15/04/2/ 6,623 6,623 HBOS Treasury Services PLC 1.27%, 06/24/04/2/ 13,247 13,247 Holmes Financing PLC 1.07%, 04/15/04/2/ 2,649 2,649 K2 USA LLC 1.07%, 08/16/04/2/ 3,312 3,311 1.08%, 04/13/04/2/ 6,623 6,623 1.08%, 05/17/04/2/ 6,623 6,623 Links Finance LLC 1.05%, 07/20/04/2/ 5,299 5,298 1.07%, 05/04/04/2/ 6,623 6,623 1.07%, 06/28/04/2/ 6,623 6,622 1.08%, 03/29/04/2/ 6,623 6,623 Nationwide Building Society 1.08%, 07/23/04/2/ 9,935 9,935 Sigma Finance Inc. 1.05%, 07/20/04/2/ 6,623 6,622 1.06%, 10/15/03/2/ 13,247 13,247 1.06%, 07/01/04/2/ 6,623 6,622 1.24%, 08/06/04/2/ 3,312 3,311 Tango Finance Corp. 1.05%, 07/15/04/2/ 3,974 3,973 1.06%, 07/06/04/2/ 3,974 3,974 Toronto Dominion 1.33%, 08/23/04/2/ 8,610 8,606 White Pine Finance LLC 1.06%, 07/06/04/2/ 7,948 7,948 1.07%, 05/17/04/2/ 7,948 7,948 1.08%, 04/20/04/2/ 6,623 6,623 217,105 COMMERCIAL PAPER - 0.06% Corporate Asset Funding Corp. 1.06%, 09/24/03/2/ 3,974 3,971 CRC Funding LLC 1.05%, 09/25/03/2/ 6,623 6,619 1.06%, 09/16/03/2/ 2,649 2,648 Edison Asset Securitization 1.06%, 09/05/03/2/ 6,623 6,623 1.06%, 09/15/03/2/ 3,974 3,973 1.07%, 10/23/03/2/ 12,452 12,433 Eureka Securitization Inc. 1.05%, 09/18/03/2/ 6,623 6,620 Jupiter Securitization Corp. 1.07%, 09/02/03/2/ 3,312 3,312 Park Avenue Receivables Corp. 1.06%, 09/16/03/2/ 3,312 3,310 Preferred Receivables Funding Corp. 1.06%, 09/08/03/2/ 3,311 3,311 Quincy Capital Corp. 1.06%, 09/17/03/2/ 13,725 13,719 Receivables Capital Corp. 1.06%, 09/17/03/2/ 9,670 9,666 UBS Finance (Delaware) Inc. 1.09%, 09/02/03/2/ 6,623 6,623 82,828 TIME DEPOSITS - 0.01% SunTrust Banks Inc. 1.00%, 09/02/03/2/ 13,247 13,247 13,247 TOTAL SHORT TERM INVESTMENTS (COST: $975,338) 975,338 TOTAL INVESTMENTS IN SECURITIES - 99.79% (COST $182,001,229) 150,495,188 OTHER ASSETS, LESS LIABILITIES - 0.21% 314,054 ------------ NET ASSETS - 100.00% $150,809,242 ============ /1/ Non-income earning securities. /2/ All or a portion of this security represents investments of securities lending collateral. /3/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. 54 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Assets and Liabilities iSHARES, INC. August 31, 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 $ 20,869,280 $ 31,822,402 $ 224,794,575 $ 70,624,096 $ 180,549,171 $ 46,939,017 ------------ ------------ ------------- ------------ ------------- ------------ Foreign currency, at cost $ 18,489 $ 27,984 $ 310,320 $ 91,078 $ 152,944 $ 50,336 ------------ ------------ ------------- ------------ ------------- ------------ Investments in securities, at value (including securities on loan/1/) (Note 1) $ 24,177,304 $ 30,136,746 $ 206,263,396 $ 60,633,738 $ 138,789,196 $ 42,445,929 Foreign currency, at value 18,034 26,952 299,597 87,830 148,612 48,735 Receivables: Investment securities sold 489,716 35,808 509,589 47,553 - 678,489 Dividends and interest 31,027 45,991 525,280 83,713 46,943 65,416 ------------ ------------ ------------- ------------ ------------- ------------ Total Assets 24,716,081 30,245,497 207,597,862 60,852,834 138,984,751 43,238,569 ------------ ------------ ------------- ------------ ------------- ------------ LIABILITIES Payables: Investment securities purchased 485,396 35,326 593,847 100,395 - 678,517 Collateral for securities on loan (Note 5) 1,912,081 8,303,623 41,381,518 6,601,036 37,045,053 12,518,814 Advisory fees (Note 2) 21,324 24,831 164,548 53,624 98,093 30,932 Distribution fees 8,976 10,504 69,483 22,603 41,395 13,079 ------------ ------------ ------------- ------------ ------------- ------------ Total Liabilities 2,427,777 8,374,284 42,209,396 6,777,658 37,184,541 13,241,342 ------------ ------------ ------------- ------------ ------------- ------------ NET ASSETS $ 22,288,304 $ 21,871,213 $ 165,388,466 $ 54,075,176 $ 101,800,210 $ 29,997,227 ============ ============ ============= ============ ============= ============ NET ASSETS CONSIST OF: Paid-in capital $ 22,722,704 $ 25,692,919 $ 193,396,288 $ 70,676,346 $ 171,892,932 $ 38,719,210 Undistributed net investment income 176,004 805,281 3,037,701 794,879 1,804,102 824,876 Accumulated net realized loss (3,916,456) (2,944,280) (12,517,918) (7,406,146) (30,132,219) (5,060,735) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies 3,306,052 (1,682,707) (18,527,605) (9,989,903) (41,764,605) (4,486,124) ------------ ------------ ------------- ------------ ------------- ------------ NET ASSETS $ 22,288,304 $ 21,871,213 $ 165,388,466 $ 54,075,176 $ 101,800,210 $ 29,997,227 ============ ============ ============= ============ ============= ============ iShares outstanding 2,100,000 1,960,000 3,300,000 3,200,000 8,100,000 1,800,000 ============ ============ ============= ============ ============= ============ Net asset value per iShare $ 10.61 $ 11.16 $ 50.12 $ 16.90 $ 12.57 $ 16.67 ============ ============ ============= ============ ============= ============
/1/ Securities on loan with market values of $1,819,379, $7,902,917, $39,353,935, $6,280,420, $35,232,310 and $11,857,205, respectively. See Note 5. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 55 Statements of Assets and Liabilities (Continued) iSHARES, INC. August 31, 2003
iSHARES MSCI ---------------------------------------------------------------------- Netherlands Spain Sweden Switzerland United Kingdom Index Fund Index Fund Index Fund Index Fund Index Fund ------------------------------------------------------------------------------------------------- ASSETS Investments at cost $ 25,326,216 $ 59,850,522 $ 22,554,303 $ 37,681,285 $ 182,001,229 ------------ ------------ ------------ ------------ -------------- Foreign currency, at cost $ 19,453 $ 136,023 $ 5,658 $ 62,657 $ 310,656 ------------ ------------ ------------ ------------ -------------- Investments in securities, at value (including securities on loan/1/) (Note 1) $ 19,923,235 $ 63,256,268 $ 21,329,793 $ 34,421,514 $ 150,495,188 Foreign currency, at value 18,723 131,270 5,304 60,192 306,969 Receivables: Investment securities sold 177,901 1,202,448 71,789 505,302 300,888 Dividends and interest 162,891 6,068 847 84,619 1,232,048 ------------ ------------ ------------ ------------ -------------- Total Assets 20,282,750 64,596,054 21,407,733 35,071,627 152,335,093 ------------ ------------ ------------ ------------ -------------- LIABILITIES Payables: Investment securities purchased 158,834 1,304,383 52,074 495,413 387,614 Collateral for securities on loan (Note 5) 1,498,956 12,847,321 4,340,155 885,597 890,835 iShares redeemed - - - - 24,768 Advisory fees (Note 2) 18,088 50,874 16,572 33,293 156,475 Distribution fees 7,616 21,524 7,011 14,036 66,159 ------------ ------------ ------------ ------------ -------------- Total Liabilities 1,683,494 14,224,102 4,415,812 1,428,339 1,525,851 ------------ ------------ ------------ ------------ -------------- NET ASSETS $ 18,599,256 $ 50,371,952 $ 16,991,921 $ 33,643,288 $ 150,809,242 ============ =-========== ============ ============ ============== NET ASSETS CONSIST OF: Paid-in capital $ 31,482,586 $ 51,447,596 $ 24,962,414 $ 43,308,444 $ 201,512,678 Undistributed net investment income 480,580 437,502 332,115 146,432 4,441,921 Accumulated net realized loss (7,954,967) (4,913,908) (7,077,968) (6,552,149) (23,618,011) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (5,408,943) 3,400,762 (1,224,640) (3,259,439) (31,527,346) ------------ ------------ ------------ ------------ -------------- NET ASSETS $ 18,599,256 $ 50,371,952 $ 16,991,921 $ 33,643,288 $ 150,809,242 ============ ============ ============ ============ ============== iShares outstanding 1,300,000 2,250,000 1,350,000 2,750,000 11,600,000 ============ ============ ============ ============ ============== Net asset value per iShare $ 14.31 $ 22.39 $ 12.59 $ 12.23 $ 13.00 ============ ============ ============ ============ ==============
/1/ Securities on loan with market values of $1,424,194, $12,222,629, $4,121,382, $843,148 and $843,603, respectively. See Note 5. SEE NOTES TO FINANCIAL STATEMENTS. 56 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Operations iSHARES, INC. Year Ended August 31, 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/ $ 307,198 $ 925,103 $ 3,926,989 $ 1,120,332 $ 2,261,091 $ 963,745 Interest 212 728 3,213 762 3,177 2,042 Securities lending income 2,916 49,879 207,342 34,642 121,389 105,152 ----------- ----------- ------------ ----------- ------------ ----------- Total investment income 310,326 975,710 4,137,544 1,155,736 2,385,657 1,070,939 ----------- ----------- ------------ ----------- ------------ ----------- EXPENSES (Note 2) Advisory fees 100,716 116,502 836,046 283,982 498,846 171,764 Distribution fees 42,676 49,365 354,257 120,331 211,376 72,782 ----------- ----------- ------------ ----------- ------------ ----------- Total expenses 143,392 165,867 1,190,303 404,313 710,222 244,546 ----------- ----------- ------------ ----------- ------------ ----------- Net investment income 166,934 809,843 2,947,241 751,423 1,675,435 826,393 ----------- ----------- ------------ ----------- ------------ ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (1,050,830) (479,171) (6,009,818) (3,082,115) (10,482,324) (820,772) In-kind redemptions 888,964 2,304,129 - - 3,069,055 409,476 Foreign currency transactions 9,070 (3,951) 93,407 43,456 128,667 (1,517) ----------- ----------- ------------ ----------- ------------ ----------- Net realized gain (loss) (152,796) 1,821,007 (5,916,411) (3,038,659) (7,284,602) (412,813) ----------- ----------- ------------ ----------- ------------ ----------- Net change in unrealized appreciation (depreciation) on: Investments 4,592,404 710,659 18,507,119 7,259,856 16,829,202 3,099,360 Translation of assets and liabilities in foreign currencies (3,039) 672 (15,156) (4,519) (28,189) 7,352 ----------- ----------- ------------ ----------- ------------ ----------- Net change in unrealized appreciation (depreciation) 4,589,365 711,331 18,491,963 7,255,337 16,801,013 3,106,712 ----------- ----------- ------------ ----------- ------------ ----------- Net realized and unrealized gain 4,436,569 2,532,338 12,575,552 4,216,678 9,516,411 2,693,899 ----------- ----------- ------------ ----------- ------------ ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,603,503 $ 3,342,181 $ 15,522,793 $ 4,968,101 $ 11,191,846 $ 3,520,292 =========== =========== ============ =========== ============ ===========
/1/ Net of foreign withholding tax of $90,352, $269,973, $821,753, $290,514, $504,170 and $139,868, respectively. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 57 Statements of Operations (Continued) iSHARES, INC. Year Ended August 31, 2003
iSHARES MSCI ------------------------------------------------------------------- Netherlands Spain Sweden Switzerland United Kingdom Index Fund Index Fund Index Fund Index Fund Index Fund --------------------------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $ 611,245 $ 707,964 $ 405,385 $ 364,707 $ 5,944,164 Interest 249 1,090 424 222 1,693 Securities lending income 13,261 22,641 19,008 2,772 12,317 ----------- ------------ ----------- ----------- -------------- Total investment income 624,755 731,695 424,817 367,701 5,958,174 ----------- ------------ ----------- ----------- -------------- EXPENSES (Note 2) Advisory fees 114,891 209,475 76,324 171,116 863,775 Distribution fees 48,683 88,761 32,341 72,507 366,006 ----------- ------------ ----------- ----------- -------------- Total expenses 163,574 298,236 108,665 243,623 1,229,781 ----------- ------------ ----------- ----------- -------------- Net investment income 461,181 433,459 316,152 124,078 4,728,393 ----------- ------------ ----------- ----------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (3,572,087) (1,937,111) (1,981,412) (2,812,965) (5,282,841) In-kind redemptions 1,167,972 1,532,541 714,452 (138,972) 8,071,852 Foreign currency transactions 19,399 4,043 15,962 22,356 81,672 ----------- ------------ ----------- ----------- -------------- Net realized gain (loss) (2,384,716) (400,527) (1,250,998) (2,929,581) 2,870,683 ----------- ------------ ----------- ----------- -------------- Net change in unrealized appreciation (depreciation) on: Investments 2,580,356 10,548,498 5,001,259 4,343,378 4,883,828 Translation of assets and liabilities in foreign currencies (5,505) (5,439) (126) (22,253) (23,289) ----------- ------------ ----------- ----------- -------------- Net change in unrealized appreciation (depreciation) 2,574,851 10,543,059 5,001,133 4,321,125 4,860,539 ----------- ------------ ----------- ----------- -------------- Net realized and unrealized gain 190,135 10,142,532 3,750,135 1,391,544 7,731,222 ----------- ------------ ----------- ----------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 651,316 $ 10,575,991 $ 4,066,287 $ 1,515,622 $ 12,459,615 =========== ============ =========== =========== ==============
/1/ Net of foreign withholding tax of $112,398, $124,574, $71,538, $155,143 and $644,847, respectively. SEE NOTES TO FINANCIAL STATEMENTS. 58 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Changes in Net Assets iSHARES, INC.
iSHARES MSCI iSHARES MSCI iSHARES MSCI AUSTRIA BELGIUM EMU INDEX FUND INDEX FUND INDEX FUND -------------------------------- -------------------------------- -------------------------------- For the For the For the For the For the For the year ended year ended year ended year ended year ended year ended August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 ------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 166,934 $ 202,143 $ 809,843 $ 217,967 $ 2,947,241 $ 1,434,550 Net realized gain (loss) (152,796) 422,446 1,821,007 (245,202) (5,916,411) (782,880) Net change in unrealized appreciation (depreciation) 4,589,365 (1,428,183) 711,331 (1,311,491) 18,491,963 (22,502,973) --------------- --------------- --------------- --------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations 4,603,503 (803,594) 3,342,181 (1,338,726) 15,522,793 (21,851,303) --------------- --------------- --------------- --------------- --------------- --------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (208,682) - (132,112) (58,802) (1,485,447) - --------------- --------------- --------------- --------------- --------------- --------------- Total distributions to iShareholders (208,682) - (132,112) (58,802) (1,485,447) - --------------- --------------- --------------- --------------- --------------- --------------- iSHARES TRANSACTIONS: iShares sold 6,782,294 9,081,694 36,573,861 1,907,060 20,183,374 62,239,581 iShares redeemed (3,629,301) (4,984,937) (28,339,593) (337) - - --------------- --------------- --------------- --------------- --------------- --------------- Net increase in net assets from iShares transactions 3,152,993 4,096,757 8,234,268 1,906,723 20,183,374 62,239,581 --------------- --------------- --------------- --------------- --------------- --------------- INCREASE IN NET ASSETS 7,547,814 3,293,163 11,444,337 509,195 34,220,720 40,388,278 NET ASSETS: Beginning of year 14,740,490 11,447,327 10,426,876 9,917,681 131,167,746 90,779,468 --------------- --------------- --------------- --------------- --------------- --------------- End of year $ 22,288,304 $ 14,740,490 $ 21,871,213 $ 10,426,876 $ 165,388,466 $ 131,167,746 =============== =============== =============== =============== =============== =============== Undistributed net investment income included in net assets at end of year $ 176,004 $ 208,682 $ 805,281 $ 72,170 $ 3,037,701 $ 1,482,500 =============== =============== =============== =============== =============== =============== iSHARES ISSUED AND REDEEMED: iShares sold 700,000 1,000,000 3,840,000 160,000 450,000 1,250,000 iShares redeemed (400,000) (600,030) (2,880,000) (30) - - --------------- --------------- --------------- --------------- --------------- --------------- Net increase in iShares outstanding 300,000 399,970 960,000 159,970 450,000 1,250,000 =============== =============== =============== =============== =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 59 Statements of Changes in Net Assets (Continued) iSHARES, INC.
iSHARES MSCI iSHARES MSCI iSHARES MSCI FRANCE GERMANY ITALY INDEX FUND INDEX FUND INDEX FUND -------------------------------- -------------------------------- -------------------------------- For the For the For the For the For the For the year ended year ended year ended year ended year ended year ended August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 ------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 751,423 $ 549,950 $ 1,675,435 $ 829,578 $ 826,393 $ 725,762 Net realized loss (3,038,659) (401,229) (7,284,602) (8,419,696) (412,813) (1,080,970) Net change in unrealized appreciation (depreciation) 7,255,337 (12,515,478) 16,801,013 (16,716,690) 3,106,712 (4,788,096) --------------- --------------- --------------- --------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations 4,968,101 (12,366,757) 11,191,846 (24,306,808) 3,520,292 (5,143,304) --------------- --------------- --------------- --------------- --------------- --------------- 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) - (733,556) - --------------- --------------- --------------- --------------- --------------- --------------- Total distributions to iShareholders (567,205) - (838,725) - (733,556) - --------------- --------------- --------------- --------------- --------------- --------------- iSHARES TRANSACTIONS: iShares sold - 3,457,530 24,678,639 8,628,640 2,068,633 - iShares redeemed - (18,419) (27,391,209) (8,690,553) (4,396,226) (501) --------------- --------------- --------------- --------------- --------------- --------------- Net increase (decrease) in net assets from iShares transactions - 3,439,111 (2,712,570) (61,913) (2,327,593) (501) --------------- --------------- --------------- --------------- --------------- --------------- INCREASE (DECREASE) IN NET ASSETS 4,400,896 (8,927,646) 7,640,551 (24,365,543) 459,143 (5,143,805) NET ASSETS: Beginning of year 49,674,280 58,601,926 94,159,659 118,525,202 29,538,084 34,681,889 --------------- --------------- --------------- --------------- --------------- --------------- End of year $ 54,075,176 $ 49,674,280 $ 101,800,210 $ 94,159,659 $ 29,997,227 $ 29,538,084 =============== =============== =============== =============== =============== =============== Undistributed net investment income included in net assets at end of year $ 794,879 $ 567,205 $ 1,804,102 $ 838,725 $ 824,876 $ 733,556 =============== =============== =============== =============== =============== =============== iSHARES ISSUED AND REDEEMED: iShares sold - 200,000 2,700,000 600,000 150,000 - iShares redeemed - (1,000) (2,400,000) (601,000) (300,000) (30) --------------- --------------- --------------- --------------- --------------- --------------- Net increase (decrease) in iShares outstanding - 199,000 300,000 (1,000) (150,000) (30) =============== =============== =============== =============== =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS. 60 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Changes in Net Assets (Continued) iSHARES, INC.
iSHARES MSCI iSHARES MSCI iSHARES MSCI NETHERLANDS SPAIN SWEDEN INDEX FUND INDEX FUND INDEX FUND -------------------------------- -------------------------------- -------------------------------- For the For the For the For the For the For the year ended year ended year ended year ended year ended year ended August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 ------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 461,181 $ 320,850 $ 433,459 $ 180,995 $ 316,152 $ 98,146 Net realized loss (2,384,716) (1,566,433) (400,527) (2,148,169) (1,250,998) (1,617,301) Net change in unrealized appreciation (depreciation) 2,574,851 (3,765,109) 10,543,059 (2,580,215) 5,001,133 (956,433) --------------- --------------- --------------- --------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations 651,316 (5,010,692) 10,575,991 (4,547,389) 4,066,287 (2,475,588) --------------- --------------- --------------- --------------- --------------- --------------- DISTRIBUTIONS TO iSHAREHOLDERS: From net investment income (320,678) (52,040) (163,361) - (100,930) - --------------- --------------- --------------- --------------- --------------- --------------- Total distributions to iShareholders (320,678) (52,040) (163,361) - (100,930) - --------------- --------------- --------------- --------------- --------------- --------------- iSHARES TRANSACTIONS: iShares sold 12,435,251 - 34,361,557 11,025,560 14,403,629 - iShares redeemed (13,270,048) (17,930) (13,252,013) (14,825,946) (9,531,073) (394) --------------- --------------- --------------- --------------- --------------- --------------- Net increase (decrease) in net assets from iShares transactions (834,797) (17,930) 21,109,544 (3,800,386) 4,872,556 (394) --------------- --------------- --------------- --------------- --------------- --------------- INCREASE (DECREASE) IN NET ASSETS (504,159) (5,080,662) 31,522,174 (8,347,775) 8,837,913 (2,475,982) NET ASSETS: Beginning of year 19,103,415 24,184,077 18,849,778 27,197,553 8,154,008 10,629,990 --------------- --------------- --------------- --------------- --------------- --------------- End of year $ 18,599,256 $ 19,103,415 $ 50,371,952 $ 18,849,778 $ 16,991,921 $ 8,154,008 =============== =============== =============== =============== =============== =============== Undistributed net investment income included in net assets at end of year $ 480,580 $ 320,678 $ 437,502 $ 163,361 $ 332,115 $ 100,930 =============== =============== =============== =============== =============== =============== iSHARES ISSUED AND REDEEMED: iShares sold 1,050,000 - 1,875,000 525,000 1,500,000 - iShares redeemed (1,050,000) (1,000) (675,000) (750,030) (975,000) (30) --------------- --------------- --------------- --------------- --------------- --------------- Net increase (decrease) in iShares outstanding - (1,000) 1,200,000 (225,030) 525,000 (30) =============== =============== =============== =============== =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 61 Statements of Changes in Net Assets (Continued) iSHARES, INC.
iSHARES MSCI iSHARES MSCI SWITZERLAND UNITED KINGDOM INDEX FUND INDEX FUND -------------------------------- -------------------------------- For the For the For the For the year ended year ended year ended year ended August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002 -------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 124,078 $ 65,396 $ 4,728,393 $ 4,083,808 Net realized gain (loss) (2,929,581) (1,137,054) 2,870,683 (7,051,788) Net change in unrealized appreciation (depreciation) 4,321,125 (2,902,375) 4,860,539 (16,145,045) --------------- --------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations 1,515,622 (3,974,033) 12,459,615 (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 2,976,574 3,498,837 76,462,198 28,061,954 iShares redeemed (2,658,605) (13,350) (55,409,169) (4,935,208) --------------- --------------- --------------- --------------- Net increase in net assets from iShares transactions 317,969 3,485,487 21,053,029 23,126,746 --------------- --------------- --------------- --------------- INCREASE (DECREASE) IN NET ASSETS 1,760,002 (501,051) 30,741,889 2,184,619 NET ASSETS: Beginning of year 31,883,286 32,384,337 120,067,353 117,882,734 --------------- --------------- --------------- --------------- End of year $ 33,643,288 $ 31,883,286 $ 150,809,242 $ 120,067,353 =============== =============== =============== =============== Undistributed net investment income included in net assets at end of year $ 146,432 $ 73,589 $ 4,441,921 $ 2,402,611 =============== =============== =============== =============== iSHARES ISSUED AND REDEEMED: iShares sold 250,000 250,000 6,600,000 2,000,000 iShares redeemed (250,000) (1,000) (4,400,000) (401,000) --------------- --------------- --------------- --------------- Net increase in iShares outstanding - 249,000 2,200,000 1,599,000 =============== =============== =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS. 62 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI AUSTRIA INDEX FUND ------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 ---------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 8.19 $ 8.18 $ 7.67 $ 9.13 $ 10.11 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/3/ 0.09 0.13 0.13 0.04 0.10 Net realized and unrealized gain (loss) 2.43 (0.12) 0.52 (1.46) (0.98) ------------- ------------- ------------- ------------- ------------- Total from investment operations 2.52 0.01 0.65 (1.42) (0.88) ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.10) - (0.14) (0.04) (0.08) Return of capital - - (0.00)/5/ - (0.02) ------------- ------------- ------------- ------------- ------------- Total distributions (0.10) - (0.14) (0.04) (0.10) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 10.61 $ 8.19 $ 8.18 $ 7.67 $ 9.13 ============= ============= ============= ============= ============= TOTAL RETURN 31.15% 0.12% 8.41% (15.51)% (8.69)% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 22,288 $ 14,740 $ 11,447 $ 10,741 $ 12,776 Ratio of expenses to average net assets 0.84% 0.84% 0.84%/1/ 1.16%/1/ 1.31% Ratio of net investment income to average net assets 0.98% 1.57% 1.69%/2/ 0.51%/2/ 1.04% Portfolio turnover rate/4/ 26% 32% 66% 34% 50%
/1/ Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the years ended August 31, 2001 and August 31, 2000 were 0.97% and 1.20%, respectively. /2/ Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the years ended August 31, 2001 and August 31, 2000 were 1.55% and 0.47%, respectively. /3/ Based on average shares outstanding throughout the period. /4/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /5/ Rounds to less than $0.01. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS 63 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI BELGIUM INDEX FUND ------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 --------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 10.43 $ 11.81 $ 13.23 $ 16.07 $ 18.40 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/3/ 0.41 0.25 0.19 0.19 0.08 Net realized and unrealized gain (loss) 0.43 (1.56) (1.34) (2.67) (0.30) ------------- ------------- ------------- ------------- ------------- Total from investment operations 0.84 (1.31) (1.15) (2.48) (0.22) ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.11) (0.07) (0.27) (0.36) (0.01) Net realized gain - - - - (1.19) Return of capital - - - - (0.91) ------------- ------------- ------------- ------------- ------------- Total distributions (0.11) (0.07) (0.27) (0.36) (2.11) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 11.16 $ 10.43 $ 11.81 $ 13.23 $ 16.07 ============= ============= ============= ============= ============= TOTAL RETURN 8.25% (11.10)% (8.72)% (15.50)% (1.00)% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 21,871 $ 10,427 $ 9,918 $ 13,230 $ 13,496 Ratio of expenses to average net assets 0.84% 0.84% 0.84%/1/ 1.13% 1.24% Ratio of net investment income to average net assets 4.10% 2.26% 1.60%/2/ 1.36% 0.45% Portfolio turnover rate/4/ 8% 18% 36% 53% 63%
/1/ Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2001 was 0.87%. /2/ Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2001 was 1.57%. /3/ Based on average shares outstanding throughout the period. /4/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. SEE NOTES TO FINANCIAL STATEMENTS. 64 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI EMU INDEX FUND ----------------------------------------------------------------- Period from Jul. 25, 2000/(8)/ Year ended Year ended Year ended to Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 ------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 46.02 $ 56.74 $ 76.02 $ 80.72 ------------- ------------- ------------- ------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)/3/ 0.93 0.75 0.72 (0.00)/5/ Net realized and unrealized gain (loss) 3.62 (11.47) (19.32) (4.70) ------------- ------------- ------------- ------------------ Total from investment operations 4.55 (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 $ 50.12 $ 46.02 $ 56.74 $ 76.02 ============= ============= ============= ================== TOTAL RETURN 10.05% (18.89)% (24.51)% (5.82)%/6/ ============= ============= ============= ================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000s) $ 165,388 $ 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 to average net assets/7/ 2.08% 1.44% 1.13% 0.03%/2/ Portfolio turnover rate/4/ 7% 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. FINANCIAL HIGHLIGHTS 65 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI FRANCE INDEX FUND ------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 --------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 15.52 $ 19.53 $ 26.41 $ 22.90 $ 19.13 ------------- ------------- ------------- -------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.23 0.18 0.06 0.10 0.14 Net realized and unrealized gain (loss) 1.33 (4.19) (6.89) 5.21 3.88 ------------- ------------- ------------- -------------- ------------- Total from investment operations 1.56 (4.01) (6.83) 5.31 4.02 ------------- ------------- ------------- -------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.18) - (0.04) (0.11) (0.12) Net realized gain - - (0.00)/3/ (1.67) (0.05) Return of capital - - (0.01) (0.02) (0.08) ------------- ------------- ------------- -------------- ------------- Total distributions (0.18) - (0.05) (1.80) (0.25) ------------- ------------- ------------- -------------- ------------- NET ASSET VALUE, END OF YEAR $ 16.90 $ 15.52 $ 19.53 $ 26.41 $ 22.90 ============= ============= ============= ============== ============= TOTAL RETURN 10.22% (20.53)% (25.86)% 23.45% 21.01% ============= ============= ============= ============== ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 54,075 $ 49,674 $ 58,602 $ 95,116 $ 77,885 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 0.96% 1.06% Ratio of net investment income to average net assets 1.56% 1.00% 0.28% 0.36% 0.67% Portfolio turnover rate/2/ 9% 3% 14% 17% 0%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. SEE NOTES TO FINANCIAL STATEMENTS. 66 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI GERMANY INDEX FUND ------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 --------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 12.07 $ 15.19 $ 20.46 $ 21.17 $ 20.25 ------------- ------------- ------------- -------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.21 0.11 0.18 0.18 0.12 Net realized and unrealized gain (loss) 0.41 (3.23) (5.26) 1.64 1.31 ------------- ------------- ------------- -------------- ------------- Total from investment operations 0.62 (3.12) (5.08) 1.82 1.43 ------------- ------------- ------------- -------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.12) - (0.19) (0.17) (0.11) Net realized gain - - - (2.32) (0.39) Return of capital - - (0.00)/3/ (0.04) (0.01) ------------- ------------- ------------- -------------- ------------- Total distributions (0.12) - (0.19) (2.53) (0.51) ------------- ------------- ------------- -------------- ------------- NET ASSET VALUE, END OF YEAR $ 12.57 $ 12.07 $ 15.19 $ 20.46 $ 21.17 ============= ============= ============= ============== ============= TOTAL RETURN 5.39% (20.54)% (24.87)% 8.44% 7.04% ============= ============= ============= ============== ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 101,800 $ 94,160 $ 118,525 $ 153,487 $ 101,645 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 0.94% 1.00% Ratio of net investment income to average net assets 1.98% 0.77% 0.99% 0.73% 0.57% Portfolio turnover rate/2/ 11% 9% 20% 56% 14%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS 67 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI ITALY INDEX FUND ------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 --------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 15.15 $ 17.79 $ 22.23 $ 21.56 $ 22.89 ------------- ------------- ------------- -------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.43 0.37 0.24 0.39 0.17 Net realized and unrealized gain (loss) 1.47 (3.01) (4.37) 2.51 1.05 ------------- ------------- ------------- -------------- ------------- Total from investment operations 1.90 (2.64) (4.13) 2.90 1.22 ------------- ------------- ------------- -------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.38) - (0.24) (0.12) (0.06) Net realized gain - - (0.07) (1.80) (2.24) Return of capital - - (0.00)/3/ (0.31) (0.25) ------------- ------------- ------------- -------------- ------------- Total distributions (0.38) - (0.31) (2.23) (2.55) ------------- ------------- ------------- -------------- ------------- NET ASSET VALUE, END OF YEAR $ 16.67 $ 15.15 $ 17.79 $ 22.23 $ 21.56 ============= ============= ============= ============== ============= TOTAL RETURN 12.79% (14.84)% (18.61)% 13.35% 5.14% ============= ============= ============= ============== ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 29,997 $ 29,538 $ 34,682 $ 50,008 $ 58,224 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 0.99% 1.03% Ratio of net investment income to average net assets 2.84% 2.34% 1.16% 1.61% 0.70% Portfolio turnover rate/2/ 22% 10% 20% 40% 8%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. SEE NOTES TO FINANCIAL STATEMENTS. 68 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI NETHERLANDS INDEX FUND ---------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 ------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 14.69 $ 18.59 $ 23.53 $ 23.45 $ 23.50 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.30 0.25 0.28 0.13 0.53 Net realized and unrealized gain (loss) (0.43) (4.11) (4.94) 0.18 1.60 ------------- ------------- ------------- ------------- ------------- Total from investment operations (0.13) (3.86) (4.66) 0.31 2.13 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.25) (0.04) (0.28) (0.08) (0.44) Net realized gain - - - (0.11) (1.66) Return of capital - - - (0.04) (0.08) ------------- ------------- ------------- ------------- ------------- Total distributions (0.25) (0.04) (0.28) (0.23) (2.18) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 14.31 $ 14.69 $ 18.59 $ 23.53 $ 23.45 ============= ============= ============= ============= ============= TOTAL RETURN (0.78)% (20.79)% (19.83)% 1.28% 8.98% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 18,599 $ 19,103 $ 24,184 $ 30,613 $ 31,685 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 1.03% 1.07% Ratio of net investment income to average net assets 2.37% 1.48% 1.34% 0.53% 2.20% Portfolio turnover rate/2/ 18% 15% 35% 22% 32%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS 69 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI SPAIN INDEX FUND ------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 --------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 17.95 $ 21.33 $ 24.19 $ 25.59 $ 23.84 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.24 0.17 0.19 0.15 0.09 Net realized and unrealized gain (loss) 4.36 (3.55) (2.89) (0.60) 3.14 ------------- ------------- ------------- ------------- ------------- Total from investment operations 4.60 (3.38) (2.70) (0.45) 3.23 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.16) - (0.16) (0.14) (0.09) Net realized gain - - - (0.80) (1.35) Return of capital - - (0.00)/3/ (0.01) (0.04) ------------- ------------- ------------- ------------- ------------- Total distributions (0.16) - (0.16) (0.95) (1.48) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 22.39 $ 17.95 $ 21.33 $ 24.19 $ 25.59 ============= ============= ============= ============= ============= TOTAL RETURN 25.81% (15.85)% (11.17)% (1.81)% 13.39% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 50,372 $ 18,850 $ 27,198 $ 39,913 $ 36,469 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 0.99% 1.04% Ratio of net investment income to average net assets 1.22% 0.85% 0.82% 0.57% 0.31% Portfolio turnover rate/2/ 17% 14% 26% 39% 17%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. SEE NOTES TO FINANCIAL STATEMENTS. 70 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI SWEDEN INDEX FUND ------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 --------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 9.88 $ 12.88 $ 24.38 $ 22.26 $ 18.39 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.25 0.12 0.07 0.14 0.10 Net realized and unrealized gain (loss) 2.58 (3.12) (11.52) 8.38 4.52 ------------- ------------- ------------- ------------- ------------- Total from investment operations 2.83 (3.00) (11.45) 8.52 4.62 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.12) - (0.05) (0.14) (0.10) Net realized gain - - - (6.22) (0.63) Return of capital - - (0.00)/3/ (0.04) (0.02) ------------- ------------- ------------- ------------- ------------- Total distributions (0.12) - (0.05) (6.40) (0.75) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 12.59 $ 9.88 $ 12.88 $ 24.38 $ 22.26 ============= ============= ============= ============= ============= TOTAL RETURN 29.04% (23.29)% (46.99)% 39.15% 25.09% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 16,992 $ 8,154 $ 10,630 $ 23,774 $ 20,034 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 1.03% 1.13% Ratio of net investment income to average net assets 2.44% 0.98% 0.40% 0.46% 0.49% Portfolio turnover rate/2/ 12% 31% 43% 90% 33%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS 71 Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI SWITZERLAND INDEX FUND --------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 ------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF YEAR $ 11.59 $ 12.95 $ 15.54 $ 15.39 $ 15.55 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.05 0.03 0.04 0.04 0.04 Net realized and unrealized gain (loss) 0.62 (1.38) (2.54) 0.27 0.19 ------------- ------------- ------------- ------------- ------------- Total from investment operations 0.67 (1.35) (2.50) 0.31 0.23 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.03) (0.01) (0.05) (0.04) (0.07) Net realized gain - - (0.04) (0.11) (0.31) Return of capital - - - (0.01) (0.01) ------------- ------------- ------------- ------------- ------------- Total distributions (0.03) (0.01) (0.09) (0.16) (0.39) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 12.23 $ 11.59 $ 12.95 $ 15.54 $ 15.39 ============= ============= ============= ============= ============= TOTAL RETURN 5.89% (10.47)% (16.08)% 1.96% 1.47% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 33,643 $ 31,883 $ 32,384 $ 44,685 $ 38,499 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 1.01% 1.09% Ratio of net investment income to average net assets 0.43% 0.20% 0.29% 0.23% 0.24% Portfolio turnover rate/2/ 10% 12% 34% 35% 35%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. SEE NOTES TO FINANCIAL STATEMENTS. 72 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (Continued) iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI UNITED KINGDOM INDEX FUND ---------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 ------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 12.77 $ 15.11 $ 18.35 $ 20.25 $ 18.48 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income/1/ 0.39 0.48 0.26 0.27 0.44 Net realized and unrealized gain (loss) 0.12 (2.60) (3.23) (0.85) 2.40 ------------- ------------- ------------- ------------- ------------- Total from investment operations 0.51 (2.12) (2.97) (0.58) 2.84 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income (0.28) (0.22) (0.25) (0.25) (0.37) Net realized gain - - (0.02) (1.03) (0.62) Return of capital - - - (0.04) (0.08) ------------- ------------- ------------- ------------- ------------- Total distributions (0.28) (0.22) (0.27) (1.32) (1.07) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 13.00 $ 12.77 $ 15.11 $ 18.35 $ 20.25 ============= ============= ============= ============= ============= TOTAL RETURN 4.20% (14.19)% (16.20)% (3.00)% 15.33% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 150,809 $ 120,067 $ 117,883 $ 146,803 $ 113,402 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 0.94% 0.97% Ratio of net investment income to average net assets 3.23% 3.39% 1.57% 1.39% 2.16% Portfolio turnover rate/2/ 6% 14% 30% 33% 13%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS 73 Notes to the Financial Statements iSHARES, INC. 1. SIGNIFICANT ACCOUNTING POLICIES iShares, Inc. (the "Company"), is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company was incorporated under the laws of the State of Maryland on September 1, 1994. As of August 31, 2003, the Company offered 24 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. Under the Funds' organizational documents, their officers and directors are indemnified against certain liabilities that may arise out of the performance of their duties to the Funds. Additionally, in the normal course of business, the Funds enter into contracts with service providers that contain general indemnification clauses. The Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, based on experience, the Funds expect the risk of loss to be remote. 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. These reclassifications had no impact on prior year net assets, net income or distributions. 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. Short-term investments are valued at amortized cost, 74 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements (Continued) iSHARES, INC. which approximates market value. 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 AND INCOME RECOGNITION 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. 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. NOTES TO THE FINANCIAL STATEMENTS 75 Notes to the Financial Statements (Continued) iSHARES, INC. At August 31, 2003, 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 $ 272,938 $ - $ 272,938 Belgium 884,836 - 884,836 EMU 3,047,220 - 3,047,220 France 794,879 - 794,879 Germany 1,804,102 - 1,804,102 Italy 824,876 - 824,876 Netherlands 480,580 - 480,580 Spain 437,502 - 437,502 Sweden 332,115 - 332,115 Switzerland 146,432 - 146,432 United Kingdom 4,486,489 - 4,486,489 -----------------------------------------------------------------------------------------
For the year ended August 31, 2003, 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 year ended August 31, 2003. From November 1, 2002 to August 31, 2003, the Funds incurred net realized capital losses and net foreign exchange losses. As permitted by tax regulations, the Funds have elected to defer those losses and treat them as arising in the year ending August 31, 2004, as follows: ----------------------------------------------------------------------- DEFERRED NET REALIZED CAPITAL/NET FOREIGN iSHARES MSCI INDEX FUND CURRENCY LOSSES ----------------------------------------------------------------------- Austria $ 1,244,041 Belgium 241,979 EMU 4,448,021 France 2,627,205 Germany 7,995,081 Italy 541,985 ----------------------------------------------------------------------- ----------------------------------------------------------------------- DEFERRED NET REALIZED CAPITAL/NET FOREIGN iSHARES MSCI INDEX FUND CURRENCY LOSSES ----------------------------------------------------------------------- Netherlands $ 2,480,372 Spain 1,582,094 Sweden 1,498,014 Switzerland 2,149,170 United Kingdom 4,272,059 ----------------------------------------------------------------------- 76 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements (Continued) iSHARES, INC. The Funds had tax basis net capital loss carryforwards at August 31, 2003, the tax year-end of the Funds, as follows:
--------------------------------------------------------------------------------------------- EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING iSHARES MSCI INDEX FUND IN 2007 IN 2008 IN 2009 IN 2010 IN 2011 TOTAL --------------------------------------------------------------------------------------------- Austria $ 4,273 $551,208 $336,553 $ 1,291,324 $ 370,948 $ 2,554,306 Belgium - 94,675 450,543 1,677,678 117,767 2,340,663 EMU - - 443 1,923,552 1,144,756 3,068,751 France - - - 3,807,513 236,944 4,044,457 Germany - - 86,860 13,573,336 5,469,732 19,129,928 Italy - - - 3,335,772 848,408 4,184,180 Netherlands - - 60,885 3,222,792 1,497,810 4,781,487 Spain - - 20,276 2,081,931 678,910 2,781,117 Sweden - - 126,557 3,350,244 1,577,551 5,054,352 Switzerland - - - 2,855,879 1,018,305 3,874,184 United Kingdom - - - 9,945,254 6,448,554 16,393,808 ---------------------------------------------------------------------------------------------
Net capital loss carryforwards may be applied against any net realized taxable gains in each succeeding year, or until their respective expiration date, whichever occurs first. 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, 2003, 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 and 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. 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 NOTES TO THE FINANCIAL STATEMENTS 77 Notes to the Financial Statements (Continued) iSHARES, INC. Emerging Markets, 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. Prior to February 24, 2003, Investors Bank served as securities lending agent for the Company. 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 August 31, 2003, BGI earned securities lending agent fees as follows: ---------------------------------------------------------------------- SECURITIES LENDING iSHARES MSCI INDEX FUND AGENT FEES ---------------------------------------------------------------------- Austria $ 3,055 Belgium 49,593 EMU 182,955 France 30,642 Germany 110,279 Italy 89,519 Netherlands 11,926 Spain 21,460 Sweden 16,355 Switzerland 2,155 United Kingdom 11,404 ---------------------------------------------------------------------- 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. 78 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements (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") and Prime Money Market Fund ("PMMF") of Barclays Global Investors Funds. The IMMF and PMMF are feeder funds in a master/feeder fund structure that invests substantially all of its assets in the Money Market Master Portfolio and Prime Money Market Master Portfolio, respectively, which are managed by BGFA, the Funds' investment advisor. The IMMF and PMMF are open-end money market funds available only to institutional investors, including other investment companies managed by BGFA. The IMMF and PMMF seek a high level of income consistent with liquidity and the preservation of capital. While the IMMF and PMMF do not directly charge an advisory fee, the master portfolios in which they invest do charge an advisory fee. Income distributions from the IMMF and PMMF 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 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 $4,542,947 as of August 31, 2003. Barclays PLC is an affiliate of BGFA, the Fund's investment advisor. As of August 31, 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 year ended August 31, 2003, were as follows: ---------------------------------------------------------------- iSHARES MSCI INDEX FUND PURCHASES SALES ---------------------------------------------------------------- Austria $ 4,371,267 $ 4,374,737 Belgium 2,337,828 1,446,116 EMU 11,904,879 10,269,683 France 4,737,423 4,480,841 Germany 11,050,985 9,752,905 Italy 6,464,087 6,352,618 Netherlands 3,580,364 3,436,456 Spain 6,246,107 6,004,978 Sweden 1,800,379 1,628,691 Switzerland 3,322,282 3,010,346 United Kingdom 9,819,668 8,323,390 ---------------------------------------------------------------- NOTES TO THE FINANCIAL STATEMENTS 79 Notes to the Financial Statements (Continued) iSHARES, INC. In-kind transactions for the year ended August 31, 2003, were as follows: ---------------------------------------------------------------- IN-KIND IN-KIND iSHARES MSCI INDEX FUND PURCHASES SALES ---------------------------------------------------------------- Austria $ 6,761,236 $ 3,624,602 Belgium 36,273,069 28,260,293 EMU 20,102,367 - France - - Germany 24,529,948 27,238,019 Italy 2,064,040 4,385,912 Netherlands 12,437,549 13,222,708 Spain 34,321,596 13,173,807 Sweden 14,412,045 9,488,534 Switzerland 2,939,952 2,629,522 United Kingdom 76,142,043 54,890,614 ---------------------------------------------------------------- At August 31, 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 $ 21,084,323 $ 3,237,197 $ (144,216) $ 3,092,981 Belgium 32,263,595 285,708 (2,411,557) (2,126,849) EMU 229,805,240 2,157,864 (25,699,708) (23,541,844) France 71,358,580 5,019,271 (15,744,113) (10,724,842) Germany 183,556,380 491,535 (45,258,719) (44,767,184) Italy 47,273,587 1,751,189 (6,578,847) (4,827,658) Netherlands 26,019,324 - (6,096,089) (6,096,089) Spain 60,401,219 3,401,711 (546,662) 2,855,049 Sweden 23,079,904 846,437 (2,596,548) (1,750,111) Switzerland 38,210,080 1,471,612 (5,260,178) (3,788,566) United Kingdom 184,997,941 3,656,244 (38,158,997) (34,502,753) ---------------------------------------------------------------------------------------
80 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements (Continued) iSHARES, INC. 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. 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, an irrevocable letter of credit issued by a bank, or securities issued or guaranteed by the U.S. Government. The initial collateral received is required to have a value of at least 102% of the market value of the loaned securities for securities denominated in U.S. dollars and a value of at least 105% for all other securities. The collateral is maintained thereafter, at a value equal to at least 100% of the current market value of the securities on loan. The risks to the Funds of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of August 31, 2003, certain of the Funds had loaned securities which were collateralized by cash. The cash collateral received was invested in a joint account which invests in securities with remaining maturities of 397 days or less and money market mutual funds. Income from the joint account is allocated daily to each Fund, based on each Fund's portion of the total cash collateral received. The market values of the securities on loan at August 31, 2003, and the value of the related collateral received are disclosed in the Statements of Assets and Liabilities. 6. LEGAL PROCEEDINGS The Company has reached a settlement in an action in the U.S. District Court for the Northern District of Illinois. In the action, a company named Mopex, Inc. and a company named Realtimemutualfunds.com alleged that the actions of the Company and others infringed a patent held by Mopex, and that the parties engaged in a "conspiracy" amongst themselves to infringe the patent. The patent itself was found to be invalid in a related action to which the Company was not a party. In the settlement, the plaintiffs' claims and allegations are dismissed with prejudice, and neither the Company nor any other defendant will pay any compensation to the plaintiffs. NOTES TO THE FINANCIAL STATEMENTS 81 Report of Independent Auditors To the Shareholders and Board of Directors of iShares, Inc. In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the iShares MSCI Austria Index Fund, iShares MSCI Belgium Index Fund, iShares MSCI EMU Index Fund, iShares MSCI France Index Fund, iShares MSCI Germany Index Fund, iShares MSCI Italy Index Fund, iShares MSCI Netherlands Index Fund, iShares MSCI Spain Index Fund, iShares MSCI Sweden Index Fund, iShares MSCI Switzerland Index Fund and iShares MSCI United Kingdom Index Fund, each a portfolio of the iShares MSCI Index Fund Series (the "Funds") at August 31, 2003, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial statements of the Funds as of August 31, 2000 and for the two years then ended were audited by other auditors, whose report dated October 13, 2000 expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP San Francisco, California October 3, 2003 82 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Tax Information (Unaudited) iSHARES, INC. For the year ended August 31, 2003, the Funds earned foreign source income and paid foreign taxes which they intend to pass through to their shareholders pursuant to Section 853 of the Internal Revenue Code as follows: -------------------------------------------------------------------- FOREIGN SOURCE FOREIGN iSHARES MSCI INDEX FUND INCOME EARNED TAXES PAID -------------------------------------------------------------------- Austria $ 397,551 $ 76,857 Belgium 1,195,076 64,205 EMU 4,748,743 314,420 France 1,410,846 145,424 Germany 2,765,261 120,225 Italy 1,103,613 17,756 Netherlands 723,643 89,508 Spain 832,538 55,411 Sweden 476,923 20,643 Switzerland 539,034 121,233 United Kingdom 6,589,011 569,252 -------------------------------------------------------------------- The following are estimates of qualified dividend income received by the Funds through August 31, 2003 that qualify for a reduced tax rate pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003. ------------------------------------------------------------- QUALIFIED DIVIDEND iSHARES MSCI INDEX FUND INCOME ------------------------------------------------------------- Austria $ 397,550 Belgium 1,150,558 EMU 4,725,528 France 1,410,846 Germany 2,765,261 Italy 1,103,613 Netherlands 723,643 Spain 832,538 Sweden 476,923 Switzerland 519,850 United Kingdom 6,589,011 ------------------------------------------------------------- TAX INFORMATION 83 Supplemental Information (Unaudited) iSHARES, INC. The tables that follow present information about the differences between the daily market price on secondary markets for shares of an iShares Fund and that Fund's net asset value. Net asset value, or "NAV", is the price per share at which each Fund issues and redeems shares. It is calculated in accordance with the standard formula for valuing mutual fund shares. The "Market Price" of each iShares Fund generally is determined using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of such Fund is listed for trading, as of the time that the Fund's NAV is calculated. Each Fund's Market Price may be at, above or below its NAV. The NAV of each Fund will fluctuate with changes in the market value of its portfolio holdings. The Market Price of each Fund will fluctuate in accordance with changes in its NAV, as well as market supply and demand. Premiums or discounts are the differences (expressed as a percentage) between the NAV and Market Price of a Fund on a given day, generally at the time NAV is calculated. A premium is the amount that a Fund is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that a Fund is trading below the reported NAV, expressed as a percentage of the NAV. The following information shows the frequency distributions of premiums and discounts for each of the iShares Funds included in this report. Except for the iShares MSCI EMU Index Fund, the information shown for each Fund is for the five-year period from July 1, 1998 through June 30, 2003, the date of the most recent calendar quarter-end. The information shown for the iShares MSCI EMU Index Fund is for each full calendar quarter completed after the launch date of that Fund through June 30, 2003. The specific periods covered for each Fund are disclosed in the table for such Fund. EACH LINE IN THE TABLE SHOWS THE NUMBER OF TRADING DAYS IN WHICH THE iSHARES FUND TRADED WITHIN THE PREMIUM/DISCOUNT RANGE INDICATED. THE NUMBER OF TRADING DAYS IN EACH PREMIUM/DISCOUNT RANGE IS ALSO SHOWN AS A PERCENTAGE OF THE TOTAL NUMBER OF TRADING DAYS IN THE PERIOD COVERED BY EACH TABLE. ALL DATA PRESENTED HERE REPRESENTS PAST PERFORMANCE, WHICH CANNOT BE USED TO PREDICT FUTURE RESULTS. iSHARES MSCI AUSTRIA INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 3.0% ........................ 11 0.88% Greater than 2.5% and Less than 3.0% ..... 12 0.95 Greater than 2.0% and Less than 2.5% ..... 17 1.35 Greater than 1.5% and Less than 2.0% ..... 40 3.18 Greater than 1.0% and Less than 1.5% ..... 99 7.88 Greater than 0.5% and Less than 1.0% ..... 187 14.88 BETWEEN 0.5% AND -0.5% 625 49.71 Less than -0.5% and Greater than -1.0% ... 168 13.37 Less than -1.0% and Greater than -1.5% ... 61 4.85 Less than -1.5% and Greater than -2.0% ... 22 1.75 Less than -2.0% and Greater than -2.5% ... 8 0.64 Less than -2.5% .......................... 7 0.56 ----- --------- 1257 100.00% ===== ========= 84 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI BELGIUM INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 2.5% ........................ 11 0.88% Greater than 2.0% and Less than 2.5% ..... 11 0.88 Greater than 1.5% and Less than 2.0% ..... 30 2.39 Greater than 1.0% and Less than 1.5% ..... 95 7.56 Greater than 0.5% and Less than 1.0% ..... 240 19.09 BETWEEN 0.5% AND -0.5% ................... 560 44.53 Less than -0.5% and Greater than -1.0% ... 181 14.40 Less than -1.0% and Greater than -1.5% ... 85 6.76 Less than -1.5% and Greater than -2.0% ... 27 2.15 Less than -2.0% and Greater than -2.5% ... 11 0.88 Less than -2.5% .......................... 6 0.48 ----- --------- 1257 100.00% ===== ========= iSHARES MSCI EMU INDEX FUND PERIOD COVERED: OCTOBER 1, 2000 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 2.5% ........................ 6 0.87% Greater than 2.0% and Less than 2.5% ..... 7 1.02 Greater than 1.5% and Less than 2.0% ..... 20 2.91 Greater than 1.0% and Less than 1.5% ..... 63 9.16 Greater than 0.5% and Less than 1.0% ..... 201 29.22 BETWEEN 0.5% AND -0.5% ................... 318 46.22 Less than -0.5% and Greater than -1.0% ... 53 7.70 Less than -1.0% and Greater than -1.5% ... 14 2.03 Less than -1.5% .......................... 6 0.87 ----- --------- 688 100.00% ===== ========= SUPPLEMENTAL INFORMATION 85 Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI FRANCE INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 2.0% ........................ 8 0.64% Greater than 1.5% and Less than 2.0% ..... 13 1.03 Greater than 1.0% and Less than 1.5% ..... 54 4.30 Greater than 0.5% and Less than 1.0% ..... 146 11.61 BETWEEN 0.5% AND -0.5% ................... 868 69.04 Less than -0.5% and Greater than -1.0% ... 121 9.63 Less than -1.0% and Greater than -1.5% ... 33 2.63 Less than -1.5% and Greater than -2.0% ... 7 0.56 Less than -2.0% .......................... 7 0.56 ----- --------- 1257 100.00% ===== ========= iSHARES MSCI GERMANY INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 2.5% ........................ 8 0.64% Greater than 2.0% and Less than 2.5% ..... 9 0.72 Greater than 1.5% and Less than 2.0% ..... 36 2.86 Greater than 1.0% and Less than 1.5% ..... 85 6.76 Greater than 0.5% and Less than 1.0% ..... 200 15.91 BETWEEN 0.5% AND -0.5% ................... 680 54.09 Less than -0.5% and Greater than -1.0% ... 151 12.01 Less than -1.0% and Greater than -1.5% ... 54 4.30 Less than -1.5% and Greater than -2.0% ... 18 1.43 Less than -2.0% and Greater than -2.5% ... 6 0.48 Less than -2.5% .......................... 10 0.80 ----- --------- 1257 100.00% ===== ========= 86 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI ITALY INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 2.0% ........................ 11 0.88% Greater than 1.5% and Less than 2.0% ..... 14 1.11 Greater than 1.0% and Less than 1.5% ..... 40 3.18 Greater than 0.5% and Less than 1.0% ..... 165 13.13 BETWEEN 0.5% AND -0.5% ................... 850 67.62 Less than -0.5% and Greater than -1.0% ... 128 10.18 Less than -1.0% and Greater than -1.5% ... 28 2.23 Less than -1.5% and Greater than -2.0% ... 14 1.11 Less than -2.0% .......................... 7 0.56 ----- --------- 1257 100.00% ===== ========= iSHARES MSCI NETHERLANDS INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 2.5% ........................ 12 0.95% Greater than 2.0% and Less than 2.5% ..... 8 0.64 Greater than 1.5% and Less than 2.0% ..... 25 1.99 Greater than 1.0% and Less than 1.5% ..... 64 5.09 Greater than 0.5% and Less than 1.0% ..... 241 19.17 BETWEEN 0.5% AND -0.5% ................... 738 58.72 Less than -0.5% and Greater than -1.0% ... 103 8.19 Less than -1.0% and Greater than -1.5% ... 46 3.66 Less than -1.5% and Greater than -2.0% ... 12 0.95 Less than -2.0% .......................... 8 0.64 ----- --------- 1257 100.00% ===== ========= SUPPLEMENTAL INFORMATION 87 Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI SPAIN INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 3.0% ........................ 6 0.48% Greater than 2.0% and Less than 3.0% ..... 11 0.88 Greater than 1.5% and Less than 2.0% ..... 12 0.95 Greater than 1.0% and Less than 1.5% ..... 52 4.14 Greater than 0.5% and Less than 1.0% ..... 176 14.00 BETWEEN 0.5% AND -0.5% ................... 817 64.99 Less than -0.5% and Greater than -1.0% ... 128 10.18 Less than -1.0% and Greater than -1.5% ... 37 2.94 Less than -1.5% and Greater than -2.0% ... 11 0.88 Less than -2.0% .......................... 7 0.56 ----- --------- 1257 100.00% ===== ========= iSHARES MSCI SWEDEN INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 2.5% ........................ 11 0.88% Greater than 2.0% and Less than 2.5% ..... 18 1.43 Greater than 1.5% and Less than 2.0% ..... 29 2.31 Greater than 1.0% and Less than 1.5% ..... 93 7.40 Greater than 0.5% and Less than 1.0% ..... 232 18.46 BETWEEN 0.5% AND -0.5% ................... 668 53.14 Less than -0.5% and Greater than -1.0% ... 108 8.59 Less than -1.0% and Greater than -1.5% ... 52 4.14 Less than -1.5% and Greater than -2.0% ... 18 1.43 Less than -2.0% and Greater than -2.5% ... 14 1.11 Less than -2.5% .......................... 14 1.11 ----- --------- 1257 100.00% ===== ========= 88 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Supplemental Information (Unaudited) (Continued) iSHARES, INC. iSHARES MSCI SWITZERLAND INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 3.0% ........................ 3 0.24% Greater than 2.5% and Less than 3.0% ..... 10 0.80 Greater than 2.0% and Less than 2.5% ..... 13 1.03 Greater than 1.5% and Less than 2.0% ..... 44 3.50 Greater than 1.0% and Less than 1.5% ..... 137 10.90 Greater than 0.5% and Less than 1.0% ..... 265 21.08 BETWEEN 0.5% AND -0.5% ................... 635 50.51 Less than -0.5% and Greater than -1.0% ... 92 7.32 Less than -1.0% and Greater than -1.5% ... 31 2.47 Less than -1.5% and Greater than -2.0% ... 18 1.43 Less than -2.0% .......................... 9 0.72 ----- --------- 1257 100.00% ===== ========= iSHARES MSCI UNITED KINGDOM INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 3.5% ........................ 8 0.64% Greater than 2.5% and Less than 3.5% ..... 9 0.72 Greater than 2.0% and Less than 2.5% ..... 19 1.51 Greater than 1.5% and Less than 2.0% ..... 77 6.13 Greater than 1.0% and Less than 1.5% ..... 199 15.83 Greater than 0.5% and Less than 1.0% ..... 294 23.39 BETWEEN 0.5% AND -0.5% ................... 554 44.06 Less than -0.5% and Greater than -1.0% ... 64 5.09 Less than -1.0% and Greater than -1.5% ... 19 1.51 Less than -1.5% and Greater than -2.5% ... 9 0.72 Less than -2.5% .......................... 5 0.40 ----- --------- 1257 100.00% ===== ========= SUPPLEMENTAL INFORMATION 89 Directors Information (Unaudited) iSHARES, INC. The Board of Directors has responsibility for the overall management and operations of the Company, including general supervision of the duties performed by BGFA and other service providers. Each Director serves until his or her successor is duly elected or appointed and qualified. iShares, Inc., iShares Trust, Barclays Global Investors Funds and Master Investment Portfolio are considered to be members of the same fund complex, as defined in Form N-1A under the 1940 Act. Each Director of iShares, Inc. also serves as a Trustee for iShares Trust and oversees 81 portfolios within the fund complex. In addition, Lee T. Kranefuss and Richard K. Lyons each serves as a Trustee for Barclays Global Investors Funds and Master Investment Portfolio and oversees 106 portfolios within the fund complex. Additional information about the Funds' Directors may be found in the Funds' Statement of Additional Information, which is available without charge upon request by calling toll-free 1-800-474-2737. INTERESTED DIRECTORS+
POSITION(S), PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS LENGTH OF SERVICE DURING PAST 5 YEARS OTHER DIRECTORSHIPS HELD -------------------------------------------------------------------------------------------------------------------- *LEE T. KRANEFUSS (41) Director, Chief Executive Officer of the Trustee (since June 18, 2003) of Barclays Global Chairman, and Individual Investor Business of iShares Trust; Board of Trustees Investors President (since Barclays Global Investors, N.A.; for Barclays Global Investors Funds 45 Fremont Street June 18, 2003) The Boston Consulting Group (until and Master Investment Portfolio San Francisco, CA 94105 1997). (since 2001). *NATHAN MOST (89) Director Consultant to BGI (1998-2002), Trustee (since 2000) and President P.O. Box 193 (since 1996) American Stock Exchange (1996-2000) (2000-2002) of iShares Trust Burlingame, CA 94011 and the Hong Kong Stock Exchange (1998 to present); Consultant to the Amsterdam Stock Exchange (1997-1998); Consultant to the Pacific Stock Exchange (1997-1998).
---------- + Garrett F. Bouton served as Chairman, President and interested Director of the Board through June 17, 2003. * Lee T. Kranefuss and Nathan Most are deemed to be "interested persons" (as defined in the 1940 Act) of the Company due to their affiliations with BGFA, the Funds' investment advisor and BGI, the parent company of BGFA. 90 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Directors Information (Unaudited) (Continued) iSHARES, INC. INDEPENDENT DIRECTORS
POSITION(S), PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS LENGTH OF SERVICE DURING PAST 5 YEARS OTHER DIRECTORSHIPS HELD -------------------------------------------------------------------------------------------------------------------- JOHN B. CARROLL (67) Director Retired Vice President of Trustee (since 2001) of iShares 520 Main Street (since 1996) Investment Management (1984-2000) Trust; Trustee and member of the Ridgefield, CT 06877 of Verizon Corporation; Advisory Executive Committee (since 1991) of Board member of Ibbotson Associates The Common Fund Institutional (1992-1998); former Vice Chairman Funds, a non-profit organization; and Executive Committee Member Member of the Board of Managers of (1994-1998) of the Committee on JP Morgan Private Equity Funds. Investment of Employee Benefit Assets of the Financial Executive Institute. RICHARD K. LYONS (42) Director Professor, University of Trustee (since 2000) of iShares Haas School of (since 2001) California, Berkeley: Haas School Trust; Trustee (since 2001) of Business, of Business (since 1993); Barclays Global Investors Funds and UC Berkeley Consultant for IMF World Bank, Master Investment Portfolio; Board Berkeley, CA 94720 Federal Reserve Bank, and Citibank of Trustees: Matthews Asian Funds N.A. (since 2000). since 1995 (oversees 6 portfolios). GEORGE C. PARKER (64) Director Dean Witter Distinguished Professor Trustee (since 2000) of iShares Graduate School of (since 2001) of Finance (since 1994); Associate Trust; Bailard, Biehl and Business (Room K301) Dean for Academic Affairs, Director Kaiser, Inc. (since 1985); Stanford University of MBA Program, and Professor, California Casualty Group of 521 Memorial Way Stanford University: Graduate Insurance Companies (since 1978); Stanford, CA 94305 School of Business (1993-2001). Continental Airlines, Inc. (since 1996); Community First Financial Group (since 1995); Dresdner/RCM Mutual Funds (1994-2002); Tyon Ranch Company (since 1999). W. ALLEN REED (56) Director President and Chief Executive Trustee (since 2001) of iShares General Motors (since 1996) Officer (since 1994) of General Trust; Director (since 1994) of Investment Motors Investment Management General Motors Investment Management Corp. Corporation. Management Corporation; Director 767 Fifth Avenue (1995-1998) of Taubman New York, NY 10153 Centers, Inc. (a real estate investment trust); Director (since 1992) of FLIR Systems (an imaging technology company); Director (since 1994) of General Motors Acceptance Corporation; Director (since 1994) of GMAC Insurance Holdings, Inc.; Director (since 1995) of Global Emerging Markets Fund; Director (since 2000) of Temple Inland Industries; Chairman (since 1995) of the Investment Advisory Committee of Howard Hughes Medical Institute.
DIRECTORS INFORMATION 91 Directors Information (Unaudited) (Continued) iSHARES, INC. OFFICERS WHO ARE NOT DIRECTORS
PRINCIPAL OCCUPATION(S) DIRECTORSHIPS HELD BY NAME, AGE AND ADDRESS POSITION DURING PAST 5 YEARS OFFICERS ------------------------------------------------------------------------------------------------- MICHAEL A. LATHAM (37) Secretary, Director of Mutual Fund Delivery in None. Barclays Global Treasurer the U.S. Individual Investor Investors and Business of BGI (since 2000); Head 45 Fremont Street Principal of Operations, BGI Europe San Francisco, CA 94105 Financial (1997-2000). Officer JEFFREY J. GABOURY (34) Assistant Director (formerly Manager), Mutual None. Investors Bank & Trust Treasurer Fund Administration, Reporting and Co. Compliance, IBT (since 1996). 200 Clarendon Street Boston, MA 02116 DANELL J. DOTY (40) Assistant Head of Mutual Fund Administration, None. Barclays Global Secretary BGI (since 1999); Vice President of Investors Operations, Berkeley Capital 45 Fremont Street Management (1994-1999); Vice San Francisco, CA 94105 President and Secretary, The Berkeley Funds (1997-1999). SUSAN C. MOSHER (48) Assistant Senior Director & Senior Counsel, None. Investors Bank & Trust Secretary Mutual Fund Administration, IBT Co. (since 1995). 200 Clarendon Street Boston, MA 02116 SANDRA I. MADDEN (37) Assistant Senior Associate Counsel, Mutual None. Investors Bank & Trust Secretary Fund Administration, IBT (since Co. 1999); Associate, Scudder Kemper 200 Clarendon Street Investments, Inc. (1996-1999). Boston, MA 02116 THEDA HABER (49) Chief Attorney/Managing Director, Deputy None. Barclays Global Legal General Counsel and Head of U.S. Investors Officer Legal, BGI (since 1997); 45 Fremont Street Attorney/Senior Counsel, BGI San Francisco, CA 94105 (1994-2000). LOIS TOWERS (51) Assistant U.S. Compliance Officer, BGI (since None. Barclays Global Vice 1999). Investors President-AML 45 Fremont Street Compliance San Francisco, CA 94105 Officer
92 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes: NOTES 93 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. The prospectus 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 Lehman Aggregate Bond Fund (AGG) 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) iShares MSCI Emerging Markets Index Fund (EEM) 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 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. 94 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS iShares are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to iShares. Barclays Global Investors Services (BGIS) assists in the marketing of iShares. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., a wholly owned subsidiary of Barclays Bank PLC, none 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. iSHARES(R) INDUSTRIAL STRENGTH INVESTMENT TOOLS FROM BARCLAYS GLOBAL INVESTORS I 800 iSHARES (I 800 474 2737) WWW.iSHARES.COM BARCLAYS BGI-F-005-09003 iShares(R) 2003 ANNUAL REPORT TO SHAREHOLDERS AUGUST 31, 2003 [GRAPHIC APPEARS HERE] 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............................................. 13 Financial Highlights............................................. 16 Notes to the Financial Statements................................ 17 Report of Independent Auditors................................... 22 Tax Information (Unaudited)...................................... 23 Supplemental Information (Unaudited)............................. 24 Directors Information (Unaudited)................................ 25 iShares Family of Funds.......................................... 30 To Our Shareholders For many investors, the last few years have been difficult and challenging. The collapse of the stock market bubble, a tepid economy, corporate accounting scandals, lackluster company earnings and the geopolitical situation all contributed to a three-year bear market. Stock market gains during the first half of 2003 give some hope that the markets have turned a corner, but there is no guarantee that challenging market conditions will not return. iShares have continued to innovate and expand, offering more tools that help investors tailor their portfolios to achieve diversity and address volatility in a complex market environment. For example, in April of this year, iShares launched an emerging markets exchange traded fund based on the MSCI's Emerging Market Free Index. Last year, iShares launched the first fixed income exchange traded funds, which BUSINESS WEEK named one of the best new products of 2002./1/ We have added a Lehman Aggregate Bond Fund to our fixed income menu, enabling investors to track one of the most well-known U.S. fixed income market indexes. Assets under management for the fixed income iShares funds were $4.3 billion as of August 31, 2003. With the addition of these iShares, investors can achieve even more diversity in their portfolios -- and at lower cost, since iShares fees are, on average, about half those of actively managed funds./2/ With over 80 different iShares to choose from, investors have the ability to build a diverse portfolio that covers a wide swath of market segments such as capitalization, sectors, value and growth, international and fixed income. That is important because market segments do not tend to move in tandem, particularly in volatile markets. 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 result in one market segment outperforming another. 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 an indispensable tool for investors in the current market. And that is also why more and more investors have recognized the benefits of iShares. Assets under management for iShares continue to grow, and as of August 31, 2003, had reached $43.0 billion. 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/ Lee T. Kranefuss Lee T. Kranefuss PRESIDENT AND CHAIRMAN OF THE BOARD 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 5/03. 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 DOES NOT GUARANTEE FUTURE RESULTS. iShares are not sponsored, endorsed, or issued by Lehman Brothers, nor are they sponsored, endorsed, issued, sold or promoted by Morgan Stanley Capital International. 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 the companies listed above. This advertising section does not constitute part of the 2003 Annual Report. 2 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Introduction In this section, Barclays Global Fund Advisors (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 Indexes 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 prohibits a Fund from investing more than 25% of the value of a Fund's total assets in the securities of a single issuer. This constraint applies to all share classes of an issuer. As an example, Samsung Electronics ordinary and preferred shares made up 35.71% of the MSCI South Korea Index as of August 31, 2003. Because of the "Single Issuer Rule", however, the iShares MSCI South Korea Index Fund could not invest more than 25% of its assets in Samsung Electronics. This contributed to the difference between the performance of the iShares MSCI South Korea Index Fund and its benchmark index. The "5/50 Rule" generally precludes the sum of all of the securities weighted over 5% in a Fund's portfolio 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 Indexes 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 75.77% as of August 31, 2003. Therefore, the iShares MSCI Mexico Index Fund had to underweight some of these stocks relative to the benchmark, and therefore overweight its investment in other stocks. This contributed to the difference between the performance of the iShares MSCI Mexico Index Fund and its benchmark index. 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 Fund and the underlying MSCI Index in dividend accruals/reinvestments. The Funds record dividend revenues on the "ex-dividend" 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 twelve-month period. Separately, the Funds might have different dividend rates versus the Indexes due to portfolio sampling or different withholding taxes. Finally, while the sole source of revenues for the MSCI Indexes is dividends, the Funds receive interest on uninvested cash and, in the case of most Funds, revenues from the lending of portfolio securities. INTRODUCTION 3 EFFECT OF UNINVESTED ASSETS: Another factor that causes performance of a Fund to differ from that of its underlying MSCI Index is the "effect of uninvested assets". Uninvested assets held by a Fund affect performance relative to its underlying benchmark index. In contrast, the MSCI Indexes 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 principal "unequitized" asset 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. In these circumstances, the effect of uninvested assets could worsen a loss for the period. SECURITIES LENDING: Finally, securities lending is when a Fund loans securities in its portfolio to another party for a given time period and in return receives cash collateral for the loan. Securities lending income is the income earned on lending the securities, which is split between the Fund and the Fund's securities lending agent. While securities lending is intended to improve the performance of the Fund, it may also contribute to differences between the performance of a Fund and its benchmark index. 4 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS THIS PAGE INTENTIONALLY LEFT BLANK. 5 Managers' Discussion and Analysis iSHARES MSCI JAPAN INDEX FUND Performance as of 8/31/03 AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------- -------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 6.69% 6.26% 6.66% 0.62% 1.81% 1.40% (6.90)% (6.85)% (6.20)% CUMULATIVE TOTAL RETURNS --------------------------------------------------------------------------- YEAR ENDED 8/31/03 FIVE YEARS ENDED 8/31/03 INCEPTION TO 8/31/03 -------------------- -------------------------- ------------------------- NAV MARKET INDEX NAV MARKET INDEX NAV MARKET INDEX 6.69% 6.26% 6.66% 3.16% 9.38% 7.20% (41.38)% (41.18)% (38.02)% "Total returns for the period since inception" are calculated from the inception date of the Fund (3/12/96). "Average annual total returns" represent the average annual change in value of an investment over the periods indicated. "Cumulative total returns" represent 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 of the Fund, and the market return in 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 NAV 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 gain distributions have been reinvested in the Fund at Market Price and NAV, 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 JAPAN INDEX [CHART APPEARS HERE] Consumer Discretionary 22.44% Consumer Staples 6.08% Energy 0.73% Financials 14.08% Health Care 5.73% Industrials 15.56% Information Technology 17.49% Materials 7.80% Telecommunications Services 5.01% Utilities 5.08% PERFORMANCE REVIEW The total return of the iShares MSCI Japan Index Fund (the "Fund") was 6.69% during the twelve-month period ended August 31, 2003 (the "reporting period"). The total return of the corresponding MSCI Japan Index (the "Index") over the reporting period was 6.66%. SIGNIFICANT PERFORMANCE FACTORS The Fund outperformed its benchmark by 0.03 percentage points during the reporting period. This was due to the positive impact of portfolio sampling, revenue differential and securities lending, which contributed 0.67, 0.20, and 0.06 percentage points, respectively, to 6 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS the Fund's return. Those factors were offset by the impact of expenses and uninvested assets, which subtracted 0.84 and 0.06 percentage points, respectively, from the Fund's return. KEY MARKET CONDITIONS In addition to the dampening effects of a global slowdown, Japan dealt with its own set of problems during the year. As the reporting period opened, Japan's banking woes had begun to resurface. Government attempts to cope with the impact of non-performing loans caused significant concerns in the banking sector. Corporate restructurings grew, and slumping export levels contributed to higher unemployment rates by the end of 2002. Early in 2003, the Nikkei fell to its lowest level in 20 years as Japan struggled with the SARS outbreak and a weak U.S. dollar. Comments by U.S. Treasury Secretary John Snow briefly caused concern, as it appeared to many investors that the U.S. administration was willing to accept a weaker dollar. Because much of Japan's economic hopes hinge on an export-led recovery, Japan's markets generally reacted unfavorably to the implication that the U.S. was willing to accept a weaker dollar. As the interpretations to these comments changed, however, the Japanese market stabilized. During the second half of the reporting period Japan appeared to be emerging from some of its difficulties. The Nikkei 225 climbed from below 8,000 to above the 10,000 mark by the end of August, a gain of about a third since April. Perhaps more significantly, in August Japan logged its sixth successive quarter of growth, with GDP rising 2.3% at an annual rate in the second quarter. This exceeded expectations and nearly matched the U.S. growth rate over the same period. The central bank maintained its commitment to a weak yen through the ongoing sale of yen throughout the period, and some of Japan's big exporters benefited. Notably, automaker Nissan Motor Co. (1.95% of the Index as of August 31, 2003) gained 44.69% and Canon Inc. (2.93% of the Index as of August 31, 2003) climbed 38.18%. Toyota Motor Corp., the largest weighting at 5.45% of the Index, returned 9.71%. Not all exporters delivered positive returns, however. Sony Corp. (2.10% of the Index as of August 31, 2003) declined 25.73%. iSHARES MSCI JAPAN INDEX FUND GROWTH OF $10,000 INVESTMENT SINCE INCEPTION [CHART APPEARS HERE] iShares MSCI Japan Index Fund MSCI Japan Index ---------------- ---------------- $ 10,000.00 $ 10,000.00 8/31/96 $ 9,688.99 $ 9,718.00 2/28/97 $ 8,059.51 $ 8,115.00 8/31/97 $ 8,529.13 $ 8,593.00 2/28/98 $ 7,366.29 $ 7,436.00 8/31/98 $ 5,682.35 $ 5,783.00 2/28/99 $ 6,867.58 $ 7,029.00 8/31/99 $ 8,986.20 $ 9,406.00 2/29/2000 $ 10,297.24 $ 10,739.00 8/31/2000 $ 9,772.14 $ 10,274.00 2/28/2001 $ 7,417.49 $ 7,813.00 8/31/2001 $ 6,413.41 $ 6,735.00 2/28/2002 $ 5,282.04 $ 5,580.00 8/31/2002 $ 5,494.17 $ 5,811.00 2/28/2003 $ 4,787.07 $ 5,053.00 8/31/2003 $ 5,861.87 $ 6,198.00 MANAGERS' DISCUSSION & ANALYSIS 7 Schedule of Investments iSHARES MSCI JAPAN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ----------------------------------------------------------------------------- COMMON STOCKS - 99.98% Toyota Motor Corp. 3,331,200 $ 91,930,614 NTT DoCoMo Inc. 22,208 57,099,760 Canon Inc. 1,041,000 50,051,508 Honda Motor Co. Ltd. 971,600 39,553,480 Takeda Chemical Industries Ltd. 1,041,000 37,650,154 Sony Corp. 1,110,400 36,543,846 Matsushita Electic Industrial Co. Ltd. 2,776,015 35,402,043 Nomura Holdings Inc. 2,429,000 35,348,320 Nissan Motors Co. Ltd. 3,088,300 33,164,552 Mitsubishi Tokyo Financial Group Inc. 5,205 30,334,248 Nippon Telegraph & Telephone Corp. 6,593 29,043,555 Tokyo Electric Power Co. Inc. (The) 1,457,400 28,353,600 Fuji Photo Film Co. Ltd. 694,000 20,817,621 Hitachi Ltd. 3,470,000 18,914,296 Rohm Co. Ltd. 138,800 18,129,174 Millea Holdings Inc. 1,735 17,992,372 Murata Manufacturing Co. Ltd. 312,300 17,558,176 East Japan Railway Co. 3,817 16,127,708 Sumitomo Mitsui Financial Group Inc. 4,511 15,735,147 Sharp Corp. 1,041,000 15,613,216 Shin-Etsu Chemical Co. Ltd. 381,700 14,982,739 Tokyo Electron Ltd. 208,252 14,671,164 Chubu Electric Power Co. Inc. 798,100 14,535,160 Toshiba Corp. 3,470,000 14,185,722 Kansai Electric Power Co. Inc. (The) 867,500 13,687,586 Kyocera Corp. 208,200 13,382,756 Kao Corp. 694,000 13,085,362 Denso Corp. 694,000 12,966,404 NEC Corp./1/ 1,735,000 12,936,664 Ricoh Co. Ltd. 694,000 12,787,967 Nippon Steel Corp. 6,940,000 12,431,094 Mitsubishi Heavy Industries Ltd. 3,817,000 12,332,953 Secom Co. Ltd. 347,000 11,895,783 JFE Holdings Inc. 589,950 11,881,921 Mitsubishi Corp. 1,388,000 11,729,242 Nintendo Co. Ltd. 138,800 11,550,806 UFJ Holdings Inc./1/ 4,164 11,134,453 Mitsui & Co. Ltd. 1,735,000 11,077,948 Hoya Corp. 138,800 10,622,934 Ito-Yokado Co. Ltd. 347,000 9,962,719 Fujitsu Ltd. 2,082,000 9,956,771 Bridgestone Corp. 694,000 9,665,324 Tokyo Gas Co. Ltd. 3,123,000 9,501,757 Mizuho Financial Group Inc./1/ 7,634 9,486,887 Seven-Eleven Japan Co. Ltd. 347,000 9,486,887 Mitsubishi Estate Co. Ltd. 1,041,000 9,332,242 Fanuc Ltd. 138,800 9,159,753 Yamanouchi Pharmaceutical Co. Ltd. 347,000 9,100,274 TDK Corp. 138,800 9,040,795 Daiwa Securities Group Inc. 1,388,000 8,957,525 Dai Nippon Printing Co. Ltd. 694,000 8,844,515 Tohoku Electric Power Co. Inc. 589,900 8,695,818 Aeon Co. Ltd. 347,000 8,579,834 Mitsubishi Electric Corp. 2,082,000 8,547,120 SANYO Electric Co. Ltd. 2,082,000 8,457,902 Mitsui Fudosan Co. Ltd. 1,041,000 8,395,449 Nikko Cordial Corp. 1,735,000 8,341,918 Mitsui Sumitomo Insurance Co. Ltd. 1,388,000 8,291,361 Olympus Optical Co. Ltd. 347,000 7,970,175 Kyushu Electric Power Co. Inc. 520,500 7,882,443 SMC Corp. 69,400 7,720,363 Nitto Denko Corp. 173,500 7,657,911 Kirin Brewery Co. Ltd. 1,041,000 7,449,734 Central Japan Railway Co. 1,041 7,342,672 Asahi Glass Co. Ltd. 1,041,000 7,315,907 Eisai Co. Ltd. 347,000 7,256,428 Keyence Corp. 34,720 7,251,683 Advantest Corp. 104,100 7,217,767 Softbank Corp. 242,900 7,119,626 Kinki Nippon Railway Co. Ltd./1/ 2,429,000 7,098,809 Omron Corp. 347,000 7,063,121 NTT Data Corp. 1,735 6,988,773 ORIX Corp. 104,100 6,914,424 Nippon Oil Corp. 1,735,500 6,856,921 Ajinomoto Co. Inc. 694,000 6,834,127 8 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI JAPAN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ----------------------------------------------------------------------------- Shizuoka Bank Ltd. (The) 1,041,000 $ 6,753,831 Fujisawa Pharmaceutical Co. Ltd. 347,000 6,661,639 Daikin Industries Ltd. 347,000 6,631,899 Asahi Kasei Corp. 1,735,000 6,572,420 Sompo Japan Insurance Inc. 1,041,000 6,414,801 Stanley Electric Co. Ltd. 347,000 6,126,329 Osaka Gas Co. Ltd. 2,429,000 6,099,563 Sekisui House Ltd. 694,000 6,096,589 Toray Industries Inc. 1,735,000 6,096,589 Japan Tobacco Inc. 1,041 6,084,693 Sumitomo Electric Industries Ltd. 694,000 6,054,954 Komatsu Ltd. 1,041,000 5,941,944 Toyota Industries Corp. 347,000 5,921,126 Alps Electric Co. Ltd. 347,000 5,900,309 JSR Corp. 347,000 5,894,361 Takefuji Corp. 104,100 5,888,413 OJI Paper Co. Ltd. 1,041,000 5,781,351 Nippon Yusen Kabushiki Kaisha 1,388,000 5,733,768 Tostem Inax Holding Corp. 347,000 5,620,758 Toppan Printing Co. Ltd. 694,000 5,614,810 Pioneer Corp. 242,900 5,454,217 Daiwa House Industry Co. Ltd. 694,000 5,406,634 Daiichi Pharmaceutical Co. Ltd. 347,000 5,305,519 Itochu Corp. 1,735,000 5,204,405 Shionogi & Co. Ltd. 347,000 5,103,291 Taisho Pharmaceutical Co. Ltd. 347,000 5,085,447 Sumitomo Chemical Co. Ltd. 1,388,000 5,020,021 Mitsubishi Chemical Corp. 2,082,000 4,835,636 West Japan Railway Co. 1,388 4,817,792 Nippon Unipac Holding 1,041 4,764,261 Konica Minolta Holdings Inc. 347,000 4,755,339 Matsushita Electric Works Ltd. 694,000 4,698,834 Terumo Corp. 242,900 4,694,374 Sumitomo Trust & Banking Co. Ltd. (The) 1,041,000 4,692,887 Sumitomo Realty & Development Co. Ltd. 694,000 4,496,606 Bank of Yokohama Ltd. (The) 1,388,000 4,330,065 Sumitomo Corp. 694,000 4,300,326 Nikon Corp./1/ 347,000 4,285,456 Sankyo Co. Ltd. 347,000 4,282,482 Nippon Express Co. Ltd. 1,041,000 4,264,638 Yamato Transport Co. Ltd. 347,000 4,130,811 Resona Holdings Inc./1/ 4,511,000 3,943,452 Marui Co. Ltd. 347,000 3,866,130 Promise Co. Ltd. 104,100 3,854,234 Toyo Seikan Kaisha Ltd. 347,000 3,809,625 Mitsui Chemicals Inc. 694,000 3,717,432 Hirose Electric Co. Ltd. 34,700 3,714,458 Chugai Pharmaceutical Co. Ltd. 347,000 3,675,797 Shiseido Co. Ltd. 347,000 3,631,188 Tokyu Corp. 1,041,000 3,631,188 Mitsui O.S.K. Lines Ltd. 1,041,000 3,613,344 Trend Micro Inc./1/ 173,500 3,494,386 UNY Co. Ltd. 347,000 3,476,543 Kubota Corp. 1,041,000 3,443,829 Yamaha Corp. 208,200 3,429,554 Keihin Electric Express Railway Co. Ltd. 694,000 3,420,038 Sumitomo Metal Industries Ltd. 3,817,000 3,402,194 Yokogawa Electric Corp. 347,000 3,357,585 Nippon Meat Packers Inc. 347,000 3,348,663 Keio Electric Railway Co. Ltd. 694,000 3,312,976 ACOM Co. Ltd. 79,810 3,310,596 Oriental Land Co. Ltd. 69,400 3,295,132 Toho Co. Ltd. 312,300 3,281,452 Daido Life Insurance Co. Ltd. 1,388 3,259,445 Uni-Charm Corp. 69,400 3,211,862 Sumitomo Metal Mining Co. Ltd. 694,000 3,158,330 Tobu Railway Co. Ltd. 1,041,000 3,042,347 Isetan Co. Ltd. 347,000 3,009,633 Credit Saison Co. Ltd. 173,500 3,003,685 Teijin Ltd. 1,041,000 2,962,050 Mabuchi Motor Co. Ltd. 34,700 2,929,337 AIFUL Corp. 52,050 2,908,519 Fast Retailing Co. Ltd. 69,400 2,884,727 Sekisui Chemical Co. Ltd. 694,000 2,878,779 Kajima Corp. 1,041,000 2,846,066 Joyo Bank Ltd. 1,041,000 2,837,144 Yamada Denki Co. Ltd. 104,100 2,819,301 Daito Trust Construction Co. Ltd. 104,100 2,801,457 Nidec Corp. 34,700 2,780,639 Toto Ltd. 347,000 2,777,665 NSK Ltd. 694,000 2,706,291 SCHEDULE OF INVESTMENTS 9 Schedule of Investments (Continued) iSHARES MSCI JAPAN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ----------------------------------------------------------------------------- Casio Computer Co. Ltd. 347,000 $ 2,691,421 Nissan Chemical Industries Ltd. 347,000 2,679,525 Kuraray Co. Ltd. 347,000 2,617,072 Marubeni Corp. 1,735,000 2,617,072 Citizen Watch Co. Ltd. 347,000 2,575,437 Kaneka Corp. 347,000 2,569,489 Taisei Corp. 1,041,000 2,542,724 Nisshin Seifun Group Inc. 347,000 2,533,802 THK Co. Ltd. 138,800 2,527,854 Furkukawa Electric Co. Ltd. 694,000 2,521,906 Bank of Fukuoka Ltd. 694,000 2,498,115 Oki Electric Industry Co. Ltd./1/ 694,000 2,367,261 TonenGeneral Sekiyu K.K. 347,000 2,361,313 Shimamura Co. Ltd. 34,700 2,340,495 Mitsui Mining & Smelting Co. Ltd. 694,000 2,331,574 Konami Corp. 104,100 2,306,295 Mitsui Trust Holdings Inc./1/ 694,000 2,295,886 Anritsu Corp./1/ 347,000 2,286,964 Obayashi Corp. 694,000 2,272,095 NGK Insulators Ltd. 347,000 2,269,121 Chiba Bank Ltd. (The) 694,000 2,260,199 CSK Corp. 69,400 2,242,355 JAFCO Co. Ltd. 34,700 2,239,381 Nippon Shokubai Co. Ltd. 347,000 2,227,485 Asahi Breweries Ltd. 347,000 2,224,512 Shimizu Corp. 694,000 2,218,564 Mitsubishi Rayon Co. Ltd. 694,000 2,206,668 Ishikawajima-Harima Heavy Industries Co. Ltd. 1,388,000 2,200,720 Kawasaki Heavy Industries Ltd. 1,735,000 2,200,720 Kikkoman Corp. 347,000 2,200,720 Nissin Food Products Co. Ltd. 104,100 2,199,233 Dainippon Screen Manufacturing Co. Ltd./1/ 347,000 2,168,007 Takashimaya Co. Ltd. 347,000 2,168,006 Taiheiyo Cement Corp. 1,041,000 2,123,397 Takara Holdings Inc. 347,000 2,066,892 Denki Kagaku Kogyo Kabushiki Kaisha 694,000 2,022,283 Lawson Inc. 69,400 2,022,283 Kamigumi Co. Ltd. 347,000 1,995,518 Showa Denko K.K./1/ 1,041,000 1,980,648 Suruga Bank Ltd. (The) 347,000 1,953,882 Kyowa Hakko Kogyo Co. Ltd. 347,000 1,950,908 Seino Transportation Co. Ltd. 347,000 1,950,908 Tosoh Corp. 694,000 1,933,065 Shimano Inc. 104,100 1,891,430 Sumitomo Bakelite Co. Ltd. 347,000 1,876,560 Ube Industries Ltd. 1,041,000 1,846,820 SEGA Corp./1/ 173,500 1,762,063 Daimaru Inc. (The) 347,000 1,739,758 Hino Motors Ltd. 347,000 1,736,784 Minebea Co. Ltd. 347,000 1,727,862 Suzuken Co. Ltd. 69,400 1,701,097 NTN Corp. 347,000 1,668,384 Fuji Television Network Inc. 347 1,650,540 Japan Airlines System Corp. 694,000 1,635,670 Ebara Corp. 347,000 1,629,722 Oracle Corp. 34,700 1,623,774 Nippon Kayaku Co. Ltd. 347,000 1,620,800 Fujikura Ltd. 347,000 1,564,296 Nisshinbo Industries Inc. 347,000 1,561,322 Mitsubishi Materials Corp./1/ 1,041,000 1,552,400 Toyoda Gosei Co. Ltd. 69,400 1,549,426 Fuji Electric Co. Ltd. 694,000 1,546,452 All Nippon Airways Co. Ltd./1/ 694,000 1,516,712 Sumitomo Heavy Industries Ltd./1/ 694,000 1,516,712 Amada Co. Ltd. 347,000 1,498,869 Bandai Co. Ltd. 34,700 1,489,947 Dainippon Ink & Chemicals Inc. 694,000 1,475,077 Namco Ltd. 69,400 1,439,390 Dowa Mining Co. Ltd. 347,000 1,424,520 Daicel Chemical Industries Ltd. 347,000 1,412,624 Gunma Bank Ltd. 347,000 1,409,650 Gunze Ltd. 347,000 1,409,650 77 Bank Ltd. (The) 347,000 1,391,807 FamilyMart Co. Ltd. 69,400 1,385,859 Mitsui Engineering & Shipbuilding Co. Ltd. 1,041,000 1,347,197 Teikoku Oil Co. Ltd. 347,000 1,323,406 Kinden Corp. 347,000 1,281,771 Benesse Corp. 69,400 1,275,823 Ito En Ltd. 34,700 1,263,927 Toyobo Co. Ltd. 694,000 1,255,005 10 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Schedule of Investments (Continued) iSHARES MSCI JAPAN INDEX FUND August 31, 2003 SECURITY SHARES VALUE ----------------------------------------------------------------------------- Nippon Sanso Corp. 347,000 $ 1,252,031 Meitec Corp. 34,700 1,249,057 Nippon Mining Holdings Inc. 520,500 1,244,596 Shimachu Co. Ltd. 69,400 1,243,109 Aeon Credit Service Co. Ltd. 34,790 1,237,389 Hitachi Cable Ltd. 347,000 1,228,240 Meiji Dairies Corp. 347,000 1,195,526 Okumura Corp. 347,000 1,192,552 Kawasaki Kisen Kaisha Ltd. 347,000 1,183,630 Meiji Seika Kaisha Ltd. 347,000 1,174,709 Coca-Cola West Japan Co. Ltd. 69,400 1,135,453 Nichirei Corp. 347,000 1,124,152 Katokichi Co. Ltd. 69,400 1,111,661 Aoyama Trading Co. Ltd. 69,400 1,103,929 Nishimatsu Construction Co. Ltd. 347,000 1,094,412 Capcom Co. Ltd. 104,100 1,089,356 Nippon Sheet Glass Co. Ltd. 347,000 1,070,621 Itochu Techno-Science Corp. 34,700 996,272 Mitsukoshi Ltd./2/ 347,000 951,663 TIS Inc. 34,700 951,663 Hokuriku Bank Ltd. (The)/1/ 694,000 945,715 Hitachi Software Engineering Co. Ltd. 34,700 936,793 Ariake Japan Co. Ltd. 34,700 933,819 Mitsubishi Gas Chemical Co. Inc. 347,000 877,314 Toda Corp. 347,000 862,444 Kanebo Ltd./1/ 694,000 844,601 Sapporo Breweries Ltd. 347,000 826,757 Asatsu-DK Inc. 34,700 811,887 World Co. Ltd. 34,700 807,426 Ashikaga Financial Group Inc./1/ 694,000 761,330 Sumitomo Osaka Cement Co. Ltd. 347,000 695,903 Bellsystem24 Inc. 3,470 691,442 Ishihara Sangyo Kaisha Ltd./1/ 347,000 689,955 Autobacs Seven Co. Ltd. 34,700 661,703 Aderans Co. Ltd. 34,700 628,990 Saizeriya Co. Ltd. 69,490 589,605 Snow Brand Milk Products Co. Ltd./1/ 173,500 478,805 TOTAL COMMON STOCKS (Cost: $1,771,177,593) 1,726,493,435 SHARES OR SECURITY PRINCIPAL VALUE ----------------------------------------------------------------------------- SHORT TERM INVESTMENTS - 11.88% MONEY MARKET FUNDS - 7.71% Barclays Global Investors Funds Institutional Money Market Fund, Institutional Shares/3/,/4/ 87,201,509 $ 87,201,509 Barclays Global Investors Funds Prime Money Market Fund, Institutional Shares/3/,/4/ 33,451,175 33,451,175 BlackRock Temp Cash Money Market Fund/3/ 1,760,140 1,760,140 Short Term Investment Co. - Liquid Assets Money Market Portfolio/3/ 3,041,016 3,041,016 Short Term Investment Co. - Prime Money Market Portfolio, Institutional Shares/3/ 7,733,547 7,733,547 133,187,387 FLOATING RATE NOTES - 2.89% Beta Finance Inc. 1.07%, 05/20/04 /3/ $ 1,520,508 1,520,346 1.16%, 08/23/04 /3/ 1,520,508 1,521,778 Canadian Imperial Bank of Commerce 1.07%, 10/30/03 /3/ 1,216,406 1,216,406 1.37%, 08/26/04 /3/ 3,041,016 3,041,016 CC USA Inc. 1.06%, 05/24/04 /3/ 3,041,016 3,040,797 1.07%, 04/19/04 /3/ 1,338,047 1,338,005 1.11%, 07/15/04 /3/ 1,520,508 1,520,983 Dorada Finance Inc. 1.07%, 05/20/04 /3/ 3,041,016 3,040,691 1.24%, 08/09/04 /3/ 760,254 760,148 Five Finance Inc. 1.08%, 04/15/04 /3/ 1,520,508 1,520,508 HBOS Treasury Services PLC 1.27%, 06/24/04 /3/ 3,041,016 3,041,016 Holmes Financing PLC 1.07%, 04/15/04 /3/ 608,203 608,203 SCHEDULE OF INVESTMENTS 11 Schedule of Investments (Continued) iSHARES MSCI JAPAN INDEX FUND August 31, 2003 SECURITY PRINCIPAL VALUE ----------------------------------------------------------------------------- K2 USA LLC 1.07%, 08/16/04 /3/ $ 760,254 $ 760,146 1.08%, 04/13/04 /3/ 1,520,508 1,520,462 1.08%, 05/17/04 /3/ 1,520,508 1,520,455 Links Finance LLC 1.05%, 07/20/04 /3/ 1,216,406 1,216,192 1.07%, 05/04/04 /3/ 1,520,508 1,520,457 1.07%, 06/28/04 /3/ 1,520,508 1,520,259 1.08%, 03/29/04 /3/ 1,520,508 1,520,508 Nationwide Building Society 1.08%, 07/23/04 /3/ 2,280,762 2,280,762 Sigma Finance Inc. 1.05%, 07/20/04 /3/ 1,520,508 1,520,240 1.06%, 10/15/03 /3/ 3,041,016 3,040,980 1.06%, 07/01/04 /3/ 1,520,508 1,520,193 1.24%, 08/06/04 /3/ 760,254 760,183 Tango Finance Corp. 1.05%, 07/15/04 /3/ 912,305 912,043 1.06%, 07/06/04 /3/ 912,305 912,226 Toronto Dominion 1.33%, 08/23/04 /3/ 1,976,660 1,975,692 White Pine Finance LLC 1.06%, 07/06/04 /3/ 1,824,610 1,824,462 1.07%, 05/17/04 /3/ 1,824,610 1,824,610 1.08%, 04/20/04 /3/ 1,520,508 1,520,508 49,840,275 COMMERCIAL PAPER - 1.10% Corporate Asset Funding Corp. 1.06%, 09/24/03 /3/ 912,305 911,714 CRC Funding LLC 1.05%, 09/25/03 /3/ 1,520,508 1,519,488 1.06%, 09/16/03 /3/ 608,203 607,952 Edison Asset Securitization 1.06%, 09/05/03 /3/ 1,520,508 1,520,374 1.06%, 09/15/03 /3/ 912,305 911,956 1.07%, 10/23/03 /3/ 2,858,555 2,854,222 Eureka Securitization Inc. 1.05%, 09/18/03 /3/ 1,520,508 1,519,798 Jupiter Securitization Corp. 1.07%, 09/02/03 /3/ 760,254 760,254 Park Avenue Receivables Corp. 1.06%, 09/16/03 /3/ 760,254 759,941 Preferred Receivables Funding Corp. 1.06%, 09/08/03 /3/ 760,254 760,120 Quincy Capital Corp. 1.06%, 09/17/03 /3/ 3,150,736 3,149,344 Receivables Capital Corp. 1.06%, 09/17/03 /3/ 2,219,942 2,218,966 UBS Finance (Delaware) Inc. 1.09%, 09/02/03 /3/ 1,520,508 1,520,508 19,014,637 TIME DEPOSITS - 0.18% SunTrust Banks Inc. 1.00%, 09/02/03 /3/ 3,041,016 3,041,016 3,041,016 TOTAL SHORT TERM INVESTMENTS (Cost: $205,083,315) 205,083,315 TOTAL INVESTMENTS IN SECURITIES - 111.86% (Cost $1,976,260,908) 1,931,576,750 OTHER ASSETS, LESS LIABILITIES - (11.86%) (204,721,849) --------------- NET ASSETS - 100.00% $ 1,726,854,901 =============== /1/ Non-income earning securities. /2/ Security valued at fair value in accordance with procedures approved by the Board of Directors. See Note 1. /3/ All or a portion of this security represents investments of securities lending collateral. /4/ Issuer is an affiliate of the Fund's investment advisor. See Note 2. SEE NOTES TO FINANCIAL STATEMENTS. 12 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statement of Assets and Liabilities iSHARES, INC. August 31, 2003 iSHARES MSCI JAPAN INDEX FUND ----------------------------------------------------------------------------- ASSETS Investments at cost $ 1,976,260,908 --------------- Foreign currency, at cost $ 1,266,193 --------------- Investments in securities, at value (including securities on loan/1/) (Note 1) $ 1,931,576,750 Foreign currency, at value 1,283,300 Receivables: Dividends and interest 600,696 --------------- Total Assets 1,933,460,746 --------------- LIABILITIES Payables: Collateral for securities on loan (Note 5) 204,503,705 Advisory fees (Note 2) 1,477,269 Distribution fees 624,871 --------------- Total Liabilities 206,605,845 --------------- NET ASSETS $ 1,726,854,901 =============== NET ASSETS CONSIST OF: Paid-in capital $ 1,854,005,314 Accumulated net investment loss (240,476) Accumulated net realized loss (82,247,705) Net unrealized depreciation on investments and translation of assets and liabilities in foreign currencies (44,662,232) --------------- NET ASSETS $ 1,726,854,901 =============== iShares outstanding 208,200,000 =============== Net asset value per iShare $ 8.29 =============== /1/ Securities on loan with market value of $194,764,480. See Note 5. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 13 Statement of Operations iSHARES, INC. Year ended August 31, 2003 iSHARES MSCI JAPAN INDEX FUND ----------------------------------------------------------------------------- NET INVESTMENT INCOME Dividends/1/ $ 6,253,519 Interest 35,640 Securities lending income 400,420 --------------- Total investment income 6,689,579 --------------- EXPENSES (NOTE 2) Advisory fees 4,549,589 Distribution fees 1,927,792 --------------- Total expenses 6,477,381 --------------- Net investment income 212,198 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments (10,052,318) In-kind redemptions 18,641,133 Foreign currency transactions 85,111 --------------- Net realized gain 8,673,926 --------------- Net change in unrealized appreciation (depreciation) on: Investments 171,078,541 Translation of assets and liabilities in foreign currencies 21,946 --------------- Net change in unrealized appreciation (depreciation) 171,100,487 --------------- Net realized and unrealized gain 179,774,413 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 179,986,611 =============== /1/ Net of foreign withholding tax of $831,913. SEE NOTES TO FINANCIAL STATEMENTS. 14 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Statements of Changes in Net Assets iSHARES, INC. iSHARES MSCI JAPAN INDEX FUND -------------------------------- For the For the year ended year ended August 31, 2003 August 31, 2002 -------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss) $ 212,198 $ (665,377) Net realized gain (loss) 8,673,926 (5,680,904) Net change in unrealized appreciation (depreciation) 171,100,487 (101,966,848) --------------- --------------- Net increase (decrease) in net assets resulting from operations 179,986,611 (108,313,129) --------------- --------------- Undistributed net investment income included in the price of capital shares issued or redeemed - 88 --------------- -------------- iSHARES TRANSACTIONS: iShares sold 1,146,153,031 316,156,642 iShares redeemed (265,660,262) (69,366,813) --------------- --------------- Net increase in net assets from iShares transactions 880,492,769 246,789,829 --------------- --------------- INCREASE IN NET ASSETS 1,060,479,380 138,476,788 NET ASSETS: Beginning of year 666,375,521 527,898,733 --------------- --------------- End of year $ 1,726,854,901 $ 666,375,521 =============== =============== Accumulated net investment loss included in net assets at end of year $ (240,476) $ (546,957) =============== =============== iSHARES ISSUED AND REDEEMED: iShares sold 158,400,000 36,600,000 iShares redeemed (36,000,000) (9,001,000) --------------- --------------- Net increase in iShares outstanding 122,400,000 27,599,000 =============== =============== SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS 15 Financial Highlights iSHARES, INC. (For a share outstanding throughout each period)
iSHARES MSCI JAPAN INDEX FUND ------------------------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 -------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 7.77 $ 9.07 $ 13.82 $ 13.22 $ 8.39 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)/1/ 0.00/3/ (0.01) (0.01) (0.05) (0.03) Net realized and unrealized gain (loss) 0.52 (1.29) (4.74) 1.21 4.91 ------------- ------------- ------------- ------------- ------------- Total from investment operations 0.52 (1.30) (4.75) 1.16 4.88 ------------- ------------- ------------- ------------- ------------- LESS DISTRIBUTIONS FROM: Net investment income - - - (0.00)/3/ (0.04) Net realized gain - - - (0.53) - Return of capital - - - (0.03) (0.01) ------------- ------------- ------------- ------------- ------------- Total distributions - - - (0.56) (0.05) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF YEAR $ 8.29 $ 7.77 $ 9.07 $ 13.82 $ 13.22 ============= ============= ============= ============= ============= TOTAL RETURN 6.69% (14.33)% (34.37)% 8.75% 58.14% ============= ============= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000s) $ 1,726,855 $ 666,376 $ 527,899 $ 787,790 $ 713,653 Ratio of expenses to average net assets 0.84% 0.84% 0.84% 0.88% 0.94% Ratio of net investment income (loss) to average net assets 0.03% (0.12)% (0.11)% (0.32)% (0.27)% Portfolio turnover rate/2/ 2% 2% 21% 22% 0%
/1/ Based on average shares outstanding throughout the period. /2/ Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. /3/ Rounds to less than $0.01. SEE NOTES TO FINANCIAL STATEMENTS. 16 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements iSHARES, INC. 1. SIGNIFICANT ACCOUNTING POLICIES iShares, Inc. (the "Company") is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Company was incorporated under the laws of the State of Maryland on September 1, 1994. As of August 31, 2003, the Company offered 24 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. Under the Fund's organizational documents, the officers and directors are indemnified against certain liabilities that may arise out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. 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. These reclassifications had no impact on prior year net assets, net income or distributions. 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. Short-term investments are valued at amortized cost, which approximates market value. Mutual fund shares are valued at net asset value. Any securities, including restricted securities or other assets NOTES TO THE FINANCIAL STATEMENTS 17 Notes to the Financial Statements (Continued) iSHARES, INC. 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 AND INCOME RECOGNITION 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. 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, 2003, the tax year-end of the Fund, the component of distributable earnings on a tax basis was $474,213 from undistributed ordinary income. FEDERAL INCOME TAXES The Fund is treated as an entity separate from the Company's other funds for federal income tax purposes. It is the policy of the Fund to qualify as a regulated investment company, as defined in Subchapter M of the Internal Revenue Code of 1986, as amended, and to annually distribute all of its net income and any net gains (taking into account any capital loss carryforwards) sufficient to relieve it from all, or substantially all, federal income and excise taxes. Accordingly, no provision for federal income taxes was required for the year ended August 31, 2003. From November 1, 2002 to August 31, 2003, the Fund incurred net realized capital losses of $5,627,048. As permitted by tax regulations, the Fund has elected to defer those losses and treat them as arising in the year ended August 31, 2004. 18 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements (Continued) iSHARES, INC. At August 31, 2003, the tax year-end of the Fund, the Fund had tax basis net capital loss carryforwards of $2,959,030, $62,572,173 and $3,621,148 expiring in 2009, 2010 and 2011, 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. 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, 2003, 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. 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 Emerging Markets, 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. NOTES TO THE FINANCIAL STATEMENTS 19 Notes to the Financial Statements (Continued) iSHARES, INC. Prior to February 24, 2003, Investors Bank served as securities lending agent for the Company. 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 August 31, 2003, BGI earned securities lending agent fees of $297,662. 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") and Prime Money Market Fund ("PMMF") of Barclays Global Investors Funds. The IMMF and PMMF are feeder funds in a master/feeder fund structure that invests substantially all of its assets in the Money Market Master Portfolio and Prime Money Market Master Portfolio, respectively, which are managed by BGFA, the Fund's investment advisor. The IMMF and PMMF are open-end money market funds available only to institutional investors, including other investment companies managed by BGFA. The IMMF and PMMF seek a high level of income consistent with liquidity and the preservation of capital. While the IMMF and PMMF do not directly charge an advisory fee, the master portfolios in which they invest do charge an advisory fee. Income distributions from the IMMF and PMMF 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. As of August 31, 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 year ended August 31, 2003, aggregated $22,322,028 and $18,216,287, respectively. In-kind purchases and sales for the year ended August 31, 2003, aggregated $1,141,392,395 and $265,014,115, respectively. At August 31, 2003, the cost of investments for federal income tax purposes was $1,984,443,903. Net unrealized depreciation aggregated $52,867,153, of which $71,277,677 represented gross unrealized appreciation on securities and $124,144,830 represented gross unrealized depreciation on securities. 4. iSHARES TRANSACTIONS The Company's authorized shares are 10.9 billion shares of $.001 par value capital stock. At August 31, 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. 20 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes to the Financial Statements (Continued) iSHARES, INC. The consideration for purchase of Creation Units of the Fund is generally the in-kind deposit of a designated portfolio of equity securities constituting a portfolio sampling representation of the MSCI Japan Index and an amount of cash. A purchase transaction fee and a redemption transaction fee are charged to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units of iShares. 5. LOANS OF PORTFOLIO SECURITIES The Fund may lend its investment securities to approved borrowers such as brokers, dealers and other financial institutions. The borrower pledges and maintains with the Fund collateral consisting of cash, an irrevocable letter of credit issued by a bank, or securities issued or guaranteed by the U.S. Government. The initial collateral received is required to have a value of at least 105% of the market value of the loaned securities. The collateral is maintained thereafter, at a value equal to at least 100% of the current market value of the securities on loan. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required, or return the securities when due. As of August 31, 2003, the Fund had loaned securities which were collateralized by cash. The cash collateral received was invested in a joint account which invests in securities with remaining maturities of 397 days or less and money market mutual funds. Income from the joint account is allocated daily to the Fund, based on the Fund's portion of the total cash collateral received. The market value of the securities on loan at August 31, 2003, and the value of the related collateral are disclosed in the Statement of Assets and Liabilities. 6. LEGAL PROCEEDINGS The Company has reached a settlement in an action in the U.S. District Court for the Northern District of Illinois. In the action, a company named Mopex, Inc. and a company named Realtimemutualfunds.com alleged that the actions of the Company and others infringed a patent held by Mopex, and that the parties engaged in a "conspiracy" amongst themselves to infringe the patent. The patent itself was found to be invalid in a related action to which the Company was not a party. In the settlement, the plaintiffs' claims and allegations are dismissed with prejudice, and neither the Company nor any other defendant will pay any compensation to the plaintiffs. NOTES TO THE FINANCIAL STATEMENTS 21 Report of Independent Auditors To the Shareholders and Board of Directors of iShares, Inc. In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the iShares MSCI Japan Index Fund (the "Fund") at August 31, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial statements of the Fund as of August 31, 2000 and for the two years then ended were audited by other auditors, whose report dated October 13, 2000 expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP San Francisco, California October 3, 2003 22 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Tax Information (Unaudited) iSHARES, INC. For the year ended August 31, 2003, the iShares MSCI Japan Index Fund earned foreign source income of $7,085,432 and paid foreign taxes of $604,154 which it intends to pass through to its shareholders pursuant to Section 853 of the Internal Revenue Code. An estimate of qualified dividend income of $7,059,077 was received by the Fund through August 31, 2003 that qualifies for a reduced tax rate pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003. TAX INFORMATION 23 Supplemental Information (Unaudited) iSHARES, INC. The table that follows presents information about the differences between the daily market price on secondary markets for shares of the iShares MSCI Japan Index Fund (the "Fund") and the Fund's net asset value. Net asset value, or "NAV", is the price per share at which the Fund issues and redeems shares. It is calculated in accordance with the standard formula for valuing mutual fund shares. The "Market Price" of the Fund is determined using the midpoint between the highest bid and the lowest offer on the Exchange on which the iShares of the Fund is listed for trading, as of the time that the Fund's NAV is calculated. The Fund's Market Price may be at, above or below its NAV. The NAV of the Fund will fluctuate with changes in the market value of its portfolio holdings. The Market Price of the Fund will fluctuate in accordance with changes in its NAV, as well as market supply and demand. Premiums or discounts are the differences (expressed as a percentage) between the NAV and Market Price of the Fund on a given day, generally at the time NAV is calculated. A premium is the amount that the Fund is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that the Fund is trading below the reported NAV, expressed as a percentage of the NAV. The following information shows the frequency distributions of premiums and discounts for the Fund, for the five-year period from July 1, 1998 through June 30, 2003, the date of the most recent calendar quarter-end. EACH LINE IN THE TABLE SHOWS THE NUMBER OF TRADING DAYS IN WHICH THE FUND TRADED WITHIN THE PREMIUM/DISCOUNT RANGE INDICATED. THE NUMBER OF TRADING DAYS IN EACH PREMIUM/DISCOUNT RANGE IS ALSO SHOWN AS A PERCENTAGE OF THE TOTAL NUMBER OF TRADING DAYS IN THE PERIOD COVERED BY EACH TABLE. ALL DATA PRESENTED HERE REPRESENTS PAST PERFORMANCE, WHICH CANNOT BE USED TO PREDICT FUTURE RESULTS. iSHARES MSCI JAPAN INDEX FUND PERIOD COVERED: JULY 1, 1998 THROUGH JUNE 30, 2003 NUMBER PERCENTAGE OF PREMIUM/DISCOUNT RANGE OF DAYS TOTAL DAYS ---------------------- ------- ------------- Greater than 3.0% ................................... 11 0.88% Greater than 2.5% and Less than 3.0% ................ 15 1.19 Greater than 2.0% and Less than 2.5% ................ 29 2.31 Greater than 1.5% and Less than 2.0% ................ 62 4.93 Greater than 1.0% and Less than 1.5% ................ 144 11.46 Greater than 0.5% and Less than 1.0% ................ 228 18.14 BETWEEN 0.5% AND -0.5% .............................. 483 38.42 Less than -0.5% and Greater than -1.0% .............. 146 11.61 Less than -1.0% and Greater than -1.5% .............. 78 6.21 Less than -1.5% and Greater than -2.0% .............. 36 2.86 Less than -2.0% and Greater than -3.0% .............. 14 1.11 Less than -3.0% ..................................... 11 0.88 ------- ------------- 1,257 100.00% ======= ============= 24 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Directors Information (Unaudited) iSHARES, INC. The Board of Directors has responsibility for the overall management and operations of the Company, including general supervision of the duties performed by BGFA and other service providers. Each Director serves until his or her successor is duly elected or appointed and qualified. iShares, Inc., iShares Trust, Barclays Global Investors Funds and Master Investment Portfolio are considered to be members of the same fund complex, as defined in Form N-1A under the 1940 Act. Each Director of iShares, Inc. also serves as a Trustee for iShares Trust and oversees 81 portfolios within the fund complex. In addition, Lee T. Kranefuss and Richard K. Lyons each serves as a Trustee for Barclays Global Investors Funds and Master Investment Portfolio and oversees 106 portfolios within the fund complex. Additional information about the Funds' Directors may be found in the Funds' Statement of Additional Information, which is available without charge upon request by calling toll-free 1-800-474-2737. INTERESTED DIRECTORS+
POSITION(S), PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS LENGTH OF SERVICE DURING PAST 5 YEARS OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------ *LEE T. KRANEFUSS (41) Director, Chief Executive Officer of the Trustee (since June 18, 2003) of Barclays Global Chairman, and Individual Investor Business of iShares Trust; Board of Trustees Investors President (since Barclays Global Investors, N.A.; for Barclays Global Investors Funds 45 Fremont Street June 18, 2003) The Boston Consulting Group (until and Master Investment Portfolio San Francisco, CA 94105 1997). (since 2001). *NATHAN MOST (89) Director Consultant to BGI (1998-2002), Trustee (since 2000) and President P.O. Box 193 (since 1996) American Stock Exchange (1996-2000) (2000-2002) of iShares Trust Burlingame, CA 94011 and the Hong Kong Stock Exchange (1998 to present); Consultant to the Amsterdam Stock Exchange (1997-1998); Consultant to the Pacific Stock Exchange (1997-1998).
---------- + Garrett F. Bouton served as Chairman, President and interested Director of the Board through June 17, 2003. * Lee T. Kranefuss and Nathan Most are deemed to be "interested persons" (as defined in the 1940 Act) of the Company due to their affiliations with BGFA, the Funds' investment advisor and BGI, the parent company of BGFA. DIRECTORS INFORMATION 25 Directors Information (Unaudited) (Continued) iSHARES, INC. INDEPENDENT DIRECTORS
POSITION(S), PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS LENGTH OF SERVICE DURING PAST 5 YEARS OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------ JOHN B. CARROLL (67) Director Retired Vice President of Trustee (since 2001) of iShares 520 Main Street (since 1996) Investment Management (1984-2000) Trust; Trustee and member of the Ridgefield, CT 06877 of Verizon Corporation; Advisory Executive Committee (since 1991) of Board member of Ibbotson Associates The Common Fund Institutional (1992-1998); former Vice Chairman Funds, a non-profit organization; and Executive Committee Member Member of the Board of Managers of (1994-1998) of the Committee on JP Morgan Private Equity Funds. Investment of Employee Benefit Assets of the Financial Executive Institute. RICHARD K. LYONS (42) Director Professor, University of Trustee (since 2000) of iShares Haas School of (since 2001) California, Berkeley: Haas School Trust; Trustee (since 2001) of Business, of Business (since 1993); Barclays Global Investors Funds and UC Berkeley Consultant for IMF World Bank, Master Investment Portfolio; Board Berkeley, CA 94720 Federal Reserve Bank, and Citibank of Trustees: Matthews Asian Funds N.A. (since 2000). since 1995 (oversees 6 portfolios). GEORGE C. PARKER (64) Director Dean Witter Distinguished Professor Trustee (since 2000) of iShares Graduate School of (since 2001) of Finance (since 1994); Associate Trust; Bailard, Biehl and Business (Room K301) Dean for Academic Affairs, Director Kaiser, Inc. (since 1985); Stanford University of MBA Program, and Professor, California Casualty Group of 521 Memorial Way Stanford University: Graduate Insurance Companies (since 1978); Stanford, CA 94305 School of Business (1993-2001). Continental Airlines, Inc. (since 1996); Community First Financial Group (since 1995); Dresdner/RCM Mutual Funds (1994-2002); Tyon Ranch Company (since 1999). W. ALLEN REED (56) Director President and Chief Executive Trustee (since 2001) of iShares General Motors (since 1996) Officer (since 1994) of General Trust; Director (since 1994) of Investment Motors Investment Management General Motors Investment Management Corp. Corporation. Management Corporation; Director 767 Fifth Avenue (1995-1998) of Taubman New York, NY 10153 Centers, Inc. (a real estate investment trust); Director (since 1992) of FLIR Systems (an imaging technology company); Director (since 1994) of General Motors Acceptance Corporation; Director (since 1994) of GMAC Insurance Holdings, Inc.; Director (since 1995) of Global Emerging Markets Fund; Director (since 2000) of Temple Inland Industries; Chairman (since 1995) of the Investment Advisory Committee of Howard Hughes Medical Institute.
26 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Directors Information (Unaudited) (Continued) iSHARES, INC. OFFICERS WHO ARE NOT DIRECTORS
PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS POSITION DURING PAST 5 YEARS DIRECTORSHIPS HELD BY OFFICERS ------------------------------------------------------------------------------------------------------------------------------ MICHAEL A. LATHAM (37) Secretary, Treasurer Director of Mutual Fund Delivery in None. Barclays Global and Principal the U.S. Individual Investor Investors Financial Officer Business of BGI (since 2000); Head 45 Fremont Street of Operations, BGI Europe San Francisco, CA 94105 (1997-2000). JEFFREY J. GABOURY (34) Assistant Treasurer Director (formerly Manager), Mutual None. Investors Bank & Trust Co. Fund Administration, Reporting and 200 Clarendon Street Compliance, IBT (since 1996). Boston, MA 02116 DANELL J. DOTY (40) Assistant Secretary Head of Mutual Fund Administration, None. Barclays Global Investors BGI (since 1999); Vice President of 45 Fremont Street Operations, Berkeley Capital San Francisco, CA 94105 Management (1994-1999); Vice President and Secretary, The Berkeley Funds (1997-1999). SUSAN C. MOSHER (48) Assistant Secretary Senior Director & Senior Counsel, None. Investors Bank & Trust Co. Mutual Fund Administration, IBT 200 Clarendon Street (since 1995). Boston, MA 02116 SANDRA I. MADDEN (37) Assistant Secretary Senior Associate Counsel, Mutual None. Investors Bank & Trust Co. Fund Administration, IBT (since 200 Clarendon Street 1999); Associate, Scudder Kemper Boston, MA 02116 Investments, Inc. (1996-1999). THEDA HABER (49) Chief Legal Officer Attorney/Managing Director, Deputy None. Barclays Global Investors General Counsel and Head of U.S. 45 Fremont Street Legal, BGI (since 1997); San Francisco, CA 94105 Attorney/Senior Counsel, BGI (1994-2000). LOIS TOWERS (51) Assistant Vice U.S. Compliance Officer, BGI (since None. Barclays Global Investors President -- AML 1999). 45 Fremont Street Compliance Officer San Francisco, CA 94105
DIRECTORS INFORMATION 27 Notes: 28 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS Notes: NOTES 29 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. The prospectus 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 Lehman Aggregate Bond Fund (AGG) 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) iShares MSCI Emerging Markets Index Fund (EEM) 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 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. 30 2003 iSHARES ANNUAL REPORT TO SHAREHOLDERS iShares are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to iShares. Barclays Global Investors Services (BGIS) assists in the marketing of iShares. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., a wholly owned subsidiary of Barclays Bank PLC, none 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. iShares(R) INDUSTRIAL STRENGTH INVESTMENT TOOLS FROM BARCLAYS GLOBAL INVESTORS 1 800 iSHARES (1 800 474 2737) WWW.iSHARES.COM [LOGO OF BARCLAYS] BGI-F-005-09001 Item 2. Code of Ethics. As of August 31, 2003, the Registrant has adopted a code of ethics that applies to the Registrant's President and Principal Financial Officer. For the year ended August 31, 2003, there were no amendments to a provision of its code of ethics, nor were there any waivers granted from a provision of the code of ethics. A copy of its code of ethics is filed with this Form N-CSR under Item 10(a). Item 3. Audit Committee Financial Expert. The Registrant's Board of Directors has determined that the Registrant has more than one audit committee financial expert serving on its audit committee. The audit committee financial experts serving on the Registrant's audit committee are John B. Carroll, Richard K. Lyons, George C. Parker and W. Allen Reed, all of whom are independent. Item 4. Principal Accountant Fees and Services. Not applicable to this filing. Item 5. Listed Company Audit Committees. Not applicable to this filing. Item 6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable to this registrant. Item 8. [Reserved] Item 9. Controls and Procedures. (a) The President and Principal Financial Officer have concluded that, based on their evaluation as of a date within 90 days of the filing date of this report, the disclosure controls and procedures of iShares, Inc. are reasonably designed to achieve the purposes described in the attached certification, Section 4 (a). (b) There were no significant changes in the iShares, Inc.'s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Item 10. Exhibits. (a) Code of Ethics is attached. (b) Certification letters are attached. (c) Section 906 Certifications are attached. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. iShares, Inc. By: /s/ Lee T. Kranefuss ------------------------------------- Lee T. Kranefuss, President Date: November 3, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Lee T. Kranefuss ------------------------------------- Lee T. Kranefuss, President Date: November 3, 2003 By: /s/ Michael A. Latham ------------------------------------- Michael A. Latham, Principal Financial Officer Date: November 3, 2003